Filed Pursuant to Rule 424(b)(4)
Registration No. 333-88417
PROSPECTUS
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3,000,000 SHARES
[INAMED LOGO]
COMMON STOCK
Inamed Corporation is offering 2,500,000 shares of its common stock and the
selling stockholders identified in this prospectus are offering 500,000 shares
of our common stock. We will not receive any of the proceeds from the sale of
shares of our common stock by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"IMDC." On November 16, 1999, the last reported sale price of the common stock
was $29.50 per share. See "Price Range of Common Stock."
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PER SHARE TOTAL
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Public offering price....................................... $29.00 $87,000,000
Underwriting discounts and commissions...................... $ 1.90 $ 5,700,000
Proceeds to Inamed, before expenses......................... $27.10 $67,750,000
Proceeds to selling stockholders............................ $27.10 $13,550,000
Inamed has granted the underwriters an option for a period of 30 days to
purchase up to 450,000 additional shares of common stock. The underwriters
expect to deliver the shares against payment on November 22, 1999.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Joint Book-Running Managers
HAMBRECHT & QUIST BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
November 17, 1999
INAMED LOGO
[INSIDE FRONT COVER OF PROSPECTUS]
PRINCIPAL PRODUCTS
BREAST IMPLANTS AND RELATED PRODUCTS
PICTURE OF SALINE-FILLED ANATOMICAL TEXTURED BREAST IMPLANT
PICTURE OF TISSUE EXPANDER
PICTURE OF COLLAGEN-BASED FACIAL IMPLANTS
TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 14
Our Company................................................. 15
Use of Proceeds............................................. 18
Price Range of Common Stock................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Selected Historical Financial Data.......................... 21
Pro Forma Consolidated Financial Information................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 36
Management.................................................. 55
Principal and Selling Stockholders.......................... 58
Description of Capital Stock................................ 60
Description of Certain Indebtedness......................... 66
U.S. Tax Considerations Applicable to Non-U.S. Holders of
the Common Stock.......................................... 68
Underwriting................................................ 70
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
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BioCell(R), ConfidencePlus(TM), Contigen(R)Bard, LAP-BAND(R), McGhan(R),
MicroCell(R), SoftForm(R), Zyderm(R) and Zyplast(R) are registered or pending
trademarks of Inamed Corporation or its subsidiaries.
Collagen licenses the trademark Hylaform(R) from Biomatrix, Inc.
Other trademarks used in this prospectus are the property of their
respective holders.
i
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that you should consider before investing in
our common stock. You should carefully read this entire prospectus, including
"Risk Factors," the financial statements and the documents to which we have
referred you before making an investment decision. In this prospectus, "we,"
"us" and "our" refer to Inamed Corporation and its subsidiaries. Unless we
indicate otherwise:
- industry data contained in this prospectus is derived from publicly
available sources, including medical and industry publications, which
we have not independently verified;
- the information we present in this prospectus assumes no exercise of
the underwriters' over-allotment option; and
- all information relating to us in this prospectus after September 1,
1999 gives effect to our acquisition of Collagen Aesthetics, Inc.
INAMED CORPORATION
We are a global surgical and medical device company engaged in the
development, manufacturing and marketing of medical devices for the plastic,
reconstructive and aesthetic surgery markets. We sell a variety of lifestyle
products used to make people look younger and more attractive, including breast
implants for cosmetic augmentation and collagen-based facial implants to correct
facial wrinkles and scars and to enhance lip definition. We also sell products
to address women's health issues, including breast implants for reconstructive
surgery following radical mastectomies, and devices to treat severe obesity.
We recently acquired Collagen Aesthetics, Inc., which designs, develops,
manufactures and markets products that treat aging or defective human tissue.
Collagen's flagship products, Zyderm(R) and Zyplast(R) collagen-based facial
implants, are used by plastic surgeons, dermatologists and other physicians in
aesthetic applications for the correction of facial wrinkles due to aging, and
scars. The Collagen acquisition broadened our portfolio of products to address
the needs of plastic surgeons and other aesthetic practitioners and is expected
to help us take advantage of our existing sales and marketing infrastructure.
For the first nine months of 1999, we had net sales of $123.7 million and
operating income of $30.3 million. For the same period, after giving effect to
the Collagen acquisition as if it had occurred at the beginning of the period,
but excluding any anticipated savings from integrating Collagen's operations
into ours, we would have had pro forma net sales of $181.9 million and pro forma
operating income of $36.8 million. In addition, our pro forma net sales would
have been 56% from plastic surgery products, including breast implants and
tissue expanders, 30% from collagen-based facial implant products and 6% from
obesity products.
Our principal executive offices are located at 5540 Ekwill Street, Suite D,
Santa Barbara, California 93111 and our telephone number is (805) 692-5400. We
maintain websites at www.inamed.com and www.collagen.com. Information contained
in these websites does not constitute, and shall not be deemed to constitute,
part of this prospectus.
1
THE OFFERING
Common stock offered by Inamed............. 2,500,000 shares
Common stock offered by selling
stockholders............................... 500,000 shares
Common stock to be outstanding after the
offering................................... 19,728,684 shares(1)
Use of proceeds to Inamed.................. To repay outstanding borrowings
under our bridge loan facility.
See "Use of Proceeds."
Nasdaq National Market symbol.............. IMDC
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(1) Excludes an aggregate of 3,870,546 shares of common stock issuable upon the
exercise of options outstanding at November 12, 1999 at exercise prices
ranging between $1.45 and $16.88 (with a weighted average exercise price of
$6.62), and warrants at exercise prices ranging between $3.53 and $24.75
(with a weighted average exercise price of $9.77). Also excludes shares of
common stock issuable upon the exercise of warrants if our bridge loan
facility is not repaid or refinanced at maturity. See "Description of
Certain Indebtedness."
2
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical financial data for our 1998, 1997 and 1996 fiscal
years are derived from the audited consolidated financial statements of Inamed
for the respective periods. The summary historical financial data for the nine
months ended September 30, 1999 and 1998 are derived from the unaudited
consolidated financial statements of Inamed for the respective periods, which
include the results of Collagen for the month of September 1999. The summary
balance sheet data at September 30, 1999 reflect the Collagen acquisition, which
occurred on September 1, 1999. In the opinion of our management, the unaudited
financial statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the results of
operations and financial position as of the date of and for the period
presented. You should read these summary data along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and the pro forma consolidated financial
information, and the related notes, included elsewhere in this prospectus.
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------
1999 1998 1998 1997 1996
-------- ------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................ $123,722 $99,109 $131,566 $ 106,381 $ 93,372
Gross profit............................. 87,125 63,890 83,612 68,738 58,077
Operating income (loss).................. 30,314 8,742 8,467(1) (3,577) (3,956)
Litigation settlement.................... -- -- -- (28,150) --
Income (loss) before income tax expense
(benefit) and extraordinary charges.... 25,090 2,164 5,341 (39,696) (8,165)
Income tax expense (benefit)............. -- 137 (8,432)(2) 1,881(3) 3,214(4)
Extraordinary charges.................... -- -- (1,800) -- --
Net income (loss)........................ $ 25,090 $ 2,027 $ 11,973 $ (41,577) $(11,379)
Net income (loss) per share of common
stock:
Basic................................ $1.74 $0.20 $1.15 $(4.97) $(1.46)
Diluted(5)........................... $1.39 $0.20 $0.92 $(4.97) $(1.46)
Weighted average common shares
outstanding (basic).................... 14,444 10,130 10,387 8,371 7,811
Weighted average common shares
outstanding (diluted).................. 18,063 10,130 14,185 8,371 7,811
DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency)................................ $ 3,378(6) $ (988) $ 6,460
Total assets................................................ 318,860 80,707 58,842
Bridge loans................................................ 155,000 -- --
Convertible and other long-term debt, net of current
installments.............................................. -- 27,767 23,574
Subordinated long-term debt, related party.................. -- -- 8,813
Stockholders' equity (deficiency)........................... 43,021 (15,625) (46,689)
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(1) Includes restructuring expense of $4,202.
(2) Reflects the recognition of an $8,000 deferred tax asset based on future
short-term income projections.
(3) Includes a provision of $1,000 for the conversion of foreign intercompany
accounts to equity.
(4) Includes the recording of a $2,006 valuation allowance on domestic deferred
tax assets.
(5) Had Inamed's pretax net income been taxed using an effective rate of 33%,
Inamed would have had fully diluted earnings per share of $0.93 for the nine
months ended September 30, 1999 and diluted earnings per share of $0.13 for
the nine months ended September 30, 1998.
(6) Working capital does not reflect receipt of an $8.2 million refund of prior
period taxes.
3
SUMMARY PRO FORMA FINANCIAL DATA
The summary unaudited pro forma data for the nine months ended September
30, 1999 have been derived from, and should be read in conjunction with, the
unaudited pro forma consolidated financial information included elsewhere in
this prospectus. The unaudited pro forma statement of operations data reflect
the Collagen acquisition as if it had occurred on January 1, 1998. The unaudited
pro forma as adjusted data reflect the issuance and sale of the shares of common
stock offered by us in this offering at an offering price of $29 per share and
the application of the net proceeds from this offering. The unaudited pro forma
condensed financial information may not be indicative of the financial position
and results of operations of Inamed that actually would have occurred had the
Collagen acquisition been in effect on the dates indicated or the financial
position and results of operations that may be obtained in the future.
You should read this summary data along with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements, Collagen's consolidated financial statements, the pro
forma consolidated financial information, and the related notes, included
elsewhere in this prospectus.
NINE MONTHS
ENDED
SEPTEMBER 30, 1999
INAMED COLLAGEN COLLAGEN --------------------------
NINE MONTHS EIGHT MONTHS ACQUISITION INAMED
ENDED ENDED PRO FORMA PRO FORMA PRO FORMA
SEPTEMBER 30, 1999 AUGUST 31, 1999 ADJUSTMENTS CONSOLIDATED AS ADJUSTED
------------------ --------------- ----------- ------------ -----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $123,722 $58,198 $ -- $181,920 $ 181,920
Cost of goods sold.............. 36,597 17,852 -- 54,449 54,449
-------- ------- ------- -------- -----------
Gross profit.................... 87,125 40,346 -- 127,471 127,471
-------- ------- ------- -------- -----------
Operating expenses.............. 56,742 29,817 -- 86,559 86,559
Amortization of goodwill........ 69 552 3,486(1) 4,107 4,107
-------- ------- ------- -------- -----------
Total operating
expenses............ 56,811 30,369 3,486 90,666 90,666
-------- ------- ------- -------- -----------
Operating income................ $ 30,314 $ 9,977 $(3,486) $ 36,805 $ 36,805
======== ======= ======= ======== ===========
SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................. $ 3,378(2) $ 3,378(2)
Total assets................................................ 318,860 318,860
Bridge loans................................................ 155,000 88,450
Stockholders' equity........................................ 43,021 109,571
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(1) To record the amortization of $140,000 of goodwill over its estimated useful
life of 30 years. We are currently in the process of having an independent
appraisal performed. Based upon the results of the appraisal, the amount
allocated to goodwill based on management's estimates may change and the
amortization period may be shorter, which may have a material impact on the
pro forma financial statements.
(2) Working capital does not reflect receipt of an $8.2 million refund of prior
period taxes.
4
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
OUR FUTURE PROFITABILITY DEPENDS ON THE SUCCESS OF OUR PRINCIPAL PRODUCTS
Sales of our breast implant, tissue expander and collagen-based facial
implant products accounted for approximately 86% of our pro forma net sales for
the nine months ended September 30, 1999, after giving effect to the Collagen
acquisition. We expect our revenues to continue to be based primarily on sales
of these principal products. Adverse rulings by regulatory authorities, product
liability lawsuits, introduction of competitive products by third parties, the
loss of market acceptance or other adverse publicity for these principal
products may significantly and adversely affect our sales of these products and,
as a result, would adversely affect our business, financial condition and
results of operations.
WE MAY HAVE DIFFICULTY INTEGRATING COLLAGEN'S OPERATIONS AND REALIZING BENEFITS
FROM THE ACQUISITION
Our acquisition of Collagen requires us to merge the operations of two
companies that previously operated independently. We may not be able to
integrate Collagen's operations without encountering difficulties or
experiencing the loss of key employees or potential customers, and the benefits
expected from the integration may not be realized. If our customers view the
acquisition as a negative development, we may lose revenues and market share. In
addition, we must integrate Collagen's domestic operations into our domestic
operations and its international operations into our international operations,
which will require a significant amount of our management's attention. We cannot
assure you that we will be successful in our integration efforts.
OUR RECENT ACQUISITION OF COLLAGEN MAKES EVALUATING OUR OPERATING RESULTS
DIFFICULT
Our historical results of operations give effect to the Collagen
acquisition from September 1, 1999 but otherwise do not give effect to the
operations of Collagen. The pro forma statements of operations included in this
prospectus are based primarily on the separate pre-acquisition financial reports
of Inamed and Collagen. Consequently, our historical results of operations and
pro forma financial information may not give you an accurate indication of how
we, together with Collagen, will perform in the future.
WE HAVE BEEN PARTY TO SIGNIFICANT BREAST IMPLANT LITIGATION IN THE PAST AND MAY
BE PARTY TO THIS TYPE OF LITIGATION IN THE FUTURE
We face an inherent business risk of exposure to product liability claims
alleging that the use of our technology or products has resulted in adverse
health effects. The risks of litigation exist even with respect to products that
have received or in the future may receive regulatory approval for commercial
sale. If we are unable to avoid significant product liability claims, our
business could be materially harmed. In particular, the manufacture and sale of
breast implant products entails significant risk of product liability claims due
to potential allegations of possible disease transmission and other health
factors, rupture or other product failure and product recalls. The manufacture
and sale of collagen-based implant products also entails risks of product
liability claims. In the past, we were party to and settled claims related to
our breast implant products. In February 1999, we received final judicial
approval of a mandatory non-opt-out settlement relating to a class action
lawsuit arising from our silicone gel-filled and saline-filled breast implant
products that were implanted before June 1, 1993. Under the settlement, we paid
an aggregate amount of $31.5 million to a court appointed escrow agent on behalf
of the plaintiff class and $3.0 million to resolve a significant indemnity claim
by Minnesota Mining and Manufacturing Company (3M). This settlement does not
apply to our breast implant products, predominantly saline-filled implants, that
were
5
implanted after June 1, 1993 or to silicone gel-filled and saline-filled breast
implants sold outside the U.S. Although the time to take an appeal from the
judicial order approving the settlement has passed, we cannot assure you that
this settlement will not be collaterally attacked in state court for lack of
jurisdiction or constitutionally inadequate class notice or representation. We
are not aware of any pending or threatened collateral attacks to the settlement
on any grounds.
We also are currently engaged in ongoing breast implant litigation, which
we are defending in the normal course. As a result of our acquisition of
Collagen, we face exposure to claims regarding Trilucent(R) breast implant
products which were distributed in Europe between January 1996 and March 1999,
and which subsequently have been discontinued. Although we have reserved a total
of $11.5 million as part of our discontinuation of the Trilucent(R) breast
implant product in 1999, this reserve may be inadequate to cover all potential
related liabilities.
OUR PRODUCTS EXPOSE US TO LIABILITIES THAT MAY NOT BE ADEQUATELY COVERED BY
INSURANCE AND OUR FINANCIAL RESULTS MAY SUFFER
In addition to the risks we face from product liability claims, we are
subject to the inherent risk that a government authority or third party may
require us to recall one or more of our products. We have liability insurance
that would cover a claim relating to the use or recall of our products under a
limited number of circumstances. In addition, a product liability claim against
us could exceed our insurance coverage. In the event liability insurance would
not sufficiently cover a product liability claim or recall, these events could
have a material adverse effect on our business, financial condition and results
of operations. Adequate product liability insurance may not continue to be
available, either at existing or increased levels of coverage, on commercially
reasonable terms or at all. Even if a claim is covered by insurance, the costs
of defending a product liability, negligence or other action, and the assessment
of damages in excess of insurance coverage, could entail significant expense and
damage our reputation. We cannot assure you that our insurance will be broad
enough to protect us against all future claims, which could have a material
adverse effect on our business, financial condition and results of operations.
Further, liability claims relating to the use of our products or a product
recall could hurt our ability to obtain or maintain regulatory approvals for our
products.
CONCERNS ABOUT THE SAFETY AND EFFICACY OF OUR PRODUCTS AND ANY NEGATIVE
PUBLICITY COULD HARM OUR FINANCIAL RESULTS
Physicians and potential patients may have a number of concerns about the
safety and efficacy of our products, primarily our breast implant products. The
responses of potential patients, physicians, the news media, legislative and
regulatory investigatory bodies and others to information about possible
complications or alleged complications of our products could result in negative
publicity and could materially reduce market acceptance of our products. These
responses or investigations, and potential resulting negative publicity, may
have a material adverse effect on our business, financial condition, results of
operations or the market price of our stock. In addition, significant negative
publicity could result in an increased number of product liability claims
against us.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL FLUCTUATIONS AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS
Our quarterly operating results may vary significantly due to a combination
of factors, many of which are beyond our control. These factors include:
- demand for our products, which historically has been the highest in
the second quarter;
- our ability to meet the demand for our products;
- increased competition;
- the number, timing and significance of new products and product
introductions and enhancements by us and our competitors;
6
- our ability to develop, introduce and market new and enhanced versions
of our products on a timely basis;
- changes in pricing policies by us and our competitors;
- the timing of significant orders and shipments; and
- general economic factors.
Our recent acquisition of Collagen may make it more difficult for us to
evaluate and predict our future operating performance and we cannot assure you
that our operating performance will continue to improve. Our expense levels are
based, in part, on our expectations of future revenue levels. If revenue levels
are below expectations, operating results are likely to be materially adversely
affected. In particular, because only a small portion of our expenses varies
with revenue in the short term, net income may be disproportionately affected by
a reduction in revenue. Due to the foregoing factors, quarterly revenue and
operating results have been and will continue to be difficult to forecast.
Based upon all of the foregoing, we believe that quarterly revenues and
operating results may vary significantly in the future and that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. We cannot assure
you that our revenue will increase or be sustained in future periods or that we
will be profitable in any future period. Any shortfall in revenue or earnings
from levels expected by securities or industry analysts could have an immediate
and significant adverse effect on the trading price of our common stock in any
given period.
CHANGES IN THE ECONOMY AND CONSUMER SPENDING COULD ADVERSELY AFFECT OUR ABILITY
TO SELL OUR PRODUCTS
Breast augmentations and collagen-based implants and injections are
elective procedures and are expensive. Other than U.S. federally mandated
insurance reimbursement for post-mastectomy reconstructive surgery, breast
augmentations and other cosmetic procedures are not typically covered by
insurance. A significant adverse change in the economy may cause consumers to
reassess their spending choices and reduce the demand for cosmetic surgery. This
shift could have an adverse effect on our ability to sell our products and could
materially harm our business.
IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS AND
TECHNOLOGIES, WE MAY EXPERIENCE A DECREASE IN DEMAND FOR OUR PRODUCTS OR OUR
PRODUCTS COULD BECOME OBSOLETE, AND OUR BUSINESS WOULD SUFFER
We believe that a crucial factor in the success of a new product is
obtaining the applicable regulatory approvals and marketing the new product
quickly to respond to new user needs or advances in medical technologies,
without compromising product quality. We are continually engaged in product
development and improvement programs. We cannot assure you that we will be
successful in enhancing existing products or developing new products or
technologies that will timely achieve regulatory approval or receive market
acceptance. To the extent that any of our competitors' products are perceived to
be superior to our products or are marketed sooner than ours, demand for our
products could decrease or our products could be rendered obsolete. If one or
more competing products or technologies achieve broader market acceptance or
render our products obsolete, we may lose customers and revenues which could
have a material adverse effect on our business, financial condition and results
of operations.
WE MAY NOT BE ABLE TO MEET UNANTICIPATED DEMAND FOR OUR PRODUCTS, WHICH COULD
CAUSE US TO LOSE REVENUES AND CUSTOMERS
Since the manufacturing processes for many of our products involve long
lead times, specialized production equipment and a significant degree of human
labor, if demand for our products increases in excess of our capacity, we may
not be able to meet this demand. If we cannot meet the demand for our products,
we may lose revenues and customers, which could have a material adverse effect
on our business, financial condition and results of operations.
7
WE DEPEND ON A SINGLE SUPPLIER FOR OUR SILICONE RAW MATERIALS AND THE LOSS OF
THIS SUPPLIER COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE MANY OF OUR
PRODUCTS
We currently rely on a single supplier for silicone raw materials used in
many of our products. Although we have an agreement with this supplier to
transfer the necessary formulations to us in the event that this supplier cannot
meet our requirements, we cannot assure you that we will be able to timely
produce a sufficient amount of quality silicone raw materials, if at all. In the
event of a disruption, we currently anticipate that we could require a period of
approximately two months before our silicone production facility could become
operational. In addition, we may not be able to quickly establish additional or
replacement suppliers to meet these needs. If we cannot produce or find
replacement suppliers for these materials, our ability to produce our products
could be impaired and we could lose customers and market share. Accordingly, the
loss of this supplier could have a material adverse effect on our business,
financial condition and results of operations.
OUR ABILITY TO SELL BOVINE COLLAGEN-BASED PRODUCTS COULD BE ADVERSELY AFFECTED
IF WE EXPERIENCE PROBLEMS WITH THE CLOSED HERD OF DOMESTIC CATTLE FROM WHICH WE
DERIVE THESE PRODUCTS
We rely on a closed herd of domestic cattle that is kept apart from all
other cattle for the production of our bovine collagen-based products. In the
event of any material diminution in the size of our herd for any reason,
including accident or disease, we would have a limited ability to quickly
increase the supply of acceptable cattle and our bovine-based products from a
similarly segregated source. Further, any stray cattle that enter our herd could
infect our cattle and could affect the purity of our cattle through mating. The
diminution in size or infection of our cattle could have a material adverse
effect on our ability to sell bovine collagen-based products and, as a result, a
material adverse effect on our business, financial condition and results of
operations.
COMPETITION MAY ERODE OUR MARKET SHARE AND REDUCE OUR PROFITABILITY
The markets for many of our products are competitive. In addition, some of
our competitors are larger or may have greater resources to devote to new
product development, clinical trials, selling and marketing. Customers may
perceive these new products to be more effective, technologically advanced,
clinically safer or otherwise more appealing, which may cause our products to be
rendered noncompetitive or obsolete. In addition, our competitors may succeed in
obtaining regulatory approvals for competing products faster than us. This would
permit our competitors to introduce their competing products to the market
before us and as a result we may lose market share and experience reduced
margins. If we do not effectively compete with our competitors, our
profitability may be materially affected. We cannot assure you that we will be
able to effectively compete in the future.
OUR INTERNATIONAL BUSINESS EXPOSES US TO A NUMBER OF RISKS
Approximately 37% of our pro forma net sales for the nine months ended
September 30, 1999, after giving effect to the Collagen acquisition as if it had
occurred at the beginning of the period, were derived from international
operations. Accordingly, any material decrease in foreign sales may have a
material adverse effect on our business, financial condition and results of
operations. Most of our international sales are denominated in U.S. dollars,
euros or yen. Depreciation or devaluation of the local currencies of countries
where we sell our products may result in our products becoming more expensive in
local currency terms, thus reducing demand. We manufacture some of our breast
implant products in Ireland and plan to begin manufacturing some breast implant
products in Costa Rica in 2000. Therefore, some of our operating expenses are
denominated in currencies other than the U.S. dollar. We cannot assure you that
we will not experience unfavorable currency fluctuation effects in future
periods, which could have an adverse effect on our operating results. Our
operations and financial results also may be significantly affected by other
international factors, including:
- the imposition of additional foreign government controls or
regulations on medical devices;
- new export license requirements;
8
- political instability, inflation or negative economic growth in our
target markets;
- trade restrictions;
- changes in tariffs; and
- difficulties in managing international operations.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS
The production and marketing of our products and our ongoing research and
development, preclinical testing and clinical trial activities are subject to
extensive regulation and review by numerous governmental authorities both in the
U.S. and abroad. Most of the medical devices we develop must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
administered by the Food and Drug Administration under the Food, Drug, and
Cosmetic Act and comparable foreign authorities before they can be marketed.
Unless an exemption applies, each medical device that we wish to market in the
U.S. must receive either a "510(k)" clearance or a premarket approval (PMA) from
the FDA. In order to be commercially distributed throughout the European
Community, a medical device must bear a CE conformity marking, indicating that
it conforms with the essential requirements of the applicable European Medical
Devices Directive. These regulations govern the testing, marketing and
registration of new medical devices, in addition to regulating manufacturing
practices, labeling and record keeping procedures. This process makes it longer,
harder and more costly to bring our products to market, and we cannot assure you
that any of our products will be approved. If we do not comply with applicable
regulatory requirements it can result in warning letters, non-approval,
suspensions of regulatory approvals, civil penalties and criminal fines, product
seizures and recalls, operating restrictions, injunctions and criminal
prosecution.
Delays in or rejection of FDA approval of our products may be encountered
due to, among other reasons, regulatory review of each new device application or
product license application we submit, as well as changes in regulatory policy
during the period of product development both in the U.S. and abroad. Even if
regulatory approval of a product is granted, this approval may entail
limitations on uses for which the product may be labeled and promoted. Further,
for a marketed product, its manufacturer and the facilities in which the product
is manufactured are subject to continual review and inspection. Later discovery
of previously unknown problems with a product, manufacturer or facility may
result in restrictions on the product, manufacturer or facility, including
withdrawal of the product from the market or other enforcement actions.
WE MAY FAIL TO MAINTAIN THE REGULATORY APPROVAL NECESSARY TO CONTINUE LEGALLY
MARKETING OUR SALINE-FILLED BREAST IMPLANT PRODUCT
Our saline-filled breast implant product has been marketed in the U.S.
based upon substantial equivalence to other saline-filled breast implant
products that were in commercial distribution before May 28, 1976. In mid-August
1999, the FDA issued regulations that will eliminate this "grandfather" status
and require all manufacturers of saline-filled breast implant products to obtain
PMA approval in order to enter or remain on the market. These regulations are
known as a "call for PMA applications."
Pursuant to the call for PMA applications, all manufacturers of
saline-filled breast implant products now in commercial distribution must have a
PMA application accepted for filing by November 17, 1999. The FDA only accepts a
PMA application for filing based upon a determination that it is sufficiently
complete to permit substantive review. Manufacturers who successfully file PMA
applications by the deadline may continue marketing their saline-filled breast
implant products during the review period. Manufacturers who do not meet the
deadline will be required to stop commercially distributing their saline-filled
implant products until after they obtain PMA approval.
We submitted a PMA application for our saline-filled breast implant product
on November 16, 1999. The FDA has 45 days in which to notify us whether our PMA
application has been accepted for filing. If the FDA declines to accept our
application, the FDA could require us to cease marketing our saline-filled
breast implant product during the agency's review of our PMA application. In
addition, the FDA
9
ultimately could find our PMA application not approvable, which would preclude
us from commercial distribution of this product in the U.S. Our failure to
obtain approval of our PMA application would have a material adverse effect on
our business, financial condition and results of operations.
FUTURE LEGISLATION OR REGULATIONS RELATING TO US OR OUR PRODUCTS COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS
If any national healthcare reform or other legislation or regulations are
passed that impose limits on the number or type of medical procedures that may
be performed or that have the effect of restricting a physician's ability to
select specific products for use in his or her procedures, it could have a
material adverse effect on the demand for our products. In the U.S., there have
been, and we expect that there will continue to be, a number of federal and
state legislative proposals and regulations to implement greater governmental
control on the healthcare industry. These proposals create uncertainty as to the
future of our industry and may have a material adverse effect on our ability to
raise capital or to form collaborations, and the enactment of these reforms
could have a material adverse effect on our business, financial condition and
results of operations. In a number of foreign markets, the pricing and
profitability of healthcare products are subject to governmental influence or
control. In addition, legislation or regulations that impose restrictions on the
price that may be charged for healthcare products or medical devices may
adversely affect our business, financial condition and results of operations.
From time to time, legislation or regulatory proposals are proposed and
discussed which could alter the review and approval process relating to medical
device products.
IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL
SUFFER
We are dependent on a limited number of key management, technical and sales
personnel, the loss of any one of which could have a material adverse effect on
our business, financial condition and results of operations. Our future success
will depend in part upon our ability to attract and retain highly qualified
personnel. We compete for these personnel with other companies, academic
institutions, government entities and other organizations. We cannot assure you
that we will be successful in hiring or retaining qualified personnel. Our
inability to attract and retain key employees could have a material adverse
effect on our business, financial condition and results of operations.
WE USE PRODUCTS IN THE MANUFACTURING PROCESS WHICH MAY BE HAZARDOUS TO THE
ENVIRONMENT IF NOT HANDLED PROPERLY, WHICH EXPOSES US TO ADDITIONAL LIABILITY
We are subject to foreign and domestic laws and regulations relating to the
protection of the environment. Our business involves the handling, storage and
disposal of materials that are classified as hazardous. Although our safety
procedures for handling, storage and disposal of these materials are designed to
comply with the standards prescribed by applicable laws and regulations, we
cannot assure you that we will not be held liable for any damages that result,
and any related liability could have a material adverse effect on our business,
financial condition and results of operations. Further, we cannot assure you
that the cost of complying with these laws and regulations will not increase
materially in the future.
WE ARE UNCERTAIN ABOUT THE STATUS OF SOME OF OUR PATENTS AND PROPRIETARY
TECHNOLOGY AND ARE INVOLVED IN PATENT LITIGATION WHICH, IF DETERMINED ADVERSELY
TO US, COULD HARM OUR RESULTS OF OPERATIONS
Our success will depend, in part, on our ability and our licensors' ability
to obtain, assert and defend our patents, protect our trade secrets and operate
without infringing the proprietary rights of others. We protect our proprietary
technology through a combination of confidentiality agreements and patents. We
cannot assure you that our owned and licensed patents, products and technology
will prove to be enforceable or that our products and technology do not infringe
the patents or proprietary rights of others. We could also incur substantial
costs in seeking enforcement of our proprietary rights against infringement or
in defending ourselves against claims of infringement by others. Since much of
our technology consists of trade secrets and unpatented know-how, we are exposed
to the risk that others will independently
10
develop similar or superior products or technologies or that our trade secrets
or know-how will become known to others.
We license some of our products and technology under patents owned by
others. In 1998, we reviewed our portfolio of patents and licenses and
determined in several situations that licensed patents either were invalid, were
unenforceable, were not being utilized or that the licensor had breached its
obligations to us. Accordingly, we ceased paying several million dollars in
annual royalties under several license agreements. We are currently engaged in
litigation with various former licensors over the recovery of past royalties
that were paid and our potential future obligations. We are also engaged in an
arbitration proceeding related to human-based collagen patents and the recovery
of damages alleged to be due in respect of a supply contract. If these
proceedings are determined against us, we may be liable for a significant amount
of past unpaid and potential future royalty or other contract payments, which
could include a significant amount of damages, interest and enhanced damages if
we are found to have willfully infringed the patents after ceasing royalty
payments, and ultimately may be prohibited from using the patented technology.
See "Business -- Legal Proceedings -- Patent and License Litigation."
WE MAY HAVE DIFFICULTY REFINANCING OUR BRIDGE LOAN FACILITY
The terms of our bridge loan facility impose significant financial burdens
on us, including a periodic increase in the interest rate and the release from
escrow of warrants to purchase our common stock, if we do not refinance this
indebtedness in full before June 1, 2000. Although we intend to refinance our
bridge loan facility with a new bank credit facility, we cannot assure you that
we will be successful in obtaining this credit facility on satisfactory terms,
or at all. See "Description of Certain Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." If we do not obtain this new
bank credit facility, we will search for other alternatives to refinance the
balance remaining under the bridge loan facility after the application of the
net proceeds from this offering. Our ability to obtain new financing will depend
on a number of factors, including market conditions, our operating performance
and investor interest. These factors may make the timing, amount, terms and
conditions of any financing uncertain or unattractive. Our inability to
refinance the bridge loan facility on acceptable terms on or prior to May 31,
2000 could have an adverse effect on our interest expense, results of operations
and earnings per share.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
Year 2000 problems could require us to incur delays and unanticipated
expenses. We have conducted a review to identify which of our computer and other
business operating systems will be affected by the Year 2000 problem and have
developed a project plan and schedule to resolve 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. We believe that
our business systems, including Collagen's, are currently Year 2000 compliant in
all material respects. However, our failure to correct a material Year 2000
problem could have a material adverse effect on our business, results of
operations and financial condition. We may experience operations difficulties
because of undetected errors or defects in the technology we use in our internal
systems.
We are also engaged in communications with our significant business
partners, suppliers and customers to determine the extent to which we are
vulnerable to these third parties' failure to address their own Year 2000
issues. We are seeking assurances from our significant business partners,
suppliers and customers that their computer applications will not fail due to
Year 2000 problems. Nevertheless, we do not control, and can give no assurances
as to the substance or success of their Year 2000 compliance efforts. If our
significant business partners, suppliers and customers fail to address their own
Year 2000 issues, our financial position or results of operations may be
materially and adversely effected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
RISKS RELATED TO THIS OFFERING
HISTORICALLY, OUR STOCK PRICE HAS BEEN VOLATILE AND OUR TRADING VOLUME HAS BEEN
LOW
The market prices for securities of medical device companies have
historically been highly volatile. Broad market fluctuations may have a material
adverse effect on the market price of our common stock. The trading price of our
common stock has been, and may be, subject to wide fluctuations in response to a
number of factors, many of which are beyond our control. These factors include:
- quarter-to-quarter variations in our operating results;
- the results of testing, technological innovations or new commercial
products by us or our competitors;
- governmental regulations, rules and orders;
- general conditions in the healthcare, medical device or plastic
surgery industries;
- changes in our earnings estimates by securities analysts;
- developments concerning patents or other proprietary rights; and
- litigation or public concern about the safety of our products.
Historically, the daily trading volume of our common stock has been
relatively low. On September 30, 1999, our common stock began trading on the
Nasdaq National Market System. We cannot assure you that an active public market
for our common stock will develop or be sustained after this offering or that
the average trading volume will increase.
AS A RESULT OF THEIR OWNERSHIP OF OUR COMMON STOCK, OUR EXECUTIVE OFFICERS,
DIRECTORS AND AFFILIATES MAY EXERCISE SIGNIFICANT INFLUENCE OVER OUR CORPORATE
DECISIONS CONTRARY TO THE INTERESTS OF OTHER STOCKHOLDERS
Our executive officers, directors and affiliates currently beneficially own
approximately 38% of our common stock and after the offering will beneficially
own approximately 34% of our common stock. Accordingly, these stockholders will
have significant influence with respect to any corporate transaction or other
matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets. Third
parties may be discouraged from making a bid or tender offer to acquire us
because of this concentration of ownership.
OUR CERTIFICATE OF INCORPORATION, BY-LAWS, RIGHTS PLAN AND DELAWARE LAW MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE BENEFIT TO OUR
STOCKHOLDERS
Our certificate of incorporation, bylaws and Delaware law include
provisions that may have the effect of discouraging a third party from pursuing
a non-negotiated takeover of our company and preventing specific changes of
control. In addition, our board of directors has adopted a stockholders' rights
plan providing for discount purchase rights to some of our stockholders upon
some acquisitions of our common stock. The exercise of these rights is intended
to inhibit specific changes of control of Inamed. In addition, we have entered
into agreements with our senior executive officers under which they could
receive substantial payments in connection with a change of control of our
company.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS OR EMPLOYEES MAY
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
There will be 19,728,684 shares of our common stock outstanding immediately
following this offering, assuming no exercise of the underwriters'
over-allotment option. As of November 12, 1999, 3,870,546 shares of our common
stock were issuable upon the exercise of outstanding options and warrants. Once
vested, these options and warrants generally may be exercised at any time. In
addition, in connection with the issuance of debt under our bridge loan
facility, we placed in escrow warrants representing in the aggregate the right
to acquire 10% of our fully-diluted common stock after giving effect to the
exercise of
12
those warrants and all other outstanding warrants, options and other equity
equivalents of Inamed. Unless we repay or refinance our bridge loan on or prior
to May 31, 2000, these warrants will be released from escrow as of June 1, 2000.
See "Description of Certain Indebtedness." Our executive officers, directors and
some of our principal stockholders, including selling stockholders, have agreed
that, with some exceptions, they will not, directly or indirectly, without the
prior written consent of Hambrecht & Quist LLC on behalf of the underwriters,
offer, sell, or otherwise dispose of any shares of our common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock owned by them during the 90-day period
following the date of this prospectus. Hambrecht & Quist LLC, on behalf of the
underwriters, may in its sole discretion, release all or any portion of the
shares subject to the lock up agreements. Many of our outstanding warrants
provide for anti-dilution adjustment upon the occurrence of certain events,
including certain issuances by us of shares of common stock, or warrants or
other rights to purchase common stock, for consideration that is, or at an
exercise price that is, less than the current market price of our common stock
(defined in these warrants as the daily volume weighted average sale price per
share of our common stock for the 20 business days ending five days before the
date of determination). The issuance or sale of a significant number of shares
of our capital stock, whether in connection with the refinancing of our bridge
loan facility, the exercise of a significant number of outstanding options or
warrants, the possible operation of these anti-dilution provisions in some of
our warrants or otherwise, could dilute the percentage interest of our other
stockholders now or in the future or materially adversely affect the market
price of our common stock. See "Description of Capital Stock."
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained or incorporated by reference in this prospectus
that are not historical facts are "forward-looking statements," as that term is
defined in the Private Securities Litigation Reform Act of 1995. Those
statements include all discussions of strategy as well as statements that
contain forward-looking expressions like "believes," "estimates," "expects,"
"intends," "may," "will," "should," or "anticipates" or the negative forms of
these expressions. In addition, from time to time, we or our representatives
have made or may make forward-looking statements, orally or in writing.
Furthermore, forward-looking statements may be included in our filings with the
Securities and Exchange Commission as well as in press releases or oral
presentations made by or with the approval of one of our authorized executive
officers.
We caution you to bear in mind that forward-looking statements, by their
very nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this prospectus are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations are disclosed in this
prospectus, including, without limitation, under the caption "Risk Factors."
These factors include, but are not limited to, the following:
- the timing and results of testing, clinical studies, technological
innovations and new product introduction;
- the clinical efficacy of and market demand for products;
- the achievement of or failure to achieve milestones, including
milestones relating to the integration of our recently acquired
subsidiary, Collagen;
- changes in the sources of, nature of and costs of raw materials,
labor and employee benefits;
- actions or delays by the FDA and other regulatory authorities;
- changes in FDA and other governmental regulations, rules and orders;
- developments concerning patents, licenses, trademarks or other
proprietary intellectual property and rights;
- product liability litigation and adequacy of reserves and insurance
coverage;
- development and rate of growth of new markets;
- general market conditions, currency fluctuations, competition and
pricing in domestic and international markets; and
- unfavorable publicity or public concern about us or our subsidiaries
or the safety of our products.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
these factors and the cautionary statements contained throughout this
prospectus.
14
OUR COMPANY
OVERVIEW OF OUR COMPANY
Our predecessor, McGhan Medical Corporation, was incorporated in 1974 and
was a manufacturer of silicone implant products for plastic and reconstructive
surgery. In 1977, that business was sold to Minnesota Mining and Manufacturing
Company (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 First American Corporation, a Florida
corporation. In 1986, First American Corporation changed its name to Inamed
Corporation. In December 1998, Inamed changed its state of incorporation to
Delaware.
RECENT DEVELOPMENTS
New Senior Management. On January 23, 1998, we announced the hiring of
Richard G. Babbitt as our President and Chief Executive Officer, and Ilan K.
Reich as our Executive Vice President. At that time, those officers were also
elected to our Board of Directors. On February 11, 1998, we announced the
resignation of Donald K. McGhan from his executive and board positions and the
election of Richard G. Babbitt as our Chairman. Also at that time, in
recognition of Donald K. McGhan's past contributions, we gave him the title of
Chairman Emeritus. On June 24, 1998, Jim J. McGhan, Donald K. McGhan's son and
then the Chief Operating Officer of Inamed, was terminated from his employment
with us. At a special meeting of stockholders held on December 21, 1998, Jim J.
McGhan ceased to serve as a member of our 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.
In the fourth quarter of 1998 and in the second quarter of 1999, our senior
management team was expanded to include John P. Strohmeyer as Vice President,
Manufacturing, Michael J. Doty as Senior Vice President and Chief Financial
Officer and David E. Bamberger as Senior Vice President, Secretary and General
Counsel.
Breast Implant Litigation. In 1992, the FDA declared a moratorium on
silicone gel-filled implants, generating a tide of litigation against all U.S.
breast implant manufacturers including Inamed subsidiaries McGhan Medical and
Cox-Uphoff International. Between 1992 and 1998, we were named as a defendant or
co-defendant in thousands of lawsuits and other claims alleging injurious
exposure to our breast implant products. On June 2, 1998, federal Judge Sam C.
Pointer, Jr. gave preliminary approval of the settlement agreements with the
plaintiffs' class settlement counsel and 3M. Under these agreements, we agreed
to pay an aggregate of $31.5 million to settle all claims arising from our
breast implant products, both silicone gel-filled and saline-filled, which were
implanted before June 1, 1993 and to pay an initial $3.0 million to resolve a
significant indemnity claim by 3M. The settlement agreement with the plaintiff
class was structured as a mandatory limited fund, non-opt-out class action
settlement covering Inamed and its subsidiaries. In September 1998, we made our
initial payment of $3.0 million under the settlement agreement to the court
appointed escrow agent on behalf of the plaintiff class. 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.
On May 10, 1999, we announced that we had made our final payment of all of
the monies owed to the court-appointed escrow agent on behalf of the plaintiff
class in the mandatory class action settlement of this breast implant
litigation. The payment was $29.9 million in cash, and included $25.5 million as
full payment of the 6% promissory note which was issued in June 1998 at the time
the settlement received preliminary approval, $1.4 million of accrued interest
on that note, and $3.0 million to repurchase the 426,323 shares of our common
stock which were also issued in June 1998 to the court-appointed escrow agent.
The funds came from our $31.1 million equity financing which was completed in
May 1999. In that financing, we issued 5.4 million new shares of our common
stock to existing warrantholders in exchange for $20.4 million in cash and the
surrender of $10.7 million of our 11% notes. We received an additional
15
$3.0 million from our noteholders and used those funds to purchase, on behalf of
our noteholders, the 426,323 shares of our common stock which were previously
issued to the court-appointed escrow agent. As a result of this payment, the
$30.0 million of liabilities relating to the settlement which was recorded on
our balance sheet at December 31, 1998 was eliminated. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Change of Independent Accountants; SEC Administrative Proceeding and
Settlement. In March 1998, Coopers & Lybrand LLP resigned as our independent
auditors and in April 1998 we retained BDO Seidman, LLP as our new independent
auditors. Coopers' reasons for resigning were set forth in our current report on
Form 8-K/A as filed on March 27, 1998, which is incorporated by reference in
this prospectus. The stated reasons included disagreements over various
related-party transactions, our failure to pay withholding taxes and other
matters that occurred under our prior management. Coopers resigned without
issuing audit reports on our financial statement for fiscal years 1996 and 1997
which was a factor in delaying the timely filing our Forms 10-K for those fiscal
years.
In 1998, under our new management, we addressed each of the matters
identified by Coopers in its resignation by, among other things, restating our
1996 earnings per share results from a $0.91 per share loss to a $1.46 per share
loss, and effectuating an equity-for-debt conversion with our former Chairman
and his affiliates on terms that compensated us for his related-party
transactions in 1996 and 1997.
In April 1998, following Coopers' resignation, the Commission commenced a
formal investigation into the matters raised by Coopers as disclosed in our
March 27, 1998 current report on Form 8-K/A. At that time, under our new
management, we cooperated in the Commission's investigation. On August 17, 1999,
as part of an administrative settlement with the Commission, without admitting
or denying the Commission's findings, we consented to the entry of a cease and
desist order as to future violations of securities laws. In that order, the
Commission noted that Inamed had replaced its senior management in the first
quarter of 1998 after the events that gave rise to the violations described in
the order had taken place. The order imposed no monetary penalties against us,
and the settlement ended the Commission's investigation against us.
Emphasis on Profitability. During 1998, our new senior management team
implemented a cost reduction program and streamlined our operations. This
program included:
- reducing overhead through an approximate 10% worldwide reduction in
the number of our employees;
- eliminating underutilized corporate offices and our European sales
headquarters;
- entering into a strategic alliance with our supplier of silicone raw
materials;
- moving our corporate headquarters from Las Vegas to Santa Barbara; and
- terminating or selling unprofitable business lines.
Our new senior management team also simplified our organizational structure
by reorganizing 26 autonomous domestic and international subsidiaries into our
current structure of three business units. These business units include our U.S.
plastic surgery and aesthetic medicine group, our international group and our
BioEnterics group which focuses on our obesity and gastro-intestinal products.
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. Our corporate staff has been refocused to
oversee the strategic, financial and operational goals for each of our business
units, enhance manufacturing efficiencies on a worldwide basis and explore new
business and product opportunities.
Based on our turnaround in profitability, the resolution of the breast
implant litigation and the financing alternatives available to fund the
settlement, our independent public accountants, BDO Seidman, LLP, did not
include in their audit report for our 1998 financial statements the "going
concern" explanatory paragraph issued in the prior years.
16
The Collagen Acquisition. On July 31, 1999, we entered into an Agreement
and Plan of Merger to acquire Collagen at a cash purchase price of $16.25 per
share. On September 1, 1999, the merger was completed and Collagen became a
wholly-owned subsidiary of Inamed. The total amount paid by us in the Collagen
acquisition, including the cancellation of all Collagen options, was
approximately $148.7 million, plus expenses of approximately $9.2 million. We
financed the Collagen acquisition, and the repayment of $16.9 million of Inamed
debt, through borrowings under a bridge loan facility, with Ableco Finance LLC
as administrative agent, in the amount of $155.0 million and $23.8 million of
cash on hand at the closing of the merger.
We believe the Collagen acquisition will provide us with a broader range of
products to serve the plastic and aesthetic surgery markets. Soon after
acquiring Collagen, we began to integrate Collagen's business into ours by:
- assimilating Collagen's current operations into ours to realize
operational and financial synergies and to achieve cost savings;
- consolidating Collagen's nine European subsidiaries into our existing
Inamed International business unit;
- combining our sales and marketing forces; and
- seeking new opportunities to become a third-party supplier for other
collagen-based products.
Several aspects of our integration plan are substantially complete, and we
currently expect to complete the integration of Collagen's business and
operations into ours by January 2000.
17
USE OF PROCEEDS
Our net proceeds from the sale of 2,500,000 shares of common stock offered
by us pursuant to this prospectus at an offering price of $29 per share are
estimated to be approximately $66.6 million after deducting underwriting
discounts and commissions and estimated expenses payable by us in connection
with the offering. If the underwriters exercise their over-allotment option in
full, we will receive approximately $12.2 million in additional net proceeds. We
will not receive any of the proceeds from the sale of shares of our common stock
by the selling stockholders.
We will apply all of the net proceeds received by us from this offering to
repay a portion of our outstanding borrowings under our bridge loan facility.
Our borrowings under this bridge loan facility, which totaled $155.0 million at
November 16, 1999, bear interest at variable rates based on a margin over LIBOR.
At November 16, 1999, the weighted average interest rate on those borrowings was
approximately 11.5% per annum. The bridge notes issued under the bridge loan
facility expire on May 31, 2000. We used the borrowings under this bridge loan
facility, together with cash on hand, to finance our acquisition of Collagen and
to repay Inamed debt. Subject to the satisfaction of specified financial
conditions, if outstanding on May 31, 2000, these bridge notes will be rolled
over into longer term notes maturing on June 1, 2007. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness" included elsewhere in this prospectus.
18
PRICE RANGE OF COMMON STOCK
Our common stock has been trading on the Nasdaq National Market under the
symbol "IMDC" since September 30, 1999. Between January 1, 1997 and June 10,
1997, our common stock was listed on the Nasdaq SmallCap Market. However,
effective June 11, 1997, our common stock was delisted from the Nasdaq SmallCap
Market. From June 11, 1997 to September 29, 1999, our common stock traded on the
OTC Bulletin Board. The table below sets forth the high and low bid prices of
our common stock as reported by Nasdaq for the periods indicated.
1997 HIGH LOW
First Quarter............................................... $ 8 1/4 $ 5 1/8
Second Quarter.............................................. 5 1/8 3 1/8
Third Quarter............................................... 7 7/8 4
Fourth Quarter.............................................. 4 1/8 3 1/4
1998 HIGH LOW
First Quarter............................................... $ 5 5/8 $ 3 1/8
Second Quarter.............................................. 9 1/4 5
Third Quarter............................................... 8 1/2 5
Fourth Quarter.............................................. 10 1/8 4 1/2
1999 HIGH LOW
First Quarter............................................... $15 $ 9 5/8
Second Quarter.............................................. 17 1/8 12
Third Quarter............................................... 29 1/2 14 5/8
Fourth Quarter (through November 16, 1999).................. 34 24 1/8
The number of shares of our common stock outstanding as of November 12,
1999 was 17,228,684. As of November 12, 1999, we had 759 stockholders of record.
Our common stock price at the close of business on November 16, 1999 was $29.50
per share.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock. Our
current policy is to retain earnings to finance the growth and development of
our business. Therefore, we do not anticipate paying cash dividends on our
common stock in the foreseeable future. In addition, our ability to pay cash
dividends is restricted by our bridge loan facility and may be restricted by any
credit facility that we may enter into to refinance the bridge notes. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, operating results,
capital requirements and other factors as our board of directors deems relevant.
19
CAPITALIZATION
The following table shows our consolidated capitalization at September 30,
1999:
- on an actual basis; and
- on an as adjusted basis to reflect the issuance and sale of the
2,500,000 shares of common stock offered by us in this offering at
an offering price of $29 per share and the application of the net
proceeds from this offering.
You should read this table in conjunction with our consolidated financial
statements, Collagen's consolidated financial statements, the pro forma
financial information and the related notes included elsewhere in this
prospectus.
SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 15,474 $ 15,474
======== ========
Current installments of long-term debt...................... $ 14 $ 14
Notes payable to bank....................................... 1,372 1,372
-------- --------
Total short-term debt....................................... $ 1,386 $ 1,386
======== ========
Bridge loans................................................ $155,000 $ 88,450
-------- --------
Total long-term debt........................................ $155,000 $ 88,450
-------- --------
Stockholders' equity:
Preferred stock, par value $0.01; authorized 1,000,000
shares, none issued....................................... $ -- $ --
Common stock, par value $0.01; authorized 25,000,000 shares;
issued and outstanding 17,187,594 shares (actual); issued
and outstanding 19,728,684 shares (as adjusted)(1)........ 172 197
Additional paid-in capital.................................. 74,778 141,303
Accumulated other comprehensive (loss)...................... (3,410) (3,410)
Accumulated deficit......................................... (28,519) (28,519)
-------- --------
Stockholders' equity................................... 43,021 109,571
-------- --------
Total capitalization.............................. $198,021 $198,021
======== ========
- ------------------------------
(1) As adjusted shares include 41,090 shares issued upon the exercise of options
and warrants since September 30, 1999 through November 12, 1999. Excludes an
aggregate of 3,870,546 shares of common stock issuable upon the exercise of
options outstanding at November 12, 1999 at exercise prices ranging between
$1.45 and $16.88 (with a weighted average exercise price of $6.62) and
warrants at exercise prices ranging between $3.53 and $24.75 (with a
weighted average exercise price of $9.77). Also excludes shares of common
stock issuable upon the exercise of warrants if our bridge loan facility is
not repaid or refinanced at maturity. See "Description of Certain
Indebtedness."
20
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below for 1998, 1997 and
1996 fiscal years are derived from the Inamed audited consolidated financial
statements appearing elsewhere in this prospectus. The selected historical
financial data set forth below for our 1995 and 1994 fiscal years are derived
from our financial statements not included in this prospectus. The selected
historical financial data for the nine months ended September 30, 1999 and 1998
are derived from the unaudited financial statements of Inamed for these periods,
which include the results of Collagen for the month of September 1999. The
selected balance sheet data at September 30, 1999 reflect the Collagen
acquisition, which occurred on September 1, 1999. In the opinion of our
management, the unaudited financial statements reflect all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation of the results of operations and financial position as of the date
of and for the periods presented. You should read these selected financial data
along with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and the notes
thereto appearing elsewhere in this prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................... $123,722 $ 99,109 $131,566 $106,381 $ 93,372 $81,626 $80,385
Cost of goods sold............. 36,597 35,219 47,954 37,643 35,295 30,156 26,264
Gross profit................... 87,125 63,890 83,612 68,738 58,077 51,470 54,121
Operating expenses:
Marketing.................. 27,099 26,894 33,364 30,002 25,088 23,434 19,179
General and
administrative........... 22,841 21,201 28,213 33,450 31,252 32,834 27,099
Research and development... 6,871 7,053 9,366 8,863 5,693 4,392 3,724
Restructuring expense...... -- -- 4,202 -- -- -- --
Total operating expenses....... 56,811 55,148 75,145 72,315 62,033 60,660 50,543
Operating income (loss)........ 30,314 8,742 8,467 (3,577) (3,956) (9,190) 3,578
Litigation settlement.......... -- -- -- (28,150) -- -- --
Net interest and other
financing
expense...................... 5,186 2,746 3,812 6,173 4,277 63 196
Income (loss) before income tax
expense (benefit) and
extraordinary charges........ 25,090 2,164 5,341 (39,696) (8,165) (8,576) 5,007
Income tax expense (benefit)... -- 137 (8,432)(1) 1,881(2) 3,214(3) (1,683) 2,261
Net income (loss) before
extraordinary charges........ 25,090 2,027 13,773 (41,577) (11,379) (6,893) 2,746
Extraordinary charges.......... -- -- (1,800) -- -- -- --
Net income (loss).............. $ 25,090 $ 2,027 $ 11,973 $(41,577) $(11,379) $(6,893) $ 2,746
Net income (loss) per share of
common stock:
Basic...................... $ 1.74 $ 0.20 $ 1.15 $ (4.97) $ (1.46) $ (0.91) $ 0.37
Diluted(4)................. $ 1.39 $ 0.20 $ 0.92 $ (4.97) $ (1.46) $ (0.91) $ 0.37
Weighted average common shares
outstanding (basic).......... 14,444 10,130 10,387 8,371 7,811 7,544 7,411
Weighted average common shares
outstanding (diluted)........ 18,063 10,130 14,185 8,371 7,811 7,544 7,411
21
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency)....... $ 3,378(5) $ (988) $ 6,460 $ 4,511 $(6,042) $ 1,088
Total assets....................... 318,860 80,707 58,842 65,912 50,385 47,810
Bridge loans....................... 155,000 -- -- -- -- --
Convertible and other long-term
debt, net of current
installments..................... -- 27,767 23,574 34,607 89 51
Subordinated long-term debt,
related party.................... -- -- 8,813 -- -- --
Stockholders' equity
(deficiency)..................... 43,021 (15,625) (46,689) (9,908) (1,704) 4,479
- -------------------------
(1) Reflects the recognition of an $8,000 deferred tax asset based on future
short-term income projections.
(2) Includes a provision of $1,000 for the conversion of foreign intercompany
accounts to equity.
(3) Includes the recording of a $2,006 valuation allowance on domestic deferred
tax assets.
(4) Had Inamed's pretax net income been taxed using an effective rate of 33%,
Inamed would have had fully diluted earnings per share of $0.93 for the nine
months ended September 30, 1999 and diluted earnings per share of $0.13 for
the nine months ended September 30, 1998.
(5) Working capital does not reflect receipt of an $8.2 million refund of prior
period taxes.
22
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following historical and unaudited pro forma consolidated financial
information has been derived from Inamed's consolidated historical financial
statements for the year ended December 31, 1998 and the nine months ended
September 30, 1999, and Collagen's consolidated historical financial statements
for the years ended June 30, 1999 and June 30, 1998, each appearing elsewhere in
this prospectus, and Collagen's consolidated historical financial statements for
the six months ended December 31, 1997 and 1998 and the two months ended August
31, 1999. In preparing these pro forma data, we have used what we believe are
reasonable methods to conform the bases of presentation of Inamed's and
Collagen's historical financial statements.
We accounted for the Collagen acquisition using the purchase method. Under
the purchase method of accounting, tangible and intangible assets acquired and
liabilities assumed are recorded at their estimated fair values. The excess of
the purchase price, including estimated fees and expenses related to the
acquisition, over the net assets acquired has been classified as goodwill. The
estimated fair values and useful lives of assets acquired and liabilities
assumed are based on a preliminary valuation. We are in the process of having an
appraisal performed of the net assets acquired. Based upon this appraisal some
assets and other intangibles may be amortized over a shorter life than the
goodwill amortization period of 30 years.
We prepared the unaudited pro forma statement of operations for the periods
presented by combining Inamed's audited statement of income for the year ended
December 31, 1998 and its unaudited statement of income for the nine months
ended September 30, 1999 with Collagen's unaudited statement of operations for
the twelve months ended December 31, 1998 and the eight months ended August 31,
1999, giving effect to the acquisition as though it occurred on January 1, 1998.
The unaudited pro forma financial statements do not reflect management's
anticipated cost savings resulting from the integration of Collagen's business
and operations into our existing business and operations.
The unaudited pro forma consolidated financial statements are presented for
informational purposes only and are not necessarily indicative of actual results
that would have been achieved had the Collagen acquisition been consummated on
the dates or for the periods indicated and do not purport to indicate results of
operations as of any future period. You should read this unaudited pro forma
consolidated financial information in conjunction with Inamed's consolidated
financial statements and the related notes thereto, Collagen's consolidated
financial statements and the related notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus.
23
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
COLLAGEN PUBLIC EQUITY
ACQUISITION OFFERING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
INAMED COLLAGEN ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED
-------- -------- ----------- --------------- ------------- -----------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Net sales................................... $131,566 $82,128 $ -- $213,694 $ -- $213,694
Cost of goods sold.......................... 47,954 22,777 -- 70,731 -- 70,731
-------- ------- -------- -------- ------ --------
Gross profit.............................. 83,612 59,351 -- 142,963 -- 142,963
-------- ------- -------- -------- ------ --------
Operating expenses
Selling, general and
administrative.......................... 61,577 40,354 -- 101,931 -- 101,931
Amortization of goodwill.................. -- 414 4,648(A) 5,062 -- 5,062
Research and development.................. 9,366 6,359 -- 15,725 -- 15,725
Restructuring expense..................... 4,202 1,541 -- 5,743 -- 5,743
-------- ------- -------- -------- ------ --------
Total operating expenses............ 75,145 48,668 4,648 128,461 -- 128,461
-------- ------- -------- -------- ------ --------
Operating income (loss)..................... 8,467 10,683 (4,648) 14,502 -- 14,502
Net interest income (expense) and other
financing costs........................... (3,812) 589 (17,825)(C) (21,048) 7,653(D) (13,395)
Amortization of deferred financing costs.... -- -- (6,975)(B) (6,975) -- (6,975)
Net gain on investments..................... -- 314 -- 314 -- 314
Other income (expense)...................... 686 (46) -- 640 -- 640
-------- ------- -------- -------- ------ --------
Income (loss) before income tax expense
(benefit)................................. 5,341 11,540 (29,448) (12,567) 7,653 (4,914)
Provision (benefit) for income taxes........ (8,432) 6,726 (2,441)(E) (4,147) 2,525(E) (1,622)
Minority interest........................... -- 12 -- 12 -- 12
-------- ------- -------- -------- ------ --------
Income (loss) from continuing operations.... $ 13,773 $ 4,802 $(27,007) $ (8,432) $5,128 $ (3,304)
======== ======= ======== ======== ====== ========
Earnings per share from continuing
operations
Basic..................................... $ 1.33 $ (0.81) $ (0.26)
======== ======== ========
Diluted................................... $ 1.05 $ (0.81) $ (0.26)
======== ======== ========
Weighted average common shares
outstanding(F)
Basic..................................... 10,387 10,387 2,500(H) 12,887
Diluted(G)................................ 14,185 14,185 2,500(H) 16,685
(See footnotes at the end of pro forma financial statements.)
24
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
INAMED COLLAGEN COLLAGEN PUBLIC EQUITY
NINE MONTHS EIGHT MONTHS ACQUISITION OFFERING
ENDED ENDED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SEPTEMBER 30, 1999 AUGUST 31, 1999 ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED
------------------ --------------- ----------- ------------ ------------- -----------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Net sales.................... $123,722 $58,198 $ -- $181,920 $ -- $181,920
Cost of goods sold........... 36,597 17,852 -- 54,449 -- 54,449
-------- ------- -------- -------- ------ --------
Gross profit................. 87,125 40,346 -- 127,471 -- 127,471
-------- ------- -------- -------- ------ --------
Operating expenses
Selling, general and
administrative........... 49,940 26,820 -- 76,760 -- 76,760
Amortization of goodwill... 69 552 3,486(A) 4,107 -- 4,107
Research and development... 6,802 2,997 -- 9,799 -- 9,799
-------- ------- -------- -------- ------ --------
Total operating
expenses........... 56,811 30,369 3,486 90,666 -- 90,666
-------- ------- -------- -------- ------ --------
Operating income (loss)...... 30,314 9,977 (3,486) 36,805 -- 36,805
Net interest income (expense)
and other financing
costs...................... (5,186) 254 (13,369)(C) (18,301) 5,740(D) (12,561)
Other income (expense)....... (38) -- -- (38) -- (38)
-------- ------- -------- -------- ------ --------
Income (loss) before income
tax expense (benefit)...... 25,090 10,231 (16,855) 18,466 5,740 24,206
Provision (benefit) for
income taxes............... -- 4,062 2,032(E) 6,094 1,894(E) 7,988
-------- ------- -------- -------- ------ --------
Income (loss) from continuing
operations................. $ 25,090 $ 6,169 $(18,887) $ 12,372 $3,846 $ 16,218
======== ======= ======== ======== ====== ========
Earnings per share from
continuing operations
Basic...................... $1.74 $0.86 $0.96
======== ======== ========
Diluted(G)................. $1.39 $0.68 $0.79
======== ======== ========
Weighted average common
shares outstanding(F)
Basic...................... 14,444 14,444 2,500(H) 16,944
Diluted(G)................. 18,063 18,063 2,500(H) 20,563
(See footnotes at the end of pro forma financial statements.)
25
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA INCOME STATEMENT ADJUSTMENTS
(A) Records adjustment to depreciation and amortization expense as follows:
Goodwill acquired totalled approximately $140,000 and represents the
excess of purchase price over the identifiable and intangible assets of
Collagen. We are in the process of having an independent appraisal
performed. Based upon the results of the appraisal, the amount allocated to
goodwill based on management's estimates in the accompanying pro forma
financial statements may change and the amortization period may be shorter,
which may have a material impact on the pro forma financial statements.
Goodwill is to be amortized over its estimated useful life of 30 years
consistent with our established policy.
The 30-year estimated useful life of goodwill is derived from management's
analysis of:
- the historical lives and future estimated lives of customer
relationships which are the core of our business;
- the longevity and continuing use of the base practice management
systems; and
- the relatively minor impact of technological obsolescence on our
core products and services.
(B) To record the amortization of deferred financing fees related to the
bridge loan facility over its nine-month term.
(C) Interest expense on our $155,000 bridge loan facility based on average
LIBOR interest rate of 5.5% plus 600 basis points. If the interest rate
fluctuated by 1.0%, the effect on interest expense would be $1,550 annually.
(D) Interest eliminated on $66,550 of our bridge loan facility currently
bearing interest at 11.5% per annum due to payment from the proceeds of this
public equity offering.
(E) Adjusts the provision for income taxes based on other pro forma
adjustments. As disclosed in our Annual Report on Form 10-K for the year ended
December 31, 1998, we have available net operating loss carryforwards, which are
available to offset future taxable income. During 1998, we adjusted our
valuation allowance with respect to our ability to recognize currently a portion
of the future tax benefits resulting from the utilization of the net operating
loss carryforwards. Accordingly, we recognized an income tax benefit in 1998 and
no tax expense for the nine months ended September 30, 1999. Assuming continued
profitability in the future, our effective tax rate will approximate a tax rate
consistent with our earnings (assume 33% effective tax rate).
(F) As of November 12, 1999 there were 17,228,684 shares of our common stock
outstanding.
(G) Had our pretax net income been taxed using an effective rate of 33%, we
would have had fully diluted earnings per share of $0.93 for the nine months
ended September 30, 1999 and diluted earnings per share of $0.13 for the nine
months ended September 30, 1998.
(H) Reflects a public equity offering of 2,500,000 shares issued as a result
of this offering at an offering price of $29 after deducting underwriting
discounts and commissions and estimated expenses payable by us, which will be
used to pay down a portion of the bridge loan facility.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Commencing in 1992, with the advent of the mass tort litigation arising
from our silicone gel-filled breast implant products, until early 1998, our
financial performance was adversely impacted by the costs of managing our
litigation problems as well as by the costs of improving manufacturing practices
and policies in accordance with FDA regulations. In addition, between 1992 and
1998, we invested significant resources to increase our international sales and
market presence. Due to these and other factors, our expenses grew at a
significantly higher rate than our sales, leading to a steady deterioration in
our financial performance.
In early 1998, we appointed a new senior management team and focused on two
primary objectives: settling the breast implant litigation and making Inamed
consistently profitable on par with other medical device companies.
On February 1, 1999, the court responsible for our breast implant
litigation entered a final non-appealable order approving our settlement with
the plaintiff class' counsel and 3M. On March 3, 1999, the statutory period for
filing appeals expired. On May 10, 1999, we announced the completion of a $31.1
million equity financing and a final payment of monies owed to the escrow agent
on behalf of the plaintiff class in the breast implant litigation.
In the third quarter of 1998, we implemented a cost reduction program that
included:
- reducing overhead through an approximate 10% worldwide reduction in
the number of our employees;
- eliminating underutilized corporate offices and our European sales
headquarters;
- entering into a strategic alliance with our supplier of silicone raw
materials;
- moving our corporate headquarters from Las Vegas to Santa Barbara;
and
- terminating or selling unprofitable business lines.
During the third and fourth quarters of 1998, we expensed a total of $4.2
million as a restructuring charge to recognize various costs associated with
implementing that plan. By the end of 1998, we accomplished our transition from
a history of unprofitable operations to profitable operations. As a result of
the restructuring, we reduced our general and administrative expense while
maintaining sales growth and gross profit. 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, our independent public
accountants, BDO Seidman, LLP, did not include in their audit report for the
1998 financial statements the "going concern" explanatory paragraph issued in
prior years.
In the third quarter of 1999, we announced and completed the acquisition of
Collagen for an aggregate purchase price of approximately $148.7 million, plus
expenses of approximately $9.2 million. We accounted for the Collagen
acquisition using the purchase method of accounting. Under the purchase method,
Collagen's financial data is consolidated with our financial results from the
effective date of the acquisition, September 1, 1999. We have commenced our plan
to integrate Collagen's business and operations into ours and expect that our
integration plan will be completed by January 2000. We believe this acquisition
makes us a global leader in plastic surgery and aesthetic medicine. See "Our
Company -- Recent Developments -- The Collagen Acquisition."
27
RESULTS OF OPERATIONS
Set forth below is a table which shows the individual components of our
actual results of operations as a percent of net sales for each of the periods
indicated, including the results of Collagen for the month of September 1999.
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- --------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Net sales.............................................. 100% 100% 100% 100% 100%
Gross profit........................................... 70 64 64 65 62
Marketing expenses..................................... 22 27 25 28 27
General and administrative expenses.................... 18 21 21 31 34
Research and development expenses...................... 6 7 7 8 6
Total operating expenses (excluding restructuring
expense)............................................. 46 56 54 68 66
Operating income (loss) (excluding restructuring
expense)............................................. 25 9 10 (3) 4
Net interest and other financing expense............... 4 3 3 6 5
Income (loss) before income taxes and extraordinary
charges.............................................. 20 2 4 (37) (9)
Net income............................................. 20% 2% 9% (39) (12)
=== === === == ==
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales for the nine months ended September 30, 1999 were
$123.7 million, reflecting an increase of $24.6 million or 25% over net sales
for the same period in 1998. This increase is attributable to increased sales
from all business units and the inclusion of one month of Collagen's net sales,
which were $8.3 million or approximately 19% of our net sales in the third
quarter of 1999. During the second and third quarters there was a slowdown in
net sales growth due to the development of backorders in selected product lines
in the U.S. plastic surgery business. The backorders were due to production
capacity issues for a limited number of our products. We largely remedied these
issues in the third quarter of 1999. We expect to report substantially larger
period-over-period sales over the next four quarters because we have expanded
our range of products and services due to the Collagen acquisition.
Net sales in the U.S. accounted for 62% of total net sales for the three
months ended September 30, 1999 and 64% of total net sales for the nine months
ended September 30, 1999, as compared to 65% for both the three months and nine
months ended September 30, 1998. International net sales accounted for 38% of
total net sales for the three months ended September 30, 1999 and 36% of total
net sales for the nine months ended September 30, 1999. International net sales
for the three months and nine months ended September 30, 1998 were 35% of total
net sales.
Cost of Goods Sold. Cost of goods sold for the nine months ended September
30, 1999 was $36.6 million, reflecting an increase of $1.4 million or 4%, over
the same period in 1998. Cost of goods sold, as a percentage of net sales,
decreased to 30% in the nine months ended September 30, 1999 as compared to 36%
in the same period in 1998. This decrease reflects improved capacity utilization
due to increased sales, the addition of higher-margin Collagen products to the
overall sales mix, strong cost reduction measures at all production facilities,
including material cost reductions and strategic alliances with key company
suppliers, reduction in headcount, discontinuance or sale of smaller
unprofitable product lines and improved asset management, especially receivables
and inventory.
Gross Profit. Gross profit for the nine months ended September 30, 1999
was $87.1 million, reflecting an increase of $23.2 million or 36% over the same
period in 1998. For the nine months ended September 30, 1999, gross profit as a
percentage of net sales increased 6% up to 70% from 64% for the same period in
1998. Margins increased primarily due to increased production efficiencies,
resulting in higher yields and increased output in all business units along with
increased sales volumes of higher margin gel products for reconstructive surgery
markets and Collagen products, and an overall reduction in
28
cost of goods sold as a percentage of sales. An offsetting factor to the higher
gross margins was the cost of validations at one U.S. plastic surgery plant for
new reconstructive surgery products which will be introduced in the near future.
In addition, gross margins in 1998 were negatively impacted by pending FDA
audits and manufacturing inefficiencies caused by idle time at both U.S. and
international plastic and reconstructive surgery operations.
Marketing Expenses. Marketing expenses for the nine months ended September
30, 1999 were $27.0 million. As a percentage of sales, marketing expenses were
22% in the nine months ended September 30, 1999 and 27% in the nine months ended
September 30, 1998. Without Collagen sales and marketing expenses, Inamed's
sales and marketing expenses decreased $1.3 million down to 21% as a percentage
of net sales. New management's goals of growing the sales and reducing costs,
which included the restructuring of the entire company during 1998 and strong
cost containment procedures, have helped to dramatically reduce our marketing
expenses in 1999 from 1998 levels. We currently anticipate that marketing
expenses will increase in future quarters. The actual amount spent will depend
on a variety of factors, including our level of operations, advertising spending
and the number of new markets we attempt to enter, either geographically or
through acquisitions, joint ventures or strategic alliances for new products.
In May 1999, we entered into a strategic alliance with Advanced Tissue
Sciences, Inc. under which we license for development, marketing and sales five
of Advanced Tissue's human-based, tissue-engineered products for surgical
applications. As of November 1, 1999, our total investment in the Advanced
Tissue strategic alliance was $10.0 million. Of this amount, $7.2 million was
paid for licensing rights and the remainder was paid for common stock, and
warrants to purchase common stock, of Advanced Tissue at a premium to market. We
also are obligated to pay Advanced Tissue an additional $2.0 million milestone
payment for each of the marketed products that receives FDA approval, up to
$10.0 million in total for all of the products. Finally, Advanced Tissue is
entitled to royalties from us on a sliding scale based on overall product sales.
We have agreed to hold any investment in Advanced Tissue common stock until at
least October 2002.
General and Administrative Expenses. General and administrative expenses
for the nine months ended September 30, 1999 were $22.8 million, an increase of
$1.6 million or 8% from the same period of 1998. General and administrative
expense decreased as a percentage of sales from 21% down to 18% for the nine
months ended September 30, 1999 as compared to the same period in 1998. The
decrease in expenses is attributable to our strong commitment to reduce costs
through elimination of unprofitable business areas, reduction in headcount as
necessary, streamlining the organizational structure from multiple domestic and
international business subsidiaries into three business units, elimination of
underutilized corporate offices, and budgeting and review of all expenses.
Research and Development Expenses. Research and development expenses were
$6.9 million for the nine months ended September 30, 1999, reflecting a slight
decrease from the same period in 1998. As a percentage of sales, research and
development costs were 6%, a decrease of 1% for the nine months ended September
30, 1999 as compared to 7% for the same period in 1998. The actual amount spent
will depend on a variety of factors, including our level of operations, and the
number of product development projects we embark upon, including through
acquisitions, strategic alliances and joint ventures for new products. Research
and development expenses consist of ongoing research and development expenses
for new product development in all business units, as well as necessary
regulatory and clinical costs associated with testing and approving new product
introductions in the U.S. and throughout the world.
Operating Income. Based on the foregoing factors, our operating income for
the nine months ended September 30, 1999 totaled $30.3 million, an increase of
$21.5 million or 247% over operating income for the same period in 1998. This
increase reflects the successful implementation of the restructuring program
initiated by our new senior management in 1998 and the continuing strength of
our core product lines.
29
Interest Expense. Net interest and other financing expense was $5.2
million for the nine months ended September 30, 1999, reflecting an increase of
$2.4 million from $2.7 million for the nine months ended September 30, 1998, due
primarily to the increased borrowings which were incurred to finance the
Collagen acquisition. Net interest and other financing expenses for the nine
months ended September 30, 1999 include a one-time financing charge of $2.0
million incurred in connection with the exercise of warrants to fund the
litigation settlement and $2.0 million to amortize the fees and interest paid in
connection with the bridge loan for the Collagen acquisition. Without these
charges, net interest and other financing expenses would have been $1.2 million
for the nine months ended September 30, 1999. This decrease resulted from the
$31.1 million equity financing used to fund the litigation settlement, which
resulted in a $10.7 million reduction in our 11% junior secured notes. All of
the remaining $16.9 million of senior and junior secured notes were paid at the
same time as the Collagen acquisition.
Foreign Currency Translation Gains and Losses. During the second quarter
of 1999, we converted the non-U.S. intercompany debts among our subsidiaries to
the capital of the respective subsidiaries. This step substantially eliminated
the significant translation adjustments which occurred in prior years. For the
nine months ended September 30, 1999, our foreign currency translation resulted
in a marginal gain of $3,000 as compared to a $961,000 loss for the same period
in 1998.
Income Taxes and Earnings Per Share. We reduced the valuation allowance on
the deferred tax asset based on pre-tax earnings for the nine months ended
September 30, 1999. We are currently the beneficiary of a substantial net
operating loss carryforward for financial reporting purposes. Management is
currently evaluating the necessity for a continued allowance on the deferred tax
asset. In order to provide investors with a perspective on its earnings per
share on a normalized basis, assuming we accrued taxes at a 33% effective rate,
our earnings for the three months ended September 30, 1999 would have been $0.33
per basic share and for the nine months ended September 30, 1999 would have been
$1.16 per basic share. If we assumed accrued taxes at a 33% effective tax rate,
our earnings per diluted share for the three months ended September 30, 1999
would have been $0.29 per diluted share and for the nine months ended September
30, 1999 would have been $0.93 per diluted share. Excluding $0.04 per share of
non-cash charges for amortization of goodwill and financing costs arising from
the Collagen acquisition, our earnings for the third quarter and the first nine
months of 1999, on a normalized tax basis, would have been $0.37 and $1.20 per
basic share and $0.33 and $0.97 per diluted share.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales for 1998 were $131.6 million, reflecting an increase
of $25.2 million or 24% over 1997 net sales. Net sales in the U.S. accounted for
65% of total net sales in 1998 and 63% of total net sales in 1997. International
net sales accounted for 35% of total net sales in 1998 and 37% of total net
sales in 1997. 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 our overall sales mix, as well as increased sales of our
anatomical and smooth-round breast implants.
Cost of Goods Sold. Cost of goods sold for 1998 were $48.0 million,
reflecting a 28% increase over 1997. Cost of goods sold, as a percentage of net
sales, were 37% in 1998 as compared to 35% in 1997. The largest factor 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 our
manufacturing facilities. Both factors were fairly stable in 1997 and 1998. In
late 1998, we entered into a long-term strategic alliance with our largest
supplier of raw materials, which should result in improved cost savings in the
coming years.
Gross Profit. Gross profit for 1998 was $83.6 million, reflecting an
increase of $14.9 million or 22% over 1997. For 1998, gross profit as a
percentage of net sales decreased slightly to 64% down from 65% for 1997.
Marketing Expenses. Marketing expenses for 1998 were $33.4 million, an
increase of $3.4 million or 11% from 1997. 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
30
sales and marketing functions, and by participation in trade conventions and
shows. In 1998, we began 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.
General and Administrative Expenses. General and administrative expenses
for 1998 were $28.2 million, a decrease of $5.2 million or 16% from 1997. Our
general and administrative expenses are affected by overall headcount in various
administrative functions and the legal, accounting and other outside services
which were necessary to defend the breast implant litigation and negotiate a
settlement. Also, in 1997, general and administrative 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, general and administrative expenses
declined as a percentage of sales to 21% in 1998 from 31% in 1997.
Research and Development Expenses. Research and development expenses
increased slightly for 1998 as compared to 1997; while as a percentage of sales,
research and development expenses were 7% in 1998 as compared to 8% in 1997. We
invested $3.5 million in 1998 and $2.4 million in 1997 at our BioEnterics
subsidiary in connection with the development of obesity products. Now that that
business unit has begun to achieve profitability, we anticipate that overall
research and development expenditures will be lower as a percentage of sales in
the coming years.
Operating Income (Loss). Our operating loss for 1997 reflected the
significant selling, general and administrative expenses which we bore under
prior management. Beginning in 1998, our new senior management team undertook a
restructuring program which was designed to reverse our poor operating
performance and significantly improve our operating margin. The positive results
of that program are reflected in the $12.7 million of operating profit
(excluding restructuring expense) for 1998.
Interest Expense. Net interest expense and other financing expense was
$3.8 million in 1998, reflecting a decline of $2.4 million from 1997. This
decrease is due to lower overall debt and reduced penalty charges. Net interest
expense of approximately $6.2 million in 1997 included penalty charges totaling
$1.6 million due to our failure to provide an effective registration statement
to the holders of our 4% convertible debentures issued earlier that year, offset
by a reduction in interest expense due to the retirement of $15.0 million of our
11% senior secured convertible notes with the proceeds that had been held in an
escrow account. Additionally, in 1997, we 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 our working capital needs. In
July 1998, we 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.
In September 1998, we refinanced $19.6 million of senior debt to extend the
maturity from March 1999 to September 2000, and also borrowed $8.0 million, at
10% interest rate, until the same date.
Foreign Currency Translation Loss. Historically, our subsidiaries have
incurred significant intercompany debts (totaling more than $29.0 million for
non-U.S. subsidiaries), which are eliminated in our 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 our 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 $1.0 million for expenses arising from those debt conversions.
Beginning in 1999, virtually all of our sales will be denominated in either
dollars or euros.
Income Tax Expense (Benefit). Our tax expense in 1997 pertained primarily
to foreign operations. In 1998 we had an income tax benefit of $8.4 million
which primarily pertained to the recognition of an $8.0 million deferred tax
asset based on an estimate of short-term future forecasted taxable income. Our
remaining deferred tax asset of approximately $15.5 million has a 100% valuation
allowance.
31
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales for 1997 were $106.4 million, reflecting an increase
of $13.0 million or 14% over 1996 net sales. Net sales in the U.S. accounted for
63% in 1997 and 65% in 1996. International net sales accounted for 37% of total
net sales in 1997 and 35% in 1996. The increase in net sales was due primarily
to higher volume.
Cost of Goods Sold. Cost of goods sold for 1997 were $37.6 million,
reflecting a 7% increase over 1996. Cost of goods sold as a percentage of net
sales were 35% in 1997 as compared to 38% in 1996. The largest factors in the
variation from year to year in cost of goods sold as a percentage of net sales
is the cost of raw materials and the yield of finished goods from our
manufacturing facilities. The yield of finished goods has fluctuated by
approximately 20 percentage points during 1994 through 1997. Given the limited
number of suppliers of medical-grade silicone raw materials and components, our
ability to control raw materials cost was often limited. In 1998, we entered
into a strategic alliance with one of our raw material suppliers. Previously, we
used internationally-manufactured raw materials from one of our foreign
subsidiaries to help stabilize and reduce our cost of goods sold.
Marketing Expenses. Marketing expenses in 1997 were $30.0 million, up $5.0
million or 20% from 1996. Marketing expense comprised 28% of net sales in 1997
and 27% of net sales in 1996. These expenses were incurred in connection with
the expansion of our business into foreign countries either through a third
party medical products distribution partner or through our own sales force.
General and Administrative Expenses. General and administrative expenses
in 1997 were $33.5 million, up $2.2 million or 7% from 1996 general and
administrative expenses. General and administrative expenses, as a percentage of
sales, were 31% in 1997 and 33% in 1996. General and administrative expenses are
affected by overall headcount in various administrative functions, and the
legal, accounting and other outside services which were necessary to defend the
breast implant litigation and negotiate a settlement. Also, in 1997, general and
administrative 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 each of
1994 through 1997, at a rate greater than the increase in gross profit dollars.
The legal, warranty and administrative costs relating to the breast implant
litigation was $4.7 million in 1997 and $3.5 million in 1996.
Operating Loss. Excluding the expenses arising from the settlement of the
breast implant litigation, we had a loss from operations in each of 1995 through
1997. The aggregate operating loss for those periods was approximately $16.8
million. Our operating losses in 1997 were $3.6 million and in 1996 were $4.0
million.
Research and Development Expenses. Research and development expenses
increased from 1994 through 1997 as we worked to develop new and advanced
medical products. In prior years, increased costs were due to our efforts to
obtain FDA approvals for our products. Research and development expenses in 1997
were $8.9 million and in 1996 were $5.7 million. The increase in 1997 and 1996
was due primarily to research and development expenses at our BioEnterics
subsidiary in connection with the development of obesity products. Research and
development expenses at BioEnterics were $2.4 million in 1997 and $1.5 million
in 1996.
Interest Expense. Net interest expense of approximately $4.3 million in
1996 was due to the net carrying costs on the $35.0 million of 11% senior
secured convertible notes issued in January 1996, as well as an accounting
charge of $1.4 million associated with the issuance of common stock under an
agreement to waive covenant defaults under the notes. Net interest expense of
approximately $6.2 million in 1997 was impacted by the incurrence of penalty
charges totaling $1.6 million due to our 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 $15.0 million of the 11% senior secured convertible notes with the
proceeds that had been held in an escrow account. Additionally, in 1997, we
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 our working capital needs.
32
LIQUIDITY AND CAPITAL RESOURCES
We have funded our cash needs since 1997 through a series of debt and
equity transactions and, in recent periods, through cash flow from operations.
Liquidity. During 1998, our 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 for 1997 and $19.2
million for 1996. This improvement is due to our efforts to reduce costs and
inventory and thereby improve cash flow. As further reductions in cost of goods,
general and administrative expenses and research and development expenses
outlined above continue to take effect, together with the reduction of redundant
expenses attributable to our acquisition of Collagen, we believe that cash flow
from operations will continue to improve.
During the nine months ended September 30, 1999, net cash provided by
operations was $27.2 million compared to $4.1 million provided by operations for
the same period in 1998. Positive cash from operations was offset by $145.0
million used in investing activities of which $133.0 million, net of cash
received, was used for the purchase of Collagen, $3.3 million was used for fixed
asset purchases and $9.1 million was used to fund strategic alliances during the
nine months ended September 30, 1999. During this period, cash provided by
financing activities of $125.0 million primarily related to our $155.0 million
debt financing which was partially offset by the breast implant litigation
settlement and debt payments which worked to offset positive operating cash. The
positive cash from operations resulted from our high operating profit margin and
our continued emphasis on the efficient management of working capital.
Capital Resources. On September 1, 1999, we borrowed $155.0 million under
a secured bridge loan facility and used $23.8 million of cash on hand at the
closing of the merger to finance the Collagen acquisition and to repay $16.9
million of Inamed debt. The loans made under our secured bridge loan facility
bear interest at variable rates based on a margin that increases by 100 basis
points every three months over 30-day LIBOR. At November 16, 1999, the weighted
average interest rate on these loans was approximately 11.5% per annum. Interest
is payable under the facility on a monthly basis. Our bridge loans mature on
June 2, 2000 and, unless repaid or refinanced, will be rolled over into longer
term senior notes maturing on June 2, 2007. Once obtained, we expect to use our
net proceeds from this offering to repay a portion of our bridge loans. See
"Description of Certain Indebtedness."
We intend to refinance the balance of our bridge loan borrowings with a
credit facility that will provide for term loans and a revolving credit line. We
anticipate that cash generated from our internal operations and borrowings under
the revolving credit portion of this credit facility will enable us to meet our
liquidity, working capital and capital expenditure requirements during the next
24 months. We cannot assure you that we will be able to obtain this credit
facility on satisfactory terms or at all.
In May 1999, we completed a $31.1 million equity financing, in which 5.4
million new shares of common stock were issued to various holders of $5.50 and
$7.50 warrants in exchange for the payment of $20.4 million of cash and the
surrender of $10.7 million of 11% junior secured notes. The 11% junior secured
notes, the $5.50 warrants and the $7.50 warrants were issued in November 1998 in
exchange for outstanding 11% senior secured convertible notes due January 1999.
Virtually all of the holders of warrants who were eligible to exercise at this
time participated in the transaction. We also received $3.0 million of cash from
our noteholders, which was used to purchase on their behalf the 426,323 shares
of common stock held by the court-appointed escrow agent in connection with the
breast implant litigation.
On May 10, 1999, we announced that we made our final payment of all monies
owed to the court-appointed escrow agent on behalf of the plaintiff class in the
mandatory class action settlement of the breast implant litigation. The payment
was $29.9 million in cash, and consisted of $25.5 million as full payment of the
6% promissory note we issued in June 1998, $1.4 million in accrued interest on
the note, and $3.0 million to repurchase 426,323 shares of common stock which
were also issued in June 1998 to the escrow agent. As a result of this payment,
approximately $30.0 million of liabilities relating to the
33
breast implant litigation that was recorded on our balance sheet as of the end
of 1998 and the first quarter of 1999 has now been eliminated.
In September 1998, we received $8.0 million of proceeds from the issuance
of our 10% senior secured notes, due September 30, 2000 and warrants expiring on
September 1, 2002 to acquire up to 590,000 shares of our common stock at an
exercise price of $6.50 per share. Under the terms of that loan, $3.0 million
was placed in a court-supervised escrow account to satisfy our 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. We repaid all of our outstanding obligations under these
notes in September 1999 in connection with our acquisition of Collagen.
Between April 1997 and January 1998, we received an aggregate of $9.9
million of proceeds from an entity affiliated with our former chairman. That
indebtedness was denoted as Inamed's 10.5% subordinated notes. By the terms of
our 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 on these notes. In July 1998, all of the 10.5%
subordinated notes, including accrued interest, were converted into 860,000
shares of common stock and a warrant to purchase 260,000 shares at $12.40 per
share. At the time, our common stock was trading at approximately $7.50 per
share.
In January 1997, we received $5.7 million of proceeds upon the issuance of
$6.2 million principal amount of 4% convertible debentures, due January 16,
2000. These debentures were convertible at 85% of the market price of the common
stock less an additional discount of 6%. In connection with this issuance, we
issued warrants to purchase up to 500,000 shares of common stock to the
placement agents for the 4% convertible debentures. 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, however warrants to purchase 7,255 shares at an exercise
price of $9.8125 per share issued to the placement agents for the debentures
remain outstanding.
Capital Expenditures. Expenditures on property and equipment approximated
$3.7 million in 1998, compared to $5.1 million in 1997 and $4.0 million in 1996.
For the nine months ended September 30, 1999, our capital expenditures were $3.3
million. The majority of the expenditures in each period were for building
improvements, computer equipment and production equipment to increase capacity
and efficiency. During 2000 to 2001, we expect to spend an aggregate of
approximately $10.0 million above our normal annual capital expenditure of
approximately $5.0 million. This new incremental spending will be used primarily
to build new manufacturing facilities.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the nine months ended September 30, 1999, we authorized the issuance
and allocation to certain of our senior executives and other officers, subject
to final ratification by our compensation committee, warrants to purchase
900,000 shares of our common stock. We expect that this will result in an annual
compensation charge of between $0.5 million to $1.0 million over the next three
years.
During the fourth quarter of our 1998 fiscal year, we 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 our 11% notes which occurred in the fourth quarter. In
addition, an income tax benefit of $8.0 million was established to recognize a
portion of the benefit expected to be received from our substantial net
operating loss carryforward.
During the fourth quarter of our 1997 fiscal year, we recorded significant
adjustments which decreased income by $29.7 million. The adjustments were to
recognize the latest developments in the breast implant litigation and the
anticipated settlement as well as income tax expense for the foreign
subsidiaries.
During the fourth quarter of our 1996 fiscal year, we recorded significant
adjustments which decreased income by $3.8 million. The adjustments were to
increase the write off of the deferred tax assets of $2.0 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. Our new management has
34
installed procedures to monitor quarterly financial statements to ensure there
are minimal adjustments. These include a review by our independent public
accountants of our quarterly financial statements.
IMPACT OF INFLATION
We believe that inflation has had a negligible effect on operations. We
believe that we can offset inflationary increases in the cost of materials and
labor by increasing sales prices and improving operating efficiencies.
IMPACT OF YEAR 2000
We have conducted a review to identify which of our computer and other
business operating systems will be affected by the "Year 2000" problem and have
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. We believe that
our business systems, including Collagen's, are currently Year 2000 compliant in
all material respects. We believe 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 our financial position or results of operations.
We are also engaged in communications with our significant business
partners, suppliers and customers to determine the extent to which we are
vulnerable to these third parties' failure to address their own Year 2000
issues. Our assessment of the impact of our Year 2000 issues includes an
assessment of our vulnerability to these third parties. We are seeking
assurances from our significant business partners, suppliers and customers that
their computer applications will not fail due to Year 2000 problems.
Nevertheless, we do not control, and we cannot give you assurances as to the
substance or success of the Year 2000 compliance efforts of these independent
third parties and we believe that there is a risk that some of these third
parties on whom our finances and operations depend will experience Year 2000
problems that could affect our financial position or results of operations.
These risks include, but are not limited to, the potential inability of
suppliers to correctly or timely provide necessary services, materials and
components for our operations and the inability of lenders, lessors or other
sources of our necessary capital and liquidity to make funds available to us
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, 2000. The adoption of SFAS No. 133 is not expected to
have a material impact on our results of operations, financial position or cash
flows.
35
BUSINESS
OVERVIEW
We are a global surgical and medical device company engaged in the
development, manufacturing and marketing of medical devices for the plastic,
reconstructive and aesthetic surgery markets. We sell a variety of lifestyle
products used to make people look younger and more attractive, including breast
implants for cosmetic augmentation and collagen-based facial implants to correct
facial wrinkles and scars and to enhance lip definition. We also sell products
to address women's health issues, including breast implants for reconstructive
surgery following radical mastectomies, and devices to treat severe obesity.
We maintain leading positions in our target markets through innovative
products and focused sales and marketing. We believe that in 1998, we had an
approximately 50% market share of the $200 million U.S. breast implant market
and an approximately 90% market share of the $65 million U.S. collagen-based
facial implant market. For the first nine months of 1999, which includes one
month of Collagen's results, we had net sales of $123.7 million and operating
income of $30.3 million. For the same period, after giving effect to the
Collagen acquisition as if it had occurred at the beginning of the period but
excluding any anticipated savings from integrating Collagen's operations into
ours, we would have had pro forma net sales of $181.9 million and pro forma
operating income of $36.8 million.
On September 1, 1999, we acquired Collagen. Collagen designs, develops,
manufactures and markets products that treat defective, diseased, traumatized or
aging human tissue. Collagen's flagship products, Zyderm(R) and Zyplast(R)
collagen-based facial implants, are used in aesthetic applications for the
correction of facial wrinkles due to aging, and scars. Collagen's products are
used by plastic surgeons, dermatologists and other physicians for elective
surgical and non-surgical therapies to remedy aging and defective facial tissue.
For the nine months ended September 30, 1999, after giving effect to the
Collagen acquisition as if it had occurred at the beginning of the period, our
pro forma net sales would have been 56% from plastic surgery products, including
breast implants and tissue expanders, 30% from collagen-based facial implant
products and 6% from obesity products. We serve these markets with our 110
person direct sales force, which currently is the largest worldwide sales
organization dedicated to plastic surgery products. The Collagen acquisition
broadened our portfolio of products to address the needs of plastic surgeons and
other aesthetic practitioners and is expected to help us take advantage of our
existing sales and marketing infrastructure. We believe we can continue to find
niche products which serve these markets and integrate them into our sales
organization.
We believe that the plastic, reconstructive and aesthetic surgery markets
will continue to be attractive for the following reasons:
- the increasing willingness of aging "baby-boomers" to accept plastic
surgery as a means to look younger;
- the majority of plastic surgery procedures are elective procedures
paid from discretionary income and not subject to reimbursement risk;
and
- FDA regulations make it difficult for new competitors to enter our
markets.
Since January 1998, our new senior management team implemented several
initiatives which resulted in:
- settlement of our extensive and longstanding breast implant
litigation;
- enhanced manufacturing efficiencies which resulted in a gross margin
improvement from 64% in the nine months ended September 30, 1998 to
70% in the nine months ended September 30, 1999;
36
- reduced overhead expenses and a simplified organizational structure
which resulted in increased operating margins from 9% in the nine
months ended September 30, 1998 to 25% in the nine months ended
September 30, 1999; and
- the acquisition of Collagen in September 1999 which enhanced our
product portfolio and is expected to help us take advantage of our
distribution infrastructure.
As a result of these efforts, together with a 24% increase in net sales for
fiscal year 1998 as compared to fiscal year 1997, we achieved profitability in
fiscal year 1998. See "Our Company -- Recent Developments."
INDUSTRY
Overview of Aesthetic Medicine Market
The market for aesthetic medicine and plastic surgery includes both
cosmetic and reconstructive procedures. Cosmetic surgery procedures are entirely
elective and are designed to improve aesthetic appearance. Reconstructive
surgery procedures reshape abnormal anatomical features, which result from
trauma, tumors, congenital defects or disease. Due to its elective nature,
cosmetic surgery is typically private pay, while reconstructive surgery is
primarily reimbursed by third-party payors. Aesthetic medicine procedures are
typically performed by plastic and reconstructive surgeons, dermatologists,
cosmetic surgeons, facial plastic surgeons and oral and maxillofacial surgeons.
According to a survey of surgeons conducted by the American Society of
Plastic and Reconstructive Surgeons in 1998, which we will refer to as the
"ASPRS study," the most frequently performed procedures in the aesthetic
medicine market in 1998 were breast augmentation, facial enhancement, eyelid
surgery and liposuction. The aesthetic medicine market has experienced
significant growth over the past decade. According to the ASPRS study,
approximately 2.2 million plastic surgery procedures were performed by U.S.
board-certified plastic surgeons in 1998. Cosmetic surgery procedures have grown
at a compounded annual growth rate of approximately 16.7% from 1992 to 1998 as
the number of procedures has increased from approximately 400,000 in 1992 to
approximately 1.0 million in 1998. Reconstructive surgery procedures have grown
from approximately 1.1 million procedures performed in 1992 to approximately 1.2
million in 1998. The ASPRS study indicates that the growth in the aesthetic
medicine market in the U.S. is attributable to a number of factors, including:
- Since the first "baby boomers" turned 50 in 1996, cosmetic surgery
procedures for 51-64 year olds have risen 47% from 164,662 in 1996 to
242,427 in 1998. We believe demographic shifts are leading to a larger
number of patients in the 20-64 age bracket which has traditionally
represented the majority of the cosmetic surgery patient population.
- In addition to growth in the 20-64 year old population, the age
bracket of patients undergoing aesthetic procedures has expanded in
both directions to teenagers and seniors. The 1998 ASPRS study showed
a 113% increase since 1996 in the number of over-65 individuals
choosing cosmetic surgery, with procedures rising from 42,597 in 1996
to 90,911 in 1998.
We believe these statistics indicate the following:
- Aesthetic medicine is gaining in acceptance and visibility. Physicians
are showing greater interest in aesthetic medicine and patients are
becoming increasingly open to discussing elective cosmetic procedures.
In addition, the media provides an ongoing flow of information on the
newest technologies and treatments to look one's best.
- Since cosmetic surgery procedures are typically private pay,
increasing discretionary incomes, especially among "baby boomers,"
helps increase the size of the market. In addition, an August 9, 1999
Newsweek cover story reported that two-thirds of the patients
undergoing plastic surgery have household incomes under $50,000 per
year but are willing to defer other discretionary expenses to pay for
cosmetic procedures.
37
- Increased patient awareness and interest in health-related issues has
led to an increase in the number of procedures, such as preventative
mastectomies, and corresponding growth in the reconstructive surgery
market.
- As the field of aesthetic medicine grows, more and more consumers have
direct and easy access to trained physicians. Aesthetic medicine has
expanded from its traditional constituency of females in select urban
centers to be a consideration for both men and women across a broader
range of geographies.
Breast Implant Market
Breast implants are used for augmentation in cosmetic surgery or for
reconstruction following a mastectomy procedure, which is the total or partial
removal of tissue as a result of breast cancer. We believe the worldwide market
for implant devices used in cosmetic and reconstructive breast surgery was
approximately $300 million in 1998, with the U.S. accounting for roughly
two-thirds of the total. Inamed and Mentor Corporation are the two principal
manufacturers of breast implant products. We believe that, together with Mentor
Corporation, we account for approximately 95% of all breast implant products
sold in the U.S. and approximately 80% of all breast implant products sold
worldwide.
Breast Augmentation. Breast augmentation surgery is the process by which
breast implants are used to enhance the size or shape of a woman's breast for
cosmetic reasons. We believe breast augmentation represents one of the fastest
growing segments of the plastic surgery industry. According to the ASPRS study,
approximately 132,400 women had breast augmentation surgery in 1998 in the U.S.,
as compared with approximately 32,600 in 1992, representing a compounded annual
growth rate of 26.7%. The ASPRS study suggests that 60% of the women undergoing
breast augmentations were between the ages of 19 and 34, and 35% were between
the ages of 35 and 50.
Breast Reconstruction. Breast reconstruction surgery is the procedure by
which a surgeon recreates or reconstructs a woman's breast following a
mastectomy. According to the ASPRS study, approximately 69,700 reconstruction
procedures were performed in 1998 in the U.S., as compared with approximately
29,600 in 1992, representing a compounded annual growth rate of 15.3%.
In 1998, we believe there were approximately 180,000 breast cancer cases
requiring a mastectomy, with less than half receiving reconstructive breast
implants. We believe the number of post-mastectomy breast reconstruction
procedures will increase due to a number of factors. First, a new federal law
was signed in October 1998 that mandates nationwide insurance coverage of
reconstructive surgery following a mastectomy. Historically, not all health
insurers covered this procedure. In addition, technological advancement allows
for earlier detection of breast cancer and improved surgical technique has
allowed for favorable clinical outcomes for patients.
Controversy and Litigation Over Silicone Implants. In January 1992, the
FDA requested that all U.S. manufacturers stop selling their silicone gel-filled
implants as a voluntary action and that surgeons refrain from implanting the
devices in patients pending further review of information relating to the safety
of the products. Furthermore, in April 1992, the FDA announced that silicone
gel-filled breast implants would be available only under controlled clinical
studies. Litigation against manufacturers of breast implants substantially
increased following the FDA moratorium. A more detailed discussion of the legal
proceedings and settlements pursued by us is included in our Form 10-K for our
1998 fiscal year which is incorporated by reference into this prospectus under
the heading "Item 3 -- Legal Proceedings -- Breast Implant Litigation." In
February 1999, Judge Sam Pointer of the Federal District Court for Northern
Alabama, approved our settlement, resolving virtually all of the breast implant
litigation outstanding against our company at that time relating to products
implanted before June 1, 1993 and precluding those who are eligible to
participate in the settlement from pursuing future litigation. In May 1999, we
made our final payment to the plaintiff class in this breast implant litigation.
With the exception of Mentor Corporation and us, all other significant breast
implant manufacturers exited the U.S. market by 1993.
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Numerous medical studies published subsequent to 1992 have described the
lack of evidence in support of an association between silicone gel-filled breast
implants and various diseases. A 30-year retrospective Mayo Clinic study
published in the June 1994 New England Journal of Medicine found no association
between breast implants and connective-tissue disease and other disorders that
were studied. A Harvard Medical School study published in the June 1995 New
England Journal of Medicine, conducted over a 14-year period, found no evidence
of an association between silicone gel-filled breast implants and either
connective-tissue diseases defined according to a variety of standardized
criteria or signs or symptoms of connective-tissue disease.
The most significant summation and overview of the evidence to date was
released in June 1999 in the form of a 400-page report commissioned by Congress
and prepared by an independent committee of 13 scientists assembled by the
Institute of Medicine, a part of the National Academy of Sciences. The Institute
of Medicine report concluded that although silicone gel-filled breast implants
may be responsible for localized problems, such as hardening or scarring of
breast tissue, implants do not cause any major or systemic diseases such as
lupus or rheumatoid arthritis.
Facial Aesthetic Market
Facial aesthetic products are designed to resurface skin, repair fine
lines, deep folds and scars, enhance the lip border and surgically contour the
face. We estimate that the 1998 market consisted of several distinct segments
including laser treatments, with sales of approximately $400 million; over-the-
counter products dispensed by physicians, with sales of approximately $150
million; and injectable collagen-based therapies, with sales of approximately
$100 million.
Collagen-based injections are one of the most popular procedures for facial
enhancement. In early 1999 the American Society for Aesthetic Plastic Surgery,
Inc. published its statistics on cosmetic procedures in the U.S. based on a
survey of board certified plastic surgeons, dermatologists and other specialists
likely to perform cosmetic surgical and non-surgical procedures. Based on this
survey, the number of collagen-based injection procedures in the U.S. increased
6% from 347,168 procedures in 1997 to 367,170 procedures in 1998. Collagen
procedures were ranked in the survey among the five most frequently performed
non-surgical cosmetic procedures in the U.S.
Collagen is a fibrous insoluble protein found in connective tissue
throughout the body, including the skin. Purified bovine collagen sourced from
cows is used to supplement the skin's natural layers of fat and collagen, which
degrade as one ages. Collagen, which can be produced in a number of forms for
different applications, is injected under the skin to "fill in" the creases
formed by years of facial movement and environmental stress. The body eventually
absorbs the injected collagen over a period of time which can range from weeks
to years. As such, injectable collagen is considered a temporary treatment for
the signs of facial aging. We believe that most patients require treatments
every three to six months in order to maintain the effects of the initial
treatment. Most facial aesthetic procedures using our products are relatively
simple and are performed on an outpatient basis.
Obesity Market
Morbid obesity products are designed to treat individuals who are either
100% over their ideal body weight or 100 pounds overweight. Morbid obesity is
life threatening, leading to cerebrovascular diseases, diabetes and other health
problems. In the U.S., it is estimated that there are approximately 6 to 9
million adults who are morbidly obese. In Europe, it is estimated that there are
approximately 2 to 7 million adults who are morbidly obese.
There are a variety of medical devices and surgical procedures used to
treat individuals for whom simple dieting and exercise are not an adequate
solution. One example is the gastric bypass operation, whereby the surgeon makes
a direct connection from the upper portion of the stomach to the intestine.
Another procedure is stomach stapling. These procedures are significantly
invasive and have a high risk of morbidity and the post-surgery side effects of
poor digestion and nutritional complications.
39
PRODUCTS
Breast Implants and Related Products
We are a leading worldwide manufacturer and marketer of breast implants,
with a diverse product line consisting of a variety of fills, shapes, sizes and
textures. Our breast implants consist of a silicone elastomer, rubber-like shell
filled with either saline solution or silicone gel. The shape of the 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. Our breast implant products are available in an aggregate
of over 200 sizes to meet our customers' preferences and needs. The outside
shell of the breast implants can consist of either a smooth or textured surface,
which generally is chosen by the surgeon. Textured implants were developed by us
primarily in response to concerns about capsular contraction, the formation of
reactive and constrictive tissue around the implant. Our textured implants are
sold at a higher average selling price than smooth implants.
We market our breast implants under the tradename McGhan(R) and the
trademarks BioCell(R) and MicroCell(R). Our net sales for breast implant
products were $84.7 million in the nine months ended September 30, 1999,
representing approximately 47% of our pro forma net sales, after giving effect
to the Collagen acquisition as if it had occurred at the beginning of the
period.
- Saline-filled breast implants. We market and distribute saline-filled
breast implants in the U.S. and abroad primarily for use in breast
augmentation for cosmetic reasons. Our saline-filled breast implants
are distributed in the U.S. pursuant to a 510(k) clearance.
Manufacturers of saline-filled breast implants were recently called by
the FDA to file PMA applications by November 17, 1999. Any
manufacturer that fails to have a PMA application accepted for filing
will lose its 510(k) clearance and will no longer be permitted to
distribute saline-filled breast implants in the U.S. until PMA
approval is obtained. We submitted our PMA application to the FDA on
November 16, 1999. The FDA has 45 days in which to notify us whether
our PMA application is accepted for filing. We currently have the CE
Mark for marketing our saline-filled products in the European
Community. In the nine months ended September 30, 1999, our net sales
for saline-filled breast implants represented approximately 63% of our
total breast implant net sales for that period.
- Silicone gel-filled breast implants. We market and distribute
silicone gel-filled breast implants primarily in Europe and Australia.
In the U.S., we sell a limited number of silicone gel-filled breast
implants for reconstructive surgeries following radical mastectomies.
Our U.S. sales are based on our participation in an adjunct clinical
study for reconstructive and revision surgery approved by the FDA. We
currently have the CE Mark for marketing our silicone gel-filled
products in the European Community. In the nine months ended September
30, 1999, our net sales for silicone gel-filled breast implants
represented approximately 37% of our total breast implant net sales.
Breast implants are placed under either a woman's breast tissue or pectoral
muscle. 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. Silicone gel-filled implants are
inserted pre-filled and require a slightly larger incision. The incision
generally is made as inconspicuously as possible in either the fold of the
breast, around the nipple or under the arm. Breast implant surgery is performed
in an 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 usually lasts less than one hour. General anesthesia is most commonly
used, although local anesthesia may be an option. Reconstructive surgery
generally occurs in a hospital, lasts one to six hours depending on the surgical
technique employed, and in substantially all cases requires more than one
operation over a period of several months.
In addition to breast implants, we develop, manufacture and market an
extensive line of breast and non-breast tissue expanders. The tissue expander is
surgically implanted under the skin at a site where new
40
tissue is desired and is filled over several weeks or months with saline
solution. The increased pressure under the skin results in tissue growth to
generate an increase in skin surface. Our tissue expanders are most commonly
used in the first stage of two-stage breast reconstruction to create additional
tissue at the mastectomy site. In addition, we make and sell a complete line of
tissue expanders that are used for purposes other than breast implant surgery,
including as an alternative to skin grafting to cover burn scars and to correct
birth defects.
Facial Enhancement Products
We offer a full line of facial enhancement products designed to improve
facial appearance by smoothing wrinkles, scars and enhancing the definition of
the lip border. Our primary products in this area are the Zyderm(R) and
Zyplast(R) collagen-based facial implants. We also distribute products
manufactured by third parties, including Hylaform(R) gel and SoftForm(R)
implant.
- Zyderm(R) and Zyplast(R) Implants. Zyderm(R) and Zyplast(R) are
injectable formulations of bovine collagen sourced from our exclusive
domestic closed-herd of cows. Zyderm(R) implants were formulated
especially for people with fine lines or superficial contour defects.
These implants are particularly effective in smoothing delicate frown
and smile lines and fine creases that develop at the corners of the
eyes and above and below the lips, and can also help correct some
kinds of shallow scars. Zyplast(R) implants are designed to treat
deeper depressions and can be used for more pronounced contour
problems, such as deeper scars, lines and furrows, and for areas upon
which more force is exerted, such as the corners of the mouth.
Zyderm(R) and Zyplast(R) implants may be used alone or in conjunction
with one another. Following injection, they produce an immediate
visible difference in the appearance of a patient's skin.
Zyderm(R) and Zyplast(R) implants are dispersed in a saline solution
containing a small amount of lidocaine, a local anesthetic, and
injected with a fine gauge needle into depressed layers of skin to
elevate the area to the level of the surrounding skin surface. As a
result, the Zyderm(R) and Zyplast(R) implants replenish the skin's
natural collagen support layer. The implants take on the texture and
appearance of human tissue and are subject to similar stresses and
aging processes. Consequently, supplemental treatments are necessary
after initial treatment, depending on the location and original cause
of the skin deformity. On average, patients require two to four
treatments per year to maintain the desired result. Because the
products are derived from a non-human source, a skin test must be
performed with a requisite 30-day period to observe the possibility of
allergic reaction in the recipient. In the nine months ended September
30, 1999, Collagen's net sales for Zyderm(R) and Zyplast(R) implants
represented approximately 30% of our total pro forma net sales, after
giving effect to the Collagen acquisition as if it had occurred at the
beginning of the period, and substantially all of our net sales for
facial enhancement products.
Zyderm(R) and Zyplast(R) received the CE Mark in June 1995, allowing
for marketing in the European Community. The FDA granted PMA
applications for Zyderm(R) in July 1981 and for Zyplast(R) in June
1985, allowing for marketing in the U.S. Our Zyderm(R) and Zyplast(R)
line of collagen-based products are the only facial injectable
products currently marketed that have been approved for marketing in
the U.S. by the FDA.
- Hylaform(R) Gel. Hylaform(R) gel is an injectable product for
same-day treatment of facial wrinkles and scars, which can be used
without a skin sensitivity test. We obtained exclusive marketing and
distribution rights to Hylaform(R) gel from BioMatrix, Inc. in
selected international markets and have the option to acquire the U.S.
distribution rights in the future. Hylaform(R) gel received a CE Mark
in December 1995 allowing marketing in the European community, but is
not approved for marketing in the U.S.
- SoftForm(R) Implant. SoftForm(R) implant is a non-resorbable,
long-lasting facial implant for the treatment of deep facial furrows
and creases such as deep frown lines, creases between the nose and
corners of the mouth, and definition of the lip border. We obtained
exclusive
41
worldwide marketing and distribution rights to SoftForm(R) from Tissue
Technologies, Inc. SoftForm(R) received the CE Mark in September 1997,
allowing marketing in the European community and FDA clearance in
September 1998 for marketing in the U.S.
Obesity and Other Products
We develop, manufacture and market devices for the treatment of obesity
through our BioEnterics Corporation subsidiary. Through Collagen, we also
develop, manufacture and market products to treat urinary incontinence, the
involuntary loss of urine from the bladder due to intrinsic sphincter
deficiency.
Our LAP-BAND(R) Adjustable Gastric Banding System is designed to provide
long-term treatment of severe obesity that is minimally invasive and is used as
an alternative to full gastric bypass surgery or stomach stapling. The
LAP-BAND(R) System consists of an adjustable silicone elastomer band which is
laparoscopically placed around the upper part of the stomach through a small
incision, making part of the stomach a small pouch. This slows down the passage
of food and makes the patient feel fuller longer. The LAP-BAND(R) System
procedure is completely reversible. The LAP-BAND(R) System has begun to achieve
acceptance in Europe and Australia, with approximately 35,000 units sold since
1993.
The LAP-BAND(R) System is currently undergoing clinical trials in the U.S.,
and we expect to complete our PMA application in early 2000. Our net sales of
the LAP-BAND(R) System in the nine months ended September 30, 1999 were $11.5
million, representing 6% of our total pro forma net sales, after giving effect
to the Collagen acquisition as if it had occurred at the beginning of the
period.
Contigen(R), our product used to treat urinary incontinence, is a sterile,
bovine dermal collagen sourced from cows. Contigen(R) is injected into the
tissues of and adjacent to the urethra and/or bladder neck. This increases
tissue bulk and subsequently joins the urethral lumen to alleviate urinary
incontinence. The Contigen(R) treatment cycle may require multiple injections at
the start of treatment and may require supplementary injections over time.
We obtained approval from the FDA to market Contigen(R) in September 1993
for the treatment of urinary incontinence. We have granted C.R. Bard exclusive
worldwide marketing and distribution rights to Contigen(R), which is currently
marketed in the U.S. C.R. Bard has received reimbursement codes for Contigen(R)
and is expected to commence marketing in several European nations, Latin
America, Japan, Australia and Canada. Our revenues, including royalties, of
Contigen(R) product in the nine months ended September 30, 1999 were $10.2
million, representing 6% of our total pro forma net sales, after giving effect
to the Collagen acquisition as if it had occurred at the beginning of the
period.
SALES AND MARKETING
Physician Marketing Efforts
- U.S. Sales Organization. In the U.S., we sell our products to plastic
and reconstructive surgeons, cosmetic surgeons, facial and oral
surgeons, dermatologists, outpatient surgery centers and hospitals
through our staff of direct sales people. We estimate that currently
there are approximately 4,600 plastic surgeons, 1,100 cosmetic surgeons
and 8,400 dermatologists in the U.S. As of September 30, 1999, we had
approximately 70 direct sales representatives in the U.S.
- International Sales Organization. Internationally, we sell our
products directly and through independent distributors in more than 60
countries worldwide, including countries in Europe, Central and South
America, Australia and Asia. These sales are managed through regional
sales and marketing employees and, in some countries, through a direct
sales force. As of September 30, 1999, our international direct sales
force consisted of approximately 40 direct sales representatives.
We reinforce our sales and marketing program with telemarketing, which is
designed to increase sales through follow-up on leads and the distribution of
product information to potential customers. We
42
supplement our marketing efforts with appearances at trade shows and
advertisements in trade journals, sales brochures, national print media, radio
and television. In addition, we sponsor symposiums and educational programs to
teach surgeons the leading techniques and methods of using our products.
Patient Education and Services
Because many of our products involve elective procedures, the costs of
which are borne directly by the patients, we strive to educate patients about
our products and provide services to make our products easier to understand and
access. We accomplish this in part through the formation in the U.S. of the
Aesthetic Marketing Alliance. This program pools physician resources through the
payment of monthly fees to purchase direct-to-consumer magazine and Internet
advertising to increase patient awareness and understanding of our various
aesthetic products and procedures. In January 1998, we launched our Aesthetic
Marketing Alliance program aimed at plastic and reconstructive physicians
involved in breast augmentation procedures. As of September 30, 1999,
approximately 1,150 physicians have enrolled in this program.
We direct potential patients accessing our website or calling the toll-free
numbers in our advertisements who want information about aesthetic products and
procedures to physicians in the Aesthetic Marketing Alliance. This helps
patients to better understand aesthetic medicine options while allowing
physicians to increase the visibility and breadth of their practice. Physicians
enrolled in the Aesthetic Marketing Alliance can also offer their patients an
option to finance cosmetic procedures for up to 48 months with interest rates
currently starting as low as 9.9% APR. We provide this option to physicians
through our strategic alliance with Life Financial Corporation.
STRATEGIC ALLIANCES
- Advanced Tissue Sciences. In May 1999, we entered into a strategic
alliance with Advanced Tissue Sciences, Inc. under which we license for
development, marketing and sales five of Advanced Tissue's human-based,
tissue-engineered products for surgical applications. These
applications are (1) temporary skin substitutes for the treatment of
laser burns, (2) cartilage for plastic and reconstructive facial
surgery, (3) injectable collagen for breast reconstruction, (4)
injectable collagen for the correction of facial wrinkles and (5)
injectable collagen to act as a bulking agent for the treatment of
urinary incontinence.
One goal of this alliance is to provide us with a potential human-based
collagen product line which does not require skin tests before use.
Advanced Tissue will be responsible for the development of the products
and the related manufacturing processes, and we will be responsible for
the related clinical, regulatory, sales and marketing activities. We
are in the process of seeking to obtain the necessary FDA approval for
some of these human-based collagen products to be marketed in the U.S.
As of November 1, 1999, our total investment in the Advanced Tissue
strategic alliance was $10.0 million. Of this amount, $7.2 million was
paid for licensing rights and the remainder was paid for common stock,
and warrants to purchase common stock, of Advanced Tissue. We also are
obligated to pay Advanced Tissue an additional $2.0 million milestone
payment for each of the marketed products that receives FDA approval,
up to $10.0 million in total for all of the products. Finally, Advanced
Tissue is entitled to royalties from us on a sliding scale based on
overall product sales. We have agreed to hold any investment in
Advanced Tissue common stock until at least October 2002.
- BioMatrix, Inc. We have exclusive rights to market and distribute
Hylaform(R) gel in Europe and selected countries outside of Europe from
BioMatrix. We also have the option to acquire distribution rights in
the U.S. once BioMatrix obtains the necessary approvals from the FDA.
- C.R. Bard. In April 1987, we entered into an amended and restated
distribution agreement with C.R. Bard, whereby we granted C.R. Bard
exclusive worldwide marketing and distribution
43
rights to Contigen(R) for the treatment of urinary incontinence. Under
the terms of the agreement, we sell Contigen(R) to C.R. Bard and we
receive a royalty on end-market sales of Contigen(R). C.R. Bard has
received reimbursement codes for Contigen(R) and is expected to
commence marketing in several European nations, Latin America, Japan,
Australia and Canada. Contigen(R) is already being marketed in the U.S.
In addition, we have entered into other alliances designed to expand our
product line as potential new technologies become available or to make our
existing products more attractive. For example, our strategic alliance with
NovaMed, Inc. gives us access to breast implants that are filled with a
water-based gel. We expect to continue evaluating strategic alliances that may
assist us in developing new products and expanding our distribution network.
MANUFACTURING
Breast Implants and Related Products
Our breast implant and related tissue expander products are manufactured by
our subsidiaries, McGhan Medical Corporation in our Santa Barbara and
Carpinteria, California facilities and McGhan Ltd. in our Wicklow, Ireland
facility. We plan to begin manufacturing some of our breast implant products in
Costa Rica in 2000. We manufacture our devices and products in a controlled
environment utilizing specialized equipment for precision measurement, quality
control, packaging and sterilization. Our quality control procedures begin with
our suppliers meeting our standards of compliance. Our in-house quality control
procedures begin upon the receipt of raw components and materials and continue
throughout production, sterilization and final packaging. We maintain quality
control and production records of each product manufactured and encourage the
return of any defective units for analysis.
All of our domestic activities are subject to FDA regulations and
guidelines, and our products and manufacturing procedures are continually
monitored or reviewed by the FDA. In 1997 and 1999, the FDA conducted a review
of our main U.S. manufacturing facilities. In 1998, the FDA conducted reviews of
the manufacturing facility of McGhan Ltd.
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
medical device manufacturers, including us. Under guidelines established by the
FDA, we have been successful in using other companies to meet our silicone raw
material needs, but at higher prices. Prior to 1998, we also devoted resources
to develop our own raw materials manufacturing capability through a subsidiary
in Wicklow, Ireland.
In late 1998, we entered into a strategic alliance with a privately-held
specialty chemical company, whereby that company has become our exclusive
supplier of silicone raw materials and has taken over the operation of our 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 initiatives like our just-in-time inventory and
new product development. This alliance also provides us with the technical
expertise necessary to become a vertically-integrated manufacturer of virtually
all of our silicone raw material needs in the event the supplier is unable to
meet our requirements due to natural disaster, industrial accidents or other
adverse events. We cannot assure you that we will not experience periodic
disruptions in our source of supply or the quantities needed due to regulatory
or other factors.
Facial Enhancement Products
Zyderm(R) and Zyplast(R), our primary collagen-based injectable products,
are manufactured by our recently acquired subsidiary, Collagen, in our Fremont,
California facility. We use a patented viral inactivation process for our
collagen-based products to promote both safety and quality. The production
processes use readily available chemicals and enzymes and bovine dermis sourced
from cows as our source of collagen. Since 1987, the hides have been sourced
from a domestic closed herd, in an effort to prevent diseases such as mad cow
disease, from contaminating our collagen-based products. We believe that the
44
supply of raw materials and processing materials for our manufacturing
operations can be purchased from other sources. Our collagen-based products have
refrigerated shelf lives of 36 months. We typically ship products to physicians
as orders are received on an express delivery basis and have no material
backlog.
Our manufacturing facility for collagen-based products is subject to
regulatory requirements and periodic inspection by regulatory authorities, such
as the FDA in the U.S. In June 1995, our quality system was audited to ensure
that our products conform to the provisions of the European Medical Devices
Directive. After the completion of the audit and review of the technical
documentation, we were granted permission to affix the CE Mark on our Zyderm(R)
and Zyplast(R) implant product packages and to sell these products in the
European Community. An annual surveillance audit of our quality system was
performed in March 1998 and our quality systems were recertified to permit us to
sell products in the European Community.
Hylaform(R) gel and the SoftForm(R) implant are manufactured by third
parties. Therefore, we are dependent on these third parties to manufacture and
supply these products to us as required.
Obesity and Other Products
Our obesity treatment products are manufactured by our subsidiary,
BioEnterics Corporation. BioEnterics manufactures the LAP-BAND(R) System at our
facility in Carpinteria, California. In 1998, the FDA reviewed BioEnterics'
manufacturing facilities. Contigen(R) is manufactured by us at our Fremont,
California facility -- the same facility where Zyderm(R) and Zyplast(R) are
produced.
COMPETITION
Breast Implant Products
Our sole significant competitor in the U.S. breast implant market is Mentor
Corporation. All other competitors discontinued production of breast implants in
the U.S. by 1993, 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, we compete with several other manufacturers, including Mentor
Corporation, PIP, Nagor, Silimed and Laboratories Sebbin. Several of these
manufacturers received 510(k) clearance from the FDA to market saline-filled
breast implants in the U.S. In August 1999, the FDA called for PMA applications
on saline-filled breast implants to be filed within 90 days. Any manufacturer
that fails to file an adequate application by November 17, 1999 will lose its
510(k) clearance and will no longer be permitted to distribute saline-filled
breast implants in the U.S. without first obtaining a PMA. We submitted our PMA
application to the FDA on November 16, 1999. The FDA has 45 days in which to
notify us whether our PMA application has been accepted for filing.
We believe that the principal factors permitting our products to compete
effectively with our competitors are our high-quality product consistency, our
variety of product designs, management's knowledge of and sensitivity to market
demands, plastic surgeons' familiarity with our products and their respective
brand names, and our ability to identify, develop and, if appropriate, license,
patented products embodying new technologies.
Facial Enhancement Products
Several companies and institutions compete directly with us in the facial
aesthetic applications business. Some of these companies and institutions are
developing human collagen-based products which, when and if commercially
introduced, may have actual and perceived advantages over our bovine collagen-
based products. Some of these companies and institutions may have substantially
greater capital resources, research and development staffs and facilities, and
experience in conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing products similar to ours. These companies and
institutions may represent significant long-term competition for us. Our
competitors may succeed in developing technologies and products that are more
effective than ours, which may render our technology and products obsolete or
non-competitive.
45
Our injectable products also compete in the dermatology and plastic surgery
markets with substantially different treatments, such as laser treatments,
chemical peels, fat injections, gelatin- or cadaver-based collagen products,
dermabrasion, botulinum toxin injections and face lifts. In addition, several
companies are engaged in research and development activities examining the use
of collagen and other biomaterials for the correction of soft tissue defects.
Obesity and Other Products
The LAP-BAND(R) System competes with the Swedish Adjustable Gastric Band in
Europe and Australia. This band is manufactured by Obtech Medical A.G., a
privately-held, Swiss company. This product is not currently available in the
U.S. Contigen(R) competes with comparable bulking agents and some surgical
procedures, including sling procedures, bladder neck suspension and insertion of
bone anchors.
PRODUCT DEVELOPMENT
We have a qualified staff of over 50 doctorates, scientists, engineers and
technicians working on material technology and product design as part of our
research and development efforts. In addition, we are directing our research and
development toward new and improved products based on scientific advances in
technology and medical knowledge together with qualified input from the surgical
profession. For the nine months ended September 30, 1999, after giving effect to
the Collagen acquisition as if it had occurred at the beginning of the period,
we had pro forma research and development expenses of $9.8 million, representing
approximately 5.4% of our pro forma net sales for the period.
PATENTS AND LICENSE AGREEMENTS
We currently own or have exclusive licenses covering more than 90 patents
and patent applications throughout the world. Certain of our patents pertaining
to our facial aesthetic application products are licensed to us under an
agreement with Cohesion Technologies, Inc., which was spun off from Collagen
Corporation in August 1998. In connection with the spin-off, Collagen
Corporation changed its name to Collagen Aesthetics, Inc. In the spin-off,
Collagen Corporation assigned substantially all its patents and patent
applications to Cohesion. Cohesion in turn granted Collagen Aesthetics, Inc. an
exclusive, worldwide, perpetual, fully paid-up license to the assigned patents
and patent applications in the fields of human aesthetic products, technologies
and treatments.
Our policy is to actively seek patent protection for our products and
manufacturing processes when appropriate. We manufacture and market our products
both under our own patents and under our license agreements with other parties.
We also have license agreements allowing other companies to manufacture products
using some of our technology in exchange for royalties and other compensation or
benefits. Included in our currently owned patents are the product and processes
that we have developed and which are used to manufacture reduced diffusion
silicone gel-filled breast implants and used for the resulting barrier coat
breast implants. We also have patents relating to our other breast implant
products, tissue expanders, textured surfaces, injection ports and valve
systems, and obesity and general surgery products.
In 1998, we reviewed our portfolio of patents and licenses and determined
in several situations that the licensed patents had expired, were invalid, were
unenforceable, were not being utilized or that the licensor had breached its
obligations to us. Accordingly, we ceased paying several million dollars in
annual royalties under some of our license agreements. We are currently engaged
in litigation and arbitration with various former licensors over our obligations
and whether we are entitled to recover past royalties that were paid. In the
proceedings, the former licensors are seeking payment of the royalties we
determined were not owed as well as additional damages and royalties for our
ongoing sales of formerly royalty bearing products. We have also brought suit
against various manufacturers and other parties that we believe have been
infringing on our intellectual property. The proceedings involving some of these
patents and licenses are discussed more fully in "-- Legal Proceedings -- Patent
and License Litigation."
46
Although we believe our patents are valuable, our knowledge and experience;
our creative product development and marketing staff; and our trade secret
information with respect to manufacturing processes, materials and product
design, have been equally important in maintaining our proprietary product
lines. As a condition of employment, we require all employees to execute a
confidentiality agreement relating to proprietary information and patent rights.
While we make efforts to protect our trade secret information, others may
independently develop or otherwise acquire substantially equivalent proprietary
information or techniques, or gain access to our proprietary technology or
disclose this technology. Any of these factors could adversely impact the value
of our proprietary trade secret information and harm our business.
GOVERNMENT REGULATIONS
United States
Application and Clearance Procedures
The FDA and corresponding state and foreign agencies regulate the clinical
testing, manufacture and sale of medical devices, including labeling,
advertising and record keeping. Most of our products manufactured or sold in the
U.S. are classified as medical devices subject to regulation by the FDA.
Unless an exemption applies, each medical device that we wish to market in
the U.S. must receive either a "510(k)" clearance or a PMA from the FDA under
the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process
usually takes three to nine months but can last longer. The FDA's PMA process
generally requires from one to three years or more. We cannot assure you that we
will obtain 510(k) clearance or a PMA for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance
or a PMA process based upon statutory criteria. These criteria include the level
of risk that the FDA perceives is associated with the device and a determination
of whether the product is within a type that is similar to devices that are
already legally marketed. Those devices deemed to pose relatively less risk are
placed in either Class I or Class II. Class II devices generally require the
manufacturer to submit a premarket notification requesting 510(k) clearance
unless an exemption applies. Some Class I devices may also require 510(k)
clearance.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a "predicate device,"
a legally marketed Class I or Class II medical device, or a preamendment Class
III medical device that was in commercial distribution before May 28, 1976 for
which the FDA has not called for PMAs. The FDA may determine that the proposed
device is not substantially equivalent to a predicate device, or that additional
information is needed before it is deemed substantially equivalent to a
predicate device or that additional information is needed before a substantial
equivalence determination can be made.
Devices deemed by the FDA to pose greater risk, or to be novel devices
lacking a legally marketed predicate, are placed in Class III and are required
to undergo the PMA process. A PMA application must contain the results of
clinical trials, the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. The FDA's review time is often significantly extended by FDA requests
for additional information or clarification of information already provided in
the submission. Modifications to a device that is the subject of an approved
PMA, its labeling or its manufacturing site or process may require approval by
the FDA of PMA supplements or new PMAs. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
If human clinical trials of a device are required in order to obtain
adequate safety, performance and/or efficacy data, and the device presents a
"significant risk" to the patient, the sponsor of the trial, usually the
manufacturer or the distributor of the device, will have to file an
Investigational Device Exemption (IDE) application prior to commencing the human
clinical trials necessary to complete a
47
PMA application. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and the study protocol is approved by one or more
appropriate Institutional Review Boards, human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate Institutional Review Boards without the need
for FDA approval. Sponsors of U.S. clinical trials are permitted to charge for
investigational devices distributed in the course of the study provided that
compensation does not exceed recovery of the costs of manufacture, research,
development and handling. An IDE supplement must be submitted and approved by
the FDA and appropriate Institutional Review Boards before a sponsor or
investigator may make a change to the investigational plan that may affect its
scientific soundness or the rights, safety or welfare of human subjects. The FDA
can disapprove an IDE or withdraw an IDE approval if there is reason to believe
that the risks to subjects are not outweighed by the anticipated benefits, or if
the sponsor fails to comply with applicable requirements or conditions of
approval.
The continuing trend of more stringent FDA oversight in product clearance
and enforcement activities has caused medical device manufacturers to experience
longer approval cycles, more uncertainty, greater risk and higher expenses.
Failure to obtain, or delays in obtaining, the required regulatory approvals for
new products could hurt our business, as could product recalls. In addition, we
cannot assure you that the FDA will give us approval to market our current
products for broader or different applications, or that it will grant us
approval with respect to separate product applications which represent
extensions of our basic technology, or that existing approvals will not be
withdrawn. In addition, it is possible that the FDA will promulgate additional
regulations restricting the sale of our present or proposed products.
A majority of our products are classified as Class III devices, including
all of our injectable bovine collagen-based products, breast implant products
and obesity treatment products. All of our products described in "-- Products,"
other than Hylaform(R) gel, the LAP-BAND(R) System and our silicone gel-filled
breast implants, have been approved or cleared for commercial sale in the U.S.
In the ongoing process of compliance with applicable laws and regulations,
we have incurred, and will continue to incur, substantial costs that 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. Manufacturers of
saline-filled breast implants must have PMA applications accepted for filing by
the FDA by November 17, 1999. Any manufacturer that fails to submit an adequate
application will not be permitted to commercially distribute saline-filled
breast implants in the U.S. without obtaining a PMA. We submitted our PMA
application to the FDA on November 16, 1999. The FDA has 45 days in which to
notify us whether our PMA application has been accepted for filing. A decision
by the FDA that our application is either not fileable or not approvable would
have a material adverse effect on our operations and financial position. We will
decide on a product-by-product basis whether to respond to any future calls for
PMAs and regulatory requirements.
We are in the process of conducting trials in preparation for potential PMA
filings on two of our products. In January 1999, we began IDE clinical trials
for silicone gel-filled implants for augmentation, reconstructive and revision
uses. We are also conducting a clinical study of the LAP-BAND(R) System in the
U.S. under an IDE granted by the FDA in April 1995, and plan to complete
submission of the results of this study by January 2000 as part of our
LAP-BAND(R) PMA application. In addition, in 1994, the FDA granted LipoMatrix,
Inc., a former subsidiary of Collagen, an IDE on the Trilucent(R) breast
implant. LipoMatrix began a pilot study for this product in December 1994 and a
pivotal study in September 1996. Enrollment in the pivotal study was stopped in
June 1997, owing to planned changes in the product which would result in the
need for a new pivotal study. We continue to follow up on the women who received
this product in the U.S. as per protocol. The Trilucent(R) product was never
marketed commercially in the U.S. See "-- Legal Proceedings -- Trilucent(R)
Implant Matters."
48
Manufacturing Regulations and Reporting Requirements
In addition to the foregoing application and clearance procedures, we must
comply with the current Quality Systems Regulation in order to receive FDA
approval to market new products and to continue to market current products.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to detailed Quality Systems Regulation requirements, which include
testing, control and documentation. Manufacturers must also comply with Medical
Device Reporting requirements that a company report to the FDA any incident in
which its product may have caused or contributed to a death or serious injury.
If a malfunction does not result in death or serious injury, a manufacturer must
report whether a recurring malfunction would be likely to cause or contribute to
death or serious injury. Labeling and promotional activities are subject to
scrutiny by the FDA and state regulatory agencies and, in some circumstances, by
the Federal Trade Commission. FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved ("off label") uses. Manufacturers of
medical devices must also report to the FDA any notices of corrections or
removals of marketed products, and submit periodic reports for PMA products.
Investigational products are also subject to reporting requirements, such as
reporting of deaths or serious injuries, periodic reporting, and special reports
as may be required by the FDA.
We are registered with the FDA as a manufacturer of medical devices. We are
subject to routine inspection by the FDA and state agencies for compliance with
Quality Systems Regulation requirements, Medical Device Reporting requirements
and other applicable regulations. Our facilities and manufacturing processes
also have been inspected periodically by the State of California and other
agencies, and remain subject to audit from time to time. We believe that we are
in substantial compliance with all applicable federal and state regulations.
Nevertheless, we cannot assure you that the FDA or a state agency will agree
with us, or that our Quality Systems Regulation compliance will not be
challenged at some subsequent point in time. Enforcement of Quality Systems
Regulation has increased significantly in the last several years, and the FDA
has stated publicly that compliance will be scrutinized more strictly. In the
event that we are determined to be in noncompliance with FDA regulations, to the
extent that we are unable to convince the FDA or state agency of the adequacy of
our compliance, the FDA or state agency has the power to assert penalties or
remedies, including injunction or temporary suspension of shipment until
compliance is achieved. Noncompliance may also lead to a recall of a product.
These penalties or remedies could have a materially adverse effect on our
business, financial condition and results of operations.
International
Medical device laws and regulations similar to those in the U.S. are also
in effect in many of the countries to which we export or sell our products.
These range from comprehensive device approval requirements for some or all of
our medical device products to requests for product data or certifications.
Some countries have historically permitted human studies earlier in the
product development cycle than U.S. regulations permit. Other countries, such as
Japan, have requirements similar to those of the U.S. Disparities in the
regulation of medical devices may result in more rapid product clearance in some
countries than in others.
The primary regulatory environment in Europe is that of the European
Community which consists of 15 countries encompassing most of the major
countries in Europe. Other countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the European Community with
respect to medical devices. The European Community has adopted numerous
directives and standards regulating the design, manufacture, clinical trial,
labeling, and adverse event reporting for medical devices. The principal rules
pertaining to medical devices in the European Community are found in the
European Medical Devices Directive, 93/42/EC.
Devices that comply with requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive and, accordingly, can be
commercially distributed throughout the European Community. The method of
assessing conformity varies depending on the class of the product, but normally
involves a combination of
49
self-assessment by the manufacturer and a third-party assessment by a notified
body. This third-party assessment may consist of an audit of the manufacturer's
quality system, review of a technical file or specific testing of the
manufacturer's products. An assessment by a notified body in one country within
the European Community is required in order for a manufacturer to commercially
distribute the product throughout the European Community. We cannot assure you
that we will be successful in meeting the European quality standards or other
certification requirements. We currently have the CE Mark for our saline-filled
and silicone gel-filled breast implants. Zyderm(R) and Zyplast(R) received CE
Mark on June 23, 1995, Contigen(R) received CE Mark on October 26, 1995,
Hylaform(R) received CE Mark on November 2, 1995 and SoftForm(R) received CE
Mark on September 22, 1997.
While no additional pre-market approvals for individual European Community
countries are required prior to the marketing of a device bearing CE Mark in
most European Community countries, practical complications with respect to
market introduction may occur. For example differences among countries have
arisen with regard to labeling requirements. In addition, advertising and
promotion of medical devices are governed primarily by national laws, subject to
certain general European Community directives on advertising. Some countries
also maintain registries or other special systems for particular types of
devices, including breast implants.
Unapproved devices subject to 510(k) clearance or PMA requirements intended
solely for export may be exported legally without FDA approval provided certain
requirements are met. However, we must, among other things, notify the FDA and
meet the importing country's requirements. We cannot assure you that we will
receive FDA export approval when this approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import.
Failure to receive import approval from other countries, or to obtain
Certificates of Exportability when required, or to meet FDA's export
requirements or to obtain FDA export approval when required to do so, could have
a material adverse effect on our business, financial condition and results of
operations.
THIRD PARTY REIMBURSEMENT
In the U.S., healthcare providers that purchase medical devices such as
Contigen(R) generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans to reimburse all or part of
the cost of the procedure in which the device is used. This reimbursement is
typically made at a fixed rate. In October 1998, a federal law was signed that
mandates nationwide insurance coverage of reconstructive surgery following a
mastectomy. Historically, not all insurance providers covered this procedure.
Reimbursement is becoming increasingly available outside the U.S., for example
in Europe and Australia, where the purchaser of medical devices such as the
LAP-BAND(R) may be reimbursed.
LIMITED WARRANTIES
We make every effort to conduct our product development, manufacturing,
marketing, and service and support activities with careful regard for the
consequences to patients. As with any medical device manufacturer, we
occasionally receive communications from surgeons or patients with respect to
various products claiming the products were defective and have resulted in
injury to the patient. We provide a limited warranty to the effect that any
breast implant, tissue expander or obesity treatment product that proves
defective will be replaced with a new product of comparable type without charge.
In the case of our breast implant products sold and implanted in the U.S., our
ConfidencePlus(TM) program provides product replacement and some financial
assistance for some surgical procedures required within ten years of
implantation.
EMPLOYEES
As of September 30, 1999, we had approximately 1,127 employees, of which
approximately 832 were in the U.S. and approximately 295 were at international
operations. We expect this number to decrease by the end of 1999 as our
integration of Collagen continues. Except for our employees at our manufacturing
50
facility in Wicklow, Ireland, none of our employees are represented by a labor
union. We offer our employees competitive benefits and wages comparable with
employees for the type of business and the location/country in which the
employment occurs. We consider our employee relations to be good throughout
operations.
PROPERTIES
We lease all of our office, manufacturing and distribution facilities, as
follows (including approximate square footage): Carpinteria, California (61,000
square feet), Fremont, California (61,000 square feet), Santa Barbara,
California (187,000 square feet), New York, New York (2,200 square feet) and
Arklow County, Wicklow, Ireland (53,000 square feet). In addition, we have
leases for space in Palo Alto, California, Las Vegas, Nevada, Mexico, The
Netherlands, Switzerland and the United Kingdom which we no longer use, or
intend to no longer use in the near future, for our operations.
Our international sales offices, located in Australia, France, Germany,
Italy, Japan, The Netherlands, Spain and the United Kingdom, lease office and
warehouse space ranging from 1,500 square feet to 4,000 square feet. We believe
our facilities are generally suitable and adequate to accommodate our current
operations.
LEGAL PROCEEDINGS
Breast Implant Litigation
Final Settlement on Litigation. Prior to the final settlement order issued
by federal Judge Sam C. Pointer, Jr. of the U.S. District Court for the Northern
District of Alabama, Southern Division on February 1, 1999, we 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-filled) that were
implanted before June 1, 1993 were consolidated into a mandatory class action
settlement and dismissed. Our settlement order became final and non-appealable
on March 3, 1999. In May 1999, we made the final payment in connection with the
class action litigation using proceeds from our $31.1 million equity issuance.
See "Our Company -- Recent Developments" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Current Product Liability Exposure. Currently, our product liability
litigation relates largely to saline-filled products that 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 are not expected
to have a material financial impact on us.
Outside the U.S., where we have been selling silicone gel-filled implants
without interruption, and where the local tort systems do not encourage or allow
contingency fee arrangements, we have had only a minimal number of product
liability lawsuits and no material financial exposure.
Resolution of 3M Contractual Indemnity Claims. In connection with the
breast implant litigation, 3M asserted against us a contractual indemnity
provision which was part of the August 1984 transaction in which our McGhan
Medical subsidiary purchased 3M's plastic surgery business. To resolve these
claims, on April 16, 1998, we entered into a provisional agreement with 3M under
which we agreed to seek to obtain releases of claims asserted against 3M in
lawsuits involving breast implants manufactured by our McGhan Medical
subsidiary. The 3M agreement provides for release of 3M's indemnity claim upon
achievement of an agreed minimum number of conditional releases for 3M.
Under the terms of the 3M agreement, as later amended in January 1999, we
paid $3.0 million to 3M in February 1999. Also under the terms of the 3M
agreement, we will assume limited indemnification obligations to 3M beginning in
the year 2000, subject to a cap of $1.0 million annually and $2.1 million in
total, depending on the resolution of other cases which were not settled prior
to the issuance of the final order.
51
Ongoing Litigation Risks. Although we expect the breast implant litigation
settlement to end as a practical matter our involvement in the current mass
product liability litigation in the U.S. over breast implants, there remain a
number of ongoing litigation risks, including:
- Collateral Attack. As in all class actions, we may be called upon to
defend individual lawsuits collaterally attacking the settlement even
though it is now non-appealable. However, the typically permissible
grounds for those attacks, in general, lack of jurisdiction or
constitutionally inadequate class notice or representation, are
significantly narrower than the grounds available on direct appeal.
- Non-Covered Claims. The settlement does not include several
categories of breast implants which we 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. We regard 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 U.S. has to date been
minimal, and the court has with minor exceptions rejected efforts by
foreign plaintiffs to file suit in the U.S.
Trilucent(R) Implant Matters. On November 6, 1998, Collagen announced the
sale of its LipoMatrix, Inc. subsidiary, manufacturer of the Trilucent(R) breast
implant, to Sierra Medical Technologies. Collagen accounted for LipoMatrix as a
discontinued operation in its 1998 fiscal year.
On March 8, 1999, the United Kingdom Medical Devices Agency (MDA) announced
the voluntary suspension of marketing and voluntary withdrawal of the
Trilucent(R) implant in the United Kingdom. The MDA stated that its actions were
taken as a precautionary measure and did not identify any immediate hazard
associated with the use of the product. The MDA further stated that it sought
the withdrawal because it had received "reports of local complications in a
small number of women" who have received those implants, involving localized
swelling. The same notice stated that there "has been no evidence of permanent
injury or harm to general health" as a result of these implants. Subsequently,
Lipomatrix's notified body in Europe suspended the product's CE Mark pending
further assessment of the long-term safety of the product. Sierra Medical has
since stopped sales of the product.
Collagen retained the liability for Trilucent(R) implants sold prior to
November 6, 1998. Collagen also agreed with the United Kingdom National Health
Service that, for a period of time, it would perform certain product
surveillance with respect to United Kingdom patients implanted with the
Trilucent(R) implant and pay for explants for any United Kingdom women with
confirmed Trilucent(R)implant ruptures. Any swelling or inflammation relating to
the Trilucent(R) implants appears to resolve upon explantation. At June 30,
1999, Collagen increased by $11.5 million its provision for LipoMatrix as a
discontinued operation. We are a party to one lawsuit brought by a patient
claiming damages from the Trilucent(R) breast implant product that is pending in
the U.K. In addition, we are a party to a legal action pending in Belgium
brought by a patient against her surgeon nearly two years before the March 1999
withdrawal of the Trilucent(R) breast implant product. That surgeon has now
impleaded Collagen as a third party. In the U.S., a total of 165 women received
Trilucent(R) breast implants in two clinical studies; enrollment in both studies
ended by June 1997. No lawsuit has been filed and we have not received any
notice of claim as a result of the implantation of any Trilucent(R) breast
implants in the U.S.
Patent and License Litigation
In February 1999, Inamed and certain of our subsidiaries were named as
respondents in an arbitration commenced by Dr. Lubomyr I. Kuzmak at the American
Arbitration Association. Dr. Kuzmak alleges that, as of the date of filing of
the arbitration, he was owed approximately $400,000 in unpaid royalties under a
license agreement covering four U.S. patents in the field of gastric banding
naming Dr. Kuzmak as an inventor. In the past, we worked with Dr. Kuzmak,
through our subsidiary BioEnterics, in the development and improvement of
gastric banding technology.
52
Inamed has moved to be dismissed from the arbitration. We have denied all
of the material allegations raised by Dr. Kuzmak and have asserted affirmative
defenses and counterclaims, including noninfringement, invalidity and
unenforceability for inequitable conduct before the U.S. Patent and Trademark
Office. An arbitration hearing is scheduled to begin in December 1999; however,
Dr. Kuzmak is seeking an adjournment.
In addition, in February 1999, we filed an action in the U.S. District
Court for the Central District of California against Dr. Kuzmak seeking a
declaratory judgment of invalidity, unenforceability, and non-infringement of
the patents to which Dr. Kuzmak claims ownership. Dr. Kuzmak has moved to
dismiss the action for lack of personal jurisdiction. That motion was heard in
September 1999, and no decision has been rendered. We are confident that our
defenses have considerable merit, although we cannot assure you that the
resolution of the dispute with Dr. Kuzmak will not require us to pay damages and
future royalties.
In January 1999, Medical Products Development Inc. instituted an action
against our subsidiary McGhan Medical Corporation in the U.S. District Court for
the Central District of California. Medical Products Development alleges that
McGhan Medical has infringed on some of its U.S. patents and has breached an
agreement between McGhan Medical and Medical Products Development that
exclusively licensed those patents to McGhan Medical. Those patents pertain to
the textured surface of the silicone shell used in our breast implants and the
methods of making those textured shells. Until last year, McGhan Medical was the
exclusive licensee under these patents and paid royalties to Medical Products
Development on sales in the U.S. of its textured implant products. In 1997, the
last full year for which McGhan Medical paid royalties under the license, McGhan
Medical paid Medical Products Development approximately $2.5 million in
royalties. In 1994, McGhan Medical and Medical Products Development entered into
a consent judgment in settlement of a dispute which stipulated that the patent
claims were valid in certain respects. The consent judgment did not address
McGhan Medical's present non-infringement defense nor its unenforceability
defense. Medical Products Development is seeking unpaid royalties up until the
date of termination of the license, unspecified damages, including enhanced
damages for alleged willful infringement, and an injunction. The unpaid
royalties allegedly due when the lawsuit was commenced were approximately $1.0
million.
McGhan Medical filed an answer denying all of the material allegations of
Medical Products Development's complaint and raising affirmative defenses and
counterclaims of non-infringement, invalidity on grounds not precluded by the
consent judgment, unenforceability of the patents and breach of contract. McGhan
Medical believes that its textured breast implant products are made using
significantly different processes than that claimed in the patents, and that the
alleged inventor of the patents engaged in inequitable conduct before the U.S.
Patent and Trademark Office during prosecution of the patents. In August 1999,
the court granted Medical Products Development's motion to dismiss some of the
counterclaims, and on its own motion dismissed the remaining counterclaims. In
September 1999, Medical Products Development filed a motion for leave to amend
its complaint to add another cause of action for breach of contract. Discovery
is currently ongoing. In November 1999, we moved for summary judgment on grounds
of unenforceability owing to inequitable conduct and of non-infringement. That
motion is pending. A scheduling order in the case calls for a trial in January
2000. We believe our affirmative defenses have considerable merit, but we cannot
assure you that the resolution of the action will not result in the payment of
damages and future royalties or limit our ability to sell textured breast
implants covered by the patents.
In May 1998, Societe Anonyme de Development des Utilisations du Collagene
(SADUC) commenced an arbitration under the rules of the International Chamber of
Commerce against Collagen Corporation under a technology license and human
collagen supply agreement between the parties. Following the spin-off of
Cohesion Technologies, Inc., Collagen Corporation changed its name to Collagen
Aesthetics, Inc. SADUC is ultimately owned by Rhone-Poulenc. SADUC seeks
recovery for alleged lost profits and royalties for Collagen Corporation's
allegedly wrongful termination of the agreement as well as compensation for
confidential information allegedly misappropriated by Collagen Corporation,
including the assignment to SADUC of certain Collagen Corporation patents
allegedly disclosing and claiming processes allegedly developed by SADUC. SADUC
seeks approximately $4.5 million in termination damages and
53
$2.1 million as losses for breach of the contractual confidentiality
obligations, plus ongoing royalties. Collagen Corporation has denied all
material allegations, as it is Collagen Corporation's belief that SADUC breached
the agreement by being unable and unwilling to supply the specified product at
the contract price. In addition, Collagen Corporation has stated that its
patents do not disclose or claim any of SADUC's allegedly confidential
information, and that SADUC's allegedly confidential information was neither
novel nor useful. Accordingly, Collagen Corporation seeks rescission of the
agreement and restitution to it of all amounts paid and the costs incurred by it
in attempting to perform under the agreement. Collagen Corporation's position is
believed to have considerable merit, but we cannot assure you that the
resolution of this arbitration will not require us to pay damages or require
these patents to be assigned to SADUC.
Other Litigation
We are involved in various legal actions arising in the ordinary course of
business, the majority of which involve product liability claims alleging
personal injuries and economic harm as a result of ruptures in breast implants.
In our experience, claimants typically do not allege that the release of saline
solution causes any chronic condition or systemic disease. While the outcome of
these matters is currently not determinable, we believe that these matters,
individually or in the aggregate, will not have a material adverse effect on our
business, results of operations or financial condition.
54
MANAGEMENT
The following table sets forth information regarding our executive officers
and directors as of November 16, 1999:
NAME AGE POSITION
---- --- --------
Richard G. Babbitt......................... 73 Chairman and Chief Executive Officer
Ilan K. Reich.............................. 45 Director and President
Michael J. Doty............................ 52 Senior Vice President and Chief Financial
Officer
David E. Bamberger......................... 42 Senior Vice President, Secretary and
General Counsel
John Strohmeyer............................ 55 Vice President, Manufacturing
James E. Bolin(1)(2)....................... 41 Director
Malcolm R. Currie, Ph.D.(1)................ 72 Director
John F. Doyle(2)........................... 70 Director
Mitchell S. Rosenthal, M.D.(2)............. 64 Director
David A. Tepper............................ 42 Director
John E. Williams, M.D.(1).................. 78 Director
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Babbitt has served as the Chief Executive Officer of Inamed since
January 22, 1998, Chairman since February 6, 1998 and President between January
22, 1998 and December 22, 1998. Prior to 1998, for more than five years, he was
associated with DNA Technologies, Inc., Ben Hogan Company, B.I. Industries,
American Safety Equipment Corporation, Welsh Manufacturing and Medical Supply
Company in Chief Executive Officer and Board positions. Mr. Babbitt is a
graduate of Purdue University and holds Bachelor of Science and Bachelor of
Naval Science Tactics degrees. He also served as an officer in the United States
Marine Corps.
Mr. Bamberger has served as Senior Vice President and General Counsel of
Inamed since June 1, 1999, and Secretary since July 21, 1999. Prior to joining
Inamed, for approximately five years, Mr. Bamberger was a partner at Olshan
Grundman Frome Rosenzweig & Wolosky LLP in New York, specializing in corporate
and general litigation. Prior to 1994, he was vice president and general counsel
of TPI Enterprises, Inc., a publicly-traded company, and before that, Senior
Counsel with MacAndrews & Forbes Holdings, Inc. He was also an attorney at
Simpson Thacher & Bartlett and Skadden Arps Slate Meagher & Flom. Mr. Bamberger
holds a J.D. from Harvard Law School and a B.A. from Brandeis University.
Mr. Bolin has served as a director of Inamed since March 18, 1999. Mr.
Bolin has been a Vice President and Secretary of Appaloosa Partners Inc. since
1995. He was previously a Vice President and Director of Corporate Bond Research
at Goldman, Sachs & Co. He also worked at Smith Barney, Harris Upham in the
Fixed Income Research Department. Mr. Bolin holds a B.A. from Washington
University in St. Louis and an M.B.A. in accounting and finance from University
of Missouri-St. Louis.
Dr. Currie has served as a director of Inamed since June 3, 1999. He has
served as the President and Chief Executive Officer of Currie Technologies
Incorporated, an electric transportation company, since 1997. He has been the
Chairman Emeritus of Hughes Aircraft Company since his retirement in 1992 as
Chairman and Chief Executive Officer. He has had an extensive career in high
technology research, engineering and management. Dr. Currie currently serves on
the Boards of Directors of the following publicly traded companies: Investment
Company of America, SM&A Corporation, LSI Logic Corporation, U.S. Electricar and
Regal One. Dr. Currie also serves as the Chairman of the University of Southern
California Board of Trustees. He has previously served as President and CEO of
Delco Electronics Corporation and Chairman and CEO of GM Hughes Electronics
Corporation. From June 1994 to August
55
1997, Dr. Currie was a manager of Electric Bicycle Co., LLC, a limited liability
company that filed for Chapter 7 bankruptcy protection in August 1997. Dr.
Currie holds a B.A. in Physics and a Ph.D. in Engineering Physics from the
University of California at Berkeley.
Mr. Doty has served as Senior Vice President and Chief Financial Officer of
Inamed since May 3, 1999. He is a certified public accountant with more than 25
years of experience in a wide range of financial, administrative and planning
positions at companies such as 3M, Honeywell, Inc. and Reckitt & Colman, PLC.
Prior to his employment with Inamed, from 1997 until May 1999, Mr. Doty was the
Vice President and Chief Financial Officer of O-Cedar Brands, Inc., a private
consumer product company based in Cincinnati. From 1994 to 1997, Mr. Doty was
the Vice President and Chief Financial Officer of White Systems, Inc., a
manufacturer and software developer. Mr. Doty holds a Bachelor of Chemistry and
Bachelor of Science in Business Administration -- Accounting from the University
of Minnesota and an M.B.A. from the University of St. Thomas.
Mr. Doyle has served as a director of Inamed since March 18, 1999. Since
1994, he has performed marketing and management consulting, primarily for
start-up companies. Prior to 1994, Mr. Doyle worked with IBM and Craig
Corporation in executive and sales and marketing positions. He served as the
Chairman and Chief Executive Officer of Pioneer Electronics (USA) Inc. from 1971
to 1986. Mr. Doyle currently serves on the Board of Directors of the Pomona
Valley Hospital Foundation, and has served on the Board of various consumer
groups as well as business and philanthropic organizations. Mr. Doyle holds a
B.A. from Miami University of Ohio.
Mr. Reich has served as a director of Inamed since January 22, 1998,
Executive Vice President between January 22, 1998 and December 22, 1998 and
President since December 22, 1998. Prior to 1998, he was a partner or counsel
with the New York law firm of Olshan Grundman Frome Rosenzweig & Wolosky LLP,
specializing in corporate and securities law. From 1988 to June 1996, Mr. Reich
served in various senior executive positions with public and private companies
controlled by a private investor, including Western Publishing Group, Inc., the
largest U.S. publisher of children's books, and Rabco Health Services, Inc., a
distributor of medical/surgical products and a wholesale pharmaceutical company.
From 1979 until July 1986, Mr. Reich was an associate and then partner at the
New York law firm of Wachtell, Lipton, Rosen & Katz, specializing in corporate
and securities law. Mr. Reich holds a B.A. from Columbia College and a J.D. from
Columbia Law School, and is a member of various bar associations.
During a four year period which ended over fifteen years ago, Mr. Reich
provided a third party with non-public information about merger and acquisition
transactions in which Mr. Reich's law firm was involved. Mr. Reich never
received any payment or profits from that information, and voluntarily
disengaged from that activity two years before any charges were brought. In
1986, Mr. Reich pleaded guilty to two federal counts of mail and securities
fraud (for which he served a prison term), consented with the Commission to
entry of an injunction against future violations of certain provisions of the
federal securities laws, paid a substantial fine and was also disbarred. In
1995, a panel of judges readmitted Mr. Reich to the practice of law. In order to
obtain readmission, Mr. Reich had to meet the burden of showing, by clear and
convincing evidence, that he is of high ethical character and unlikely to engage
in further violative conduct. The board of directors was aware of the foregoing
facts and took them into consideration in concluding that Mr. Reich was fit to
serve as an executive officer and director of the company.
Dr. Rosenthal has served as a director of Inamed since June 3, 1999. He is
a psychiatrist and since 1970 has served as the president of Phoenix House
Foundation, which he founded over 30 years ago and which is the nation's largest
non-profit substance abuse treatment and prevention system, with more than three
dozen programs in New York, California, Texas and Florida. Dr. Rosenthal has
been a White House advisor on drug policy, a special consultant to the Office of
National Drug Control Policy and serves on the New York State Advisory Council
on Alcoholism and Substance Abuse services, which he chaired from 1985 to 1997.
Dr. Rosenthal is a lecturer in psychiatry at Columbia University's College of
Physicians and Surgeons and a former president of the American Association of
Psychoanalytic Physicians. He is a graduate of Lafayette College and earned his
M.D. from the State University of New York.
56
Dr. Rosenthal is a member of the Council on Foreign Relations and serves on the
Board of the Pro Musicis Foundation.
Mr. Strohmeyer has served as Vice President, Manufacturing of Inamed since
November 2, 1998. From early 1995 to November 1998, Mr. Strohmeyer was Chief
Executive Officer of Sport Carriers Incorporated, an original equipment
manufacturer for the auto industry. Prior to that, Mr. Strohmeyer spent a number
of years in the electronics and automotive industries, including Nissan Motor
Corporation and Nippondenso (Japan). He has been involved in start-ups,
re-engineering of manufacturing facilities, relocation and development of
international operations, and is skilled in manufacturing and general management
of companies. Mr. Strohmeyer holds a B.S. from Long Beach State University,
California.
Mr. Tepper has served as a director of Inamed since March 18, 1999. Mr.
Tepper has been President of Appaloosa Partners Inc. since its formation in
1993. He was previously head trader in the High Yield Department of Goldman,
Sachs & Co. He also has been employed by Keystone Funds and Republic Steel. Mr.
Tepper holds an M.B.A. from Carnegie Mellon University and a B.A. with honors in
Economics from the University of Pittsburgh.
Dr. Williams has served as a director of Inamed since March 31, 1997. Dr.
Williams recently retired from his decades long practice as a plastic surgeon
specializing in aesthetic surgery. He is a Diplomat of the American Board of
Plastic Surgery and is a Fellow of the American College of Surgeons. Dr.
Williams is a member of the American Society of Plastic and Reconstructive
Surgeons and the American Society of Aesthetic Plastic Surgeons. He holds
memberships in state, national and international plastic surgery societies and
is a member of the American Medical Association and the Los Angeles County
Medical Association.
57
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth with respect to the beneficial ownership of
the shares of our common stock owned as of November 12, 1999, by each person
known by us to be the beneficial owner of more than five percent of the
outstanding common stock of Inamed, each of our selling stockholders, each of
our directors, each of our chief executive officer and the four other most
highly compensated executive officers, and all of our directors and executive
officers as a group. Unless otherwise indicated in the footnotes following the
table and subject to community property laws where applicable, the person(s) as
to whom the information is given had sole voting and investment power over the
shares of common stock shown as beneficially owned.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
------------------------ NUMBER OF SHARES ------------------------
NAME NUMBER PERCENT(1) BEING OFFERED NUMBER PERCENT(2)
- ---- ----------- ---------- ---------------- ----------- ----------
Entities affiliated with Appaloosa Management
L.P............................................ 6,400,052(3) 35.2% -- 6,400,052 31.0%
26 Main Street
Chatham, New Jersey 07928
Entities affiliated with Oracle Partners, L.P.... 1,297,902(4) 7.5% 500,000(4) 797,902(4) 4.0%
712 Fifth Avenue, 45th Floor
New York, New York 10019
Donald K. McGhan................................. 1,274,858(5) 7.4% -- 1,274,858 6.5%
3800 Howard Hughes Pkwy
Suite 1800
Las Vegas, Nevada 89109
Medical Device Alliance, Inc. 1,120,000(6) 6.4% -- 1,120,000 5.6%
5851 West Charleston
Las Vegas, Nevada 89146
Richard G. Babbitt(7)............................ 230,000(9) 1.3% -- 230,000 1.2%
Ilan K. Reich(8)................................. 313,500(10) 1.8% -- 313,500 1.6%
David E. Bamberger(8)............................ 1,000 * -- 1,000 *
Michael J. Doty(8)............................... -- * -- -- --
James E. Bolin(7)................................ --(11) * -- -- --
Malcolm R. Currie, Ph.D.(7)...................... 35,000(12) * -- 35,000 *
John F. Doyle(7)................................. 60,653(12) * -- 60,653 *
Mitchell S. Rosenthal, M.D.(7)................... 5,000(13) * -- 5,000 *
David A. Tepper(7)............................... 6,405,052(14) 35.2% -- 6,405,052 31.0%
John E. Williams, M.D.(7)........................ 65,000(13) * -- 65,000 *
John Strohmeyer(7)............................... 8,333(13) * -- 8,333 *
All officers and directors as a group (11
persons)....................................... 7,123,538(15) 38.0% -- 7,123,538 33.5%
- -------------------------
* Less than 1%
(1) The percentages are calculated on the basis of the amount of outstanding
shares of common stock as of November 12, 1999, which is 17,228,684 plus
shares of common stock underlying each holder's options and warrants which
have been issued and are exercisable within 60 days hereof.
(2) The percentages are calculated on the basis of the amount of outstanding
shares of common stock as of November 12, 1999, which is 17,228,684, plus
shares of common stock underlying each holder's options and warrants which
have been issued and are exercisable within 60 days hereof, plus the
2,500,000 shares being offered by Inamed. The percentages assume no
exercise of the underwriters' over-allotment option.
(3) Based on the Schedule 13D/A filed jointly in June 1999 by Appaloosa
Management L.P. and David A. Tepper. Mr. Tepper is the President of
Appaloosa Partners Inc., the general partner of Appaloosa Management L.P.
Includes (i) 362,286 shares of common stock issuable upon the exercise of
warrants to purchase shares of common stock at $7.50 per share and (ii)
579,510 shares of common stock issuable upon the exercise of warrants to
purchase shares of common stock at $6.50 per share.
(4) Includes 89,770 shares of common stock issuable upon exercise of warrants
to purchase common stock at $7.50 per share. Funds managed by Oracle
Partners, L.P. that are participating in this offering are Oracle Partners,
L.P. (287,759 shares), Oracle Institutional Partners, L.P. (95,000 shares),
SAM Oracle Fund, Inc. (95,000 shares), Oracle Offshore Limited (10,000
shares) and Quasar International Partners, C.V. (12,241 shares).
(5) Based on a Schedule 13D filed jointly in March 1999 by Donald K. McGhan,
Shirley M. McGhan, McGhan Management Corp., McGhan Management Limited
Partnership, International Integrated Industries LLC and Medical Device
Alliance Inc., includes (i) 87,485 shares owned by McGhan Management
Corporation, a corporation for which Mr. McGhan is the chairman; (ii)
197,280 shares owned by McGhan Management Limited Partnership, a limited
partnership of which Mr. McGhan is the
58
general partner and (iii) 354,489 shares owned by International Integrated
Industries L.L.C., a limited liability corporation of which Mr. McGhan is
the managing member. Does not include 207,310 shares of common stock owned
by Shirley M. McGhan, the wife of Donald K. McGhan, to which Mr. McGhan
disclaims beneficial ownership. By order dated June 29, 1999, Mr. McGhan
was removed as an officer and director of Medical Device Alliance and was
replaced by a court-appointed receiver. Mr. McGhan has filed a writ of
prohibition against that order, in effect taking an appeal from it. Does
not include the 860,000 shares and 260,000 warrants to purchase common
stock at $12.40 per share, which are beneficially owned by Medical Device
Alliance. Pursuant to a letter agreement dated July 8, 1998, Mr. McGhan
agreed for a five-year period to comply with various traditional
"standstill" provisions, including, among others, to vote all of the common
stock owned by him or his affiliates, including International Integrated
Industries, Inc. and Medical Device Alliance, in proportion to the votes
(or abstentions) of all other stockholders on any matter submitted to a
vote or consent of stockholders, except for a vote on any proposed business
combination, recapitalization or other similar transaction and, except
under limited circumstances, not to transfer any shares of common stock in
one or a series of transactions in a manner that would result in the
acquiror owning 5% or more of the outstanding common stock of Inamed.
(6) Includes 660,000 shares, an additional 200,000 shares held in escrow by
Inamed and 260,000 warrants to purchase common stock at $12.40 per share.
Because Medical Device Alliance was an affiliate of Mr. McGhan on July 8,
1998, all of the shares of our common stock held by Medical Device Alliance
are subject to the "standstill" provisions of the July 8, 1998 letter
agreement referred to in note 5 above.
(7) The named person is an officer and/or director of Inamed and his address is
5540 Ekwill Street, Suite D, Santa Barbara, California 93111.
(8) The named person is an officer and/or director of Inamed and his address is
11 Penn Plaza, Suite 946, New York, New York 10001.
(9) Includes 200,000 shares of common stock issuable upon the exercise of
options and/or warrants within 60 days hereof, but excludes 400,000 shares
of common stock issuable upon exercise of various warrants which have not
yet vested.
(10) Includes 275,000 shares of common stock issuable upon the exercise of
options and/or warrants within 60 days hereof, but excludes 400,000 shares
of common stock issuable upon exercise of various warrants which have not
yet vested.
(11) Mr. Bolin is the Vice President of Appaloosa Partners Inc., the general
partner of Appaloosa Management L.P. Mr. Bolin disclaims beneficial
ownership of all shares owned by Appaloosa Management L.P.
(12) Includes 5,000 shares of common stock issuable upon the exercise of options
within 60 days hereof.
(13) Consists of shares of common stock issuable upon the exercise of options
within 60 days hereof.
(14) Based on the Schedule 13D/A filed jointly in June 1999 by Appaloosa
Management L.P. and David A. Tepper. Mr. Tepper is the President of
Appaloosa Partners Inc., the general partner of Appaloosa Management L.P.
Includes (i) 362,286 shares of common stock issuable upon the exercise of
warrants to purchase shares of common stock at $7.50 per share and (ii)
579,510 shares of common stock issuable upon the exercise of warrants to
purchase shares of common stock at $6.50 per share. Also includes 5,000
shares of common stock issuable upon the exercise of options within 60 days
hereof.
(15) Includes 1,510,129 shares of common stock issuable upon the exercise of
options and warrants within 60 days hereof.
59
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation authorizes 26,000,000 shares of capital
stock, consisting of 25,000,000 shares of common stock, par value $0.01 per
share, and 1,000,000 shares of preferred stock, par value $0.01 per share. As of
November 12, 1999, the outstanding capital stock of Inamed consisted of
17,228,684 shares of common stock held by 759 stockholders of record. No shares
of preferred stock are outstanding. The following summaries of provisions of our
common stock and preferred stock do not purport to be complete and are subject
to, and qualified in their entirety by, the provisions of the restated
certificate of incorporation and bylaws of Inamed, which are incorporated by
reference as exhibits to the Registration Statement of which this prospectus
forms a part, and by applicable law. Inamed changed its state of incorporation
in December 1998 from Florida to Delaware and is now subject to the Delaware
corporation law.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders of Inamed, and the holders of
common stock vote together as a single class on all matters to be voted upon by
the stockholders. The holders of common stock are entitled to receive ratably
dividends when, as and if declared from time to time by our board of directors
out of the assets of Inamed available for the payment of dividends to the extent
permitted by law, subject to preferences that may be applicable to any
outstanding preferred stock and any other provisions of our certificate of
incorporation.
Holders of common stock have no preemptive or other rights to subscribe for
additional shares. No shares of common stock are subject to redemption or a
sinking fund. Holders of common stock also do not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of directors can elect all the directors then being elected. In the
event of any liquidation, dissolution or winding up of Inamed, whether voluntary
or involuntary, after payment of the debts and other liabilities of Inamed, and
subject to the rights of holders of shares of preferred stock, holders of common
stock are entitled to share pro rata in any distribution of remaining assets to
the stockholders. All of the outstanding shares of common stock are, and the
shares offered hereby will be, validly issued, fully paid and non-assessable. If
we assume that all of the outstanding warrants and options of Inamed are
exercised, 21,099,230 shares of common stock will be issued and outstanding
prior to the issuance of shares of common stock pursuant to this offering.
We have not declared or paid any cash dividends on our common stock and it
is our current policy to retain earnings to finance the growth and development
of our business. Therefore, we do not anticipate paying cash dividends on our
common stock in the foreseeable future. See "Dividend Policy" included elsewhere
in this prospectus.
PREFERRED STOCK
Our board of directors is authorized, without further vote or action by the
holders of common stock, to issue by resolution an aggregate of 1,000,000 shares
of preferred stock. These shares of preferred stock may be issued in one or more
series as established from time to time by our board of directors. Our board
also is authorized to fix the number of shares and the designation or title of
each series of preferred stock prior to the issuance of any shares of that
series. Regarding each class or series of preferred stock, our board will fix
the voting powers which may be full or limited, or there may be no voting
powers. Our board will also determine the preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions, of each series of preferred stock. Our board is further
authorized to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
the class or series then outstanding.
Our board of directors has created a Series A junior participating
preferred stock in connection with the amendment of our rights plan. See
"-- Rights Plan." The rights plan was amended to substitute one
60
one-thousandth of a share of this Series A preferred stock for each share of
common stock previously issuable upon exercise of the rights. The Series A
preferred shares purchasable upon exercise of the rights are not redeemable.
Each preferred share is entitled to a minimum preferential quarterly dividend
payment of $1 per share but will be entitled to an aggregate dividend of 1,000
times the dividend declared per common share. In the event of liquidation of
Inamed, each holder of a Series A preferred share will be entitled to a minimum
preferential liquidation payment of $1,000 per share but will be entitled to an
aggregate payment of 1,000 times the payment made per common share. Each Series
A preferred share will have 1,000 votes, voting together with the common shares
as a single class. Finally, in the event of any merger, consolidation or other
transaction in which common shares are exchanged, each Series A preferred share
will be entitled to receive 1,000 times the amount received per common share.
These rights are protected by customary antidilution provisions.
We currently have no plans to issue any additional series of preferred
stock. It is not possible to state the effect of the authorization and issuance
of any series of preferred stock upon the rights of the holders of common stock
until our board of directors determines the specific terms, rights and
preferences of a series of preferred stock. However, possible effects might
include restricting dividends on the common stock, diluting the voting power of
the common stock or impairing the liquidation rights of the common stock without
further action by holders of common stock. In addition, under some
circumstances, the issuance of preferred stock may render more difficult or tend
to discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of our securities or the removal of incumbent
management, which could thereby depress the market price of our common stock.
COMMON STOCK WARRANTS
At November 12, 1999, we had outstanding warrants for the purchase of
3,384,713 shares of our common stock. Each warrant is exercisable at prices
ranging from $3.53 to $24.75 per share (with a weighted average exercise price
of $9.77) of common stock. In addition, in connection with the issuance of debt
under our bridge loan facility, we placed in escrow warrants representing in the
aggregate the right to acquire 10% of our fully-diluted common stock after
giving effect to the exercise of those warrants and all other outstanding
warrants, options and other equity equivalents of Inamed.
In 1997, we issued warrants to purchase 1,846,071 shares of common stock,
which have an exercise price of $7.50 per share, in connection with the
restructuring of $35.0 million in convertible debt and the funding of our breast
implant litigation settlement. In September 1998, we obtained $8.0 million to
fund our breast implant litigation settlement by issuing 10% senior secured
notes and warrants to acquire up to 590,000 shares of our common stock with an
exercise price of $6.50 per share.
On November 5, 1998, we completed an exchange offer whereby we exchanged
our outstanding 11% senior secured convertible notes for a package of securities
which consisted of (1) 11% junior secured notes, (2) warrants to acquire an
aggregate of 3,671,616 shares of our common stock with an exercise price of
$5.50 per share and (3) warrants to purchase an aggregate of 500,000 shares of
our common stock with an exercise price of $7.50 per share. These $7.50 warrants
were issued to all holders of the 11% senior secured convertible notes,
regardless of whether or not they participated in the exchange offer, as a part
of the restructuring of our senior debt and as an anti-dilution adjustment.
We also have outstanding warrants to acquire up to 260,000 shares of our
common stock with an exercise price of $12.40 per share.
During the second quarter of 1999, also in connection with the financing of
the settlement of our breast implant litigation, we completed a $31.1 million
equity financing, in which 5.4 million new shares of our common stock were
issued to various holders of the $5.50 warrants and the 1997 $7.50 warrants in
exchange for the payment of $20.4 million of cash and the surrender of $10.7
million of 11% convertible junior secured notes. Virtually all of the holders of
warrants who were eligible to exercise at this time participated in the
transaction. All of those shares of common stock contain a legend that restricts
transferability absent compliance with or an exemption under Rule 144 of the
Securities Act after the applicable holding period or an effective registration
statement.
61
Regarding our outstanding warrants, including warrants already issued and
those to be issued to our senior executive officers described below, the
exercise price and number of shares of our common stock purchasable upon the
exercise of the warrants are subject to anti-dilution adjustment upon the
occurrence of specified events, including stock dividends, stock splits,
combinations and reclassification of the common stock.
Additionally, an adjustment to our warrants would be made in the case of a
reclassification or exchange of the common stock, consolidation or merger of
Inamed with or into another corporation (other than a consolidation or merger in
which Inamed is the surviving corporation) or, in the case of the non-employee
warrants, sale of all or substantially all of the assets of Inamed in order to
enable stockholders to acquire the kind and number of shares of stock or other
securities or property receivable in similar circumstances by the holder of the
warrant. The executive officer warrants fully vest upon a change of control of
Inamed.
In addition to the adjustments described above, the $6.50 and 1998 $7.50
warrants are subject to further anti-dilution adjustment upon certain issuances
by us of shares of common stock, or warrants or other rights to purchase shares
of common stock including stock options, for consideration that is, or at an
exercise price that is, less than the current market price of our common stock.
Current market price is defined in these warrants as the daily volume weighted
average sale price per share of our common stock for the 20 business days ending
five days before the date of determination.
The $6.50 warrants provide that we cannot issue, sell or exchange, or agree
to issue, sell or exchange any equity securities (as defined in these warrants)
unless we first give written notice to each warrant holder, and to all holders
of common stock issued pursuant to those warrants, of such issuance, sale or
exchange and we offer to issue to each of those holders, the holder's
proportionate percentage of those securities. We have obtained a waiver of these
preemptive rights and the anti-dilution provisions described in the preceding
two paragraphs from all relevant holders for this offering.
A holder of any of the warrants described above will not be entitled to any
rights as a stockholder of Inamed, including, without limitation, the right to
vote with respect to the shares of our common stock or the right to dividend or
other rights, until the holder has exercised the warrants. Some of these warrant
holders are entitled to registration rights as described below under
"-- Registration Rights."
We also recently authorized the issuance and allocation of warrants,
subject to final ratification of our compensation committee, to purchase 900,000
shares of common stock with a weighted average exercise price of $19.06 per
share to certain of our senior executives and other officers.
For a description of the warrants issued in connection with the bridge loan
facility, see "Description of Certain Indebtedness -- Warrants."
STOCK OPTION AND STOCK AWARD PLANS
In 1987, Inamed adopted an incentive stock award plan. Under the terms of
the 1987 plan, 300,000 shares of common stock were reserved for issuance to
employees at the discretion of our board of directors. At September 30, 1999,
there were 120,223 shares available for future grant under the 1987 plan.
In 1993, Inamed adopted a non-employee director stock option plan which
authorized us to issue up to 150,000 shares of common stock to directors who are
not employees of or consultants to Inamed and who are thus not eligible to
receive stock option grants under Inamed'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. Between 1997 and 1999, options
exercisable for a total of 70,000 shares of common stock were granted under the
1993 plan. Of those options, options exercisable for a total of 40,000 shares
remain
62
outstanding as of September 30, 1999. At September 30, 1999 there were 85,000
options available for future grant under this plan.
In 1998, Inamed adopted a non-qualified stock option 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 82 employees under
the 1998 plan at $6.50 per share. No options were granted under this plan since
1998. The options are exercisable for no more than ten years after the option
grant date and vest ratably over three years. Of those options, 427,500 remain
outstanding as of September 30, 1999.
In 1999, Inamed adopted a non-employee director stock election plan which
authorized us to issue up to 50,000 shares of common stock to directors who
wished to be compensated for their annual director fee in shares of common stock
rather than cash. The shares of common stock issuable to any director under the
1999 plan will be valued using the closing market price of Inamed common stock
on the date prior to the grant of common stock under this plan.
The exercise price of all options outstanding under our stock option plans
range from $1.45 to $16.88 per share (with a weighted average exercise price of
$6.62) and these options are exercisable in the aggregate for 485,833 shares of
common stock. At September 30, 1999, there were at least 277,723 shares
available for future grant under these option and award plans. Two of our
employees have rights to purchase a total of 30,000 shares of common stock
issuable pursuant to options granted under previously established stock option
benefit plans.
REGISTRATION RIGHTS
Our warrantholders have been granted various registration rights regarding
the common stock underlying their warrants as specified in the warrants. If at
any time we propose or are required to register our equity securities or
securities convertible into or exchangeable for our equity securities under the
Securities Act, those warrantholders have the right to cause us to use our best
efforts, following a customary notice and response period, to register the
common stock underlying their warrants with our registration statement. There is
no limit to the number of times that the non-employee warrantholders can make
this incidental registration request. The registration rights provisions of
these non-employee warrants contain customary indemnification provisions between
us and the warrantholders. We are obligated to pay all expenses, including legal
and accounting fees and expenses, incurred in connection with any registration.
We have agreed with certain holders of our warrants and shares issued
pursuant to these warrants (other than holders that are affiliates of Appaloosa
Management L.P.) that we will file a registration statement on an appropriate
form under the Securities Act with respect to these warrant shares as soon as
practicable after a date that is 120 days after the date of this prospectus,
subject to reduction as determined by a nationally recognized financial advisor.
We have further agreed with these holders that we will use our best efforts to
cause this registration statement to be declared effective and to keep this
registration statement continuously effective, subject to customary limitations,
so as to permit or facilitate the sale or distribution of these shares. We have
entered into a similar agreement with holders that are affiliates of Appaloosa
Management L.P. to file a registration statement as soon as practicable after
this offering is completed (subject to reduction as determined by a naturally
recognized financial advisor), to use our best efforts to cause this
registration statement to be declared effective within six months following the
date of this prospectus and to keep this registration statement continuously
effective, subject to customary limitations.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of Delaware corporation law provides the power to indemnify any
director or officer acting in his or her capacity as our representative who was,
is or is threatened to be made a party to any action or proceeding for expenses,
judgments, penalties, fines and amounts paid in settlement in connection with
that action or proceeding. The indemnity provisions apply whether the action was
instituted by a third
63
party or arose by or in our right. Generally the only limitations on our ability
to indemnify our director or officer is that the director or officer acted in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action, that the
director or officer has no reasonable cause to believe that his conduct was
unlawful.
Our bylaws provide a right to indemnification to the full extent permitted
by law for expenses, attorney's fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by any director or officer whether
or not the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in our right by reason of the fact that the director
or officer is or was serving as our director or officer at our request, as a
director, officer, partner, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
unless a court finally determines that the director or officer did not act in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action, that the
director or officer has no reasonable cause to believe that his conduct was
unlawful. Our bylaws provide for the advancement of expenses to an indemnified
party upon receipt of an undertaking by the party to repay those amounts if it
is finally determined that the indemnified party is not entitled to
indemnification.
Our bylaws authorize us to take steps to ensure that all persons entitled
to indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
LIMITATION OF LIABILITY
Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for a breach
of fiduciary duty as a director, except for liability:
- for any breach of that person's duty of loyalty;
- for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporation law; and
- for any transaction resulting in receipt by that person of an improper
personal benefit.
We maintain directors and officers' liability insurance to provide
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no pending litigation or proceeding, and we are not aware of
any threatened litigation or proceeding, involving any director or officer where
indemnification will be required or permitted under our certificate of
incorporation or our bylaws.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of Delaware corporation law provides in general that a
stockholder acquiring more than 15% of the outstanding voting stock of a
Delaware corporation has become an interested stockholder. An interested
stockholder may not engage in certain business combinations described in Section
203 with the corporation for a period of three years subsequent to the date on
which that stockholder became an interested stockholder. There are several
exceptions that permit an interested stockholder to engage in a business
combination, including if prior to the date the stockholder became an interested
stockholder the corporation's board of directors approved either the business
combination or the interested stockholder transaction, or if the business
combination is approved by the corporation's board of directors and authorized
by a vote of at least 66 2/3% of the outstanding voting stock of the corporation
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in financial benefit to a
stockholder. Section 203 could prohibit or delay mergers or other takeover or
change of control attempts with respect to Inamed and, accordingly, may
discourage attempts
64
that might result in a premium over the market price for the shares of common
stock held by stockholders.
RIGHTS PLAN
Our board of directors has unanimously adopted a stockholder rights plan,
commonly known as a "poison pill," and declared a dividend granting to our
stockholders the right to purchase for each share of our common stock held by
them, one share of common stock at an initial purchase price of $80. The record
date for the rights plan was June 13, 1997. The rights plan is designed to
protect stockholders from various abusive takeover tactics, including attempts
to acquire control of Inamed at an inadequate price which would deny
stockholders the full value of their investments. The rights are attached to the
our common stock and are not exercisable. They become detached from the common
stock and become exercisable ten days after any person or group of persons
becomes the beneficial owner of 15% or more of the common stock or ten business
days after any person or group of persons publicly announces a tender or
exchange offer that would result in the same beneficial ownership level. Once
exercisable, depending on the circumstances, each right will entitle a holder,
other than the potential acquiror, to purchase at the then current purchase
price shares of either Inamed or an acquiring company having a market value
equal to twice the purchase price. Unless previously redeemed by Inamed, the
rights will expire on June 2, 2007. From time to time we have amended the rights
plan to create and clarify a "grandfather" clause to the definition of acquiring
person under the rights plan which currently exempts one of our stockholders,
Appaloosa Management L.P. and its affiliates, from being deemed an acquiring
person under that definition so long as its beneficial ownership level, as
defined in the rights plan, does not exceed 33%.
In addition, our board of directors has amended the rights plan to
substitute one one-thousandth of a share of Series A junior participating
preferred stock for each share of common stock issuable upon exercise of the
rights. Each one one-thousandth of a share of the preferred stock is designed to
have a value approximately equal to, and rights substantially similar to, one
share of common stock. See "-- Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation, Glendale, California.
65
DESCRIPTION OF CERTAIN INDEBTEDNESS
We paid approximately $148.7 million to acquire Collagen in the offer and
the merger, including the cancellation of all options of Collagen and expenses
of approximately $9.2 million.
Bridge Loan Facility and Use of Proceeds. The acquisition of Collagen, and
the repayment of $16.9 million of Inamed debt, was financed through the issuance
of senior secured bridge notes in an aggregate principal amount of $155.0
million plus $23.8 million of cash on hand at the closing of the merger. We
issued bridge notes on September 1, 1999 pursuant to the terms of a loan
agreement among Inamed and our acquisition subsidiary, as borrowers, the lenders
named in the loan agreement, as initial lenders, and Ableco Finance LLC, as
administrative agent. Cerberus Capital Management, L.P. was the lead lender
under the loan agreement. The acquisition financing was arranged by U.S. Bancorp
Libra, a division of U.S. Bancorp Investments, Inc.
Collateral and Security. The bridge notes issued under the bridge loan
facility are secured by perfected first priority liens on, and security
interests in, substantially all of the assets of Inamed, substantially all of
the stock and assets of our domestic subsidiaries, including the stock and
assets of Collagen and its domestic subsidiaries, and 65% of the outstanding
capital stock of our foreign subsidiaries.
Guarantee. The bridge notes issued under the bridge loan facility are
guaranteed on a senior basis by all of our material U.S. subsidiaries, including
Collagen and its material U.S. subsidiaries. These guarantees are collateralized
to the extent provided under "-- Collateral and Security" as described above.
Interest Rate. The bridge notes bear interest initially at a margin of 600
basis points over the 30-day London Interbank Offered Rate (LIBOR). The
applicable margin increases 100 basis points every three months during the term
of the bridge notes. Approximately every 30 days, the interest rate will be
adjusted based upon changes to the 30-day LIBOR, and the new rate will be in
effect until the next 30-day adjustment. Interest is payable monthly in cash in
arrears.
Fees. In connection with the bridge loan facility, Inamed paid an initial
commitment fee equal to 0.5% of the maximum principal amount of the bridge
notes, or $775,000, to Cerberus. Inamed also paid a fee equal to 1.0% of the
maximum principal amount of the bridge notes, or $1.55 million, to the bridge
lenders upon the execution and delivery of the merger agreement.
In connection with the funding of the bridge loan facility, Inamed paid a
fee equal to 1.0% of the maximum principal amount of the bridge notes, or $1.55
million, to the bridge lenders, and a fee equal to 1.0% of the principal amount
actually funded by the lenders under the bridge loan facility, or $1.55 million,
in cash to U.S. Bancorp Libra.
Optional Prepayments. Under the terms of the bridge notes, we are
permitted to, at any time at our option, prepay the bridge notes, at par plus
accrued interest plus a fee equal to 1.0% of the prepayment amount, subject to
LIBOR breakage and/or redeployment costs.
Maturity. The bridge notes are due and payable on May 31, 2000, nine
months from the initial funding date.
Exchange Feature; Rollover Securities. If outstanding on the maturity
date, the bridge notes will be exchanged for new "rollover securities" subject
to the satisfaction of the following conditions: no event of default under the
bridge loan facility has occurred and is continuing; no event or condition that
would become an event of default under the bridge loan facility has occurred and
is continuing, subject to cure and grace periods; all fees and expenses due to
the lenders as of the maturity date have been paid in full; and our earnings
before interest, taxes, depreciation and amortization for the trailing four
quarters is not less than $35.0 million. We cannot assure you that these
conditions will be met or that the rollover securities will be issued.
Terms of Rollover Securities. The rollover securities will mature seven
years after issuance and will bear interest, payable semiannually in arrears, at
15% per year. Of that interest, 12% per year will be payable in cash, and the
remaining 3% per year will be payable through the issuance of additional
rollover
66
securities. The rollover securities will be senior notes secured by all of our
material domestic subsidiaries, including Collagen. Upon the sale of any
rollover securities to third parties not affiliated with Cerberus, those
transferred rollover securities will become non-callable until the fourth
anniversary of their issuance, and thereafter will be redeemable at our option
at premiums customary for high yield debt securities. Rollover securities owned
by Cerberus or its affiliates will remain callable at our option without premium
or penalty. The rollover securities will have covenants and other terms
substantially similar to and customary for high-yield debt securities, including
a debt incurrence covenant that prohibits us and our subsidiaries from incurring
more than $25.0 million of secured debt, including sale-leasebacks, and
customary limitations on other debt incurrence and assumption.
Warrants. Upon the funding of the bridge loan facility, we placed in
escrow warrants representing in the aggregate the right to acquire 10.0% of our
fully-diluted common stock as of June 1, 2000, calculated after giving effect to
the exercise of those warrants and all other outstanding warrants, options and
other equity equivalents of Inamed. These warrants will expire five years after
their issuance and will be exercisable for cash at an exercise price equal to
the average closing price of our common stock for the ten trading days preceding
their issuance. These warrants will be released from escrow (a) to the lenders
upon original maturity of the bridge notes, if the bridge notes, or any portion
of the principal or interest thereof, remain outstanding after the original
maturity date, whether or not the rollover securities are issued in exchange for
the bridge notes, or (b) otherwise, to Inamed for cancellation. Holders of the
shares of common stock issuable upon exercise of these warrants will be entitled
to the benefits of a registration rights agreement in customary form for bridge
loan transactions that provides for one demand registration and unlimited
"piggyback" registrations, subject to standard cutbacks and "blackout" periods.
A demand registration that is reduced at the discretion of the financial
institution underwriting or arranging such distribution of shares by more than
40% will entitle the holders to one additional demand registration.
67
U.S. TAX CONSIDERATIONS APPLICABLE
TO NON-U.S. HOLDERS OF THE COMMON STOCK
The following are the material United States federal income and estate tax
consequences to Non-U.S. Holders of the purchase, ownership and disposition of
the common stock. You will be considered a Non-U.S. Holder if you are:
(1) not an individual citizen or resident of the United States;
(2) not a corporation, partnership or other entity created and organized
in or under the laws of the United States or any state of the United
States;
(3) not an estate the income of which is subject to United States
federal income tax regardless of its source; and
(4) not a trust subject to control of one or more United States persons
and the primary supervision of a United States court.
This discussion is not intended to reflect the individual tax situation of
any Non-U.S. Holder of the common stock. This discussion does not deal with:
(1) holders with a special tax status or special tax situation, such as
financial institutions or dealers in securities or currencies; or
(2) common stock held as a hedge or as part of a straddle with other
investments or as part of a "synthetic security" or other integrated
investment (including a "conversion transaction") consisting of
common stock and one or more other investments.
This discussion is based upon the United States federal tax laws and
regulations now in effect and as currently interpreted. It does not take into
account possible changes in those tax laws or interpretations, all of which may
be applied retroactively. This discussion does not include any description of
the tax laws of any state or local government within the United States or of any
foreign government that may be applicable to you or to the common shares.
For purposes of this discussion, dividends and gain on the sale, exchange
or other disposition of common stock will be considered to be "U.S. trade or
business income" if the income or gain is:
(1) effectively connected with a United States trade or business
conducted by you; or
(2) attributable to a permanent establishment (or, in the case of an
individual, a fixed base) in the United States if you are a treaty
resident.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE APPLICATION OF THE
UNITED STATES FEDERAL TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
DIVIDENDS
If you are a Non-U.S. Holder, payments of dividends to you will be subject
to a 30% United States federal withholding tax unless that rate is reduced by an
applicable tax treaty. Dividends that are considered U.S. trade or business
income are generally subject to United States federal income tax on a net basis
at regular income tax rates. If you receive dividends from the common stock as
U.S. trade and business income and you provide a Form 4224 (or a successor Form
W-8ECI), to the payor of the dividends, then those dividends will generally not
be subject to the 30% withholding tax. If you are a corporation, you may be
subject to a branch profits tax equal to 30% (or a lower treaty rate) with
respect to dividends treated as U.S. trade or business income. If the dividends
that are paid to you with respect to the common stock are sent to an address in
a foreign country, you are presumed to be a resident of that country, (absent
any contradictory information) for purposes of the withholding tax and the
applicability of a tax treaty rate. Under recently issued final Treasury
Regulations which will be effective on January 1, 2001, if you are a Non-U.S.
Holder and you would like to claim the benefit of an applicable treaty rate, you
must comply with certain certification requirements, including filing a Form
W-8BEN or Form W-8IMY and providing a document issued by foreign governmental
authorities as proof of your residence in that foreign country.
68
If you are a Non-U.S. Holder eligible for a reduced rate of withholding
under a tax treaty, you may obtain a refund of any excess amounts currently
withheld by filing a claim for a refund with the Internal Revenue Service.
SALE, EXCHANGE, REDEMPTION OR OTHER DISPOSITION
If you are a Non-U.S. Holder, you will not be subject to the United States
federal income tax on gain realized on the sale, exchange or other disposition
of common stock, unless:
(1) the gain is effectively connected with your conduct of a trade or
business in the United States;
(2) you are an individual present in the United States for 183 days or
more in the taxable year of disposition and either:
- your "tax home" (as defined in Internal Revenue Code Section
911(d)(3)) is in the United States unless the gain is attributable
to a fixed place of business that you maintain in a foreign country
and such income has been subject to foreign tax of at least 10%) or
- the gain is attributable to an office or other fixed place of
business maintained by you in the United States; or
(3) you are subject to the United States federal tax as it applies to
certain expatriates (including certain former citizens or residents
of the United States).
FEDERAL ESTATE TAX
If you are a Non-U.S. Holder who is not a citizen or resident of the United
States for United States federal estate tax purposes, the common shares will be
included in your gross estate for U.S. federal estate tax purposes unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We are required to report annually to the IRS and to each Non-U.S. Holder
any dividend income that is either subject to withholding or that is exempt from
United States withholding tax under a tax treaty. The tax authorities of the
country in which you reside may obtain copies of these information returns under
the provisions of a specific tax treaty or agreement.
Under current law, we, our agents and our paying agents will not be
required to "backup" withhold a tax equal to 31% of each dividend payment made
to a Non-U.S. Holder at an address outside the United States, unless we, our
agents and our paying agents know that you are a U.S. person. Under the recently
issued final Treasury Regulations, if you are a Non-U.S. Holder, you will be
subject to backup withholding unless you file a Form W-8BEN or Form W-8IMY and
meet certain other requirements.
Unless you certify under penalty of perjury that you are a Non-U.S. Holder
or otherwise prove that you are exempt from information and backup withholding
requirements, any payment of proceeds from the disposition of common stock to or
through the United States office of any broker, either domestic or foreign, will
be subject to information reporting and possible backup withholding. In
addition, the broker must not have knowledge that you are a U.S. Person or that
you have not satisfied the conditions for exemption. The payment of proceeds
from the disposition of common stock to or through a non-U.S. office of a
non-U.S. broker that is not related to you as a "U.S. related person" under the
Code will not be subject to information reporting or backup withholding.
If you receive payment of proceeds from the disposition of common stock to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the broker is required to report information with respect to
that payment. The broker is not required to report if it has documentary
evidence that you are a Non-U.S. Holder and it has no knowledge to the contrary.
Any payments made to you by the foreign office of a broker that is a U.S. person
or a U.S. related person will not be subject to backup withholding, unless the
broker knows that you are a U.S. Person.
You may apply any backup withholding amounts as a refund or credit to your
U.S. federal income tax liability.
69
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below have severally agreed to purchase from us and the
selling stockholders the following respective number of shares of our common
stock:
NUMBER
NAME OF SHARES
- ---- ---------
Hambrecht & Quist LLC....................................... 1,125,000
Bear, Stearns & Co. Inc..................................... 1,125,000
CIBC World Markets Corp..................................... 750,000
---------
Total............................................. 3,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions we must satisfy, including receipt of
certificates, opinions and letters from us and the selling stockholders, our
counsel and our independent auditors. The nature of the underwriters' obligation
is such that they are committed to purchase all shares of common stock offered
in this offering if any of the shares are purchased.
The underwriters propose to offer the shares of our common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to dealers at such price less a concession not in excess of $1.05
per share. The underwriters may allow and such dealers may reallow a concession
not in excess of $0.10 per share to other dealers. After the public offering of
the shares, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 450,000 additional
shares of our common stock at the public offering price, less the underwriting
discount, set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares said underwriter purchased in the above table. We will be
obligated, pursuant to the option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise the option only to
cover over-allotments made in connection with the sale of common stock offered
in this prospectus.
The following table summarizes the compensation that we will pay to the
underwriters in connection with this offering.
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
Underwriting discounts and commissions paid by us..... $1.90 $4,750,000 $5,605,000
Underwriting discounts and commissions paid by the
selling stockholders.................................. $1.90 $ 950,000 $ 950,000
We estimate that the total expenses of this offering to be incurred by us,
excluding underwriting discounts and commissions, will be approximately $1.2
million.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect
thereof.
Our executive officers, directors and some of our principal stockholders,
including the selling stockholders, have agreed that, with certain exceptions,
they will not, directly or indirectly, without the prior written consent of
Hambrecht & Quist LLC, on behalf of the underwriters, offer, sell, or otherwise
70
dispose of any shares of our common stock, options or warrants to acquire shares
of common stock or securities exchangeable for or convertible into shares of
common stock owned by them during the 90-day period following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 90-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options or warrants granted prior to the date
hereof and we may grant additional options under our stock option plans provided
that, without the prior written consent of Hambrecht & Quist LLC, such
additional options shall not be exercisable during such period.
In general, the rules of the Commission will prohibit the underwriters from
making a market in our common stock during the "cooling off" period immediately
preceding the commencement of sales in the offering. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an underwriter to continue to make
a market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, some underwriters, selling group members (if any) or their
respective affiliates intend to engage in passive market making in our common
stock during the cooling off period.
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
Hambrecht & Quist LLC served as our financial advisor and dealer manager in
connection with our acquisition of Collagen. Hambrecht & Quist LLC is entitled
to receive a total of $1.5 million in fees for those services.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Milbank, Tweed, Hadley & McCloy LLP, New York, New York. Legal
matters in connection with the offering will be passed upon for the underwriters
by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
Our consolidated balance sheets at December 31, 1998 and 1997 and our
consolidated statements of operations, stockholders' deficiency, cash flows and
schedule for the years ended December 31, 1998, 1997 and 1996, included in this
prospectus, have been audited by BDO Seidman, LLP, independent certified public
accountants, and are included herein in reliance on their reports given upon the
authority of that firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Collagen at June 30, 1999 and 1998, and for
each of the three years in the period ended June 30, 1999, as set forth in their
report. We have included these financial statements and schedule in this
prospectus in reliance on Ernst & Young LLP's report given on their authority as
experts in accounting and auditing.
71
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy any of those reports, proxy
statements or other documents at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices located at 7 World Trade
Center, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission at
1-800-SEC-0330 for further information on its public reference facilities. These
filings are also available to the public from commercial document retrieval
services and at the Commission's Web site at www.sec.gov.
Our common stock is quoted on the Nasdaq National Market System. Reports,
proxy statements and other information concerning Inamed can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. In addition, we maintain websites at www.inamed.com and
that contain additional information, including news releases, about our business
and operations. Information contained in these websites do not constitute, and
shall not be deemed to constitute, part of this prospectus.
You may also request a copy of any of our filings with the Commission, or
any of the agreements or other documents that constitute exhibits to those
filings, at no cost, by writing or telephoning us at the following address or
phone number:
Assistant Secretary
Inamed Corporation
5540 Ekwill Street
Suite D
Santa Barbara, CA 93111
Tel. No. (805) 692-5400
The Commission allows us to "incorporate by reference" in this prospectus
reports that we file with them, which means that we can disclose important
information to you by referring you to those reports. Accordingly, we are
incorporating by reference in this prospectus the documents listed below and any
future filings we make with the Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1998;
(2) Our Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1999, June 30, 1999 and September 30, 1999;
(3) Our Quarterly Report on Form 10-Q/A for the quarterly period ended
June 30, 1999;
(4) Our Current Reports on Form 8-K dated February 1, 1999, March 4,
1999, March 19, 1999, April 2, 1999, May 10, 1999, and September 15,
1999; and
(5) Our Current Reports on Form 8-K/A dated March 27, 1998 and November
9, 1999.
The information incorporated by reference is deemed to be part of this
prospectus, except for any information superseded by information contained
directly in this prospectus. Any information that we file later with the
Commission will automatically update and supercede this information.
This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the Commission under the Securities Act, with respect to the
common stock that we are offering in this prospectus. This prospectus does not
contain all the information that is contained in the registration statement,
some of which we are allowed to omit in accordance with the rules and
regulations of the Commission. We refer to the registration statement and to the
exhibits filed with the registration statement for further information with
respect to Inamed. Copies of the registration statement and the exhibits to the
registration statement are on file at the offices of the Commission and may be
obtained upon payment of the prescribed fee or may be examined without charge at
the public reference facilities of the Commission described above. Statements
contained in this prospectus concerning the provisions of documents are
summaries of the material provisions of those documents, and each of those
statements is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. Since this prospectus may not
contain all of the information that you may find important, you should review
the full text of these documents.
72
INDEX TO FINANCIAL STATEMENTS
PAGE
NO.
----
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF INAMED
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998...................................... F-2
Consolidated Income Statements for the nine months ended
September 30, 1999 and 1998............................ F-3
Consolidated Income Statements for the three months ended
September 30, 1999 and 1998............................ F-4
Consolidated Statements of Comprehensive Income for the
three months ended September 30, 1999 and 1998......... F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998...................... F-6
Notes to Consolidated Financial Statements................ F-7
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF INAMED
Independent Auditor's Report.............................. F-12
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-13
Consolidated Statements of Operations for the fiscal years
ended December 31, 1998, 1997 and 1996................. F-14
Consolidated Statements of Stockholders' Deficiency for
the fiscal years ended December 31, 1998, 1997 and
1996................................................... F-15
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1998, 1997 and 1996................. F-16
Notes to Consolidated Financial Statements................ F-17
Schedule II -- Valuation and Qualifying Accounts............ F-37
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COLLAGEN
Independent Auditor's Report.............................. F-38
Consolidated Balance Sheets at June 30, 1999 and 1998..... F-39
Consolidated Statements of Operations for the fiscal years
ended June 30, 1999, 1998 and 1997..................... F-40
Consolidated Statements of Stockholders' Equity for the
fiscal years ended June 30, 1999, 1998 and 1997........ F-41
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1999, 1998 and 1997..................... F-42
Notes to Consolidated Financial Statements................ F-43
Schedule II -- Valuation and Qualifying Accounts............ F-60
F-1
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
UNAUDITED AUDITED
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,474 $ 11,873
Trade accounts receivable, net of allowance for doubtful
accounts and returns and allowances of $6,513 and
$6,158.................................................. 38,337 23,169
Inventories............................................... 28,098 17,855
Prepaid expenses and other current assets................. 15,038 1,337
Income tax refund receivable.............................. 960 726
Deferred income taxes..................................... 19,103 8,000
--------- --------
Total current assets............................... 117,010 62,960
--------- --------
Property and equipment, at cost:
Machinery and equipment................................... 27,160 14,170
Furniture and fixtures.................................... 25,412 3,418
Leasehold improvements.................................... 17,033 11,986
--------- --------
69,605 29,574
Less accumulated depreciation and amortization............ (43,408) (16,751)
--------- --------
Net property and equipment......................... 26,197 12,823
Notes receivable, net of allowance of $467.................. 2,765 2,769
Intangible assets, net...................................... 147,912 1,015
Deferred income taxes....................................... 4,278 --
Other assets, at cost....................................... 20,698 1,140
--------- --------
Total assets....................................... $ 318,860 $ 80,707
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 14 $ 51
Notes payable to bank..................................... 1,372 1,186
Accounts payable.......................................... 16,519 12,226
Accrued liabilities:
Salaries, wages, and payroll taxes...................... 12,954 2,681
Interest................................................ 1,469 2,032
Self-insurance.......................................... 4,123 3,649
Merger and integration costs............................ 28,070 --
Provision for disposal of discontinued operations....... 4,431 --
Other................................................... 17,875 10,244
Royalties payable......................................... 3,455 5,061
Taxes payable............................................. 23,350 1,318
Note payable, escrow agent................................ -- 25,500
--------- --------
Total current liabilities.......................... 113,632 63,948
--------- --------
Long-term debt.............................................. 155,000 27,767
Provision for disposal of discontinued operations........... 5,495 --
Deferred grant income....................................... 1,025 1,235
Deferred income taxes....................................... 687 382
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' equity:
Preferred stock, $0.01 par value; authorized 1,000,000
shares; none issued..................................... -- --
Common stock, $0.01 par value; authorized 25,000,000
shares; issued and outstanding 17,187,594 and
11,010,290.............................................. 172 110
Additional paid-in capital................................ 74,778 37,605
Accumulated other comprehensive (loss) income............. (3,410) 269
Accumulated deficit....................................... (28,519) (53,609)
--------- --------
Stockholders' equity (deficiency).................. 43,021 (15,625)
--------- --------
Total liabilities and stockholders' equity.................. $ 318,860 $ 80,707
========= ========
The Notes to Financial Statements are an integral part of this statement.
F-2
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net sales.................................................. $ 123,722 $ 99,109
Cost of goods sold......................................... 36,597 35,219
---------- ----------
Gross profit.......................................... 87,125 63,890
---------- ----------
Operating expenses:
Marketing................................................ 27,099 26,894
General and administrative............................... 22,841 21,201
Research and development................................. 6,871 7,053
---------- ----------
Total operating expenses.............................. 56,811 55,148
---------- ----------
Operating income...................................... 30,314 8,742
---------- ----------
Other income (expense):
Foreign currency transaction gains (losses).............. 3 (961)
Miscellaneous loss....................................... (41) (2,871)
---------- ----------
Net other expense..................................... (38) (3,832)
---------- ----------
Income before interest and taxes........................... 30,276 4,910
Interest and other financing expense, net.................. 5,186 2,746
Income before income tax expense........................... 25,090 2,164
Income tax expense......................................... -- 137
---------- ----------
Net income............................................ $ 25,090 $ 2,027
========== ==========
Net income per share of common stock
Basic.................................................... $ 1.74 $ 0.20
========== ==========
Diluted.................................................. $ 1.39 $ 0.20
========== ==========
Weighted average common shares outstanding basic........... 14,444,246 10,129,766
========== ==========
Weighted average common shares outstanding diluted......... 18,063,118 10,129,766
========== ==========
The Notes to Financial Statements are an integral part of this statement.
F-3
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net sales.................................................. $ 43,969 $ 32,130
Cost of goods sold......................................... 12,677 11,926
---------- ----------
Gross profit.......................................... 31,292 20,204
---------- ----------
Operating expenses:
Marketing................................................ 10,685 8,598
General and administrative............................... 7,906 5,549
Research and development................................. 2,770 2,943
---------- ----------
Total operating expenses.............................. 21,361 17,090
---------- ----------
Operating income...................................... 9,931 3,114
---------- ----------
Other income (expense):
Foreign currency transaction gains (losses).............. (97) 106
Miscellaneous loss....................................... 839 (2,757)
---------- ----------
Net other expense..................................... 742 (2,651)
---------- ----------
Income before interest and taxes........................... 10,673 463
Interest and other financing expense, net.................. 2,147 891
Income (loss) before income tax expense.................... 8,526 (428)
Income tax expense......................................... -- 33
---------- ----------
Net income (loss)..................................... $ 8,526 $ (461)
========== ==========
Net income (loss) per share of common stock
Basic.................................................... $ 0.50 $ (0.04)
========== ==========
Diluted.................................................. $ 0.44 $ (0.04)
========== ==========
Weighted average common shares outstanding basic........... 17,138,961 10,924,108
========== ==========
Weighted average common shares outstanding diluted......... 19,512,899 10,924,108
========== ==========
The Notes to Financial Statements are an integral part of this statement.
F-4
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30,1998
------------------- -------------------
Net income (loss)......................................... $ 8,526 $ (461)
Other comprehensive (loss) income, net of tax:
Cumulative foreign currency translation gains
(losses)............................................. (2,030) 392
------- ------
Comprehensive income (loss)............................... $ 6,496 $ (69)
------- ------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net income................................................. $25,090 $2,027
Other comprehensive income (loss), net of tax:
Cumulative foreign currency translation gains (losses)... (3,679) 1,071
------- ------
Comprehensive income....................................... $21,411 $3,098
The Notes to Financial Statements are an integral part of this statement.
F-5
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
--------- -------
INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income................................................ $ 25,090 $ 2,027
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 4,311 4,312
Deferred income taxes..................................... (2,507) --
Provision for doubtful accounts, notes & returns.......... (140) --
Provision for obsolescence of inventory................... 1,395 --
Provision for asset impairment............................ 600 --
Non-cash compensation..................................... 40 --
Non-cash financing cost................................... 1,977 --
Changes in assets and liabilities:
Trade accounts receivable and notes receivable.......... (1,030) (8,223)
Inventories............................................. (1,189) 4,320
Prepaid expenses and other current assets............... (1,251) (248)
Other assets............................................ (4,318) --
Accounts payable, accrued and other liabilities......... 4,224 1,919
--------- -------
Total adjustments....................................... 2,112 2,080
--------- -------
Net cash provided by operating activities............... 27,202 4,107
--------- -------
Cash flows from investing activities:
Business acquisitions, net of cash acquired............... (132,528) --
Investments in strategic alliances........................ (9,100) --
Purchases of property and equipment, net.................. (3,311) (935)
Disposal of property and equipment, net................... -- (670)
--------- -------
Net cash used in investing activities..................... $(144,939) $(1,605)
--------- -------
Cash flows from financing activities:
Payment of note in escrow for litigation settlement....... $ (25,500) $ --
Increases in notes payable and long-term debt............. 155,000 410
Principal repayment of notes payable and long-term debt... (27,767) --
Payment of redeemable common stock in escrow for
litigation settlement................................... (3,000)
Increase (decrease) in related party payables............. -- 1,038
(Increase) decrease in related party receivables.......... -- 128
Proceeds from the exercise of warrants.................... 26,495 --
Proceeds from issuance of common Stock.................... -- 80
(Decrease) Increase in deferred grants.................... (210) 298
--------- -------
Net cash provided by financing activities............... 125,018 1,954
--------- -------
Effect of exchange rate changes on cash................. (3,680) 141
--------- -------
Net increase in cash and cash equivalents............... 3,601 4,597
Cash and cash equivalents at beginning of period............ 11,873 1,946
--------- -------
Cash and cash equivalents at end of period.................. $ 15,474 $ 6,543
--------- -------
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest................................................ $ 9,166 $ 2,424
========= =======
Income taxes............................................ $ 11 $ 97
========= =======
Disclosure of accounting policy:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Non-cash transactions:
1999 1998
------- ----
Common stock exchanged for junior secured notes............. $10,700 --
The Notes to Financial Statements are an integral part of this statement.
F-6
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for fair presentation of the results of
operations for the periods presented. Interim results are not necessarily
indicative of the results to be expected for a full year.
Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as allowed by Form 10-Q. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 1998 as filed with the Securities and Exchange Commission on
Form 10-K.
2 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Inamed Corporation and all of its wholly owned subsidiaries (the "Company").
Intercompany transactions are eliminated in consolidation.
THE COMPANY
Inamed Corporation is a global surgical and medical device company engaged
in the development, manufacturing and marketing of medical devices for the
plastic, reconstructive and aesthetic surgery markets. Inamed Corporation's
subsidiaries are organized into three business units: United States Plastic,
Reconstructive and Aesthetic Surgery (consisting primarily of McGhan Medical
Corporation, Collagen Aesthetics, 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 of Inamed International Corp. and its subsidiaries
which are engaged in manufacturing and distribution through McGhan Limited
(based in Ireland) and sales subsidiaries in various countries, including
Holland, Germany, Italy, United Kingdom, France, and Spain, which sell products
for the plastic, aesthetic medicine and bariatric surgery fields).
EARNINGS PER SHARE
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", ("SFAS No. 128")
which provides for the calculation of "basic" and "diluted" earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1998. 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 reflects, in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options and warrants. As required
by this Statement, all periods presented have been restated to comply with the
provisions of SFAS No. 128.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130") established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting
F-7
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SEGMENT REPORTING
In June 1998, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("SFAS
No. 131") which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
TAXES
The Company reduced the valuation allowance on the deferred tax asset by
$8.3 million and $2.8 million for the nine months and three months ended
September 30, 1999, respectively, based on pre tax income for the nine months
ended September 30, 1999. The Company has a $7.2 million allowance remaining as
of September 30, 1999. The Companies management is currently evaluating the
necessity for a continued allowance on the deferred tax assets. The majority of
taxes currently payable relate to the net assets acquired from Collagen
Aesthetics, Inc.
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" ("SFAS No. 133"), 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, 2,000. 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 the 1998 consolidated financial
statements to conform to the 1999 presentation.
3 -- ACQUISITION
On September 1, 1999, the Company acquired all of the net assets of
Collagen Aesthetics, Inc. ("Collagen") for approximately $157 million (including
the cancellation of employee stock options and expenses). The Collagen
acquisition has been accounted for by the purchase method of accounting, and
accordingly, the results of operations of Collagen for the period from September
1, 1999 are included in the accompanying consolidated financial statements. The
unaudited consolidated financial statements includes managements preliminary
allocation of the total consideration paid by the Company in connection with the
Collagen acquisition. The Company has hired an independent appraiser to value
the net assets. Upon completion of this valuation, the Company will reallocate
the purchase price to Collagen's assets and liabilities, both intangible and
tangible, with the excess of the cost over fair value of the net assets acquired
allocated to goodwill and amortized on a straight-line basis over 30 years.
Management expects that, based on this allocation, additional purchase
accounting adjustments will be made to Collagen's assets and liabilities.
F-8
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition the Company has recorded merger and
acquisition costs of $39,427. These charges include severance and stock option
payouts of $21,300, restructuring costs of $10,771 and professional fees of
$7,356.
The $140,000 excess of the purchase price over Collagen's net assets has
been allocated to goodwill subject to the completion of an appraisal discussed
above. The total acquisition consideration will be allocated to assets,
liabilities and the elimination of stockholders' equity of Collagen based on
management's estimated fair value as summarized below:
Cash and cash equivalents................................... $ 16,631
Short term investments...................................... 5,890
Accounts receivable, net.................................... 13,116
Inventories, net............................................ 10,515
Prepaid and other current assets............................ 7,891
Property and equipment net.................................. 12,862
Intangible assets, net...................................... 8,221
Goodwill, net............................................... 140,000
Other investments and assets, net........................... 5,995
Accounts payable............................................ (5,292)
Accrued liabilities......................................... (7,256)
Provision for disposal of discontinued operations........... (8,771)
Income taxes payable........................................ (15,775)
Other long-term liabilities................................. (1,198)
--------
Total acquisition consideration............................. $182,829
========
The summarized unaudited pro forma results of operations set forth below
for 1999 and 1998 assume the Collagen acquisition, which was accounted for under
the purchase method of accounting, occurred as of the beginning of each of these
periods.
PRO FORMA CONSOLIDATED
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net Sales.................................................. $181,112 $158,555
Net Income (loss) from continuing operations............... 12,372 $ (9,505)
Net Income (loss) from continuing operations per common
share:
Basic.................................................... $ 0.86 (0.94)
Diluted.................................................. $ 0.68 (0.94)
Pro forma adjusted net income per common share may not be indicative of
actual results, primarily because the pro forma earnings include historical
results of Collagen and do not reflect any cost savings or potential sales
erosion that may result from the Company's integration efforts.
4 -- PROVISION FOR DISPOSAL OF DISCONTINUED OPERATIONS
The provision for disposal of discontinued operations of $9,926 at
September 30, 1999 is the remaining provision for Collagen's discontinued
operation of the LipoMatrix breast implant business. The LipoMatrix operations
have been classified as discontinued since June 30, 1998.
F-9
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 -- ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Accounts receivable........................................ $44,850 $29,327
Allowance for doubtful accounts............................ (1,034) (1,402)
Allowance for returns and credits.......................... (5,479) (4,756)
------- -------
Net accounts receivable.................................... $38,337 $23,169
======= =======
Notes receivable........................................... $ 3,232 $ 3,236
Allowance for doubtful notes............................... (467) (467)
------- -------
Net notes receivable....................................... $ 2,765 $ 2,769
======= =======
6 -- INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Raw materials.............................................. $ 6,968 $ 3,764
Work in process............................................ 5,997 3,931
Finished goods............................................. 17,697 11,329
------- -------
30,662 19,024
Less allowance for obsolescence............................ (2,564) (1,169)
------- -------
$28,098 $17,855
======= =======
7 -- LONG TERM DEBT
The following is a summary of the Company's significant long-term debt:
$155 million senior secured bridge loan facility secured by perfected
first priority liens on, and security interests in, substantially all of
the assets of Inamed, substantially all of the stock and assets of Inamed's
subsidiaries, including the stock and assets of Collagen and its
subsidiaries, and 65% of the outstanding capital stock of certain of
Inamed's foreign subsidiaries. The loans made under the secured bridge loan
facility bear interest at variable rates based on a margin that increases
by 100 basis points every three months over 30-day LIBOR. At September 27,
1999, the weighted average interest rate on the loans was 11.5% per annum.
Interest is payable under the facility on a monthly basis. The bridge loan
facility matures on May 31, 2000 and, unless repaid or refinanced, will be
rolled over into longer term senior notes maturing on June 1, 2007.
8 -- EQUITY FINANCING AND FINANCE CHARGE
During the second quarter of 1999, the Company completed a $31.1 million
equity financing, in which 5.4 million new shares of common stock were issued to
various holders of $5.50 and $7.50 warrants in exchange for the payment of $20.4
million of cash and the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to exercise at this
time participated in the transaction. The Company also received $3 million of
cash from its noteholders, which was used to purchase on their behalf the
426,323 shares of common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that restricts
transferability absent compliance with or an exemption under Rule 144 (after the
one-year holding period) or an effective
F-10
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
registration statement. In addition, the Company incurred a one-time $2.0
million finance charge against earnings in connection with the exercise of
warrants to fund the litigation settlement.
9 -- COMMITMENTS AND CONTINGENCIES
Final payment to plaintiffs in the mandatory class action settlement of the
breast implant litigation:
In May of 1999, the Company completed the final payment of all of the
monies owed to the court-appointed escrow agent on behalf of the plaintiffs
in the mandatory class action settlement of the breast implant litigation.
The payment was $29.9 million in cash, and included $25.5 million as full
payment of the 6% promissory note which was issued in June 1998 at the time
the settlement received preliminary approval, $1.4 million of accrued
interest on that note, and $3 million to repurchase the 426,323 shares of
common stock which were also issued in June 1998 to the escrow agent. As a
result of this payment, approximately $30 million of liabilities relating
to the breast implant litigation that was recorded on the Company's balance
sheet as of the end of the first quarter of 1999 has now have been
eliminated.
10 -- NON CASH COMPENSATION
During the nine months ended September 30, 1999, we authorized the issuance
and allocation to certain of our senior executives, subject to final
ratification by our compensation committee, warrants to purchase 900,000 shares
of our common stock. We expect that this will result in an annual compensation
charge of between $0.5 million to $1.0 million over the next three years.
11 -- SUBSEQUENT EVENTS
In October 1999, the Company filed a registration statement offering
2,500,000 shares of its common stock (plus an additional 450,000 shares for the
underwriters' over-allotment option). The Company anticipates using the net
proceeds of the offering to repay a portion of the borrowings under its
outstanding bridge loan facility.
F-11
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
F-12
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1998 1997
------- --------
ASSETS
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
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
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 25,000,000
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.
F-13
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.
F-14
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(IN 000'S)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- 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:
Net income............................... -- -- -- -- (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 (loss):
Net loss................................. -- -- -- -- 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.
F-15
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.
F-16
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 1997 AND 1996
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Inamed Corporation and each of its wholly-owned subsidiaries (the "Company").
Intercompany transactions are eliminated in consolidation.
The 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 manufacturing companies 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.
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.
F-17
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-18
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
YEAR ENDED
DECEMBER 31, 1998
-----------------
COMPUTATION OF PER SHARE EARNINGS
Diluted:
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
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.
F-19
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
Intangible 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.
F-21
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-22
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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
F-23
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-24
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 -- --
Exercised........................ (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
======= ======= =======
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 amounts
for 1998. (The effects on pro forma net income for 1997 and 1996 are not
material and are therefore not shown.)
F-25
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-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.
EXERCISE FAIR MARKET VALUE
SHARES PRICE EXPIRATION 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 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.
F-26
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 this issuance. 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.
F-27
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
F-28
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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 reimbursement for the
foregoing aircraft rental and flight related services expenses through the July,
1998 debt restructuring 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
F-29
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-30
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-31
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-32
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-33
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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, 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.
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.
F-34
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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)
======= ======= ======= ========
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.
F-35
INAMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
F-36
SCHEDULE II
INAMED CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN 000'S)
BEGINNING OF END OF PERIOD
DESCRIPTION PERIOD BALANCE 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 deferred tax
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
F-37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Collagen Aesthetics, Inc.
We have audited the accompanying consolidated balance sheets of Collagen
Aesthetics, Inc. (formerly Collagen Corporation) as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conduct our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a text basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position for Collagen
Aesthetics, Inc. (formerly Collagen Corporation) at June 30, 1999 and 1998, and
the consolidated results of its operations and its cash flows, for each of the
three years in the period ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 30, 1999
F-38
COLLAGEN AESTHETICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 16,741 $ 7,916
Short-term investments................................. 7,890 8,011
Accounts receivable, less allowance for doubtful
accounts ($439 in 1999 and $505 in 1998).............. 14,283 13,764
Inventories, net....................................... 11,690 12,101
Inventories of discontinued operations, net............ -- 417
Other current assets, net.............................. 7,455 11,016
-------- --------
Total current assets.............................. 58,059 53,225
Property and equipment, net............................... 12,877 14,448
Intangible assets, net.................................... 8,877 6,861
Investment in Boston Scientific Corporation............... -- 73,979
Investment in Devices, Inc................................ -- 7,027
Investment in Pharming, B.V............................... -- 7,010
Loans to officers and employees, net...................... 54 259
Other investments and assets, net......................... 5,967 3,530
-------- --------
$ 85,834 $166,339
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 7,206 $ 3,561
Accrued compensation................................... 3,166 4,749
Accrued liabilities.................................... 6,871 11,913
Provision for disposal of discontinued operations,
current............................................... 4,431 1,193
Income taxes payable................................... 15,666 10,606
Liabilities of discontinued operations, net............ -- 781
-------- --------
Total current liabilities......................... 37,340 32,803
Long-term liabilities:
Deferred income taxes..................................... -- 30,589
Provision for disposal of discontinued operations,
long-term.............................................. 5,495 914
Other long-term liabilities............................... 1,170 1,393
-------- --------
Total long-term liabilities....................... 6,665 32,896
Commitments and contingencies...............................
Minority interest........................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value, authorized: 5,000,000
shares; none issued or outstanding..................... -- --
Common shares, $.01 par value, authorized: 28,950,000
shares, issued: 11,046,359 shares (10,937,830 shares in
1998), outstanding: 8,592,359 shares (8,864,930 shares
in 1998)............................................... 110 109
Additional paid-in capital................................ 56,036 69,619
Retained earnings......................................... 34,710 32,128
Cumulative translation adjustment......................... (2,084) (2,030)
Unrealized gain on available-for-sale investments......... -- 43,833
Treasury stock, 2,454,000 shares in 1999 (2,072,900 shares
in 1998)............................................... (46,943) (43,019)
-------- --------
Total stockholders' equity........................ 41,829 100,640
-------- --------
$ 85,834 $166,339
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-39
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Product sales............................................. $ 86,389 $ 82,772 $68,335
Costs and expenses:
Cost of sales............................................. 24,559 23,958 17,223
Selling, general and administrative....................... 41,120 42,535 38,792
Research and development.................................. 7,889 22,715 14,087
Restructuring expense..................................... -- 1,541 --
Purchased in-process research and development............. -- 10,587 --
-------- -------- -------
73,568 101,336 70,102
-------- -------- -------
Income (loss) from operations............................... 12,821 (18,564) (1,767)
Other income (expense):
Net gain on investments, principally Boston Scientific
Corporation............................................ 3,721 19,096 9,063
Net gain on investment in Prograft Medical, Inc........... -- -- 15,395
Equity in losses of other affiliates...................... (35) (151) (970)
Interest income........................................... 591 988 1,110
Interest expense.......................................... (64) (56) (473)
-------- -------- -------
Income before income taxes, minority interest and
discontinued operations................................... 17,034 1,313 22,358
Provision for income taxes.................................. 7,010 3,207 8,325
Minority interest........................................... 1 (16) (765)
-------- -------- -------
Income (loss) from continuing operations.................... 10,023 (1,878) 14,798
Discontinued operations:
Loss from operations...................................... -- (5,279) (9,145)
Benefit for income taxes.................................. -- 1,630 1,718
-------- -------- -------
Loss from discontinued operations, net of taxes........ -- (3,649) (7,427)
Provision for disposal.................................... (11,500) (11,045) --
Benefit for income taxes.................................. 4,059 2,489 --
-------- -------- -------
Provision for disposal, net of taxes................... (7,441) (8,556) --
-------- -------- -------
Total loss from discontinued operations, net of
taxes................................................ (7,441) (12,205) (7,427)
-------- -------- -------
Net income (loss)........................................... $ 2,582 $(14,083) $ 7,371
======== ======== =======
Net income (loss) per share -- Basic:
Continuing operations..................................... $ 1.16 $ (0.21) $ 1.68
Discontinued operations................................... (0.86) (1.37) (0.84)
======== ======== =======
Net income (loss) per share -- Basic................... $ 0.30 $ (1.58) $ 0.84
======== ======== =======
Net income (loss) per share -- Diluted:
Continuing operations..................................... $ 1.15 $ (0.21) $ 1.66
Discontinued operations................................... (0.85) (1.37) (0.83)
======== ======== =======
Net income (loss) per share -- Diluted................. $ 0.30 $ (1.58) $ 0.83
======== ======== =======
Shares used in calculating per share information -- Basic... 8,650 8,913 8,804
======== ======== =======
Shares used in calculating per share
information -- Diluted.................................... 8,714 8,913 8,930
======== ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-40
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
GAIN ON
ADDITIONAL CUMULATIVE AVAILABLE- TOTAL
YEARS ENDED JUNE 30, COMMON PAID-IN RETAINED TRANSLATION FOR-SALE TREASURY STOCKHOLDERS'
1999, 1998 AND 1997 STOCK CAPITAL EARNINGS ADJUSTMENT INVESTMENTS STOCK EQUITY
- -------------------- ------ ---------- -------- ----------- ----------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE AT JUNE 30, 1996... $106 $ 64,844 $ 42,378 $ (649) 34,549 $(38,220) $103,008
Sale of common stock under
options and employee
stock purchase plans..... 2 1,871 -- -- -- -- 1,873
Tax benefit relating to
stock options............ -- 489 -- -- -- -- 489
Foreign currency
translation adjustment... -- -- -- (880) -- -- (880)
Dividends declared ($.20
per share)............... -- -- (1,750) -- -- -- (1,750)
Treasury stock purchased... -- -- -- -- -- (2,546) (2,546)
Unrealized gain on
available-for-sale
investments.............. -- -- -- -- 12,520 -- 12,520
Net income................. -- -- 7,371 -- -- -- 7,371
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1997... 108 67,204 47,999 (1,529) 47,069 (40,766) 120,085
Sale of common stock under
options and employee
stock purchase plans..... 1 1,843 -- -- -- -- 1,844
Tax benefit relating to
stock options............ -- 572 -- -- -- -- 572
Foreign currency
translation adjustment... -- -- -- (501) -- -- (501)
Dividends declared ($.20
per share)............... -- -- (1,788) -- -- -- (1,788)
Treasury stock purchased... -- -- -- -- -- (2,253) (2,253)
Unrealized loss on
available-for-sale
investments.............. -- -- -- -- (3,236) -- (3,236)
Net loss................... -- -- (14,083) -- -- -- (14,083)
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1998... 109 69,619 32,128 (2,030) 43,833 (43,019) 100,640
Sale of common stock under
options and employee
stock purchase plans..... 1 1,168 -- -- -- -- 1,169
Tax benefit relating to
stock options............ -- 68 -- -- -- -- 68
Spinoff of Cohesion........ -- (14,819) -- -- (43,833) -- (58,652)
Foreign currency
translation adjustment... -- -- -- (54) -- -- (54)
Treasury stock purchased... -- -- -- -- -- (3,924) (3,924)
Net income................. -- -- 2,582 -- -- -- 2,582
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1999... $110 $ 56,036 $ 34,710 $(2,084) -- $(46,943) $ 41,829
==== ======== ======== ======= ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-41
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss)......................................... $ 2,582 $(14,083) $ 7,371
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Purchased in-process research and development........... -- 10,587 --
Depreciation and amortization........................... 4,890 4,899 4,419
Equity in losses of affiliates.......................... 35 151 969
Gain on investments, net of taxes paid of $1.5 million,
none and $10.8 million in 1999, 1998 and 1997,
respectively.......................................... (2,195) (19,096) (13,625)
Deferred income taxes................................... (7,087) (2,979) (1,463)
Tax benefit relating to stock options................... 68 572 489
Write-down of purchased intangibles of discontinued
operations............................................ -- 6,078 --
Write-down of inventory and property and equipment of
discontinued operations............................... -- 5,261 --
Decrease (increase) in assets:
Accounts receivable................................... (869) (3,042) (1,225)
Inventories........................................... 333 (1,928) (2,245)
Other................................................. 6,965 (105) 2,820
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other....... 8,923 9,361 271
Income taxes payable.................................. 5,360 1,230 1,788
Other long-term liabilities........................... (206) (2,473) 1,529
Net changes in assets and liabilities of discontinued
operations.......................................... -- (239) (2,387)
------- -------- --------
Total adjustments................................... 16,217 8,277 (8,660)
------- -------- --------
Net cash provided by (used in) operating activities..... 18,799 (5,806) (1,289)
------- -------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific Corp. stock,
net of taxes paid....................................... 2,139 20,442 5,578
Net proceeds from sale of other affiliate stock, net of
taxes paid.............................................. 508 704 9,771
Proceeds from sales and maturities of short-term
investments............................................. 8,888 9,413 6,634
Purchases of short-term investments....................... (9,783) (12,308) (7,968)
Expenditures for property and equipment................... (3,676) (5,029) (3,360)
Increase in intangible and other assets................... (4,929) (5) (2,726)
Equity investments and loans to affiliates................ -- (3,075) (1,928)
Acquisition of interest in Cohesion Corporation, net of
cash balances........................................... -- (10,587) --
------- -------- --------
Net cash provided (used in) by investing activities..... (6,853) (445) 6,001
------- -------- --------
Cash flows from financing activities:
Repurchase of common stock................................ (3,924) (2,253) (2,546)
Net proceeds from issuance of common stock................ 1,169 1,844 1,873
Cash dividends paid....................................... (896) (1,774) (1,750)
Cohesion Technologies, Inc. Spinoff....................... 530 -- --
Repayments of bank borrowings............................. -- (2,031) (5,000)
------- -------- --------
Net cash used in financing activities................... (3,121) (4,214) (7,423)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 8,825 (10,465) (2,711)
Cash and cash equivalents at beginning of period............ 7,916 18,381 21,092
------- -------- --------
Cash and cash equivalents at end of period.................. $16,741 $ 7,916 $ 18,381
======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Collagen
Aesthetics, Inc. (formerly Collagen Corporation), ("Collagen" or the "Company"),
a Delaware corporation, and its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated subsidiaries, and other investments in which the
Company has a 20% to 50% interest or otherwise has the ability to exercise
significant influence, are accounted for under the equity method. Investments in
companies in which the Company has less than a 20% interest with either no
readily determinable fair value or with transfer restrictions are carried at
cost or estimated realizable value, if less, and those unrestricted investments
with a readily determinable fair value are carried at market value with the
unrealized gains or losses, net of tax, recorded as a component of stockholders'
equity.
On August 18, 1998 (the "Distribution Date"), the Company spun off ("the
Spinoff"), in a one-for-one distribution of common stock to the Company's
stockholders, Cohesion Technologies, Inc. ("Cohesion"), which previous to the
Spinoff was a wholly-owned subsidiary of the Company. The transaction resulted
in the distribution of 100% of the outstanding shares of Cohesion in a tax-free
transaction. For fiscal year 1999, the Company has included Cohesion's results
through the Distribution Date. Included in the June 30, 1998 balance sheet are
assets and liabilities related to Cohesion -- See Note 13, "Cohesion
Technologies."
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. As of June 30, 1999, the Company has a provision for
discontinued operations of $9,926,000, which represents management's best
estimate of additional current and future losses related to the discontinued
operations. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
Cash equivalents, short-term investments and other investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.
The Company invests its excess cash in deposits with major banks and in
money market securities of companies with strong credit ratings and from a
variety of industries. These securities are typically short-term in nature and,
therefore, bear minimal risk. The Company has not experienced any losses on its
money market investments.
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. All of the Company's debt and equity securities are
classified as available-for-sale. The carrying value of available-for-sale debt
securities approximates fair value because of the short-term maturity of these
investments. Both realized and unrealized gains and losses on debt securities
were immaterial as of June 30, 1999, 1998 and 1997 and for the years ended June
30, 1999, 1998 and 1997.
F-43
Unrestricted available-for-sale equity securities with a readily
determinable fair value in which the Company has a less than 20% interest,
which, prior to the Spinoff of Cohesion, included Cohesion's holdings in Boston
Scientific Corporation ("Boston Scientific"), Innovasive Devices, Inc.
("Innovasive Devices"), and Medarex, Inc., are carried at fair value with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Restricted equity securities in which the Company has less
than a 20% interest are carried at cost or estimated realizable value, if less,
and are included in "other investments and assets" in the accompanying balance
sheets. (See Note 13, "Cohesion Technologies", for discussion related to the
Investment in Boston Scientific and the Investment in Innovasive Devices) The
cost of securities sold is based on the specific identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income or expense. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale debt securities are
included in interest income or expense. Interest and dividends on securities
classified as available-for-sale are included in interest income.
Inventories
Inventories are valued at the lower of cost, determined on a standard cost
basis which approximates average cost, or market.
Property and equipment
Depreciation and amortization of property and equipment, which is stated at
cost, are provided on the straight-line method over estimated useful lives as
follows:
Machinery and equipment............................... 3 - 7 years
Leasehold improvements................................ Term of lease
Intangible assets
Intangible assets are amortized using the straight-line method. Purchased
product distribution rights and a non-compete covenant are amortized over the
lesser of the estimated useful life or the contract period. Patents acquired
prior to October 1996 are amortized over a seventeen-year period beginning with
the effective date or over the remainder of such period from the date acquired
and patents purchased thereafter are expensed when acquired. Trademarks acquired
prior to fiscal 1996 are amortized over a twenty-year period beginning with the
trademark filing dates and trademarks purchased thereafter are expensed when
acquired. The effect of changes in accounting for patents and trademarks were
not material to the accompanying financial statements.
Loans to officers and employees
Principal plus accrued interest due from current and former employees
totaled, prior to reserves, approximately $54,000 and $1.5 million at June 30,
1999 and 1998, respectively, and principal plus accrued interest due from
officers totaled approximately $167,000 at June 30, 1998. There were no loans to
officers at June 30, 1999. Included within the amounts due from current and
former employees at June 30, 1998 are promissory notes totaling, prior to
reserves, $1.2 million due from the Company's former Chairman and Chief
Executive Officer. Due to uncertainties regarding collection, loans to the
former Chairman and Chief Executive Officer were fully reserved as of June 30,
1997. These promissory notes were transferred to Cohesion in connection with the
Spinoff.
Summary of Fair Value of Financial Instruments
The table below summarizes the carrying value and fair value of the
Company's financial instruments which are all held for purposes other than
trading.
F-44
JUNE 30,
------------------------------------------
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Assets:
Cash equivalents and short-term investments (See
Note 3)........................................... $15,992 $15,992 $14,802 $14,802
Boston Scientific stock (See Note 13)*.............. -- -- 73,979 73,979
Innovasive Devices stock (See Note 13)*............. -- -- 7,027 7,916
Medarex stock*...................................... -- -- 1,920 1,920
Pharming B.V. stock*................................ -- -- 7,010 7,010
Other non-public equity securities.................. 1,000 1,000 1,364 1,364
Loans to officers and employees..................... 54 54 259 259
Equity Collar Instruments*.......................... -- -- -- 96
- ---------------
* Asset was transferred to Cohesion in connection with the Spinoff.
Revenue Recognition
Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.
Concentration of Credit and Other Risk
The Company sells its facial aesthetics products primarily to physicians
and pharmacies in North America, Europe and the Pacific Rim. The Company sells
Contigen(R) Bard collagen implant ("Contigen implant") to C.R. Bard, Inc.
("Bard"), its marketing partner for Contigen implant. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations.
All of the Company's manufacturing capacity for collagen products, the
majority of its research and development activities, its corporate headquarters,
and other critical business functions are located near major earthquake faults.
In addition, all of the manufacturing capacity for collagen-based products is
located in one primary facility with the Company currently maintaining only
limited amounts of finished product inventory. While the Company has some
limited protection in the form of disaster recovery programs and basic insurance
coverage, the Company's operating results and financial condition would be
materially adversely affected in the event of a major earthquake, fire or other
similar calamity affecting its manufacturing facilities.
Advertising costs
The Company expenses advertising costs as incurred. Total advertising
expense was $668,000, $975,000 and $900,000 for 1999, 1998 and 1997,
respectively.
Stock based compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for employee stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
F-45
Comprehensive income
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes new rules
for the reporting and display of comprehensive income and its components. The
components of comprehensive income, net of related tax, are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Net income (loss)............................. $2,582 $(14,083) $ 7,371
Change in unrealized losses on securities..... -- (3,236) 12,520
Foreign currency translation adjustments...... (54) (501) (880)
------ -------- -------
Comprehensive income (loss)................... $2,528 $(17,820) $19,011
====== ======== =======
The movement in unrealized losses in securities in years ended June 30,
1998 and 1997 relate to the investments in Boston Scientific and Innovasive
Devices, which were transferred to Cohesion in connection with the Spinoff.
Earnings per share
Beginning with fiscal year 1998, basic earnings per share (EPS) and diluted
EPS are computed using the methods required by Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic EPS
is calculated using the weighted average number of common shares outstanding for
the period. The computation of diluted EPS includes the effects of stock
options, warrants and convertible preferred stock, if such effect is dilutive.
Prior period amounts have been restated to conform with the presentation
requirements of SFAS 128. Below is a reconciliation between the basic and
diluted weighted average common and common-equivalent shares for 1999, 1998 and
1997:
YEARS ENDED JUNE 30,
-----------------------
1999 1998 1997
----- ----- -----
(IN THOUSANDS)
Basic weighted average common shares outstanding.... 8,650 8,913 8,804
Weighted average common stock options outstanding... 64 -- 126
----- ----- -----
Diluted weighted average shares outstanding......... 8,714 8,913 8,930
===== ===== =====
Foreign currency translation
The functional currency for each foreign subsidiary is its respective
foreign currency. Accordingly, all assets and liabilities related to these
operations are translated at the current exchange rates at the end of each
period. The resulting cumulative translation adjustments are recorded directly
to the accumulated foreign currency translation adjustment account included in
stockholders' equity. Revenues and expenses are translated at average exchange
rates in effect during the period. Foreign currency transaction gains and losses
are included in results of operations.
At June 30, 1999 and 1998, no foreign currency transaction exposures were
hedged. Unhedged net foreign assets were $6.1 million and $6.5 million at June
30, 1999 and 1998, respectively.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS 133 is effective for
years beginning June 15, 2000 and is not anticipated to have an impact on the
Company's results of operations or financial condition when adopted.
F-46
2. BALANCE SHEET INFORMATION
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Other current assets:
Deferred taxes....................................... $ 2,811 $ 6,925
Other................................................ 4,644 4,091
-------- --------
$ 7,455 $ 11,016
======== ========
Property and equipment:
Machinery and equipment.............................. $ 32,851 $ 37,286
Leasehold improvements............................... 4,371 6,404
-------- --------
37,222 43,690
Less accumulated depreciation and amortization....... (24,345) (29,242)
-------- --------
$ 12,877 $ 14,448
======== ========
Intangible assets:
Patents, trademarks, distribution rights and
non-compete covenant.............................. $ 12,611 $ 9,387
Organization costs................................... 1,865 1,865
-------- --------
14,476 11,252
Less accumulated amortization........................ (5,599) (4,391)
-------- --------
$ 8,877 $ 6,861
======== ========
Accrued liabilities:
Accrued rent......................................... $ 598 $ 599
Sales and property taxes payable..................... 528 444
Benefits payable..................................... 208 474
Dividends payable.................................... -- 896
Accrued restructuring charges........................ -- 1,541
Other accrued liabilities............................ 5,537 7,959
-------- --------
$ 6,871 $ 11,913
======== ========
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale debt securities at
amortized cost, which approximates estimated fair value:
JUNE 30,
----------------
1999 1998
------ ------
(IN THOUSANDS)
Cash Equivalents:
Money market funds....................................... $8,102 $3,121
Corporate obligations.................................... -- 3,670
------ ------
$8,102 $6,791
====== ======
Short-term investments:
Corporate obligations.................................... $7,890 $8,011
====== ======
During the years ended June 30, 1999, 1998 and 1997, the Company sold
available-for-sale debt securities with a fair value at the dates of sale of
$8.9 million, $9.4 million, and $6.6 million, respectively.
F-47
Both gross realized and unrealized gains and losses on these securities were
insignificant. The Company uses amortized cost as the basis for recording gains
and losses from securities transactions. Contractual maturities of the debt
securities do not exceed one year at June 30, 1999.
4. INVENTORIES
Inventories consist of the following:
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Raw materials............................................ $ 2,330 $ 1,765
Work-in-process.......................................... 3,684 3,948
Finished goods........................................... 5,676 6,388
------- -------
$11,690 $12,101
======= =======
5. DISCONTINUED OPERATIONS OF LIPOMATRIX
On June 30, 1998, the Board of Directors of the Company approved the
discontinuation of the operations of LipoMatrix, Inc. ("LipoMatrix") of
Neuchatel, Switzerland, and authorized efforts to sell the wholly-owned
subsidiary and all rights related to the Trilucent(R) breast implant ("Trilucent
implant") that LipoMatrix manufactured, thereby allowing the Company's
aesthetics operations to dedicate further resources to its core business. As a
result, in fiscal 1998 the Company recorded a provision of $8.6 million, net of
an income tax benefit of $2.5 million, for the loss on disposal of net assets of
LipoMatrix including estimated future costs. On November 6, 1998, the Company
sold LipoMatrix to Sierra Medical Technologies ("Sierra") of Carson City,
Nevada. Consideration to the Company included a cash payment and the right to
receive royalties on future worldwide breast implant sales. Sierra was also
granted the option to purchase the U.S. Trilucent implant patent portfolio and
marketing rights for additional cash consideration. The Company retains
responsibility for Trilucent implants sold prior to November 6, 1998.
On March 8, 1999, the United Kingdom Medical Devices Agency ("MDA")
announced the voluntary suspension of marketing and voluntary withdrawal of the
Trilucent implant in the United Kingdom. The MDA stated that its actions were
taken for precautionary reasons and did not identify any immediate hazard
associated with the use of the product. Subsequently, LipoMatrix's notified body
in Europe suspended the product's CE Mark pending further assessment of the
long-term safety of the product. Sierra has since stopped sales of the product.
In the quarter ended June 30, 1999, the Company agreed with the United
Kingdom National Health Service to perform certain product surveillance for a
specified period of time with respect to United Kingdom patients implanted with
the Trilucent implant and, after conferring with the MDA, the Company determined
the nature, timing and scope of work intended to address safety concerns about
the product. On June 30, 1999, the Company recorded an additional provision for
the loss on disposal of LipoMatrix of $7.4 million, net of an income tax benefit
of $4.1 million. Approximately $2.5 million of the additional provision was
incurred in fiscal year 1999 and approximately $9.0 million is expected to be
paid over the next several years. The adjustment represents management's best
estimate based on current information of the most likely costs and provides for
additional current and future losses related to ongoing clinical follow-up for
multi-year studies in the U.S. and Europe, the withdrawal of the Trilucent
implant from the European and U.K. markets, safety studies and a patient
surveillance program in the U.K.
Results of operations for LipoMatrix and the breast implant business have
been presented separately as discontinued operations. The following table
summarizes the revenues, loss from operations and loss per share of LipoMatrix
for the three fiscal years ended June 30.
F-48
YEARS ENDED JUNE 30,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ -- $ 3,871 $ 3,477
======== ======== =======
Discontinued operations:
Loss from operations.............................. $ -- $ (5,279) $(9,145)
Benefit for income taxes.......................... -- 1,630 1,718
-------- -------- -------
Loss from discontinued operations, net of
taxes........................................ -- (3,649) (7,427)
Provision for disposal............................ (11,500) (11,045) --
Benefit for income taxes.......................... 4,059 2,489 --
-------- -------- -------
Provision for disposal, net of taxes........... (7,441) (8,556) --
-------- -------- -------
Total loss from discontinued operations, net of
taxes........................................ $ (7,441) $(12,205) $(7,427)
======== ======== =======
Net loss per share -- Basic:
Loss from discontinued operations of LipoMatrix,
Inc............................................ $ -- $ (0.41) $ (0.84)
Loss from disposal of LipoMatrix, Inc............. (0.86) (0.96) --
-------- -------- -------
Net loss per share -- Basic.................... $ (0.86) $ (1.37) $ (0.84)
======== ======== =======
Net loss per share -- Diluted:
Loss from discontinued operations of LipoMatrix,
Inc............................................ $ -- $ (0.41) $ (0.83)
Loss from disposal of LipoMatrix, Inc............. (0.85) (0.96) --
-------- -------- -------
Net loss per share -- Diluted.................. $ (0.85) $ (1.37) $ (0.83)
======== ======== =======
6. RESTRUCTURING EXPENSE
In June 1998, the Company decided to restructure its domestic and
international operations to improve operational efficiency by reducing costs and
facilitating a product refocus. The international effort included moving the
Company's European headquarters from Switzerland to the United Kingdom and
terminating eleven employees. The domestic effort was substantially smaller and
included the reorganization of the North American Sales force and termination of
one employee. As a result of these actions, on June 30, 1998 the Company
recorded $1.5 million in restructuring charges, consisting of approximately
$735,000 for severance costs and approximately $806,000 for facility commitments
and moving expenses associated with fixed assets. At June 30, 1999, all of the
activities contemplated had been completed and actual costs incurred were
substantially equivalent to the original restructuring charges.
7. COMMITMENTS
Minimum lease payments
Future minimum lease payments under noncancelable operating leases at June
30, 1999 are as follows (in thousands):
FISCAL YEAR AMOUNT
- ----------- -------
2000....................................................... $ 4,090
2001....................................................... 3,816
2002....................................................... 2,923
2003....................................................... 2,789
2004....................................................... 2,634
Thereafter................................................. 1,372
-------
Total minimum lease payments............................... $17,624
=======
F-49
Rental expense was $4.1 million, $5.0 million and $4.6 million in fiscal
1999, 1998 and 1997, respectively.
8. LEGAL MATTERS
The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of the Company's technology or products
has resulted in adverse effect, particularly with respect to claims regarding
Trilucent implant, which was sold in a medical field (breast augmentation,
reconstruction and replacement) in which there have been sizable product
liability claims. As discussed in Note 5 "Discontinued Operations of
LipoMatrix", the Company retains responsibility for Trilucent implants sold
prior to November 6, 1998.
The risk of product liability claims will exist even with respect to those
products that have received or in the future may receive regulatory approval for
commercial sale. There can be no assurance that the Company will avoid
significant product liability claims and negative publicity. Furthermore, there
can be no assurance that present insurance coverage will be adequate or that
adequate insurance coverage will remain available at acceptable costs, if at
all, or that a product liability claim or recall would not adversely affect the
future business or financial condition of the Company. A successful claim
brought against the Company for which coverage is denied or in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is involved in legal actions, including product liability
claims, arising in the ordinary course of business. While the outcome of these
matters is currently not determinable, it is management's opinion that these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of its operations.
9. STOCKHOLDERS' EQUITY
Stock Options
The Company has various stock option plans under which incentive stock
options or non-statutory stock options may be granted to officers, directors,
key employees and consultants to purchase the Company's common stock. The
options are granted at no less than the fair market value at the dates of grant
and generally expire after ten years. Incentive stock options become exercisable
at the rate of two percent each month beginning the first full month after the
date of grant unless accelerated by the Board of Directors. Non-statutory stock
options become exercisable on a monthly or yearly basis as determined by the
Board of Directors at the date of grant.
At June 30, 1999, the total number of shares of common stock reserved for
issuance under the Company's current stock option plans was 1,935,497.
F-50
Stock option activities under the stock option plans were as follows:
WEIGHTED
AVERAGE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------------- --------- -----------
Outstanding at June 30, 1996............ 1,481,673 $ 4.69 - $28.25 $17.88 976,896
Granted................................. 549,250 16.75 - 20.75 18.76
Exercised............................... (146,552) 16.56 - 22.75 9.09
Forfeitures or expired.................. (162,468) 7.25 - 28.25 20.22
---------
Outstanding at June 30, 1997............ 1,721,903 4.69 - 28.25 18.69 1,016,326
Granted................................. 282,115 16.63 - 21.38 17.80
Exercised............................... (145,955) 4.69 - 20.50 9.02
Forfeitures or expired.................. (325,810) 5.50 - 28.25 19.49
---------
Outstanding at June 30, 1998............ 1,532,253 6.38 - 28.25 19.27 1,010,275
Granted................................. 647,385 8.63 - 13.40 10.00
Exercised............................... (50,508) 9.50 - 13.22 11.05
Forfeitures or expired.................. (477,345) 6.38 - 22.00 13.62
---------
Outstanding at June 30, 1999............ 1,651,785 $ 8.63 - $20.06 $12.39 962,611
=========
Available for grant at June 30, 1999.... 283,712
=========
Stock Purchase Plan
Prior to the Spinoff, employees purchased the Company's common stock on an
annual basis from the 1985 Employee Stock Purchase Plan (the "1985 Purchase
Plan") under which 700,000 shares were reserved for issuance to employees. For
fiscal 1999, 1998 and 1997, shares issued under the 1985 Purchase Plan were
24,358, 34,053 and 34,769, respectively, with an average issuance price per
share of $13.88, $15.52, $15.52, respectively. In August 1998, subsequent to the
Spinoff, the Company's stockholders approved the adoption of the 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") under which 125,000 shares were
reserved for issuance to employees and purchases of the Company's common stock
can be made by employees twice a year. Under both the 1985 Purchase Plan and the
1998 Purchase Plan, the Company's employees, subject to certain restrictions,
may purchase shares at a price per share that is the lesser of 85 percent of the
fair market value as of the beginning or close of the offering period. For
fiscal 1999, total shares issued under the 1998 Purchase Plan were 33,663 with
an average issuance price per share of $7.65.
Stock Compensation
The Company has elected to follow Accounting Principles Board Statement No.
25 ("APB No. 25") and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is generally recognized.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123 and determined as if the Company had accounted for its
employee stock options granted subsequent to June 30, 1995 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1999, 1998 and
1997: risk-free interest rate of 5.1%, 5.75% and 6.34%, respectively; volatility
factor of the expected market price of the Company's
F-51
Common Stock of 50%, 41% and 43%, respectively; no dividend payments; and a
weighted-average expected life of the option of 6.0, 4.6 and 4.0 years,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
The Company's pro forma information follows:
YEARS ENDED JUNE 30,
-------------------------------------
1999 1998 1997
--------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net income (loss)............................ $1,265 $(15,703) $5,545
Pro forma net income (loss) per share -- Basic......... $ 0.15 $ (1.76) $ 0.63
Pro forma net income (loss) per share -- Diluted....... $ 0.15 $ (1.76) $ 0.62
The following table summarizes information about stock options outstanding
at June 30, 1999:
WEIGHTED AVERAGE OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE PRICES NUMBER EXERCISE PRICE CONTRACTUAL NUMBER EXERCISE PRICE
PER SHARE OUTSTANDING PER SHARE LIFE EXERCISABLE PER SHARE
- ------------------- ----------- -------------- ----------- ----------- --------------
$ 8.63 - $ 8.88 198,499 $ 8.81 9.47 24,249 $ 8.81
9.00 - 9.00 10,000 9.00 9.52 1,000 9.00
9.84 - 9.84 280,330 9.84 9.23 51,287 9.84
10.12 - 12.07 251,849 11.85 6.61 208,247 11.90
12.16 - 12.65 172,604 12.54 6.88 112,350 12.49
12.69 - 13.40 191,918 13.01 6.79 81,222 13.03
13.49 - 14.02 220,996 13.87 6.30 159,235 13.89
14.11 - 15.62 167,262 15.00 3.04 166,694 15.00
15.71 - 18.82 153,027 16.60 3.73 153,027 16.60
20.06 - 20.06 5,300 20.06 1.64 5,300 20.06
--------- -------
$ 8.63 - $20.06 1,651,785 $12.39 6.78 962,611 $13.53
========= =======
The weighted-average fair values of options granted during the years ended
June 30, 1999, 1998 and 1997 were $4.09, $5.87 and $5.75 per share,
respectively.
In December 1998, the Company's Board of Directors approved the repricing
of options previously granted with an exercise price equal to or greater than
$14.50 per share. As a result, 151,254 shares were repriced to $8.88 per share
in December 1998.
Stock Repurchase Program
In August 1998, the Company's Board of Directors approved a continuation of
the stock repurchase program previously approved in February 1993 and authorized
the repurchase of up to an additional 500,000 shares having a value not to
exceed $5 million. In fiscal years 1999, 1998 and 1997, the Company repurchased
381,100, 125,000 and 147,900 shares at average acquisition prices of
approximately $10, $18 and $17 per share, respectively. As of June 30, 1999, up
to 168,900 additional shares could be repurchased
F-52
under the Board of Directors' authorization. The Company plans to retain
repurchased shares as treasury stock.
Stockholder Rights Plan
The Company has a stockholder rights plan which would entitle stockholders
to purchase stock in the Company or in an acquiror of the Company at a
discounted price in the event of certain hostile efforts to acquire control of
the Company. The rights may only be exercised, if at all, upon the occurrence of
certain events unless earlier redeemed pursuant to the plan. The rights expire
on November 28, 2004.
10. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. The Company operates its
business in two reportable segments, facial aesthetics and stress urinary
incontinence. Each of the Company's major facial aesthetics product lines have
similar economic characteristics, technology, manufacturing processes, customers
distribution and marketing strategies, as well as a similar regulatory
environment. In fiscal years 1999, 1998 and 1997, 82%, 85% and 95% of facial
aesthetic product sales or 67%, 65% and 80% of total product sales,
respectively, were derived from Zyderm(R) and Zyplast(R)collagen implant
products. The Contigen implant revenues to the Company from its marketing
partner, Bard, represented 100% of the stress urinary incontinence product sales
in fiscal years 1999, 1998 and 1997.
Information by reporting segment is noted below (in thousands).
FACIAL STRESS URINARY
AESTHETICS INCONTINENCE OTHER CONSOLIDATED
---------- -------------- -------- ------------
1999
Product sales............................... $70,772 $14,279 $ 1,338 $86,389
Income (loss) from operations............... 3,921 10,257 (1,357) 12,821
Total assets................................ 84,351 1,483 -- 85,834
1998
Product sales............................... 63,028 17,701 2,043 82,772
Income (loss) from operations............... 767 12,152 (31,483) (18,564)
Total assets................................ 69,957 1,608 94,774 166,339
1997
Product sales............................... 57,915 7,893 2,527 68,335
Income (loss) from operations............... 7,655 6,936 (16,358) (1,767)
Total assets................................ 68,453 1,583 114,604 184,640
F-53
Geographic Information
Net sales and property and equipment by major geographic area are
summarized below:
NORTH
AMERICA* INTERNATIONAL ASIA PACIFIC DISTRIBUTORS/OTHER CONSOLIDATED
-------- ------------- ------------ ------------------ ------------
(IN THOUSANDS)
NET SALES
1999...................... $51,539 $23,092 $8,629 $3,129 $86,389
1998...................... 51,083 21,136 6,882 3,671 82,772
1997...................... 36,008 22,968 5,172 4,187 68,335
PROPERTY AND EQUIPMENT
1999...................... $11,954 $ 690 $ 233 $ -- $12,877
1998...................... 11,489 886 -- 2,073 14,448
1997...................... 11,337 1,042 -- 1,566 13,945
- ---------------
* North America includes the sales of Contigen to Bard, the stress urinary
incontinence segment.
Major Customer
Sales realized from the Company's marketing partner, Bard, represented 17%,
21% and 12% of total product sales in fiscal years 1999, 1998 and 1997. No other
customer accounted for ten percent or more of total sales in any fiscal year.
11. INCOME TAXES
The Company uses the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of June 30, 1999 and June
30, 1998 are presented below:
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Unrealized gain on marketable securities............... $ -- $30,061
Investments............................................ 2,010 1,888
Intangible assets...................................... 145 12
Foreign earnings and credits (net)..................... 82 214
------- -------
Total deferred tax liabilities................. 2,237 32,175
------- -------
F-54
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Equity in losses of affiliates......................... 5,669 5,700
Accrued liabilities relating to disposal of
LipoMatrix.......................................... 6,554 2,935
Non-deductible accruals................................ 3,428 3,561
State income taxes..................................... 368 488
Accounts receivable.................................... 210 676
Inventories............................................ 603 482
Property, plant & equipment............................ 165 207
Other.................................................. 279 436
Valuation allowance.................................... (6,503) (5,974)
------- -------
Total deferred tax assets...................... 10,773 8,511
------- -------
Net deferred tax liabilities (assets).......... $(8,536) $23,664
======= =======
The valuation allowance increased by $529,000 and $93,000 in fiscal years
1999 and 1998, respectively, and decreased by $59,000 in fiscal year 1997.
Significant components of the provision for income taxes, including discontinued
operations, are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current:
Federal............................................. $ 4,824 $ 1,103 $ 5,442
Foreign............................................. 738 544 553
State............................................... 1,128 420 2,075
------- ------- -------
Total current............................... 6,690 2,067 8,070
------- ------- -------
Deferred:
Federal............................................. (3,054) (2,328) (971)
State............................................... (685) (651) (492)
------- ------- -------
Total deferred.............................. (3,739) (2,979) (1,463)
------- ------- -------
Provision (benefit) for income taxes, net............. $ 2,951 $ (912) $ 6,607
======= ======= =======
For financial reporting purposes, income (loss), including discontinued
operations, before income taxes includes the following components:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Domestic operations................................... $2,302 $(12,033) $15,498
Foreign operations.................................... 3,232 (2,978) (2,285)
------ -------- -------
$5,534 $(15,011) $13,213
====== ======== =======
F-55
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Income (loss) before income taxes (including
discontinued operations)............................ $5,534 $(15,011) $13,213
====== ======== =======
Expected tax at 35%................................... $1,937 $ (5,254) $ 4,625
State income tax, net of federal benefit.............. 287 (223) 741
In-process research and development................... -- 2,375 --
Non-deductible intangibles............................ -- 1,699 --
Non-deductible accruals............................... 560 -- --
Net operating losses of subsidiaries for which no
current benefit is realizable....................... 197 164 1,176
Equity in losses of affiliates........................ (5) 76 (222)
Goodwill/intangible amortization...................... 290 428 530
Research and development credit....................... (306) (150) (125)
Other................................................. (9) (27) (118)
------ -------- -------
Provision (benefit) for income taxes, net............. $2,951 $ (912) $ 6,607
====== ======== =======
12. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
YEARS ENDED JUNE 30,
-------------------------
1999 1998 1997
------- ---- ------
(IN THOUSANDS)
Cash paid during the year for:
Interest................................................ $ 64 $ 56 $ 473
Income taxes (net of refunds)........................... (3,060) (65) 5,068
Non-cash financing activity:
Dividends declared...................................... $ -- $896 $ 881
13. COHESION TECHNOLOGIES
Acquisition of Cohesion Corporation
Cohesion Corporation was a privately-held company developing novel
biomaterials with superior performance characteristics in the area of hemostats,
biosealants, and adhesion prevention barriers for surgical applications located
in Palo Alto, California. The Company acquired ownership of Cohesion Corporation
in a series of transactions and integrated it with the Company's Technologies
division to create Cohesion Technologies. In connection with the Company's
purchases of Cohesion Corporation shares, substantially all of the purchase
price was allocated to in-process research and development and was expensed at
the time of the purchases. The $10.5 million December 1997 purchase price
includes $3.8 million of cash compensation amounts associated with the purchase
of certain vested employee stock options, which amounts were expensed in
accordance with the Accounting Principles Board Opinion No. 25. After allocation
of the purchase amounts to in-process technology, there was no goodwill
recorded.
The Company determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
The Company concluded that the in-process technology had no alternative future
use after taking into consideration the potential for both usage of the
technology in different products and for resale of the technology.
F-56
The unaudited pro forma results of operations of the Company for fiscal
years 1998 and 1997, assuming the acquisition of Cohesion Corporation shares
occurred on July 1, 1995, on the basis described above with all material
intercompany transactions eliminated, are as follows:
JUNE 30,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................. $82,772 $68,335
Income from continuing operations........................ 8,709 14,798
Net income (loss)........................................ (3,496) 7,371
Net income (loss) per share -- Basic..................... $ (0.39) 0.84
Net income (loss) per share -- Diluted................... $ (0.39) 0.83
The unaudited pro forma net income (loss) and per share amounts above do
not include the charges for in-process research and development aggregating
$13.6 million arising from the acquisitions of shares of Cohesion Corporation.
The unaudited pro forma information is not necessarily indicative of the actual
results of operations had the transaction occurred at the beginning of the
periods indicated, nor should it be used to project the Company's results of
operations for any future dates or periods.
Spinoff
On August 18, 1998, the Company spun off, in a one-for-one distribution of
common stock to the Company's stockholders, Cohesion Technologies, Inc., which
previous to the Spinoff was a wholly-owned subsidiary of the Company. The
transaction resulted in the distribution of 100% of the outstanding shares of
Cohesion in a tax-free transaction. For fiscal year 1999, the Company included
Cohesion's results through the Distribution Date. Included in the June 30, 1998
balance sheet are assets and liabilities related to Cohesion.
Intercompany Agreements
Allocation of assets and liabilities to Cohesion. Effective January 1,
1998, the Company entered into certain agreements with Cohesion which (i)
provided for the transfer, effective January 1, 1998, of certain assets and
liabilities relating to the businesses previously conducted by the Cohesion
division to Cohesion, and (ii) established contractual arrangements between the
Company and Cohesion described below. The business activities of the Cohesion
division focused on the design, development, manufacture and commercialization
of innovative resorbable biomaterials, adhesive technologies, and delivery
systems in the fields of tissue repair and regeneration.
Under the agreements, substantially all investments in affiliates,
(including Boston Scientific and Innovasive Devices), and specifically
identifiable trade receivables, notes receivable, loans to officers and
employees, fixed assets and employee related liabilities (including a separation
agreement with the Company's former CEO and related costs) were allocated to
Cohesion. For assets and liabilities where it was not practical to use the
specific identification method, Cohesion was allocated a specified percentage of
these assets and liabilities.
Contractual Arrangements between the Company and Cohesion. The Company
also entered into supply, services, research and development, benefits, tax
allocation, and distribution agreements with Cohesion. Under the Collagraft
Supply Agreement, the Company will supply Cohesion's requirements of Collagraft
necessary for Cohesion to fulfill its obligations under its agreement with
Zimmer, Inc. at a price that is the greater of a percentage of the sales price
or a defined multiplier of the Company's cost. In accordance with the Collagen
Supply Agreement, the Company will supply Cohesion products, intermediates and
finished materials at a price equal to a multiplier of Collagen's cost. Under
the Services Agreement, which was effective through June 30, 1999, Cohesion
provided the Company with services in the following areas: facilities,
telephone, library, investor relations, research and development services (to
the extent not provided for by the research and development agreement), and
clinical and regulatory. The
F-57
Company provided Cohesion with certain services in the following areas:
financial and tax services, health and welfare benefits administration and
administration of the 401(k) Savings Plan, administrative, legal, regulatory,
quality assurance, medical affairs, and manufacturing services. In accordance
with the Recombinant Technology and Development License Agreement, the Company
and Cohesion will collaborate to develop recombinant human collagen and provide
for cost sharing for the project until certain milestones are met. The Benefits
Agreement provided for the continuation or replacement of benefits for the
employees transferred to Cohesion and employees remaining with the Company. The
Tax Allocation Agreement provided that the Company will be responsible for all
taxes prior to the Distribution Date and Cohesion will be responsible for all of
its tax liabilities subsequent to that date. Under the Vitrogen International
Distribution Agreement, Collagen International, Inc., a subsidiary of the
Company, shall act as Cohesion's distributor in Germany for Vitrogen.
Investment in Boston Scientific
At June 30, 1998, the Company owned approximately 1.0 million shares of
Boston Scientific common stock. Boston Scientific is a leading manufacturer of
catheter-based devices that can be inserted through small body openings and are
used in heart surgery and other operations. Boston Scientific common stock is
quoted on the New York Stock Exchange under the symbol BSX. On June 30, 1998,
the closing price of Boston Scientific common stock was $71.63 per share. In
fiscal 1998, the Company sold 332,340 shares of Boston Scientific common stock
for a pre-tax gain of approximately $19.0 million and in fiscal 1997, the
Company sold 330,000 shares of Target Therapeutics, Inc. (the predecessor of
Boston Scientific) common stock for a pre-tax gain of approximately $9.2
million.
The Company's investment in shares of Boston Scientific common stock at
June 30, 1998 was classified as available-for-sale and was recorded at fair
value. The unrealized gains (estimated fair value less cost) on these
available-for-sale securities have been reported as a separate component of
stockholders' equity, net of tax. The following is a summary of the aggregate
estimated fair value, gross unrealized gains and amortized cost of the Company's
investment in Boston Scientific common stock.
JUNE 30,
1998
--------------
(IN THOUSANDS)
Amortized cost......................................... $ 4,468
Gross unrealized gains................................. 69,511
-------
Estimated fair value................................... $73,979
=======
In order to manage the risk of market fluctuations in this stock, the
Company entered into certain costless collar instruments ("collars"), to hedge a
portion (725,000 shares at June 30, 1998) of the Boston Scientific equity
securities against changes in market value. A costless collar instrument is a
form of equity collar instrument consisting of a purchased put option and a
written call option on a specific equity security such that the cost of the
purchased put and the proceeds of the written call offset each other; therefore,
there is no initial cost or cash outflow for these instruments. The Company
purchased the collars with expiration dates and numbers of shares so that the
potential adverse impact of movements in market price of the stock will be at
least partially offset by an associated increase in the value of the collars.
Realized gains and losses on the collars are recorded in other income
(expense) with the related gains from the sale of stock. Unrealized gains and
losses on these instruments, net of tax, are recorded as an adjustment to
unrealized gains and losses on available-for-sale investments, a component of
stockholder's equity, with a corresponding receivable or payable recorded.
Equity collar instruments that do not qualify for hedge accounting and early
termination of these instruments with the sale of the underlying stock, would be
recognized in other income (expense). For early termination with the sale of the
underlying stock, the intrinsic value will adjust the cost basis of the
underlying security. At June 30, 1998, the notional amount of the put and call
options were $46.0 million and $70.7 million, respectively. The fair value of
the equity collars at June 30, 1998 was $96,000. The fair value of the purchased
puts and the written calls were determined based on quoted market prices at that
date.
F-58
Investment in Innovasive Devices
At June 30, 1998, Cohesion owned approximately 844,000 shares of Innovasive
Devices common stock. Innovasive Devices designs, develops, manufactures and
markets proprietary tissue repair systems which facilitate the repair of soft
tissue injuries. Innovasive Devices' common stock is quoted on The Nasdaq Stock
Market under the symbol IDEA. The closing price of Innovasive Devices' common
stock at June 30, 1998, was $9.38 per share. Restrictions which prevented the
sale of any of Cohesion's shares of common stock of Innovasive Devices were no
longer applicable to 650,000 shares at June 30, 1998. The Company carried the
portion of Cohesion's investment in Innovasive Devices, which could be sold
within one year, as an available-for-sale investment at market value, or $6.1
million at June 30, 1998, reflecting an unrealized gain of $3.0 million ($6.1
million estimated fair value less $3.1 million cost), which was included in a
separate component of stockholders' equity, net of tax. The remaining 194,000
shares of common stock were valued at cost of $934,000.
During fiscal 1998 and 1997, the Company did not sell any of Cohesion's
shares of common stock of Innovasive Devices.
14. SUBSEQUENT EVENTS (UNAUDITED)
On August 2, 1999, the Company and Inamed Corporation ("Inamed") each
announced the signing of a definitive agreement to merge whereby Inamed made a
cash tender offer to acquire all of the outstanding common stock of the Company
for approximately $142 million, or $16.25 a share. The Boards of Directors of
both companies unanimously approved the definitive merger agreement. The tender
offer was subject to a majority of the Company's fully diluted shares being
validly tendered and not withdrawn and other customary conditions. The
transaction was not subject to financing contingencies. In that regard, Inamed
obtained a secured bridge loan commitment for $155 million from a group of
financial institutions. The transaction was completed on September 1, 1999.
Inamed is a global surgical and medical device company engaged in the
development, manufacturing and marketing of medical devices for the plastic,
reconstructive and aesthetic surgery markets, as well as devices to treat
obesity. Inamed common stock was quoted on the OTC Bulletin Board, and since
September 30, 1999 has been quoted on the Nasdaq National Market, under the
symbol IMDC.
F-59
SCHEDULE II
COLLAGEN AESTHETICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1999, 1998, 1997
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
(IN THOUSANDS)
1999
Allowance for doubtful accounts............ $505 $ 56 $122 $439
1998
Allowance for doubtful accounts............ $418 $169 $ 82 $505
1997
Allowance for doubtful accounts............ $375 $ 71 $ 28 $418
F-60
[INSIDE BACK COVER OF PROSPECTUS]
THE BIO-ENTERICS LAP-BAND(R) SYSTEM
PICTURE OF LAP-BAND PRODUCT
CAPTION: Offers a minimally invasive, completely reversible alternative to
traditional gastric bypass surgery for the treatment of severe obesity
DIAGRAM OF LAP-BAND PLACED AROUND THE STOMACH
CAPTION: The LAP-BAND(R) is placed around the upper portion of the stomach
LAP-BAND(R) System has not been approved by the FDA for commercial
sale in the U.S. We cannot assure you that the LAP-BAND will receive
FDA approval if such approval is sought.
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3,000,000 SHARES
INAMED LOGO
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
-------------------------
November 17, 1999
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE AND THE SELLING STOCKHOLDERS ARE OFFERING TO
SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
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