UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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, 1997 COMMISSION FILE NUMBER: 1-9741
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 No X
On August 31, 1997 there were 8,443,602 Shares of the Registrant's Common
Stock Outstanding.
This document contains 20 pages.
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INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
Quarter Ended March 31, 1997
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 15
PART II - OTHER INFORMATION 19
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<TABLE>
<CAPTION>
PART I.FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 1997 DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,283,446 $ 923,291
Restricted cash, Settlement Fund 14,953,759 14,795,892
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $4,428,342 at March 31, 1997 and
$4,477,187 at December 31, 1996 15,839,748 12,427,797
Related party notes receivable 261,986 236,065
Inventories 21,645,290 21,929,981
Prepaid expenses and other current assets 1,355,465 1,547,322
Income tax refund receivable 141,620 150,575
Deferred income taxes 2,018,096 2,022,382
___________ ___________
Total current assets 57,499,410 54,033,305
___________ ___________
Property and equipment, at cost:
Machinery and equipment 10,889,019 10,555,229
Furniture and fixtures 4,225,960 4,494,461
Leasehold improvements 9,376,687 9,147,570
___________ ___________
24,491,666 24,197,260
Less accumulated depreciation
and amortization (12,457,694) (11,937,738)
___________ ___________
Net property and equipment 12,033,972 12,259,522
___________ ___________
Notes receivable, net of allowance of
$1,066,958 at March 31, 1997 and
December 31, 1996 2,130,569 2,108,334
Intangible assets, net 1,333,048 1,409,935
Deferred income taxes 467 1,759
Other assets, at cost 275,416 287,572
___________ ___________
Total assets $ 73,272,882 $ 70,100,427
___________ ___________
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this statement.
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<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 1997 DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS'(DEFICIT) EQUITY
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 253,680 $ 320,839
Notes payable to bank 1,004,953 914,361
Accounts payable 13,205,430 12,445,123
Accrued liabilities:
Salaries, wages, and payroll taxes 4,457,060 4,891,054
Interest 1,676,933 3,110,179
Self-insurance 1,315,785 1,372,657
Stock option compensation 68,714 68,714
Other 1,444,375 1,538,758
Royalties payable 1,856,451 4,038,404
Income taxes payable 1,296,126 1,692,401
Deferred income taxes 36,569 26,885
___________ ___________
Total current liabilities 26,616,076 30,419,375
___________ ___________
Long-term debt, excluding current installments 69,482 91,105
Deferred grant income 1,177,174 1,269,123
Deferred income taxes 290,285 253,535
Litigation settlement 9,152,000 9,152,000
Convertible debt 40,195,972 34,516,065
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 8,209,350 82,094 80,366
Additional paid-in capital 15,000,741 13,585,509
Cumulative translation adjustment 62,853 430,933
Accumulated deficit (19,373,795) (19,697,584)
___________ ___________
Stockholders' (deficit) equity (4,228,107) (5,600,776)
___________ ___________
Total liabilities and stockholders'
(deficit) equity $ 73,272,882 $ 70,100,427
___________ ___________
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
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<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
Three Months Three Months
Ended Ended
MARCH 31, 1997 MARCH 31, 1996
<S> <C> <C>
Net sales $ 26,417,400 $ 20,402,033
Cost of goods sold 8,842,883 7,772,723
___________ ___________
Gross profit 17,574,517 12,629,310
___________ ___________
Operating expenses:
Marketing 7,098,793 5,947,057
General and administrative 6,462,328 6,431,668
Research and development 2,050,117 1,175,973
___________ ___________
Total operating expenses 15,611,238 13,554,692
___________ ___________
Operating income (loss) 1,963,279 (925,382)
___________ ___________
Other income (expense):
Interest income 261,293 277,770
Interest expense (1,045,653) (853,874)
Foreign currency transaction gains (losses) (878,224) (94,000)
Miscellaneous income 16,028 143,174
___________ ___________
Net other income (expense) (1,646,556) (526,930)
___________ ___________
Income (loss) before income tax expense
(benefit) 316,723 (1,452,312)
Income tax expense (benefit) (7,066) (185,359)
___________ ___________
Net income (loss) $ 323,789 $ (1,266,953)
___________ ___________
Net income (loss) per share of common stock $ .04 $ (.17)
___________ ___________
Weighted average common shares outstanding 8,195,910 7,602,431
___________ ___________
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
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<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 323,789 $ (1,266,953)
___________ ___________
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation of property and equipment 326,977 496,522
Amortization of intangible assets 76,590 36,006
Deferred income taxes 57,833 (29,782)
Changes in assets and liabilities:
Trade accounts receivable (3,978,002) (1,251,235)
Notes receivable (22,235) (59,839)
Inventories (663,694) (1,196,717)
Prepaid expenses and other current assets 145,559 223,745
Income tax refund receivable (430) (18,545)
Other assets 10,077 (126,954)
Accounts payable 915,862 (5,372,051)
Accrued salaries, wages and payroll taxes (359,018) (5,716,087)
Accrued interest (1,433,246) (122,818)
Accrued self-insurance (56,872) (22,000)
Other accrued liabilities (49,742) (950,646)
Royalties payable (2,181,953) (598,074)
Income taxes payable (335,213) (1,010,902)
___________ ___________
Total adjustments (7,547,507) (15,719,377)
___________ ___________
Net cash provided by
(used in) operating activities (7,223,718) (16,986,330)
___________ ___________
Cash flows from investing activities:
Purchases of property and equipment (791,719) (521,259)
___________ ___________
Net cash used in investing activities (791,719) (521,259)
___________ ___________
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this statement.
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<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months ended March 31, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
1997 1996
<S> <C> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt $ 5,902,092 $ 34,506,489
Principal repayment of notes payable
and long-term debt (131,882) (157,958)
(Increase) decrease in related party receivables (26,310) 382,942
Increase (decrease) in related party payables -- (1,696,373)
Net change in deferred grant income (28,973) (16,394)
Repurchases and retirements of common stock -- (3,463)
Issuance of common stock 1,416,960 --
___________ ___________
Net cash provided by (used in)
financing activities 7,131,887 33,015,243
___________ ___________
Effect of exchange rate changes on cash 1,401,572 210,792
___________ ___________
Net increase (decrease) in cash
and cash equivalents 518,022 15,718,446
Cash and cash equivalents at beginning of
period 15,719,183 2,807,327
___________ ___________
Cash and cash equivalents at end of period $ 16,237,205 $ 18,525,773
___________ ___________
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest $ 1,066,796 $ 43,771
___________ ___________
Income taxes $ 39,824 $ 1,150,437
___________ ___________
</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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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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, 1996
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 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). All significant intercompany balances and
transactions have been eliminated in consolidation.
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 (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 1996 consolidated financial
statements to conform to the 1997 presentation.
Note 3 - Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
March 31, 1997 December 31, 1996
Accounts receivable $ 20,268,090 $ 16,904,984
Allowance for doubtful accounts (665,300) (714,145)
Allowance for returns and credits (3,763,042) (3,763,042)
___________ ___________
Net accounts receivable $ 15,839,748 $ 12,427,797
___________ ___________
Notes receivable $ 3,197,527 $ 3,175,292
Allowance for doubtful notes (1,066,958) (1,066,958)
___________ ___________
Net notes receivable $ 2,130,569 $ 2,108,334
___________ ___________
Note 4 - Inventories
Inventories are summarized as follows:
MARCH 31, 1997 DECEMBER 31, 1996
Raw materials $ 4,050,556 $ 3,558,250
Work in process 4,449,717 3,917,259
Finished goods 14,478,249 15,780,401
___________ ___________
22,978,522 23,255,910
Less allowance for
obsolescence (1,333,232) (1,325,929)
___________ ___________
$ 21,645,290 $ 21,929,981
<PAGE>
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 (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 notes are collateralized
by all the assets of the Company. The indenture contains restrictive
covenants including, but not limited to, payment of dividends and
maintenance of operating profits. 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 based on the Company receiving a
mandatory non-opt certification by the Federal Court. 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 initial conversion rate was
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 Company's 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. The Company offered 10% bonus shares to note holders for
early conversion of the notes in May, 1996. As a result of this
inducement, $440,000 in notes was converted to common stock. An
additional $100,000 in notes was converted to common stock in December,
1996.
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; operating profit for such quarter was $90,878.
The default in operating profit was subject to cure by the Company
through the issuance of additional securities (junior 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 the 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 was eliminated when the shares were issued on
January 10, 1997.
In June 1997, the Company received a "Notice of Default" from Appaloosa
Management ("Appaloosa") and its affiliates, who are holders of more
than 50 percent in principal amount of the Company's 11% Secured
Convertible Notes due 1999 (the "Notes'). Although the Company is
current in its payment obligations with respect to the Notes, the
Notice of Default relates to non-compliance with various financial
covenants and the non-delivery of opinions and certificates due under
the indenture governing the Notes. Specifically, the Notice of Default
is under Section 4.1(3) of the Indenture in the performance of the
Company's agreements and covenants in Sections 8.6, 8.16, 8.18 and 12.2
of the Indenture and Section 2.18 of the Note Purchase Agreement. The
Notice of Default was not an acceleration notice under the indenture;
instead, it simply purported to increase the interest rate on the Notes
to the default rate of 14.5%.
In July 1997 the Company reached a comprehensive settlement agreement
with Appaloosa. As a result, the Company has agreed to amend certain
provisions of the Notes. The purpose of the restructuring was to cure
and waive all past defaults and provide certainty as to the conversion
price of the Notes, which the Company has agreed to fix at $5.50 per
share instead of 85% of the market. The restructuring also reduces the
Company's debt by approximately $15 million through the redemption of
Notes with the proceeds of the escrow fund. Those monies would be
replaced when needed to fund the settlement of the breast implant
litigation with the capital raised through the mandatory redemption of
warrants issued to the Noteholders with an exercise price of $8.00 per
share (subject to adjustment), at the Company's option, if the Common
Stock maintains a value of at least $10.00 per share for a specified
measurement period.
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, 1997, 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 or 1997 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 in aggregate were $26.4 million during the first three months
of 1997 which represents more than a 29% increase over the first three
months sales of 1996 which totaled $20.4 million. During the first
three months of 1996, domestic sales growth was adversely affected by
shortages of raw materials and by changes made by the Company to
certain manufacturing processes and procedures in order to achieve
regulatory approvals and attain higher standards of control. The
Company notes increasing demand internationally for its products and
expects international sales to continue to represent an increasing
percentage of net sales. Management anticipates that market growth,
continued increases in production capacity, both domestically and
internationally, and further expansion of the international sales force
will allow an increase in sales growth throughout the remainder of
1997.
Gross profit was $17.6 million or 67% of net sales for the first three
months of 1997 compared to $12.6 million and 62% of net sales for the
corresponding period in 1996. Management notes 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 in the first quarter of 1997 were $7.1 million, an
increase of approximately $1.2 million over this like year-ago period,
but as a percentage of net sales decreased to 27% from 29%. 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 $6.5 million for the quarter
ended March 31, 1997 and $6.4 million for the quarter ended March 31,
1996. General and administrative expenses as a percentage of net sales
were 24% in the first three months of 1997 compared to 32% in the first
three months of 1996. Management expects future general and
administrative expenses to grow proportionally with sales, and to be
reactive to litigation expense.
Research and development expenses increased from $1.2 million in the
first quarter of 1996 to $2.1 million in the first quarter of 1997,
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 8% in the first
three months of 1997 and 6% in the first three months of 1996.
Developing new medical devices by exploiting new technologies continues
to be the Company's focus. R&D expenses are expected to increase
proportionately with sales throughout 1997 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 at $1 million for the first three months of 1997
increased in comparison with interest expense for the same period of
1996 of $.9 million.
The Company continues to incur 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 three months of 1997 INAMED Corporation 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 in Ireland. 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 by favoring direct sales methods rather over 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, 1996, and the current
ratio was 2.2 to 1 at March 31, 1997, compared to 1.8 to 1 at December
31, 1996. 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 increased
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
continue to draw on the Company's liquidity throughout 1997. 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.
During 1997 the Company has had discussions with Noteholders in
majority of the 11% Secured Convertible Notes due 1999 to restructure
the terms of the notes. In July 1997, the Company reached a
comprehensive settlement agreement with the Noteholders in majority.
The purpose of the restructuring was to cure and waive all past
defaults and provide certainty as to the conversion price of the Notes,
which the Company has agreed to fix at $5.50 per share instead of 85%
of the market. The restructuring also reduces the Company's debt by
approximately $15 million through the redemption of Notes with the
proceeds of the escrow fund. Those monies would be replaced when
needed to fund the settlement of the breast implant litigation with the
capital raised through the mandatory redemption of warrants issued to
the Noteholders with an exercise price of $8.00 per share (subject to
adjustment), at the Company's option, if the Common Stock maintains a
value of at least $10.00 per share for a specified measurement period.
In June 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.
In January 1997, the Company received $5.7 million in proceeds from
$6.2 million in financing via a 4% convertible debenture purchase
agreement, issued at an 8% discount, due January 16, 2000. Interest is
payable quarterly in arrears on March 31, June 30, September 30 and
December 31. The proceeds received were to be used for working capital
purposes.
The debentures became convertible into shares of common stock at the
option of the holder 60 days after the issue date. The conversion
price for each debenture is the lesser of the average per share market
value of INAMED common stock for the 5 trading days preceding the
original issue date or the average per share market value for the 5
trading days preceding conversion and adjusted to halve any increase
exceeding 33%, whichever is greater, or 85% of the average per share
market value for the five trading days immediately preceding the
conversion date.
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 1997 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 renew work on projects, or elect to terminate them, a
business decision that will be made 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 April 1994, the Company increased its international line of credit
with a major Dutch bank. The current line is approximately $796,000
and is collateralized by the accounts receivable, inventories and
certain other assets of INAMED B.V. As of March 31, 1997,
approximately $419,000 had been drawn on the line of credit. The
interest rate on the line of credit is 7% per annum.
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 under its "Industry R & D Initiative" for approved research
and development programs for up to $1 million. The Company believes
that additional approvals may be achieved in future years.
Management believes short-term liquidity will improve as a result of
increased sales throughout 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
Form 8-K, dated March 19, 1997
Form 8-K, dated June 10, 1997
Form 8-K, dated July 9, 1997
<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
<PAGE>
INAMED CORPORATION
DOCUMENT TYPE EX-27
DOCUMENT DESCRIPTION FINANCIAL DATA SCHEDULE
PERIOD TYPE 3 MONTHS
FISCAL YEAR END DECEMBER 31, 1997
PERIOD START JANUARY 1, 1997
PERIOD END MARCH 31, 1997
CASH 16,237,205
SECURITIES 0
RECEIVABLES 20,268,090
ALLOWANCES 4,428,342
INVENTORY 21,645,290
CURRENT ASSETS 57,499,410
PP&E 24,491,666
DEPRECIATION 12,457,694
TOTAL ASSETS 73,272,882
CURRENT LIABILITIES 26,616,076
BONDS 0
PREFERRED - MANDATORY 0
PREFERRED 0
COMMON 15,082,835
OTHER SE (19,310,942)
TOTAL LIABILITIES AND EQUITY 73,272,882
SALES 26,417,400
TOTAL REVENUE 26,417,400
CGS 8,842,883
TOTAL COSTS 24,454,121
OTHER EXPENSES 0
LOSS PROVISION 0
INTEREST EXPENSE 1,045,653
INCOME - PRETAX 316,723
INCOME TAX 7,066
INCOME - CONTINUING 323,789
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 323,789
EPS - PRIMARY .04
EPS - DILUTED .04
