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 March 31, 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 March 31, 1996 there were 7,602,317 Shares of the Registrant's
Common Stock Outstanding.
This document contains 19 pages.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
Form 10-Q
Quarter Ended March 31, 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 6
Notes to the Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II - OTHER INFORMATION 18
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
MARCH 31, 1996 DECEMBER 31, 1995
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 3,403,652 $ 2,807,327
Restricted cash, Settlement Fund 15,122,121 --
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $6,543,068 at March 31, 1996 and
$6,641,177 at December 31, 1995 11,656,286 10,470,375
Notes receivable - trade 179,476 157,534
Related party notes receivable 2,566 385,508
Inventories 18,713,112 17,695,847
Prepaid expenses and other current assets 1,581,643 1,825,213
Income tax refund receivable 112,300 95,580
Deferred income taxes 2,012,592 2,014,589
___________ ___________
Total current assets 52,783,748 35,451,973
___________ ___________
Property and equipment, at cost:
Machinery and equipment 9,067,846 8,923,564
Furniture and fixtures 3,778,009 3,714,717
Leasehold improvements 7,751,614 7,567,208
___________ ___________
20,597,469 20,205,489
Less accumulated depreciation
and amortization (9,776,123) (9,234,166)
___________ ___________
Net property and equipment 10,821,346 10,971,323
___________ ___________
Notes receivable, net of allowance of $1,066,958
at March 31, 1996 and December 31, 1995 2,043,816 2,047,535
Intangible assets, net 1,622,774 1,658,926
Other assets, at cost 381,830 255,187
Total assets $67,653,514 $50,384,944
___________ ___________
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this statement.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
MARCH 31, 1996 DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<S> <C>
Current liabilities:
Current installments of long-term debt $ 38,847 $ 51,735
Notes payable to bank 1,113,656 1,273,476
Related party notes payable 63,044 1,759,417
Accounts payable 13,182,560 18,596,800
Accrued liabilities:
Salaries, wages, and payroll taxes 3,808,488 9,559,348
Interest 1,487,129 1,609,947
Self-insurance 1,108,632 1,130,632
Stock option compensation 68,714 68,714
Other 1,242,060 2,200,860
Royalties payable 2,328,314 2,926,388
Income taxes payable 798,607 1,812,818
Deferred income taxes 93,624 10,065
___________ ___________
Total current liabilities 25,333,675 41,000,200
___________ ___________
Long-term debt, excluding current installments 76,552 89,437
Deferred grant income 1,080,611 1,114,735
Deferred income taxes 120,928 239,177
Litigation settlement 9,152,000 9,152,000
Convertible notes payable 35,000,000 493,511
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 7,602,317 76,024 76,027
Additional paid-in capitaL 9,960,175 9,963,635
Cumulative translation adjustment 746,426 882,146
Accumulated deficit (13,892,877) (12,625,924)
___________ ___________
Stockholders' (deficit) equity (3,110,252) (1,704,116)
Total liabilities and stockholders' (deficit) equity $67,653,514 $50,384,944
___________ ___________
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
Three Months Three Months
Ended Ended
MARCH 31, 1996 MARCH 31, 1995
<S> <C> <C>
Net sales $20,402,033 $21,744,875
Cost of goods sold 7,772,723 6,334,312
___________ ___________
Gross profit 12,629,310 15,410,563
___________ ___________
Operating expenses:
Marketing 5,947,051 5,381,079
General and administrative 6,431,668 7,608,602
Research and development 1,175,973 1,066,375
___________ ___________
Total operating expenses 13,554,692 14,056,056
___________ ___________
Operating income (loss) (925,382) 1,354,507
___________ ___________
Other income (expense):
Interest income 277,770 356,647
Interest expense (853,874) (128,743)
Foreign currency transaction gains (losses) (94,000) 263,743
Miscellaneous income 143,174 119,211
___________ ___________
Net other income (expense) (526,930) 610,858
___________ ___________
Income (loss) before income tax expense (benefit) (1,452,312) 1,965,365
Income tax expense (benefit) (185,359) 824,869
___________ ___________
Net income (loss) $(1,266,953) $ 1,140,496
___________ ___________
Net income (loss) per share of common stock $ (.17) $ .15
___________ ___________
Weighted average common shares outstanding 7,602,431 7,491,821
___________ ___________
</TABLE>
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months ended March 31, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
<S> <C>
Cash flows from operating activities:
Net income (loss) $(1,266,953) $ 1,140,496
___________ ___________
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 496,522 758,659
Amortization of intangible assets 36,006 77,699
Deferred income taxes (29,782) 358,633
Changes in assets and liabilities:
Trade accounts receivable (1,251,235) (2,215,168)
Notes receivable (59,839) 417,166
Inventories (1,196,717) (1,310,035)
Prepaid expenses and other current assets 223,745 967,447
Income tax refund receivable (18,545) 1,840
Other assets (126,954) (10,105)
Accounts payable (5,372,051) (2,029,370)
Accrued salaries, wages and payroll taxes (5,716,087) 2,680,724
Accrued interest (122,818) --
Accrued self-insurance (22,000) 1,006,027
Other accrued liabilities (950,646) (935,272)
Royalties payable (598,074) (69,497)
Income taxes payable (1,010,902) 332,878
___________ ___________
Total adjustments (15,719,377) 31,626
___________ ___________
Net cash provided by
(used in) operating activities (16,986,330) 1,172,122
___________ ___________
Cash flows from investing activities:
Purchases of property and equipment (521,259) (1,314,472)
___________ ___________
Net cash used in investing activities (521,259) (1,314,472)
___________ ___________
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this
statement.
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<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months ended March 31, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
<S> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt $34,506,489 $ --
Principal repayment of notes payable
and long-term debt (157,958) (472,651)
(Increase) decrease in related party receivables 382,942 (166,611)
Increase (decrease) in related party payables (1,696,373) 896
Net change in deferred grant income (16,394) (18,629)
Repurchases and retirements of common stock (3,463) --
Issuance of common stock -- 84,500
Cash overdraft -- 348,782
___________ ___________
Net cash provided by (used in)
financing activities 33,015,243 (223,713)
___________ ___________
Effect of exchange rate changes on cash 210,792 (307,888)
___________ ___________
Net increase (decrease) in cash
and cash equivalents 15,718,446 (673,951)
Cash and cash equivalents at beginning of period 2,807,327 673,951
___________ ___________
Cash and cash equivalents at end of period $18,525,773 $ --
___________ ___________
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest $ 43,771 $ 139,874
Income taxes $ 1,150,437 $ 382,998
___________ ___________
</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
MARCH 31, 1996 (CONTINUED)
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
Note 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, 1995
as filed with the Securities and Exchange Commission on Form 10-K.
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 focuses on the development and
promotion of the merits of the use of silicone chemistry in the fields
of medical devices, pharmaceuticals and biotechnology; INAMED
Development Company, which is engaged in the research and development
of new medical devices using silicone-based technology; McGhan Limited,
an Irish corporation which manufactures medical devices principally for
the plastic and general surgery fields; Medisyn Technologies, Ltd. and
Chamfield Ltd., Irish corporations which specialize in the development
of silicone materials for use by INAMED's wholly-owned subsidiaries;
and 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, 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). All significant intercompany balances and
transactions have been eliminated in consolidation.
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. Common stock
equivalents are excluded since their inclusion would immaterially
affect the calculation or would be antidilutive.
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:
March 31, 1996 December 31, 1995
<S> <C> <C>
Accounts receivable $18,199,354 $17,111,552
Allowance for doubtful accounts (866,819) (964,928)
Allowance for returns and credits (5,676,249) (5,676,249)
___________ ___________
Net accounts receivable $11,656,286 $10,470,375
Notes receivable $ 3,110,774 $ 3,114,493
Allowance for doubtful notes (1,066,958) (1,066,958)
___________ ___________
Net notes receivable $ 2,043,816 $ 2,047,535
</TABLE>
<TABLE>
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
March 31, 1996 December 31, 1995
<S> <C> <C>
Raw materials $ 2,842,637 $ 2,513,862
Work in process 4,526,526 3,773,579
Finished goods 11,853,924 12,167,768
___________ ___________
19,223,087 18,455,209
Less allowance for
obsolescence (509,975) (759,362)
___________ ___________
$18,713,112 $17,695,847
</TABLE>
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 terms of the note agreement, the Company may obtain up to $5
million in structured debt or make equity offering without restriction.
However, the terms of the note agreement restrict the Company's ability
to make a debt offering.
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 March 31, 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales as an aggregate were $20.4 million during the first three
months of 1996 which represents a 6% decrease from the first three
months of 1995 when sales totaled $21.7 million. Domestic sales growth
was adversely affected during the first three 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 the market growth, continued
increase in production capacity, both domestically and internationally,
and expansion of the international sales force will allow an increase
in sales growth throughout the remainder of 1996.
Gross profit was $12.6 million or 62% of net sales for the first three
months of 1996 compared to $15.4 million and 71% of net sales 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 $5.9 million and $5.4 million for the quarters
ended March 31, 1996 and March 31, 1995 respectively. Marketing
expense as a percentage of net sales was 29% in the first three months
of 1996, compared to 25% for the first three months of 1995. This
increase is primarily due to the domestic demand for product in excess
of current production capabilities, which has required marketing
personnel to expend greater efforts in managing the placement of
inventory in the field.
General and administrative expenses were $6.4 million and $7.6 million
for the quarters ended March 31, 1996 and March 31, 1995 respectively.
General and administrative expenses as a percentage of net sales were
32% in the first three months of 1996 compared to 35% in the first
three 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 $1.2 million in the
first quarter of 1996 from $1.1 million in the first quarter of 1995,
reflecting the Company's continuing 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 6% in the first
three months of 1996 and 5% in the first three months of 1995.
Diversification into other facets of medical devices through use of new
technology remains a goal of the Company. R & D expenses are expected
to increase throughout 1996 as the Company is also increasing research
and development overseas due to the FDA backlog on approval of new
devices in the United States.
Interest expense of $0.9 million increased for the first three months
of 1996 in comparison with interest expense for the same period in 1995
of $0.1 million. This was primarily due to the interest incurred on
the Company's convertible notes payable which were issued in January
1996.
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.
Management anticipates strong market growth, continued increases in
production capacity domestically and internationally, and expansion of
the international sales force will contribute to a trend of sales
growth throughout the remainder of 1996.
Financial Condition
During the first three 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 increased international product needs, the Company has
increased production of its products in Europe through expansion at its
manufacturing plant in Ireland which supplies the majority of the
products for the Company's international market. The Irish facility
works closely with the Company's subsidiaries in Europe to develop new
products for that market. Internationally, the Company has
significantly increased its market share due to the use of direct sales
methods rather than distributors wherever financially advantageous to
do so. The Company currently has direct marketing subsidiaries in ten
international countries.
The cash balance has increased since December 31, 1995, and the current
ratio was 2.1 to 1 at March 31, 1996, compared to the ratio at December
31, 1995 of 0.9 to 1. The majority of the Company's cash flows in the
first three months of 1996 were generated by the issuance of
convertible notes as discussed in Note 4 to the financial statements,
and by product sales. Growth, regulatory activities and legal expenses
continue to use 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.
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
the 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 $1.3
million and is collateralized by the accounts receivable, inventories
and certain other assets of INAMED B.V. As of March 31, 1996,
approximately $1.0 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 is actively working to establish a global banking
relationship with goals to strengthen its consolidated financial
position.
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, 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 tothe unaudited consolidated financial
statements.
ITEMS 2. THROUGH 5.
Not Applicable
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(1) Form 8-K, dated January 23, 1996
(2) Form 8-K, dated April 19, 1996
<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 President
Dated: SEPTEMBER 8, 1997
DOCUMENT TYPE EX-27
DOCUMENT DESCRIPTION FINANCIAL DATA SCHEDULE
PERIOD TYPE 3 MONTHS
FISCAL YEAR END DECEMBER 31, 1996
PERIOD START JANUARY 1, 1996
PERIOD END MARCH 31, 1996
CASH 18,525,773
SECURITIES 0
RECEIVABLES 18,199,354
ALLOWANCES 6,543,068
INVENTORY 18,713,112
CURRENT ASSETS 52,783,748
PP&E 20,597,469
DEPRECIATION 9,776,123
TOTAL ASSETS 67,653,514
CURRENT LIABILITIES 25,333,675
BONDS 0
PERFERRED - MANDATORY 0
PREFERRED 0
COMMON 10,036,199
OTHER SE (13,146,451)
TOTAL LIABILITES AND EQUITY 67,653,514
SALES 20,402,033
TOTAL REVENUE 20,402,033
CGS 7,772,723
TOTAL COSTS 21,327,415
OTHER EXPENSES 0
LOSS PROVISION 0
INTEREST EXPENSE 853,874
INCOME - PRETAX (1,452,312)
INCOME TAX (185,359)
INCOME - CONTINUING (1,266,953)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME (1,266,953)
EPS - PRIMARY (0.17)
EPS - DILUTED (0.17)
