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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 presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INAMED
Corporation and Subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth therein for
each of the three years in the period ended December 31, 1998.
BDO Seidman, LLP
New York, New York
February 12, 1999, except
for Note 14 which is as of
March 3, 1999
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
In (000's)
December 31,
Assets 1998 1997
Current Assets:
Cash and cash equivalents $ 11,873 $ 1,946
Trade accounts receivable, net of
allowances for doubtful accounts and
returns of $6,158 and $5,221 23,169 13,979
Related party notes receivable -- 129
Inventories 17,855 23,117
Prepaid expenses and other current assets 1,337 1,413
Income tax refund receivable 726 472
Deferred income taxes 8,000 --
------- -------
Total current assets 62,960 41,056
Property and equipment, at cost:
Machinery and equipment 14,170 12,585
Furniture and fixtures 3,418 4,541
Leasehold improvements 11,986 10,996
------- -------
29,574 28,122
Less, accumulated depreciation
and amortization (16,751) (14,639)
------- -------
Net property and equipment 12,823 13,483
Notes receivable, net of allowances of $467 2,769 2,799
Intangible assets, net 1,015 1,164
Other assets 1,140 340
------- -------
Total assets $ 80,707 $ 58,842
------- -------
------- -------
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
In (000's except share data)
December 31,
Liabilities and Stockholders' Deficiency 1998 1997
Current liabilities:
Current installments of long-term debt $ 51 $ 30
Notes payable to bank 1,186 659
Accounts payable 12,226 14,759
Accrued liabilities:
Salaries, wages, and payroll taxes 2,681 2,683
Interest 2,032 3,146
Self-insurance 3,649 3,602
Other 4,523 2,667
Royalties payable 5,061 4,156
Income taxes payable 1,318 2,894
Accrued litigation settlement 5,721 --
Note payable, escrow agent 25,500 --
------- -------
Total current liabilities 63,948 34,596
------- -------
Convertible and other long-term debt 27,767 23,574
Subordinated notes payable, related party -- 8,813
Deferred grant income 1,235 993
Deferred income taxes 382 220
Accrued litigation settlement -- 37,335
Commitments and contingencies
Redeemable common stock, $.01 par value
426,323 shares issued and outstanding
stated at redemption value $7.04 per share 3,000 --
Stockholders' deficiency:
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
11,010,290 and 8,885,076 110 89
Additional paid-in capital 37,605 19,027
Accumulated other comprehensive adjustments 269 (223)
Accumulated deficit (53,609) (65,582)
------- -------
Stockholders' deficiency (15,625) (46,689)
------- -------
Total liabilities and stockholders'
deficiency $ 80,707 $ 58,842
------- -------
------- -------
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
In (000's except share and per share data)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Net sales $ 131,566 $ 106,381 $ 93,372
Cost of goods sold 47,954 37,643 35,295
------- ------- -------
Gross profit 83,612 68,738 58,077
------- ------- -------
Operating expense:
Marketing 33,364 30,002 25,088
General and administrative 28,213 33,450 31,252
Research and development 9,366 8,863 5,693
Restructuring expense 4,202 -- --
_______ _______ _______
Total operating expenses 75,145 72,315 62,033
------- ------- -------
Operating profit (loss) 8,467 (3,577) (3,956)
------- ------- -------
Other income (expense):
Litigation settlement -- (28,150) --
Net interest expense and
debt costs (3,812) (6,173) (4,277)
Foreign currency transactions
gains (losses) 686 (1,796) 68
------- ------- -------
Other expense (3,126) (36,119) (4,209)
Income (loss) before income tax
expense (benefit) and extraordinary
charges 5,341 (39,696) (8,165)
Income tax expense (benefit) (8,432) 1,881 3,214
------- ------- -------
Income (loss) before
extraordinary charges 13,773 (41,577) (11,379)
Extraordinary charges (1,800) -- --
------- ------- -------
Net income (loss) $ 11,973 $ (41,577) $ (11,379)
------- ------- -------
------- ------- -------
Income (loss) before extraordinary charges
per share of common stock
Basic $ 1.33 $ (4.97) $ (1.46)
Diluted $ 1.05 $ (4.97) $ (1.46)
Income (loss) from extraordinary charges
per share of common stock
Basic $ (0.18) $ (0.00) $ (0.00)
Diluted $ (0.13) $ (0.00) $ (0.00)
Net income (loss) per share of common stock
Basic $ 1.15 $ (4.97) $ (1.46)
Diluted $ 0.92 $ (4.97) $ (1.46)
Weighted average shares outstanding:
Basic 10,387,163 8,371,399 7,811,073
Diluted 14,185,244 8,371,399 7,811,073
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
In (000's)
Years ended December 31, 1998, 1997 and 1996
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Adjustments Deficit Deficiency
Balance, January
1, 1996 7,603 $ 76 $ 9,964 $ 882 $ (12,626) $ (1,704)
Comprehensive income (loss):
Net loss -- -- -- -- (11,379) (11,379)
Translation
adjustment -- -- -- (451) -- (451)
-------
Total comprehensive income (11,830)
=======
Repurchases and retirement
of common stock -- -- (3) -- -- (3)
Issuance of
common stock
(exercise of stock
options) 32 -- 45 -- -- 45
Issuance of common stock
(Regulation S
Transaction) 344 3 2,997 -- -- 3,000
Issuance of common stock
(conversions debt
to equity) 58 1 583 -- -- 584
Balance, December
31, 1996 8,037 80 13,586 431 (24,005) (9,908)
Comprehensive income (loss):
Net loss -- -- -- -- (41,577) (41,577)
Translation
adjustment -- -- -- (654) -- (654)
-------
Total comprehensive income (42,231)
=======
Repurchases and retirement of
common stock (11) -- (55) -- -- (55)
Issuance of common stock
(exercise of stock
options) 71 1 102 -- -- 103
Issuance of common stock
(conversions of debt to
equity) 616 6 2,261 -- -- 2,267
Issuance of common stock
(waiver of covenant
defaults) 172 2 1,415 -- -- 1,417
Issuance of Warrants
& Options -- -- 1,718 -- -- 1,718
Balance, December
31, 1997 8,885 89 19,027 (223) (65,582) (46,689)
Comprehensive income:
Net -- -- -- -- 11,973 11,973
Translation
adjustment -- -- -- 492 -- 492
-------
Total comprehensive income 12,465
=======
Issuance of common stock
(exercise of stock
options) 33 -- 47 -- -- 47
Issuance of common stock
(conversions of debt
to equity)1,990 20 15,188 -- -- 15,208
Issuance of common
stock 102 1 555 -- -- 556
Issuance of Warrants
& Options -- -- 2,788 -- -- 2,788
Balance, December
31, 1998 11,010 $ 110 $37,605 $ 269 $(53,609) $ (15,625)
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
In (000's)
1998 1997 1996
Cash flows from operating activities:
Net income (loss) $ 11,973 $ (41,577) $ (11,379)
Net cash provided by (used for)
operating activities:
Depreciation and amortization 3,769 2,379 3,000
Non-cash debt costs 2,538 1,487 --
Non-cash compensation to
directors 250 231 --
Provision (credits) for
doubtful accounts, notes
and returns 936 (785) (1,216)
Provision for obsolescence of
inventory 156 264 563
Deferred income taxes (8,104) (35) 2,030
Changes in current assets and liabilities:
Trade accounts receivable (9,471) (3,265) 119
Notes receivable (150) (101) 87
Inventories 5,659 (4,491) (3,910)
Prepaid expenses and other
current assets (174) (294) 212
Other assets (636) (105) (173)
Accounts payable, accrued
and other liabilities 633 3,116 (8,565)
Income taxes payable (1,612) 1,091 (6)
Accrued litigation
settlement (3,114) 28,183 --
------- ------- -------
Net cash provided by
(used for) operating
activities 2,653 (13,902) (19,238)
------- ------- -------
Cash flows from investing activities:
Disposal of fixed assets 1,621 -- (44)
Loss on Investments -- -- 100
Purchase of property and
equipment (3,678) (5,106) (4,039)
------- ------- -------
Net cash used in
investing activities (2,057) (5,106) (3,983)
-------- ------- -------
Cash flows from financing activities:
Restricted cash in escrow for
litigation settlement $ -- $ 14,796 $ (14,796)
Increases in notes payable
and long-term debt 638 -- 271
Increases in convertible
notes payable and
debentures payable 8,000 5,648 34,516
Principal repayment of notes
payable and long-term debt -- (13,816) (197)
Decrease in related party
receivables 128 105 149
Increase (decrease) in related
party payables 1,038 8,813 (1,759)
Grants received, gross 308 -- 210
Issuance of common stock 104 48 3,043
------- ------- -------
Net cash provided by
financing activities 10,216 15,594 21,437
------- ------- -------
Effect of exchange rate
changes on cash (885) 4,437 (100)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 9,927 1,023 (1,884)
Cash and cash equivalents at
beginning of year 1,946 923 2,807
------- ------- -------
Cash and cash equivalents at
end of year $ 11,873 $ 1,946 $ 923
======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 4,562 $ 3,745 $ 3,519
Income taxes $ 1,138 $ 988 $ 1,336
See accompanying notes to consolidated financial statements.
(1) Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
INAMED Corporation and each of its wholly-owned subsidiaries (the
"Company"). Intercompany transactions are eliminated in consolidation.
The Company
INAMED Corporation's subsidiaries are organized into three business units
(for financial reporting purposes all business units are considered to be
one segment): United States Plastic and Reconstructive Surgery (consisting
primarily of McGhan Medical Corporation, Flowmatrix Corporation and CUI
Corporation, which develop, manufacture and sell medical devices and
components); BioEnterics Corporation, which develops, manufactures and
sells medical devices and associated instrumentation to the bariatric and
general surgery fields; and International (consisting primarily of two
manufacturingcompanies based in Ireland--McGhan Limited and Chamfield Ltd.
- -and sales subsidiaries in various countries, including The Netherlands,
Germany, Italy, United Kingdom, France, Spain and Mexico, which sell
products for both the plastic and bariatric surgery fields).
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Financial
Accounting Standards No. 48, "Revenue Recognition When Right of Return
Exists". Revenues are recorded net of estimated returns and allowances when
product is shipped. The Company ships product with the right of return and
has provided an estimate of the allowance for returns based on historical
returns. Because management can reasonably estimate future returns, the
product prices are substantially fixed and the Company recognizes net
sales when the product is shipped. The estimated allowance for returns is
based on the historical trend of returns, year-to-date sales and other factors.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) convention. The Company provides a provision for
obsolescence based upon historical experience.
Current Vulnerability Due to Certain Concentrations
The Company has limited sources of supply for certain raw materials, which
are significant to its manufacturing process. A change in suppliers could
cause a delay in manufacturing and a possible loss of sales, which would
adversely affect operating results.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Significant improvements and betterments are capitalized while
maintenance and repairs are charged to operations as incurred.
Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from five to ten years.
Leasehold improvements are amortized on the straight-line basis over their
estimated economic useful lives or the lives of the leases, whichever is
shorter.
Intangible and Long-Term Assets
Intangible and long-term assets are stated at cost less accumulated
amortization, and are being amortized on a straight-line basis over their
estimated useful lives ranging from 5 to 17 years.
The Company classifies as goodwill the cost in excess of fair value of the
net assets acquired in purchase transactions. The Company periodically
evaluates the realizability of long-lived assets and goodwill in
accordance with Statement of Financial Account Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121). This statement requires that
long-lived assets and certain identifiable intangible assets to be held
and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. The carrying value of long-term assets is periodically
reviewed by management, and impairment losses, if any, are recognized when
the expected non-discounted future operating cash flows derived from such
assets are less than their carrying value. Impairment of long-lived
assets is measured by the difference between the discounted future cash
flows expected to be generated from the long-lived asset against the
carrying value of the long-lived asset. Fair value of long-lived assets is
determined by the amount at which the asset could be bought or sold in a
current transaction between willing parties. Based upon its most recent
analysis, no impairment of long-lived assets exists at December 31, 1998.
Research and Development
Research and development costs are expensed when incurred.
Advertising costs
Advertising costs are charged to operations in the year incurred and
totaled approximately $677, $426 and $441 in 1998, 1997 and 1996, respectively.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Income Taxes
The Company accounts for its income taxes using the liability method, under
which deferred taxes are determined based on the differences between
the financial reporting and tax bases of assets and liabilities, using
enacted tax rates in effect for the years in which the differences are
expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
The Company has provided a valuation allowance against deferred tax assets
on its U.S. operations (see Note 8).
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", ("SFAS
No. 128"), which provides for the calculation of "basic" and "diluted"
earnings per share. SFAS No. 128 became effective for financial statements
issued for periods ending after December 15, 1997. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the effect of common shares issuable upon exercise of
common stock equivalents. The assumed conversion of the notes payable and
exercise of the warrants and options would have been anti-dilutive and,
therefore, were not considered in the computation of diluted earnings
per share for the years ended December 31, 1997 and 1996.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Earnings Per Share (continued)
Computation of Per Share Earnings
Year Ended
Diluted: December 31, 1998
Net income $11,973
Interest and convertible debt
assuming conversion at
beginning of the year 1,112
-------
Net income for diluted calculation $13,085
Weighted average shares outstanding 10,387
Shares outstanding assuming conversion
at the beginning of the year:
Convertible debt 3,318
Stock options 192
Warrants 1,723(1)
Less assumed repurchase of shares (1,434)
-------
Shares outstanding 14,186
Per share amount $0.92
(1)The calculation excludes 2,701 warrants that are anti-dilutive.
The Company's diluted per share amounts were anti-dilutive in 1997 and 1996
and are therefore not computed above.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their
local currencies, and accordingly, the assets and liabilities of these
foreign subsidiaries are translated at the rate of exchange at the balance
sheet date. Revenues and expenses have been translated at the average
rate of exchange in effect during the periods. For the year ended December
31, 1998, the foreign subsidiaries have incurred significant intercompany
debts, which are denominated in various foreign currencies. The
translation of the intercompany debts
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Foreign Currency Translation (continued)
resulted in a foreign currency translation gain (loss) of $686, ($1,796)
and $68 in 1998, 1997 and 1996, respectively. Unrealized translation
adjustments do not reflect the results of operations and are included
in the accumulated other comprehensive adjustments account as a
component of stockholders' deficiency, while transaction gains and losses
are reflected in the consolidated statement of operations. To date, the
Company has not entered into hedging transactions to protect against
changes in foreign currency exchange rates.
Stock-Based Compensation
The Company has adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation", ("SFAS No. 123") as of December 31, 1996. Pro-forma
information regarding net income and earnings per share using the fair value
method is required by SFAS No. 123.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an
initial maturity of three months or less to be cash equivalents. As at
December 31, 1998, a total of $9,200 was invested in short-term deposits
maturing in thirty days or less.
Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist
primarily of trade receivables and short-term cash investments.
The Company places its short-term cash investments with high credit quality
financial institutions and, by policy, limits the amount of credit exposure
to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and
its dispersion across different types of healthcare professionals and
geographic areas. The Company maintains an allowance for losses based
on the expected collectability of all receivables.
Financial Instruments
The fair value of cash and cash equivalents and receivables approximate
their carrying value due to their short-term maturities. The fair value of
long-term debt instruments, including the current portion, approximates
the carrying value and is estimated based on the current rates offered to
the Company for debt of similar maturities.
(1) Basis of Presentation and Summary of Significant Accounting
Policies (continued)
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.
Reclassification
Certain reclassifications were made to 1997 and 1996 consolidated financial
statements to conform to the 1998 presentation. There was no effect on net
income or stockholders' deficiency as a result of these reclassifications.
(2) Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
December 31,
1998 1997
Accounts receivable $ 29,327 $ 19,200
Allowance for doubtful accounts (1,402) (865)
Allowance for returns and credits (4,756) (4,356)
________ ________
Net accounts receivable $ 23,169 $ 13,979
Notes receivable $ 3,236 $ 3,266
Allowance for doubtful notes (467) (467)
________ ________
Net notes receivable $ 2,769 $ 2,799
(3) Inventories
Inventories are summarized as follows:
December 31,
1998 1997
Raw materials $ 3,764 $ 4,671
Work in progress 3,931 3,799
Finished goods 11,329 16,161
_______ _______
19,024 24,631
Less allowance for
obsolescence (1,169) (1,514)
_______ _______
$ 17,855 $ 23,117
(4) Intangible Assets
ntangible assets primarily consist of patents, trademarks and
goodwill net of accumulated amortization of approximately $4,107 and $3,733
amounting to $1,015 and $1,164 at December 31, 1998 and 1997.
(5) Lines of Credit
For the years ended December 31, 1998 and 1997, the Company's foreign
subsidiaries financed approximately $1,186 and $659 which was secured by
its accounts receivable.
The Company's weighted average interest rate on short-term borrowings was
7% in both 1998 and 1997.
(6) Long-Term Debt
Long-term debt is summarized as follows:
December 31,
1998 1997
10% Senior Secured Note payable, maturing
September, 2000, interest payable
quarterly, December 31, March 31, June 30,
and September 30 (a) $ 7,948 $ --
11% Secured Convertible Note payable,
maturing September, 2000, interest payable
quarterly, January 1, April 1, July 1,
and October 1 (b) 57 19,691
11% Junior Secured Note payable, maturing
September, 2000, interest payable
quarterly, January 1, April 1, July 1,
and October 1 (b) 19,549 --
4% Convertible Debenture payable, maturing
January 2000 interest payable March 31, June 30,
September 30 and December 31 (c) -- 3,857
Capital lease obligations, collateralized by related
equipment 264 56
------- -------
27,818 23,604
Less, current installments (51) (30)
------- -------
$ 27,767 $ 23,574
The following is a summary of the Company's significant long-term debt:
(a) In September, 1998 $8 million of proceeds were received 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. Along with the debt the Company issued 590,000
warrants which resulted in a $52 charge to debt costs.
(6) Long-Term Debt (continued)
(b) During January 1996, $35,000 of proceeds were received upon the
issuance of 11% senior secured convertible notes, due March 31, 1999, in
a private placement transaction. Of that amount, $14,800 was placed in an
escrow account to be released within one year, following court approval of
a mandatory non-opt-out class settlement of the breast implant litigation.
Inasmuch as that condition was not met, in July 1997 the Company returned
those escrowed funds to the senior Noteholders, in exchange for warrants
to purchase $13,900 of common stock at $8.00 per share (subsequently
adjusted to $7.50 per share), resulting in a charge of $864 to debt costs
for 1997. The conversion price of the 11% senior secured convertible notes
was originally $10 per share. In July 1997 the Company and the senior
Noteholders agreed to change the conversion price to $5.50 per share at 103% of
principal balance as part of an overall restructuring plan which included the
waiver of past defaults. The conversion price of $5.50 per share was above
market value. 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%.
The Company recorded an extraordinary charge of $1,800 net of taxes of
$1,200 related to the exchange of the 11% senior secured convertible
notes for non-convertible junior secured debt and warrants. At December
31, 1998, $19.6 million of the 11% senior notes were outstanding.
(c) During January 1997, $5,700 of proceeds were received upon the issuance
of $6,200 principal amount of 4% convertible debentures, due January
30, 2000. These debentures were convertible at 85% of the market price
of the common stock. On March 31, 1997 the Company was in default of certain
covenants. The default required the Company to reduce the conversion price by
6%. In addition, the Company incurred 3% liquidated damages per month on
the outstanding principal balance. These transactions resulted in $396
and $1,202 of debt and interest expenses in 1997. 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.
In addition, commencing during April 1997 and continuing
through January 1998, an entity controlled by the Company's former Chairman
loaned $9,900 to the Company to provide it with working capital to fund its
operations. At December 31, 1997, the Company owed $8,800 (see note 12).
The loan agreement discussed in (a) above precluded the payment of interest
and principal on this 10.5% subordinated note without the consent of the
senior Noteholders. 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.
(6) Long-Term Debt (continued)
The aggregate installments of long-term debt as of December 31,
1998 are as follows:
Year ending December 31:
1999 $ 51
2000 27,609
2001 60
2002 57
2003 41
-------
$ 27,818
(7) Deferred Grant Income
Deferred grant income represents grants received from the Irish Industrial
Development Authority (IDA) for the purchase of capital equipment and
is being amortized to income over the life of the related assets.
Amortization for the years ended December 31, 1998, 1997 and 1996 was
approximately $110, $454 and $96, respectively.
IDA grants are subject to revocation upon a change of ownership or
liquidation of McGhan Limited. If the grant were revoked, the Company would
be liable on demand from the IDA for all sums received and deemed to have
been received by the Company in respect to the grant. In the event of
revocation of the grant, the Company could be liable for the amount of
approximately $2,407 and $1,418 at December 31, 1998 and 1997.
(8) Income Taxes
The Company currently has a net operating loss (NOL) for financial
reporting purposes of approximately $53,000.
The Company has federal tax credit carryforwards of approximately $1,958
and state net operation loss ("NOL") and credit carryforwards of approximately
$5,200 and $570, 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.
(8) Income Taxes (continued)
The primary components of temporary differences which compose the Company's
net deferred tax assets as of December 31, 1998 and 1997 are as follows:
December 31, December 31,
1998 1997
Allowance for returns $ 1,618 $ 1,742
Allowance for doubtful accounts 103 346
Allowance for inventory obsolescence 402 605
Accrued liabilities 2,097 1,673
Allowance for doubtful notes 187 187
Litigation reserve 13,781 14,821
Net operating losses and credits 2,996 8,200
Debt costs 1,646 568
Uniform capitalization adjustments 648 --
------- -------
Deferred tax assets 23,478 28,142
Valuation allowance (15,478) (28,142)
------- -------
Deferred tax assets $ 8,000 $ --
The Company's deferred tax assets have been reduced with a valuation
allowance of $15,478 as at December 31, 1998. The Company has
recognized a $8,000 deferred tax asset based on future short-term income
projections. Although the Company has a history of prior losses, these
losses were primarily attributable to costs related to the breast implant
litigation. The remaining valuation allowance is necessary due to the
uncertainty of future income estimates.
Income tax expense for 1997 pertains primarily to foreign operations. The
Company recorded a provision in 1997 for foreign taxes of $1,000 related
to the planned capitalization of intercompany balances with foreign
subsidiaries. In addition to taxes on foreign operations, income tax
expense for 1996 includes providing a 100% valuation allowance on the
deferred tax assets not previously allowed for of $2,006.
The 1998 tax benefit differs from the amount computed using the Federal
statutory income tax rate due to the utilization of NOL's to offset current
years taxable income and the recording of a $8,000 deferred tax asset.
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been
and will continue to be permanently reinvested. These earnings could
become subject to additional tax if they were remitted as dividends, if foreign
earnings were loaned to the Company or a U.S. affiliate, or if the Company
should sell its stock in the foreign subsidiaries. It is not practicable to
determine the amount of additional tax, if any, that might be payable on the
foreign earnings. The cumulative amount of reinvested earnings was
approximately $5,686 and $5,460 at December 31, 1998 and 1997.
(9) Royalties
The Company has obtained the right to produce, use and sell patented
technology through various license agreements. The Company pays royalties
ranging from 5% to 10% of the related net sales, depending upon sales levels.
Royalty expense under these agreements was approximately $6,626, $5,689
and $6,302 for the years ended December 31, 1998, 1997 and 1996, respectively,
and is included in marketing expense. The license agreements expire at
the expiration of the related patents.
(10) Stockholders' Equity
The Company has adopted several incentive and non-qualified stock option
plans. Under the terms of the plans, 1,160,354 shares of common stock are
reserved for issuance to key employees.
Activity under these plans for the years ended December 31, 1998, 1997 and
1996:
1998 1997 1996
Wgtd.Avg. Wgtd.Avg. Wgtd. Avg.
Shares Exer.Price Shares Exer.Price Shares Exer.Price
Options
outstanding
at beginning
of year 71,500 $ 2.46 115,000 $ 1.46 146,500 $1.46
Granted 470,000 6.18 30,000 3.81 -- --
Exercise (30,000) 1.45 (73,500) 1.45 (31,500) 1.45
Expired (1,500) 2.49 -- -- -- --
_______ ________ ________
Options outstanding
at end of year 510,000 5.95 71,500 2.46 115,000 1.46
Options exercisable
at end of year 60,000 2.63 71,500 2.46 90,000 1.47
(10) Stockholders' Equity (continued)
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$1.45 40,000 4.94 $1.45 30,000 $1.45
6.50 440,000 9.75 6.50 -- --
3.75 to 3.875 30,000 5.71 3.81 30,000 3.81
- -----------------------------------------------------------------------------
510,000 9.14 $5.95 60,000 $2.63
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its employee stock options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, risk-free interest rates of 4.09%; volatility factor
of the expected market price of the Company's Common Stock of 34.8%; and a
weighted- average expected life of the option of 9.14 years.
Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amonts for 1998. (The effects on pro forma net income for 1997 and
1996 are not material and are therefore not shown.)
1998
Net income $10,618
Net income per common share
Basic $1.02
Diluted $0.75
In 1998, the Company issued 4,750,916 warrants in connection with the
restructuring of the 11% junior secured notes and the issuance of the 10%
senior secured notes (see Note 6). In addition, the Company issued 260,000
warrants in connection with the conversion of its 10.5% subordinated note
into equity (see Note 12). Compensatory warrants totaling 995,000 were
issued during 1998; 845,000 to executive officers and 150,000 to non-
(10) Stockholders' Equity (continued)
employee directors.
In 1997, the Company issued 1,846,071 warrants in connection with the
restructuring of the $35,000 convertible debt and 500,000 warrants in
connection with the issuance of the $6,200 convertible debenture (see Note
6). Compensatory warrants totaling 175,000 were also issued to non-employee
directors.
Shares Exercise Expiration Fair Market Value
Price Date on Grant Date
1998
Warrants granted in 1998 400,000 $ 3.95 January 22, 2008 $ 769,000
Warrants granted in 1998 400,000 3.525 January 31, 2008 726,000
Warrants granted in 1998 150,000 5.51 March 4, 2005 211,000
Warrants granted in 1998 25,000 5.51 March 15, 2005 60,000
Warrants granted in 1998 20,000 5.51 July 29, 2008 40,000
Warrants granted in 1998 260,000 12.40 July 8, 2002 330,000
Warrants granted in 1998 500,001 7.50 September 1, 2000 356,000
Warrants granted in 1998 590,000 6.50 September 1, 2000 52,000
Warrants granted in 1998 3,660,915 5.50 September 1, 2002 3,000,000
1997
Warrants granted in 1997 1,846,071 $ 7.50 March 30, 2000 $ 864,000
Warrants granted in 1997 500,000 9.81 January 15, 2000 623,000
Warrants granted in 1997 175,000 5.51 April 1, 2004 180,000
The Company estimates the fair value of each stock option and warrant at
the grant date by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1998: no
dividends paid for all years; expected volatility of 34.8%; risk-free
interest rates ranging from 5.71% to 4.06%; and expected lives ranging from
0.58 years to 9 years. For 1997: no dividends paid for all years; expected
volatility of 34.8%; risk-free interest rates ranging from 6.17% to 5.87%;
and expected lives ranging from 2.6 years to 6.7 years.
In 1998 and 1997, the Company has recorded $2,538 and $1,487 as interest
and other debt costs and $250 and $231 as compensation expense for
warrants issued to executives and directors.
The exercise price of all options outstanding under the stock option plans
range from $1.45 to $6.50 per share. All options exercised in 1996, 1997
and 1998 were exercised at a price of $1.45. At December 31, 1998, there
were 143,900 shares available for future grant under these plans. Under
certain plans, the Company granted options at $1.45, which was below
(10) Stockholders' Equity (continued)
the fair market value of the common stock at the date of grant. The
Company recorded compensation expense for the difference between the fair
market value and the exercise price of the related outstanding options.
In 1984, McGhan Medical Corporation adopted an incentive stock
option plan (the "1984 Plan"). Under the terms of the 1984 Plan, 100,000
shares of common stock were reserved for issuance to key employees at prices
not less than the market value of the stock at the date the option is
granted. In 1985, INAMED Corporation agreed to substitute options to
purchase its shares (on a two-for-one basis) for those of McGhan Medical
Corporation. In 1998, 10,000 options were granted under the 1984 Plan. No
options were granted under this plan during 1997 or 1996.
In 1986, the Company adopted an incentive and non-qualified stock
option plan (the "1986 Plan"). Under the terms of the 1986 Plan, 300,000
shares of common stock have been reserved for issuance to key employees.
In 1998, 20,000 options were granted under the 1986 Plan. No options were
granted under this plan during 1997 or 1996.
In 1987, the Company adopted an incentive stock award plan (the "1987
Plan"). Under the terms of the 1987 Plan, 300,000 shares of common stock were
reserved for issuance to employees at the discretion of the Board of
Directors. No shares were awarded under the 1987 Plan during 1998, 1997 or
1996. At December 31, 1998, there were 119,612 shares available for
future grant under the 1987 Plan.
In 1993, the Company adopted a Non-Employee Director Stock Option Plan
which authorized the Company to issue up to 150,000 shares of common stock
to directors who are not employees of or consultants to the Company and who
are thus not eligible to receive stock option grants under the Company's
stock option plans. Pursuant to this Plan, each non-employee director is
automatically granted an option to purchase 5,000 shares of common stock on
the date of his or her initial appointment or election as a director, and an
option to purchase an additional 5,000 shares of common stock on each
anniversary of his or her initial grant date providing he or she is
still serving as a director. The exercise price per share is the fair market
value per share on the date of grant. No shares were awarded under this
plan in 1998. A total of 30,000 options were issued during 1997 under this
plan and the Company recorded stock compensation expense of $51 for
thisissuance. At December 31, 1998 there were 120,000 options available
for future grant under this plan.
In 1998, the Company adopted a non-qualified stock option plan (the "1998
Plan"). Under the terms of the 1998 Plan, 450,000 shares of common stock
have been reserved for issuance to key employees. In 1998, 440,000
options were granted to approximately 70 employees under the 1998 Plan at $6.50
per share. The current market price of the Company's common stock at
that time was $5.8125. The options are exercisable for ten (10 years
after the option grant date and vest ratably over three (3) years.
(11) Geographic Segment Data
U.S. International Elimination Consolidated
Year ended December 31, 1998
Net sales to unaffiliated
customers $ 85,889 $ 45,677 $ 131,566
Intersegment sales 9,204 29,020 $ (38,224) ____
----------------------------------------------
Total net sales $ 95,093 $ 74,697 $ (38,224) $ 131,566
==============================================
Operating profit $ 20,071 $ 3,845 $ 23,916
==============================================
General corporate expenses (6,792) ___ (6,792)
Restructuring expense (4,202)
Depreciation and amortization (2,832) (937) (3,769)
Net interest expense (3,812)
------
Profit/(loss) before income
taxes and extraordinary
charges $ 6,057 $ (716) $ 5,341
==============================================
Long lived assets $ 46,987 $ 32,705 $ 79,692
==============================================
Year ended December 31, 1997
Net sales to unaffiliated
customers $ 66,778 $ 39,603 $ 106,381
Intersegment sales 7,857 33,785 $ (41,642) ___
-----------------------------------------------
Total net sales $ 74,635 $ 73,388 $ (41,642) $ 106,381
===============================================
Operating profit $ 1,101 $ 3,349 $ 4,450
===============================================
General corporate expenses (7,444) ___ (7,444)
Litigation settlement expense (28,150)
Depreciation and amortization(2,025) (354) (2,379)
Net interest expense (6,173)
------
Profit/(loss) before
income taxes $(42,246) $ 2,550 $(39,696)
===============================================
Long lived assets $ 28,148 $ 29,530 $ 57,678
===============================================
Year ended December 31, 1996
Net sales to unaffiliated
customers $ 60,831 $ 32,541 $ 93,372
Intersegment sales 5,587 25,235 $ (30,822) ___
------------------------------------------------
Total net sales $ 66,418 $ 57,776 $ (30,822) $ 93,372
================================================
Operating profit $ 2,147 $ 2,206 $ 4,353
General corporate expenses (5,241) ___ (5,241)
Depreciation and amortization(2,257) (743) (3,000)
Net interest expense (4,277)
------
Profit/(loss) before
income taxes $ (9,489) $ 1,324 $ (8,165)
=================================================
Long lived assets $ 39,222 $ 25,280 $ 64,502
=================================================
The international classification above includes the Netherlands, United
Kingdom, Italy, France, Belgium, Germany, Ireland, Spain, Mexico, Brazil
and Hong Kong. The individual operations were not material and are
therefore included in the international classification.
(12) Related Party Transactions
From April 1997 until January 1998, International Integrated
Industries, LLC ("Industries"), an entity affiliated with Mr. Donald K. McGhan,
the Company's former Chairman, Chief Executive Officer and President and a
greater than 10% stockholder, lent the Company an aggregate of $9,900, of
which $8,800 was included in liabilities at December 31, 1997. That
indebtedness is denoted as the Company's 10.5% subordinated notes. By the
terms of the 11% senior secured convertible notes, the 10.5% subordinated
notes are junior in right of payment and liquidation and, accordingly, no
interest or principal payments can be made with respect thereto without
the consent of the senior Noteholders. 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.
Interest expense with respect to this note totaled $535 and $386 in 1998
and 1997.
In 1997, the Company entered into an agreement with Medical Device
Alliance, Inc. ("MDA") to sell furniture, artwork and equipment which the
Company was acquiring through a capital sublease with Wells Fargo Bank
for a total purchase price of $300. The Company recorded a gain on sale of
assets of approximately $9 in 1997 in respect to this transaction. In
1997, the Company also entered into an agreement to sublease approximately
5,000 square feet of office space in Las Vegas for $10 per month, from
MDA on a month to month basis. This sublease was terminated as of June 30,
1998. Donald K. McGhan is the Chairman of MDA.
In 1996 and 1997, the Company performed administrative services for
MDA and other related parties. The Company believes the value of these
services is approximately $150,000. The reimbursement for these services
was recognized as part of the July, 1998 debt restructuring with
International Integrated Industries, LLC (see Note 6).
In 1997, the Company signed a distribution agreement with LySonix
Inc., a subsidiary of MDA, to sell ultrasonic surgery equipment in the
European and Latin American regions. Special incentive discounts were offered
to the Company for the introduction of the product in 1997. Net sales in 1998
and 1997 were approximately $606 and $300. In 1998, the terms of the
original agreement were revised so that the Company would obtain the goods
on a consignment basis and not have an obligation with LySonix until
the products were sold. This agreement and its revision have been reviewed and
approved by the Company's current management.
Included in general and administrative expense on the income
statement in 1997 and 1996 is $1,600 and $1,500 in aircraft rental expenses
paid to Executive Flite Management, Inc., a company that is controlled by
the family of Mr. Donald K. McGhan. No signed contract exists and the Company
was billed based on its usage. In 1998, the Company discontinued the
use of such corporate aircraft.
(12) Related Party Transactions (continued)
The Company incurred $140 and $253 during 1997 and 1996 for flight
related services with McGhan Management Corporation. Mr. Donald K. McGhan and
his wife are the majority shareholders of McGhan Management Corporation.
The Company believes it obtained full and fair reimburement for the foregoing
aircraft rental and flight related services expenses through the July,
1998 debtrestructuring with International Integrated Industries, L.L.C.
(see Note 6).
(13) Employee Benefit Plans
Effective January 1, 1990, the Company adopted a 401(k) Defined
Contribution Plan (the "Plan") for all U.S. employees. Participants may
contribute to the Plan and the Company may, at its discretion, match
a percentage of the participant's contribution as specified in the
Plan's provisions. Participants direct their own investments and the funds
are managed by a trustee. The Company has no liability for future contributions
and has not contributed to the Plan since 1993.
Certain foreign subsidiaries sponsor defined benefit or defined
contribution plans. The two largest are summarized below. The remaining
plans, covering approximately 50 non-U.S. employees, were instituted at
various times during 1991 through 1997 and the accumulated assets and
obligations are immaterial. These plans are funded annually according to
plan provisions with aggregate contributions of $189, $125 and $86 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Effective February 1, 1990, a certain subsidiary adopted a Defined
Contribution Plan for all non-production employees. Upon commencement of
service, these employees become eligible to participate in the plan and
contribute to the plan up to 5% of their compensation. The Company's matching
contribution is equal to 10% of the participant's compensation. The
employee is immediately and fully vested in the Company's contribution. The
Company's contributions to the plan approximated $292, $303 and $254 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1990, a certain foreign subsidiary adopted a Defined
Benefit Plan for all employees. As of September 30, 1998, this subsidiary
was closed and all employees were dismissed. At December 31, 1998 all
obligations with respect to the pension plan have been
paid and no further liability exists. At December 31, 1997, there were 30
active employees covered, none retired and seven deferred pensioners.
For the year ended December 31, 1997, the plan had net periodic pension cost
of $46, plan assets at fair market value of $371, a projected benefit
obligation of $415, a vested benefit amount of $212, and an unfunded
liability of $60. The plan has assumed a 6% discount rate, 6% expected
long-term rate of return on plan assets and a 3.5% salary increase rate.
(14) Litigation
Breast Implant Litigation
Final Order of Settlement. Prior to the final settlement order issued by
federal Judge Sam C. Pointer, Jr. 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. (See
Note 6). 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. The common stock is callable at the option
of the holders and has therefore been classified as redeemable common
stock on the balance sheet with a $3,000 assigned value.
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 inApril 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
(14) Litigation (continued)
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.
(14) Litigation (continued)
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
(14) Litigation (continued)
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.
(14) Litigation (continued)
Accounting Treatment. In 1993, the Company recorded a $9,152 reserve for
litigation. For the year ended December 31, 1997, the Company booked an
additional reserve of $28,150. The litigation reserve as of December 31,
1997 of $37,335 includes the cost of the non-opt-out settlement agreement of
$31,500, other settlements of $4,885 and legal fees and other related
expenses of $950.
At December 31, 1998 the litigation reserve was $5,721 consisting of
accruals for other settlements of $4,885 and legal fees and other
related expenses of $836. The reduction of the December 31, 1997 litigation
reserve was due to the issuance of the 6% $25,500 note payable to the
escrow agent, $3,000 of redeemable common stock, and the payment of $3,000
cash as prescribed in the settlement agreement.
(15) Commitments and Contingencies
The Company leases facilities under operating leases. The leases are
generally on an all-net basis, whereby the Company pays taxes, maintenance
and insurance. Leases that expire are expected to be renewed or
replaced by leases on other properties. Rent expense aggregated $4,589,
$4,664 and $4,650 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Minimum lease commitments under all noncancelable leases at December 31,
1998 are as follows:
Year ending December 31:
1999 $ 4,253
2000 3,487
2001 2,822
2002 2,411
2003 1,930
Thereafter 7,625
-------
$ 22,528
(16) Sale of Subsidiaries
In 1993, the Company sold its wholly-owned subsidiary, Specialty Silicone
Fabricators, Inc. (SSF), a manufacturer of silicone components for the
medical device industry, for $10.8 million. The consideration consisted
of $2.7 million in cash, the forgiveness of $2.2 million in intercompany
notes due to SSF, and $5.9 million in structured notes. The receivable
included a note in the amount of $2,425 due February 1995 and a note in the
amount of $3,466 due on August 31, 2003, accruing interest quarterly
at a rate of prime, not to exceed 11%. The notes have been reflected on the
balance sheet net of a discount of $644. In addition, the Company has
recorded an allowance for doubtful notes as of December 31,
(16) Sale of Subsidiaries (continued)
1996 of $1,067. In 1997, the Company reduced this allowance on the note by
$600 and recorded the resulting income effectively reducing general
and administrative expenses by the same amount. The reduction of the
allowance was in part based on negotiations with SSF. The notes are
collateralized by all of the assets of the merger. The Company has filed
a UCC-1 and its position is subordinated only to that of the primary
lender.
(17) Supplemental Schedule of Non-Cash Investing and Financing Activities
Year ended December 31, 1998:
The Company issued 1,112,173 shares of common stock and recorded a
corresponding $4,080 reduction of convertible debt in connection with the 4%
Convertible Debentures converted to equity.
The Company issued 66,117 shares of common stock as payment of $261 of
accrued debt costs related to the 1997 default of certain financial
covenants related to the $6,200 convertible debenture.
The Company issued 16,052 shares of common stock and recorded a
corresponding $86 reduction of convertible notes payable in connection
with the 11% Convertible Notes converted to equity.
The Company issued 90,744 shares of common stock and recorded a
corresponding $500 reduction of royalties payable.
The Company issued $25,500 of notes payable and 426,323 shares of
redeemable common stock at an aggregate stated value of $3,000 and
recorded a corresponding $28,500 reduction in the accrued litigation
settlement.
Year ended December 31, 1997:
The Company issued 615,958 shares of common stock and recorded a
corresponding $2,267 reduction of convertible debt in connection with the 4%
Convertible Debentures converted to equity.
The Company accrued debt costs of $396 related to the default of certain
financial covenants related to the $6,200 convertible debenture. During
1997, the Company issued 36,711 shares of common stock as payment of $135
of the accrued debt costs.
(17) Supplemental Schedule of Non-Cash Investing and Financing
Activities
Year ended December 31, 1996:
The Company issued 58,400 shares of common stock and recorded a
corresponding $540 reduction of convertible notes payable in connection
with the 11% Secured Convertible Notes converted to common stock.
The Company recorded an accounting/finance charge of $1,417 and
corresponding liability in connection with the 5% bonus shares given to the
11% Secured Convertible Noteholders for their consent and waiver of
default of the operating income covenant in the first quarter of 1996.
The liability was extinguished upon the issuance of the shares in
January 1997.
The Company recorded a debt conversion charge of $44 in connection with the
10% conversion inducement offered to the 11% Secured Convertible Noteholders.
(18) Quarterly Summary of Operations (unaudited)
The following is a summary of selected quarterly financial data for 1998
and 1997:
Quarter
First Second Third Fourth
Net Sales:
1998 $ 30,052 $ 36,928 $ 32,130 $ 32,457
1997 26,417 29,686 24,206 26,072
Gross Profit:
1998 17,760 25,926 20,204 19,722
1997 17,139 20,504 16,220 14,875
Net Income (loss):
1998 (1,285) 3,773 (461) 9,946
1997 (277) 269 (908) (40,661)
Net Income (loss) per share:
1998 Basic (0.14) 0.38 (0.04) 0.87
1998 Diluted (0.14) 0.30 (0.04) 0.72
1997 Basic
and Diluted (0.03) 0.03 (0.11) (4.73)
(18) Quarterly Summary of Operations (continued)
Significant Fourth Quarter Adjustments, 1998
During the fourth quarter of the year ended December 31, 1998, the Company
recorded significant adjustments which increased net income by
$6,200. The adjustments were as follows:
Extraordinary charge for issuance of
Warrants $ (1,800)
Income Tax Benefit 8,000
The Company incurred the extraordinary charge in relation to the
restructuring of the Company's 11% junior subordinated notes, which
occurred in the fourth quarter of 1998.
An income tax benefit was established to recognize a portion of the benefit
expected to be received from the Company's substantial net operating loss
carryforward.
Significant Fourth Quarter Adjustments, 1997
During the fourth quarter of the year ended December 31, 1997, the Company
recorded significant adjustments which decreased income by $29,700. The
adjustments were as follows:
Litigation related expenses $ 28,200
General & administrative expenses
Related to litigation 500
Income Tax Expense 1,000
The Company's litigation settlement expense was adjusted to recognize the
latest developments in the breast implant litigation.
(18) Quarterly Summary of Operations (continued)
Significant Fourth Quarter Adjustments, 1996
During the fourth quarter of the year ended December 31, 1996, the Company
recorded significant adjustments to the results of operations which decreased
income by $3,842. The adjustments were as follows:
Income Tax Expense $ 2,006
Provision for product returns 934
Provision for product liability 254
Royalty expense 648
The Company's provision for product returns was adjusted to recognize the
return of goods previously sold to customers based on historical results.
The Company's income tax expense was adjusted to write off the deferred tax
assets previously carried on the domestic subsidiaries financial statements.
During 1996, the provision for product liability was increased by $254 to
recognize the potential impact of the Company's limited product warranty.
The Company's royalty expense was also increased in the fourth quarter
of 1996 by $648 to recognize the royalty expense for products sold
internationally under various license agreements.
Schedule II
INAMED CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997, and 1996
(in 000's)
Beginning End of period
Description of period Additions Deductions Balance
Year ended December 31, 1998:
Allowance for returns $ 4,356 $ 400 __ $ 4,756
Allowance for doubtful
accounts 865 537 __ 1,402
Allowance for obsolescence 1,514 __ $ 345 1,169
Valuation allowance for
deferred tax assets 28,142 __ 12,664 15,478
Self-insurance accrual 3,602 47 __ 3,649
Allowance for doubtful Notes 467 __ __ 467
Litigation reserve 37,335 __ 31,614 5,721
Year ended December 31, 1997:
Allowance for returns 4,697 __ 341 4,356
Allowance for doubtful accounts 714 151 __ 865
Allowance for obsolescence 1,326 188 __ 1,514
Valuation allowance for
deferredtax assets 12,026 16,116 __ 28,142
Self-insurance accrual 1,373 2,229 __ 3,602
Allowance for doubtful Notes 1,067 -- 600 467
Litigation reserve 9,152 28,183 __ 37,335
Year ended December 31, 1996:
Allowance for returns 5,676 934 1,913 4,697
Allowance for doubtful accounts 965 101 352 714
Allowance for obsolescence 759 567 __ 1,326
Valuation allowance for
deferred tax assets 7,377 4,649 __ 12,026
Self-insurance accrual 1,131 270 28 1,373
Allowance for doubtful Notes 1,067 __ __ 1,067
Litigation reserve 9,152 __ __ 9,152
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
INAMED CORPORATION (Delaware)
This Restated Certificate of Incorporation (the "Certificate") of INAMED
CORPORATION (Delaware)
(the "Corporation"), was duly adopted by the Board of Directors of the
Corporation on December 22, 1998 and
the stockholders of the Corporation on December 21, 1998 in accordance
with Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware. The original Certificate
of Incorporation was filed on
November 17, 1998.
The text of the Certificate of Incorporation is hereby restated and further
amended to read in its entirety
as follows:
FIRST: The name of the corporation is INAMED Corporation.
SECOND: The address of the registered office of the Corporation in the
State of Delaware shall be
at Corporation Trust Center, 1209 Orange Street, City of Wilmington, County
of New Castle, Delaware 19801.
The name and address of the Corporation's registered agent in the State of
Delaware is The Corporation Trust
Company, 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations
may now or hereafter be organized under the General Corporation Law of the
State of Delaware.
FOURTH: 1. The total number of shares of stock which the Corporation
shall have authority
to issue is Twenty-Six Million (26,000,000) shares, consisting of
Twenty-Five Million (25,000,000) shares of
Common Stock, par value $.01 per share (the "Common Stock"), and One
Million (1,000,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock").
2. Shares of Preferred Stock may be issued from time to time in one or
more
series as may be established from time to time by resolution of the Board
of Directors of the Corporation (the
"Board of Directors"), each of which series shall consist of such number of
shares and have such distinctive
designation or title as shall be fixed by resolution of the Board of
Directors prior to the issuance of any shares of
such series. Each such class or series of Preferred Stock shall have such
voting powers, full or limited, or no
voting powers, and such preferences and relative, participating, optional
or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated in
such resolution of the Board of Directors
providing for the issuance of such series of Preferred Stock. The Board of
Directors is further authorized to
increase or decrease (but not below the number of shares of such class or
series then outstanding) the number of
shares of any series subsequent to the issuance of shares of that series.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute and subject to Article
Sixth hereof, the Board of Directors is expressly authorized to adopt,
repeal, rescind, alter or amend in any
respect the Bylaws of the Corporation (the "Bylaws").
SIXTH: Notwithstanding Article Fifth hereof, the Bylaws may be adopted,
rescinded, altered or amended
in any respect by the stockholders of the Corporation, but only by the
affirmative vote of the holders of not less
than a majority of the voting power of all outstanding shares of voting
stock regardless of class and voting
together as a single voting class.
SEVENTH: The business and affairs of the Corporation shall be
managed by and under the direction
of the Board of Directors. Except as may otherwise be provided pursuant to
Section 2 of Article Fourth hereof in
connection with rights to elect additional directors under specified
circumstances which may be granted to the
holders of any series of Preferred Stock, the exact number of directors of
the Corporation shall be determined
from time to time by a Bylaw or Amendment thereto provided that the number
of directors shall not be reduced to
less than three (3), except that there need be only as many directors as
there are stockholders in the event that the
outstanding shares are held of record by fewer than three (3) stockholders.
Elections of directors need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
EIGHTH: Each director shall serve until his successor is elected and
qualified or until his death,
resignation or removal; no decrease in the authorized number of directors
shall shorten the term of any incumbent
director; and additional directors, elected pursuant to Section 2 of
Article Fourth hereof in connection with rights
to elect such additional directors under specified circumstances which may
be granted to the holders of any series
of Preferred Stock, shall not be included in any class, but shall serve for
such term or terms and pursuant to such
other provisions as are specified in the resolution of the Board of
Directors establishing such series. Any
stockholder proposals and nominations for the election of a director by a
stockholder shall be delivered to the
Corporate Secretary of the Corporation no less than ninety (90) days nor
more than one hundred twenty (120)
days in advance of the first anniversary of the Company's annual meeting
held in the prior year, provided,
however, in the event the Company shall not have had an annual meeting in
the prior year, such notice shall be
delivered no less than ninety (90) days nor more than one hundred twenty
(120) days in advance of May 15 of the
current year. Such stockholder nominations must contain (a) as to each
person whom the stockholder proposes to
nominate for election or re-election as a director at the annual meeting:
(w) the name, age, business address and
residence address of the proposed nominee, (x) the principal occupation or
employment or the proposed nominee,
(y) the class and number of shares of capital stock of the Corporation
which are beneficially owned by the
proposed nominee, and (z) any other information relating to the proposed
nominee that is required to be disclosed
in solicitations for proxies for election of directors pursuant to Rule 14a
under the Securities Exchange Act of
1934, as amended; and (b) as to the stockholder giving notice of nominees
for election at the annual meeting, (x)
the name and record address of the stockholder, and (y) the class and
number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder.
NINTH: Except as may otherwise be provided pursuant to Section 2 of
Article Fourth hereof in
connection with rights to elect additional directors under specified
circumstances which may be granted to the
holders of any series of Preferred Stock, newly created directorships
resulting from any increase in the number of
directors, or any vacancies on the Board of Directors resulting from death,
resignation, removal or other causes,
shall be filled solely by the affirmative vote of a majority of the
remaining directors then in office, even though
less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of
directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall
have been elected and qualified or until
such director's death, resignation or removal, whichever first occurs.
TENTH: Except for such additional directors as may be elected by the
holders of any series of
Preferred Stock pursuant to the terms thereof established by a resolution
of the Board of Directors pursuant to
Article Fourth hereof, any director may be removed from office with or
without cause and only by the affirmative
vote of the holders of not less than 50% of the voting power of all
outstanding shares of voting stock entitled to
vote in connection with the election of such director regardless of class
and voting together as a single voting
class.
ELEVENTH: Meetings of stockholders of the Corporation may be held
within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision of
applicable law) outside the State of Delaware at such place or places as
may be designated from time to time by
the Board of Directors or in the Bylaws.
TWELFTH: For the purposes of this Restated Certificate of
Incorporation, the terms "affiliate,"
"associate," "control," "interested stockholder," "owner," "person" and
"voting stock" shall have the meanings
set forth in Section 203(c) of the Delaware General Corporation Law.
THIRTEENTH: The provisions set forth in this Article Thirteenth and in
Articles Fourth, Fifth, Sixth,
Seventh, Eighth, Ninth, Tenth and Eleventh hereof may not be repealed,
rescinded, altered or amended in any
respect, and no other provision or provisions may be adopted which
impair(s) in any respect the operation or
effect of any such provision, except by the affirmative vote of the holders
of a majority of the voting power of all
outstanding shares of voting stock regardless of class and voting together
as a single voting class, and, where such
action is proposed by an interested stockholder or by any associate or
affiliate of an interested stockholder, the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares of voting stock,
regardless of class and voting together as a single class, other than
shares held by the interested stockholder which
proposed (or the affiliate or associate of which proposed) such action, or
any affiliate or associate of such
interested stockholder.
FOURTEENTH: The Corporation reserves the right to adopt, repeal,
rescind, alter or amend in any
respect any provision contained in this Certificate in the manner now or
hereafter prescribed by applicable law,
and all rights conferred on stockholders herein are granted subject to this
reservation. Notwithstanding the
preceding sentence, the provisions set forth in Articles Fourth, Fifth,
Sixth, Seventh, Eighth, Ninth, Tenth,
Eleventh and Fourteenth may not be repealed, rescinded, altered or amended
in any respect, and no other
provision or provisions may be adopted which impair(s) in any respect the
operation or effect of any such
provision, unless such action is approved as specified in Article
Fourteenth hereof.
FIFTEENTH: No director of the Corporation shall be liable to the
Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for
acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware
General Corporation Law, or (d) for any transaction from which the director
derived an improper personal
benefit. If the Delaware General Corporation Law hereafter is amended to
authorize the further elimination or
limitation of the liability of directors, then the liability of a director
of the Corporation, in addition to the
limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended
Delaware General Corporation Law. Any repeal or modification of this
Section by the stockholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or
modification.
SIXTEENTH: No contract or other transaction of the Corporation with
any other person, firm or
corporation, or in which this corporation is interested, shall be affected
or invalidated by: (a) the fact that any one
or more of the directors or officers of the Corporation is interested in or
is a director or officer of such other firm
or corporation; or, (b) the fact that any director or officer of the
Corporation, individually or jointly with others,
may be a party to or may be interested in any such contract or transaction,
so long as the contract or transaction is
authorized, approved or ratified at a meeting of the Board of Directors by
sufficient vote thereon by directors not
interested therein, to which such fact of relationship or interest has been
disclosed, or the contract or transaction
has been approved or ratified by vote or written consent of the
stockholders entitled to vote, to whom such fact of
relationship or interest has been disclosed, or so long as the contract or
transaction is fair and reasonable to the
Corporation. Each person who may become a director or officer of the
Corporation is hereby relieved from any
liability that might otherwise arise by reason of his contracting with the
Corporation for the benefit of himself or
any firm or corporation in which he may in any way be interested.
IN WITNESS WHEREOF INAMED CORPORATION has caused this Restated Certificate
of
Incorporation to be executed by its President and to be attested to by its
Secretary as of the 22 day of December,
1998.
INAMED CORPORATION
By:/s/ Richard G. Babbitt
Richard G. Babbitt
Chairman, Chief Executive Officer and President
By: /s/ Carol A. Brennan
Carol A. Brennan
Secretary
Exhibit 3.2
BYLAWS
OF
INAMED CORPORATION
(A DELAWARE CORPORATION)
The following are the Bylaws of INAMED CORPORATION (Delaware), a Delaware
corporation (the
"Corporation"), effective as of December 21, 1998, after approval by the
Corporation's Board of Directors and
stockholders:
ARTICLE I
Offices
Section 1.01. Principal Executive Office. The principal executive office
of the Corporation shall be
located at 3800 Howard Hughes Boulevard, Suite 900, Las Vegas, Nevada
89109. The Board of Directors of the
Corporation (the "Board of Directors") may change the location of said
principal executive office.
Section 1.02. Other Offices. The Corporation may also have an office or
offices at such other place or
places, either within or without the State of Delaware, as the Board of
Directors may from time to time determine
or as the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 2.01. Annual Meetings. The annual meeting of stockholders of the
Corporation shall be held at
a date and at such time as the Board of Directors shall determine. At each
annual meeting of stockholders,
directors shall be elected in accordance with the provisions of Section
3.03 hereof and any other proper business
may be transacted.
Section 2.02. Special Meetings. Special meetings of stockholders for any
purpose or purposes may be
called at any time by a majority of the Board of Directors, by the Chairman
of the Board, the President or by
holders of not less than ten percent (10%) of the voting power of all
outstanding shares of voting stock regardless
of class and voting together as a single voting class. The term "voting
stock" as used in these Bylaws shall have
the meaning set forth in Section 203(c) of the Delaware General Corporation
Law. Special meetings may not be
called by any other person or persons. Each special meeting shall be held
at such date and time as is requested by
the person or persons calling the meeting, within the limits fixed by law.
Section 2.03. Place of Meetings. Each annual or special meeting of
stockholders shall be held at such
location as may be determined by the Board of Directors or, if no such
determination is made, at such place as
may be determined by the Chairman of the Board. If no location is so
determined, any annual or special meeting
shall be held at the principal executive office of the Corporation.
Section 2.04. Notice of Meetings. Written notice of each annual or
special meeting of stockholders
stating the date and time when, and the place where, it is to be held shall
be delivered either personally or by mail
to stockholders entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date
of the meeting. The purpose or purposes for which the meeting is called
may, in the case of an annual meeting,
and shall, in the case of a special meeting, also be stated. If mailed,
such notice shall be directed to a stockholder
at his address as it shall appear on the stock books of the Corporation,
unless he shall have filed with the Secretary
of the Corporation a written request that notices intended for him be
mailed to some other address, in which case
such notice shall be mailed to the address designated in such request.
Section 2.05. Conduct of Meetings. All annual and special meetings of
stockholders shall be conducted
in accordance with such rules and procedures as the Board of Directors may
determine subject to the requirements
of applicable law and, as to matters not governed by such rules and
procedures, as the chairman of such meeting
shall determine. The chairman of any annual or special meeting of
stockholders shall be the Chairman of the
Board. The Secretary, or in the absence of the Secretary, a person
designated by the Chairman of the Board,
shall act as secretary of the meeting.
Section 2.06. Quorum. At any meeting of stockholders of the Corporation,
the presence, in person or
by proxy, of the holders of record of a majority of the shares then issued
and outstanding and entitled to vote at
the meeting shall constitute a quorum for the transaction of business;
PROVIDED, HOWEVER, that this Section
2.06 shall not affect any different requirement which may exist under
statute, pursuant to the rights of any
authorized class or series of stock, or under the Certificate of
Incorporation of the Corporation, as amended or
restated from time to time (the "Certificate"), for the vote necessary for
the adoption of any measure governed
thereby.
In the absence of a quorum, the stockholders present in person or by proxy,
by majority vote and without
further notice, may adjourn the meeting from time to time until a quorum is
attained. At any reconvened meeting
following such adjournment at which a quorum shall be present, any business
may be transacted which might have
been transacted at the meeting as originally notified.
Section 2.07. Votes Required. The affirmative vote of a majority of the
shares present in person or
represented by proxy at a duly called meeting of stockholders of the
Corporation, at which a quorum is present
and entitled to vote on the subject matter, shall be sufficient to take or
authorize action upon any matter which
may properly come before the meeting, except that the election of directors
shall be by plurality vote, unless the
vote of a greater or different number thereof is required by statute, by
the rights of any authorized class of stock
or by the Certificate.
Unless the Certificate or a resolution of the Board of Directors adopted in
connection with the issuance of
shares of any class or series of stock provides for a greater or lesser
number of votes per share, or limits or denies
voting rights, each outstanding share of stock, regardless of class or
series, shall be entitled to one (l) vote on each
matter submitted to a vote at a meeting of stockholders.
Section 2.08. Proxies. A stockholder may vote the shares owned of record
by him either in person or
by proxy executed in writing (which shall include writings sent by telex,
telegraph, cable or facsimile
transmission) by the stockholder himself or by his duly authorized
attorney-in-fact. No proxy shall be valid after
three (3) years from its date, unless the proxy provides for a longer
period. Each proxy shall be in writing,
subscribed by the stockholder or his duly authorized attorney-in-fact, and
dated, but it need not be sealed,
witnessed or acknowledged.
Section 2.09. Action by Written Consent. Any action that may be taken at
any annual or special meeting
of stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all
shares entitled to vote thereon were present and voted. Notice of the
taking of such action shall be given promptly
to each stockholder that would have been entitled to vote thereon at a
meeting of stockholders and that did not
consent thereto in writing.
Section 2.10. List of Stockholders. The Secretary of the Corporation
shall prepare and make (or cause
to be prepared and made), at least ten (10) days before every meeting of
stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order and showing the address of, and the
number of shares registered in the name of, each stockholder. Such list
shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten
(10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the meeting
during the duration thereof, and may be
inspected by any stockholder who is present.
Section 2.11. Inspectors of Election. In advance of any meeting of
stockholders, the Board of Directors
may appoint Inspectors of Election to act at such meeting or at any
adjournment or adjournments thereof. If such
Inspectors are not so appointed or fail or refuse to act, the chairman of
any such meeting may (and, upon the
demand of any stockholder or stockholder's proxy, shall) make such an
appointment.
The number of Inspectors of Election shall be one (1) or three (3). If
there are three (3) Inspectors of
Election, the decision, act or certificate of a majority shall be effective
and shall represent the decision, act or
certificate of all. No such Inspector need be a stockholder of the
Corporation.
Subject to any provisions of the Certificate of Incorporation, the
Inspectors of Election shall determine
the number of shares outstanding, the voting power of each, the shares
represented at the meeting, the existence
of a quorum and the authenticity, validity and effect of proxies; they
shall receive votes, ballots or consents, hear
and determine all challenges and questions in any way arising in connection
with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close and
determine the result; and finally, they shall
do such acts as may be proper to conduct the election or vote with fairness
to all stockholders. On request, the
Inspectors shall make a report in writing to the secretary of the meeting
concerning any challenge, question or
other matter as may have been determined by them and shall execute and
deliver to such secretary a certificate of
any fact found by them.
Section 2.13 Notice of Stockholder Action. Any stockholder proposal or
nomination for the election of a
director by a stockholder shall be delivered to the Corporate Secretary of
the Corporation no less than ninety (90)
days nor more than one hundred twenty (120) days in advance of the first
anniversary of the Company's annual
meeting held in the prior year, provided, however, in the event the Company
shall not have had an annual meeting
in the prior year, such notice shall be delivered no less than ninety (90)
days nor more than one hundred twenty
(120) days in advance of May 15 of the current year. Such stockholder
nominations must contain (a) as to each
person whom the stockholder proposes to nominate for election or
re-election as a director at the annual meeting:
(w) the name, age, business address and residence address of the proposed
nominee, (x) the principal occupation
or employment or the proposed nominee, (y) the class and number of shares
of capital stock of the Corporation
which are beneficially owned by the proposed nominee, and (z) any other
information relating to the proposed
nominee that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a
under the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving notice of nominees
for election at the annual meeting, (x) the name and record address of the
stockholder, and (y) the class and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder.
ARTICLE III
Directors
Section 3.01. Powers. The business and affairs of the Corporation shall
be managed by and be under
the direction of the Board of Directors. The Board of Directors shall
exercise all the powers of the Corporation,
except those that are conferred upon or reserved to the stockholders by
statute, the Certificate of Incorporation or
these Bylaws.
Section 3.02. Number. The number of directors shall be fixed from time to
time by resolution of the
Board of Directors but shall not be less than three (3) nor more than nine
(9).
Section 3.03. Election and Term of Office. Each director shall serve
until his successor is elected and
qualified or until his death, resignation or removal, no decrease in the
authorized number of directors shall
shorten the term of any incumbent director, and additional directors
elected in connection with rights to elect such
additional directors under specified circumstances which may be granted to
the holders of any series of Preferred
Stock shall not be included in any class, but shall serve for such term or
terms and pursuant to such other
provisions as are specified in the resolution of the Board of Directors
establishing such series.
Section 3.04. Election of Chairman of the Board. At the organizational
meeting immediately following
the annual meeting of stockholders, the directors shall elect a Chairman of
the Board from among the directors
who shall hold office until the corresponding meeting of the Board of
Directors in the next year and until his
successor shall have been elected or until his earlier resignation or
removal. Any vacancy in such office may be
filled for the unexpired portion of the term in the same manner by the
Board of Directors at any regular or special
meeting.
Section 3.05. Removal. Any director may be removed from office only as
provided in the Certificate of
Incorporation.
Section 3.06. Vacancies and Additional Directorships. Newly created
directorships resulting from
death, resignation, disqualification, removal or other cause shall be
filled solely by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of
the class of directors in which the new directorship was created or the
vacancy occurred and until such director's
successor shall have been elected and qualified. No decrease in the number
of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 3.07. Regular and Special Meetings. Regular meetings of the Board
of Directors shall be held
immediately following the annual meeting of the stockholders; without call
at such time as shall from time to time
be fixed by the Board of Directors; and as called by the Chairman of the
Board in accordance with applicable law.
Special meetings of the Board of Directors shall be held upon call by or at
the direction of the Chairman
of the Board, the President or any two (2) directors, except that when the
Board of Directors consists of one (1)
director, then the one director may call a special meeting. Except as
otherwise required by law, notice of each
special meeting shall be mailed to each director, addressed to him at his
residence or usual place of business, at
least three days before the day on which the meeting is to be held, or
shall be sent to him at such place by telex,
telegram, cable, facsimile transmission or telephoned or delivered to him
personally, not later than the day before
the day on which the meeting is to be held. Such notice shall state the
time and place of such meeting, but need
not state the purpose or purposes thereof, unless otherwise required by
law, the Certificate of Incorporation or
these Bylaws ("Bylaws").
Notice of any meeting need not be given to any director who shall attend
such meeting in person (except
when the person attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened) or who shall waive notice
thereof, before or after such meeting, in a signed writing.
Section 3.08. Quorum. At all meetings of the Board of Directors, a
majority of the fixed number of
directors shall constitute a quorum for the transaction of business, except
that when the Board of Directors
consists of one (1) director, then the one director shall constitute a
quorum.
In the absence of a quorum, the directors present, by majority vote and
without notice other than
by announcement, may adjourn the meeting from time to time until a quorum
shall be present. At any reconvened
meeting following such an adjournment at which a quorum shall be present,
any business may be transacted which
might have been transacted at the meeting as originally notified.
Section 3.09. Votes Required. Except as otherwise provided by applicable
law or by the Certificate of
Incorporation, the vote of a majority of the directors present at a meeting
duly held at which a quorum is present
shall be sufficient to pass any measure.
Section 3.10. Place and Conduct of Meetings. Each regular meeting and
special meeting of the Board of
Directors shall be held at a location determined as follows: The Board of
Directors may designate any place,
within or without the State of Delaware, for the holding of any meeting.
If no such designation is made: (a) any
meeting called by a majority of the directors shall be held at such
location, within the county of the Corporation's
principal executive office, as the directors calling the meeting shall
designate; and (b) any other meeting shall be
held at such location, within the county of the Corporation's principal
executive office, as the Chairman of the
Board may designate or, in the absence of such designation, at the
Corporation's principal executive office.
Subject to the requirements of applicable law, all regular and special
meetings of the Board of Directors shall be
conducted in accordance with such rules and procedures as the Board of
Directors may approve and, as to matters
not governed by such rules and procedures, as the chairman of such meeting
shall determine. The chairman of
any regular or special meeting shall be the Chairman of the Board, or, in
his absence, a person designated by the
Board of Directors. The Secretary, or, in the absence of the Secretary, a
person designated by the chairman of the
meeting, shall act as secretary of the meeting.
Section 3.11. Fees and Compensation. Directors shall be paid such
compensation as may be fixed from
time to time by resolution of the Board of Directors: (a) for their usual
and contemplated services as directors; (b)
for their services as members of committees appointed by the Board of
Directors, including attendance at
committee meetings as well as services which may be required when committee
members must consult with
management staff; and (c) for extraordinary services as directors or as
members of committees appointed by the
Board of Directors, over and above those services for which compensation is
fixed pursuant to items (a) and (b) in
this Section 3.11. Compensation may be in the form of an annual retainer
fee or a fee for attendance at meetings,
or both, or in such other form or on such basis as the resolutions of the
Board of Directors shall fix. Directors
shall be reimbursed for all reasonable expenses incurred by them in
attending meetings of the Board of Directors
and committees appointed by the Board of Directors and in performing
compensable extraordinary services.
Nothing contained herein shall be construed to preclude any director from
serving the Corporation in any other
capacity, such as an officer, agent, employee, consultant or otherwise, and
receiving compensation therefor.
Section 3.12. Committees of the Board of Directors. To the full extent
permitted by applicable law, the
Board of Directors may from time to time establish committees, including,
but not limited to, standing or special
committees and an executive committee with authority and responsibility for
bookkeeping, with authority to act as
signatories on Corporation bank or similar accounts and with authority to
choose attorneys for the Corporation and
direct litigation strategy, which shall have such duties and powers as are
authorized by these Bylaws or by the
Board of Directors. Committee members, and the chairman of each committee,
shall be appointed by the Board
of Directors. The Chairman of the Board, in conjunction with the several
committee chairmen, shall make
recommendations to the Board of Directors for its final action concerning
members to be appointed to the several
committees of the Board of Directors. Any member of any committee may be
removed at any time with or
without cause by the Board of Directors. Vacancies which occur on any
committee shall be filled by a resolution
of the Board of Directors. If any vacancy shall occur in any committee by
reason of death, resignation,
disqualification, removal or otherwise, the remaining members of such
committee, so long as a quorum is present,
may continue to act until such vacancy is filled by the Board of Directors.
The Board of Directors may, by
resolution, at any time deemed desirable, discontinue any standing or
special committee. Members of standing
committees, and their chairmen, shall be elected yearly at the regular
meeting of the Board of Directors which is
held immediately following the annual meeting of stockholders. The
provisions of Sections 3.07, 3.08, 3.09 and
3.10 of these Bylaws shall apply, MUTATIS MUTANDIS, to any such Committee
of the Board of Directors.
ARTICLE IV
Officers
Section 4.01. Designation, Election and Term of Office. The Corporation
shall have a Chairman of the
Board, a President, Treasurer, such senior vice presidents and vice
presidents as the Board of Directors deems
appropriate, a Secretary and such other officers as the Board of Directors
may deem appropriate. These officers
shall be elected annually by the Board of Directors at the organizational
meeting immediately following the annual
meeting of stockholders, and each such officer shall hold office until the
corresponding meeting of the Board of
Directors in the next year and until his successor shall have been elected
and qualified or until his earlier
resignation, death or removal. Any vacancy in any of the above offices may
be filled for the unexpired portion of
the term by the Board of Directors at any regular or special meeting.
Section 4.02. Chairman of the Board. The Chairman of the Board of
Directors shall preside at all
meetings of the directors and shall have such other powers and duties as
may from time to time be assigned to him
by the Board of Directors.
Section 4.03. President. The President shall be the chief executive
officer of the Corporation and shall,
subject to the power of the Board of Directors, have general supervision,
direction and control of the business and
affairs of the Corporation. He shall preside at all meetings of the
stockholders and, in the absence of the
Chairman of the Board, at all meetings of the directors. He shall have the
general powers and duties of
management usually vested in the office of president of a corporation, and
shall have such other duties as may be
assigned to him from time to time by the Board of Directors.
Section 4.04. Treasurer. The Treasurer shall keep and maintain, or cause
to be kept and maintained,
adequate and correct books and records of account of the properties and
business transactions of the Corporation,
including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, retained earnings and
shares. The books of account shall at all reasonable times be open to
inspection by the directors.
The Treasurer shall deposit all moneys and other valuables in the name and
to the credit of the
Corporation with such depositaries as may be designated by the Board of
Directors. He shall disburse the funds
of the Corporation as may be ordered by the Board of Directors, shall
render to the President and directors,
whenever they request it, an account of all of his transactions as the
Treasurer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties
as may be prescribed by the Board
of Directors or the Bylaws.
Section 4.05. Secretary. The Secretary shall keep the minutes of the
meetings of the stockholders, the
Board of Directors and all committees. He shall be the custodian of the
corporate seal and shall affix it to all
documents which he is authorized by law or the Board of Directors to sign
and seal. He also shall perform such
other duties as may be assigned to him from time to time by the Board of
Directors or the Chairman of the Board
or President.
Section 4.06. Assistant Officers. The President may appoint one or more
assistant secretaries and such
other assistant officers as the business of the Corporation may require,
each of whom shall hold office for such
period, have such authority and perform such duties as may be specified
from time to time by the President.
Section 4.07. When Duties of an Officer May Be Delegated. In the case of
absence or disability of an
officer of the Corporation or for any other reason that may seem sufficient
to the Board of Directors, the Board of
Directors or any officer designated by it, or the President, may, for the
time of the absence or disability, delegate
such officer's duties and powers to any other officer of the Corporation.
Section 4.08. Officers Holding Two or More Offices. The same person may
hold any two (2) or more
of the above-mentioned offices.
Section 4.09. Compensation. The Board of Directors shall have the power
to fix the compensation of all
officers and employees of the Corporation.
Section 4.10. Resignations. Any officer may resign at any time by giving
written notice to the Board of
Directors, to the President, or to the Secretary of the Corporation. Any
such resignation shall take effect at the
time specified therein unless otherwise determined by the Board of
Directors. The acceptance of a resignation by
the Corporation shall not be necessary to make it effective.
Section 4.11. Removal. Any officer of the Corporation may be removed,
with or without cause, by the
affirmative vote of a majority of the entire Board of Directors. Any
assistant officer of the Corporation may be
removed, with or without cause, by the President or by the Board of
Directors.
ARTICLE V
Indemnification of Directors, Officers
Employees end other Corporate Agents
Section 5.01. Action, Etc. Other Than By Or In The Right of The
Corporation. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is or
was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee, trustee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (all such persons being
referred to hereinafter as an "Agent"), against expenses (including
attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not,
of itself, create a presumption
that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal
action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
Section 5.02. Action, Etc., By Or In The Right of The Corporation. The
Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he
is or was an Agent against expenses (including attorneys' fees) actually
and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be
liable to the Corporation by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, unless and
only to the extent that the court in which such action or suit was brought
shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court shall
deem proper.
Section 5.03. Determination of Right of Indemnification. Any
indemnification under Sections 5.01 or
5.02 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a
determination that indemnification of the Agent is proper in the
circumstances because the Agent has met the
applicable standard of conduct set forth in Sections 5.01 and 5.02 hereof,
which determination is made (a) by the
Board of Directors, by a majority vote of a quorum consisting of directors
who were not parties to such action,
suit or proceeding, or (b) if such a quorum is not obtainable, or, even if
obtainable, if a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(c) by the stockholders.
Section 5.04. Indemnification Against Expenses of Successful Party.
Notwithstanding the other
provisions of this Article V, to the extent that an Agent has been
successful on the merits or otherwise, including
the dismissal of an action without prejudice or the settlement of an action
without admission of liability, in defense
of any action, suit or proceeding referred to in Sections 5.01 or 5.02
hereof, or in defense of any claim, issue or
matter therein, such Agent shall be indemnified against expenses, including
attorneys' fees actually and reasonably
incurred by such Agent in connection therewith.
Section 5.05. Advances of Expenses. Except as limited by Section 5.06 of
this Article V, expenses
incurred by an Agent in defending any civil or criminal action, suit, or
proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding, if the Agent shall undertake to
repay such amount if it shall ultimately be determined that such person is
not entitled to be indemnified as
authorized in this Article V. Notwithstanding the foregoing, no advance
shall be made by the Corporation if a
determination is reasonably and promptly made by the Board of Directors by
a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested
directors so directs) by independent legal counsel in a written opinion,
that, based upon the facts known to the
Board of Directors or counsel at the time such determination is made, such
person acted in bad faith and in a
manner that such person did not believe to be in or not opposed to the best
interest of the Corporation, or, with
respect to any criminal proceeding, that such person believed or had
reasonable cause to believe his conduct was
unlawful.
Section 5.06. Right of Agent to Indemnification Upon Application;
Procedure Upon Application. Any
indemnification or advance under this Article V shall be made promptly, and
in any event within ninety days,
upon the written request of the Agent, unless a determination shall be made
in the manner set forth in the second
sentence of Subsection 5.05 hereof that such Agent acted in a manner set
forth therein so as to justify the
Corporation's not indemnifying or making an advance to the Agent. The
right to indemnification or advances as
granted by this Article V shall be enforceable by the Agent in any court of
competent jurisdiction, if the Board of
Directors or independent legal counsel denies the claim, in whole or in
part, or if no disposition of such claim is
made within ninety (90) days. The Agent's expenses incurred in connection
with successfully establishing his
right to indemnification, in whole or in part, in any such proceeding shall
also be indemnified by the Corporation.
Section 5.07. Other Rights and Remedies. The indemnification and
advancement of expenses provided
by, or granted pursuant to, this Article V shall not be deemed exclusive of
any other rights to which an Agent
seeking indemnification or advancement of expenses may be entitled under
any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in
another capacity while holding such office, and shall, unless otherwise
provided when authorized or ratified,
continue as to a person who has ceased to be an Agent and shall inure to
the benefit of the heirs, executors and
administrators of such a person. All rights to indemnification under this
Article V shall be deemed to be provided
by a contract between the Corporation and the Agent who serves in such
capacity at any time while these Bylaws
and other relevant provisions of the Delaware General Corporation Law and
other applicable law, if any, are in
effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing.
Section 5.08. Insurance. Upon resolution passed by the Board of
Directors, the Corporation may
purchase and maintain insurance on behalf of any person who is or was an
Agent against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the
Corporation would have the power to indemnify him against such liability
under the provisions of this Article V.
Section 5.09. Constituent Corporations. For the purposes of this Article
V, references to "the
Corporation" shall include, in addition to the resulting corporation, all
constituent corporations (including all
constituents of constituents) absorbed in a consolidation or merger as well
as the resulting or surviving
corporation, which, if the separate existence of such constituent
corporation had continued, would have had power
and authority to indemnify its Agents, so that any Agent of such
constituent corporation shall stand in the same
position under the provisions of the Article V with respect to the
resulting or surviving corporation as that Agent
would have with respect to such constituent corporation if its separate
existence had continued.
Section 5.10. Other Enterprises, Fines, and Serving at Corporation's
Request. For purposes of this
Article V, references to "other enterprises" shall include employee benefit
plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to
"serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of
the Corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with
respect to any employee benefit plan, its participants or beneficiaries;
and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred
to in this Article V.
Section 5.11. Savings Clause. If this Article V or any portion thereof
shall be invalidated on any ground
by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each Agent as to
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any action,
suit or proceeding, whether civil, criminal, administrative or
investigative, and whether internal or external,
including a grand jury proceeding and an action or suit brought by or in
the right of the Corporation, to the full
extent permitted by any applicable portion of this Article V that shall not
have been invalidated, or by any other
applicable law.
ARTICLE VI
Stock
Section 6.01. Certificates. Except as otherwise provided by law, each
stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number
and class (and series, if appropriate) of
shares of stock owned by him in the Corporation. Each certificate shall be
signed in the name of the Corporation
by the Chairman of the Board or a Vice-Chairman of the Board or the
President or a Vice President, together with
the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary. Any or all of the signatures
on any certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 6.02. Transfer of Shares. Shares of stock shall be transferable
on the books of the Corporation
only by the holder thereof, in person or by his duly authorized attorney,
upon the surrender of the certificate
representing the shares to be transferred, properly endorsed, to the
Corporation's transfer agent, if the
Corporation has a transfer agent, or to the Corporation's registrar, if the
Corporation has a registrar, or to the
Secretary, if the Corporation has neither a transfer agent nor a registrar.
The Board of Directors shall have
power and authority to make such other rules and regulations concerning the
issue, transfer and registration of
certificates of the Corporation's stock as it may deem expedient.
Section 6.03. Transfer Agents and Registrars. The Corporation may have
one or more transfer agents
and one or more registrars of its stock whose respective duties the Board
of Directors or the Secretary may, from
time to time, define. No certificate of stock shall be valid until
countersigned by a transfer agent, if the
Corporation has a transfer agent, or until registered by a registrar, if
the Corporation has a registrar. The duties
of transfer agent and registrar may be combined.
Section 6.04. Stock Ledgers. Original or duplicate stock ledgers,
containing the names and addresses of
the stockholders of the Corporation and the number of shares of each class
of stock held by them, shall be kept at
the principal executive office of the Corporation or at the office of its
transfer agent or registrar.
Section 6.05. Record Dates. The Board of Directors may fix, in advance, a
date as the record date for
the purpose of determining stockholders entitled to notice of, or to vote
at, any meeting of stockholders or any
adjournment thereof, or stockholders entitled to receive payment of any
dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or in
order to make a determination of stockholders for any other proper purpose.
Such date in any case shall be not
more than sixty (60) days, and in case of a meeting of stockholders, not
less than ten (10) days, prior to the date
on which the particular action requiring such determination of stockholders
is to be taken. Only those stockholders
of record on the date so fixed shall be entitled to any of the foregoing
rights, notwithstanding the transfer of any
such stock on the books of the Corporation after any such record date fixed
by the Board of Directors.
Exhbit 10.46
INAMED CORPORATION
1998 STOCK OPTION PLAN
1. Purpose of the Plan.
This 1998 Stock Option Plan (the "Plan") is intended as an incentive, to
retain in the
employ of INAMED CORPORATION (the "Company") and any Subsidiary of the
Company, within the meaning
of Section 424(f) of the United States Internal Revenue Code of 1986, as
amended (the "Code"), persons of
training, experience and ability, to attract new employees, consultants,
officers and directors, whose services are
considered valuable, to encourage the sense of proprietorship and to
stimulate the active interest of such persons in
the development and financial success of the Company and its Subsidiaries.
It is further intended that options (the "Options") granted pursuant to the
Plan shall be Options
not intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
The Company intends that the Plan meet the requirements of Rule 16b-3
("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and that transactions
of the type specified in subparagraphs (c) to (f) inclusive of Rule 16b-3
by officers and directors of the Company
pursuant to the Plan will be exempt from the operation of Section 16(b) of
the Exchange Act. In all cases, the
terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the
Company's intent as stated in this Section 1.
2. Administration of the Plan.
The Board of Directors of the Company (the "Board") shall administer the
Plan unless and until
the Board delegates administration to a Committee. The Board may delegate
administration of the Plan to a
Committee or Committees of one or more members of the Board. In the
discretion of the Board, a Committee
may consist solely of two or more Outside Directors (as such term is
defined in Section 162(m) of the Code), or
solely of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3). If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers
theretofore possessed by the Board (and references in this Plan to the
Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions
of the Plan, as may be adopted from
time to time by the Board. The Board may abolish the Committee at any time
and revest in the Board the
administration of the Plan.
Subject to the provisions of the Plan, the Board shall have the authority,
in its discretion: (1) to
grant Options; (2) to determine, upon review of relevant information and in
accordance with Section 5 of the
Plan, the Fair Market Value of the Common Stock of the Company, $.01 par
value per share ("Common Stock");
(3) to determine the exercise price per share of Options to be granted,
which exercise price shall be determined in
accordance with Section 5 of the Plan; (4) to determine the recipients to
whom, and the time or times at which,
Options shall be granted and the number of shares to be represented by each
Option; (5) to interpret the provisions
and supervise the administration of the Plan; (6) to prescribe, amend and
rescind rules and regulations relating to
the Plan; (7) to determine the terms and provisions of each Option granted
(which need not be identical) and, with
the consent of the holder thereof, modify or amend each Option; (8) to
accelerate or defer (with the consent of the
recipient of the Option (the "Optionee")) the exercise date of any Option,
consistent with the provisions of Section
5 of the Plan; (9) to authorize any person to execute on behalf of the
Company any instrument required to
effectuate the grant of an Option previously granted by the Board; and (10)
to make all other determinations
deemed necessary or advisable for the administration of the Plan.
All decisions, determinations and interpretations of the Board shall be
final and binding on all
Optionees and any other holders of any Options granted under the Plan.
In the event that for any reason the Board is unable to act
or if the Board at the time of any
grant, award or other acquisition under the Plan of Options or Common Stock
does not consist of two or more
Non-Employee Directors, then any such grant, award or other acquisition may
be approved or ratified in any
other manner contemplated by subparagraph (d) of Rule 16b-3.
3. Designation of Optionees.
The persons eligible for participation in the Plan as recipients of Options
(the "Optionees") shall
include employees, consultants and directors of the Company or any
Subsidiary. In selecting Optionees, and in
determining the number of shares to be covered by each Option granted to
Optionees, the Board may consider the
office or position held by the Optionee or the Optionee's relationship to
the Company, the Optionee's degree of
responsibility for and contribution to the growth and success of the
Company or any Subsidiary, the Optionee's
length of service, age, promotions, potential and any other factors that
the Board may consider relevant. An
Optionee who has been granted an Option hereunder may be granted an
additional Option or Options, if the Board
shall so determine.
4. Common Stock Reserved for the Plan.
Subject to adjustment as provided in Section 7 hereof, a total of 450,000
shares of the Common
Stock shall be subject to the Plan. The shares of Common Stock subject to
the Plan shall consist of unissued
shares or previously issued shares held by any Subsidiary of the Company,
and such amount of shares of Common
Stock shall be and is hereby reserved for such purpose. Any of such shares
of Common Stock that may remain
unsold and that are not subject to outstanding Options at the termination
of the Plan shall cease to be reserved for
the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient
number of shares of Common Stock to meet the requirements of the Plan.
Should any Option expire or be
cancelled prior to its exercise in full or should the number of shares of
Common Stock to be delivered upon the
exercise in full of an Option be reduced for any reason, the shares of
Common Stock theretofore subject to such
Option may be subject to future Options under the Plan.
5. Terms and Conditions of Options.
Options granted under the Plan shall be subject to the following conditions
and shall contain such
additional terms and conditions, not inconsistent with the terms of the
Plan, as the Board shall deem desirable:
(a) Option Price. The purchase price of each share of Common Stock
purchasable
under an Option shall be determined by the Board at the time of grant, but
shall not be less than 85% of the Fair
Market Value (as defined below) of such share of Common Stock on the date
the Option is granted; provided,
however, that if an option granted to the Company's Chief Executive Officer
or to any of the Company's other
four most highly compensated officers is intended to qualify as
performance-based compensation under Section
162(m) of the Code, the exercise price of such Option shall not be less
than 100% of the Fair Market Value of
such share of Common Stock on the date the Option is granted. The exercise
price for each Option shall be
subject to adjustment as provided in Section 7 below. Fair Market Value
means the closing price of publicly
traded shares of Common Stock on a national securities exchange or the
over-the-counter Bulletin Board market
("OTC Bulletin Board"), or, if not so listed or regularly quoted, the mean
between the closing bid and asked
prices of publicly traded shares of Common Stock in the over-the-counter
market, or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company, or as
determined by the Board in a manner consistent with the provisions of the
Code. Anything in this Section 5(a) to
the contrary notwithstanding, in no event shall the purchase price of a
share of Common Stock be less than the
minimum price permitted under rules and policies of any national securities
exchange or the OTC Bulletin Board
if and so long as the Common Stock is listed on any such exchange or the
OTC Bulletin Board.
(b) Option Term. The term of each Option shall be fixed by the Board,
but no
Option shall be exercisable more than 10 years after the date such Option
is granted.
(c) Exercisability. Options shall be exercisable at such time or times
and subject
to such terms and conditions as shall be determined by the Board at the
time of grant. Unless the Board shall
decide otherwise, Options shall vest ratably over three (3) years.
(d) Method of Exercise. Options to the extent then exercisable may be
exercised
in whole or in part at any time during the option period, by giving written
notice to the Company specifying the
number of shares of Common Stock to be purchased, accompanied by payment in
full of the purchase price, in
cash, by check or such other instrument as may be acceptable to the Board.
Payment in full or in part may also
be made by (i) exchanging Common Stock owned by the Optionee which is not
the subject of any pledge or
security interest, (ii) the Optionee's written selection to have shares of
Common Stock withheld by the Company
from the shares of Common Stock otherwise to be received with such withheld
shares of Common Stock having a
Fair Market Value on the date of exercise equal to the exercise price of
the Option, or (iii) by a combination of
the forgoing, provided that the combined value of all cash and cash
equivalents and the Fair Market Value of any
shares surrendered to the Company is at least equal to such exercise price.
An Optionee shall have the right to
dividends and other rights of a stockholder with respect to shares of
Common Stock purchased upon exercise of an
Option after (i) the Optionee has given written notice of exercise and has
paid in full for such shares and (ii)
becomes a stockholder of record with respect thereto. The provisions of
this subsection 5(d) are subject to any
Option provisions governing the minimum number of shares as to which an
Option may be exercised.
Neither the recipient of an Option nor any person to whom an Option is
transferred in
accordance with the Plan shall be deemed to be the holder of, or to have
any of the rights of a holder with respect
to, any shares subject to such Option unless and until such person has
satisfied all requirements for exercise of the
Option pursuant to its terms.
(e) Non-transferability of Options. Options may be transferred to the
extent
provided in the Option Agreement; provided that if the Option Agreement
does not expressly permit the transfer
of an Option, the Option shall not be transferable except by will, by the
laws of descent and distribution or
pursuant to a domestic relations order satisfying the requirements of Rule
16 of the Exchange Act and shall be
exercisable during the lifetime of the person to whom the Option is granted
only by such person or any transferee
pursuant to a domestic relations order. Notwithstanding the foregoing, the
person to whom the Option is granted
may, by delivering written notice to the Company, in a form satisfactory to
the Company, designate a third party
who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option. Any attempt to
transfer, assign, pledge or otherwise dispose of, or to subject to
execution, attachment or similar process, any
Option contrary to the provisions hereof shall be void and ineffective and
shall give no right to the purported
transferee.
(f) Termination by Death. Unless otherwise determined by the Board at
grant, if
any Optionee's employment with or service to the Company or any Subsidiary
terminates by reason of death, the
Option may thereafter be exercised, to the extent then exercisable (or on
such accelerated basis as the Board shall
determine at or after grant), by the legal representative of the estate or
by the legatee of the Optionee under the
will of the Optionee, for a period of one year after the date of such death
or until the expiration of the stated term
of such Option as provided under the Plan, whichever period is shorter.
(g) Termination by Reason of Disability. Unless otherwise determined
by the
Board at grant, if any Optionee's employment with or service to the Company
or any Subsidiary terminates by
reason of total and permanent disability (as defined in Section 22(e)(3) of
the Code, "Disability"), any Option held
by such Optionee may thereafter be exercised, to the extent it was
exercisable at the time of termination due to
Disability (or on such accelerated basis as the Board shall determine at or
after grant), but may not be exercised
after 30 days after the date of such termination of employment or service
or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period,
any unexercised Option held by such Optionee shall thereafter be
exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of
such death or for the stated term of such
Option, whichever period is shorter.
(h) Other Termination. Unless otherwise determined by the Board at
grant, if any
Optionee's employment with or service to the Company or any Subsidiary
terminates for any reason other than
death or Disability, the Option shall thereupon terminate, except that the
portion of any Option that was
exercisable on the date of such termination of employment may be exercised
for the lesser of 30 days after the
date of termination or the balance of such Option's term if the Optionee's
employment or service with the
Company or any Subsidiary is terminated by the Company or such Subsidiary
without cause (the determination as
to whether termination was for cause to be made by the Board). The
transfer of an Optionee from the employ of
the Company to a Subsidiary, or vice versa, or from one Subsidiary to
another, shall not be deemed to constitute a
termination of employment for purposes of the Plan.
6. Effective Date of Plan and Term of Plan
The Plan is subject to approval, at a duly held shareholders' meeting,
within twelve (12) months
after the date the Board approves the Plan, by the affirmative vote of the
holders of a majority of the voting shares
of the Company represented in person or by proxy and entitled to vote at
the meeting. Options may be granted,
but not exercised, before such shareholder approval. If the shareholders
fail to approve the Plan within the
required time period, any Options granted under the Plan shall be void, and
no additional Options may thereafter
be granted. The Plan shall continue until such time as it may be terminated
by action of the Board; provided,
however, that no Options may be granted under this Plan on or after the
tenth anniversary of approval of the Plan
by the Board, but Options theretofore granted may extend beyond that date.
7. Adjustments Upon Changes in Capitalization or Merger.
(a) Subject to any required action by the stockholders of the Company,
the number of
shares of Common Stock covered by each outstanding Option, and the number
of shares of Common Stock which
have been authorized for issuance under the Plan but as to which no Options
have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as
well as the price per share of Common
Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend,
combination or reclassification of the Common Stock of the Company or the
payment of a stock dividend with
respect to the Common Stock or any other increase or decrease in the number
of issued shares of Common Stock
effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of Common Stock of any class, or
securities convertible into shares of Common Stock of any class, shall
affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common
Stock subject to an Option.
(b) Unless otherwise provided by the Board at the time of grant, in the
event of: (i) a
dissolution, liquidation or sale of substantially all of the assets of the
Company; (ii) a merger or consolidation in
which the Company is not the surviving corporation; (iii) a reverse merger
in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by
virtue of the merger into other property, whether in the form of
securities, cash or otherwise; or (iv) the
acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Exchange Act, or
any comparable successor provisions (excluding any employee benefit plan or
related trust sponsored or
maintained by the Company or any affiliate of the Company), of the
beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor
rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power
entitled to vote in the election of directors,
then, with respect to Options held by Optionees, the vesting of such
Options (and, if applicable, the time during
which such Options may be exercised) shall be accelerated immediately prior
to such event and the Options shall
terminate if not exercised (if applicable) twenty days following such
acceleration.
8. Purchase for Investment.
Unless the Options and shares covered by the Plan have been registered
under the United States
Securities Act of 1933, as amended (the "Securities Act"), or the Company
has determined that such registration
is unnecessary, each person exercising an Option under the Plan may be
required by the Company to give a
representation in writing that he is acquiring the shares for his own
account for investment and not with a view
to, or for sale in connection with, the distribution of any part thereof.
9. Taxes.
The Company may make such provisions as it may deem appropriate, consistent
with applicable
law, in connection with any Options granted under the Plan with respect to
the withholding of taxes or any other
tax matters.
10. Amendment and Termination.
The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made
that would impair the rights of any Optionee under any Option theretofore
granted without his consent, and
except that no amendment shall be made which, without the approval of the
stockholders of the Company would:
(a) materially increase the number of shares that may be issued under
the Plan,
except as provided in Section 7;
(b) materially increase the benefits accruing to the Optionees under
the Plan;
(c) materially modify the requirements as to eligibility for
participation in the
Plan; or
(d) extend the term of any Option beyond that provided for in Section
5(b).
The Board may amend the terms of any Option theretofore granted,
prospectively or
retroactively, but no such amendment shall impair the rights of any
Optionee without his consent. The Board may
also substitute new Options for previously granted Options, including
options granted under other plans applicable
to the participant and previously granted Options having higher option
prices, upon such terms as the Board may
deem appropriate.
11. Government Regulations.
The Plan, and the grant and exercise of Options hereunder, and the
obligation of the Company to
sell and deliver shares under such Options, shall be subject to all
applicable laws, rules and regulations, and to
such approvals by any governmental agencies, or by national securities
exchanges or the OTC Bulletin Board if
and so long as the Common Stock is listed on any such exchange or the OTC
Bulletin Board, as may be required.
12. General Provisions.
(a) Certificates. All certificates for shares of Common Stock
delivered under the
Plan shall be subject to such stop transfer orders and other restrictions
as the Board may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission, or other securities
commission having jurisdiction, any applicable Federal, provincial or state
securities law, any stock exchange
upon which the Common Stock is then listed and the Board may cause a legend
or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
(b) Employment Matters. The adoption of the Plan shall not confer upon
any
Optionee of the Company or any Subsidiary any right to continued employment
or, in the case of an Optionee who
is a director, continued service as a director, with the Company or a
Subsidiary, as the case may be, nor shall it
interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its
employees, the service of any of its directors or the retention of any of
its consultants or advisors at any time.
(c) Limitation of Liability. No member of the Board or the Committee,
or any
officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for
any action, determination, or interpretation taken or made in good faith
with respect to the Plan, and all members
of the Board or the Committee and each and any officer or employee of the
Company acting on their behalf shall,
to the extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action,
determination or interpretation.
(d) Registration of Common Stock. Notwithstanding any other provision
in the
Plan, no Option may be exercised unless and until the Common Stock to be
issued upon the exercise thereof has
been registered under the Securities Act and applicable state securities
laws, or is, in the opinion of counsel to the
Company, exempt from such registration in the United States or exempt from
the prospectus and registration
requirements under applicable provincial legislation. The Company shall
not be under any obligation to register
under applicable federal or state securities laws any Common Stock to be
issued upon the exercise of an Option
granted hereunder, or to comply with an appropriate exemption from
registration under such laws or the laws of
any province in order to permit the exercise of an Option and the issuance
and sale of the Common Stock subject
to such Option. However, the Company may in its sole discretion register
such Common Stock at such time as
the Company shall determine. If the Company chooses to comply with such an
exemption from registration, the
Common Stock issued under the Plan may, at the direction of the Board, bear
an appropriate restrictive legend
restricting the transfer or pledge of the Common Stock represented thereby,
and the Committee may also give
appropriate stop transfer instructions to the Company's transfer agents.
Exhibit 21
List of Subsidiaries of INAMED Corp.
Biodermis Corporation
Biodermis Ltd.
Bioenterics Corporation
Bioenterics Latin America S.A. de C.V.
Bioenterics Ltd.
Bioplexus Corporation
Bioplexus Ltd.
Chamfield Ltd.
CUI Corporation
Flowmatrix Corporation
Inamed Development Company
Inamed do Brasil, LTDA
Inamed International Corp.
Inamed Japan
Inamed Medical Group
McGhan LTD.
McGhan Medical Asia Pacific
McGhan Medical Benelux B.V.
McGhan Medical B.V.
McGhan Medical B.V.B.A.
McGhan Medical Corporation
McGhan Medical GmbH
McGhan Medical Ltd.
McGhan Medical Mexico, S.A. de C.V.
McGhan Medical, S.A.
McGhan Medical S.A.R.L.
McGhan Medical S.R.L.
Medisyn Technologies Corporation
Medisyn Technologies Ltd.