SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 1997
Commission File Number: 1-9741
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 June 30, 1998, was $79,681,534.
On June 10, 1998 there were 10,120,290 shares of Common Stock out
standing.
This document contains 110 pages.
Exhibit index located on pages 42-45.
This Form 10-K is for the fiscal year ended December 31, 1997,
and also includes updated disclosure and audited financial
statements with respect to the fiscal year ended December 31,
1996. The Company has chosen to adopt this presentation format
because its Form 10-K for the fiscal year ended December 31, 1996
did not include an auditor's report, and in the approximately
fifteen month period since the late filing of that report there
have been numerous material changes involving the Company and its
business which are disclosed in this Annual Report on Form 10-K.
The Company believes that the most effective means of providing
complete and updated disclosure is to present in one document all
of the periods which would otherwise be covered in its 1996 and
1997 Forms 10-K.
PART I
ITEM 1. BUSINESS.
INAMED Corporation ("INAMED" or the "Company"), through its
subsidiaries, is one of the leading world-wide developers,
manufacturers and marketers of breast implants for plastic and
reconstructive surgery. The Company produces both saline-filled
and silicone gel-filled breast implants in a wide variety of
models, shapes and sizes. The Company also manufactures and
markets a number of other surgically implantable products,
including tissue expanders, facial implants and custom prostheses
for plastic and reconstructive surgery, as well as products for
treatment of obesity. The Company owns, or has exclusive
licenses covering, over 40 patents in the United States and
overseas and manufactures its products in facilities located in
the United States and Ireland.
The Company's common stock is publicly traded on the OTC
Bulletin Board under the under the symbol IMDC.
Recent Developments
Beginning in January 1998, there have been a number of
significant developments at the Company:
Changes in Senior Management. On January 23, 1998 the
Company announced the hiring of Richard G. Babbitt as President
and Chief Executive Officer, and Ilan K. Reich as Executive Vice
President. Those officers were also elected to the Board of
Directors. On February 11, 1998, the Company announced the
resignation of Donald K. McGhan from his executive and board
positions with the Company and the election of Richard G. Babbitt
as Chairman. In recognition of Mr. McGhan's past contributions
he was named Chairman Emeritus. On March 25, 1998 the Company
announced the hiring of Tom K. Larson, Jr. as its new Chief
Financial Officer. On June 24, 1998, Jim J. McGhan's employment
with the Company and its subsidiaries was terminated. Jim J.
McGhan was the Chief Operating Officer of the Company, and he is
Donald K. McGhan's son. Jim J. McGhan continues as a member of
the Board of Directors.
New Management's Focus. The new senior executive management
team has been focused on three key priorities: first, resolving
the breast implant litigation on an expeditious basis; second,
returning the Company to profitability; and third, formulating
and executing a long-term strategic plan for the Company. This
strategic plan will entail the reorganization of certain of the
Company's businesses and personnel. The Company anticipates that
further changes in the composition of the Company's board of
directors and senior management staff (both at the parent company
level and at the subsidiary level) may arise during 1998.
Proposed Settlement of Breast Implant Litigation. In April
1998 the Company entered into agreements with the Plaintiffs'
Class Settlement Counsel and Minnesota Mining & Manufacturing
Company ("3M"), under which it will pay an aggregate of $34.5
million to settle all claims arising from breast implants which
were implanted before June 1, 1993 and to resolve a significant
indemnity claim by 3M. The settlement agreement with the
plaintiffs, which is subject to Court approval, is structured as
a mandatory non-opt-out class action settlement covering the
Company and its subsidiaries. The provisional agreement with 3M
is subject to completion of the settlement with the plaintiffs.
The payments under these agreements will not become due before
April 30, 1999 or 90 days after the Court's final order becomes
non-appealable, whichever is later. For a detailed discussion of
the terms of the proposed settlement, see "Item 3 - Legal
Proceedings - Breast Implant Litigation."
Financing the Settlement of the Breast Implant Litigation.
The Company contemplates financing the cost of the settlement
through a combination of the issuance of additional senior
secured debt, the issuance of $3 million of common stock, and the
application of approximately $13.9 million in proceeds to be
received upon exercise of the warrants to purchase common stock
which were issued for this general purpose in July 1997. The
Company has discussed its financing plans with Appaloosa
Management L.P. and its affiliates, who are jointly the largest
holders of the Company's 11% senior secured notes. Those
entities have indicated their willingness to provide the new
financing, subject to negotiation of satisfactory terms,
covenants and legal documentation, including amendments to the
existing indenture and a new maturity date for the existing
senior debt. Such new financing may entail the issuance of
warrants or convertible securities which could be dilutive to
existing holders of the Company's common stock.
Substantial Charges to 1997 Results. In order to reflect
the costs of the proposed settlement of the breast implant
litigation and other items, the Company is incurring an aggregate
of $32 million of charges for 1997. In addition, the Company
believes that it will incur approximately $5 million of charges
in 1998 in connection with a proposed restructuring plan
currently being developed by the new senior management team.
While the Company believes that these charges adequately reflect
the total costs of the proposed settlement and the restructuring
plan, the Company may be required to incur additional charges
(which could be substantial) as those matters are concluded.
Change of Independent Accountants; SEC Action. In March
1998 Coopers & Lybrand L.L.P. resigned as the Company's
independent accountant, and in April 1998 the Company retained
BDO Seidman LLP as its new independent accountant. Due to a
variety of factors, the Company did not timely file its Annual
Reports on Form 10-K for 1996 and 1997; moreover, now that the
audits for those years are completed, the Company will be
restating its 1997 quarterly financial statements. In December
1997 the Company entered into a consensual settlement of a
lawsuit by the Securities and Exchange Commission (the "SEC"),
whereby the Company agreed to file an amendment to its 1996 Form
10-K by March 2, 1998 and to thereafter timely file its required
public filings. Due to a variety of factors, the Company was
unable to meet that deadline. The Company has held discussions
with the SEC regarding this matter; however, the Company does not
know whether, or to what extent, the SEC may seek sanctions or
other remedies based on the Company's failure to meet the terms
of this settlement. The Company understands that the SEC is
conducting a preliminary inquiry with respect to certain matters
which were publicly disclosed in a Form 8-K filing in March
1998 in connection with the resignation of Coopers & Lybrand
L.L.P. The Company has been fully cooperating with the SEC's
requests for documents in connection with that inquiry.
Corporate History and Organization
The Company (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 company's ("3M") 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 Corporatino, 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 idividual corporations
corresopnding 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 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 anticipated increasing
future 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 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 subsidiaires 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 manufacturing facilities in Ireland 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,
international and ultimately global 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 global distribution of premium
products for dermatology, wound care and burn treatment.
In 1992, the Company also incorporated its Medisyn
Technologies Corporation subsidiary in Las Vegas, Nevada, in order
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.
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.
In 1993, the Company also incorporated Flowmatrix Corporation
in Las Vegas, Nevada, a wholly-owned subsidiary which manufactures
high-quality silicone components and devices for INAMED's wholly-
owned subsidiaries.
The Company continued to expand its international marketing
base in 1993 by incorporating INAMED S.A.R.L. in Paris, France, 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
strengthened 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 incorporation of INAMED do Brasil in 1995, INAMED Mexico
in 1996, and BioEnterics Latin America in 1997 has strengthened
the Company's presence in the Latin American area.
In 1995, the Company incorporated its INAMED Japan subsidiary
in Las Vegas, Nevada. INAMED Japan subsequently acquired 95% of
INAMED Medical Group, a Japanese corporation. In 1996, INAMED
Japan acquired the remaining 5% of INAMED Medical Group.
Additionally, the Company's McGhan Medical Corporation subsidiary
incorporated its McGhan Medical Asia Pacific, Ltd. subsidiary in
1995. The formation of INAMED Japan and McGhan Medical Asia
Pacific, Ltd. has enabled the Company to continue its expansion
into the Asia-Pacific Rim market.
Products and Markets
Breast implants and related tissue expander products, which
comprise approximately 90% of the Company's consolidated sales,
are used for reconstruction following total or partial removal
(mastectomy) of tissue as the result of breast cancer, or for
augmentation in cosmetic surgery.
Implant Products. All breast implants consist of a silicone
elastomer (rubber) shell filled with either saline solution (salt
water) or silicone gel. In order to meet each woman's individual
needs, most breast implants are produced in a wide variety of
shapes and sizes. The shape of breast implants can be either
round or anatomical. Round breast implants generally give a
woman a round curve in the upper part of her breasts, while
anatomical breast implants give the woman a gentle slope which is
shaped more like a natural breast. Both types of implants are
designed to increase breast size. The surface construction of the
finished implants provides the surgeon the opportunity to select
from a smooth silicone, the patented BioCell textured surface or
the patented MicroCell textured surface.
In January 1992, the Food and Drug Administration ("FDA")
requested that all U.S. manufacturers stop selling 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.
Furthermore, in April 1992, the FDA announced that silicone gel-
filled breast implants would be available only under controlled
clinical studies. Accordingly, through 1997, the Company markets
and distributes its silicone gel-filled breast implants only
outside the United States, and markets and distributes saline-
filled breast implants both in the United States and abroad.
Breast reconstructive surgery is the process by which a
surgeon recreates or reconstructs a woman's breast following a
mastectomy. According to a study published by the American
Society of Plastic and Reconstructive Surgeons ("ASPRS"), in 1997
approximately 50,000 reconstruction procedures were performed, as
compared with approximately 29,000 in 1992. The Company believes
that the aging U.S. population and the increased awareness among
middle-aged and older women in the United States of the dangers
and incidence of breast cancer will lead to increased numbers of
mastectomies, and corresponding increases in opportunities for
reconstructive breast implants. In addition, according to the
ASPRS, 26 states now have legislation requiring insurance
carriers that reimburse female policyholders for part or all of
the cost of radical mastectomies to offer partial or full
reimbursement for reconstructive breast implant surgery as well.
Breast augmentation is the process by which breast implants
are used to enhance the size or shape of a woman's breast for
cosmetic reasons. According to the ASPRS, approximately 122,000
women had augmentation surgery in 1997, as compared to
approximately 32,000 in 1992. Typical recipients of breast
implants for augmentation purposes are women aged 18 to 50 with
moderate to upper-moderate incomes. The Company believes that
the large proportion of the U.S. population currently aged 25 to
40 will result in increased demand for augmentation breast
implant surgery in the coming years.
Breast implants are placed either under a woman's breast
tissue (subglandular position) or under a woman's pectoralis
muscle (sub-muscular position). If the implant is saline-filled,
it is usually inserted empty and then filled and positioned. An
advantage to this type of implant is that it can usually be
placed through a small incision. The incision is made as
inconspicuously as possible in either the fold of the breast (an
inframammary incision), around the nipple (a periareolar
incision) or under the arm (a transaxillary incision). If the
incision is made under the arm, endoscopic techniques, involving
the use of a probe fitted with a tiny camera, may be used to
visualize the creation of the surgical pocket.
Breast implant surgery is performed in an outpatient
operating room, either in the surgeon's office or at a hospital.
If done for augmentation purposes, the surgery is typically
performed on an outpatient basis and general anesthesia is most
commonly used, although local anesthesia may be an option.
Augmentation surgery usually lasts one to two hours during which
the surgeon makes an incision and creates a pocket for the
implant. Finally, the incision is closed with stitches and tape.
Reconstructive surgery generally occurs in a hospital, and can
often require more than one operation over a period of several
months.
Tissue Expanders and Other Products. The Company develops,
manufactures and markets a line of implantable and intraoperative
tissue expanders, which are used in connection with
reconstructive surgery as the result of breast cancer. A typical
tissue expander is implanted at a site where new tissue is
desired. After the device is implanted, fluid can be injected
into the injection port which then flows into the larger
expanding chamber. This causes 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 the location of the injection port.
The Company manufactures and markets its patented BioSpan
tissue expander product line that utilizes the patented BioCell
textured surface which allows more precise surgical placement.
Use of the BioSpan tissue expander surface decreases the risk of
severe contraction of the tissue capsule around the implant. The
Company produces the BioDimensional system for breast
reconstruction following radical mastectomy procedures. The
BioSpan tissue expanders and BioCell breast implants used for
this system were designed using computer-assisted modeling to
determine the ideal dimensions. Computer imaging programs were
also used to evaluate the expected aesthetic results. The
BioDimensional system matches the specific size tissue expander
to the breast implant that will be used for the breast
reconstruction procedure.
The Company also manufactures and markets silicone gel
sheeting intended for use in the treatment and control of
scarring. The products are sold under the trade names TopiGel
and Epi-Derm. The Company has configurations for the scar
management of long incisional scars following cardiac or C-
Section surgery, custom configurations for treating small and mid-
size scars, and a full-sized sheet for reduction of post-burn
scarring. In addition, the Company has developed two new
silicone gel sheeting configurations for treating post-mastoplexy
and areolar scars. In 1997 the Company received 510(k) clearance
notification of substantial equivalency from the FDA for the
CRYOSIL Silicone Gel Sheeting Patch, intended for the single use
protection of tissue surrounding skin lesions, such as basal cell
carcinoma, or skin tabs, during cryosurgery with spray
refrigerants like liquid nitrogen and nitrous oxide.
Obesity and General Surgery Products. Through its
BioEnterics Corporation subsidiary, the Company develops,
manufactures and markets two patented devices for the treatment
of obesity: the LAP-BAND Adjustable Gastric Banding System and
the BioEnterics Intragastric Balloon (BIB). In 1997,
approximately $9.3 million of these products were sold to
surgeons and hospitals, primarily in Europe and Australia. The
LAP-BAND System is currently undergoing clinical trials in the
United States. This subsidiary also produces the patented
EndoLuminar II and MicroLumina Transillumination Systems for
increasing visibility during laparoscopic procedures.
People who are 100 pounds or more overweight are considered
severely or morbidly obese. This extreme obesity is life
threatening, leading to cerebrovascular diseases, cardiovascular
diseases, diabetes and other health problems. In the United
States it is estimated that there are 3.1 million to 9.3 million
adults who are morbidly obese. In Europe it is estimated that
there are 2.5 million to 7.4 million adults who are morbidly
obese. On a worldwide basis it is estimated that approximately
1% to 2% of the population is morbidly obese.
The failure of non-surgical weight loss programs to treat
morbid obesity has led surgeons to devise a variety of weight
loss operations for the morbidly obese. One example is the
gastric bypass operation, whereby the surgeon makes a direct
connection from the upper portion of the stomach to a lower
segment of the lower intestine. By creating a path for food
which bypasses part of the stomach and the small bowel, the
operation causes food to be poorly digested and insufficiently
absorbed. Long-term follow-up of bypass operations has revealed
serious nutritional complications.
Surgeons have also created alternate procedures for weight
loss that only restrict passage of food through the stomach. The
major one is a vertical banded gastroplasty, in which a band and
staples are used to create a pouch at the top of the stomach that
holds a small amount of food. By delaying the emptying of food
from the pouch, the small outlet in the bottom of the pouch
causes a feeling of fullness and restricts the amount of food
which can be eaten at one time.
The LAP-BAND System is an advanced form of gastric banding
used to treat morbid obesity. During the operation, a silicone
elastomer band is laparoscopically placed around the upper part
of the stomach, thereby making a small pouch. Most importantly,
with the LAP-BAND System the physician can easily adjust the
amount of food which the patient can eat through non-surgical
modification of the pouch and outlet size, thereby fine-tuning
the rate of individual weight loss. There is no need for large
incisions and open wounds. No cutting or stapling of the stomach
is required and there is no by-passing of the stomach or
intestines. If necessary, it can be removed laparoscopically,
thereby completely reversing the procedure.
The BIB System is a short-term therapy, designed for
patients who must shed pounds either: a) in preparation for
surgery, whether for the LAP-BAND System or any other surgery
which needs to be performed on an obese patient, or b) for
moderately obese persons to be used in conjunction with a diet
and behavior modification program. The BIB System is a silicone
elastomer balloon which is filled with saline after insertion
into the patient. Placement in the stomach is non-surgical and
usually requires only 20 to 30 minutes and is performed on an out-
patient basis by an endoscopist, using local anesthesia. The BIB
contains a self-sealing valve which allows for personalized
adjustment of the volume from 400 ml to 700 ml (the size of a
large grapefruit), either at the time of placement or later.
When the BIB is deflated, it can easily be removed
endoscopically. The Company anticipates beginning clinical trials
for the BIB System in the United States in late 1998.
The EndoLumina and MicroLumina Systems are illuminated
medical devices used to light internal organs during various
types of general surgery. The primary uses are to aid in surgery
of the esophagus, rectum and other structures. In some
operations it replaces an endoscope as a source of light within
the body. Unlike an endoscope, the EndoLumina emits a cool light
and does not risk burning the tissue. The EndoLumina System was
licensed by the Company and recently redesigned to improve its
illumination and durability. It includes a detachable sterile
tip, which is provided for one-time use. In 1997 the EndoLumina
System received 510(k) approval from the FDA, and it is now being
marketed in the U.S. and internationally.
During the past four years, the Company's proprietary
products accounted for approximately 98% of annual net sales.
Marketing
In the United States, the Company's products are sold to
plastic and reconstructive surgeons, cosmetic surgeons, facial
and oral surgeons, dermatologists, outpatient surgery centers and
hospitals through the Company's own staff of direct sales people
and independent distributors. The Company reinforces its sales
and marketing program with telemarketing, which produces sales by
providing follow-up procedures on leads and distributing product
information to potential customers. The Company supplements its
marketing efforts with appearances at trade shows and
advertisements in trade journals and sales brochures.
The Company sells its products directly and through
independent distributors in more than twenty-five countries
worldwide, including Europe, Central and South America, Australia
and Asia. Those sales are managed through regional sales and
marketing employees and, in certain countries, through a direct
sales force.
During the past four years, no customer accounted for more
than 5% of the Company's revenues.
Competition
The Company's sole significant competitor in the United
States is Mentor Corporation. All other major competitors
discontinued production of breast implants in 1992 largely as a
result of regulatory action by the FDA and the ensuing wave of
litigation by women alleging injury from their breast implants.
Internationally, the Company competes with several other
manufacturers, including Mentor Corporation, Silimed,
Laboratories Sebbin, L.P.I., P.I.P., Nagor and LipoMatrix.
The Company believes that the principal factors permitting
its products to compete effectively with its competitors are its
high-quality product consistency, its variety of product designs,
management's knowledge of and sensitivity to market demands,
plastic surgeons' familiarity with the Company's products and
their respective brand names, and the Company's ability to
identify, develop and/or obtain license agreements for patented
products embodying new technologies. The Company seeks to avoid
marketing its products on the basis of price, although when
necessary or appropriate it will do so on occasion.
Research and Product Development
A qualified staff of over fifty doctorates, scientists,
engineers and technicians work in material technology and product
design as part of the Company's research and development efforts.
In addition, 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 incurred $8.9 million, $5.7 million, $4.4
million and $3.7 million in 1997, 1996, 1995 and 1994,
respectively, on its research and development efforts. These
expenditures represented 8%, 6%, 5% and 5% of sales in 1997,
1996, 1995 and 1994, respectively. Excluding research and
development expenses at BioEnterics Corporation, the Company
anticipates that it will spend approximately 6% of sales on
research and development in the next few years.
Patents and License Agreements
The Company currently owns or has exclusive licenses
covering more than 40 patents throughout the world.
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
breast implants and for the resulting barrier coat breast
implants. Intrashiel is the Company's registered trademark for
the products using this technology. Beginning in 1984, such
patents were granted in the United States and various European
countries. In addition, 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
compensation or benefits.
The Company's other patents include those relating to its
breast implants, tissue expanders, textured surfaces, injection
ports and valve systems, and obesity and general surgery
products. The Company also has various patent assignments or
license agreements which grant the Company the right to
manufacture and market certain products.
Substantially all of the patents relating to products which
generate significant revenue have at least seven years remaining
until expiration.
Although the Company believes that its patents are valuable,
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
its manufacturing processes, materials and product design, have
been equally important in maintaining proprietary product lines.
As a condition of employment, the Company and its
subsidiaries require all employees to execute a confidentiality
agreement relating to proprietary information and patent rights.
Manufacturing; Raw Materials
The Company manufactures its silicone devices and products
under controlled conditions. The manufacturing process is
accomplished 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, sterilization 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. All of the Company's domestic
activities are subject to FDA regulations and guidelines, and the
Company's products and manufacturing procedures are continually
monitored and/or reviewed by the FDA. In 1997 the FDA conducted
a review of the Company's main U.S. manufacturing facilities and
notified the Company that it was in compliance with applicable
good manufacturing practices.
Since the 1992 moratorium on silicone gel-filled breast
implants and the ensuing litigation, traditional suppliers of
silicone raw materials have ceased to supply implant or
medical grade materials to the Company and other medical device
manufacturers. Under guidelines established by the FDA, the
Company has been successful in replacing those suppliers with
other companies, but at higher prices. There can be no assurance
that there will not be periodic disruptions in the source of
supply, or the quantities needed, due to regulatory or other
factors. The Company is seeking to expand its sources of supply,
including through a foreign subsidiary.
Limited Warranties
The Company makes every effort to conduct its product
development, manufacturing, marketing and service and support
activities with careful regard for the consequences to patients.
As with any medical device manufacturer, the Company occasionally
receives communications from surgeons or patients with respect to
various products claiming the products were defective and have
resulted in injury to the patient. The Company provides a
limited warranty to the effect that it will replace any product
that proves defective with a new product of comparable type
without charge.
In certain situations the Company also provides limited
financial assistance to cover non-reimbursed operating room or
surgical expenses. The costs of this program are periodically
reviewed to ascertain whether adequate reserves for future claims
are being maintained. The Company reserves the right to make
changes to this financial assistance policy from time to time.
Government Regulations
All of 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 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 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. 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
breast implant products are Class III devices.
In the ongoing process of compliance with applicable laws
and regulations, 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 required by the FDA. 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 basis whether to respond to
any future calls for PMAs and regulatory requirements, requested
response or Company action. The cost of any such potential PMA
filings is unknown until the call for a PMA occurs and the
Company has 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 required by the
FDA that would be so restrictive as to remove the Company's
primary products from the marketplace.
Medical device laws and regulations similar to those
described above are also in effect in many of the countries to
which the Company exports or sells its products. These range
from comprehensive device approval requirements for some or all
of the Company's medical device products to requests for product
data or certifications.
As a manufacturer of medical devices, the Company's
manufacturing processes and facilities are subject to continual
review by the FDA, responsible state or local agencies such as
the California State Department of Health Services and other
regulatory agencies to ensure compliance with good manufacturing
practices and public safety compliance. The Company's
manufacturing plants, as users of certain solvents, are also
subject to regulation by the local Air Pollution Control District
and by the Environmental Protection Agency.
Geographic Segment Data
A description of the Company's net sales, operating income
(loss) and identifiable assets within the United States and
International, is detailed in Note 11 of the Notes to the
consolidated financial statements, attached as Exhibit (a)(1).
Employees
As of December 31, 1997, the Company had 938 employees, of
which 646 were in the United States and 292 were at foreign
subsidiaries. Except for the Company's manufacturing operation
in Ireland, none of the Company's employees are represented by a
labor union. The Company offers its employees competitive
benefits and wages comparable with employees 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 its headquarters office space in Las
Vegas, Nevada (4,500 square feet and 5,000 square feet subleased
from a related party). The Company also leases manufacturing,
warehouse and office buildings in Las Vegas, Nevada (24,000
square feet, of which 17,000 is subleased to a third party),
Carpinteria, California (61,000 square feet), Santa Barbara,
California (187,000 square feet), Arklow County, Wicklow, Ireland
(53,000 square feet) and The Netherlands (18,000 square feet).
The Company's international sales offices, located in
Belgium, Germany, Italy, United Kingdom, France, Spain, Russia,
Brazil, Mexico, Hong Kong, Singapore and Japan, lease office and
warehouse space ranging from 1,500 square feet to 8,900 square
feet.
The Company believes its facilities and the facilities of
its subsidiaries are generally suitable and adequate to
accote its current operations.
ITEM 3. LEGAL PROCEEDINGS.
Breast Implant Litigation
INAMED and its McGhan Medical and CUI subsidiaries are
defendants in numerous state and federal court lawsuits involving
breast implants. The alleged factual basis for typical lawsuits
includes allegations that the plaintiffs' silicone gel-filled
breast implants caused specified ailments including, among
others, auto-immune disease, lupus, scleroderma, systemic
disorders, joint swelling and chronic fatigue. The Company has
opposed plaintiffs' claims in these lawsuits and other similar
actions and continues to deny any wrongdoing or liability of any
kind. In addition, the Company believes that a substantial body
of medical evidence exists which indicates that silicone gel-
filled implants are not causally related to any of the above
ailments. Numerous studies in the past few years by medical
researchers in North America and Europe have failed to show a
definitive connection between breast implants and disease (some
critics, however, have assailed the methodologies of these
studies). Nevertheless, plaintiffs continue to contest the
findings of these studies, and more than 15,000 lawsuits and
claims alleging such ailments are pending against the Company and
its subsidiaries. The volume of lawsuits has created substantial
ongoing litigation and settlement expense, in addition to the
inherent risk of adverse jury verdicts in cases not resolved by
dismissal or settlement.
Proposed Class Action Settlement
As a result of the burdens imposed by the litigation on the
Company's management and operations, the substantial ongoing
litigation and settlement expense, the continuing litigation
risks, and the adverse perception held by the financial community
arising out of the litigation, the Company is seeking approval of
a mandatory ("non-opt-out") class action settlement (the
"Settlement") under Federal Rule of Civil Procedure 23(b)(1)(B).
As described below, the Company is seeking through this
settlement to resolve all claims arising from McGhan Medical and
CUI breast implants implanted before June 1, 1993, a cutoff date
which encompasses substantially all domestically-implanted
silicone gel-filled implants.
Background of Class Settlement Negotiations
The Settlement has its genesis in negotiations begun in 1994
with the Plaintiffs' Negotiation Committee ("PNC"), a committee
of the national Plaintiffs' Steering Committee ("PSC") appointed
by Judge Sam C. Pointer, Jr. of the United States District Court
for the Northern District of Alabama (the "Court") to represent
the interests of plaintiffs in multi-district breast implant
litigation transferred to the Court for pretrial proceedings
under the federal multi-district transfer statute. At that time
the Company entered into an agreement to participate in a
proposed industry-wide class action settlement (the "Global
Settlement") of domestic breast implant litigation and petitioned
the Court to certify the Company's portion of the Global
Settlement as a mandatory class under Federal Rule of Civil
Procedure 23(b)(1)(B), meaning that claimants could not elect to
"opt out" from the class in order to pursue individual lawsuits
against the Company. Negotiations with the PNC over mandatory
class treatment were tabled, however (and the Company's petition
consequently not ruled upon), when an unexpectedly high
projection of current disease claims and the subsequent election
of Dow Corning Corporation to file for protection under federal
bankruptcy laws necessitated a substantial restructuring of the
Global Settlement.
In late 1995, the Company agreed to participate in a scaled-
back Revised Settlement Program ("RSP") providing for settlement,
on a non-mandatory basis, of claims by domestic claimants who
were implanted before January 1, 1992 with silicone gel-filled
implants manufactured by the Company's McGhan Medical subsidiary,
and who met specified disease and other criteria. Under the
terms of the RSP, 80% of the settlement costs relating to the
Company's McGhan Medical implants were to be paid by 3M and Union
Carbide Corporation, with the remaining 20% to be paid by the
Company. However, because the RSP did not provide a vehicle for
settling claims other than by persons who elected to participate,
and because of continuing uncertainty about the Company's ability
to fund its obligations under the RSP in the absence of a broader
settlement also resolving breast implant lawsuits against the
Company and its CUI subsidiary which would not be covered by the
RSP, the Company continued through 1996 and 1997 to negotiate
with the PNC in an effort to reach a broader resolution through a
mandatory class. The PNC was advised in these negotiations by
its consultant, Ernst & Young LLP, which at the PNC's request
conducted reviews of the Company's finances and operations in
1994 and again in 1996 and 1997.
On April 2, 1998, the Company and the Settlement Class
Counsel executed a formal settlement agreement (the "Settlement
Agreement"), resolving, on a mandatory, non-opt-out basis, all
claims arising from McGhan Medical and CUI breast implants
implanted before June 1, 1993. The Settlement Agreement was
submitted to the Court for preliminary approval on May 21, 1998.
Terms and Conditions of the Settlement Agreement
Under the Settlement Agreement, $31.5 million of
consideration, consisting of $3 million of cash, $3 million of
common stock and $25.5 million principal amount of a 6%
subordinated note will be deposited in a court supervised escrow
account approximately 90 days after preliminary approval by the
Court. The parties will then request the Court to authorize the
mailing of a notice of the proposed Settlement to all class
members and schedule a fairness hearing, which would probably be
held in the fourth quarter of 1998.
In the event the Court grants final approval of the
Settlement, the consideration held in the escrow account will
then be released, once the Court's final order becomes non-
appealable, to the court-appointed settlement office for
distribution to the plaintiff class, and the $25.5 million
subordinated note will mature and become payable in cash.
However, this payment will not become due before April 30, 1999
or 90 days after the Court's final order becomes non-appealable,
whichever is later. In the event the subordinated note is still
outstanding on September 1, 1999, the interest rate will increase
to 11%.
The Settlement Agreement covers all domestic claims against
the Company and its subsidiaries by persons who were implanted
with McGhan Medical or CUI silicone gel-filled or saline implants
before June 1, 1993, including claims for injuries not yet known
and claims by other persons asserting derivative recovery rights
by reason of personal, contractual or legal relationships with
such implantees. The Settlement is structured as a mandatory,
non-opt-out class settlement pursuant to Federal Rule of Civil
Procedure 23(b)(1)(B), and is modeled on similarly-structured
mandatory class settlements approved in the 1993 Mentor
Corporation breast implant litigation, and more recently in the
1997 Acromed Corporation pedicle screw litigation.
On June 2, 1998 the Court issued a preliminary order
approving the Settlement. The Court also issued an injunction
staying all pending breast implant litigation against the Company
(and its subsidiaries) in federal and state courts. The Company
believes that this stay will alleviate a significant financial
and managerial burden which these lawsuits had placed on the
Company.
The application for preliminary approval included
evidentiary submissions by both the Company and the plaintiffs
addressing requisite elements for certification and approval,
including the existence, absent settlement, of a "limited fund"
insufficient to respond to the volume of individual claims, and
the fairness, reasonableness and adequacy of the Settlement.
The Settlement is subject to a number of conditions,
including:
1. Extinguishment of the Company's Obligations under the
RSP. The Settlement is conditioned on the entry by the Court of
an order, pursuant to the default provisions of the RSP,
extinguishing the Company's obligations under the RSP and
restoring RSP participants' previously existing rights in the
litigation system against the Company and its subsidiaries. On
May 19, 1998, the Court issued such an order.
2. Certification of Settlement Class. The Settlement is
conditioned on the Court's certification of a new settlement
class pursuant to Federal Rule of Civil Procedure 23(b)(1)(B).
The parties are requesting such certification under the same
theory applied in the Mentor Corporation and Acromed Corporation
settlements, namely that the Company is a "limited fund" whose
resources, absent a mandatory class settlement, are insufficient
to respond to the volume of claims pending against it.
3. Court Approval of Settlement. The Settlement is subject
to judicial approval of its terms and conditions as fair,
reasonable and adequate under Federal Rule of Civil Procedure
23(e), a determination which takes into account such factors as
the nature of the claims, the arms' length negotiation process,
the recommendation of approval by experienced class counsel, and
the defendant's ability to pay.
4. Resolution of 3M Contractual Indemnity Claims. The
settlement is conditioned on resolution of claims asserted by 3M
under a contractual indemnity provision which was part of the
August 1984 transaction in which the Company's McGhan Medical
subsidiary purchased 3M's plastic surgery business. To resolve
these claims, on April 16, 1998 the Company and 3M entered into a
provisional agreement (the "3M Agreement") pursuant to which the
Company will seek to obtain releases, conditional on judicial
approval of the Company's settlement and favorable resolution of
any appeals, of claims asserted against 3M in lawsuits involving
breast implants manufactured by the Company's McGhan subsidiary.
The 3M Agreement provides for release of 3M's indemnity claim,
again conditional on judicial approval of the Settlement and
favorable resolution of any appeals, upon achievement of an
agreed minimum number of conditional releases for 3M. The 3M
Agreement requires that this condition be met or waived before
notice of the Settlement is given to the class.
Under the terms of the 3M Agreement, the Company will pay $3
million to 3M once the Court grants final approval of the
Settlement; except that no payment will become due any sooner
than April 30, 1999 or 90 days after the Court's final order on
the Settlement becomes non-appealable, whichever is later.
Under the terms of the 3M Agreement, after the indemnity to
3M is released, the Company will assume certain limited
indemnification obligations to 3M beginning in the year 2000,
subject to a cap of $1 million annually and $3 million in total.
5. State Law Contribution and Indemnity Claims. The
Settlement is conditioned on entry by the Court of an order
finding the Settlement to have been made in good faith and
barring joint tortfeasor claims for contribution and indemnity
arising under state law (e.g., claims against the Company by
other manufacturers, suppliers or physicians also sued by a
settling class member). As additional protection against such
claims in states whose laws do not provide for a bar of
contribution and indemnity claims upon determination of good
faith settlement, the Settlement also requires class members to
reduce any judgments they may obtain against such third parties
by the amount necessary to eliminate such parties' contribution
or indemnity claims against the Company under state law.
6. U.S. Government and Private Carrier Claims. The United
States government and private insurance carriers are seeking
reimbursement of medical services provided to class members. The
Company is presently in discussions with these parties concerning
the terms of such settlement. While the Settlement is not
conditioned on resolution of these claims, the Company
anticipates that it, together with Settlement Class Counsel and
the Court, if appropriate, will be able to resolve the issues
raised by the U.S. government and the private insurance carriers
before the mailing date of the class notice.
7. Favorable Resolution of Appeals. The Settlement is
conditioned on favorable resolution of any appeals which may be
taken from the final judgment approving the Settlement or from an
interim stay order. In the event the Settlement is disapproved
on appeal, all of the escrowed settlement funds, plus accrued
interest, will be returned to the Company, and the litigation
will be restored to the status which existed prior to any class
settlements.
8. Allocation and Distribution of Settlement Proceeds.
Following the procedures adopted in the Mentor Corporation and
Acromed Corporation mandatory class settlements, the Settlement
leaves allocation and distribution of the proceeds to class
members to later proceedings to be conducted by the Court, and
contemplates that the Court may appoint subclasses or adopt other
procedures in order to ensure that all relevant interests are
adequately represented in the allocation and distribution
process.
Class Settlement Approval Process and Timetable
Following the issuance by the Court of a preliminary order
on June 2, 1998, the settlement approval process is anticipated
to proceed in several stages, as follows:
1. Satisfaction of the Condition under the 3M Agreement.
Within 60 days after the date of the preliminary order
(extendable to 90 days at the Company's option), the Company
needs to obtain an agreed minimum number of conditional releases
for 3M pursuant to the terms of the 3M Agreement. At 3M's
option, that condition can be modified or waived. The Company
anticipates satisfying that condition by August 1, 1998.
2. Notice to the Class. Following conditional class
certification and preliminary approval of the Settlement, as well
as satisfaction (or waiver) of the condition in the 3M Agreement,
the parties will give notice to class members advising class
members of the Court's preliminary order and advising them of
their opportunity to be heard in support of or opposition to
final certification and approval. The parties expect that class
notice will be given approximately 30 days after satisfaction of
the condition in the 3M Agreement. Prior to the distribution of
the class notice, the Company must deposit in a court supervised
escrow account $31.5 million of consideration, consisting of $3
million of cash, $3 million of common stock (to be valued based
on the average closing bid price for the Company's common stock
during the period of June 10, 1998 through July 8, 1998), and
$25.5 million principal amount of a 6% subordinated note. The
Company anticipates that this deposit will occur prior to
September 30, 1998.
The parties' proposed form of notice provides a 60-day
deadline for class members to submit comments, objections, or
requests to intervene and be heard, with a final settlement
hearing scheduled approximately 20 days thereafter. Assuming the
Court adopts this schedule, the final settlement hearing would
occur in the latter part of the fourth quarter of 1998, barring
further unanticipated delays.
3. Hearing on Final Certification and Approval. At the
hearing on final certification and approval, the Court will
consider any comments and objections received from class members
as well as any further evidence and legal argument submitted by
the parties or interveners concerning issues relevant to
certification and approval, including the Company's status as a
"limited fund" and fairness, reasonableness and adequacy of the
Settlement. Assuming a favorable outcome, the Court will
thereafter issue a final order and judgment certifying the class
as a mandatory class under Federal Rule of Civil Procedure
23(b)(1)(B), approving the settlement, enjoining class members
from litigation of settled claims, and barring contribution and
indemnity claims to the extent permitted under state law.
Ongoing Litigation Risks
Although the Company expects the Settlement, if approved, to
end as a practical matter its involvement in the current mass
product liability litigation in the United States over breast
implants, there remain a number of ongoing litigation risks,
including:
1. Non-Approval of Settlement. The Settlement Agreement
requires all parties to use their best efforts to obtain approval
of the Settlement by the Court and on appeal. However, there can
be no assurance that the Court will approve the Settlement or
that a decision approving it will be affirmed on appeal. The
approval decision turns on factual issues which may be contested
by class members opposing the Settlement, and additionally
implicates a number of legal issues that neither the United
States Supreme Court nor the federal appellate courts have
definitely ruled upon. While courts have approved similarly
structured mandatory class settlements in the Mentor Corporation
and Acromed Corporation cases, neither of those decisions was
subjecteultimate outcome of the approval process or the appeals
process in the event any appeals of the Settlement are filed in a
timely manner.
2. Collateral Attack. As in all class actions, the
Company may be called upon to defend individual lawsuits
collaterally attacking the Settlement even if approved and
affirmed on appeal. However, the typically permissible grounds
for such attacks (in general, lack of jurisdiction or
constitutionally inadequate class notice or representation) are
significantly narrower than the grounds available on direct
appeal.
3. Non-Covered Claims. The Settlement does not include
several categories of breast implants which the Company will be
left to defend in the ordinary course through the tort system.
These include lawsuits relating to breast implants implanted on
or after June 1, 1993, and lawsuits in foreign jurisdictions.
The Company regards lawsuits involving post-June 1993 implants
(predominantly saline-filled implants) as routine litigation
manageable in the ordinary course of business. Breast implant
litigation outside of the United States has to date been minimal,
and the Court has with minor exceptions rejected efforts by
foreign plaintiffs to file suit in the United States.
The Company does not currently have any product liability
insurance. Depending on the availability and cost of such
insurance, the Company may in the future seek to obtain product
liability insurance.
The Company plans to obtain cash needed to fund the proposed
settlement from a combination of new senior secured debt and the
proceeds to be received upon the exercise of $13,900 of warrants
to purchase common stock (which were issued to the senior
Noteholders in July 1997 in anticipation of this event). The
Company has discussed its financing plans with Appaloosa
Management, L.P. and its affiliates, who are jointly the largest
holders of the 11% senior secured convertible notes. Those
entities have indicated their willingness to provide the new
financing, subject to negotiation of satisfactory terms,
covenants and legal documentation, including amendments to the
existing indenture and a new maturity date for the existing
senior debt. Such new financing may entail the issuance of
warrants or convertible securities which could be dilutive to
existing holders of the Company's common stock.
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 trades on the OTC Bulletin
Board under the symbol IMDC. The Company's Common Stock was
delisted rom the Nasdaq SmallCap Market effective June 11, 1997.
On June 30, 1998, the Company had 827 stockholders of record. The
Company's common stock price at the close of business of June 30,
1998 was $7.875 per share.
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
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
1996
1st Quarter $ 13-1/4 $ 8-3/4
2nd Quarter $ 12-5/8 $ 8
3rd Quarter $ 10-1/2 $ 7-1/8
4th Quarter $ 9-7/8 $ 6-3/8
1997
1st Quarter $ 8-3/8 $ 5-1/8
2nd Quarter $ 7-3/8 $ 2-3/4
3rd Quarter $ 7-7/8 $ 4-1/4
4th Quarter $ 5-1/4 $ 3
1998
1st Quarter $ 5-3/4 $ 3-1/8
2nd Quarter $ 9-7/16 $ 5
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 the
Settlement. Therefore, the Company does not anticipate paying
cash dividends on its common stock in the foreseeable future.
On June 10, 1997, the Company announced that its Board of
Directors unanimously adopted a Stockholder Rights Plan (the
"Plan") and has declared a dividend granting to its stockholders
the right to purchase (the "Right") for each share of the
Company's common stock, $.01 par value, one Common Share (a
"Common Share") at an initial price of $80. The record date for
the Rights was June 13, 1997. The Plan is designed to protect
stockholders from various abusive takeover tactics, including
attempts to acquire control of the Company at an inadequate price
which would deny stockholders the full value of their
investments. The Rights are attached to the Common Shares of the
Company and are not exercisable. They become detached from the
Common Shares and become immediately exercisable after any person
or group of persons becomes the beneficial owner of 15% or more
of the Common Shares (with certain exceptions) or 10 days after
any person or group of persons publicly announces a tender or
exchange offer that would result in the same beneficial ownership
level.
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>
<CAPTION>
Years Ended December 31,
(In 000's except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992
Income Statement Data:
Net sales $106,381 $93,372 $81,626 $80,385 $74,498 $64,343
Operating income(loss) (4,322) (4,419) (9,190) 3,578 5,680 (612)(3)
Litigation settlement (28,150) -- -- -- (9,152) --
Gain on sale of subsidiaries -- -- -- -- 4,159 --
Income (loss) before income
tax expense (benefit) (39,696) (8,165) (8,576) 5,007 449 436
Income tax expense (benefit) 1,881(2) 3,214(1) (1,683) 2,261 4,533 1,807
--------------------------------------------------------------------------------------------
Net income (loss) $(41,577) $(11,379) $(6,893) $2,746 $(4,084) $(1,371)
============================================================================================
Net income (loss) per share
of common stock basic
and diluted(4) $ (4.97) $ (1.46) $ (0.91) $ 0.37 $ (0.52) $ (0.17)
=======================================================================================
Weighted average common
shares outstanding 8,371,399 7,811,073 7,544,335 7,410,591 7,850,853 7,873,504
============================================================================================
</TABLE>
(1) Includes a write-off of domestic deferred tax assets of $2,006.
(2) Includes a provision of $1,000 for the conversion of foreign
intercompany accounts to equity.
(3) Includes write-offs of assets for product inventory aggregating $1,974.
(4) The earnings per share amounts for all years presented have been restated
to comply with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share".
<TABLE>
<CAPTION>
At December 31,
(in 000's except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992
Balance Sheet Data:
Working capital (deficiency) $ 6,460 $ 4,510 $(5,548) $ 1,088 $(2,317) $(1,922)
Total assets 58,842 65,912 50,385 47,810 37,857 29,093
Long term debt, net of
current installments 23,574 34,607 583 51 235 454
Subordinated long term debt,
related party 8,813 -- -- -- -- --
Stockholders' (deficiency)
equity (46,689) (9,908) (1,704) 4,479 1,347 6,546
Stockholders' (deficiency) equity
per share of common stock $ (5.58) $ (1.27) $ (.23) $ 0.60 $ 0.17 $ 0.83
Dividends paid -- -- -- -- -- --
=============================================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This Annual Report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all
forward-loking statements involve risks and uncertainty,
including without limitation, the ability of the Company to
continue its expansion strategy, changes in costs of raw
materials, labor, and employee benefits, as well as general
market conditions, competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this
Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be
achieved.
Results of Operations
The Company's financial performance in each of the four years
ended December 31, 1997, 1996, 1995 and 1994 was strongly and
adversely impacted by: 1) the costs of improving manufacturing
practices and policies in accordance with FDA regulations; 2) the
costs of addressing the breast implant litigation; 3) investments
made in international markets to increase the Company's sales and
marketing presence; and 4) the cost of investing in research and
development, particularly in new products and technologies.
Based on these factors, although sales have grown during those
periods, expenses have grown at a significantly higher rate.
Consequently, the Company's financial performance has
deteriorated in each of 1994 through 1997.
Recent developments. In January 1998 a new management team
was selected, and in April 1998 a settlement agreement providing
for a mandatory, non-opt-out class action settlement of the
breast implant litigation was announced. Consequently, the
Company has taken a $28.2 million charge to the 1997 results of
operations for costs directly related to the litigation
settlement. The Company believes an additional charge of
approximately $5 million will be incurred in 1998 (to reflect the
costs of a proposed restructuring plan).
Summary financial table. Set forth below is a table which
shows the individual components of the Company's results of
operations, both in dollars (in thousands) and as a percent of
net sales; and including the percentage increase (decrease) from
the prior year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995 1994
(000s) % % % %
Inc. Inc. Inc. Inc.
Sales 106,318 14% 93,372 14% 81,626 2% 80,385 8%
Cost of Goods Sold 37,643 7% 35,295 17% 30,156 15% 26,264 14%
Gross Profit 68,738 18% 58,077 13% 51,470 (5%) 54,121 5%
As a % of sales 65% 62% 63% 67%
Marketing 30,349 19% 25,569 9% 23,434 19% 19,719 17%
As a % of sales 29% 27% 29% 25%
G&A 33,848 8% 31,234 (5%) 32,834 21% 27,099 5%
As a % of sales 32% 33% 40% 34%
R&D 8,863 56% 5,693 30% 4,392 18% 3,724 21%
As a % of sales 8% 6% 5% 5%
Operating expenses 73,060 17% 62,496 3% 60,660 20% 50,543 (8%)
As a % of sales 69% 67% 74% 63%
Operating income/ (4,322) (4,419) (9,190) 3,578
(loss)
Litigation settlement 28,150 -- -- --
</TABLE>
Sales. While the Company's revenues are subject to
adjustments due to changes in price or volume of units sold,
revenue increases from 1994 through 1997 were primarily a result
of increased volume.
Sales in the United States accounted for 63%, 65%, 68% and 74%
of total net sales in 1997, 1996, 1995 and 1994, respectively.
The low growth rate in sales in 1995 was due to a shortage of raw
materials and production capacity, because of cash flow problems
in paying suppliers and the diversion of manufacturing time to
satisfy FDA-mandated process validation procedures. In all other
years, the increase in sales was due to higher sales in the
Company's various product lines.
International sales accounted for 37%, 35%, 32% and 26% of
total net sales in 1997, 1996, 1995 and 1994, respectively.
These increases were due to market expansion in various countries
around the world, as the Company invested in new sales and
distribution infrastructure in Europe, Central and South America
and Asia/Pacific.
Cost of goods sold. The largest factors in the variation from
year to year in cost of goods sold as a percentage of net sales
is the cost of raw materials and the yield of finished goods from
the Company's manufacturing facilities. The yield of finished
goods has fluctuated by approximately 20 percentage points during
1994 through 1997. Given the limited number of suppliers of
medical-grade silicone raw materials and components, the
Company's ability to control raw materials cost is often limited.
The Company's use of internationally-manufactured raw materials
from one of its foreign subsidiaries may also help to stabilize
and reduce cost of goods sold in the future. While the Company
seeks to manufacture its finished goods as efficiently as
possible, its products are subject to stringent quality and
control standards (including those agreed upon with the FDA),
which can periodically have a significant impact on the yield of
finished goods. The new management team has set targets to
improve the gross profit margin.
Marketing expenses. The largest factor in the variation from
year to year in marketing expenses is the success of the
Company's start-up businesses in various foreign countries.
Depending on the country and the potential market demand for the
Company's products, the Company may choose to begin operations in
a new territory through either a third party medical products
distribution partner or through its own sales force. In either
situation, extra financial support may be necessary for several
years while the Company establishes itself in a new market and
generates sufficient sales to earn a profit in that new
territory. However, in the future the new management team plans
to control the introduction of new products and the entry into
new markets so as to minimize negative impacts on results of
operations.
General and administrative expenses. G&A expenses are
affected by overall headcount in various administrative
functions, and the legal, accounting and other outside services
which were necessary to defend the Company in the breast implant
litigation and negotiate a settlement. Also, in 1997 G&A expenses
were affected by the legal and accounting costs necessary to
complete the audits for 1996 and 1997. The number and cost for
employees engaged in general and administrative positions has
increased in each of 1994 through 1997, at a rate greater than
the increase in gross profit dollars. The legal, warranty and
administrative costs relating to the breast implant litigation
was $4.7 million, $3.5 million, $2.5 million and $3.9 million in
1997, 1996, 1995 and 1994, respectively. The new management team
has set targets to control and reduce general and administrative
expenses throughout the Company.
Research and development expenses. R&D expenses have
increased from 1994 through 1997 to reflect the Company's
commitment to develop new and advanced medical products. In prior
years increased costs were due to the Company's efforts to obtain
FDA PMA approvals. The increase in 1996 and 1997 was due
primarily to R&D expenses at the Company's BioEnterics subsidiary
in connection with the development of obesity products. Research
and development expenses at Bioenterics were $1.5 million in 1996
and $2.4 million in 1997. In 1998 the new management team began
considering various options to sell a portion of its interest in
this business. Accordingly, it is anticipated that R&D expenses
for the rest of the Company's operations will not exceed 6% of
sales in the coming few years.
Interest expense. In 1994 and 1995, the Company funded its
operations primarily through operating cash flow and,
accordingly, did not incur significant net interest expenses.
Net interest expense of approximately $4.3 million in 1996 was
due to the net carrying costs on the $35 million of 11% senior
secured convertible notes issued in January 1996, as well as an
accounting charge of $1.4 million associated with the issuance of
common stock under an agreement to waive certain covenant
defaults. Net interest expense of approximately $6.2 million in
1997 was impacted by the incurrence of penalty charges totaling
$1.6 million due to the Company's failure to provide an effective
registration statement to the holders of the 4% convertible
debentures issued earlier that year, offset by a reduction in
interest expense due to the retirement of $15 million of the 11%
senior secured convertible notes with the proceeds that had been
held in an escrow account. Additionally, in 1997 the Company
accrued (but did not pay) interest on approximately $9.9 million
of 10.5% subordinated notes which were incurred primarily in the
later half of the year to fund its working capital needs.
Foreign currency translation loss. Historically the Company's
subsidiaries have incurred significant intercompany debts
(totaling more than $44 million for non-U.S. subsidiaries),
which are eliminated in the consolidated financial statements.
However, those intercompany debts, which are denominated in
various foreign currencies, give rise to translation adjustments.
In 1998 the new management team evaluated various alternatives
for reducing the Company's foreign currency exposure, and
concluded to convert the non-U.S. intercompany debts to the
capital of the respective subsidiaries. The fourth quarter of
1997 includes a provision of $1 million for income tax expense,
which will be incurred as those conversions occur.
Operating Loss. Excluding the expenses arising from the
settlement of the breast implant litigation, the Company had a
loss from operations in each of 1995 through 1997. The aggregate
operating loss for those periods was approximately $18 million.
In 1998 the new management team has undertaken a restructuring
program which is designed to reverse the Company's poor operating
performance and significantly improve the Company's operating
margin. Included in this program is a planned reduction in
headcount, discontinuance or sale of unprofitable product lines,
improved asset management (especially receivables and inventory),
and reduced general and administrative expenses. There is no
assurance that the Company will be successful in these efforts.
Financial Condition
Liquidity. The Company's liquidity has deteriorated
significantly in each of the last four years resulting in
substantial doubt about the Company's ability to continue as a
going concern. Pre-tax losses aggregated $19.4 million during
1994 through 1997, excluding the effect of the $32 million charge
to 1997 results of operations arising primarily from the $28.2
proposed settlement of the breast implant litigation. Net cash
used for operating activities totaled $23.6 million during 1994
through 1997. Beginning in 1998, after the appointment of new
management, steps were taken to reverse these trends, and for the
first five months of 1998 the Company succeeded in achieving a
small, positive cash flow from operations. As the reductions in
cost of goods, G&A and R&D outlined above begin to take effect,
the Company believes it can improve its cash flow from
operations.
Among the primary factors which contributed to the significant
negative cash flow from operations during 1994 through 1997 were:
1) operating losses; 2) the increase in inventory ($4.5 million
in 1997, $3.9 million in 1996, and $2.5 million in 1995), which
was necessary to support anticipated higher sales (particularly
in new international markets), to overcome negative customer
perceptions due to past product shortages, and to supply certain
customers with consignment inventory in order to meet competitive
practices; and 3) capital expenditures aggregating $16.7 million
from 1994 through 1997 which exceeded depreciation and
amortization by $9.5 million during that period. Consequently,
at various times during 1995, 1996 and 1997 the Company had
serious liquidity problems, resulting in delayed payments with
respect to vendors, licensors and accrued payroll ie. payroll
taxes. The Company is presently current in the payment of payroll
taxes and has reached an agreement with the IRS during 1997 to
settle all prior unpaid taxes.
The Company's working capital improved from 1995 through 1997
due to cash retained from outside financings. The Company's
working capital as of December 31, 1997 was approximately $6.5
million. The Company's accumulated deficit increased
significantly in 1997 due to the charge for the anticipated
breast implant litigation settlement. In reducing the accumulated
deficit, the Company is developing a restructuring plan which
will reduce excess personnel as well as facilities and other
contractual obligations. These actions together with the plans to
reduce inventory will enable the Company to improve its working
capital in the future.
The Company has funded its cash needs through a series of debt
and equity transactions, including:
$35 million of proceeds received upon the issuance of
11% senior secured convertible notes, due March 31, 1999, in
a private placement transaction in January 1996. Interest
is payable quarterly as of March 31, June 30, September 30,
and December 31. Of that amount, $14.8 million was placed
in an escrow account to be released within one year,
following court approval of a mandatory non-opt-out class
settlement of the breast implant litigation. Inasmuch as that
condition was not met, in July 1997 the Company returned
those escrowed funds to the senior Noteholders, in exchange
for warrants to purchase $13.9 million of common stock at
$8.00 per share (subsequently adjusted to $7.50 per share).
The conversion price of the 11% senior secured convertible
notes was originally $10 per share. In July 1997 the Company
and the senior Noteholders agreed to change the conversion
price to $5.50 per share at 103% of the principal balance as
part of an overall restructuring plan which included the
waiver of past defaults. At June 5, 1998, $19.6 million of
the 11% senior notes was outstanding.
$3 million of proceeds received in June 1996 upon the sale of
344,333 shares of common stock in a Regulation S transaction
to non-U.S. investors, at a price of $8.7125 per share.
$5.7 million of proceeds received in January 1997 upon the
issuance of $6.2 million principal amount of 4% convertible
debentures, due January 30, 2000. Interest is payable
quarterly as of March 30, June 29, September 29 and
December 30. These debentures were convertible at 85% of the
market price of the common stock less an additional discount
of 6%. As of April 6, 1998, all of such debentures had been
converted into an aggregate of 1,724,017 shares of common
stock at prices ranging from $2.60 to $4.44 per share. No
debentures are currently outstanding.
$9.9 million of proceeds received periodically from April
1997 until January 1998 from an entity affiliated with the
Company's former chairman. That indebtedness is denoted as the
Company's 10.5% subordinated notes. By the terms of the 11%
senior secured convertible notes, the 10.5% subordinated notes
are junior in right of payment and liquidation and,
accordingly, no interest or principal payments can be made
with respect thereto without the consent of the senior
Noteholders. The Company plans to negotiate the conversion of
the 10.5% subordinated notes into common stock sometime during
1998, although there can be no assurance that such a
transaction will occur or that the price or timeframe for
any such conversion will be favorable to the Company's
existing stockholders.
The Company is seeking to establish a domestic revolving
line of credit. Under the terms of the 11% senior secured
convertible notes, the Company has leeway for up to $5 million of
such financing. The Company's Dutch subsidiary has a l ine of
credit with a major Dutch bank, currently totaling $860,000. The
line of credit is collateralized by the accounts receivable,
inventories and certain other assets of that subsidiary.
The Company currently has a net operating loss (NOL)
carryforward for financial statement purposes of approximately
$55 million. NOL carryforwards for federal income tax purposes
of approximately $14.0 million are available to offset federal
taxable income through the year 2012 . The cost of the litigation
settlement discussed in Note 14 to the financial statements
for 1996 and 1997 will be deductible for federal income tax
purposes at such time as the consideration is deposited in a court
supervised escrow account and accordingly will increase the NOL
carryforward for federal income tax purposes by the same amount.
The difference between the NOL for financial reporting
purposes and federal income tax purposes results from differences
in accounting for allowance for returns, accrued litigation
settlements and other accrued liabilities and allowances not
currently deductible for tax purposes. The Company has provided a
100% valuation allowance on deferred tax assets substantially
resulting from the NOL carryforwards discussed above.
Currently, the Company is not repatriating funds to the U.S.
operations. Payments by the foreign subsidiaries to the domestic
subsidiaries are only for the payment of purchases of product.
The Company does not currently enter into hedging
transactions to control foreign currency exchange rate risk. New
management is investigating this with plans to have a program in
place by year end.
Breast Implant Settlement. Under the terms of the proposed
settlement of the breast implant litigation, the Company will be
obligated to pay an aggregate of $34.5 million to the plaintiffs
and 3M at the later of (x) April 30, 1999 or (y) 90 days after
the Court's final order becomes non-appealable. That payment
will consist of $31.5 million of cash (which will be used to
retire the $25.5 million note to the plaintiffs which will be
placed in escrow prior to the mailing of notice of the proposed
settlement) and $3 million of common stock, to be valued based on
the average closing bid price of the Company's common stock
during the period of June 10, 1998 through July 8, 1998.
The Company plans to obtain the cash needed to fund the
proposed settlement from a combination of new senior secured debt
and the proceeds to be received upon the exercise of $13.9
million of warrants to purchase common stock (which were issued
to the senior Noteholders in July 1997 in anticipation of this
event). The Company has discussed its financing plans with
Appaloosa Management, L.P. and its affiliates, who are jointly
the largest holders of the 11% senior secured convertible notes.
Those entities have indicated their willingness to provide the
new financing, subject to negotiation of satisfactory terms,
covenants and legal documentation, including amendments to the
existing indenture and a new maturity date for the existing
senior debt. Such new financing may entail the issuance of
warrants or convertible securities which could be dilutive to
existing holders of the Company's common stock.
The costs of defending the breast implant litigation-both
past and future-vastly exceed the Company's financial resources.
Absent the successful completion of the settlement of this
litigation through the vehicle of a mandatory non-opt-out class,
management believes that the Company would not be able to
continue as a going concern. Although the Company is optimistic
that the proposed settlement agreement can be completed on the
terms and within the timetable negotiated and announced in April
1998, there can be no assurance in this regard.
The Company's continuation as a going concern is dependent
upon its ability to obtain financing for the non-opt-out
settlement agreement and its ability to generate sufficient cash
flows to meet its obligations on a timely basis. The Company is
actively seeking financing and anticipates doing a restructuring
which the Management believes will ultimately enable them to
attain profitability.
Capital Expenditures
Expenditures on property and equipment approximated $5.1
million in 1997 compared to $4 million in 1996 and $4.7 million
in 1995. The majority of the expenditures in each year were for
building improvements and equipment to increase production
capacity and efficiency. Working capital is expected to fund
capital expenditures in 1998.
Significant Fourth Quarter Adjustments
During the fourth quarter of the year ended December 31,
1997, the Company recorded significant adjustments which
decreased income by $29.7 million. The adjustments were to
recognize the latest developments in the Company's breast implant
litigation and the anticipated settlement as well as income tax
expense for the foreign subsidiaries.
During the fourth quarter of the year ended December 31,
1996, the Company recorded significant adjustments which decreased
income by $3.8 million. The adjustments were to increase the write
off of the deferred tax assets of $2 million, to increase
provision for product returns by $0.9 million and to increase
provision for product liability and record royalty expenses under
international royalty agreements.
Significant adjustments to the fourth quarter for the year
ended December 31, 1995 included a reduction of income tax expense
by $4.2 million, an increase in the provision for returns by $1.4
million and an increase to compensation expense of $0.9 milion to
record bonuses and compensation payments declared after year end.
Significant adjustments to the fourth quarter for the year
ended December 31, 1994 included a reduction of income tax expense
by $3.4 million, increases in various reserves for returns,
inventory obsolescence and product liability of $1.9 million,
decrease in rent expense of $0.8 million, increase in royalty
income of $0.3 million and an increase in compensatio n expense of
$0.2 million.
The Company's new management has installed procedures to
monitor quarterly financial statements to ensure there are
minimal significant fourth quarter adjustments.
Impact of Inflation
The Company believes that inflation has had a negligible
effect on operations over the past four years. The Company
believes that it can offset inflationary increases in the cost of
materials and labor by increasing sales prices and improving
operating efficiencies.
Impact of Year 2000
Management has initiated a company-wide program to prepare
the Company's computer systems and applications for the year
2000, as well as identify critical third parties which the
Company relies upon to operate its business to assess their
readiness for the year 2000. The year 2000 issue arises from the
widespread use of computer programs that rely on two-digit date
codes to perform computations for decision-making functions. At
this time, management expects that all such modifications will be
completed on a timely basis and that the costs of these
modifications will not have a material adverse effect on the
Company's results of operations, financial position or liquidity.
There can be no assurance that the systems of other companies
which the Company's systems rely upon will be timely converted,
or that such failure to convert by another company would not have
a material adverse effect on the Company's systems and results of
operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", ("SFAS No. 131") which supersedes SFAS
No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS No. 131 establishes standards for the way
public companies report information about operating segments in
annual financial statements and requires reporting of selected
information about operating segments in interim financial
statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources
and in assessing performance.
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") established
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among
other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
Both SFAS Nos. 130 and 131 are effective for financial
statements for periods beginning after December 15, 1997 and
require comparative information for earlier years to be restated.
The adoption of these standards is not expected to have a
material effect on the Company's financial position, results of
operations or financial statement disclosures.
ITEM 8(a). FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit (a)(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND DISCLOSURE.
On March 11, 1998, the Company announced the resignation of
its outside auditor, Coopers & Lybrand, L.L.P. as of March 6,
1998. All developments and related issues in connection with the
resignation of Coopers & Lybrand, L.L.P. are contained in the
Form 8-K Current Report of the Company, as filed with the S.E.C.
on March 16, 1997, and amended by the Form 8-K/A filed with the
S.E.C. on March 27, 1998, which are incorporated herein by
reference.
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
Richard G. Babbitt 72 Chairman of the Board,
President and Chief Executive Officer
Ilan K. Reich 43 Executive Vice President, Director
Tom K. Larson, Jr. 62 Vice President, Finance and Administration
Chief Financial Officer
Jeffrey J. Barber 38 Executive Vice President
Harrison E. Bull, Esq. 57 Director
Jim J. McGhan 45 Director
Richard Wm. Talley 54 Director
John E. Williams, M.D. 76 Director
Richard G. Babbitt
Mr. Babbitt has been the President and Chief Executive
Officer of INAMED since January 22, 1998, and Chairman since
February 6, 1998. Mr. Babbitt also serves as Chairman of
DNA Technologies, Inc. since June 1997 and President of B.I.
Advisors. He has been associated with Ben Hogan Company,
B.I. Industries, American Safety Equipment Corporation,
Welsh Manufacturing and Medical Supply Company in C.E.O. and
Board positions.
Ilan K. Reich
Mr. Reich has been Executive Vice President and a
director of INAMED since January 22, 1998. Until that time
he was a partner with the New York law firm of Olshan
Grundman Frome & Rosenzweig LLP, specializing in corporate
and securities law. From 1988 to June 1996, Mr. Reich served
in various senior executive positions with public and
private companies controlled by a private investor,
including Western Publishing Group, Inc., the largest U.S.
publisher of children's books, and Rabco Health Services,
Inc., a distributor of medical/surgical products and a
wholesale pharmaceutical company. Mr. Reich is a graduate
of Columbia College and Columbia Law School, and a member of
various bar associations.
Tom K. Larson, Jr.
Tom K. Larson, Jr. joined INAMED as Chief Financial
Officer effective April 1, 1998. Mr. Larson has broad
experience in financial and operating management in a wide
range of industries. He is a 16-year veteran of Xerox
Corporation, with financial and administrative roles in
their telecommunications business, research laboratories and
special products division, which included aerospace and
medical diagnostic products. He has also been the CFO of
Revell Corporation (a Rothchilds company), a maker of scale
model kits, and for the past eight years was the CFO of a
privately held specialty bed manufacturer. Mr. Larson has a
B.A. degree from Allegheny College, a Masters degree from
the University of Pittsburgh and has attended programs at
Harvard Business School.
Jeffrey J. Barber
Mr. Barber has served as an Executive Vice President of
INAMED since March 31, 1997. Mr. Barber originally joined
the Company in 1992 as Worldwide Marketing Manager for
McGhan Medical Corporation. He later became Vice President
of Business Development and Marketing. In 1996 he became a
vice president of the Company responsible for marketing,
business development and international development. Prior
to his employment with the Company, Mr. Barber held
positions with Chiron Corporation and Baxter Healthcare,
Inc.
Harrison E. Bull, Esq.
Mr. Bull has served as a Director of INAMED since March
31, 1997. Mr. Bull is the senior partner of the law firm of
Bull, Cohn and Associates and its predecessor since 1974.
The firm is primarily a general practice law firm in Santa
Barbara, California, with general emphasis on civil
litigation. Mr. Bull has been a member of the Florida Bar
since 1973, the California Bar since 1974 and is a member of
the American Bar Association. Mr. Bull was admitted to
practice before the Supreme Court of the United States in
1984.
Jim J. McGhan
Mr. McGhan has been a Director of INAMED since March
31, 1997. Mr. McGhan previously served INAMED as Chief
Operating Officer from January 22, 1998 through June 24,
1998 and as President from March 31, 1997 to January 22,
1998. Mr. McGhan also served McGhan Medical Corporation as
Chief Executive Officer from April 1996 until June 24, 1998
and as President from August 1992 to April 1996.
Richard Wm. Talley
Mr. Talley has served as a Director of INAMED since
March 31, 1997. Mr. Talley is currently a principal with
Talley, King & Co., a NASD broker-dealer based in Irvine,
California, specializing in private placement transactions,
which he founded in 1993. Prior to that he founded Talley,
McNeil & Tormey, Inc., a regionally focused investment bank,
which merged in 1990 into a larger investment banking firm
in Irvine, California. Prior to that he opened the Santa
Barbara office of Shearson Lehman Brothers and managed that
location until the merger with American Express Corporation.
Mr. Talley is also the founder and Director of CentraCan
Inc., the previous MRI division of HealthCare Merger Corp.,
providing cancer-related diagnostic and treatment services
in Central America. He is a graduate of the University of
California Santa Barbara and holds an MBA from Cornell
University.
John E. Williams, M.D.
Dr. Williams has served as a Director of INAMED since
March 31, 1997. Dr. Williams is a plastic surgeon
specializing in aesthetic surgery. He is currently not
practicing. He is a Diplomate of the American Board of
Plastic Surgery and is a Fellow of the American College of
Surgeons. He is a member of the American Society of Plastic
and Reconstructive Surgeons and the American Society of
Aesthetic Plastic Surgeons. He holds memberships in state,
national and international plastic surgery societies and is
a member of the American Medical Association and the Los
Angeles County Medical Association.
ITEM 11. EXECUTIVE COMPENSATION.
The Company established a Compensation Committee of
the Board of Directors in March 1997 consisting of the three
non-management directors: Messrs. Bull and Talley and Dr.
Williams.
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 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, 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 for their contributions. The grant of
options is based primarily on a key employee's potential
contribution to the Company's growth and profitability.
Options are currently granted at an option price of $1.45
per share and vest immediately upon granting.
Employment, Severance, and Change of Control Agreements
On January 23, 1998, Donald K. McGhan resigned as Chief
Executive Officer of the Company. Subsequently, on February
11, 1998, Mr. McGhan resigned as Chairman of the Board as
well as a Director, positions he had held since 1985. From
time to time, as requested by the Company's new Chairman,
Mr. McGhan continues to provide the benefit of his knowledge,
ideas and experience to the Company in the non-director
capacity of Chairman Emeritus.
On January 23, 1998, the Company entered into an
Employment Agreement with Richard G. Babbitt (the "Babbitt
Agreement"), whereby the Company engaged Mr. Babbitt to act
as President and Chief Executive Officer for a term of three
years. Under the terms of the Babbitt Agreement, Mr. Babbitt
is to be paid $400,000 per year. In addition, Mr. Babbitt
received an Executive Officer Warrant granting him the right
to purchase 400,000 shares of the Company's Common Stock at
a price of $3.525 per share.
On January 22, 1998, the Company entered into an
Employment Agreement with Ilan K. Reich (the "Reich
Agreement"), whereby the Company engaged Mr. Reich to act as
Executive Vice President for a term of three years. Under
the terms of the Reich Agreement, Mr. Reich is to be paid
$400,000 per year. In addition, Mr. Reich received an
Executive Officer Warrant granting Mr. Reich the right to
purchase 400,000 shares of the Company's Common Stock at a
price of $3.95 per share.
Mr. Babbitt and Mr. Reich (each, a "Covered Employee")
have each entered into an Employee Severance Agreement (a
"Severance Agreement") with the Company. Under the terms of
the Severance Agreement, and for a term of three years, upon
a change in control of the Company (as defined in the
Severance Agreement), and the subsequent termination of the
Covered Employee, such Covered Employee will be entitled to
certain benefits, including, among other things, a lump sum
severance payment equal to 300% of annual base salary and a
cash payment in lieu of shares of Common Stock issuable to
the Covered Employee upon severance of certain outstanding
options. The payments under the Severance Agreement are
subject to a "gross-up" provision whereby the Company will
pay an additional amount to the Covered Employee to
counteract the effect of any excise tax under Section 4999
of the Internal Revenue Code.
On April 1, 1998, the Company entered into an
Employment Agreement with Tom K. Larson, Jr. (the "Larson
Agreement"), whereby the Company engaged Mr. Larson to act
as Chief Financial officer for a term of three years. Under
the terms of the Larson Agreement, Mr. Larson is to be paid
$165,000 per year. In addition, Mr. Larson received an
option to acquire 20,000 shares of the Company's Common
Stock at a price of $1.45 under an existing employee stock
option plan. Mr. Larson also received an Executive Officer
Warrant granting Mr. Larson the right to purchase 25,000
shares of the Company's Common Stock at a price of $5.00 per
share.
On June 24, 1998, Jim J. McGhan's employment with the Company
and its subsidiaries was terminated. Jim J. McGhan was the
Chief Operating Officer of the Company, and he is Donald K.
McGhan's son. Jim J. McGhan continues as a member of the
Board of Directors.
Stock Option Plans
In 1984, McGhan Medical Corporation adopted an
incentive stock option plan (the "1984 Plan"). Under the
terms of the 1984 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 the 1984 Plan during 1997, 1996, 1995 or
1994.
In 1986, the Company adopted an incentive and
nonstatutory stock option plan (the "1986 Plan"). Under the
terms of the 1986 Plan, 300,000 shares of common stock have
been reserved for issuance to key employees. No options
were granted under the 1986 Plan during 1997, 1996, 1995 or
1994.
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 this 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 inital
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 providing 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.
At December 31, 1997 30,000 options were granted under this
plan. The Company recorded stock compensation expense of
$51,000 for the year ended December 31, 1997.
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 1987 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 1987 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, 1997. No stock awards were granted under
this plan during 1997 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
The following table sets forth information with
respect to the compensation of the Company's executive
officers as of December 31, 1997 for services in executive
capacities to the Company in 1994, 1995, 1996 and 1997:
Long-Term
Compensation
Annual Compensation
Stock
Options/SARs
Other
Annual Granted All Other
Name and Principal Position Year Salary Bonus Compensation (in Shares) Compensation (6)
<S> <C> <C> <C> <C> <C> <C>
Donald K. McGhan (1) 1997 $ 27,763 $ __ $ __ $ __ $ 20,289
Chairman, Chief Executive 1996 6,427 -- -- -- 32,994
Officer and President 1995 299,676 -- -- -- __
1994 253,187 -- -- -- --
Michael D. Farney (2) 1997 56,250 -- -- -- 3,573
Chief Executive Officer 1996 225,000 -- -- -- 19,302
And Secretary 1995 245,165 714,277 -- -- --
1994 207,354 -- -- -- __
Jim J. McGhan (3) 1997 218,077 3,462 180,000 -- 536
Chief Operating Officer 1996 -- -- 330,000 -- --
1995 -- -- 260,000 -- --
1994 -- -- 314,000 -- --
Thomas R. Pilholski (4) 1997 17,692 -- -- -- 3,726
Chief Financial Officer
Jeffrey J. Barber (5) 1997 120,462 9,162 __ __ 5,536
_________________
</TABLE>
(1) Mr. McGhan was Chairman from 1985 to February 6, 1998,
President from January 1987 to March 1997, and Chief
Executive Officer from April 1987 until June 1992 and March
31, 1997 until January 22, 1998. Mr. McGhan is currently
Chairman Emeritus, and no longer has any executive or board
responsibilities with the Company.
(2) Mr. Farney resigned as Chief Executive Officer and Secretary
as of March 31, 1997.
(3) Mr. McGhan served as Chief Operating Officer from January
22, 1998 through June 24, 1998 and served as President from
March 31, 1997 to January 22, 1998. Prior to his direct
employment with the Company, he served as a consultant to
one of the Company's subsidiaries, McGhan Medical
Corporation. Consulting fees paid to Mr. McGhan in prior
years are listed in other annual compensation. Mr. McGhan's
employment with the Company ceased on June 24, 1998.
(4) Mr. Pilholski commenced employment with the Company on
November 19, 1997 and departed on March 3, 1998.
(5) Mr. Barber has served as Executive Vice President since
March 31, 1997.
(6) Fringe benefits including automobile allowance, relocation
allowances and group term insurance.
Table of Stock Option Exercises in 1997 and 1996 and Year-End
Option Values
No. of Value of
No. of Securities Unexercised In-
Shares Underlying the-Money
Acquired Value Unexercised Options at
Name on in $ Options at 12/31/97 ($)
Exercise Realized 12/31/97 ($) Exercisable/
Exercisable/ Unexercisable
Unexercisable
Jeffrey J. Barber - __ 10,000/0 $30,000/$0
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, 1992 until December 31, 1997. The total
shareholder return assumes $100 invested at December 31, 1992 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.
12/92 12/93 12/94 12/95 12/96 12/97
INAMED Corporation 100 105 124 338 324 157
Nasdaq Stock Market 100 115 112 159 195 240
(U.S.)
S&P Health Care (Medical 100 76 90 153 175 219
Products & Supplies)
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 June 5, 1998, 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, (iii) each of the officers named
in the Summary Compensation Table and (iv) 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.
Name of Beneficial
Owner or Identity of Group Number of Shares Percent of Class
Group
Appaloosa Management LP 4,593,355(1) 33.10%
26 Main Street
Chatham, NJ 07928
Donald K. McGhan 1,330,203(2) 13.13%
3800 Howard Hughes Parkway
Suite 1800
Las Vegas, Nevada 89109
Oracle Partners, L.P. 1,195,891(3) 10.64%
712 Fifth Avenue, 45th Floor
New York, New York 10019
HBK Investments L.P. et al 583,928 5.77%
777 Main Street, Suite 2750
Forth Worth, Texas 76102
Richard G. Babbitt(4) 0(5)
Ilan K. Reich(4) 75,000(6) 0.74%
Tom K. Larson, Jr.(4) 20,000(7)
Jim J. McGhan(4) 0
Jeffrey J. Barber(4) 12,000 0.12%
Harrison E. Bull(4) 35,000(8) 0.84%
Richard Wm. Talley(4) 60,000(8) 1.09%
John E. Williams(4) 35,000(8) 0.84%
All officers and 237,000 3.63%
directors as a group
(1) Includes 2,660,341 shares of which Appaloosa Management LP
has beneficial ownership by reason of the ownership of
$14,205,714 aggregate principal amount of the Company's 11%
Secured Convertible Notes due 1999. Also includes 1,098,214
shares of common stock issuable upon exercise of warrants to
purchase common stock at $7.50 per share.
(2) Includes 207,310 shares of common stock owned by Shirley M.
McGhan, the wife of Donald K. McGhan, to which Mr. McGhan
disclaims beneficial ownership; 107,985 shares owned by a
corporation of which Mr. McGhan is the chairman; 197,280
shares owned by a limited partnership of which Mr. McGhan is
the general partner; and 173,453 shares owned by a limited
liability corporation of which Mr. McGhan is the managing
member. Also includes 8,571 shares of common stock issuable
upon exercise of warrants to purchase common stock at $7.50
per share.
(3) Includes 749,091 shares of which Oracle Partners L.P. has
beneficial ownership by reason of the ownership of
$4,000,000 aggregate principal amount of the Company's 11%
Secured Convertible Notes due 1999. Also includes 375,000
shares of common stock issuable upon exercise of warrants to
purchase common stock at $7.50 per share.
(4) The address of these officers and directors is 3800 Howard
Hughes Parkway, Suite 900, Las Vegas, Nevada 89109
(5) Does not include a warrant to purchase 400,000 shares, which
begins to vest in 1999.
(6) Based on a warrant to purchase stock at $5.51 per share,
which is currently exercisable. Does not include a warrant to
purchase 400,000 shares, which begins to vest in 1999.
(7) Does not include a warrant to purchase 25,000 shares, which
begins to vest in 1999.
(8) Includes director options and warrants which are currently
exercisable. Does not include a warrant to purchase 50,000
shares, which begins to vest in 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From April 1997 until January 1998, International Integrated
Industries, LLC, ("Industries") an entity affiliated with Mr.
Donald K. McGhan, the Company's former Chairman, Chief
Executive Officer and President and 13% stockholder, lent the
Company an aggregate of $9.9 million, of which $8.8 million is
included in liabilities at December 31, 1997. That indebtedness
is denoted as the Company's 10.5% subordinated notes. By the
terms of the 11% senior secured convertible notes, the 10.5%
subordinated notes are junior in right of payment and liquidation
and, accordingly, no interest or principal payments can be made
with respect thereto without the consent of the senior
Noteholders. Interest expense of $386,000 was accrued in the 1997
income statement with respect to those notes but has not been
paid to date.
After Industries began to loan those monies to the Company, Mr.
McGhan represented to the Board of Directors that those funds
were derived from personal financial resources. Recently,
however, in connection with Mr. McGhan's unsuccessful efforts to
negotiate a payment schedule for the interest and principal of
that loan, the Company learned that approximately two-thirds of
the monies lent by Industries to the Company were in fact derived
from loans made to Industries by Medical Device Alliance, Inc.
("MDA"). MDA is a private company formed by Mr. McGhan in 1995
to develop and market various products for use in ultrasonic
liposuction; the Company believes that approximately $20
million has been raised to date by MDA from various outside
investors through private placement transactions. The Company
does not believe those outside investors were apprised of the
loans from MDA to Industires; importantly, however, the
investment of those funds in a medical device company such as
INAMED was apparently within the permitted scope of the proposed
use of funds which existed when those investors made their
investment. The Company's Board of Directors has been advised
by legal counsel: (a) that the Company has no responsibility
whatsoever to the outside investors in MDA for the monies which
Mr. McGhan arranged to loan to Industries, which in turn were
loaned by Industries to the Company, and (b) that Mr. McGhan,
as the controlling person of both MDA and Industries at the
times those loans were made, is solely responsible to the
outside investors in MDA for his actions with respect to
those monies.
The Company plans to negotiate the conversion of the
10.5% subordinated notes into common stock sometime during
1998, although there can be no assurance that such a
transaction will occur or that the price or timeframe for any
such conversion will be favorable to the Company's existing
stockholders.
In 1997, the Company entered into an agreement with Medical
Device Alliance, Inc. ("MDA") to sell furniture, artwork and
equipment which the Company was acquiring through a capital
sublease with Wells Fargo Bank for a total purchase price of
$300,001. The Company recorded a gain on sale of assets of
approximately $9,000 in 1997 in respect to this transaction. In
1997, the Company also entered into an agreement to sublease from
MDA on a month-to-month basis approximately 5,000 square feet of
office space in Las Vegas for $10,000 per month. Donald K.
McGhan is the Chairman of MDA.
In 1996 and 1997, the Company performed administrative
services for MDA and other related parties. The Company believes
the value of these services is approximately $150,000 and will
invoice MDA when it finishes assessing the extent of those
services.
In 1997, the Company signed a distribution agreement with
Lysonix Inc., a subsidiary of MDA, to sell ultrasonic surgery
equipment in the European and Latin American regions. Special
incentive discounts were offered to the Company for the
introduction of the product in 1997. Net sales in 1997 were
approximately $300,000. In 1998, the terms of the original
agreement were revised so that the Company would obtain the goods
on a consignment basis and not have an obligation with Lysonix
until the products were sold. This agreement and its revision
have been reviewed and approved by the Company's current
management.
Included in general and administrative expense on the income
statement in 1997 and 1996 is $1.6 million and $1.5 million in
aircraft rental expenses paid to Executive Flite Management,
Inc., a company that is controlled by the family of Mr. Donald K.
McGhan. No signed contract exists and the Company was billed
based on its usage. The Company believes that such rental
expenses are on substantially equivalent terms to that which the
Company could obtain from an unaffiliated third party. In 1998
the Company discontinued the use of such corporate aircraft.
Included in related party notes receivable in 1996 is a
10.5% note with McGhan Management Corporation, in the amount of
$202,510. Mr. Donald K. McGhan and his wife are the majority
shareholders of McGhan Management Corporation. This note has
since been paid in its entirety. During 1996, the Company
incurred $253,000 for flight related services with McGhan
Management Corporation. During 1997, the Company incurred
$140,000 for flight related services.
Included in assets in 1995 is an unsecured note receivable
from Michael D. Farney, former Chief Executive Officer and Chief
Financial Officer of the Company. This receivable approximated
$386,000 as of December 31, 1995. The note bears interest at
9.5% per annum and was due in June 1996. On March 4, 1996, the
balance of the note was paid in full.
Included in liabilities in 1995 are notes payable to McGhan
Management Corporation, and Donald K. McGhan. These payables
approximated $1,209,000 as of December 31, 1995. The notes bear
interest at prime plus 2% per annum (10.5% per annum at December
31, 1995) and were 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 in 1995 is a note payable of
approximately $550,000 to Pedro Ramirez, a former 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 Star America Corporation for rental of an aircraft to
provide air transportation for corporate purposes. Michael D.
Farney is the only director and officer of Star America
Corporation. Rental expense for 1995 and 1994 was $900,000 and
$888,000, 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 the
actual rental arrangement. 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 Corporation 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 F-1
Consolidated Balance Sheets as of F-2
December 31, 1997, and 1996
Consolidated Statements of Operations for the F-4
Years ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' F-5
Deficiency for the years ended December 31,
1997 and 1996
Consolidated Statements of Cash Flows for the F-6
Years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheet as of F-35
December 31, 1995
Consolidated Statements of Operations for the F-37
Years ended December 31, 1995 and 1994
Consolidated Statements of Stockholders' F-38
Equity (Deficit) for the years ended December
31, 1995 and 1994
Consolidated Statements of Cash Flows for the F-39
Years ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements F-42
(a)(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts F-63
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:
Exhibit Description
3.1 Registrant's Articles of Incorporation.
(Incorporated herein by reference to Exhibit 3.1 of
the Company's Financial Report on Form 10-K for the
year ended December 31, 1995 (Commission File No. 0-
7101).)
3.2 Registrant's By-Laws. (Incorporated herein by
reference to Exhibit 3.2 of the Company's Financial
Report on Form 10-K for the year ended December 31,
1995 (Commission File No. 0-7101).)
4.1 Specimen Stock Certificate for INAMED Corporation
Common Stock, par value $.01 per Share.
(Incorporated herein by reference to Exhibit 3.3 of
the Company's Financial Report on Form 10-K for the
year ended December 31, 1995 (Commission File No. 0-
7101).)
4.2 Warrant Agreement dated as of July 2, 1997 between
INAMED Corporation and U.S. Stock Transfer
Corporation. (Incorporated herein by reference to
Exhibit 10.6 of the Company's Current Report on Form
8-K filed with the Commission on July 9, 1997.)
10.1 Stock Option Plan, together with form of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement. (Incorporated herein by reference to
Exhibit 10.1 of the Company's Financial Report on
Form 10-K for the year ended December 31, 1995
(Commission File No. 0-7101).)
10.2 Stock Award Plan. (Incorporated herein by reference
to Exhibit 10.2 of the Company's Financial Report on
Form 10-K for the year ended December 31, 1995
(Commission File No. 0-7101).)
10.3 Non-Employee Directors' Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.3 of
the Company's Financial Report on Form 10-K for the
year ended December 31, 1995 (Commission File No. 0-
7101).)
10.4 Form of INAMED Corporation February 27, 1997 Letter
Agreement. (Incorporated herein by reference to
Exhibit 10.4 of the Company's Financial Report on
Form 10-K for the year ended December 31, 1996.)
10.5 Form of INAMED Corporation 4% Convertible Debenture.
(Incorporated herein by reference to Exhibit 10.5 of
the Company's Financial Report on Form 10-K for the
year ended December 31, 1996.)
10.6 Form of Registration Rights Agreement. (Incorporated
herein by reference to Exhibit 10.6 of the Company's
Financial Report on Form 10-K for the year ended
December 31, 1996.)
10.7 Form of Convertible Debenture Agreement.
(Incorporated herein by reference to Exhibit 10.7 of
the Company's Financial Report on Form 10-K for the
year ended December 31, 1996.)
10.8 Rights Agreement, dated as of June 2, 1997, between
INAMED Corporation and U.S. Stock Transfer
Corporation, which includes the form of Rights
Certificate as Exhibit A and the Summary of Rights
to Purchase Common Stock as Exhibit B.
(Incorporated herein by reference to Exhibit 4.1 of
the Company's Current Report on Form 8-K filed with
the Commission on May 23, 1997.)
10.9 Form of Letter from the Board of Directors of INAMED
Corporation to Shareholders to be mailed with copies
of the Summary of Rights appearing as Exhibit B to
Exhibit 1 hereto. (Incorporated herein by reference
to Exhibit 99.2 of the Company's Current Report on
Form 8-K filed with the Commission on May 23, 1997.)
10.10 Amendment No. 1 to Rights Agreement, dated as of
June 13, 1997, between INAMED Corporation and U.S.
Stock Transfer Corporation. (Incorporated herein by
reference to Exhibit 10.10 of the Company's
Financial Report on Form 10-K for the year ended
December 31, 1996.)
10.11 Letter Agreement dated as of July 2, 1997 by and
among INAMED Corporation, Appaloosa Management L.P.,
and Donald K. McGhan. (Incorporated herein by
reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the Commission on July
9, 1997.)
10.12 Second Supplemental Indenture, dated as of July 2,
1997, between INAMED Corporation and Santa Barbara
Bank & Trust. (Incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K
filed with the Commission on July 9, 1997.)
10.13 Letter of Representation of INAMED Corporation dated
as of July 2, 1997 in favor of holders of 11%
Secured Convertible Notes due 1999. (Incorporated
herein by reference to Exhibit 10.3 of the Company's
Current Report on Form 8-K filed with the Commission
on July 9, 1997.)
10.14 Consent and Waiver of certain holders of 11% Secured
Convertible Notes due 1999 dated as of July 8, 1997.
(Incorporated herein by reference to Exhibit 10.4 of
the Company's Current Report on Form 8-K filed with
the Commission on July 9, 1997.)
10.15 Letter executed by Appaloosa Investment Limited
Partnership, Ferd L.P. and Palomino Fund Ltd.
withdrawing the notice of default under the
Indenture. (Incorporated herein by reference to
Exhibit 10.5 of the Company's Current Report on Form
8-K filed with the Commission on July 9, 1997.)
10.16 Amendment No. 2 to Rights Agreement, dated as of
July 2, 1997, between INAMED Corporation and U.S.
Stock Transfer Corporation. (Incorporated herein by
reference to Exhibit 10.7 of the Company's Current
Report on Form 8-K filed with the Commission on July
9, 1997.)
10.17 Form of Note Purchase Agreement. (Incorporated
herein by reference to Exhibit 99.1 of the Company's
Current Report on Form 8-K filed with the Commission
on April 19, 1996.)
10.18 Indenture between the Registrant and Santa Barbara
Bank & Trust, as trustee. (Incorporated herein by
reference to Exhibit 99.2 of the Company's Current
Report on Form 8-K filed with the Commission on
April 19, 1996.)
10.19 Form of 11% Secured Convertible Note due 1999.
(Incorporated herein by reference to Exhibit 99.3 of
the Company's Current Report on Form 8-K filed with
the Commission on April 19, 1996.)
10.20 Security Agreement between the Registrant and Santa
Barbara Bank & Trust, as trustee. (Incorporated
herein by reference to Exhibit 99.4 of the Company's
Current Report on Form 8-K filed with the Commission
on April 19, 1996.)
10.21 Guarantee and Security Agreement between certain
subsidiaries of the Registrant and Santa Barbara
Bank & Trust, as trustee. (Incorporated herein by
reference to Exhibit 99.5 of the Company's Current
Report on Form 8-K filed with the Commission on
April 19, 1996.)
10.22 Guarantee Agreement between certain subsidiaries of
the Registrant and Santa Barbara Bank & Trust, as
trustee. (Incorporated herein by reference to
Exhibit 99.6 of the Company's Current Report on Form
8-K filed with the Commission on April 19, 1996.)
10.23 Loan Purchase Agreement between First Interstate
Bank of California and Santa Barbara Bank & Trust,
as trustee. (Incorporated herein by reference to
Exhibit 99.7 of the Company's Current Report on Form
8-K dated filed with the Commission on April 19,
1996.)
10.24 Escrow Agreement between the Registrant and Santa
Barbara Bank & Trust, as trustee. (Incorporated
herein by reference to Exhibit 99.8 of the Company's
Current Report on Form 8-K filed with the Commission
on April 19, 1996.)
10.25 Escrow Agreement between the Registrant and Santa
Barbara Bank & Trust, as trustee. (Incorporated
herein by reference to Exhibit 99.9 of the Company's
Current Report on Form 8-K filed with the Commission
on April 19, 1996.)
10.26 Settlement Agreement dated April 2, 1998.
(Incorporated herein by reference to Exhibit 10.26
of the Company's Current Report on Form 8-K filed
with the Commission on April 17, 1998.)
10.27 Letter Agreement with Appaloosa Management, L.P.
dated April 2, 1998. (Incorporated herein by
reference to Exhibit 10.27 of the Company's Current
Report on Form 8-K filed with the Commission on
April 17, 1998.)
21 Registrant's Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated March 19, 1997
Form 8-K dated May 23, 1997
Form 8-K dated June 11, 1997
Form 8-K dated June 25, 1997
Form 8-K dated July 9, 1997
Form 8-K dated January 23, 1998
Form 8-K dated February 11, 1998
Form 8-K dated March 6, 1998 (as amended)
Form 8-K dated April 1, 1998
Form 8-K dated April 6, 1998
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
July 7, 1998 By: /s/ Richard G. Babbitt
Richard G. Babbitt, Chairman of the Board,
Chief Executive Officer and President
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/ Richard G. Babbitt Chairman of the Board, Chief
Richard G. Babbitt Executive Officer, President
and Director (Principal
Executive Officer)
/s/ Ilan K. Reich Executive Vice President and
Ilan K. Reich Director
/s/ Tom K. Larson, Jr. Vice President, Finance and Administration
Tom K. Larson, Jr. Chief Financial Officer (Principal Accounting
Officer)
/s/ Harrison E. Bull, Esq. Director
Harrison E. Bull, Esq.
/s/ Jim J. McGhan Director
Jim J. McGhan
/s/ Richard Wm. Talley Director
Richard Wm. Talley
/s/ John E. Williams, M.D. Director
John E. Williams, M.D.
STATEMENT OF MANAGEMENT RESPONSIBILITY
To the Stockholders of INAMED Corporation & Subsidiaries
The Management of INAMED Corporation and Subsidiaries is
responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information
presented in this report. The accompanying consolidated
financial statements have been prepared in conformity with
generally accepted accounting principles and properly reflect the
effects of certain estimates and judgements made by management.
The Company's management maintains an effective system of
internal control that is designed to provide reasonable assurance
that assets are safeguarded and transactions are properly
recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct
management review and the independent accountants.
The Company's consolidated financial statements for the years
ended December 31, 1997 and 1996 have been audited by BDO
Seidman, LLP, independent accountants. Their audits were
conducted in accordance with generally accepted auditing
standards, and included a review of financial controls and test
of accounting records and procedures as they considered necessary
in the circumstances.
The Audit Committee of the Board of Directors, which consists of
outside directors, meets regularly with management and the
independent accountants to review accounting, reporting, auditing
and internal control matters. The committee has direct and
private access to the independent accountants.
/s/ Richard G. Babbitt
Richard G. Babbitt
Chairman, Chief Executive
Officer and President
/s/ Tom K. Larson Jr.
Tom K. Larson Jr.
Vice President, Finance
Chief Financial Officer
May 29, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
INAMED Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
INAMED Corporation and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the years then ended.
We have also audited the schedule listed in the accompanying
index for the same period. These financial statements and
schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and schedules are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements and schedule. 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 at December 31,
1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the
schedules present fairly, in all material respects, the
information set forth therein for the years ended December 31,
1997 and 1996.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 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 1 to the
consolidated financial statements.
BDO Seidman, LLP
May 29, 1998
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
In (000's)
December 31,
Assets 1997 1996
Current Assets:
Cash and cash equivalents $ 1,946 $ 923
Trade accounts receivable, net of allowances
for doubtful accounts and returns of $5,221
and $5,411 13,979 11,452
Related party notes receivable 129 236
Inventories 23,117 20,724
Prepaid expenses and other current assets 1,413 1,563
Income tax refund receivable 472 151
------ ------
Total current assets 41,056 35,049
------ ------
Property and equipment, at cost:
Machinery and equipment 12,585 10,555
Furniture and fixtures 4,541 4,495
Leasehold improvements 10,996 9,148
------ ------
28,122 24,198
Less, accumulated depreciation and
amortization (14,639) (11,938)
------ ------
Net property and equipment 13,483 12,260
Notes receivable, net of allowances of $467
and $1,067 2,799 2,108
Intangible assets, net 1,164 1,410
Restricted cash, settlement fund -- 14,796
Other assets 340 289
------ ------
Total assets $ 58,842 $ 65,912
====== ======
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
In (000's except share data)
December 31,
Liabilities and Stockholders' Deficiency 1997 1996
Current liabilities:
Current installments of long-term debt $ 30 $ 321
Notes payable to bank 659 914
Accounts payable 14,759 12,373
Accrued liabilities:
Salaries, wages, and payroll taxes 2,683 4,895
Interest 3,146 3,110
Self-insurance 3,602 1,373
Other 2,667 1,672
Royalties payable 4,156 4,039
Income taxes payable 2,894 1,841
------ ------
Total current liabilities 34,596 30,538
------ ------
Convertible and other long-term debt 23,574 34,607
Subordinated notes payable, related party 8,813 --
Deferred grant income 993 1,269
Deferred income taxes 220 254
Accrued litigation settlement 37,335 9,152
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.01 par value
Authorized 20,000,000 shares;
issued and outstanding 8,885,076
and 8,036,550 89 80
Additional paid-in capital 19,027 13,586
Cumulative translation adjustment (223) 431
Accumulated deficit (65,582) (24,005)
------ ------
Stockholders' deficiency (46,689) (9,908)
------ ------
Total liabilities and stockholders'
deficiency $ 58,842 $ 65,912
====== ======
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
In (000's except share and per share data)
Years ended December 31, 1997 and 1996
1997 1996
Net sales $ 106,381 $ 93,372
Cost of goods sold 37,643 35,295
------- -------
Gross profit 68,738 58,077
------- -------
Operating expense:
Marketing 30,349 25,569
General and administrative 33,848 31,234
Research and development 8,863 5,693
------- -------
Total operating expenses 73,060 62,496
------- -------
Operating loss (4,322) (4,419)
------- -------
Other income (expense):
Litigation settlement (28,150) --
Interest income 817 1,110
Interest expense and debt costs (6,990) (5,387)
Royalty income 347 481
Foreign currency transaction gains (losses) (1,796) 68
Miscellaneous income (expense) 398 (18)
------- -------
Other expense (35,374) (3,746)
------- -------
Loss before income tax expense (39,696) (8,165)
Income tax expense 1,881 3,214
------- -------
Net loss $ (41,577) $ (11,379)
======= =======
Net loss per share of common stock
Basic $ (4.97) $ (1.46)
Diluted $ (4.97) $ (1.46)
======= =======
Weighted average shares outstanding 8,371,399 7,811,073
========= =========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
In (000's)
Years ended December 31, 1997 and 1996
Additional Cumulative
Common Stock Paid-in Translation Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit Deficiency
<C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 7,603 $ 76 $ 9,964 $ 882 $(12,626) $ (1,704)
Net loss -- -- -- -- (11,379) (11,379)
Repurchases and retirement
of common stock -- -- (3) -- -- (3)
Issuance of common stock
(exercise ofstock options) 32 -- 45 -- -- 45
Issuance of common stock
(Regulation S Transaction) 344 3 2,997 -- -- 3,000
Issuance of common stock
(conversions debt to equity) 58 1 583 -- -- 584
Translation adjustment -- -- __ (451) __ (451)
-----------------------------------------------------------------------------
Balance, December 31, 1996 8,037 80 13,586 431 (24,005) (9,908)
Net Loss -- -- -- -- (41,577) (41,577)
Repurchases and retirement
of common stock (11) __ (55) -- -- (55)
Issuance of common
(exercise of stock options) 71 1 102 -- -- 103
Issuance of common stock
(conversions of debt to equity) 616 6 2,261 -- __ 2,267
Issuance of common stock
(waiver of covenant defaults) 172 2 1,415 -- -- 1,417
Issuance of Warrants & Options -- -- 1,718 __ __ 1,718
Translation adjustment __ __ __ (654) __ (654)
----------------------------------------------------------------------------
Balance, December 31, 1997 8,885 $ 89 $19,027 $(223) $(65,582) $(46,689)
============================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
In (000's)
1997 1996
Cash flows from operating activities:
Net loss $(41,577) $(11,379)
Net cash provided by (used for)
operating activities:
Depreciation and amortization 2,267 2,728
Non-cash debt costs 1,487 --
Amortization of deferred grant income (454) (96)
Amortization of intangible assets 244 328
Amortization of debenture discount 273 --
Amortization of private offering costs 49 40
Non-cash compensation to directors 231 --
Provision for doubtful accounts and returns (185) (1,216)
Provision for doubtful notes (600) --
Provision for obsolescence of inventory 264 563
Deferred income taxes (35) 2,030
Changes in current assets and liabilities:
Trade accounts receivable (3,265) 119
Notes receivable (101) 87
Inventories (4,491) (3,910)
Prepaid expenses and other
current assets 43 273
Income tax refund receivable (337) (61)
Other assets (105) (173)
Accounts payable 2,016 (6,193)
Accrued salaries, wages, and payroll
taxes (2,304) (4,584)
Accrued interest 36 1,500
Accrued self-insurance 2,230 242
Other accrued liabilities 1,021 (642)
Royalties payable 117 1,112
Income taxes payable 1,091 (6)
Accrued litigation settlement 28,183 --
------- -------
Net cash used for
operating activities (13,902) (19,238)
------- -------
Cash flows from investing activities:
Disposal of fixed assets -- (44)
Loss on Investments -- 100
Purchase of property and equipment (5,106) (3,959)
Purchase of intangible assets -- (80)
------- -------
Net cash used in
investing activities (5,106) (3,983)
------- -------
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
1997 1996
Cash flows from financing activities:
Restricted cash in escrow for litigation
settlement $ 14,796 $ (14,796)
Increases in notes payable and long-term debt -- 271
Increases in convertible notes payable
and debentures payable 5,648 34,516
Principal repayment of notes payable
and long-term debt (13,816) (197)
Decrease in related party receivables 105 149
Increase (decrease) in related party payables 8,813 (1,759)
Grants received, gross -- 210
Proceeds from exercise of stock options 103 46
Repurchase of common stock (55) (3)
Issuance of common stock -- 3,000
-------- -------
Net cash provided by financing activities 15,594 21,437
-------- -------
Effect of exchange rate changes on cash 4,437 (100)
-------- -------
Net increase (decrease) in cash
and cash equivalents 1,023 (1,884)
Cash and cash equivalents at beginning of year 923 2,807
-------- -------
Cash and cash equivalents at end of year $ 1,946 $ 923
======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 3,745 $ 3,519
======== =======
Income taxes $ 988 $ 1,336
======== =======
See accompanying notes to consolidated financial statements.
INAMED Corporation
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(in 000's, except share and per share data)
(1) Basis of Presentation and Summary of Significant Accounting
Policies
The accompanying consolidated financial statements include
the accounts of INAMED Corporation and each of its wholly-
owned subsidiaries (the "Company"). Intercompany
transactions are eliminated in consolidation.
The Financial Statements do not include any adjustments
relating to the recoverability and classification of the
recorded asset and liability amounts that might be necessary
should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent
upon its ability to obtain financing for the non-opt-out
settlement agreement (see Note 14) and its ability to generate
sufficient cash flows to meet its obligations on a timely basis.
The Company is actively seeking financing and anticipates doing
a restructuring which the Management believes will ultimately
enable them to attain profitability.
The Company
INAMED Corporation's subsidiaries are McGhan Medical
Corporation and CUI Corporation, which develop, manufacture
and sell medical devices principally for the plastic and
general surgery fields; BioEnterics Corporation which
develops, manufactures and sells medical devices and
associated instrumentation to the bariatric and general
surgery fields; Biodermis Corporation which develops,
produces and distributes premium products for dermatology,
wound care and burn treatment; Bioplexus Corporation which
develops, produces and distributes specialty medical
products for use by the general surgery profession;
Flowmatrix Corporation which manufactures high quality
silicone components and devices for INAMED's wholly-owned
subsidiaries and distributes an international line of
proprietary silicone products; Medisyn Technologies
Corporation which focuses on the development and promotion
of the merits of the use of silicone chemistry in the fields
of medical devices, pharmaceuticals and biotechnology;
INAMED Development Company, which is engaged in the research
and development of new medical devices using silicone-based
technology; McGhan Limited, an Irish corporation which
manufactures medical devices principally for the plastic and
general surgery fields; Medisyn Technologies, Ltd. and
Chamfield Ltd., Irish corporations which specialize in the
development of silicone materials for use by INAMED's wholly-
owned subsidiaries; and McGhan Medical B.V., a Netherlands
corporation, McGhan Medical B.V.B.A., a Belgium corporation,
McGhan Medical GmbH, a German corporation, McGhan Medical
S.R.L., an Italian corporation, McGhan Medical Ltd., a
United Kingdom corporation, McGhan Medical S.A.R.L., a
French corporation, McGhan Medical S.A., a Spanish
corporation, INAMED do Brasil, a Brazilian corporation,
INAMED Medical Group, a Japanese corporation, McGhan Medical
Asia Pacific, a Hong Kong corporation, McGhan Medical
Mexico, S.A. de C.V., a Mexican corporation, and Bioenterics
Latin America, S.A. de C.V., a Mexican corporation, which
all sell medical devices on a direct sales basis in the
various countries in which they are located.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
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 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
returns based on historical returns. Because management can
reasonably estimate future returns, the product prices are
substantially fixed and the Company recognizes net sales
when the product is shipped. The estimated allowance for
returns is based on the historical trend of returns, year-to-
date sales and other factors.
Inventories
Inventories are stated at the lower of cost or market using
the first-in, first-out (FIFO) convention. The Company
provides a provision for obsolescence based upon historical
experience.
Current Vulnerability Due to Certain Concentrations
The Company has limited sources of supply for certain raw
materials which are significant to its manufacturing
process. A change in suppliers could cause a delay in
manufacturing and a possible loss of sales, which would
adversely affect operating results.
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
is shorter. Fully depreciated assets still in use at
December 31, 1997 and 1996 include machinery and leasehold
improvements of approximately $5,800 and $1,600,
respectively.
Intangible and Long-Term Assets
Intangible and long-term assets are stated at cost less
accumulated amortization, and are being amortized on a
straight-line basis over their estimated useful lives
ranging from 5 to 17 years.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Intangible and Long-Term Assets (continued)
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 in accordance with Statement of
Financial Account Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121). Based upon its most recent
analysis, no impairment of goodwill exists at December 31,
1997.
SFAS No. 121 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 that 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.
Research and Development
Research and development costs are expensed when incurred.
Advertising costs
Advertising costs are charged to operations in the year
incurred and totaled approximately $426 and $441 in 1997 and
1996.
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.
The Company has provided an allowance against deferred tax
assets on its U.S. operations at December 31, 1997 and 1996.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, the Company is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
Earnings Per Share
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("SFAS No. 128") which provides for
the calculation of "basic" and "diluted" earnings per share.
SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997. Basic earnings
per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the effect of common shares issuable
upon exercise of common stock equivalents. The assumed
conversion of the notes payable and exercise of the warrants
and options would have been anti-dilutive and, therefore,
were not considered in the computation of diluted earnings
per share for December 31, 1997 and 1996. As required by
this Statement, all periods presented have been restated to
comply with the provisions of SFAS No. 128.
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. For
the year ended December 31, 1997, the foreign subsidiaries
have incurred significant intercompany debts which are
denominated in various foreign currencies. The translation
of the intercompany debts resulted in a foreign currency
translation loss of $1,796. Unrealized translation
adjustments do not reflect the results of operations and are
reported as a separate component of stockholders'
deficiency, 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.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Stock-Based Compensation
The Company has adopted the disclosure-only option under
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", ("SFAS No. 123")
as of December 31, 1996. Pro-forma information regarding
net income and earnings per share using the fair value
method is required by SFAS No. 123; however, application of
SFAS No. 123 would not result in a significant difference
from reported net income and earnings per share for the
years ended December 31, 1997 and 1996.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments and other short-
term investments with an initial maturity of three months or
less to be cash equivalents.
Concentrations of Credit Risk
Certain financial instruments potentially subject the
Company to concentrations of credit risk. These financial
instruments consist primarily of trade receivables and short-
term cash investments.
The Company places its short-term cash investments with high
credit quality financial institutions and, by policy, limits
the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to
trade receivables are limited due to a large customer base
and its dispersion across different types of healthcare
professionals and geographic areas. The Company maintains
an allowance for losses based on the expected collectability
of all receivables.
Financial Instruments
The fair value of cash and cash equivalents and receivables
approximate their carrying value due to their short-term
maturities. The fair value of long-term debt instruments,
including the current portion, approximates the carrying
value and is estimated based on the current rates offered to
the Company for debt of similar maturities.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS No. 131") which
supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise. SFAS No. 131 establishes standards
for the way public companies report information about
operating segments in annual financial statements and
requires reporting of selected information about operating
segments in interim financial
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
New Accounting Pronouncements (continued)
statements issued to the public. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about which
separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance.
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130")
established standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by
owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards
as components of comprehensive income be reported in a
financial statement that is displayed with the same
prominence as other financial statements.
Both SFAS Nos. 130 and 131 are effective for financial
statements for periods beginning after December 15, 1997 and
require comparative information for earlier years to be
restated. The adoption of these standards is not expected
to have a material effect on the Company's financial
position, results of operations or financial statement
disclosures.
Reclassification
Certain reclassifications were made to 1996 and 1995
consolidated financial statements to conform to the 1997
presentation. There was no effect on net income or
stockholders' deficiency as a result of these
reclassifications.
(2) Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
December 31,
1997 1996
Accounts receivable $ 19,200 $ 16,863
Allowance for doubtful accounts (865) (714)
Allowance for returns and credits (4,356) (4,697)
_________ _________
Net accounts receivable $ 13,979 $ 11,452
======== ========
Notes receivable $ 3,266 $ 3,175
Allowance for doubtful notes (467) (1,067)
_________ _________
Net notes receivable $ 2,799 $ 2,108
========= =========
(3) Inventories
Inventories are summarized as follows:
December 31,
1997 1996
Raw materials $ 4,671 $ 3,554
Work in progress 3,799 3,911
Finished goods 16,161 14,584
_________ _________
24,631 22,049
Less allowance for
obsolescence (1,514) (1,325)
_________ _________
$ 23,117 $ 20,724
========= =========
(4) Intangible Assets
Intangible assets primarily consist of patents, trademarks
and goodwill net of accumulated amortization of
approximately $3,733 and $3,973 amounting to $1,164 and
$1,410 at December 31, 1997 and 1996.
(5) Lines of Credit
The Company's Dutch subsidiary has a line of credit with a
major Dutch bank, currently totaling $860. The line of
credit is collateralized by the accounts receivable,
inventories and certain other assets of that subsidiary.
The line of credit was renegotiated in 1996 with no
expiration date. As of December 31, 1997, no funds were
drawn on the line of credit. As of December 31, 1996
approximately $537 had been drawn on the line of credit.
The interest rate on the line of credit is 7% per annum.
For the years ended December 31, 1997 and 1996, the
Company's foreign subsidiaries financed approximately $659
and $377 which was secured by its accounts receivable.
The Company's weighted average interest rate on short-term
borrowings was 7% in both 1997 and 1996.
The Company is currently seeking to establish a domestic
line of credit.
(6) Long-Term Debt
Long-term debt is summarized as follows:
December 31,
1997 1996
11% Secured Convertible Note payable,
maturing January 1999, interest payable
quarterly, January 1, April 1, July 1,
and October 1 (a) $ 19,691 $ 34,460
4% Convertible Debenture payable, maturing
January 2000 interest payable March 31, June 30,
September 30 and December 31 (b) 3,857 56
Capital lease obligations, collateralized
by related equipment 56 412
-- ---
23,604 34,928
Less, current installments (30) (321)
------- -------
$ 23,574 $ 34,607
======= =======
(6) Long-Term Debt (continued)
The following is a summary of the Company's significant long-term
debt:
(a) During January 1996, $35,000 of proceeds were received
upon the issuance of 11% senior secured convertible notes,
due March 31, 1999, in a private placement transaction. Of
that amount, $14,800 was placed in an escrow account to be
released within one year, following court approval of a
mandatory non-opt-out class settlement of the breast implant
litigation. Inasmuch as that condition was not met, in July
1997 the Company returned those escrowed funds to the senior
Noteholders, in exchange for warrants to purchase $13,900 of
common stock at $8.00 per share (subsequently adjusted to
$7.50 per share), resulting in a charge of $864 to debt
costs for 1997. The conversion price of the 11% senior
secured convertible notes was originally $10 per share. In
July 1997 the Company and the senior Noteholders agreed to
change the conversion price to $5.50 per share at 103% of
principal balance as part of an overall restructuring plan
which included the waiver of past defaults. The conversion
price of $5.50 per share was above market value. At May 29,
1998, $19,600 of the 11% senior notes were outstanding. In
1996 the Company offered an incentive to convert the senior
secured convertible notes. The incentive increased the
number of shares received upon conversion by 10%. At
December 31, 1996 $540 in notes had been converted,
resulting in a $44 charge to debt costs. There were no
conversions in 1997.
On March 31, 1996, the Company was in default of certain
financial covenants. The Noteholders waived the covenant
default and in return they received additional stock equal
to 5% of the number shares as if the notes had been
converted on June 10, 1996. This resulted in an accrued
charge to debt costs of $1,417 in 1996. The stock was
issued in 1997.
(b) During January 1997, $5,700 of proceeds were received
upon the issuance of $6,200 principal amount of 4%
convertible debentures, due January 30, 2000. These
debentures were convertible at 85% of the market price of
the common stock. On March 31, 1997 the Company was in
default of certain covenants. The default required the
Company to reduce the conversion price by 6%. In addition,
the Company incurred 3% liquidated damages per month on the
outstanding principal balance. These transactions resulted
in $396 and $1,202 of debt and interest expenses in 1997.
In 1998, the remaining debentures have been converted into
an aggregate of 1,108,059 shares of common stock. At
December 31, 1997 $2,120 of the convertible debentures were
converted into 615,958 shares of common stock at prices
ranging from $2.60 to $4.60 per share.
In addition, commencing during April 1997 and
continuing through January 1998, an entity controlled by the
Company's former Chairman and 13.14% stockholder loaned
$9,900 to the Company to provide it with working capital to
fund its operations. At December 31, 1997, the Company owed
$8,800 (see note 12). The loan agreement discussed in (a)
above precludes the payment of interest and principal on
this 10.5% subordinated note without the consent of the
senior Noteholders. The Company intends to negotiate the
conversion of the 10.5% subordinated notes into common stock
sometime during 1998, although there can be no assurance
that such a transaction will occur or that the price or
(6) Long-Term Debt (continued)
timeframe for any such conversion will be favorable to
the Company's existing stockholders or that the former
Chairman will agree to the conversion.
The aggregate installments of long-term debt as of December
31, 1997 are as follows:
Year ending December 31:
1998 $ 30
1999 19,701
2000 3,865
2001 8
------
$ 23,604
======
(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 being amortized to
income over the life of the related assets. Amortization
for the years ended December 31, 1997 and 1996 was
approximately $454 and $96.
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 could be liable for the
amount of approximately $1,418 at December 31, 1997.
(8) Income Taxes
The Company currently has a net operating loss (NOL)
carryforward for financial statement purposes of
approximately $55,000. NOL carryforwards for federal income
tax purposes of approximately $14,000 are available to
offset federal taxable income through the year 2012. If the
Company has a change in ownership as defined under Internal
Revenue Code Section 382, use of the NOL carryforward will
be limited. The cost of the litigation settlement discussed
in Note 14 will be deductible for federal income tax
purposes at such time as the consideration is deposited in a
court supervised escrow account and accordingly will
increase the NOL carryforward for federal income tax
purposes by the same amount.
The primary components of temporary differences which
compose the Company's deferred tax assets as of December 31,
1997 and 1996 are as follows:
(8) Income Taxes (continued)
December 31, December 31,
1997 1996
----------- -----------
Allowance for returns $ 1,742 $ 1,879
Allowance for doubtful accounts 346 286
Allowance for inventory obsolescence 605 530
Accrued liabilities 1,673 776
Allowance for doubtful notes 187 427
Litigation reserve 14,821 3,661
Net operating losses 8,200 3,900
Debt costs 568 567
----------- -----------
Deferred tax assets 28,142 12,026
Valuation allowance (28,142) (12,026)
----------- -----------
Deferred tax assets $ __ $ __
=========== ===========
The Company's deferred tax assets have been reduced 100%
with a valuation allowance as the Company's ability to
generate future taxable income is not presently estimable.
Income tax expense for 1997 pertains primarily to foreign
operations. The Company recorded a provision in 1997 for
foreign taxes of $1,000 related to the planned
capitalization of intercompany balances with foreign
subsidiaries. In addition to taxes on foreign operations,
income tax expense for 1996 includes providing a 100%
allowance on the deferred tax assets not previously allowed
for of $2,006.
The tax provision differs from the amount computed using the
Federal statutory income tax rate due to foreign taxes and
the increases in the allowances provided on deferred tax
assets. Provision has not been made for U.S. or additional
foreign taxes on undistributed earnings of foreign
subsidiaries. Those earnings have been and will continue to
be permanently reinvested. These earnings could become
subject to additional tax if they were remitted as
dividends, if foreign earnings were loaned to the Company or
a U.S. affiliate, or if the Company should sell its stock in
the foreign subsidiaries. It is not practicable to
determine the amount of additional tax, if any, that might
be payable on the foreign earnings. The cumulative amount of
reinvested earnings was approximately $5,460 and $3,147 at
December 31, 1997 and 1996.
(9) Royalties
The Company has obtained the right to produce, use and sell
patented technology through various license agreements. The
Company pays royalties ranging from 5% to 10% of the related
net sales, depending upon sales levels. Royalty expense
under
(9) Royalties (continued)
these agreements was approximately $5,689 and $6,302 for the
years ended December 31, 1997 and 1996, 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-qualified
stock option plans. Under the terms of the plans, 610,345
shares of common stock are reserved for issuance to key
employees.
Activity under these plans for the years ended December 31,
1997, and 1996:
1997 1996
Wgtd.Avg. Wgtd.Avg.
Shares Exer.Price Shares Exer.Price
Options outstanding
at beginning of year 115,000 $ 1.46 146,500 $1.46
Granted 30,000 3.81 -- --
Exercised (73,500) 1.45 (31,500) 1.45
------- -------
Options outstanding
at end of year 71,500 2.46 115,000 1.46
======= =======
Options exercisable
at end of year 71,500 2.46 90,000 1.47
======= =======
The Company issued 1,846,071 warrants in connection with the
restructuring of the $35,000 convertible debt and 500,000
warrants in connection with the issuance of the $6,200
convertible debenture (see Note 6). Compensatory warrants
totaling 175,000 were also issued to non-employee directors.
1997 Fair Market
Exercise Value on
Shares Price Expiration Date Grant Date
Warrants granted in 1997 1,846,071 $7.50 March 30,2000 $ 864,000
Warrants granted in 1997 500,000 $9.81 January 15, 2000 623,000
Warrants granted in 1997 175,000 $5.51 April 1, 2004 180,000
(10) Stockholders' Equity (continued)
The Company estimates the fair value of each stock option
and warrant at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1997: no dividends paid for
all years; expected volatility of 34.8%; risk-free interest
rates ranging from 6.17% to 5.87%; and expected lives
ranging from 2.6 years to 6.7 years.
The Company has recorded in 1997 $1,487 as interest and
other debt costs and $231 as directors fees.
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 1996 and 1997 were exercised at a price
of $1.45. At December 31, 1997, there were 163,900 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. The Company recorded compensation expense for the
difference between the fair market value and the exercise
price of the related outstanding options.
In 1984, McGhan Medical Corporation adopted an incentive
stock option plan (the "1984 Plan"). Under the terms of the
1984 Plan, 100,000 shares of 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
the 1984 Plan during 1997 or 1996.
In 1986, the Company adopted an incentive and non-qualified
stock option plan (the "1986 Plan"). Under the terms of the
1986 Plan, 300,000 shares of common stock have been reserved
for issuance to key employees. No options were granted
under the 1986 Plan during 1997 or 1996.
In 1987, the Company adopted an incentive stock award plan
(the "1987 Plan"). Under the terms of the 1987 Plan,
300,000 shares of common stock were reserved for issuance to
employees at the discretion of the Board of Directors. No
shares were awarded under the 1987 Plan during 1997 and 1996.
At December 31, 1997 and 1996, there were 119,612 shares
available for future grant under the 1987 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 this 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
(10) Stockholders' Equity (continued)
each anniversary of his or her initial grant date providing
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. At December 31, 1997 30,000 options were
granted under this plan. The Company recorded stock
compensation expense of $51 for the year ended December 31,
1997.
(11) Geographic Segment Data
<TABLE>
<CAPTION>
U.S. International Elimination Consolidated
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Net sales to unaffiliated customers $ 66,778 $ 39,603 $106,381
Intersegment sales 7,857 33,785 $(41,642)
--------------------------------------------------
Total net sales $ 74,635 $ 73,388 $(41,642) $106,381
=================================================
Operating (loss) profit $ 1,101 $ 3,349 $ 4,450
=================================================
General corporate expenses (7,444) __ (7,444)
Litigation settlement expense (28,150)
Depreciation and amortization (2,025) (354) (2,379)
Net interest expense (6,173)
_______
Profit/(Loss) before income taxes $(42,246) $ 2,550 $(39,696)
=======
Identifiable assets $ 28,148 $ 29,530 __ $ 57,678
===================================================
Year ended December 31, 1996
Net sales to unaffiliated customers $ 60,831 $ 32,541 $ 93,372
Intersegment sales 5,587 25,235 $(30,822) __
---------------------------------------------------
Total net sales $ 66,418 $ 57,776 $(30,822) $ 93,372
===================================================
Operating profit $ 2,147 $ 2,206 __ $ 4,353
===================================================
General corporate expenses (5,241) __ (5,241)
Depreciation and amortization (2,257) (743) (3,000)
Net interest expense (4,277)
-------
Loss before income taxes $ (9,489) $ 1,324 $ (8,165)
=======
Identifiable Assets $ 39,222 $ 25,280 __ $ 64,502
===================================================
The international classification above includes European
countries, specifically the Netherlands, United Kingdom,
Italy, France, Belgium, Germany and Ireland. The operations
in Spain, Mexico, Brazil and Hong Kong were not material and
were therefore also included in the international
classification.
</TABLE>
(12) Related Party Transactions
From April 1997 until January 1998, International Integrated
Industries, LLC, ("Industries") an entity affiliated with
Mr. Donald K. McGhan, the Company's former Chairman, Chief
Executive Officer and President and 13% stockholder, lent
the Company an aggregate of $9,900, of which $8,800 is
included in liabilities at December 31, 1997. That
indebtedness is denoted as the Company's 10.5% subordinated
notes. By the terms of the 11% senior secured convertible
notes, the 10.5% subordinated notes are junior in right of
payment and liquidation and, accordingly, no interest or
principal payments can be made with respect thereto without
the consent of the senior Noteholders. Interest expense of
$386 was accrued in the 1997 income statement with respect
to those notes but has not been paid to date.
After Industries began to lend those monies to the Company,
Mr. McGhan represented to the Board of Directors that those
funds were derived from person financial resources. Recently,
however, in connection with Mr. McGhan's unsuccessful efforts
to negotiate a payment schedule for the interest and
principal of that loan, the Company learned that approximatlely
two-thirds of the monies lent by Industries to the Company
were in fact derived from loans made to Industries by Medical
Device Alliance ("MDA"). MDA is a private company formed by
Mr. McGhan in 1995 to develop and market various products for
use in ultrasonic liposuction; the Company believes that
approximately $20 million has been raised to date by MDA from
various outside investors through private placement trans-
actions. The Company does not believe those outside
investors were apprised of the loans from MDA to Industries;
importantly, however, the investment of those funds in a
medical device company such as INAMED was apparently within
the permitted scope of the proposed use of funds which existed
when those investors made their investment. The Company's
Board of Directors has been advised by legal counsel: (a) that
the Company has no responsibility whatsoever to the outside
investors in MDA for the monies which Mr. McGhan arranged
to loan to Industries, which in turn were loaned by Industries
to the Company, and (b) that Mr. McGhan, as the controlling
person of both MDA and Industries at the times those loans
were made, is solely responsible to the outside investors in
MDA for his actions with respect to thoe monies.
In 1997, the Company entered into an agreement with Medical Device
Alliance, Inc. ("MDA") to sell furniture, artwork and equipment
which the Company was acquiring through a capital
sublease with Wells Fargo Bank for a total purchase price of
$300. The Company recorded a gain on sale of assets of
approximately $9 in 1997 in respect to this transaction. In
1997, the Company also entered into an agreement to sublease
approximately 5,000 square feet of office space in Las Vegas
from MDA for $10 per month, on a month to month basis.
Donald K. McGhan is the Chairman of MDA.
In 1996 and 1997, the Company performed administrative services for
MDA and other related parties. The Company believes the value of
these services is approximately $150,000 and will invoice MDA when
it finishes assessing the extent of those services.
In 1997, the Company signed a distribution agreement with
LySonix, Inc., a subsidiary of MDA, to sell ultrasonic surgery
equipment in the European and Latin American regions. Special
incentive discounts were offered to the Company for the
introduction of the product in 1997. Net sales in 1997 were
approximatley $300. In 1998, the terms of the original
agreement were revised so that the Company would obtain the
goods on a consignment basis and not have an obligation with
LySonix until the products were sold. This agreement and
its revision has been reviewed and approved by the Company's
current management.
Included in general and administrative expense on the income
statement in 1997 and 1996 is $1,600 and $1,500 in aircraft
rental expenses paid to Executive Flite Management, Inc., a
company that is controlled by the family of Mr. Donald K.
McGhan. No signed contract exists and the Company was billed
based on its usage. The Company believes that such rental
expenses are on substantially equivalent terms to that which
the Company could obtain from an unaffiliated third party.
In 1998, the Company discontinued the use of such corporate
aircraft.
Included in related party notes receivable in 1996 is a
10.5% note with McGhan Management Corporation in the amount
of $203. Mr. Donald K. McGhan and his wife are the majority
shareholders of McGhan Management Corporation. This note
has since been paid in its entirety. During 1996, the Company
paid a $1,209 Note in full to McGhan Management Corporation
and incurred $253 for flight related services with McGhan
Management Corporation. During 1997, the Company incurred
$140 for flight related services.
During 1996, the Company collected a $386 receivable from the
former Chief Executive Officer and Chief Financial Officer of
the Company. The Company also collected $108 from Star America,
Inc. a company owned by the former officer.
On February 6, 1996, the Company paid $550 to a former officer of
INAMED S.A. in connection with the Company's acquisition of this
subsidiary.
(13) Employee Benefit Plans
Effective January 1, 1990, the Company adopted a 401(k)
Defined Contribution Plan (the "Plan") for all U.S.
employees. Participants may contribute to the Plan and the
Company may, at its discretion, match a percentage of the
participant's contribution as specified in the Plan's
provisions. Participants direct their own investments and
the funds are managed by a trustee. The Company has no
liability for future contributions and has not contributed
to the Plan since 1993.
(13) Employee Benefit Plans (continued)
Certain foreign subsidiaries sponsor defined benefit or
defined contribution plans. The two largest are summarized
below. The remaining plans, covering approximately 50 non-
U.S. employees, were instituted at various times during 1991
through 1997 and the accumulated assets and obligations are
immaterial. These plans are funded annually according to
plan provisions with aggregate contributions of $125 and $86
for the years ended December 31, 1997 and 1996.
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 10% of the participant's
compensation. The employee is immediately and fully vested
in the Company's contribution. The Company's contributions
to the plan approximated $303 and $254 for the years ended
December 31, 1997 and 1996.
Effective January 1, 1990, a certain foreign subsidiary
adopted a Defined Benefit Plan for all employees. At
December 31, 1997, there were 30 active employees covered,
none retired and seven deferred pensioners. For the year
ended December 31, 1997, the plan had net periodic pension
cost of $46, plan assets at fair market value of $371, a
projected benefit obligation of $415 a vested benefit amount
of $212, and an unfunded liability of $60. The plan has
assumed a 6% discount rate, 6% expected long-term rate of
return on plan assets and a 3.5% salary increase rate.
(14) Litigation
INAMED and its McGhan Medical and CUI subsidiaries are
defendants in numerous state and federal court lawsuits
involving breast implants. The alleged factual basis for
typical lawsuits includes allegations that the plaintiffs'
silicone gel-filled breast implants caused specified
ailments including, among others, auto-immune disease,
lupus, scleroderma, systemic disorders, joint swelling and
chronic fatigue. The Company has opposed plaintiffs' claims
in these lawsuits and other similar actions and continues to
deny any wrongdoing or liability of any kind. In addition,
the Company believes that a substantial body of medical
evidence exists which indicates that silicone gel-filled
implants are not causally related to any of the above
ailments. Numerous studies in the past few years by medical
researchers in North America and Europe have failed to show
a definitive connection between breast implants and disease
(some critics, however, have assailed the methodologies of
these studies). Nevertheless, plaintiffs continue to
contest the findings of these studies, and more than 15,000
lawsuits and claims alleging such ailments are pending
against the Company and its subsidiaries. The volume of
lawsuits has created substantial ongoing litigation and
settlement expense, in addition to the inherent risk of
adverse jury verdicts in cases not resolved by dismissal or
settlement.
(14) Litigation (continued)
Proposed Class Action Settlement
As a result of the burdens imposed by the litigation on the
Company's management and operations, the substantial ongoing
litigation and settlement expense, the continuing litigation
risks, and the adverse perception held by the financial
community arising out of the litigation, the Company is
seeking approval of a mandatory ("non-opt-out") class action
settlement (the "Settlement") under Federal Rule of Civil
Procedure 23(b)(1)(B). As described below, the Company is
seeking through this settlement to resolve all claims
arising from McGhan Medical and CUI breast implants
implanted before June 1, 1993, a cutoff date which
encompasses substantially all domestically-implanted
silicone gel-filled implants.
Background of Class Settlement Negotiations
The Settlement has its genesis in negotiations begun in 1994
with the Plaintiffs' Negotiation Committee ("PNC"), a
committee of the national Plaintiffs' Steering Committee
("PSC") appointed by Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
(the "Court") to represent the interests of plaintiffs in
multi-district breast implant litigation transferred to the
Court for pretrial proceedings under the federal multi-
district transfer statute. At that time the Company entered
into an agreement to participate in a proposed industry-wide
class action settlement (the "Global Settlement") of
domestic breast implant litigation and petitioned the Court
to certify the Company's portion of the Global Settlement as
a mandatory class under Federal Rule of Civil Procedure
23(b)(1)(B), meaning that claimants could not elect to "opt
out" from the class in order to pursue individual lawsuits
against the Company. Negotiations with the PNC over
mandatory class treatment were tabled, however (and the
Company's petition consequently not ruled upon), when an
unexpectedly high projection of current disease claims and
the subsequent election of Dow Corning Corporation to file
for protection under federal bankruptcy laws necessitated a
substantial restructuring of the Global Settlement.
In late 1995, the Company agreed to participate in a scaled-
back Revised Settlement Program ("RSP") providing for
settlement, on a non-mandatory basis, of claims by domestic
claimants who were implanted before January 1, 1992 with
silicone gel-filled implants manufactured by the Company's
McGhan Medical subsidiary, and who met specified disease and
other criteria. Under the terms of the RSP, 80% of the
settlement costs relating to the Company's McGhan Medical
implants were to be paid by 3M and Union Carbide
Corporation, with the remaining 20% to be paid by the
Company. However, because the RSP did not provide a vehicle
for settling claims other than by persons who elected to
participate, and because of continuing uncertainty about the
Company's ability to fund its obligations under the RSP in
the absence of a broader settlement also resolving breast
implant lawsuits against the Company and its CUI subsidiary
which would not be covered by the RSP, the Company continued
through 1996 and 1997 to negotiate with the PNC in an effort
to reach a broader resolution through a mandatory class.
The PNC was advised in these negotiations by its consultant,
Ernst & Young LLP, which at the PNC's
(14) Litigation (continued)
request conducted reviews of the Company's finances and
operations in 1994 and again in 1996 and 1997.
On April 2, 1998, the Company and the Settlement Class
Counsel executed a formal settlement agreement (the
"Settlement Agreement"), resolving, on a mandatory, non-opt-
out basis, all claims arising from McGhan Medical and CUI
breast implants implanted before June 1, 1993. The
Settlement Agreement was submitted to the Court for
preliminary approval on May 21, 1998.
Terms and Conditions of the Settlement Agreement
Under the Settlement Agreement, $31,500 of consideration,
consisting of $3,000 of cash, $3,000 of common stock and
$25,500 principal amount of a 6% subordinated note will be
deposited in a court supervised escrow account approximately
90 days after preliminary approval by the Court. The
parties will then request the Court to authorize the mailing
of a notice of the proposed Settlement to all class members
and schedule a fairness hearing, which would probably be
held in the fourth quarter of 1998.
In the event the Court grants final approval of the
Settlement, the consideration held in the escrow account
will then be released, once the Court's final order becomes
non-appealable, to the court-appointed settlement office for
distribution to the plaintiff class, and the $25,500
subordinated note will mature and become payable in cash.
However, this payment will not become due before April 30,
1999 or 90 days after the Court's final order becomes non-
appealable, whichever is later. In the event the
subordinated note is still outstanding on September 1, 1999,
the interest rate will increase to 11%.
The Settlement Agreement covers all domestic claims against
the Company and its subsidiaries by persons who were
implanted with McGhan Medical or CUI silicone gel-filled or
saline implants before June 1, 1993, including claims for
injuries not yet known and claims by other persons asserting
derivative recovery rights by reason of personal,
contractual or legal relationships with such implantees.
The Settlement is structured as a mandatory, non-opt-out
class settlement pursuant to Federal Rule of Civil Procedure
23(b)(1)(B), and is modeled on similarly-structured
mandatory class settlements approved in the 1993 Mentor
Corporation breast implant litigation, and more recently in
the 1997 Acromed Corporation pedicle screw litigation.
On June 2, 1998 the Court issued a preliminary order
approving the Settlement. The Court also issued an
injunction staying all pending breast implant litigation
against the Company (and its subsidiaries) in federal and
state courts. The Company believes that this stay will
alleviate a significant financial and managerial burden
which these lawsuits had placed on the Company.
The application for preliminary approval included
evidentiary submissions by both the
(14) Litigation (continued)
Company and the plaintiffs addressing requisite elements for
certification and approval, including the existence, absent
settlement, of a "limited fund" insufficient to respond to
the volume of individual claims, and the fairness,
reasonableness and adequacy of the Settlement.
The Settlement is subject to a number of conditions,
including:
1. Extinguishment of the Company's Obligations under the
RSP. The Settlement is conditioned on the entry by the
Court of an order, pursuant to the default provisions of the
RSP, extinguishing the Company's obligations under the RSP
and restoring RSP participants' previously existing rights
in the litigation system against the Company and its
subsidiaries. On May 19, 1998, the Court issued such an
order.
2. Certification of Settlement Class. The Settlement is
conditioned on the Court's certification of a new settlement
class pursuant to Federal Rule of Civil Procedure
23(b)(1)(B). The parties are requesting such certification
under the same theory applied in the Mentor Corporation and
Acromed Corporation settlements, namely that the Company is
a "limited fund" whose resources, absent a mandatory class
settlement, are insufficient to respond to the volume of
claims pending against it.
3. Court Approval of Settlement. The Settlement is subject
to judicial approval of its terms and conditions as fair,
reasonable and adequate under Federal Rule of Civil
Procedure 23(e), a determination which takes into account
such factors as the nature of the claims, the arms' length
negotiation process, the recommendation of approval by
experienced class counsel, and the defendant's ability to
pay.
4. Resolution of 3M Contractual Indemnity Claims. The
settlement is conditioned on resolution of claims asserted
by 3M under a contractual indemnity provision which was part
of the August 1984 transaction in which the Company's McGhan
Medical subsidiary purchased 3M's plastic surgery business.
To resolve these claims, on April 16, 1998 the Company and
3M entered into a provisional agreement (the "3M Agreement")
pursuant to which the Company will seek to obtain releases,
conditional on judicial approval of the Company's settlement
and favorable resolution of any appeals, of claims asserted
against 3M in lawsuits involving breast implants
manufactured by the Company's McGhan subsidiary. The 3M
Agreement provides for release of 3M's indemnity claim,
again conditional on judicial approval of the Settlement and
favorable resolution of any appeals, upon achievement of an
agreed minimum number of conditional releases for 3M. The
3M Agreement requires that this condition be met or waived
before notice of the Settlement is given to the class.
Under the terms of the 3M Agreement, the Company will pay
$3,000 to 3M once the Court grants final approval of the
Settlement; except that no payment will become due any
sooner than April 30, 1999 or 90 days after the Court's
final order on the Settlement becomes non-appealable,
whichever is later.
(14) Litigation (continued)
Under the terms of the 3M Agreement, after the indemnity to
3M is released, the Company will assume certain limited
indemnification obligations to 3M beginning in the year
2000, subject to a cap of $1,000 annually and $3,000 in
total.
5. State Law Contribution and Indemnity Claims. The
Settlement is conditioned on entry by the Court of an order
finding the Settlement to have been made in good faith and
barring joint tortfeasor claims for contribution and
indemnity arising under state law (e.g., claims against the
Company by other manufacturers, suppliers or physicians also
sued by a settling class member). As additional protection
against such claims in states whose laws do not provide for
a bar of contribution and indemnity claims upon
determination of good faith settlement, the Settlement also
requires class members to reduce any judgments they may
obtain against such third parties by the amount necessary to
eliminate such parties' contribution or indemnity claims
against the Company under state law.
6. U.S. Government and Private Carrier Claims. The United
States government and private insurance carriers are seeking
reimbursement of medical services provided to class members.
The Company is presently in discussions with these parties
concerning the terms of such settlement. While the
Settlement is not conditioned on resolution of these claims,
the Company anticipates that it, together with Settlement
Class Counsel and the Court, if appropriate, will be able to
resolve the issues raised by the U.S. government and the
private insurance carriers before the mailing date of the
class notice.
7. Favorable Resolution of Appeals. The Settlement is
conditioned on favorable resolution of any appeals which may
be taken from the final judgment approving the Settlement or
from an interim stay order. In the event the Settlement is
disapproved on appeal, all of the escrowed settlement funds,
plus accrued interest, will be returned to the Company, and
the litigation will be restored to the status which existed
prior to any class settlements.
8. Allocation and Distribution of Settlement Proceeds.
Following the procedures adopted in the Mentor Corporation
and Acromed Corporation mandatory class settlements, the
Settlement leaves allocation and distribution of the
proceeds to class members to later proceedings to be
conducted by the Court, and contemplates that the Court may
appoint subclasses or adopt other procedures in order to
ensure that all relevant interests are adequately
represented in the allocation and distribution process.
Class Settlement Approval Process and Timetable
Following the issuance by the Court of a preliminary order
on June 2, 1998, the settlement approval process is
anticipated to proceed in several stages, as follows:
(14) Litigation (continued)
1. Satisfaction of the Condition under the 3M Agreement.
Within 60 days after the date of the preliminary order
(extendable to 90 days at the Company's option), the Company
needs to obtain an agreed minimum number of conditional releases
for 3M pursuant to the terms of the 3M Agreement. At 3M's
option, that condition can be modified or waived. The Company
anticipates satisfying that condition by August 1, 1998.
2. Notice to the Class. Following conditional class
certification and preliminary approval of the Settlement, as
well as satisfaction (or waiver) of the condition in the 3M
Agreement, the parties will give notice to class members
advising class members of the Court's preliminary order and
advising them of their opportunity to be heard in support of
or opposition to final certification and approval. The
parties expect that class notice will be given approximately
30 days after satisfaction of the condition in the 3M
Agreement. Prior to the distribution of the class notice,
the Company must deposit in a court supervised escrow
account $31,500 of consideration, consisting of $3,000 of
cash, $3,000 of common stock (to be valued based on the
average closing bid price for the Company's common stock
during the period of June 10, 1998 through July 8, 1998),
and $25,500 principal amount of a 6% subordinated note.
The Company anticipates that this deposit will occur prior
to September 30, 1998.
The parties' proposed form of notice provides a 60-day
deadline for class members to submit comments, objections,
or requests to intervene and be heard, with a final
settlement hearing scheduled approximately 20 days
thereafter. Assuming the Court adopts this schedule, the
final settlement hearing would occur in the latter part of
the fourth quarter of 1998, barring further unanticipated
delays.
3. Hearing on Final Certification and Approval. At the
hearing on final certification and approval, the Court will
consider any comments and objections received from class
members as well as any further evidence and legal argument
submitted by the parties or interveners concerning issues
relevant to certification and approval, including the
Company's status as a "limited fund" and fairness,
reasonableness and adequacy of the Settlement. Assuming a
favorable outcome, the Court will thereafter issue a final
order and judgment certifying the class as a mandatory class
under Federal Rule of Civil Procedure 23(b)(1)(B), approving
the settlement, enjoining class members from litigation of
settled claims, and barring contribution and indemnity
claims to the extent permitted under state law.
Ongoing Litigation Risks
Although the Company expects the Settlement, if approved, to
end as a practical matter its involvement in the current
mass product liability litigation in the United States over
breast implants, there remain a number of ongoing litigation
risks, including:
(14) Litigation (continued)
1. Non-Approval of Settlement. The Settlement Agreement
requires all parties to use their best efforts to obtain approval
of the Settlement by the Court and on appeal. However, there can
be no assurance that the Court will approve the Settlement or
that a decision approving it will be affirmed on appeal. The
approval decision turns on factual issues which may be contested
by class members opposing the Settlement, and additionally
implicates a number of legal issues that neither the United
States Supreme Court nor the federal appellate courts have
definitely ruled upon. While courts have approved similarly
structured mandatory class settlements in the Mentor Corporation
and Acromed Corporation cases, neither of those decisions was
subjected to appellate review. The Company cannot predict the
ultimate outcome of the approval process or the appeals process
in the event any appeals of the Settlement are filed in a timely
manner.
2. Collateral Attack. As in all class actions, the Company
may be called upon to defend individual lawsuits
collaterally attacking the Settlement even if approved and
affirmed on appeal. However, the typically permissible
grounds for such attacks (in general, lack of jurisdiction
or constitutionally inadequate class notice or
representation) are significantly narrower than the grounds
available on direct appeal.
3. Non-Covered Claims. The Settlement does not include
several categories of breast implants which the Company will
be left to defend in the ordinary course through the tort
system. These include lawsuits relating to breast implants
implanted on or after June 1, 1993, and lawsuits in foreign
jurisdictions. The Company regards lawsuits involving post-
June 1993 implants (predominantly saline-filled implants) as
routine litigation manageable in the ordinary course of
business. Breast implant litigation outside of the United
States has to date been minimal, and the Court has with
minor exceptions rejected efforts by foreign plaintiffs to
file suit in the United States.
The Company does not currently have any product liability
insurance. Depending on the availability and cost of such
insurance, the Company may in the future seek to obtain
product liability insurance.
The Company plans to obtain the cash needed to fund the
proposed settlement from a combination of new senior secured
debt and the proceeds to be received upon the exercise of
$13,900 of warrants to purchase common stock (which were
issued to the senior Noteholders in July 1997 in
anticipation of this event). The Company has discussed its
financing plans with Appaloosa Management, L.P. and its
affiliates, who are jointly the largest holders of the 11%
senior secured convertible notes. Those entities have
indicated their willingness to provide the new financing,
subject to negotiation of satisfactory terms, covenants and
legal documentation, including amendments to the existing
indenture and a new maturity date for the existing senior
debt. Such new financing may entail the issuance of
warrants or convertible securities which could be dilutive
to existing holders of the Company's common stock.
(14) Litigation (continued)
Accounting Treatment
In 1993, the Company recorded a $9,152 reserve for
litigation. For the year ended December 31, 1997, the
Company booked an additional reserve of $28,150. The
litigation reserve as of December 31, 1997 of $37,335
includes the cost of the non-opt-out settlement agreement of
$31,500, other settlements of $4,885 and legal fees and
other related expenses of $950.
(15) 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 aggregated $4,664 and $4,650
for the years ended December 31, 1997 and 1996.
Minimum lease commitments under all noncancelable leases at
December 31, 1997 are as follows:
Year ending December 31:
1998 $ 5,294
1999 4,048
2000 3,115
2001 2,524
2002 2,430
Thereafter 9,689
------
$27,100
======
(16) Sale of Subsidiaries
In 1993, the Company sold its wholly-owned subsidiary,
Specialty Silicone Fabricators, Inc. (SSF), a manufacturer
of silicone components for the medical device industry, for
$10.8 million. 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
receivable includes a note in the amount of $2,425 due on
February 25, 1995 with interest of 10% per annum and a note
in the amount of $3,466 due on August 31, 2003,
(16) Sale of Subsidiaries (continued)
accruing interest quarterly at a rate of prime, not to
exceed 11%. The notes have been reflected on the balance
sheet net of a discount of $644. In addition, the Company
has recorded an allowance for doubtful notes as of December
31, 1996 of $1,067. In 1997, the Company reduced this
allowance on the note by $600 and recorded the resulting
income effectively reducing general and administrative
expenses by the same amount. The reduction of the allowance
was in part based on negotiations with Specialty Silicone
Fabricators. The notes are collateralized by all of the
assets of the merger. The Company has filed a UCC1 and its
position is subordinated only to that of the primary lender.
(17) Supplemental Schedule of Non-Cash Investing and Financing Activities
Year ended December 31, 1997:
The Company issued 615,958 shares of common stock and
recorded a corresponding $2,267 reduction of convertible
debt in connection with the 4% Convertible Debentures
converted to equity.
In 1997, the Company accrued debt costs of $396 related to
the default of certain financial covenants related to the
$6,200 convertible debenture. During 1997, the Company
issued 36,711 shares of common stock as payment of $135 of
the accrued debt costs.
Year ended December 31, 1996:
The Company issued 58,400 shares of common stock and
recorded a corresponding $540 reduction of convertible notes
payable in connection with the 11% Secured Convertible Notes
converted to common stock.
The Company recorded an accounting/finance charge of $1,417
and corresponding liability in connection with the 5% bonus
shares given to the 11% Secured Convertible Noteholders for
their consent and waiver of default of the operating income
covenant in the first quarter of 1996. The liability was
extinguished upon the issuance of the shares in January
1997.
The Company recorded a debt conversion charge of $44 in
connection with the 10% conversion inducement offered to the
11% Secured Convertible Noteholders.
(18) Subsequent Events
In January, 1998, the Company entered into Employment
Agreements with Richard G. Babbitt and Ilan K. Reich,
whereby the Company engaged those persons to act as
President and Chief Executive Officer, and Executive Vice
President, respectively, for a term of three years. Under
the terms of those agreements, each of Messrs. Babbitt and
Reich received an Executive Officer Warrant granting them
the right to purchase 400,000 shares of the Company's common
stock at a price of $3.525 and $3.95 per share,
respectively.
(18) Subsequent Events (continued)
On April 1, 1998, the Company entered into an Employment
Agreement with Tom K. Larson, Jr. , whereby the Company
engaged Mr. Larson to act as Chief Financial officer for a
term of three years. Under the terms of that agreement, Mr.
Larson received an option to acquire 20,000 shares of the
Company's common stock at a price of $1.45 under an existing
employee stock option plan, and an Executive Officer Warrant
granting him the right to purchase 25,000 shares of the
Company's common stock at a price of $5.00 per share. The
Company will record compensation expense of approximately
$80,000 in the first quarter of 1998 related to the issuance
of Mr. Larson's stock options and warrants.
(19) Quarterly Summary of Operations (Unaudited)
The following is a summary of selected quarterly financial
data for 1997 and 1996:
Quarter
First Second Third Fourth
Net Sales:
1997 $ 26,417 $ 29,686 $ 24,206 $ 26,072
1996 20,402 27,859 23,260 21,851
Gross Profit:
1997 17,264 20,629 16,346 14,499
1996 12,629 19,928 14,655 10,865
Net Income (loss):
1997 (277) 269 (908) (40,661)
1996 (1,267) 1,143 (988) (10,267)
Net Income (loss)
per share:
1997 Basic (0.03) 0.03 (0.11) (4.73)
1997 Diluted (0.03) 0.03 (0.11) (4.73)
==========================================
1996 Basic (0.17) 0.15 (0.12) (1.28)
1996 Diluted (0.17) 0.15 (0.12) (1.28)
Significant Fourth Quarter Adjustments, 1997
--------------------------------------------
During the fourth quarter of the year ended December 31,
1997, the Company recorded significant adjustments which
decreased income by $29,700. The adjustments were as
follows:
Litigation related expenses $ 28,200
General & administrative expenses
Related to litigation 500
Income Tax Expense 1,000
The Company's litigation settlement expense was adjusted to
recognize the latest developments in the breast implant
litigation.
Significant Fourth Quarter Adjustments, 1996
--------------------------------------------
During the fourth quarter of the year ended December 31,
1996, the Company recorded significant adjustments to the
results of operations which decreased income by $3,842. The
adjustments were as follows:
Income Tax Expense $ 2,006
Provision for product returns 934
Provision for product liability 254
Royalty expense 648
(19) Quarterly Summary of Operations (continued)
- -----------------------------------------------------
The Company's provision for product returns was adjusted to
recognize the return of goods previously sold to customers
based on historical results.
The Company's income tax expense was adjusted to write off
the deferred tax assets previously carried on the domestic
subsidiaries financial statements.
During 1996, the provision for product liability was
increased by $254 to recognize the potential impact of the
Company's limited product warranty. The Company's royalty
expense was also increased in the fourth quarter of 1996 by
$648 to recognize the royalty expense for products sold
internationally under various license agreements.
<page intentionally left blank>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1995
Assets
Current Assets:
Cash and cash equivalents $ 2,807,327
Trade accounts receivable, net
of allowance for doubtful accounts
and returns and allowances
of $ 6,641,177 10,470,375
Notes receivable - trade 157,534
Related party notes receivable 385,508
Inventories 17,695,847
Prepaid expenses and other
current assets 1,825,213
Income tax refund receivable 95,580
Deferred income taxes 2,014,589
-----------
Total current assets 35,451,973
-----------
Property and equipment, at cost:
Machinery and equipment 8,923,564
Furniture and fixtures 3,714,717
Leasehold improvements 7,567,208
-----------
20,205,489
Less, accumulated depreciation
and amortization (9,234,166)
-----------
Net property and equipment 10,971,323
Notes receivable, net of allowance
of $1,066,958 2,047,535
Intangible assets, net 1,658,926
Other assets, at cost 255,187
-----------
Total assets $50,384,944
===========
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1995
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current installments of long-term debt $ 51,735
Notes payable to bank 1,273,476
Related party notes payable 1,759,417
Accounts payable 18,596,800
Accrued liabilities:
Salaries, wages, and payroll taxes 9,559,348
Interest 1,609,947
Self-insurance 1,130,632
Stock option compensation 68,714
Other 2,200,860
Royalties payable 2,926,388
Income taxes payable 1,812,818
Deferred income taxes 10,065
-----------
Total current liabilities 41,000,200
-----------
Long-term debt, excluding current installments 89,437
Convertible notes payable 493,511
Deferred grant income 1,114,735
Deferred income taxes 239,177
Litigation settlement 9,152,000
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 7,602,617 76,027
Additional paid-in capital 9,963,635
Cumulative translation adjustment 882,146
Accumulated deficit (12,625,924)
-----------
Stockholders' equity (deficit) (1,704,116)
-----------
Total liabilities and stockholders'
equity (deficit) $50,384,944
===========
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994
1995 1994
----------- -----------
Net sales $81,625,581 $80,385,342
Cost of goods sold 30,155,783 26,264,458
----------- -----------
Gross profit 51,469,798 54,120,884
----------- -----------
Operating expense:
Marketing 23,434,040 19,719,078
General and administrative 32,833,609 27,099,371
Research and development 4,392,054 3,724,410
----------- -----------
Total operating expenses 60,659,703 50,542,859
Operating (loss) income (9,189,905) 3,578,025
----------- -----------
Other income (expense):
Interest income 770,081 428,704
Interest expense (833,086) (624,261)
Royalty income 351,376 419,675
Foreign currency transaction
(losses) gains (252,525) 264,473
Miscellaneous income 578,199 940,487
----------- -----------
Net other income 614,045 1,429,078
----------- -----------
Income (loss) before income
tax (benefit) expense (8,575,860) 5,007,103
Income tax expense (benefit) (1,682,799) 2,260,792
----------- -----------
Net income (loss) $(6,893,061) $ 2,746,311
=========== ===========
Net income (loss) per share
of common stock
Basic $ (0.91) $ 0.37
=========== ===========
Fully diluted $ (0.91) $ 0.37
=========== ===========
Weighted average shares
outstanding 7,544,335 7,410,591
=========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1995 and 1994
Additional Cumulative
Common Stock Paid-in Translation Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C> <C>
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 (124,034) (1,240) (405,447) __ __ (406,687)
Issuances ofcommon 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 1,368 265,632 -- __ 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)
========= ======= ========== ========= ============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
1995 1994
Cash flows from operating activities:
Net income (loss) $(6,893,061) $2,746,311
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,432,554 2,058,462
Amortization of deferred grant income (78,322) (61,262)
Amortization of intangible assets 297,722 254,391
Non-cash stock compensation 29,500 29,000
Non-cash compensation to officers/directors 165,000 --
Provision for doubtful accounts and returns 1,707,308 884,831
Provision for obsolescence 308,632 450,730
Deferred income taxes 243,430 199,897
Write-off of intangible assets -- 46,017
Changes in current assets and liabilities:
Trade accounts receivable 503,114 (3,634,991)
Notes receivable 343,534 12,814
Inventories (2,539,782) (1,854,374)
Prepaid expenses and other current assets 791,350 (2,091,247)
Income tax refund receivable 367,476 (113,304)
Other assets (6,286) (62,376)
Accounts payable 2,731,166 1,610,174
Accrued salaries, wages, and payroll taxes 6,094,940 2,353,998
Accrued interest 1,042,582 342,294
Accrued self-insurance (160,973) (1,631)
Other accrued liabilities (284,380) (108,978)
Royalties payable 1,872,500 91,526
Income taxes payable (3,147,534) 576,768
----------- ----------
Net cash provided by
operating activities 5,820,470 3,729,050
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (4,694,592) (2,948,945)
Acquisition of INAMED, S.A. -- (400,050)
----------- ----------
Net cash used in
investing activities (4,694,592) (3,348,995)
----------- ----------
(Continued)
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
1995 1994
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)
Decrease in related party receivables 302,676 451,516
Increase in related party payables 788,807 420,610
Grants received, gross 228,453 157,728
Proceeds from exercise of stock options 72,500 26,100
Repurchase of common stock (1,345) (406,687)
---------- ----------
Net cash provided by financing activities 1,275,818 609,249
---------- ----------
Effect of exchange rate changes on cash (268,320) (315,353)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 2,133,376 673,951
Cash and cash equivalents at beginning of year 673,951 --
---------- ----------
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
========== ==========
Income taxes $ 273,947 $1,639,755
========== ==========
(Continued)
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Supplemental schedule of non-cash 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 non-cash 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.
See accompanying notes to consolidated financial statements.
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and
for each of the years ended December 31, 1995 and 1994
(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 breast implants 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 an original 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
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Revenue Recognition (continued)
shipped. The Company ships product with the right of return
and has provided an estimate of the allowance for sales
returns based on its historical returns experience, known
patterns and other specific factors. 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.
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 may have a material and adverse effect
on the consolidated results of operations and cash flows.
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
is shorter.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
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:
Customer lists 5 years
Organization costs 5 years
Patents 17 years
Trademarks and technology 5 years
Goodwill 10-12 years
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 (SFAS
No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", 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.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Net Income/Loss Per Share
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("SFAS No. 128") which provides for
the calculation of "basic" and "diluted" earnings per share.
SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997. Basic earnings
per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the effect of common shares issuable
upon exercise of stock options. As required by this
Statement, all periods presented have been restated to
comply with the provisions of SFAS No. 128.
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' equity (deficit), 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 1994 consolidated
financial statements to conform to the 1995 presentation.
(2) Inventories
Inventories are summarized as follows:
December 31, 1995
Raw materials $ 2,513,862
Work in progress 3,773,579
Finished goods 12,167,768
----------
18,455,209
Less allowance for
obsolescence (759,362)
--------
$ 17,695,847
==========
(3) Intangible Assets
Intangible assets, at cost, are summarized as follows:
December 31, 1995
Customer lists $ 125,000
Organization and acquisition costs 251,539
Patents, trademarks and technology 2,585,961
Goodwill 1,785,451
Other 337,827
----------
5,085,778
Less accumulated amortization (3,426,852)
----------
$ 1,658,926
==========
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.
(4) Lines of Credit
As of December 31, 1995, the Company had outstanding
borrowings in the amount of $328,366 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 and $105,417 was paid on the line of
credit in 1995 and 1994, 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.
4) Lines of Credit (continued)
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 expired on March 31, 1996. As of December 31, 1995,
approximately $900,000 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% in 1995.
The Company is currently seeking alternative lending sources
from other financial institutions. However, no agreements
have been finalized to replace the line of credit.
(5) Long-Term Debt
Long-term debt is summarized as follows:
December 31, 1995
11% Secured Convertible Note payable, maturing
January 1999, interest payable quarterly,
January 1, April 1, July 1 and October 1 $493,511
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
--------
634,683
Less, current installments (51,735)
--------
$ 582,948
========
The aggregate installments of long-term debt as of December 31,
1995 are as follows:
Year ending December 31:
1996 $ 51,735
1997 65,993
1998 23,444
1999 493,511
-------
$ 634,683
=======
(6) 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 and 1994 was approximately $78,000
and $61,000.
In addition, for the year ended December 31, 1994,
approximately $125,000 was received for training grants.
This amount has 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 (one of the
Company's Irish subsidiaries). If the grants 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.
(7) Income Taxes
Income tax (benefit) expense at December 31, is summarized
as follows:
1995 1994
Current:
Federa $(2,267,198) $1,577,188
State (195,969) 310,816
Foreign 551,893 172,891
----------- ----------
Total $(1,911,274) $2,060,895
----------- ----------
Deferred:
Federal $530,419 $ (70,778)
State (157,016) (39,984)
Foreign (144,928) 310,659
-------- ----------
Total 228,475 199,897
-------- ----------
$(1,682,799) $2,260,792
=========== ==========
(7) Income Taxes (continued)
For financial reporting purposes, earnings from continued
operations before income taxes includes the following
components:
Year ended December 31, 1995 1994
Pretax income:
Domestic $ (6,486,671) $ 5,728,982
Foreign (2,089,189) (721,879)
------------ -----------
Total Pretax Income $ (8,575,860) $ 5,007,103
============ ===========
The primary components of temporary differences which
comprise the Company's net deferred tax assets as of
December 31,1995 are as follows:
December 31,
1995
Deferred tax assets:
Allowance for doubtful accounts $ 576,350
Allowance for returns 2,895,564
Inventory reserves 90,090
Inventory capitalization 481,456
Accrued liabilities 599,605
Net operating losses 1,103,248
State taxes 2,554
Intangible assets 168,151
Litigation settlement 3,651,648
Tax credits 145,748
Other 8,322
----------
Deferred tax assets 9,722,736
Valuation allowance (7,377,074)
----------
Deferred tax assets 2,345,662
----------
Deferred tax liabilities:
Depreciation and amortization (46,456)
Installment sale (358,584)
Other foreign (175,275)
----------
Deferred tax liability (580,315)
----------
Net deferred tax asset $1,765,347
==========
(7) Income Taxes (continued)
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.
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 and 1994 is as follows:
1995 1994
"Expected" tax expense (benefit) $(2,915,792) $1,702,415
Tax effect of nondeductible expenses 51,084 43,974
Goodwill amortization 49,924 61,525
Research tax credits (1,099,596) (188,223)
Foreign taxes 406,965 483,550
State franchise tax (benefit), net of
Federal tax benefits (268,488) 175,944
Losses of foreign operations (48,256) (290,522)
Change in valuation allowance of
deferred tax assets 1,948,830 --
Tax penalties 276,708 150,726
Other (84,178) 121,403
---------- ---------
$(1,682,799) $2,260,792
========== =========
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.
(8) 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 and $4,326,000 for the years
ended December 31, 1995 and 1994, respectively, and is
included in marketing expense. The license agreements
expire at the expiration of the related patents.
(9) 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 and 1994 is as follows:
1995 1994
Options outstanding at beginning of year 202,500 247,854
Granted -- --
Exercised (50,000) (18,000)
Expired or canceled (6,000) (27,354)
------- -------
Options outstanding at end of year 146,500 202,500
======= =======
Options exercisable at end of year 94,000 122,500
======= =======
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 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 and 1994 aggregated
$9,000 and $10,000, respectively.
In 1984, McGhan Medical Corporation adopted an incentive
stock option plan (the "1984 Plan"). Under the terms of the
1984 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 an 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.
(9) Stockholders' Equity (continued)
In 1986, the Company adopted an incentive and nonstatutory
stock option plan (the "1986 Plan"). Under the terms of the
1986 Plan, 300,000 shares of common stock have been reserved
for issuance to key employees. No options were granted
under the 1986 Plan during 1995.
In 1987, the Company 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.
(10) Foreign Sales Information
Net sales to customers in foreign countries for the years
ended December 31, 1995 and 1994 represented the following
percentages of net sales:
1995 1994
Europe 22.3% 21.5%
Asia-Pacific 3.5 2.7
Iberia & Latin America 5.4 1.4
Other 0.3 0.7
----- -----
31.5% 26.3%
===== =====
The Europe classification above includes The Netherlands,
Belgium, United Kingdom, Italy, France and Germany. The Asia-
Pacific classification includes Hong Kong, China, Japan,
Taiwan, Singapore, Thailand, The Philippines, Korea,
Indonesia, India, Pakistan, New Zealand and Australia. The
Iberia & Latin American classification includes Central
America, South America, Mexico, Spain and Portugal.)
(11) 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 and 1994:
1995 1994
Net sales:
United States $55,881,262 59,196,401
International 25,744,319 21,188,941
---------- ----------
$81,625,581 80,385,342
========== ==========
Operating income (loss):
United States $(7,601,277) 4,717,154
International (1,588,628) (1,139,129)
---------- ---------
$(9,189,905) 3,578,025
========= =========
Identifiable assets:
United States $25,976,480 29,337,456
International 24,408,464 18,472,945
---------- ----------
$50,384,944 47,810,401
========== ==========
The international classification above includes the
Netherlands, United Kingdom, Italy, France, Belgium, Germany
and Ireland. The operations in Spain, Mexico, Brazil and
Hong Kong were not material and were therefore also included
in the international classification.
(12) Related Party Transactions
Included in assets is an unsecured note receivable from
Michael D. Farney, former 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 was due in June 1996. The note is primarily for
various personal activities and certain relocation
allowances. 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, former Chairman, Chief Executive Officer 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.
This payable approximated $1,209,000 as of December 31,
1995. The note bears interest at prime plus 2% per annum
(10.5% per annum at December 31, 1995) and was 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.
(12) Related Party Transactions (continued)
During 1992, the Company entered into a lease arrangement
with Star America Corporation, a Nevada corporation, for
rental of an aircraft to provide air transportation for
corporate purposes. Michael D. Farney, former Chief
Executive Officer and Chief Financial Officer of the
Company, is a director and officer of Star America
Corporation. 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
lease of $74,000 during 1994. Rental expense for 1995 and
1994 was $900,000 and $888,000 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 the actual rental
arrangement. 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
with Star America Corp. was terminated effective December
31, 1995.
(13) 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 eligible compensation annually, subject to the
limitations in the Internal Revenue Code. The Company can
match contributions equal to 10% of each participant's
eligible 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 among 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 did
not make contributions to the plan for the years ended
December 31, 1995 and 1994.
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 and $12,900 for the years ended December 31, 1995
and 1994, respectively.
(13) Employee Benefit Plans (continued)
Contributions to the defined benefit pension plan
approximated $75,000 and $49,000 for the years ended
December 31, 1995 and 1994, 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 and $144,000 for the years
ended December 31, 1995 and 1994, 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 and $14,000 for the years ended
December 31, 1995 and 1994, 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 and $1,344
in 1994. The Company's contributions to the plan
approximated $24,000 and $10,000 for the years ended
December 31, 1995 and 1994, 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
(13) Employee Benefit Plans (continued)
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 and $307 for the years
ended December 31, 1995 and 1994, respectively. The
Company's contributions to the plan approximated $9,000 and
$7,000, for the years ended December 31, 1995 and 1994,
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 and $2,413 for the years
ended December 31, 1995 and 1994, 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.
(14) Litigation (See Note 17b)
INAMED and/or its subsidiaries are defendants in numerous
State court actions and a Federal class action in the United
States District Court, Northern District of Alabama,
Southern Division, under Chief Judge Sam C. Pointer, Jr.,
U.S. District Court, regarding Master File No. C892-P-10000-
S (Silicone Gel Breast Implants Product Liability Litigation
MDL 926). The claims are for general and punitive damages
substantially exceeding provisions made in the Company's
consolidated financial statements. The accompanying
consolidated financial statements have been prepared
assuming that the Company will withstand the financial
results of said litigation.
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 provides
for 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. 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 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.
Under the terms of the Settlement Agreement, the parties
stipulate and agree that all claims of the Settlement Class
against the Company regarding breast implants and breast
implant materials shall 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
will pay $1 million to the Settlement fund for each of 25
years starting three years after Settlement approval by the
Court. The Company recorded a pre-tax charge of $9.1
million in the fourth quarter of 1993. The charge
represents the present value (discounted at 8%) of the
Company's settlement of $25 million over a payment period of
25 years.
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 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, it
(14) Litigation, continued
appears that projected amounts of eligible current claims
exceed the $1.2 billion provided in the Settlement. 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 and Union Carbide Revised
Settlement Program (the "Revised Settlement Program").
At December 31, 1995, the Company's reasonable estimate of
its liability to fund the Revised Settlement Program is a
range between $9.1 million, the original estimate as noted
above, and $50 million, with no amount within the range a
better estimate. Due to the uncertainty of the ultimate
resolution and acceptance of the Revised Settlement Program
by the PNC, as well as a lack of information related to the
total claims, the financial statements do not reflect any
additional provision for the litigation 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
Revised Settlement Agreement which insures a more
satisfactory method of resolving claims of women who have
received the Company's breast implants.
Management's commitment to the Settlement does not alter the
Company's need for complete resolution sought under a
mandatory ("non-opt-out") settlement class (the "Mandatory
Class"). Therefore, the Company has petitioned the United
States District Court, Northern District of Alabama,
Southern Division, for certification of a Mandatory Class
under the provisions of Federal Rule of Civil Procedure.
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 decision was reversed in March 1995 resulting
in no financial responsibility on the part of the Company.
(15) 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, and 1994 aggregated $4,927,677 and $4,913,327,
respectively.
Minimum lease commitments under all non-cancelable leases as
of December 31, 1995 are as follows:
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
==========
(16) 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 of $1,066,958
has been provided for in the financial statements.
(17) Subsequent Event
a) In January 1996, the Company completed a private placement
offering by issuing three-year secured 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 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.
b) UNAUDITED
The litigation disclosure at Note 13 has been updated. Refer
to the Breast Implant Litigation section within Item 3,
Legal Proceedings in the afore portion of this document.
(18) Quarterly Summary of Operations (Unaudited)
The following is a summary of selected quarterly financial
data for 1995 and 1994:
Quarter
--------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
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 1,004,409 (1,240,349)
Net Income(loss)
per share:
1995 Basic .15 .36 (.34) (1.08)
1995 Diluted .15 .36 (.34) (1.08)
1994 Basic .17 .23 .14 (.17)
1994 Diluted .17 .23 .14 (.17)
==================================================
(18) Quarterly Summary of Operations (Unaudited) (continued)
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:
Provision for income taxes $(4,162,607)
Provision for doubtful accounts and
returns and allowances 1,424,734
Compensation expense 891,200
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:
Provision for income taxes $(3,396,858)
Provision for doubtful accounts and
returns and allowances 546,054
Provision for inventory obsolescence 221,590
Provision for product liability 1,123,605
Rental expense (800,000)
Royalty income (325,301)
Compensation expense 187,500
The Company's provision for income taxes was adjusted to
reduce income tax expense in 1994 and 1995.
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.
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.
<TABLE>
<CAPTION>
Schedule II
INAMED CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996, 1995 and 1994
(in 000's except 1995 and 1994 data)
Beginning of
period End of period
Description balance Additions Deductions balance
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for returns $ 4,697 __ $341 $ 4,356
Allowance for doubtful accounts 714 $151 __ 865
Allowance for obsolescence 1,326 187 __ 1,513
Valuation allowance for 12,026 16,116 __ 28,142
deferred tax assets
Self-insurance accrual 1,373 2,229 __ 3,602
Allowance for doubtful Notes 1,067 __ 600 467
Litigation reserve 9,152 28,183 __ 37,335
Year ended December 31, 1996:
Allowance for returns 5,676 934 1,913 4,697
Allowance for doubtful accounts 965 101 352 714
Allowance for obsolescence 759 567 __ 1,326
Valuation allowance for 7,377 4,649 __ 12,026
deferred tax assets
Self-insurance accrual 1,131 270 28 1,373
Allowance for doubtful Notes 1,067 __ __ 1,067
Litigation reserve 9,152 __ __ 9,152
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 5,000,080 2,376,994 __ 7,377,074
deferred tax assets
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 5,606,666 __ 606,586 5,000,080
deferred tax assets
Self-insurance accrual 1,293,236 __ 1,631 1,291,605
</TABLE>
Exhibit 21
List of Subsidiaries of INAMED Corporation
Biodermis Corporation
Biodermis Ltd.
BioEnterics Corporation
BioEnterics, Latin America SA de CV
BioEnterics, Ltd.
Bioplexus Corporation
Bioplexus Ltd.
Chamfield Ltd.
CUI Corporation
Flowmatrix Corporation
Inamed Development Company
Inamed Japan
IMG Japan Inc.
McGhan Ltd.
McGhan Medical Asia Pacific Ltd.
McGhan Medical Benelux B.V.
McGhan Medical Benelux B.V.B.A.
McGhan Medical B.V.
McGhan Medical Corporation
McGhan Medical do Brasil Ltda.
McGhan Medical GmbH
McGhan Medical Ltd.
McGhan Medical Mexico, SA de CV
McGhan Medical S.A.
McGhan Medical S.A.R.L.
McGhan Medical S.R.L.
Medisyn Technologies Corp.
Medisyn Technologies Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,946 923
<SECURITIES> 0 0
<RECEIVABLES> 19,200 16,863
<ALLOWANCES> 5,221 5,411
<INVENTORY> 23,117 20,724
<CURRENT-ASSETS> 41,056 35,049
<PP&E> 28,122 24,198
<DEPRECIATION> 14,639 11,938
<TOTAL-ASSETS> 58,842 65,912
<CURRENT-LIABILITIES> 34,596 30,538
<BONDS> 0 0
0 0
0 0
<COMMON> 89 80
<OTHER-SE> (46,778) (9,988)
<TOTAL-LIABILITY-AND-EQUITY> 58,842 65,912
<SALES> 106,381 93,372
<TOTAL-REVENUES> 106,381 93,372
<CGS> 37,643 35,295
<TOTAL-COSTS> 110,703 97,791
<OTHER-EXPENSES> 35,374 3,746
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,990 5,387
<INCOME-PRETAX> (39,696) (8,165)
<INCOME-TAX> 1,881 3,214
<INCOME-CONTINUING> (41,577) (11,379)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (41,577) (11,379)
<EPS-PRIMARY> (4.97) (1.46)
<EPS-DILUTED> (4.97) (1.46)
</TABLE>
