UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 COMMISSION FILE NUMBER:0-7101
INAMED CORPORATION
State of Incorporation: Florida I.R.S. Employer Identification No.:59-0920629
3800 Howard Hughes Parkway, Suite #900, Las Vegas, Nevada 89109
Telephone Number: (702) 791-3388
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _____
On November 8, 1996 there were 8,006,050 Shares of the Registrant's
Common Stock Outstanding.
This document contains 21 pages.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 1996
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Unaudited Consolidated Income Statements 5
Unaudited Consolidated Statements
of Cash Flows 7
Notes to the Unaudited Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II - OTHER INFORMATION 20
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,346,086 $2,807,327
Restricted cash, Settlement Fund 14,636,348 --
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $4,314,969 at September 30, 1996 and
$6,641,177 at December 31, 1995 14,190,963 10,470,375
Notes receivable - trade -- 157,534
Related party notes receivable 13,546 385,508
Inventories 20,055,176 17,695,847
Prepaid expenses and other current assets 1,685,370 1,825,213
Income tax refund receivable 235,408 95,580
Deferred income taxes 2,010,622 2,014,589
___________ ___________
Total current assets 56,173,519 35,451,973
___________ ___________
Property and equipment, at cost:
Machinery and equipment 9,816,728 8,923,564
Furniture and fixtures 3,946,873 3,714,717
Leasehold improvements 8,597,623 7,567,208
___________ ___________
22,361,224 20,205,489
Less accumulated depreciation
and amortization (11,097,509) (9,234,166)
___________ ___________
Net property and equipment 11,263,715 10,971,323
___________ ___________
Notes receivable, net of allowance of $1,066,958
at September 30, 1996 and December 31, 1995 2,022,264 2,047,535
Intangible assets, net 1,427,862 1,658,926
Other assets, at cost 401,840 255,187
___________ ___________
Total assets $71,289,200 $50,384,944
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 14,168 $ 51,735
Notes payable to bank 1,481,381 1,273,476
Notes payable to others -- 493,511
Related party notes payable -- 1,759,417
ACCOUNTS PAYABLE 12,426,827 18,596,800
Accrued liabilities:
Salaries, wages, and payroll taxes 4,086,006 9,559,348
Interest 1,672,313 1,609,947
Self-insurance 1,094,332 1,130,632
Stock option compensation 68,714 68,714
Other 2,682,201 2,200,860
ROYALTIES PAYABLE 1,980,337 2,926,388
Income taxes payable 86,611 1,812,818
Deferred income taxes 26,595 10,065
___________ ___________
Total current liabilities 25,619,485 41,493,711
___________ ___________
Long-term debt, excluding current installments 100,472 89,437
Deferred grant income 1,129,148 1,114,735
Deferred income taxes 190,166 239,177
Litigation settlement 9,152,000 9,152,000
Convertible notes payable 34,560,000 --
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 8,006,050 80,061 76,027
Additional paid-in capital 13,456,089 9,963,635
Cumulative translation adjustment 739,681 882,146
Accumulated deficit (13,737,902) (12,625,924)
___________ ___________
Stockholders' (deficit) equity 537,929 (1,704,116)
Total liabilities and stockholders' (deficit) equity $71,289,200 $50,384,944
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C>
Net sales $71,521,118 $64,136,586
Cost of goods sold 24,308,821 20,854,509
___________ ___________
Gross profit 47,212,297 43,282,077
___________ ___________
Operating expenses:
Marketing 18,850,662 16,772,662
General and administrative 21,761,260 21,587,052
Research and development 3,560,114 3,276,591
___________ ___________
Total operating expenses 44,172,036 41,636,305
___________ ___________
Operating income 3,040,261 1,645,772
___________ ___________
Other income (expense):
Interest income 756,526 648,866
Interest expense (4,785,071) (213,229)
Royalty Income 94,766 102,265
Foreign currency transaction losses (222,123) (414,175)
Miscellaneous income 156,663 238,348
___________ ___________
Net other income (expense) (3,999,239) 362,075
___________ ___________
Income (loss) before income tax expense (958,978) 2,007,847
Income tax expense 153,001 715,491
___________ ___________
Net income (loss) $(1,111,979) $ 1,292,356
=========== ===========
Net income (loss) per share of common stock $ (0.14) $ 0.17
=========== ===========
Weighted average common shares outstanding 7,743,767 7,559,073
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral
part of this statement.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C>
Net sales $23,259,585 $18,279,111
Cost of goods sold 8,605,078 6,839,178
___________ ___________
Gross profit 14,654,507 11,439,933
___________ ___________
Operating expenses:
Marketing 6,026,752 5,233,406
General and administrative 7,161,294 8,159,422
Research and development 1,456,633 1,165,297
___________ ___________
Total operating expenses 14,644,679 14,558,125
___________ ___________
Operating income (loss) 9,828 (3,118,192)
___________ ___________
Other income (expense):
Interest income 181,387 325,790
Interest expense (1,059,378) (72,730)
Royalty income 0 74,287
Foreign currency transaction losses (42,061) (580,253)
Miscellaneous income (expense) 4,425 94,967
___________ ___________
Net other expense (915,627) (157,939)
___________ ___________
Income (loss) before income taxes (905,799) (3,276,131)
Income taxes 82,291 (683,543)
___________ ___________
Net income (loss) $ (988,090) $(2,592,588)
=========== ===========
Net income (loss) per share of common stock $ (0.12) $ (0.34)
=========== ===========
Weighted average common shares outstanding 7,998,507 7,662,257
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this
statement
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<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months ended September 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,111,979) $ 1,292,356
___________ ___________
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 1,810,802 1,940,954
Amortization of intangible assets 230,533 233,057
Deferred income taxes (24,093) 532,535
Changes in assets and liabilities:
Trade accounts receivable (3,832,241) (1,772,322)
Notes receivable 174,564 304,107
Inventories (2,728,211) (3,385,739)
Prepaid expenses and other current assets 117,451 1,472,731
Income tax refund receivable (144,828) 20,091
Other assets (147,455) (7,062)
Accounts Payable (6,143,367) 415,305
Accrued salaries, wages and payroll taxes (5,396,239) 3,672,596
Accrued interest 62,366 (1,027)
Accrued self-insurance (36,300) (54,573)
Other accrued liabilities 497,656 (452,066)
ROYALTIES PAYABLE (946,051) 921,692
Income taxes payable (1,726,374) (610,421)
___________ ___________
Total adjustments (18,231,787) 3,229,858
___________ ___________
Net cash provided by
(used in) operating activities (19,343,766) 4,522,214
___________ ___________
Cash flows from investing activities:
Purchases of property and equipment (2,266,227) (3,907,150)
___________ ___________
Net cash used in investing activities (2,266,227) (3,907,150)
___________ ___________
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months ended September 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
<S> <C> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt $34,836,498 $ 190,580
Principal repayment of notes payable
and long-term debt (530,451) (452,330)
(Increase) decrease in related party receivables 371,962 (322,756)
Increase (decrease) in related party payables (1,759,417) 114,204
Net change in deferred grant income 13,520 51,222
Repurchases and retirements of common stock (3,463) (1,346)
Proceeds from exercise of stock options -- 181,250
Issuance of common stock 3,499,951 29,500
Cash overdraft -- --
___________ ___________
Net cash provided by (used in)
financing activities 36,428,600 (209,676)
___________ ___________
Effect of exchange rate changes on cash 356,500 (310,372)
___________ ___________
Net increase in cash
and cash equivalents 15,175,107 95,016
Cash and cash equivalents at beginning of period 2,807,327 673,951
___________ ___________
Cash and cash equivalents at end of period $17,982,434 $ 768,967
___________ ___________
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 1,388,794 $ 249,148
=========== ===========
Income taxes $ 1,530,932 $ 853,577
=========== ===========
</TABLE>
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.
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (CONTINUED)
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include
all adjustments (of normal recurring accruals only) 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, 1995
as filed with the Securities and Exchange Commission on Form 10-K/A.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
THE COMPANY
INAMED Corporation's subsidiaries are McGhan Medical Corporation and
CUI Corporation, which develop, manufacture and sell medical devices
principally for the plastic and general surgery fields; BioEnterics
Corporation which develops, manufactures and sells medical devices and
associated instrumentation to the bariatric and general surgery fields;
Biodermis Corporation which develops, produces and distributes premium
products for dermatology, wound care and burn treatment; Bioplexus
Corporation which is a development company that develops, produces and
distributes specialty medical products for use by the general surgery
profession; Flowmatrix Corporation which manufactures high quality
silicone components and devices for INAMED's wholly-owned subsidiaries
and distributes an international line of proprietary silicone products;
Medisyn Technologies Corporation which develops and promotes the use of
silicone chemistry in the fields of medical devices, pharmaceuticals
and biotechnology; INAMED Development Company, which is engaged in the
research and development of new medical devices using silicone-based
technology; INAMED Japan an administration company for INAMED Medical
Group, McGhan Limited, an Irish corporation which manufactures medical
devices principally for the plastic and general surgery fields; Medisyn
Technologies, Ltd. and Chamfield Ltd., Irish corporations which
specialize in the development of silicone materials for use by INAMED's
wholly-owned subsidiaries; and INAMED B.V., a Netherlands corporation,
INAMED B.V.B.A., a Belgium corporation, INAMED GmbH, a German
corporation, INAMED S.R.L., an Italian corporation, INAMED Ltd., a
United Kingdom corporation, INAMED S.A.R.L., a French corporation,
INAMED, Mexico S.A. de C.V., a Mexican corporation, INAMED, S.A., a
Spanish corporation, INAMED do Brazil, a Brazilian corporation, INAMED
Medical Group, a Japanese corporation, and McGhan Medical Asia Pacific,
a Hong Kong corporation, which all sell medical devices on a direct
sales basis in the various countries in which they are located.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of INAMED
Corporation and its wholly owned subsidiaries (collectively referred to
as the Company for the purposes of financial reporting). All
significant intercompany balances and transactions have been eliminated
in consolidation.
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (CONTINUED)
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of
shares outstanding during each of the respective periods.
RECLASSIFICATION
Certain reclassifications were made to the 1995 consolidated financial
statements to conform to the 1996 presentation.
<TABLE>
NOTE 3 - Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
Accounts receivable $18,505,932 $17,111,552
Allowance for doubtful accounts (551,927) (964,928)
Allowance for returns and credits (3,763,042) (5,676,249)
___________ ___________
Net accounts receivable $14,190,963 $10,470,375
Notes receivable $ 3,089,222 $ 3,114,493
Allowance for doubtful notes (1,066,958) (1,066,958)
___________ ___________
Net notes receivable $ 2,022,264 $ 2,047,535
</TABLE>
The provision for doubtful accounts and returns was reduced from
$6,641,177 at December 31, 1995 to $4,314,969 at September 30, 1996.
Actual bad debt from 1993 to the present amounts to approximately 0.16%
of sales per year and the return rate continues to decline.
NOTE 4 - INVENTORIES
<TABLE>
Inventories are summarized as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
Raw materials $ 3,261,974 $ 2,513,862
Work in process 4,438,272 3,773,579
Finished goods 13,266,582 12,167,768
___________ ___________
20,966,828 18,455,209
Less allowance for
obsolescence (911,652) (759,362)
___________ ___________
$20,055,176 $17,695,847
=========== ===========
</TABLE>
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (CONTINUED)
NOTE 5 - CONVERTIBLE NOTES PAYABLE
In January 1996, the Company completed a private placement offering by
issuing three-year secured convertible, non-callable notes due March
31, 1999 bearing an interest rate of 11%. The Company received $35
million in proceeds from the offering to be used for the anticipated
litigation settlement, for capital investments and improvements to
expand production capacity, and for working capital purposes. Of the
proceeds received from the offering, $15 million was deposited to
escrow for litigation settlement purposes to be released into a
settlement fund upon the Company achieving complete resolution sought
under a mandatory ("non-opt-out") settlement class (the "Mandatory
Class") or other acceptable settlement resolution. INTEREST ON THE
CONVERTIBLE NOTES IS PAYABLE QUARTERLY, WITHIN TEN DAYS OF THE END OF
SUCH PERIOD, FOR THE PERIODS ENDED MARCH 31, JUNE 30, SEPTEMBER 30 AND
DECEMBER 31.
The notes became convertible into shares of common stock at the option
of the note holders on April 22, 1996. The conversion rate is one
share of common stock for each $10 principal amount of notes.
Alternatively, the notes may automatically convert into shares of
common stock upon the occurrence of certain events in connection with
the certification of the Mandatory Class. In April 1996 the Company
completed the Form S-3 registration of 3.5 million shares of its common
stock in direct response to the private placement offering
requirements.
UNDER THE INDENTURE (THE "INDENTURE") AND PURSUANT TO CERTAIN FINANCIAL
COVENANTS TO WHICH THE COMPANY ISSUED ITS 11% SECURED CONVERTIBLE NOTES
DUE 1999 (THE "NOTES"), THE COMPANY WAS REQUIRED TO GENERATE OPERATING
PROFIT (AS DEFINED IN THE INDENTURE) IN THE QUARTER ENDED MARCH 31,
1996 IN EXCESS OF $2.0 MILLION. FOLLOWING THE CALCULATION PERIOD SET
FORTH IN THE INDENTURE, THE COMPANY DETERMINED THAT IT DID NOT MEET
SUCH FINANCIAL COVENANT, THAT OPERATING PROFIT FOR SUCH QUARTER WAS
$90,878. THE COVENANT DEFAULT IN OPERATING PROFIT WAS SUBJECT TO CURE
BY THE COMPANY THROUGH ISSUANCE OF ADDITIONAL SECURITIES (JUNIOR IN
RIGHT TO THE NOTES) WITHIN 60 DAYS OF MARCH 31, 1996. THE COMPANY
ELECTED NOT TO ISSUE SUCH ADDITIONAL SECURITIES BUT INSTEAD NEGOTIATED
WITH THE HOLDERS OF THE NOTES REGARDING A WAIVER OF THE DEFAULT. IN
ACCORDANCE WITH THE TERMS OF THE INDENTURE, THE HOLDERS WAIVED THE
DEFAULT IN CONSIDERATION OF THE ISSUANCE TO EACH HOLDER OF RECORD ON
THE RECORD DATE FOR GRANTING SUCH WAIVER A NUMBER OF SHARES OF COMMON
STOCK OF THE COMPANY EQUAL TO 5% OF THE SHARES OF COMMON STOCK THAT
WOULD HAVE BEEN ISSUABLE TO SUCH HOLDER IF ALL OF SUCH HOLDER'S NOTES
HAD BEEN CONVERTED ON SUCH RECORD DATE (THE "ISSUANCE"), THE ISSUANCE
TO BE MADE ON JANUARY 10, 1997. CONCURRENTLY, WITH THE CONSENT OF THE
NOTEHOLDERS, THE COMPANY AMENDED THE INDENTURE TO EXCLUDE THEREFROM THE
EFFECTS OF THE ISSUANCE. THE COMPANY RECORDED A FINANCE CHARGE AND
ACCOMPANYING LIABILITY TOTALING $1,416,960 IN CONNECTION WITH THE
ISSUANCE OF THE 172,800 SHARES. THE LIABILITY WILL BE ELIMINATED WHEN
THE SHARES ARE ISSUED ON JANUARY 10, 1997.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
THE COMPANY and/or its subsidiaries are defendants in numerous state
and federal court actions and a Federal class action in the United
States District Court, Northern District of Alabama, Southern Division,
under THE HONORABLE Sam C. Pointer, Jr., CHIEF JUDGE U.S. DISTRICT
COURT, IDENTIFIED AS BREAST IMPLANT PRODUCTS LIABILITY LITIGATION,
MULTIPLE DISTRICT LITIGATION NO. 926, MASTER FILE NO. CV 92-P-10000-S
("MDL 926"). ONE OF THE FEDERAL CASES, LINDSEY, ET AL., V. DOW CORNING
CORP., ET AL., CIVIL ACTION NO. CV 94-11558-S WAS CONDITIONALLY
CERTIFIED AS A CLASS ACTION FOR PURPOSES OF SETTLEMENTS ("MDL
SETTLEMENT") ON BEHALF OF PERSONS HAVING CLAIMS AGAINST CERTAIN
MANUFACTURERS OF BREAST IMPLANTS. THE ALLEGED FACTUAL BASIS FOR TYPICAL
LAWSUITS INCLUDE ALLEGATIONS THAT THE PLAINTIFFS' BREAST IMPLANTS
CAUSED SPECIFIED AILMENTS INCLUDING, AMONG OTHERS, AUTO-IMMUNE DISEASE,
SCLERODERMA, SYSTEMIC DISORDERS, JOINT SWELLING AND CHRONIC FATIGUE.
A RESULT OF THE MDL SETTLEMENT WAS THE ESTABLISHMENT OF A CLAIMS
ADMINISTRATION OFFICE IN HOUSTON, TEXAS, UNDER THE DIRECTION OF JUDGE
ANN COCHRAN. CLASS MEMBERS WHO HAD BREAST IMPLANTS PRIOR TO JUNE 1993
HAVE REGISTERED WITH THE CLAIMS OFFICE. JUDGE POINTER CERTIFIED THE
"GLOBAL" SETTLEMENT BY FINAL ORDER AND JUDGMENT ON SEPTEMBER 1, 1994.
SUBSEQUENTLY, A PRELIMINARY REVIEW OF CLAIMS PRODUCED PROJECTED PAYOUTS
THAT WERE GREATER THAN THE AMOUNTS THE BREAST IMPLANT MANUFACTURERS HAD
AGREED TO PAY. ON MAY 15, 1995, DOW CORNING CORP., FORMERLY ONE OF THE
MANUFACTURERS AND A SIGNIFICANT CONTRIBUTOR TO THE GLOBAL SETTLEMENT
FUND, FILED FOR FEDERAL BANKRUPTCY PROTECTION BECAUSE OF LAWSUITS OVER
THE DEVICES.
ON DECEMBER 29, 1995, THE COMPANY ENTERED INTO AN AGREEMENT WITH THE
MDL 926 SETTLEMENT CLASS COUNSEL AND CERTAIN OTHER DEFENDANTS THAT IS
NOW IDENTIFIED AS THE "BRISTOL, BAXTER, 3M, MCGHAN & UNION CARBIDE
REVISED BREAST IMPLANT SETTLEMENT PROGRAM" ("REVISED SETTLEMENT"). THE
REVISED SETTLEMENT PROVIDES A PROCEDURE TO RESOLVE CLAIMS OF CURRENT
CLAIMANTS AND ONGOING CLAIMANTS WHO ARE REGISTERED WITH THE CLAIMS
OFFICE.
DUE TO THE NATURE OF THE REVISED SETTLEMENT WHICH ALLOWED ONGOING
REGISTRATIONS, "OPT-INS", AS WELL AS A LIMITED POTENTIAL FOR CLAIMANTS,
DURING THE LIFE OF THE PROGRAM, TO OPT-OUT OF THE REVISED SETTLEMENT
("OPT-OUTS"), THE AGGREGATE DOLLAR AMOUNT TO BE RECEIVED BY THE CLASS
OF CLAIMANTS UNDER THE REVISED SETTLEMENT HAS NOT BEEN FULLY
ASCERTAINED.
THE REVISED SETTLEMENT IS AN APPROVED-CLAIMS BASED SETTLEMENT.
THEREFORE, TO PROJECT A RANGE OF THE POTENTIAL COST OF THE REVISED
SETTLEMENT, THE PARTIES UTILIZED A COURT-SPONSORED SAMPLE OF CLAIMANTS'
REGISTRATIONS AND CLAIMS FILED THROUGH THE MDL 926 SETTLEMENT CLAIMS
OFFICE AGAINST ALL DEFENDANTS AND ASSUMED APPROVAL OF 100 PERCENT OF
THE CLAIMS AS INITIALLY SUBMITTED. ALTHOUGH ADEQUATE FOR NEGOTIATION
PURPOSES, THE SAMPLE IS UNSATISFACTORY FOR THE PURPOSES OF DETERMINING
AN AGGREGATE DOLLAR LIABILITY FOR ACCOUNTING PURPOSES BECAUSE THE
PROCESSING OF CURRENT CLAIMS IS NOT COMPLETE, THE PROCESS OF ONGOING
CLAIMS WILL CONTINUE FOR FIFTEEN YEARS, AND THE SETTLEMENT IS SUBJECT
TO OPT-INS AND OPT-OUTS.
THE FOLLOWING IS A RECAP OF THE CERTAIN EVENTS INVOLVING THE COMPANY'S
PRODUCT LIABILITY ISSUES RELATING TO SILICONE GEL BREAST IMPLANTS WHICH
THE COMPANY MANUFACTURES AND MARKETS.
THE CLAIMS IN SILICONE GEL BREAST IMPLANT PRODUCTS LIABILITY LITIGATION
MDL 926 ARE FOR GENERAL AND PUNITIVE DAMAGES RELATING TO PHYSICAL AND
MENTAL INJURIES ALLEGEDLY SUSTAINED AS A RESULT OF SILICONE GEL BREAST
IMPLANTS PRODUCED BY THE COMPANY. ALTHOUGH THE AMOUNT OF CLAIMS
ASSERTED AGAINST THE COMPANY IS NOT READILY DETERMINABLE, THE COMPANY
BELIEVES THAT THE STATED AMOUNT OF CLAIMS substantially exceeds
provisions made in the Company's consolidated financial statements.
THE COMPANY HAS BEEN A DEFENDANT IN SUBSTANTIAL LITIGATION RELATED TO
BREAST IMPLANTS WHICH HAVE ADVERSELY AFFECTED THE LIQUIDITY AND
FINANCIAL CONDITION OF THE COMPANY. THIS RAISES SUBSTANTIAL DOUBT
ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. The
accompanying consolidated financial statements have been prepared
assuming that the Company will CONTINUE AS A GOING CONCERN AND DO NOT
INCLUDE ANY ADJUSTMENTS THAT MIGHT RESULT FROM THIS UNCERTAINTY.
ON JUNE 25, 1992 THE JUDICIAL PANEL ON MULTI-DISTRICT LITIGATION IN RE:
SILICONE GEL BREAST IMPLANT PRODUCTS LIABILITY LITIGATION CONSOLIDATED
ALL FEDERAL BREAST IMPLANT CASES FOR DISCOVERY PURPOSES IN FEDERAL
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA UNDER THE MULTI-
DISTRICT LITIGATION RULES. Several U.S.-based manufacturers negotiated
a settlement with the Plaintiffs' Negotiating Committee ("PNC"), and on
March 29, 1994 filed a Proposed Non-Mandatory Class Action Settlement
in the Silicone Breast Implant Products Liability (the "Settlement
Agreement") providing for settlement of the claims as to the class (the
"Settlement") as described in the Settlement Agreement. The Settlement
Agreement, upon approval, WOULD HAVE provided resolution of any
existing or future claims, including claims for injuries not yet known,
under any Federal or State law, from any claimant who received a
silicone breast implant prior to June 1, 1993.
The Company was not originally a party to the Settlement Agreement.
However, on April 8, 1994 the Company and the PNC reached an agreement
which would join the Company into the Settlement. The agreement
reached between the Company and the PNC added great value to the
Settlement by enabling all plaintiffs and U.S.-based manufacturers to
participate in the Settlement, and facilitating the negotiation of
individual contributions by the Company, Minnesota Mining and
Manufacturing Company ("3M"), and Union Carbide Corporation which total
more than $440 million.
A fairness hearing for the non-mandatory class was held before Judge
Pointer on August 18, 1994. On September 1, 1994, Judge Pointer gave
final approval to the non-mandatory class action settlement. The
deadline for plaintiffs to enter the Settlement was March 1, 1995.
Under the terms of the Settlement Agreement, the parties stipulated and
agreed that all claims of the Settlement Class against the Company
regarding breast implants and breast implant materials would be fully
and finally settled and resolved on the terms and conditions set forth
in the Settlement Agreement.
Under the terms of the Settlement Agreement, the Company would have
paid $1 million to the Settlement fund for each of 25 years starting
three years after Settlement approval by the Court. THE SETTLEMENT WAS
APPROVED BY THE COURT ON SEPTEMBER 1, 1994. The Company recorded a
pre-tax charge of $9.1 million in October of 1994. The charge
represents the present value (discounted at 8%) of the Company's
settlement of $25 million over a payment period of 25 years, $1 million
per year starting three years from the date of Settlement approval.
Under the Settlement, $1.2 billion had been provided for "current
claims" (disease compensation claims). In May 1995, Judge Pointer
completed a preliminary review of current claims AGAINST ALL SETTLEMENT
DEFENDANTS which had been filed as of September 1994, in compliance
with deadlines set by the court. Judge Pointer determined that based
on the preliminary review, projected amounts of eligible current claims
appeared to exceed the $1.2 billion provided by the Settlement.
DISCRETE INFORMATION AS TO EACH DEFENDANT WAS NOT MADE AVAILABLE BY
THE COURT AND THE COMPANY IS NOT AWARE OF ANY INFORMATION FROM SUCH
FINDINGS THAT WOULD AFFECT THE COMPANY'S $9.1 MILLION ACCRUAL. The
Settlement provided that in the event of such over subscription, the
amounts to be paid to eligible current claimants would be reduced and
claimants would have a right to "opt-out" of the Settlement at that
time.
On October 1, 1995, Judge Pointer finalized details of a scaled-back
breast implant injury settlement involving defendants Bristol-Myers
Squibb, Baxter International, and 3M, allowing plaintiffs to reject
this settlement and file their own lawsuits if they believe payments
are too low. On November 14, 1995, McGhan Medical and Union Carbide
were added to this list of settling defendants to achieve the "Bristol,
Baxter, 3M, McGhan & Union Carbide Revised Settlement Program" (the
"Revised Settlement Program"). WITH RESPECT TO THE PARTIES THERETO,
THE REVISED SETTLEMENT PROGRAM INCORPORATED AND SUPERSEDED THE
SETTLEMENT. THE REVISED SETTLEMENT PROGRAM DOES NOT FIX THE LIABILITY
OF ANY DEFENDANTS, BUT ESTABLISHED FIXED BENEFIT AMOUNTS FOR QUALIFYING
CLAIMS. THE COMPANY'S OBLIGATIONS UNDER THE REVISED SETTLEMENT ARE
CANCELABLE IF THE REVISED SETTLEMENT IS DISAPPROVED ON APPEAL.
THE COMPANY RECORDED A PRE-TAX CHARGE OF $23.4 MILLION IN THE THIRD
QUARTER OF 1995. THE CHARGE REPRESENTED THE PRESENT VALUE (DISCOUNTED
AT 8%) OF THE MAXIMUM ADDITIONAL AMOUNT THAT THE COMPANY THEN ESTIMATED
IT MIGHT BE REQUIRED TO CONTRIBUTE TO THE REVISED SETTLEMENT PROGRAM -
$50 MILLION OVER A 15-YEAR PERIOD BASED ON A CLAIMS-MADE AND PROCESSED
BASIS. DUE TO THE UNCERTAINTY OF ULTIMATE RESOLUTION AND ACCEPTANCE OF
THE REVISED SETTLEMENT PROGRAM BY THE REGISTRANTS, CLAIMANTS AND
PLAINTIFFS, AND THE LACK OF INFORMATION RELATED TO THE SUBSTANCE OF THE
CLAIMS, THE COMPANY REVERSED THIS CHARGE AT YEAR-END 1995 FOR THE THIRD
QUARTER OF 1995.
At September, 1996, the Company's reasonable estimate of its liability
to fund the Revised Settlement Program was a range between $9.1
million, the original accrual as noted above, and THE DISCOUNTED
PRESENT VALUE OF THE $50 MILLION AGGREGATE THE COMPANY ESTIMATED IT
MIGHT HAVE BEEN REQUIRED TO CONTRIBUTE UNDER THE REVISED SETTLEMENT
PROGRAM. Again, due to the uncertainty of the ultimate resolution and
acceptance of the Revised Settlement Program by the REGISTRANTS,
CLAIMANTS AND PLAINTIFFS (WHICH ACCEPTANCE AND PARTICIPATION IS
NECESSARY FOR ANY CONTRIBUTIONS UNDER THE REVISED SETTLEMENT PROGRAM)
AND THE LIMITED AND CHANGING INFORMATION RELATED TO THE CLAIMS, NO
ESTIMATE OF THE POSSIBLE ADDITIONAL LOSS OR RANGE OF LOSS CAN BE MADE
AND, CONSEQUENTLY, THE FINANCIAL STATEMENTS DO NOT REFLECT ANY
ADDITIONAL PROVISION FOR THE LITIGATION SETTLEMENT.HOWEVER, PRELIMINARY
INFORMATION OBTAINED PRIOR TO JULY 31, 1997, CONCERNING CLAIMS AND OPT-
OUTS FILED UNDER THE REVISED SETTLEMENT INDICATES THAT THE RANGE OF
COSTS TO THE COMPANY OF ITS CONTRIBUTIONS, WHILE LIKELY TO EXCEED $9.1
MILLION, WILL BE SUBSTANTIALLY LESS THAN $50 MILLION. THIS PRELIMINARY
INFORMATION SUGGESTS THAT THE COST FOR CURRENT CLAIMS, WHICH WILL BE
PAYABLE AFTER THE CONCLUSION OF ALL APPEALS RELATING TO THE REVISED
SETTLEMENT, IS NOT LIKELY TO EXCEED $16 MILLION. THIS ESTIMATE MAY
CHANGE AS FURTHER INFORMATION IS OBTAINED. THE ADDITIONAL COST FOR
ONGOING CLAIMS PAYABLE OVER THE 15-YEAR LIFE OF THE PROGRAM IS STILL
UNKNOWN, BUT IS CAPPED AT APPROXIMATELY $6 MILLION UNDER THE TERMS OF
THE REVISED SETTLEMENT.
THE COMPANY HAS ENTERED INTO A SETTLEMENT AGREEMENT WITH HEALTH CARE
PROVIDERS PURSUANT TO WHICH THE COMPANY IS REQUIRED TO PAY, ON OR
BEFORE DECEMBER 17, 1996, OR AFTER THE CONCLUSIONS OF ANY AND ALL
DISAPPROVED APPEALS, $1 MILLION INTO THE MDL SETTLEMENT FUNDS ("THE
FUND") TO BE ADMINISTERED BY EDGAR C. GENTLE, III, ESQ. ("THE FUND
AGENT"). THE CHARGE FOR SETTLEMENT WILL BE APPLIED AGAINST THE $9.1
MILLION ACCRUAL PREVIOUSLY ESTABLISHED BY THE COMPANY. THE COMPANY, IN
THE SPIRIT OF THE REVISED SETTLEMENT PROGRAM, ALSO CONTRIBUTED $600,000
IN 1996 AND $300,000 IN 1997 TO THE CLAIMS ADMINISTRATION MANAGEMENT
FOR THE SETTLEMENT.
The Company has opposed the plaintiffs' claims in these complaints and
other similar actions, and continues to deny any wrongdoing or
liability to the plaintiffs of any kind. However, the extensive
burdens and expensive litigation the Company would continue to incur
related to these matters prompted the Company to work toward and enter
into the Settlement which insures a more satisfactory method of
resolving claims of women who have received the Company's breast
implants.
Management's commitment to the Revised Settlement Program does not
alter the Company's need for complete resolution sought under a
mandatory ("non-opt-out") settlement class (the "Mandatory Class") OR
OTHER ACCEPTABLE SETTLEMENT RESOLUTION. In 1994, the Company
petitioned the United States District Court, Northern District of
Alabama, Southern Division, for certification of a Mandatory Class
under the provisions of Federal Rules of Civil Procedure. SINCE THAT
TIME, THE COMPANY HAS BEEN IN NEGOTIATION WITH THE PLAINTIFFS
CONCERNING AN UPDATED MANDATORY SETTLEMENT CLASS OR OTHER ACCEPTABLE
RESOLUTION. ON JULY 1, 1996, THE COMPANY FILED AN APPEARANCE OF
COUNSEL AND STATUS REPORT ON THE INAMED MANDATORY CLASS APPLICATION TO
THE UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF ALABAMA,
SOUTHERN DIVISION, CHIEF HONORABLE JUDGE SAMUEL C. POINTER, JR. THERE
CAN BE NO ASSURANCE THAT THE COMPANY WILL RECEIVE MANDATORY CLASS
CERTIFICATION OR OTHER ACCEPTABLE SETTLEMENT RESOLUTION.
IF THE MANDATORY CLASS IS NOT CERTIFIED, THE COMPANY WILL CONTINUE TO
BE A PARTY TO THE REVISED SETTLEMENT PROGRAM. HOWEVER, IF THE COMPANY
FAILS TO MEET ITS OBLIGATIONS UNDER THE PROGRAM, PARTIES IN THE PROGRAM
WILL BE ABLE TO REINSTATE LITIGATION AGAINST THE COMPANY. IN ADDITION,
THE COMPANY WILL CONTINUE TO BE SUBJECT TO FURTHER POTENTIAL LITIGATION
FROM PERSONS WHO ARE NOT PROVIDED FOR IN THE REVISED SETTLEMENT PROGRAM
AND WHO OPT OUT OF THE REVISED SETTLEMENT PROGRAM. THE NUMBER OF SUCH
PERSONS AND THE OUTCOME OF ANY ENSUING LITIGATION IS UNCERTAIN.
FAILURE OF THE MANDATORY CLASS TO BE CERTIFIED, ABSENT OTHER ACCEPTABLE
SETTLEMENT RESOLUTION, IS EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY.
The Company was a defendant with 3M in a case involving three
plaintiffs in Houston, Texas, in March 1994, in which the jury awarded
the plaintiffs $15 million in punitive damages and $12.9 million in
damages plus fees and costs. However, the matter was resolved in March
1995 resulting in no financial responsibility on the part of the
Company.
IN CONNECTION WITH 3M'S 1984 DIVESTITURE OF THE BREAST IMPLANT BUSINESS
NOW OPERATED BY THE COMPANY'S SUBSIDIARY, MCGHAN MEDICAL CORPORATION,
3M HAS A POTENTIAL CLAIM FOR CONTRACTUAL INDEMNITY FOR 3M'S LITIGATION
COSTS ARISING OUT OF THE SILICONE BREAST IMPLANT LITIGATION. THE
POTENTIAL CLAIM VASTLY EXCEEDS THE COMPANY'S NET WORTH. TO DATE, 3M
HAS NOT SOUGHT TO ENFORCE SUCH AN INDEMNITY CLAIM. AS PART OF ITS
EFFORTS TO RESOLVE POTENTIAL BREAST IMPLANT LITIGATION LIABILITY, THE
COMPANY HAS DISCUSSED WITH 3M THE POSSIBILITY OF RESOLVING THE
INDEMNITY CLAIM AS PART OF THE OVERALL EFFORTS FOR GLOBAL RESOLUTION OF
THE COMPANY'S POTENTIAL LIABILITIES. BECAUSE OF THE UNCERTAIN NATURE
OF SUCH AN INDEMNITY CLAIM, THE FINANCIAL STATEMENTS DO NOT REFLECT ANY
ADDITIONAL PROVISION FOR SUCH A CLAIM.
IN OCTOBER 1995, THE FEDERAL DISTRICT COURT FOR THE EASTERN DISTRICT OF
MISSOURI ENTERED A $10 MILLION DEFAULT JUDGMENT AGAINST A SUBSIDIARY OF
THE COMPANY ARISING OUT OF A PLAINTIFF'S CLAIM THAT SHE WAS INJURED BY
CERTAIN BREAST IMPLANTS ALLEGEDLY MANUFACTURED BY THE SUBSIDIARY. THE
COMPANY DID NOT BECOME AWARE OF THE LAWSUIT UNTIL NOVEMBER 1996, DUE TO
IMPROPER SERVICE. THE PLAINTIFF'S ATTORNEY WAITED OVER ONE YEAR TO
NOTIFY THE COMPANY THAT A DEFAULT JUDGMENT HAD BEEN ENTERED. THE
PLAINTIFF'S ATTORNEY REFUSED TO VOLUNTARILY SET ASIDE THE JUDGMENT,
ALTHOUGH IT IS CLEAR FROM THE ALLEGATIONS OF THE COMPLAINT THAT THE
PLAINTIFF SUED THE WRONG ENTITY, SINCE NEITHER THE NAMED SUBSIDIARY,
THE COMPANY, NOR ANY OF ITS OTHER SUBSIDIARIES MANUFACTURED THE DEVICE.
THE COMPANY HAS MOVED TO HAVE THIS JUDGMENT SET ASIDE. THE COMPANY HAS
NOT MADE ANY ADJUSTMENT IN ITS 1996 FINANCIAL REPORTS TO REFLECT THIS
JUDGMENT.
THE COMPANY DOES NOT HAVE PRODUCT LIABILITY INSURANCE AND THEREFORE
RECOVERY FROM AN INSURANCE CARRIER FOR ANY SETTLEMENTS PAID IS NOT
POSSIBLE.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales as an aggregate were $71.5 million during the first nine
months of 1996 which represents a 12% increase from the first nine
months of 1995 WHEN SALES TOTALED $64.1 MILLION. Domestic sales growth
was adversely affected during the first six months of 1996 by shortages
of raw materials and by changes made by the Company in certain
manufacturing processes and procedures in order to achieve regulatory
approvals and attain higher standards of control. The Company expects
international sales to continue to represent an increasing percentage
of net sales, since this market is experiencing increasing demand.
Management anticipates that continued market growth, an increase in
production capacity, both domestically and internationally, and
expansion of the international sales force will allow an increase in
sales growth.
Gross profit was $47.2 MILLION, or 66% of net sales for the first nine
months of 1996 compared to $43.3 MILLION, or 67% for the corresponding
period in 1995. Management anticipates that the Company may experience
future quarters with higher costs of production as modifications are
made to accommodate changing FDA views and related regulations.
MARKETING EXPENSES WERE $18.9 MILLION AND $16.8 MILLION YEAR TO DATE
FOR THE PERIODS ENDED SEPTEMBER 30 1996 AND 1995 RESPECTIVELY.
Marketing expense as a percentage of net sales was 26% in the first
nine months of 1996, compared to 26% for the first nine months of 1995.
This increase is primarily due to an increase in royalty payments.
GENERAL AND ADMINISTRATIVE EXPENSES WERE $21.8 MILLION AND $21.6
MILLION YEAR TO DATE FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
RESPECTIVELY. General and administrative expenses as a percentage of
net sales were 30% in the first nine months of 1996 compared to 34% in
the first nine months of 1995. Management expects future general and
administrative expenses to grow proportionally with sales, and to be
reactive to litigation expense.
Research and development expenses increased to $3.6 million in the
first nine months of 1996 from $3.3 million for the same period in
1995. The Company continues its commitment to developing new and
improved medical products for use by the medical profession and the
public. As a percentage of net sales, this expense was 5% for both the
first nine months of 1996 and 1995. R & D expenses are expected to
increase throughout the remaining quarter of 1996 and into 1997 as the
Company increases research and development overseas due to the FDA
backlog on approval of new devices in the United States.
Interest expense of $4.8 MILLION increased for the first nine months of
1996 in comparison with interest expense of $0.2 MILLION for the same
period of 1995. The significant increase was A RESULT of interest
incurred on the Company's convertible notes payable which were issued
in January 1996 AND THE FINANCE CHARGE ASSOCIATED WITH THE ISSUANCE OF
THE SHARES UNDER THE WAIVER OF COVENANT DEFAULT AGREEMENT .
On May 24, 1996 INAMED Corporation offered investors in the above
subject convertible notes an incentive for early conversion. The
investors were offered a ten percent (10%) bonus of INAMED common stock
based upon the holders' respective amount of shares issuable upon
conversion of the notes. The offer expired on May 29, 1996, at which
time an amount of $440,000 had been converted to equity, resulting in
the issuance of 4,400 bonus shares on September 24, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On June 27, 1996 the Company entered into a Regulation S transaction
("Offshore Stock Subscription Agreement") with certain non-US investors
outside the United States. This agreement was in connection with an
offer and sale by the Company of 344,333 shares of common stock at
$8.7125 per share.
The Company continues to incur increased costs related to obtaining FDA
and European Economic Community approvals for the Company's products.
The Company is continuing to address FDA regulations related to pre-
market approval of silicone mammary implants, and anticipates ongoing
investment of employee hours and Company funds to facilitate compliance
with all FDA regulations as determined by PMA studies and any new
regulations which may be adopted. THE COMPANY HAS RECEIVED FROM THE FDA
AN UNDERSTANDING THAT THE AGENCY WILL NOT CALL FOR FINAL PMA
APPLICATIONS TO BE SUBMITTED PRIOR TO SEPTEMBER, 1998. THE DATE FOR
SUBMISSION OF PMA APPLICATIONS MAY BE FURTHER EXTENDED BY THE FDA.
NOTWITHSTANDING ANY SUCH EXTENSION, THE COMPANY INTENDS TO SUBMIT ITS
PMA APPLICATION FOR SALINE FILLED IMPLANTS IN A TIMELY FASHION AND IS
COLLECTING DATA WHICH WILL BE NECESSARY FOR THIS APPLICATION. HOWEVER,
NEITHER THE TIMING OF SUCH PMA APPLICATION NOR ITS ACCEPTANCE BY THE
FDA CAN BE ASSURED, IRRESPECTIVE OF THE TIME AND MONEY THAT THE COMPANY
HAS EXPENDED. SHOULD THE COMPANY'S PMA APPLICATION FOR SALINE FILLED
IMPLANTS NOT BE FILED TIMELY OR BE DENIED, IT WOULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S OPERATIONS AND FINANCIAL POSITION. THE
COMPANY WILL DECIDE ON A PRODUCT BY PRODUCT AND SUBSIDIARY BY
SUBSIDIARY BASIS WHETHER TO RESPOND TO ANY FUTURE CALLS FOR PMAS AND
REGULATORY REQUIREMENTS, REQUESTED RESPONSE OR COMPANY ACTION. THE
COST OF ANY PMA FILINGS IS UNKNOWN UNTIL THE CALL FOR A PMA OCCURS AND
THE COMPANY HAS OPPORTUNITY TO REVIEW THE FILING REQUIREMENTS.
FINANCIAL CONDITION
During the first nine months of 1996, INAMED Corporation has maintained
its position as one of the largest medical device companies serving
the plastic, reconstructive and general surgical markets worldwide. In
order to meet increasing demand, internationally, for its products, the
Company has increased production in Europe through expansion of its
manufacturing plant in Ireland. This plant supplies the majority of
the products for the Company's international market. The Irish facility
works closely with the Company's other subsidiaries in Europe to
develop new products for that market. Internationally, the Company has
significantly increased its market share by use of direct sales methods
rather than distributors wherever it is financially advantageous to do
so. The Company currently has direct marketing subsidiaries in eleven
non-US countries.
Since December 31, 1995, the cash balance has increased and the current
ratio has changed from 0.9 to 1 on December 31, 1995 to 2.2 to 1 on
September 30, 1996. The majority of the Company's cash flows in the
first nine months of 1996 were generated by the issuance of convertible
notes as discussed in Note 5 to the financial statements, and by
product sales. Growth, regulatory activities and legal expenses
continue to consume a significant amount of available cash resources.
BREAST IMPLANT PRODUCT LIABILITY RELATED ISSUES ARE EXPECTED TO DRAW ON
THE COMPANY'S LIQUIDITY THROUGHOUT 1996. THE COMPANY IS IN THE PROCESS
OF NEGOTIATING EXTENDED PAYMENT TERMS ON THESE EXPENSES, WHICH THE
COMPANY FEELS, WILL REDUCE THE ADVERSE EFFECT ON SHORT-TERM AND LONG-
TERM LIQUIDITY. HOWEVER, THERE IS NO ASSURANCE THAT THE EXTENDED
PAYMENT TERMS WILL BE GRANTED BY THE LEGAL FIRMS INVOLVED.
THE COST OF THE FOREGOING LITIGATION HAS ADVERSELY AFFECTED THE
LIQUIDITY OF THE COMPANY. MANAGEMENT BELIEVES THAT THE COMPANY MAY NOT
CONTINUE AS A GOING CONCERN IF MANDATORY CLASS IS NOT CERTIFIED AND NO
OTHER ACCEPTABLE SETTLEMENT RESOLUTION TO THE BREAST IMPLANT LITIGATION
AGAINST THE COMPANY EXISTS. ALTHOUGH MANAGEMENT IS OPTIMISTIC THAT THE
MANDATORY CLASS WILL BE APPROVED BY THE COURT, THERE CAN BE NO
ASSURANCES THAT THIS OUTCOME WILL BE ACHIEVED.
IN JANUARY 1996, THE COMPANY COMPLETED A PRIVATE PLACEMENT OFFERING BY
ISSUING THREE-YEAR COLLATERALIZED CONVERTIBLE, NON-CALLABLE NOTES DUE
MARCH 31, 1999 BEARING AN INTEREST RATE OF 11%. THE COMPANY RECEIVED
$35 MILLION IN PROCEEDS FROM THE OFFERING TO BE USED FOR A PORTION OF
THE ANTICIPATED LITIGATION SETTLEMENT, FOR CAPITAL INVESTMENTS AND
IMPROVEMENTS TO EXPAND PRODUCTION CAPACITY, AND FOR WORKING CAPITAL
PURPOSES. OF THE PROCEEDS RECEIVED FROM THE OFFERING, $15 MILLION IS
HELD IN AN ESCROW ACCOUNT TO BE RELEASED UPON THE GRANTING AND COURT
APPROVAL OF MANDATORY CLASS CERTIFICATION.
ON JUNE 27, 1996 THE COMPANY ENTERED INTO A REGULATION S TRANSACTION
("OFFSHORE STOCK SUBSCRIPTION AGREEMENT") WITH CERTAIN NON-US INVESTORS
OUTSIDE THE UNITED STATES. THIS AGREEMENT WAS IN CONNECTION WITH AN
OFFER AND SALE BY THE COMPANY OF 344,333 SHARES OF COMMON STOCK AT
$8.7125 PER SHARE. THE COMPANY RECEIVED $3 MILLION IN PROCEEDS FROM
THIS TRANSACTION.
THE COMPANY FORECASTS THAT THE MAJORITY OF CASH NECESSARY FOR US
OPERATIONS WILL CONTINUE TO BE GENERATED BY OPERATIONS. THE COMPANY
CURRENTLY CONTINUES TO UTILIZE A COMBINATION OF WORKING CAPITAL AND ITS
OVERSEAS CREDIT FACILITY. THE COMPANY IS ALSO WORKING TO ESTABLISH A
DOMESTIC CREDIT FACILITY TO MEET PERIODIC SHORT-TERM CASH REQUIREMENTS.
INCREASED SALES ACTIVITY THROUGHOUT 1996 IS EXPECTED TO INCREASE THE
AVAILABILITY OF CASH RESOURCES. IF CASH IS DETERMINED TO BE INADEQUATE
FOR THE LEVEL OF ACTIVITY, THE COMPANY MAY REDUCE EXPENSES SUCH AS
THOSE RELATED TO R & D PROJECTS. THE FUTURE OF ANY AFFECTED PROJECT
WOULD THEN BE UNCERTAIN. AS CASH FLOW BECOMES MORE AVAILABLE,
MANAGEMENT MAY RESTART PROJECTS, OR ELECT TO TERMINATE PROJECTS, BASED
ON A BUSINESS DECISION AND ON A PROJECT BY PROJECT BASIS.
THE COMPANY INTENDS TO SEEK OUT A SUITABLE PARTNER IN BANKING TO
ACHIEVE CURRENT AND FUTURE CREDIT FACILITY NEEDS FOR DOMESTIC
SUBSIDIARIES' SUPPORT. ADDITIONALLY, THE COMPANY INTENDS TO DEVELOP
OTHER METHODS TO ACHIEVE INCREASED WORKING CAPITAL. THESE METHODS MAY
BE ACHIEVED THROUGH BOTH THE PRIVATE AND/OR PUBLIC SECTOR. HOWEVER,
THERE CAN BE NO ASSURANCE THAT SUCH FINANCING WILL BE AVAILABLE AT
ACCEPTABLE TERMS, IF AT ALL. SETTLEMENT OF THE BREAST IMPLANT
LITIGATION WILL GREATLY ENHANCE THE COMPANY'S ABILITY TO OBTAIN
FINANCING FROM BANKS OR OTHER LENDING INSTITUTIONS.
In June of 1990, the Company established a $4.5 million comprehensive
financing package for working capital with a major bank that utilizes
domestic accounts receivable, inventories and certain other assets as
collateral. In December of 1990, the line of credit was increased to
$5.3 million. The line of credit agreement expired August 31, 1993 and
was extended through March 31, 1996. In January 1996, the obligation
to the bank was satisfied.
In April 1994, the Company increased its international line of credit
with a major Dutch bank. The current line is approximately $0.9
MILLION and is collateralized by the accounts receivable, inventories
and certain other assets of INAMED B.V. As of November 8, 1996,
approximately $0.9 MILLION had been drawn on the line of credit. The
interest rate on the line of credit is European prime discount rate
plus 2.5% per annum, at a minimum of 7% per annum.
The Company continues to develop a global banking relationship in order
to most efficiently manage its increasingly international cash flows.
McGhan Limited continues to receive grants from the Irish Industrial
Development Authority ("IDA") which include reimbursement for qualified
training expenses, leasehold improvements and capital improvement costs
at the Company's operation in Ireland. Additionally, McGhan Limited
has obtained approval for additional grants from the European Economic
Community "Industry R & D Initiative" for approved research and
development programs for up to $1 million. The Company believes that
additional approvals will be achieved in future years.
MANAGEMENT BELIEVES SHORT-TERM LIQUIDITY WILL IMPROVE AS A RESULT OF
INCREASED SALES THROUGHOUT 1996 AND INTO 1997, DUE TO INCREASED SALES
AREAS AND NEW PRODUCT INTRODUCTION DECREASED LITIGATION COSTS AS A
RESULT OF PROJECTED GLOBAL SETTLEMENT AND MANDATORY CLASS
CERTIFICATION, AND EFFORTS BY THE COMPANY TO RAISE FUTURE FUNDING
THROUGH A BANK LINE, PUBLIC, OR PRIVATE OFFERING. HOWEVER, NO
ASSURANCES CAN BE GIVEN AS TO THE OUTCOME OF SUCH EFFORTS.
THE LONG-TERM LIQUIDITY OF THE COMPANY IS INEXTRICABLY INTERTWINED WITH
THE COMPANY'S EFFORTS AND ULTIMATE ABILITY TO SUCCESSFULLY RESOLVE THE
BREAST IMPLANT LITIGATION. DETERMINING THE LONG TERM LIQUIDITY NEEDS OF
THE COMPANY IS NOT CURRENTLY POSSIBLE BECAUSE THE SETTLEMENT PROCESS
HAS NOT PROGRESSED TO THE POINT WHERE THE NUMBERS OF CURRENT, ONGOING,
AND FUTURE CLAIMANTS CAN BE DETERMINED. MANAGEMENT'S PRIMARY PLAN TO
OVERCOME ITS LIQUIDITY AND FINANCIAL CONDITION DIFFICULTIES IS TO
CONTINUE TO VIGOROUSLY DEFEND THE PRODUCTS LIABILITY LITIGATION TO
WHICH IT IS A PARTY AND TO SEEK A PROMPT AND FAVORABLE SETTLEMENT OF
SUCH LITIGATION AND TO SUPPLEMENT ITS SHORT-TERM LIQUIDITY USING A
COMBINATION OF CASH GENERATED FROM OPERATIONS AND DEBT AND EQUITY
FINANCING. MANAGEMENT FIRMLY BELIEVES THAT SUCH PLAN IS THE ONLY
VIABLE PLAN AVAILABLE TO THE COMPANY. THE COMPANY'S COUNSEL AND
ADVISORS ARE IN AGREEMENT WITH MANAGEMENT THAT THE EXTENT OF THE
COMPANY'S LIABILITY CANNOT BE DETERMINED AT THIS TIME.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in breast implant litigation as
discussed in Note 6 to the unaudited consolidated financial
statements.
ITEMS 2. THROUGH 5.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE>
INAMED CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
INAMED CORPORATION
By /S/DONALD K. MCGHAN
Donald K. McGhan
Chairman of the Board and
Chief Executive Officer
Dated: SEPTEMBER 8, 1997
DOCUMENT TYPE EX-27
DOCMENT DESCRIPTION FINANCIAL DATA SCHEDULE
PERIOD TYPE 9 MONTHS
FISCAL YEAR END DECEMBER 31, 1996
PERIOD START JANUARY 1, 1996
PERIOD END SEPTEMBER 30, 1996
CASH 17,982,434
SECURITIES 0
RECEIVABLES 18,505,932
ALLOWANCES 4,314,969
INVENTORY 20,055,176
CURRENT ASSETS 56,173,519
PP&E 22,361,224
DEPRECIATION 11,097,509
TOTAL ASSETS 71,289,200
CURRENT LIABILITIES 25,619,485
BONDS 0
PREFERRED - MANDATORY 0
PREFERRED 0
COMMONN 13,536,150
OTHER SE (12,998,221)
TOTAL LIABILITIES AND EQUITY 71,289,200
SALES 71,521,118
TOTAL REVENUE 71,521,118
CGS 24,308,821
TOTAL COSTS 68,480,857
OTHER EXPENSES 0
LOSS PROVISION 0
INTEREST EXPENSE 4,785,071
INCOME - PRETAX (958,978)
INCOME TAX 153,001
INCOME - CONTINUING (1,111,979)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME (1,111,979)
EPS - PRIMARY (0.14)
EPS - DILUTED (0.14)
