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 September 30, 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 X No_____
On November 24,1997 there were 8,823,476 Shares of the
Registrant's Common Stock Outstanding.
This document contains 22 pages.
INAMED CORPORATION AND SUBSIDIARIES
Form 10-Q
Quarter Ended September 30, 1997
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Income Statements 5
Unaudited Consolidated Statements
of Cash Flows 7
Notes to the Unaudited Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II - OTHER INFORMATION 21
PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1997 December 31, 1996
Assets
Current assets:
Cash and cash equivalents $ 2,657,897 $ 923,291
Restricted cash, Settlement Fund -- 14,795,892
Trade accounts receivable, net of
allowance for doubtful accounts
and returns allowances of $4,400,672
at September 30, 1997 and $4,477,187
at December 31, 1996 16,561,209 12,427,797
Related party notes receivable 15,588 236,065
Inventories 25,157,420 21,929,981
Prepaid expenses & other current assets 1,477,652 1,547,322
Income tax refund receivable 366,872 150,575
Deferred income taxes 2,006,267 2,022,382
----------- ----------
Total current assets 48,242,905 54,033,305
Property and equipment, at cost:
Machinery and equipment 12,129,084 10,555,229
Furniture and fixtures 4,467,608 4,494,461
Leasehold improvements 10,335,240 9,147,570
----------- -----------
26,931,932 24,197,260
Less accumulated depreciation
and amortization (13,727,251) (11,937,738)
----------- -----------
Net property and equipment 13,204,681 12,259,522
Notes receivable, net of allowance of
$1,066,958 at September 30, 1997
and December 31, 1996 2,174,986 2,108,334
Intangible assets, net 1,187,344 1,409,935
Deferred income taxes 741,450 1,759
Other assets, at cost 342,761 287,572
----------- -----------
Total assets $ 65,894,127 $ 70,100,427
----------- -----------
----------- -----------
(continued)
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1997 December 31, 1996
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Current installments of long-term debt $ 98,941 $ 320,839
Notes payable to bank 791,755 914,361
Accounts payable 11,216,393 12,445,123
Accrued liabilities:
Salaries, wages, and payroll taxes 2,770,855 4,891,054
Interest 1,369,057 3,110,179
Self-insurance 1,195,025 1,372,657
Stock option compensation 68,714 68,714
Other 1,473,551 1,538,758
Royalties payable 4,846,418 4,038,404
Income taxes payable 2,455,710 1,692,401
Deferred income taxes 12,429 26,885
----------- -----------
Total current liabilities 26,298,848 30,419,375
Long-term debt, excluding current
installments 27,386 91,105
Related Party Notes Payable 6,257,875 --
Deferred grant income 1,040,950 1,269,123
Deferred income taxes 767,056 253,535
Litigation settlement 9,152,000 9,152,000
Convertible debt 24,232,162 34,516,065
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 8,552,905 85,529 80,366
Additional paid-in capital 16,368,666 13,585,509
Cumulative translation adjustment (136,274) 430,933
Accumulated deficit (18,200,071) (19,697,584)
----------- -----------
Stockholders' (deficit) equity (1,882,150) (5,600,776)
Total liabilities and stockholders'
(deficit) equity $ 65,894,127 $ 70,100,427
----------- -----------
----------- -----------
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, 1997 September 30, 1996
Net sales $ 80,309,290 $ 71,521,118
Cost of goods sold 26,285,338 24,308,821
----------- -----------
Gross profit 54,023,952 47,212,297
Operating expenses:
Marketing 21,216,025 18,850,662
General and administrative 20,603,156 21,761,260
Research and development 6,694,108 3,560,114
----------- -----------
Total operating expenses 48,513,289 44,172,036
Operating income 5,510,663 3,040,261
Other income (expense):
Interest income 677,676 756,526
Interest expense (3,057,628) (4,785,071)
Royalty Income 211,384 94,766
Foreign currency transaction
gains (losses) (1,272,032) (222,123)
Miscellaneous income (loss) (200,516) 156,663
----------- ----------
Net other income (expense) (3,641,116) (3,999,239)
Income (loss) before income
tax expense 1,869,547 (958,978)
Income tax expense 372,034 153,001
----------- ----------
Net income (loss) $ 1,497,513 $ (1,111,979)
----------- -----------
----------- -----------
Net income (loss) per share of
common stock $ 0.18 $ (0.14)
Weighted average common shares
outstanding 8,296,157 7,743,767
The Notes to Financial Statements are an
integral part of this statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
Net sales $ 24,205,593 $ 23,259,585
Cost of goods sold 7,799,433 8,605,078
----------- -----------
Gross profit 16,406,160 14,654,507
Operating expenses:
Marketing 6,298,355 6,026,752
General and administrative 7,336,515 7,161,294
Research and development 2,310,329 1,456,633
----------- -----------
Total operating expenses 15,945,199 14,644,679
Operating income (loss) 460,961 9,828
Other income (expense):
Interest income 141,866 181,387
Interest expense (875,711) (1,059,378)
Royalty income 211,384 --
Foreign currency transaction
gains (losses) 81,253 (42,061)
Miscellaneous income (expense) (244,734) 4,425
----------- -----------
Net other (expense) (685,942) (915,627)
Income (loss) before income taxes (224,981) (905,799)
Income tax expense (benefit) (5,548) 82,291
----------- -----------
Net income (loss) $ (219,433) $ (988,090)
----------- -----------
----------- -----------
Net income (loss) per share of
common stock $ (0.03) $ (0.12)
Weighted average common shares
outstanding 8,477,455 7,998,507
The Notes to Financial Statements are an integral part of this
statement
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months ended September 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
1997 1996
Cash flows from operating activities:
Net income (loss) $ 1,497,513 $ (1,111,979)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 1,415,910 1,810,802
Amortization of intangible assets 223,813 230,533
Deferred income taxes (213,144) (24,093)
Changes in assets and liabilities:
Trade accounts receivable (4,947,503) (3,832,241)
Notes receivable (66,652) 174,564
Inventories (4,791,839) (2,728,211)
Prepaid expenses & other current assets (9,531) 117,451
Income tax refund receivable (228,489) (144,828)
Other assets (58,365) (147,455)
Accounts payable (905,540) (6,143,367)
Accrued salaries, wages & payroll taxes(2,003,836) (5,396,239)
Accrued interest (1,741,122) 62,366
Accrued self-insurance (177,632) (36,300)
Other accrued liabilities 5,527 497,656
Royalties payable 808,014 (946,051)
Income taxes payable 853,578 (1,726,374)
----------- -----------
Total adjustments (11,836,811) (18,231,787)
Net cash provided by
(used in) operating activities (10,339,298) (19,343,766)
Cash flows from investing activities:
Purchases of property and equipment (3,747,536) (2,266,227)
Net cash used in investing activities (3,747,536) (2,266,227)
(continued)
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months ended September 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
1997 1996
Cash flows from financing activities:
Increases in notes payable and
long-term debt $ 5,647,935 $ 34,836,498
Principal repayment of notes payable
and long-term debt (16,211,223) (530,451)
(Increase) decrease in related party
receivables 219,500 371,962
Increase (decrease) in related party
payables 6,257,875 (1,759,417)
Net change in deferred grant income (75,827) 13,520
Repurchases and retirements of common stock (6,906) (3,463)
Issuance of common stock 2,795,225 3,499,951
----------- -----------
Net cash provided by (used in)
financing activities (1,373,421) 36,428,600
Effect of exchange rate changes on cash 2,398,969 356,500
----------- -----------
Net increase in cash
and cash equivalents (13,061,286) 15,175,107
Cash and cash equivalents at beginning
of period 15,719,183 2,807,327
Cash and cash equivalents at end
of period $ 2,657,897 $ 17,982,434
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 3,198,314 $ 1,388,794
Income taxes $ 370,564 $ 1,530,932
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.
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 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, McGhan Medical Asia
Pacific, a Hong Kong corporation, McGhan Medical Mexico S.A. de
C.V., a Mexican corporation, and Bioenterics Latin America, S.A.
de C.V., a Mexican corporation which all sell medical devices on
a direct sales basis in the various countries in which they are
located.
Basis of Presentation
The consolidated financial statements include the accounts
of INAMED Corporation and its wholly-owned subsidiaries
(collectively referred to as the Company for the purposes of
financial reporting). All significant intercompany balances and
transactions have been eliminated in consolidation.
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:
September 30, 1997 December 31, 1996
Accounts receivable $ 20,961,881 $ 16,904,984
Allowance for doubtful accounts (637,630) (714,145)
Allowance for returns and credits (3,763,042) (3,763,042)
_________ _________
Net accounts receivable $ 16,561,209 $ 12,427,797
Notes receivable $ 3,241,944 $ 3,175,292
Allowance for doubtful notes (1,066,958) (1,066,958)
_________ _________
Net notes receivable $ 2,174,986 $ 2,108,334
Note 4 - Inventories
Inventories are summarized as follows:
September 30, 1997 December 31, 1996
Raw materials $ 4,030,980 $ 3,558,250
Work in process 3,819,929 3,917,259
Finished goods 18,319,775 15,780,401
----------- -----------
26,170,684 23,255,910
Less allowance for
obsolescence (1,013,264) (1,325,929)
------------ -----------
$ 25,157,420 $ 21,929,981
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. 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 103% of the note balance at $5.50
per share instead of 85% of the market. The restructuring also
resulted in the Company returning approximately $15 million to
the Noteholders and reducing the total note balance to
approximately $19.7 million which if converted would result in
3,687,668 shares issued. The $15 million 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. The exercise price
has decreased to $7.50 due to the Company's inability to cause
the registration statement for the warrants and warrant shares to
be declared effective by October 31, 1997. The total shares to
be issued if these warrants were executed would be 1,846,071.
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 includes allegations that the plaintiffs' breast
implants caused specified ailments including, among others, auto-
immune disease, scleroderma, systemic disorders, joint swelling
and chronic fatigue.
A result of the MDL Settlement was the establishment of a
Claims Administration Office in Houston, Texas, under the
direction of Judge Ann Cochran. Class Members who had breast
implants prior to June 1993 have registered with the Claims
Office. Judge Pointer certified the "Global" Settlement by Final
Order and Judgment on September 1, 1994. Subsequently, a
preliminary review of claims produced projected payouts that were
greater than the amounts the breast implant manufacturers had
agreed to pay. On May 15, 1995, Dow Corning Corp., formerly one
of the manufacturers and a significant contributor to the Global
Settlement fund, filed for federal bankruptcy protection because
of lawsuits over the devices.
On December 29, 1995, the Company entered into an agreement
with the MDL 926 Settlement Class Counsel and certain other
defendants that is now identified as the "Bristol, Baxter, 3M,
McGhan & Union Carbide Revised Breast Implant Settlement Program"
("Revised Settlement"). The Revised Settlement provides a
procedure to resolve claims of current claimants and ongoing
claimants who are registered with the Claims Office.
Due to the nature of the Revised Settlement which allowed
ongoing registrations, "opt-ins", as well as a limited potential
for claimants, during the life of the program, to opt-out of the
Revised Settlement ("opt-outs"), the aggregate dollar amount to
be received by the class of claimants under the Revised
Settlement has not been fully ascertained.
The Revised Settlement is an approved-claims based
settlement. Therefore, to project a range of the potential cost
of the Revised Settlement, the parties utilized a court-sponsored
sample of claimants' registrations and claims filed through the
MDL 926 Settlement Claims Office against all defendants and
assumed approval of 100 percent of the claims as initially
submitted. Although adequate for negotiation purposes, the
sample is unsatisfactory for the purposes of determining an
aggregate dollar liability for accounting purposes because the
processing of current claims is not complete, the process of
ongoing claims will continue for fifteen years, and the
Settlement is subject to opt-ins and opt-outs.
The following is a recap of the certain events involving the
Company's product liability issues relating to silicone gel
breast implants which the Company manufactures and markets.
The claims in Silicone Gel Breast Implant Products Liability
Litigation MDL 926 are for general and punitive damages relating
to physical and mental injuries allegedly sustained as a result
of silicone gel breast implants produced by the Company.
Although the amount of claims asserted against the Company is not
readily determinable, the Company believes that the stated amount
of claims substantially exceeds provisions made in the Company's
consolidated financial statements. The Company has been a
defendant in substantial litigation related to breast implants
which have adversely affected the liquidity and financial
condition of the Company. This raises substantial doubt about
the Company's ability to continue as a going concern. The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do
not include any adjustments that might result from this
uncertainty.
On June 25, 1992 the judicial panel on multi-district
litigation in re: Silicone Gel Breast Implant Products Liability
Litigation consolidated all federal breast implant cases for
discovery purposes in Federal District Court for the Northern
District of Alabama under the multi-district litigation rules.
Several U.S.-based manufacturers negotiated a settlement with the
Plaintiffs' Negotiating Committee ("PNC"), and on March 29, 1994
filed a Proposed Non-Mandatory Class Action Settlement in the
Silicone Breast Implant Products Liability (the "Settlement
Agreement") providing for settlement of the claims as to the
class (the "Settlement") as described in the Settlement
Agreement. The Settlement Agreement, upon approval, would have
provided resolution of any existing or future claims, including
claims for injuries not yet known, under any Federal or State
law, from any claimant who received a silicone breast implant
prior to June 1, 1993.
The Company was not originally a party to the Settlement
Agreement. However, on April 8, 1994 the Company and the PNC
reached an agreement which would join the Company into the
Settlement. The agreement reached between the Company and the
PNC added great value to the Settlement by enabling all
plaintiffs and U.S.-based manufacturers to participate in the
Settlement, and facilitating the negotiation of individual
contributions by the Company, Minnesota Mining and Manufacturing
Company ("3M"), and Union Carbide Corporation which total more
than $440 million.
A fairness hearing for the non-mandatory class was held
before Judge Pointer on August 18, 1994. On September 1, 1994,
Judge Pointer gave final approval to the non-mandatory class
action settlement. The deadline for plaintiffs to enter the
Settlement was March 1, 1995.
Under the terms of the Settlement Agreement, the parties
stipulated and agreed that all claims of the Settlement Class
against the Company regarding breast implants and breast implant
materials would be fully and finally settled and resolved on the
terms and conditions set forth in the Settlement Agreement.
Under the terms of the Settlement Agreement, the Company
would have paid $1 million to the Settlement fund for each of 25
years starting three years after Settlement approval by the
Court. The Settlement was approved by the Court on September 1,
1994. The Company recorded a pre-tax charge of $9.1 million in
October of 1994. The charge represents the present value
(discounted at 8%) of the Company's settlement of $25 million
over a payment period of 25 years, $1 million per year starting
three years from the date of Settlement approval.
Under the Settlement, $1.2 billion had been provided for
"current claims" (disease compensation claims). In May 1995,
Judge Pointer completed a preliminary review of current claims
against all Settlement defendants which had been filed as of
September 1994, in compliance with deadlines set by the court.
Judge Pointer determined that based on the preliminary review,
projected amounts of eligible current claims appeared to exceed
the $1.2 billion provided by the Settlement. Discrete
information as to each defendant was not made available by the
Court and the Company is not aware of any information from
such findings that would affect the Company's $9.1 million
accrual. The Settlement provided that in the event of such over
subscription, the amounts to be paid to eligible current
claimants would be reduced and claimants would have a right to
"opt-out" of the Settlement at that time.
On October 1, 1995, Judge Pointer finalized details of a
scaled-back breast implant injury settlement involving defendants
Bristol-Myers Squibb, Baxter International, and 3M, allowing
plaintiffs to reject this settlement and file their own lawsuits
if they believe payments are too low. On November 14, 1995,
McGhan Medical and Union Carbide were added to this list of
settling defendants to achieve the "Bristol, Baxter, 3M, McGhan &
Union Carbide Revised Settlement Program" (the "Revised
Settlement Program"). With respect to the parties thereto, the
Revised Settlement Program incorporated and superseded the
Settlement. The Revised Settlement Program does not fix the
liability of any defendants, but established fixed benefit
amounts for qualifying claims. The Company's obligations under
the Revised Settlement are cancelable if the Revised Settlement
is disapproved on appeal.
The Company recorded a pre-tax charge of $23.4 million in
the third quarter of 1995. The charge represented the present
value (discounted at 8%) of the maximum additional amount that
the Company then estimated it might be required to contribute to
the Revised Settlement Program - $50 million over a 15-year
period based on a claims-made and processed basis. Due to the
uncertainty of ultimate resolution and acceptance of the Revised
Settlement Program by the registrants, claimants and plaintiffs,
and the lack of information related to the substance of the
claims, the Company reversed this charge at year-end 1995 for the
third quarter of 1995.
At September 30, 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 precise 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
indicated that the range of costs to the Company of its
contributions, while likely to exceed $9.1 million, would 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, would not likely 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.
The Company's agreement to the terms of 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. The Company's ability to meet its obligations under
the Revised Settlement Program is uncertain. 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 in this lawsuit, 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.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales as an aggregate were $80.3 million during the
first nine months of 1997 which represents a 12% increase from
the first nine months of 1996 when sales totaled $71.5 million.
The net sales increase is the result of significant effort by
management and other employees directed toward moving the Company
into a clear leadership position on a worldwide basis in the
breast implant market for both reconstructive and aesthetic
procedures. The Company expects international sales to continue
to represent an increasing percentage of net sales, since this
market is experiencing increasing demand. Management anticipates
that continued market growth, an increase in production capacity,
both domestically and internationally, and expansion of the
international sales force will allow an increase in sales growth
throughout the remainder of 1997 and into 1998.
Gross profit was $54 million, or 67% of net sales for the
first nine months of 1997 compared to $47.2 million, or 66% for
the corresponding period in 1996. 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 $21.2 million and $18.9 million year
to date for the periods ended September 30, 1997 and 1996
respectively. Marketing expense as a percentage of net sales
was 26% in the first nine months of 1997 and 1996. The increase
in marketing expenses represents the Company's continued
commitment to expansion into new markets worldwide with a more
diversified line of advanced medical products.
General and administrative expenses were $20.6 million and
$21.8 million year to date for the periods ended September 30,
1997 and 1996 respectively. General and administrative expenses
as a percentage of net sales were 26% in the first nine months of
1997 compared to 30% in the first nine 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 were $6.7 million and $3.6
million in the first nine months of 1997 and 1996 respectively.
The Company continues its commitment to developing new and
improved medical products for use by the medical profession and
the public. As a percentage of net sales, this expense was 8% in
the first nine months of 1997 and 5% in the first nine months of
1996. R & D expenses are expected to increase throughout 1997.
Interest expense of $3.1 million decreased for the first
nine months of 1997 in comparison with interest expense for the
same period of 1996 of $4.8 million. The significant decrease
was the result of the finance charge recorded in the second
quarter of 1996 for the issuance of the shares in connection with
the waiver of a covenant default in 1996 for the Company's 11%
Secured Convertible Notes due 1999. In addition, the redemption
of the $15 million convertible notes has lowered the Company's
interest expense.
On May 24, 1996 INAMED Corporation offered investors in the
above subject convertible notes an incentive for early
conversion. The investors were offered a ten percent (10%) bonus
of INAMED common stock based upon the holders' respective amount
of shares issuable upon conversion of the notes. The offer
expired on May 29, 1996, at which time an amount of $440,000 had
been converted to equity, resulting in the issuance of 4,400
bonus shares in the third quarter of 1996.
On June 27, 1996 the Company entered into a Regulation S
transaction ("Offshore Stock Subscription Agreement") with
certain non-US investors outside the United States. This
agreement was in connection with an offer and sale by the Company
of 344,333 shares of common stock at $8.7125 per share.
The Company continues to incur 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 breast 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 saline filled breast
implants PMA applications to be submitted prior to September,
1998. The date for submission of PMA applications may be further
extended by the FDA. Notwithstanding any such extension, the
Company intends to submit its PMA application for saline filled
implants in a timely fashion and is collecting data which will be
necessary for this application. However, neither the timing of
such PMA application nor its acceptance by the FDA can be
assured, irrespective of the time and money that the Company has
expended. Should the Company's PMA application for saline filled
implants not be filed timely or be denied, it would have a
material adverse effect on the Company's operations and financial
position. The Company will decide on a product by product and
subsidiary by subsidiary basis whether to respond to any future
calls for PMAs and regulatory requirements, requested response or
Company action. The cost of any PMA filings is unknown until the
call for a PMA occurs and the Company has opportunity to review
the filing requirements.
Financial Condition
During the first nine months of 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 decreased significantly since December
31, 1996 due to the return of the escrowed funds to the
Noteholders. The current ratio was 1.8 to 1 at September 30,
1997, compared to 1.8 to 1 at December 31, 1996. The majority of
the Company's cash flows in the first nine months of 1997 were
generated by the issuance of the $6.2 million debenture, the $6.4
million related party revolving promissory note, as well as by
increased product sales. In 1996, cash flows were primarily from
the convertible notes as discussed in Note 5 to the financial
statements. 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 continues to negotiate 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. $15
million was initially held in an escrow account to be released
upon the granting and court approval of mandatory class
certification; however, these funds have since be returned to the
Noteholders.
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 103% of the note balance at $5.50 per share instead of 85%
of the market price. The restructuring also resulted in the
Company returning approximately $15 million to the Noteholders
and reducing the total note balance to approximately $19.7
million which if converted would result in 3,687,668 shares
issued. The $15 million 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. The exercise price has decreased to $7.50
due to the Company's inability to cause the registration
statement for the warrants and warrant shares to be declared
effective by October 31, 1997. The total shares to be issued if
these warrants were executed would be 1,846,071.
On June 27, 1996 the Company entered into a Regulation S
transaction ("Offshore Stock Subscription Agreement") with
certain non-US investors outside the United States. This
agreement was in connection with an offer and sale by the Company
of 344,333 shares of common stock at $8.7125 per share. The
Company received $3 million in proceeds from this transaction.
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. Year
to date, $1.4 million of this debenture has converted to common
stock.
The Company currently has a revolving unsecured promissory
note with International Integrated Industries, L.L.C., an entity
controlled by the Company's Chairman and Chief Executive Officer,
Mr. Donald McGhan. The note balance as of September 30, 1997 was
approximately $6.4 million and is accruing interest at a rate of
10.5%. Mr. McGhan has established this loan to assist the
company with its working capital needs. It is at terms
advantageous to the Company compared with the various other
fundings discussed above.
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.
The Company has an international line of credit with a major
Dutch bank. The current available line is approximately $0.8
million and is collateralized by the accounts receivable,
inventories and certain other assets of INAMED B.V. As of
September 30, 1997, the full line of credit is available as no
funds have been drawn against 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 current rate
is 7%.
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 continue to
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 or resolution of breast implant
litigation, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in breast implant litigation
as discussed in Note 6 to the unaudited consolidated
financial statements.
ITEMS 2. THROUGH 5.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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: November 28, 1997