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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the fiscal year ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-9741
INAMED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-0920629
State of Incorporation I.R.S. Employer Identification No.
700 Ward Drive, Santa Barbara, California 93111-2919
(Address of Principal Executive Officers) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock,
$.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates as of
March 19, 1999 was $134,314,869.
On March 19, 1999 there were 11,461,613 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference to a
definitive proxy statement to be filed by the Registrant not later than
April 30, 1999 pursuant to Regulation 14A.
This document contains 72 pages.
Exhibit index located on pages 30-34.
PART I
ITEM 1. BUSINESS.
INAMED Corporation ("INAMED" or the "Company") is a medical device
company which reports through one segment. The Company operates through
subsidiaries which are organized under three business units. Through
two business units-U.S. Plastic and Reconstructive Surgery and
Inamed International-the Company manufactures and markets saline and
silicone gel-filled breast implants for plastic and reconstructive surgery,
as well as other silicone based products including tissue expanders, facial
implants and custom prostheses for plastic and reconstructive surgery.
Through its third business unit-BioEnterics Corporation-the Company
manufactures and markets products for the treatment of obesity and for
use by general and laparoscopic surgeons.
The Company manufactures its products in Santa Barbara, California
and in Arklow, County Wicklow, Ireland, and owns or has exclusive licenses for
over 40 patents in the United States and overseas. The Company believes,
with an approximately 50% U.S. market share and a worldwide market share
of approximately 40%, that it is the leading company in the $275 million
worldwide breast implant market.
In 1998 the Company initiated a comprehensive restructuring
program, which included hiring a new senior management team, settling the
extensive and longstanding product liability litigation relating to silicone
gel-filled breast implants, and reducing expenses. As a result of these
efforts, together with a 24% increase in sales, during 1998 the Company was
able to achieve profitability; also, the Company's independent public
accountants have removed from their report on the Company's 1998 financial
statements the "going concern" explanatory paragraph issued
in the prior year.
The following table contains summary financial information which
highlights the improvements in profitability and working capital management
since the new senior management team undertook the restructuring program:
1997 1998 %Change
Income Statement data
(Dollars, in millions)
Net sales 106.4 131.6 23.7%
Gross profit 68.7 83.6 21.7%
Gross margin 64.6% 63.6%
Marketing expense 30.0 33.4 11.3%
As a % of sales 28.2% 25.4%
G&A expense 33.4 28.2 -15.6%
As a % of sales 31.4% 21.4%
R&D expense 8.9 9.3 4.5%
As a % of sales 8.4% 7.1%
Restructuring expense 0 4.2 100.0%
As a % of sales 0.0% 3.2%
Total operating expenses 72.3 75.1 3.9%
As a % of sales 68.0% 57.1%
Operating income (loss) (3.6) 8.5
Operating margin -3.4% 6.5%
Balance sheet data:
Cash & equivalents 1.9 11.9 526.3%
Accounts receivable 14.0 23.2 65.7%
Inventory 23.1 17.9 -22.5%
Accounts payable 14.8 12.2 -17.6%
Total debt 32.4 27.8 -14.2%
Stockholder's equity
(deficiency) (46.7) (15.6) -66.5%
The Company's common stock is publicly traded on the OTC Bulletin
Board under the symbol IMDC. The Company is actively seeking to have its
common stock listed on a recognized stock exchange, such as Nasdaq or the
American Stock Exchange. Based on the dramatic improvements achieved
in 1998 and its substantial market capitalization, the Company
believes that it will ultimately succeed in that effort, although there can
be no assurance as to whether or when a change in listing status may occur.
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. At that time,
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. Also at that time, in recognition of
Mr. McGhan's past contributions, he was named Chairman Emeritus. 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. At a special meeting of
shareholders held on December 21, 1998 Jim J. McGhan ceased to serve as a
member of the Board of Directors. On December 22, 1998 Donald K. McGhan
was relieved of the title of Chairman Emeritus. Also on that date,
Ilan K. Reich was elected President, with Richard G. Babbitt retaining the
titles of Chairman and Chief Executive Officer.
New Management's Focus. Throughout 1998 the new senior executive
management team focused on resolving the breast implant litigation and
returning the Company to profitability. Both goals have been successfully
accomplished.
Settlement of Litigation. On June 2, 1998, federal Judge Sam C.
Pointer, Jr. gave preliminary approval of the settlement agreements with the
Plaintiffs' Class Settlement Counsel and Minnesota Mining & Manufacturing
Company ("3M"). Under these agreements, the Company agreed to pay an
aggregate of $34.5 million to settle all claims arising from breast implant
products (both silicone gel-filled and saline) which were implanted before
June 1, 1993 and to resolve a significant indemnity claim by 3M. The
settlement agreement with the plaintiffs is structured as a mandatory limited
fund, non-opt-out class action settlement covering the Company and
its subsidiaries. On February 1, 1999 Judge Pointer granted final approval
of the settlement.
On March 3, 1999 the statutory 30-day period for filing appeals
expired, with no notices of appeal being filed with the Federal District Court
within that period. As a result, by June 2, 1999 the Company will be
required to fund the $25.5 million promissory note which was previously
issued to the court-supervised escrow agent on behalf of the plaintiff
class. The Company has the ability to meet that funding obligation from a
combination of both cash on hand and the proceeds to be received upon
the exercise of certain warrants which were issued in contemplation of this
event. An additional $3 million of funding will be needed by June 2, 1999 to
purchase the 426,323 shares of common stock which were issued last year to
the court-supervised escrow agent as part of the consideration for the
settlement. Those funds will be provided directly by the Company's senior
noteholders. The Company had assigned its right to purchase that stock to its
senior noteholders in April 1998, at the time the settlement agreement was
signed.
Emphasis on Profitability. During 1998 the new senior management
team initiated a restructuring program and reorganized the Company's
operations. This program included the reduction of overhead through a 10%
headcount reduction, elimination of underutilized corporate offices and
the European sales headquarters, entering into a strategic alliance with the
Company's leading supplier of raw materials, moving the corporate
headquarters from Las Vegas to Santa Barbara, and terminating or selling
unprofitable business lines. The new senior management team
also streamlined the organizational structure by replacing 26 autonomous
domestic and international subsidiaries with three business units: U.S.
Plastic and Reconstructive Surgery, Inamed International Corp. (with
operations in Europe, Central America and Asia/Pacific), and BioEnterics
Corporation (the Company's obesity management subsidiary). Each business
unit has a president who is responsible for the profitability of that
entity, as well as an executive management staff with responsibilities for
finance, operations, manufacturing, sales and marketing, research and
development, and regulatory affairs. The Company's corporate staff has been
refocused to establish and oversee the financial and operational goals for
each of the business units, enhance manufacturing efficiencies on a
worldwide basis, explore new business and product opportunities, and
set the strategic direction of the Company.
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. 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 until July 8,
1998. 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
an 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., and that it is focusing on the activities of
prior management. The Company has been fully cooperating with the SEC's
requests for documents and interviews with accounting employees in
connection with that inquiry.
Corporate Organization
The Company traces its history to the establishment in 1974 of
McGhan Medical Corporation as a manufacturer of silicone implant
products for plastic and reconstructive surgery. In 1977, that
business was sold to 3M. In 1984, a new McGhan Medical Corporation
acquired the assets of 3M's silicone implant product line. In 1985, this
entity became a subsidiary of a public company through a merger with a
Florida corporation (First American Corporation), and in 1986 the name of
that public company was changed 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".
In December 1998, following approval by the Company's stockholders,
INAMED changed its state of incorporation to Delaware in order to have
greater latitude in raising capital and conducting acquisitions, and also in
order to benefit from a more predictable body of corporate law that is
applied to publicly-traded companies.
The Company now operates through three business units.
The U.S. Plastic and Reconstructive Surgery group consists of
McGhan Medical Corporation, a California corporation. In 1998 and early 1999
the Company sold or discontinued a number of smaller business lines which
were related to the activities of its U.S. plastic surgery business; it
also consolidated the separate activities of CUI Corporation and Flowmatrix
Corporation into the management and corporate structure of McGhan
Medical. These changes were undertaken to improve manufacturing
efficiencies, centralize management and reduce duplicate administrative
expenses.
Inamed International Corp., a new Delaware corporation, was formed
in December 1998 to hold all of the Company's international
manufacturing and sales subsidiaries and to direct the activities of the
Company's network of distributors throughout Europe, the Middle East, South
America and the Asia/Pacific region. Its subsidiaries include McGhan
Limited, an Irish corporation which is engaged in manufacturing, as well as
direct sales organizations in England, France, Germany, the Netherlands,
Italy, Spain and Mexico. During 1998 and early 1999 the Company
discontinued the active operations of its subsidiaries or representative
offices in Belgium, Brazil, Hong Kong, Singapore and Russia, as well as
silicone raw materials manufacturing (which had been conducted through
Chamfield Ltd.) and the European sales headquarters based in Holland.
These changes were undertaken to reduce costs and instill greater
management control and coordination among the disparate international
subsidiaries and distributors.
BioEnterics Corporation is the Company's third business unit. It is
engaged in the development, production and marketing of proprietary
implantable devices for the bariatric, general and laparoscopic surgery
markets for the treatment of serious obesity and gastrointestinal disorders,
and to minimize risks associated with surgery. BioEnterics' primary
product is the LAP-BAND, Adjustable Gastric Banding System. During 1998 the
Company began to explore an affiliation with a major medical device
manufacturer, in order to better exploit the future potential of this
product.
Products and Markets
Breast implants and related tissue expander products, which
currently 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.
Breast 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 are more likely to 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 or a textured surface sold under the BioCell
or MicroCell tradenames.
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 breastimplants would be available only under
controlled clinical studies. Accordingly, through 1997 the Company marketed
and distributed its silicone gel-filled breast implants only outside the
United States,and marketed and distributed saline-filled breast implants
both in the United States and abroad. Since April 1998 the Company has
been selling certain styles of its silicone gel-filled breast implants in the
United States as part of an adjunct study for reconstructive and revision
surgery.
Breast reconstructive surgery is the process by which a surgeon
recreates or reconstructs a woman's breast following a mastectomy.
According to a member survey 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, in October 1998 a federal
law was signed that mandates nationwide insurance coverage of
reconstructive surgery following a mastectomy. Historically, not all health
insurers covered this procedure.
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 breast implant augmentation 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 BioSpan? tissue expander
product line that utilizes the BioCell textured surface which allows more
precise surgicalplacement. 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.
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)
System. In 1998 approximately $12 million of these products were sold to
surgeons and hospitals, primarily in Europe and Australia, as compared to
$9.3 million in 1997. The LAP-BAND System is currently undergoing clinical
trials in the United States. BioEnterics also produces the patented
EndoLuminar II and MicroEndoLumina? Transillumination Systems for
increasing visibility during laparoscopic procedures, and is developing an
Anti-Reflux Prosthesis for the laparoscopic treatment of gastroesophageal
reflux disease.
People who are 100% over one's ideal weight or 100 pounds or more
overweight are considered severely or morbidly obese. Morbid 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, such as the vertical
banded gastroplasty. In this procedure, a non-adjustable 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, the adjustable silicone
elastomer band is laparoscopically placed around the upper part of the
stomach, 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, 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, the band may be removed laparoscopically, completely reversing the
procedure.
The LAP-BAND System has begun to achieve widespread acceptance in
Europe and Australia, with approximately 20,000 units implanted since 1995.
It is currently undergoing clinical trials in the United States, with complete
submission of the pre-marketing approval application to the FDA expected in
early 2000.
The BIB System is a short-term therapy, designed for patients who
must reduce weight 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 patients 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, 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 the second half of 1999.
The EndoLumina and MicroEndoLumina 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 for the new design, which is now being marketed in the U.S. and
internationally.
The Anti-Reflux Prosthesis (ARPT) is designed to be placed
laparoscopically to prevent gastroesophageal reflux disease, or GERD. GERD
results in chronic injury to the inner lining of the esophagus, causing pain,
inflammation and sometimes scarring and difficulty in swallowing. An
improvement of a previously-marketed device, the ARPT is designed to
facilitate a less traumatic and more durable procedure.
The LAP-BANDr System, BIBr System and ARPr are investigational
devices in the United States, limited to use within clinical studies approved
by the FDA.
During the past three 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 forty 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 three 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. and NovaMed. Several of these manufacturers have received
510(k) approval from the FDA to market saline breast implants in the United
States. The Company believes that in 1998 these companies accounted for less
than 3% of domestic sales of breast implant products.
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.
Research and Product Development
A qualified staff of over 50 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 $9.4 million, $8.9
million and $5.7 million in 1998, 1997 and 1996, respectively, on its research
and development efforts. These expenditures represented 7%, 8% and 6% of
sales in 1998, 1997 and 1996, respectively.
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 reduced diffusion 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 these products 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 five years remaining until
expiration.
During 1998 the Company undertook a review of its portfolio of
patents and licenses and determined in several situations that either the
patent had expired or was invalid, or that the licensor had breached its
obligations. Accordingly, the Company is no longer paying several million
dollars in annual royalties under certain license agreements and instead
is now engaged in litigation with various licensors over its future
obligations and whether it is entitled to recover past royalties which were
paid. The Company is also considering suing various manufacturers and
other parties which it believes have been infringing on the Company's
intellectual property.
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 staff, 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 in 1998 the FDA
conducted reviews of the Company's BioEnterics and International
manufacturing facilities; in all instances the FDA notified the Company that
it was in compliance with applicable good manufacturing practices.
Since the 1992 moratorium by the FDA on silicone gel-filled breast
implants and the ensuing litigation, traditional major commercial 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 using
other companies to meet its silicone raw material needs, but at higher prices.
For the past few years, the Company has also devoted resources to develop
its own raw materials manufacturing capability through its Chamfield Ltd.
subsidiary in Ireland, which has been supplying much of the Company's raw
materials needs for international production. In late 1998, the Company entered
into a strategic alliance with a privately-held specialty chemical company,
whereby that company will become the Company's exclusive supplier of
silicone raw materials and take over the operation of the Company's Irish raw
materials facility. This alliance includes favorable long-term pricing,
reduction of the overhead previously associated with the in-house manufacturing,
and closer technical support for such initiatives as just-in-time inventory
and new product development. This alliance also provides the Company with
the technical expertise necessary to become a vertically-integrated
manufacturer of virtually all of its silicone raw material needs in the event
the supplier is unable to meet the Company's requirements due to a major
catastrophe. 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.
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 any product that proves
defective will be replaced 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. The Company's illumination products are
classified as Class II devices. Tissue expanders are currently proposed to be
classified as Class II devices. The Company's breast implant products are
classified as Class III devices. The Company's obesity and anti-reflux
products are classified as 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. Although the FDA did not, as anticipated, call for final
PMA applications to be submitted prior to the end of 1998, the Company has
completed all of the required clinical studies and is prepared to meet a call
for the final PMA for saline-filled implants. The Company currently
anticipates that such a call will be made in the second quarter of 1999,
although the date for submission of PMA applications may be further
extended by the FDA. 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.
In late 1998 the Company received FDA approval for an IDE to begin
a clinical trial for silicone gel-filled implants for augmentation surgery.
In January 1999 the Company began that trial, which is expected to take several
months to become fully enrolled. Assuming the current regulatory framework
remains unchanged, the Company anticipates filing a PMA based on that
clinical trial by 2002.
The Company is currently conducting a clinical study of the
LAP-BAND System in the United States under an Investigational Device Exemption
(IDE) granted by the FDA. The Company anticipates beginning clinical
studies of the BIB System and the Anti-Reflux Prosthesis in the United
States in the second half of 1999. The Company plans to submit the
results of the studies as part of PMAs for these products.
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, 1998, the Company had 862 employees, of which
604 were in the United States and 258 were at international operations.
Except for the Company's manufacturing facility 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 all of its office, manufacturing and
distribution facilities, as follows: Carpinteria, California (61,000 square
feet), Santa Barbara, California (187,000 square feet), Arklow County,
Wicklow, Ireland (53,000 square feet). In addition, the Company has
leases for space in Las Vegas, Nevada and The Netherlands which it no
longer uses for its operations.
The Company's international sales offices, located in Germany,
Italy, United Kingdom, France, Netherlands, Spain and Mexico 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 accommodate its current
operations.
ITEM 3. LEGAL PROCEEDINGS.
Breast Implant Litigation
Final Order of Settlement. Prior to the final settlement order
issued by federal Judge Sam C. Pointer, Jr. of the United States District Court
for the Northern District of Alabama, Southern Division on February 1, 1999,
INAMED and its McGhan Medical and CUI subsidiaries were defendants in
tens of thousands of state and federal court lawsuits involving breast implants.
As part of that final order, all of those cases arising from breast
implant products (both silicone gel-filled and saline) which were
implanted before June 1, 1993 were consolidated into a mandatory class
action settlement and dismissed.
On March 3, 1999 the statutory 30-day period for filing appeals
expired, with no notices of appeal being filed with the Federal District Court
within that period. As a result, by June 2, 1999 the Company will be
required to fund the $25.5 million promissory note which was previously
issued to the court-supervised escrow agent on behalf of the plaintiff
class. The Company has the ability to meet that funding obligation from a
combination of both cash on hand and the proceeds to be received upon the
exercise of certain warrants which were issued in contemplation of this event.
An additional $3 million of funding will be needed by June 2, 1999 to purchase
the 426,323 shares of common stock which were issued in September 1998 to the
court-supervised escrow agent as part of the consideration for the settlement.
Those funds will be provided directly by the Company's senior noteholders.
The Company had assigned its right to purchase that stock to its senior
noteholders in April 1998, at the time the settlement agreement was signed.
Current Product Liability Exposure. Currently, the Company's
product liability litigation relates almost entirely to saline products which
were implanted after the 1992 FDA moratorium on silicone gel-filled implants
went into effect. These cases are being handled in the ordinary course of
business and will not have a material financial impact on the Company.
Outside the United States, where the Company has been selling silicone
gel-filled implants without interruption, and where the local tort systems do
not encourage or allow contingency fee arrangements, the Company has only a
minimal number of product liability lawsuits and no material financial exposure.
History of the Litigation Settlement. Beginning in 1992 with the
FDA moratorium on silicone gel-filled implants, a torrent of litigation
was filed against the manufacturers. The alleged factual basis for
typical lawsuits included 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 opposed plaintiffs' claims
in these lawsuits and other similar actions and has continually denied any
wrongdoing or liability. 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). Most recently in December 1998, a science panel of
independent experts appointed by Judge Pointer reached the same
conclusion. Nevertheless, the immense volume of lawsuits created a
substantial burden on the Company, both in terms of ongoing litigation
costs and the expenses of settlement, in addition to the inherent risk of
adverse jury verdicts in cases that could not be resolved by dismissal or
settlement.
Beginning in 1994 the Company sought to resolve breast implant
litigation by participating in a proposed industry-wide class action settlement
(the "Global Settlement") of domestic breast implant litigation. At that
time, the Company 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 plaintiffs' negotiating committee 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 preliminarily approved by the Court on June 2,
1998. 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 has alleviated the significant
financial and managerial burden which these lawsuits had placed on the Company.
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 were deposited in a
court-supervised escrow account in September 1998. Thereafter, the Court
authorized the mailing of a notice of the proposed Settlement to all class
members and scheduled a fairness hearing, which was held on January 11, 1999.
Now that the Court has granted final approval of the Settlement and
that final order has become non-appealable, once the Company completes its
funding obligations (by June 2, 1999) the consideration held in the
escrow account will be released to the court-appointed settlement
office for distribution to the plaintiff class in accordance with an
allocation plan to be determined by the Court in proceedings to be held in
mid-1999.
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.
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. In connection with a fairness hearing held on January 11, 1999,
the Company and the plaintiffs submitted additional materials to support
questions posed by the Court and to answer various objections which had been
made.
Resolution of 3M Contractual Indemnity Claims. The Settlement was
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 (as later amended in January
1999), the Company paid $3 million to 3M in February 1999, shortly after
the Court granted final approval of the Settlement. Also under the terms of
the 3M Agreement 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 to $6 million in total, depending on the
resolution of certain cases which were not settled prior to the issuance of
the final order.
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.
Ongoing Litigation Risks. Although the Company expects the
Settlement 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. Collateral Attack. As in all class actions, the Company
may be called upon to defend individual lawsuits collaterally attacking the
Settlement even after it becomes non-appealable. 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.
2. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 21, 1998, the Company held a Special Meeting of Shareholders
(the "Meeting"), whereby the shareholders approved (i) the election of five
(5) directors; (ii) the change of the Company's state of incorporation from
Florida to Delaware by means of a merger of the Company with and into a
wholly owned subsidiary; (iii) the increase in the number of authorized
shares of common stock of the Company from 20,000,000 to 25,000,000; (iv)
the authorization of the issuance of up to 1,000,000 shares of Preferred Stock;
(v) the adoption of revised Bylaws; (vi) the provision in the Company's
Certificate of Incorporation and Bylaws for advance notice of shareholder
proposals and nominations for the election of directors; and (vii) the
Company's 1998 Stock Option Plan. The vote on such matters was as follows:
1. Election of Directors
Total Vote of Each Nominee Total Vote Withheld From Each
Nominee
Richard G. Babbitt 8,963,954 12,097
Ilan K. Reich 8,951,589 24,462
Harrison E. Bull, Esq. 8,136,054 839,997
Richard Wm. Talley 8,129,848 846,203
John E. Williams, M.D. 8,050,298 925,753
2. The change of the Company's state of incorporation from Florida to
Delaware by means of a merger with and into a wholly owned subsidiary:
For 6,592,836
Against 30,146
Abstaining 35,581
Broker Non-Votes 2,324,174
3. The increase in the number of authorized shares of common stock of
the Company from 20,000,000 to 25,000,000:
For 6,586,150
Against 30,146
Abstaining 35,581
Broker Non-Votes 2,324,174
4. The authorization of the issuance of up to 1,000,000 shares of
preferred stock:
For 6,344,623
Against 231,268
Abstaining 35,720
Broker Non-Votes 2,364,440
5. The adoption of revised Bylaws:
For 6,591,672
Against 5,950
Abstaining 13,989
Broker Non-Votes 2,364,440
6. The adoption of the provision in the Company's Certificate of
Incorporation and Bylaws for advance notice of shareholder proposals and
nominations for the election of directors:
For 6,590,176
Against 7,650
Abstaining 13,785
Broker Non-Votes 2,364,440
7. The approval of the Company's 1998 Stock Option Plan:
For 8,665,383
Against 297,942
Abstaining 12,726
Broker Non-Votes 0
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 from the
Nasdaq SmallCap Market effective June 11, 1997. On March 19, 1999, the
Company had 787 stockholders of record. The Company's common stock price
at the close of business of March 19, 1999 was $13.00 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
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
High Low
1998
1st Quarter $ 5-3/4 $ 3-1/8
2nd Quarter $ 9-7/16 $ 5
3rd Quarter $ 8-5/8 $ 5-1/8
4th Quarter $ 10-1/4 $ 4-5/8
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.
Years Ended December 31,
(in 000's except share and per share data)
1998 1997 1996 1995 1994
Income Statement Data:
Net sales $ 131,566 $106,381 $93,372 $81,626 $80,385
Restructuring expense (4,202) -- -- -- --
Operating income (loss) 8,467 (3,577) (3,956) (9,190) 3,578
Litigation settlement -- (28,150) -- -- --
Income (loss) before income
tax expense (benefit) and
extraordinary charges 5,341 (39,696) (8,165) (8,576) 5,007
Income tax expense
(benefit) (8,432)(4) 1,881(2) 3,214(1) (1,683) 2,261
Net income (loss)
before extraordinary
charges 13,773 (41,577) (11,379) (6,893) 2,746
Extraordinary charges (1,800) -- -- -- --
Net income (loss) $ 11,973 $(41,577) $(11,379) $(6,893) $2,746
Net income (loss)
per share of common
stock(3)
Basic $ 1.15 $ (4.97) $ (1.46) $ (0.91) $ 0.37
Diluted $ 0.92 $ (4.97) $ (1.46) $ (0.91) $ 0.37
Weighted average
common shares
outstanding 10,387,163 8,371,399 7,811,073 7,544,335 7,410,591
(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) 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".
(4) Reflects the recognition of a $8,000 deferred tax asset based on future
short-term income projections.
At December 31,
(in 000's except share and per share data)
1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital
(deficiency) ($ 988) $ 6,460 $ 4,510 $( 5,548) $ 1,088
Total assets 80,707 58,842 65,912 50,385 47,810
Long term debt,
net of current
installments 27,767 23,574 34,607 583 51
Subordinated long
term debt, related
party -- 8,813 -- -- --
Stockholders'
(deficiency)
equity (15,625) (46,689) (9,908) (1,704) 4,479
Dividends paid -- -- -- -- --
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-looking 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 including 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
Commencing in 1992-with the advent of the mass tort litigation arising from
the Company's silicone gel-filled breast implant products-until early
1998, the Company's financial performance was adversely impacted by the costs
of managing its litigation problems as well as by the costs of improving
manufacturing practices and policies in accordance with FDA regulations.
In addition, the Company invested significant resources to increase its
international sales and market presence. Due to these and other factors,
sales grew during that period although expenses grew at a significantly
higher rate, leading to a steady deterioration in the Company's financial
performance.
In early 1998, a new senior management team was appointed and became
focused on two primary objectives: settling the breast implant litigation and
making the Company consistently profitable on par with its peers in the
medical device industry.
By June 1998, settlement agreements with the plaintiffs' negotiating
committee and 3M Corp. had been reached and preliminarily approved by the
Court. As part of this approval the Court also entered an injunction
staying virtually all of the breast implant litigation against the
Company, thereby relieving the Company of the substantial monetary and time
burdens of defending the tens of thousands of cases in which it was named
as a defendant. On February 1, 1999, the Court entered a final order
approving the settlement; and on March 3, 1999 the statutory period for
filing appeals expired, with no notices of appeal having been filed. In
order to reflect the costs of the litigation settlement, the Company took a
$28.2 million charge to the 1997 results of operations, in addition to the
$9.2 million charge taken in 1993. Management believes that these
reserves properly reflect all of the costs of the litigation settlement.
Also in 1998, as the framework for the litigation settlement began to fall
into place, the new management team undertook a strategic review of the
Company's operations and businesses. Based on that effort a restructuring
plan was implemented beginning in the third quarter of 1998. This plan
included an approximate 10% worldwide reduction in headcount, the closing
of certain administrative offices and the exiting or discontinuance of
certain smaller unprofitable product lines. The plan also included a renewed
focus on new product development (so as to provide a foundation for future
sales growth), and a new emphasis on improving manufacturing efficiencies
and reducing expenses generally. During the third and fourth quarters of
1998, a total of $4.2 million was expensed as a restructuring charge to
recognize various costs associated with implementing that plan.
By the end of 1998 the transition from a history of unprofitability to
profitable operations was successfully accomplished. Operating profit
before restructuring expense-which is defined as income from continuing
operations before interest, foreign exchange gains and losses, taxes,
litigation settlement and extraordinary charges-was $12.7 million in 1998,
as compared to an operating loss of $3.6 million in 1997. Moreover, based
on the turnaround in profitability, the resolution of the breast implant
litigation and the financing alternatives available to fund the settlement,
the Company's independent public accountants, BDO Seidman LLP, removed from
their audit report for the 1998 financial statements the "going concern"
explanatory paragraph issued in the prior year.
Summary financial table. Set forth below is a table which shows the
individual components of the Company's actual 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.
1998 1997 1996
% Inc. %Inc. %Inc.
(in 000's)
Sales 131,566 23.7% 106,381 13.9% 93,372 14.4%
Cost of Goods Sold 47,954 27.4% 37,643 6.7% 35,295 17.0%
Gross Profit 83,612 21.6% 68,738 18.4% 58,077 12.8%
As a % of sales 63.6% 64.6% 62.2%
Marketing 33,364 11.2% 30,002 19.6% 25,088 7.0%
As a % of sales 25.4% 28.2% 26.9%
G&A 28,213 -15.7% 33,450 7.0% 31,252 -4.8%
As a % of sales 21.4% 31.4% 33.5%
R&D 9,366 5.7% 8,863 55.7% 5,693 29.6%
As a % of sales 7.1% 8.3% 6.1%
Restructuring expense 4,202 100.0% - -
As a % of sales 3.2% 0.0% 0.0%
Operating expenses 75,145 3.9% 72,315 16.6% 62,033 2.3%
As a % of sales 57.1% 68.0% 66.4%
Operating income/(loss) 8,467 (3,577) (3,956)
As a % of sales 6.4% -3.4% -4.2%
Litigation settlement - (28,150) -
Net interest expense &
debt costs (3,812) (6,173) (4,277)
Income (loss) before
income taxes and
extraordinary charges 5,341 (39,696) (8,165)
Sales. While the Company's revenues are subject to adjustments due
to changes in price or volume of units sold, revenue increases from 1996
through 1998 were primarily a result of increased volume. Based on
publicly available information, the Company believes that the markets for its
products are growing, and that it is increasing its market share in
relation to competitors.
Sales in the United States accounted for 65%, 63% and 65% of total
net sales in 1998, 1997 and 1996, respectively. International sales accounted
for 35%, 37% and 35% of total net sales in 1998, 1997 and 1996, respectively.
The accelerated growth in 1998 in U.S.sales was due primarily to the
introduction of silicone gel-filled implants for reconstructive and
revision surgery, which improved the overall sales mix, as well as
increased sales of the Company's anatomical and smooth-shaped breast
implants.
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 are the cost of
raw materials and the yield of finished goods from the Company's
manufacturing facilities. Both factors were fairly stable from 1996 through
1998. In late 1998 the Company entered into a long-term strategic
alliance with its largest supplier of raw materials, which should result in
improved cost savings in the coming years.
Marketing expenses. The increase in marketing expenses is
generally correlated to increased sales, based on commissions to sales
representatives and other payments to third parties with sales-based payment
arrangements. Marketing expenses are also affected by the overhead
associated with supporting various sales and marketing functions, and by
participation in trade conventions and shows. In 1998, the Company
began its efforts to reevaluate and, where appropriate, reduce these
expenses through budgeting and planning. As a result, marketing expenses
declined as a percentage of sales to 25% in 1998 from 28% in 1997 and 27% in
1996.
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 increased in
1997 and early 1998, at a rate greater than the increase in gross profit
dollars. However, beginning with the implementation of new
management's restructuring plan in mid-1998, these were reduced; thereby
resulting in the significant decline in general and administrative expenses
for 1998 as compared to 1997. As a result, G&A expenses declined as a
percentage of sales to just 21% in 1998 from 32% in 1997 and 33% in 1996.
Research and development expenses. R&D expenditures increased
slightly for 1998 as compared to 1997; while as a percentage of sales, R&D
expenses were 7% in 1998 as compared to 8% in 1997 and 6% in 1996. The Company
invested $3.5 million, $2.4 million and $1.5 million at its BioEnterics
subsidiary in connection with the development of obesity products.
Now that that business unit has begun to achieve profitability, the
Company anticipates that overall R&D expenditures will be lower as a
percentage of sales in the coming years. In 1998, the Company began
considering various options to seek a partner to assist in the
development of BioEnterics' business.
Interest expense. Net interest expense declined from $6.2 million
in 1997 and $4.3 million in 1996 to $3.8 million in 1998 due to lower overall
debt and reduced penalty charges, as detailed below. 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.
In July 1998, the Company converted all of those 10.5% subordinated notes into
common stock; and as of April 1998 all of the 4% debentures were converted
into common stock and the Company is no longer incurring any penalty
charges. Also, in September 1998 the Company refinanced its $19.6 million
of senior debt to increase the maturity from March 1999 to September 2000,
and also borrowed $8 million, at 10% interest rate, until the same date.
Foreign currency translation loss. Historically the Company's
subsidiaries have incurred significant intercompany debts (totaling more than
$29 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 substantially all of the non-U.S. intercompany
debts (particularly in countries with volatile local currencies) to the
capital of the respective subsidiaries. The fourth quarter of 1997 included a
provision of $1 million for expenses arising from those debt conversions.
Beginning in 1999, virtually all of the Company's sales will be denominated in
either dollars or euros, and the Company is considering a hedging program
to provide protection against fluctuations in the euro in relation to budgeted
sales.
Operating Income (Loss). The operating loss for 1997 reflected the
significant selling, general and administrative expenses which the Company
bore under prior management. Beginning in 1998 the new senior management team
undertook a restructuring program which was designed to reverse the
Company's poor operating performance and significantly improve the
Company's operating margin. The positive results of that program are
reflected in the $12.7 million of operating profit (excluding restructuring
expense) for 1998.
Income Tax Expense (Benefit). The tax expense in 1997 pertained
primarily to foreign operations. In 1998 the Company had an income tax
benefit of $8.4 million which primarily pertained to the recognition of an
$8 million deferred tax asset based on an estimate of short-term future
forecasted taxable income. The Company has a remaining deferred tax asset
of approximately $15.5 milion which has a 100% valuation allowance.
Financial Condition
Liquidity. During 1998, the new senior management team focused on
reversing the significant negative cash flow of the prior two years. Based
on the operating profit and net income for 1998 and improved inventory turns,
net cash provided by operating activities totaled $2.7 million for 1998, as
compared to net cash used in operating activities of $13.9 million and
$19.2 million for 1997 and 1996, respectively. The swing from using
cash in operating activities to providing cash from operating activities,
totaling approximately $16.6 million, is the result of the efforts which
were undertaken to reduce costs and inventory and thereby improve cash
flow. As further reductions in cost of goods, G&A and R&D outlined above
continue to take effect, the Company believes that cash flow from
operations will continue to improve.
The Company has funded its cash needs from 1996 through 1998
through a series of debt and equity transactions, including:
$35 million of proceeds received upon the issuance of 11% senior secured
convertible notes in a private placement transaction completed in January
1996. Of the proceeds received, $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. In
September 1998 the Company and the senior Noteholders agreed to extend the
maturity of this debt from March 31, 1999 to September 30, 2000 and to
exchange this debt for non-convertible junior secured debt and warrants
to purchase common stock at $5.50 per share. Under certain circumstances,
the interest rate of these notes can be reduced to 9%. At December 31,
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. 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
these 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 was denoted as the Company's 10.5% subordinated notes.
By the terms of the 11% senior secured convertible notes, the 10.5%
subordinated notes were junior in right of payment and liquidation and,
accordingly, no interest or principal payments were made with respect
thereto. In July 1998 the Company and its former chairman agreed to
convert all of the 10.5% subordinated notes (including accrued interest)
into 860,000 shares of common stock and a warrant to purchase 260,000 shares
at $12.40 per share. At the time, the Company's common stock was trading at
approximately $7.50 per share.
$8 million of proceeds received in September 1998 from the issuance of
the Company's 10% senior secured notes, due September 30, 2000. Under the
terms of that loan, $3 million was placed in a court-supervised escrow
account to satisfy the Company's deposit obligation under the settlement
agreement for the breast implant litigation, and the balance was reserved for
allocation to specific working capital and capital expenditure projects.
Previously, the Company's Dutch subsidiary had a line of credit
with a major Dutch bank, which was collateralized by the accounts
receivable, inventories and certain other assets of that subsidiary. As
part of the restructuring program undertaken in 1998, that line of credit
was repaid in its entirety and cancelled.
The Company currently has a net operating loss ("NOL") for
financial statement purposes of approximately $53 million. The
Company has federal tax credit carryforwards of approximately $2
million and state NOL and credit carryforwards of approximately $5.2
million and $570,000 respectively. The federal credit carryforward amounts
will expire in various years beginning in 2008. If the Company has a
change in ownership as defined by Internal Revenue Code Section 382, use of
these carryforward amounts could be limited.
A significant portion of the cost of the litigation settlement
expenses discussed in Note 14 will be deductible for federal and state
income tax purposes when qualified consideration is deposited in a
court supervised escrow account. To the extent the settlement gives rise
to a federal NOL, such NOL may be carried back 10 years.
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. In
1997 the Company had provided a 100% valuation allowance on deferred tax
assets substantially resulting from the NOL carryforwards discussed above.
In 1998 the Company recognized $8 million as an income tax benefit with
respect to that NOL carryforward. The $8 million deferred tax asset was
recognized based on shot-term future forecasted taxable income. At
December 31, 1998 the Company has an approximately $15.5 million deferred ta
asset which has a 100% valuation allowance.
Breast Implant Settlement. Under the terms of the final settlement
order entered by the Court on February 1, 1999 with respect to the breast
implant litigation, the Company will be obligated to pay the plaintiffs
$25.5 million (plus accrued interest) by June 2, 1999. Previously, in
October 1998, the Company had funded a portion of its payment obligation to the
plaintiffs by depositing $3 million of cash and 426,323 shares of common
stock. While the Company is obligated to repurchase that common stock for
$3 million by June 2, 1999, it had assigned that right to the senior
noteholders in April 1998 as part of the negotiations leading to the
preliminary settlement agreement. Also, in February 1999 the Company paid
$3 million to 3M Corp. in satisfaction of its current obligations under
the settlement agreement with that company.
The Company plans to meet its funding obligation under the
settlement agreement in a complete and timely manner from a combination of
both cash on hand and the proceeds to be received upon the exercise of
certain warrants, which were issued in contemplation of this event. The
Company reserves the right to explore utilizing other equity and/or debt
financing sources in the public or private markets in order to meet its
funding obligation under the settlement agreement and to repay or
refinance its existing senior debt.
Capital Expenditures
Expenditures on property and equipment approximated $3.7 million in
1998, compared to $5.1 million in 1997 and $4 million in 1996. The
majority of the expenditures in each year were for building improvements,
computer equipment and production equipment to increase capacity and
efficiency. During 1999 and 2000 the Company expects to spend
approximately $4 million annually on various capital projects, including
management information systems and improvements to manufacturing
capabilities and new manufacturing facilities. Funding for these capital
expenditures is expected to be through cash provided by operating activities.
Significant Fourth Quarter Adjustments
During the fourth quarter of the year ended December 31, 1998, the
Company recorded significant adjustments which increased net income by
$6.2 million. The adjustments were to recognize an extraordinary charge of
$1.8 million for the issuance of warrants in the restructuring of the
Company's 11% notes (which occurred in the fourth quarter). In
addition, an income tax benefit of $8 million was established to
recognize a portion of the benefit expected to be received from the
Company's substantial net operating loss carryforward.
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.
The Company's new management has installed procedures to monitor
quarterly financial statements to ensure there are minimal adjustments.
These include a review by the Company's independent public accountants of the
quarterly financial statements.
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
The Company has conducted a review to identify which of its
computer and other business operating systems will be affected by the "Year
2000" problem and has developed a project plan and schedule to solve this
issue. Among the functions and systems impacted could be inventory and
accounting systems, electronic data interchange, and mechanical systems
operating everything from office building environmental controls to
telephone switches and fax machines. The Company is on schedule to be Year
2000 compliant by July 31, 1999. The Company believes that the costs of
modifications, upgrades, or replacements of software, hardware, or capital
equipment which would not be incurred but for Year 2000 compatibility
requirements have not and will not have a material impact on the Company's
financial position or results of operations.
The Company is also engaged in communications with its significant business
partners, suppliers and customers to determine the extent to which the
Company is vulnerable to such third parties' failure to address their own
Year 2000 issues. The Company's assessment of the impact of its Year 2000
issues includes an assessment of the Company's vulnerability to such third
parties. The Company is seeking assurances from its significant business
partners, suppliers and customers that their computer applications will not
fail due to Year 2000 problems. Nevertheless, the Company does not control,
and can give no assurances as to the substance or success of the Year 2000
compliance efforts of such independent third parties and the Company
believes that there is a risk that certain of these third parties on
whom the Company's finances and operations depend will experience Year 2000
problems that could affect the financial position or results of operations
of the Company. These risks include, but are not limited to, the
potential inability of suppliers to correctly or timely provide necessary
services, materials and components for the Company's operations and the
inability of lenders, lessors or other sources of the Company's
necessary capital and liquidity to make funds available to the Company when
required.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure these instruments at fair value.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
The Company is currently reviewing SFAS No. 133 and has of yet been unable
to fully evaluate the impact, if any, it may have on future operating
results or financial statement disclosures.
ITEM 7(a). MARKET RISKS
Not applicable.
ITEM 8. 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, 1998, 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 information required in this item is incorporated herein by
reference to portions of the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December
31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in this item is incorporated herein by
reference to portions of the Proxy Statement for Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days
of the close of the fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required in this item is incorporated herein by
reference to portions of the Proxy Statement for Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days
of the close of the fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in this item is incorporated
herein by reference to portions of the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the close of the fiscal year ended December 31, 1998.
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
December 31, 1998, and 1997 F-2
Consolidated Statements of Operations for the
Years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders'
Deficiency for the years ended December 31,
1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the
Years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-9
(a)(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts F-34
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
2.1 Agreement and Plan of Merger dated as of December 22, 1998 by
and between INAMED Corporation and INAMED Corporation (Delaware).
(Incorporated herein by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K filed with the Commission
on December 30, 1998.)
3.1 Registrant's Articles of Incorporation, as amended December 22,
1998.
3.2 Registrant's By-Laws, as amended December 22, 1998.
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.)
10.28 Letter Agreement with Donald K. McGhan dated July 8, 1998.
(Incorporated herein by reference to Exhibit 99.3 of the
Company's Current Report on Form 8-K filed with the Commission
on July 14, 1998.)
10.29 Form of 10% Senior Secured Note due March 31, 1999.
(Incorporated herein by reference to Exhibit 99.3 of the
Company's Current Report on Form 8-K filed with the Commission
on October 15, 1998.)
10.30 Note Purchase Agreement Among INAMED Corporation, certain
purchasers and Appaloosa Management, L.P., as Collateral Agent,
dated as of September, 30, 1998 (Incorporated herein by
reference to Exhibit 99.4 of the Company's Current Report on
Form 8-K filed with the Commission on October 15, 1998.)
10.31 Form of Warrant (Incorporated herein by reference to Exhibit
99.5 of the Company's Current Report on Form 8-K filed with the
Commission on October 15, 1998.)
10.32 Security Agreement by INAMED Corporation and Appaloosa
Management, L.P., as Collateral Agent, dated as of September,
30, 1998 (Incorporated herein by reference to Exhibit 99.6 of
the Company's Current Report on Form 8-K filed with the
Commission on October 15, 1998.)
10.33 Guarantee and Security Agreement between certain
subsidiaries of the Registrant and Appaloosa Management, L.P.,
as Collateral Agent, dated as of September, 30, 1998
(Incorporated herein by reference to Exhibit 99.7 of the
Company's Current Report on Form 8-K filed with the Commission
on October 15, 1998.)
10.34 Guarantee Agreement by certain subsidiaries of the Registrant
in favor of the holders of the Registrant's 10% Senior Secured
Notes Due March 31, 1999 and Appaloosa Management, L.P., as
Collateral Agent, dated as of September, 30, 1998 (Incorporated
herein by reference to Exhibit 99.8 of the Company's Current
Report on Form 8-K filed with the Commission on October 15, 1998.)
10.35 Intercreditor Agreement between Appaloosa Investment
Partnership I, L.P., as Collateral Agent and Santa Barbara Bank
and Trust, dated as of September, 30, 1998 (Incorporated
herein by reference to Exhibit 99.9 of the Company's Current
Report on Form 8-K filed with the Commission on October 15, 1998.)
10.36 Registration Rights Agreement, dated as of September, 30, 1998
(Incorporated herein by reference to Exhibit 99.10 of the
Company's Current Report on Form 8-K filed with the Commission
on October 15, 1998.)
10.37 Amendment No. 3 to Rights Agreement, dated as of September, 30,
1998 between INAMED Corporation and U.S. Stock
Transfer Corporation (Incorporated herein by reference to
Exhibit 99.11 of the Company's Current Report on Form 8-K
filed with the Commission on October 15, 1998.)
10.38 Form of 11% Senior Subordinated Secured Note due March 31, 1999
or September 1, 2000. (Incorporated herein by reference to
Exhibit 99.1 of the Company's Current Report on Form 8-K filed
with the Commission on November 19, 1998.)
10.39 Subordinated Indenture between INAMED Corporation and Santa
Barbara Bank and Trust, as Trustee, dated as of November 5,
1998. (Incorporated herein by reference to Exhibit 99.2 of the
Company's Current Report on Form 8-K filed with the Commission
on November 19, 1998.)
10.40 Form of Exchange Warrant. (Incorporated herein by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K filed
with the Commission on November 19, 1998.)
10.41 Form of Warrant. (Incorporated herein by reference to Exhibit 99.4
of the Company's Current Report on Form 8-K filed with the
Commission on November 19, 1998.)
10.42 Subordinated Security Agreement between INAMED Corporation and
Santa Barbara Bank and Trust, as trustee, dated as of
November 5, 1998. (Incorporated herein by reference to Exhibit
99.6 of the Company's Current Report on Form 8-K filed with the
Commission on November 19, 1998.)
10.43 Subordinated Guarantee and Security Agreement between certain
subsidiaries of the Registrant and Santa Barbara Bank and Trust,
as trustee, dated as of November 5, 1998. (Incorporated herein
by reference to Exhibit 99.7 of the Company's Current Report on
Form 8-K filed with the Commission on November 19, 1998.)
10.44 Subordinated Guarantee Agreement by certain subsidiaries of the
Registrant in favor of the holders of the Registrant's 11%
Senior Subordinated Secured Notes due March 31, 1999 or September
1, 1999, dated as of November 5, 1998. (Incorporated herein by
reference to Exhibit 99.8 of the Company's Current Report
on Form 8-K filed with the Commission on November 19, 1998.)
10.45 Registration Rights Agreement INAMED Corporation and Santa
Barbara Bank and Trust, as trustee, dated as of November 5,
1998. (Incorporated herein by reference to Exhibit 99.9 of
the Company's Current Report on Form 8-K filed with the
Commission on November 19, 1998.)
10.46 1998 Employee Stock Option Plan.
21 Registrant's Subsidiaries
27 Financial Data Schedule
99.1 Order and Final Judgement Certifying INAMED Settlement Class,
Approving Class Settlement, and Dismissing Claims against
INAMED and Released Parties dated February 1, 1999.
(b) Reports on Form 8-K:
Form 8-K dated October 2, 1998
Form 8-K dated November 5, 1998
Form 8-K dated December 28, 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
March 26, 1999 By: /s/ Richard G. Babbitt
Richard G. Babbitt, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of Registrant in the capacities and on the dates indicated:
/s/ Richard G. Babbitt Chairman of the Board, Chief Executive Officer
Richard G. Babbitt and Director (Principal Executive Officer)
/s/ Ilan K. Reich President and Director
Ilan K. Reich
/s/ Tom K. Larson, Jr. Vice President, Finance and Administration and
Tom K. Larson, Jr. Chief Financial Officer (Principal Accounting
Officer)
/s/ James E. Bolin Director
James E. Bolin
/s/ Harrison E. Bull, Esq. Director
Harrison E. Bull, Esq.
/s/ John F. Doyle Director
John F. Doyle
/s/ Richard Wm. Talley Director
Richard Wm. Talley
/s/ David A. Tepper Director
David A. Tepper
/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, 1998, 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
/s/ Tom K. Larson Jr.
Tom K. Larson Jr.
Vice President, Finance and Administration and
Chief Financial Officer
February 12, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC 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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' deficiency and cash
flows for each of the three years in the period ended December 31, 1998.
We have also audited the schedule listed in the accompanying index for
the same periods. 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
schedule 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 presentat