United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 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 July 28, 1998 there were 10,990,290 Shares of the Registrant's
Common Stock Outstanding.
This document contains 24 pages.
INAMED CORPORATION AND SUBSIDIARIES
Form 10-Q/A-1
Quarter Ended June 30, 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 7
Notes to the Unaudited Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II - OTHER INFORMATION 23
PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
Unaudited Audited
June 30, 1997 December 31, 1996
Assets
Current assets:
Cash and cash equivalents $ 1,254 $ 923
Trade accounts receivable, net of
allowance for doubtful accounts
and returns and allowances
of $5,432 and $5,411 16,000 11,452
Related party notes receivable 211 236
Inventories 20,963 20,724
Prepaid expenses and other
current assets 1,188 1,563
Income tax refund receivable 201 151
-------- --------
Total current assets 39,817 35,049
-------- --------
Property and equipment, at cost:
Machinery and equipment 11,387 10,555
Furniture and fixtures 4,235 4,495
Leasehold improvements 9,674 9,148
-------- --------
25,296 24,198
Less accumulated depreciation
and amortization (13,067) (11,938)
-------- --------
Net property and equipment 12,229 12,260
-------- --------
Notes receivable, net of allowance
of $767 and $1,067 2,459 2,108
Intangible assets, net 1,255 1,410
Restricted cash, settlement fund 15,125 14,796
Other assets, at cost 353 289
-------- --------
Total assets $ 71,238 $ 65,912
======== ========
(continued)
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in 000's except share and per share data)
Unaudited Audited
June 30, 1997 December 31, 1996
Liabilities and Stockholders' Deficiency Equity
Current liabilities:
Current installments of
long-term debt $ 151 $ 321
Notes payable to bank 766 914
Accounts payable 10,292 12,373
Accrued liabilities:
Salaries, wages, and payroll
taxes 2,471 4,895
Interest 2,409 3,110
Self-insurance 2,487 1,373
Other 1,973 1,672
Royalties payable 3,493 4,039
Income taxes payable 1,400 1,841
-------- --------
Total current liabilities 25,442 30,538
-------- --------
Convertible and other long-term debt,
excluding current installments 39,465 34,607
Related Party Notes Payable 3,601 --
Deferred grant income 1,107 1,269
Deferred income taxes 424 254
Accrued litigation settlement 9,152 9,152
Commitments and contingencies
Stockholders' deficiency equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 8,444,358
and 8,036,550 84 80
Additional paid-in capital 15,929 13,585
Cumulative translation adjustment 48 432
Accumulated deficit (24,014) (24,005)
-------- --------
Stockholders' deficiency (7,953) (9,908)
-------- --------
Total liabilities and stockholders'
deficiency $ 71,238 $ 65,912
======== ========
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in 000's except share and per share data
Six Months Six Months
Ended Ended
June 30, 1997 June 30,1996
Net sales $ 56,104 $ 48,262
Cost of goods sold 18,461 15,704
-------- --------
Gross profit 37,643 32,558
-------- --------
Operating expenses:
Marketing 14,918 12,824
General and administrative 14,286 14,600
Research and development 4,384 2,103
-------- --------
Total operating expenses 33,588 29,527
-------- --------
Operating income 4,055 3,031
-------- --------
Other income (expense):
Interest income 536 575
Interest expense (2,913) (3,726)
Royalty Income -- 95
Foreign currency transaction
gains (losses) (1,353) (180)
Miscellaneous income 44 152
-------- --------
Net other income (expense) (3,686) (3,084)
-------- --------
Income (loss) before income
tax expense 369 (53)
Income tax expense 377 71
-------- --------
Net income $ (8) $ (124)
======== ========
Net Income/(loss) per share of common stock
Basic $ 0.00 $ (0.02)
======== ========
Diluted $ 0.00 $ (0.02)
======== ========
Weighted average common shares
outstanding 8,204,004 7,618,140
The Notes to Financial Statements are an integral part of this statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in 000's except share and per share data)
Three Months Three Months
Ended Ended
June 30, 1997 June 30, 1996
Net sales $ 29,687 $ 27,860
Cost of goods sold 9,183 7,931
-------- --------
Gross profit 20,504 19,928
-------- --------
Operating expenses:
Marketing 7,819 6,877
General and administrative 7,852 8,168
Research and development 2,334 928
-------- --------
Total operating expenses 18,005 15,973
-------- --------
Operating income 2,499 3,956
-------- --------
Other income (expense):
Interest income (expense) 275 297
Interest expense (1,676) (2,872)
Royalty income -- 95
Foreign currency transaction losses (475) (86)
Miscellaneous income 30 9
-------- --------
Net other expense (1,846) (2,557)
-------- --------
Income before income taxes 653 1,399
Income taxes 384 256
-------- --------
Net income $ 269 $ 1,143
======== ========
Net income per share of common stock
Basic $ 0.03 $ 0.15
======== ========
Diluted $ 0.03 $ 0.15
======== ========
Weighted average common shares
outstanding 8,212,009 7,633,848
The Notes to Financial Statements are an integral part of this
statement
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000's)
Six Months ended June 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
1997 1996
Cash flows from operating activities:
Net income (loss) $ (8) $ (124)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and
equipment 828 1,114
Amortization of intangible assets 154 148
Amortization of deferred grant income (53) --
Amortization of debenture discount 135 --
Amortization of private offering costs 24 16
Deferred income taxes 180 506
Changes in assets and liabilities:
Trade accounts receivable (5,288) (4,350)
Notes receivable (351) 135
Inventories (1,613) (796)
Prepaid expenses and other
current assets 293 (638)
Income tax refund receivable (86) (93)
Other assets (66) (136)
Accounts payable (1,897) (5,993)
Accrued salaries, wages and
payroll taxes (2,323) (6,633)
Accrued interest 777 112
Accrued self-insurnce 1,114 (36)
Other accrued liabilities 422 320
Royalties payable (545) (570)
Income taxes payable (343) (1,099)
-------- --------
Total adjustments (8,638) (17,993)
-------- --------
Net cash used in
operating activities (8,646) (18,117)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,891) (1,168)
-------- --------
Net cash used in investing
activities (1,891) (1,168)
-------- --------
(continued)
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000's)
Six Months ended June 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
1997 1996
Cash flows from financing activities:
Restricted cash in escrow for litigation
settlement $ (329) $ (14,500)
Increases in notes payable and
long-term debt -- 50
Increases in convertible notes payable and
debentures payable 5,648 34,510
Principal repayment of notes payable
and long-term debt (255) (826)
(Increase) decrease in related party
receivables 25 385
Increase (decrease) in related
party payables 3,601 (1,759)
Grant income -- 24
Repurchases and retirements of common stock -- (3)
Proceeds from the exercise of stock options 1 1
Issuance of common stock -- 3,000
-------- --------
Net cash provided by (used in)
financing activities 8,691 20,882
-------- --------
Effect of exchange rate
changes on cash 2,177 307
Net increase in cash
and cash equivalents 331 1,904
Cash and cash equivalents at
beginning of period 923 2,807
-------- --------
Cash and cash equivalents at
end of period $ 1,254 $ 4,711
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 2,116 $ 1,134
======== ========
Income taxes $ 366 $ 1,658
======== ========
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
JUNE 30, 1997
(in 000's except share and per share data)
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 within the report for the year ended
December 31, 1997.
Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies
The accompanying consolidated financial statements include the
accounts of INAMED Corporation and each of its wholly-owned
subsidiaries (the "Company"). Intercompany transactions are
eliminated in consolidation.
The Financial Statements do not include any adjustments relating
to the recoverability and classification of the recorded asset
and liability amounts that might be necessary should the Company
be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon
its ability to obtain financing for the non-opt-out settlement
agreement (see Note 6) and its ability to generate sufficient
cash flows to meet its obligations on a timely basis. The
Company is actively seeking financing and anticipates undertaking
restructuring which the Company believes will ultimately enable
it to attain profitability.
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 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 McGhan Medical B.V., a Netherlands corporation, McGhan
Medical B.V.B.A., a Belgium corporation, McGhan Medical GmbH, a
German corporation,
Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies (continued)
The Company (continued)
McGhan Medical S.R.L., an Italian corporation, McGhan Medical
Ltd., a United Kingdom corporation, McGhan Medical S.A.R.L., a
French corporation, McGhan Medical S.A., a Spanish corporation,
INAMED do Brasil, 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.
Earnings Per Share
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
per Share", ("SFAS No. 128") which provides for the calculation
of "basic" and "diluted" earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending
after December 15, 1997. Basic earnings per share includes no
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects,
in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options. The
assumed conversion of the notes payable and exercise of the
warrants and options would have been anti-dilutive and,
therefore, were not considered in the computation of diluted
earnings per share for June 30, 1997 and 1996. As required by
this Statement, all periods presented have been restated to
comply with the provisions of SFAS No. 128.
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:
June 30, 1997December 31, 1996
Accounts receivable $ 21,432 $ 16,863
Allowance for doubtful
accounts (735) (714)
Allowance for returns
and credits (4,697) (4,697)
_________ _________
Net accounts receivable $ 16,000 $ 11,452
========= =========
Notes receivable $ 3,226 $ 3,175
Allowance for doubtful notes(767) (1,067)
_________ _________
Net notes receivable $ 2,459 $ 2,108
========= =========
Note 4 - Inventories
Inventories are summarized as follows:
June 30, 1997 December 31, 1996
Raw materials $ 4,080 $ 3,554
Work in process 4,346 3,911
Finished goods 14,024 14,584
-------- --------
22,450 22,049
Less allowance for
obsolescence (1,487) (1,325)
-------- --------
$ 20,963 $ 20,724
======== ========
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 $35,000 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, $15,000 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 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 in notes was converted to common
stock. An additional $100 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 $91.
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
Note 5 - Convertible Notes Payable (continued)
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 $1,417 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 $15,000 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 (subsequently reduced to $7.50 per share), 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 January 1997, the Company received $5,700 of proceeds upon the
issuance of $6,200 principal amount of 4% convertible debentures,
due January 30, 2000. Interest is payable quarterly as of March
30, June 29, September 29 and December 30. These debentures were
convertible at 85% of the market price of the common stock. . On
March 31, 1997 the Company was in default of certain covenants.
The default required the Company to reduce the conversion price
by 6%. In addition, the Company incurred 3% liquidated damages
per month beginning in May, 1997 on the outstanding principal
balance due to the Company's failure to provide an effective
registration statement to the debenture holders.
Note 6 - Commitments and Contingencies
INAMED and its McGhan Medical and CUI subsidiaries are defendants
in numerous state and federal court lawsuits involving breast
implants. The alleged factual basis for typical lawsuits
includes allegations that the plaintiffs' silicone gel-filled
breast implants caused specified ailments including, among
others, auto-immune disease, lupus, scleroderma, systemic
disorders, joint swelling and chronic fatigue. The Company has
opposed plaintiffs' claims in these lawsuits and other similar
actions and continues to deny any wrongdoing or liability of any
kind. In addition, the Company believes that a substantial body
of medical evidence exists which indicates that silicone gel-
filled implants are not causally related to any of
Note 6 - Commitments and Contingencies (continued)
the above ailments. Numerous studies in the past few years by
medical researchers in North America and Europe have failed to
show a definitive connection between breast implants and disease
(some critics, however, have assailed the methodologies of these
studies). Nevertheless, plaintiffs continue to contest the
findings of these studies, and more than 15,000 lawsuits and
claims alleging such ailments are pending against the Company and
its subsidiaries. The volume of lawsuits has created substantial
ongoing litigation and settlement expense, in addition to the
inherent risk of adverse jury verdicts in cases not resolved by
dismissal or settlement.
Proposed Class Action Settlement
As a result of the burdens imposed by the litigation on the
Company's management and operations, the substantial ongoing
litigation and settlement expense, the continuing litigation
risks, and the adverse perception held by the financial community
arising out of the litigation, the Company is seeking approval of
a mandatory ("non-opt-out") class action settlement (the
"Settlement") under Federal Rule of Civil Procedure 23(b)(1)(B).
As described below, the Company is seeking through this
settlement to resolve all claims arising from McGhan Medical and
CUI breast implants implanted before June 1, 1993, a cutoff date
which encompasses substantially all domestically-implanted
silicone gel-filled implants.
Background of Class Settlement Negotiations
The Settlement has its genesis in negotiations begun in 1994 with
the Plaintiffs' Negotiation Committee ("PNC"), a committee of the
national Plaintiffs' Steering Committee ("PSC") appointed by
Judge Sam C. Pointer, Jr. of the United States District Court for
the Northern District of Alabama (the "Court") to represent the
interests of plaintiffs in multi-district breast implant
litigation transferred to the Court for pretrial proceedings
under the federal multi-district transfer statute. At that time
the Company entered into an agreement to participate in a
proposed industry-wide class action settlement (the "Global
Settlement") of domestic breast implant litigation and petitioned
the Court to certify the Company's portion of the Global
Settlement as a mandatory class under Federal Rule of Civil
Procedure 23(b)(1)(B), meaning that claimants could not elect to
"opt out" from the class in order to pursue individual lawsuits
against the Company. Negotiations with the PNC over mandatory
class treatment were tabled, however (and the Company's petition
consequently not ruled upon), when an unexpectedly high
projection of current disease claims and the subsequent election
of Dow Corning Corporation to file for protection under federal
bankruptcy laws necessitated a substantial restructuring of the
Global Settlement.
In late 1995, the Company agreed to participate in a scaled-back
Revised Settlement Program ("RSP") providing for settlement, on a
non-mandatory basis, of claims by domestic claimants who were
implanted before January 1, 1992 with silicone gel-filled
implants manufactured by the Company's McGhan Medical subsidiary,
and who met specified disease and other criteria. Under the
terms of the RSP, 80% of the settlement costs relating to the
Company's McGhan Medical implants were to be paid by 3M and Union
Carbide Corporation, with the remaining 20% to be paid by the
Company. However, because the RSP did not provide a vehicle for
settling claims other than by persons who elected to participate,
and because of continuing uncertainty about the Company's ability
to fund its obligations under the RSP in the absence of a broader
settlement also resolving breast implant lawsuits against the
Company and its CUI subsidiary which would not be covered by the
RSP, the Company continued through 1996 and 1997 to negotiate
with the PNC in an effort to reach a broader resolution through a
mandatory class. The PNC was advised in
these negotiations by its consultant, Ernst & Young LLP, which at
the PNC's request conducted reviews of
Note 6 - Commitments and Contingencies (continued)
the Company's finances and operations in 1994 and again in 1996
and 1997.
On April 2, 1998, the Company and the Settlement Class Counsel
executed a formal settlement agreement (the "Settlement
Agreement"), resolving, on a mandatory, non-opt-out basis, all
claims arising from McGhan Medical and CUI breast implants
implanted before June 1, 1993.
Terms and Conditions of the Settlement Agreement
Under the Settlement Agreement, $31,500 of consideration,
consisting of $3,000 of cash, $3,000 of common stock and $25,500
principal amount of a 6% subordinated note will be deposited in a
court supervised escrow account approximately 90 days after
preliminary approval by the Court. The parties will then request
the Court to authorize the mailing of a notice of the proposed
Settlement to all class members and schedule a fairness hearing,
which would probably be held in the fourth quarter of 1998.
In the event the Court grants final approval of the Settlement,
the consideration held in the escrow account will then be
released, once the Court's final order becomes non-appealable, to
the court-appointed settlement office for distribution to the
plaintiff class, and the $25,500 subordinated note will mature
and become payable in cash. However, this payment will not
become due before April 30, 1999 or 90 days after the Court's
final order becomes non-appealable, whichever is later. In the
event the subordinated note is still outstanding on September 1,
1999, the interest rate will increase to 11%.
The Settlement Agreement covers all domestic claims against the
Company and its subsidiaries by persons who were implanted with
McGhan Medical or CUI silicone gel-filled or saline implants
before June 1, 1993, including claims for injuries not yet known
and claims by other persons asserting derivative recovery rights
by reason of personal, contractual or legal relationships with
such implantees. The Settlement is structured as a mandatory,
non-opt-out class settlement pursuant to Federal Rule of Civil
Procedure 23(b)(1)(B), and is modeled on similarly-structured
mandatory class settlements approved in the 1993 Mentor
Corporation breast implant litigation, and more recently in the
1997 Acromed Corporation pedicle screw litigation.
On June 2, 1998 the Court issued a preliminary order approving
the Settlement. The Court also issued an injunction staying all
pending breast implant litigation against the Company (and its
subsidiaries) in federal and state courts. The Company believes
that this stay will alleviate a significant financial and
managerial burden which these lawsuits had placed on the Company.
The application for preliminary approval included evidentiary
submissions by both the Company and the plaintiffs addressing
requisite elements for certification and approval, including the
existence, absent settlement, of a "limited fund" insufficient to
respond to the volume of individual claims, and the fairness,
reasonableness and adequacy of the Settlement.
The Settlement is subject to a number of conditions, including:
1. Extinguishment of the Company's Obligations under the RSP.
The Settlement is conditioned on the entry by the Court of an
order, pursuant to the default provisions of the RSP,
extinguishing the Company's obligations under the RSP and
restoring RSP participants' previously existing rights in the
Note 6 - Commitments and Contingencies (continued)
litigation system against the Company and its subsidiaries. On
May 19, 1998, the Court issued such an order.
2. Certification of Settlement Class. The Settlement is
conditioned on the Court's certification of a new settlement
class pursuant to Federal Rule of Civil Procedure 23(b)(1)(B).
The parties are requesting such certification under the same
theory applied in the Mentor Corporation and Acromed Corporation
settlements, namely that the Company is a "limited fund" whose
resources, absent a mandatory class settlement, are insufficient
to respond to the volume of claims pending against it.
3. Court Approval of Settlement. The Settlement is subject to
judicial approval of its terms and conditions as fair, reasonable
and adequate under Federal Rule of Civil Procedure 23(e), a
determination which takes into account such factors as the nature
of the claims, the arms' length negotiation process, the
recommendation of approval by experienced class counsel, and the
defendant's ability to pay.
4. Resolution of 3M Contractual Indemnity Claims. The
settlement is conditioned on resolution of claims asserted by 3M
under a contractual indemnity provision which was part of the
August 1984 transaction in which the Company's McGhan Medical
subsidiary purchased 3M's plastic surgery business. To resolve
these claims, on April 16, 1998 the Company and 3M entered into a
provisional agreement (the "3M Agreement") pursuant to which the
Company will seek to obtain releases, conditional on judicial
approval of the Company's settlement and favorable resolution of
any appeals, of claims asserted against 3M in lawsuits involving
breast implants manufactured by the Company's McGhan subsidiary.
The 3M Agreement provides for release of 3M's indemnity claim,
again conditional on judicial approval of the Settlement and
favorable resolution of any appeals, upon achievement of an
agreed minimum number of conditional releases for 3M. The 3M
Agreement requires that this condition be met or waived before
notice of the Settlement is given to the class.
Under the terms of the 3M Agreement, the Company will pay $3,000
to 3M once the Court grants final approval of the Settlement;
except that no payment will become due any sooner than (x) April
30, 1999 or (y) 90 days after the Court's final order on the
Settlement becomes non-appealable, whichever is later.
Under the terms of the 3M Agreement, after the indemnity to 3M is
released, the Company will assume certain limited indemnification
obligations to 3M beginning in the year 2000, subject to a cap of
$1,000 annually and $3,000 in total.
5. State Law Contribution and Indemnity Claims. The Settlement
is conditioned on entry by the Court of an order finding the
Settlement to have been made in good faith and barring joint
tortfeasor claims for contribution and indemnity arising under
state law (e.g., claims against the Company by other
manufacturers, suppliers or physicians also sued by a settling
class member). As additional protection against such claims in
states whose laws do not provide for a bar of contribution and
indemnity claims upon determination of good faith settlement, the
Settlement also requires class members to reduce any judgments
they may obtain against such third parties by the amount
necessary to eliminate such parties' contribution or indemnity
claims against the Company under state law.
6. U.S. Government and Private Carrier Claims. The United
States government and private insurance carriers are seeking
reimbursement of medical services provided to class members. The
Company is presently in discussions with these parties concerning
the terms of such settlement. While
Note 6 - Commitments and Contingencies (continued)
the Settlement is not conditioned on resolution of these claims,
the Company anticipates that it, together with Settlement Class
Counsel and the Court, if appropriate, will be able to resolve
the issues raised by the U.S. government and the private
insurance carriers before the mailing date of the class notice.
7. Favorable Resolution of Appeals. The Settlement is
conditioned on favorable resolution of any appeals which may be
taken from the final judgment approving the Settlement or from an
interim stay order. In the event the Settlement is disapproved
on appeal, all of the escrowed settlement funds, plus accrued
interest, will be returned to the Company, and the litigation
will be restored to the status which existed prior to any class
settlements.
8. Allocation and Distribution of Settlement Proceeds.
Following the procedures adopted in the Mentor Corporation and
Acromed Corporation mandatory class settlements, the Settlement
leaves allocation and distribution of the proceeds to class
members to later proceedings to be conducted by the Court, and
contemplates that the Court may appoint subclasses or adopt other
procedures in order to ensure that all relevant interests are
adequately represented in the allocation and distribution
process.
Class Settlement Approval Process and Timetable
Following the issuance by the Court of a preliminary order on
June 2, 1998, the settlement approval process is anticipated to
proceed in several stages, as follows:
1. Satisfaction of the Condition under the 3M Agreement.
Within 60 days after the date of the preliminary order
(extendable to 90 days at the Company's option), the Company
needs to obtain an agreed minimum number of conditional releases
for 3M pursuant to the terms of the 3M Agreement. At 3M's
option, that condition can be modified or waived. The Company
anticipates satisfying that condition in August 1998.
2. Notice to the Class. Following conditional class
certification and preliminary approval of the Settlement, as well
as satisfaction (or waiver) of the condition in the 3M Agreement,
the parties will give notice to class members advising class
members of the Court's preliminary order and advising them of
their opportunity to be heard in support of or opposition to
final certification and approval. The parties expect that class
notice will be given approximately 30 days after satisfaction of
the condition in the 3M Agreement. Prior to the distribution of
the class notice, the Company must deposit in a court supervised
escrow account $31,500 of consideration, consisting of $3,000 of
cash, $3,000 of common stock (valued based on the trading price
for the twenty trading day period commencing five trading days
after the Court grants preliminary approval of the Settlement),
and $25,500 principal amount of a 6% subordinated note. The
Company anticipates that this deposit will occur prior to
September 30, 1998.
The parties' proposed form of notice provides a 60-day deadline
for class members to submit comments, objections, or requests to
intervene and be heard, with a final settlement hearing scheduled
approximately 20 days thereafter. Assuming the Court adopts this
schedule, the final settlement hearing would occur in the latter
part of the fourth quarter of 1998, barring further unanticipated
delays.
3. Hearing on Final Certification and Approval. At the hearing
on final certification and approval, the Court will consider any
comments and objections received from class members as well as
any further evidence and legal argument submitted by the parties
or interveners concerning issues relevant to
Note 6 - Commitments and Contingencies (continued)
certification and approval, including the Company's status as a
"limited fund" and fairness, reasonableness and adequacy of the
Settlement. Assuming a favorable outcome, the Court will
thereafter issue a final order and judgment certifying the class
as a mandatory class under Federal Rule of Civil Procedure
23(b)(1)(B), approving the settlement, enjoining class members
from litigation of settled claims, and barring contribution and
indemnity claims to the extent permitted under state law.
Ongoing Litigation Risks
Although the Company expects the Settlement, if approved, to end
as a practical matter its involvement in the current mass product
liability litigation in the United States over breast implants,
there remain a number of ongoing litigation risks, including:
1. Non-Approval of Settlement. The Settlement Agreement
requires all parties to use their best efforts to obtain approval
of the Settlement by the Court and on appeal. However, there can
be no assurance that the Court will approve the Settlement or
that a decision approving it will be affirmed on appeal. The
approval decision turns on factual issues which may be contested
by class members opposing the Settlement, and additionally
implicates a number of legal issues that neither the United
States Supreme Court nor the federal appellate courts have
definitely ruled upon. While courts have approved similarly
structured mandatory class settlements in the Mentor Corporation
and Acromed Corporation cases, neither of those decisions was
subjected to appellate review. The Company cannot predict the
ultimate outcome of the approval process or the appeals process
in the event any appeals of the Settlement are filed in a timely
manner.
2. Collateral Attack. As in all class actions, the Company may
be called upon to defend individual lawsuits collaterally
attacking the Settlement even if approved and affirmed on appeal.
However, the typically permissible grounds for such attacks (in
general, lack of jurisdiction or constitutionally inadequate
class notice or representation) are significantly narrower than
the grounds available on direct appeal.
3. Non-Covered Claims. The Settlement does not include several
categories of breast implants which the Company will be left to
defend in the ordinary course through the tort system. These
include lawsuits relating to breast implants implanted on or
after June 1, 1993, and lawsuits in foreign jurisdictions. The
Company regards lawsuits involving post-June 1993 implants
(predominantly saline-filled implants) as routine litigation
manageable in the ordinary course of business. Breast implant
litigation outside of the United States has to date been minimal,
and the Court has with minor exceptions rejected efforts by
foreign plaintiffs to file suit in the United States.
The Company does not currently have any product liability
insurance. Depending on the availability and cost of such
insurance, the Company may in the future seek to obtain product
liability insurance.
The Company plans to obtain the cash needed to fund the proposed
settlement from a combination of new senior secured debt and the
proceeds to be received upon the exercise of $13,900 of warrants
to purchase common stock (which were issued to the senior
Noteholders in July 1997 in anticipation of this event). The
Company has discussed its financing plans with Appaloosa
Management, L.P. and its affiliates, who are jointly the largest
holders of the 11% senior secured convertible notes. Those
entities have indicated their willingness to provide the new
financing, subject to negotiation of satisfactory terms,
covenants and legal documentation, including amendments to the
existing indenture and a new maturity
Note 6 - Commitments and Contingencies (continued)
date for the existing senior debt. Such new financing may entail
the issuance of warrants or convertible securities which could be
dilutive to existing holders of the Company's common stock.
Accounting Treatment
In 1993, the Company recorded a $9,152 reserve for litigation.
For the year ended December 31, 1997, the Company booked an
additional reserve of $28,150. The litigation reserve as of
March 31, 1998 of $37,295 includes the cost of the non-opt-out
settlement agreement of $31,500, other settlements of $4,845 and
legal fees and other related expenses of $950.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales as an aggregate were $56.1 million during the
first six months of 1997 which represents a 16% increase from the
first six months of 1996 when sales totaled $48.3 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.
Gross profit was $37.6 million, or 67% of net sales for the
first six months of 1997 compared to $32.6 million, or 67% 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 $14.9 million and $12.8 million year
to date for the periods ended June 30 1997 and 1996 respectively.
Marketing expense as a percentage of net sales was 27% in the
first six months of 1997, compared to 27% for the first six
months of 1996. The increase in marketing expenses represents
the Company continued commitment to expansion into new markets
worldwide with amore diversified line of advanced medical
products.
General and administrative expenses were $14.2 million and
$14.6 million year to date for the periods ended June 30, 1997
and 1996 respectively. General and administrative expenses as a
percentage of net sales were 25% in the first six months of 1997
compared to 30% in the first six 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 $4.4 million and $2.1
million in the first six 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 7.8%
in the first six months of 1997 and 4.4% in the first six months
of 1996. Diversification into other facets of medical devices
through the use of new technology remains a goal of the Company.
R & D expenses are expected to increase throughout 1997 as the
Company increases research and development overseas due to the
FDA backlog on approval of new devices in the United States.
Interest expense of $2.9 million decreased for the first six
months of 1997 in comparison with interest expense for the same
period of 1996 of $3.7 million. The significant decrease was the
result of the finance charge of $1.4 million 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. Interest
expense for the six months ended June 30, 1997 included
approximately $736,000 for penalty charges due to the Company's
failure to provide an effective registration statement to the
holders of the 4% convertible debentures issued in January of
1997.
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 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 six 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 slightly since December 31,
1996, and the current ratio was 1.6 to 1 at June 30, 1997,
compared to 1.1 to 1 at December 31, 1996. The majority of the
Company's cash flows in the first six months of 1996 were
generated by the issuance of convertible notes as discussed in
Note 5 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 (subsequently reduced to $7.50 per share), at the Company's
option, if the Common Stock maintains a value of at least $10.00
per share for a specified measurement period.
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. On
March 31, 1997 the Company was in default of certain covenants.
The default required the Company to reduce the conversion price
by 6%. In addition, the Company incurred 3% liquidated damages
per month beginning in May, 1997 on the outstanding principal
balance due to the Company's failure to provide an effective
registration statement to the debenture holders.
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 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 June 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 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
(1) Form 8-K, dated March 19, 1997
(2) Form 8-K, dated June 10, 1997
(3) Form 8-K, dated July 9, 1997
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
July 29, 1998 By: /s/ Richard G. Babbitt
Richard G. Babbitt,
Chairman of the Board,
Chief Executive Officer and President