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 June 30, 1999
Commission File Number: 1-9741
INAMED CORPORATION
State of Incorporation: Delaware I.R.S. Employer
Identification No.: 59-0920629
5540 Ekwill Street, Suite D, Santa Barbara, California 93111-2919
Telephone Number: (805) 692-5400
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 August 12, 1999 there were 17,120,437 Shares of the
Registrant's Common Stock Outstanding.
This document contains 21 pages.
INAMED CORPORATION AND SUBSIDIARIES
Form 10-Q
Quarter Ended June 30, 1999
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
Comprehensive Income 7
Unaudited Consolidated Statements of
Cash Flows 8
Notes to the Consolidated Financial
Statements 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
Item 3. Market Risk 19
PART II - OTHER INFORMATION 20
PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
<TABLE>
Unaudited Audited
June 30, 1999 December 31, 1998
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,542 $ 11,873
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $6,525 and $6,158 25,007 23,169
Inventories 16,773 17,855
Prepaid expenses and other current assets 2,102 1,337
Income tax refund receivable 695 726
Deferred income taxes 9,134 8,000
------- -------
Total current assets 67,253 62,960
------- -------
Property and equipment, at cost:
Machinery and equipment 14,984 14,170
Furniture and fixtures 3,362 3,418
Leasehold improvements 11,933 11,986
------- -------
30,279 29,574
Less accumulated depreciation
and amortization (17,589) (16,751)
------- -------
Net property and equipment 12,690 12,823
------- -------
Notes receivable, net of allowance of $467 2,835 2,769
Intangible assets, net 884 1,015
Other assets, at cost 4,965 1,140
------- -------
Total assets $ 88,627 $ 80,707
======== ========
</TABLE>
(continued)
The Notes to Financial Statements are an integral part of this
statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
<TABLE>
Unaudited Audited
June 30, 199 December 31, 1998
Liabilities and Stockholders' Deficiency Equity
Current liabilities:
<S> <C> <C>
Current installments of long-term debt $ 25 $ 51
Notes payable to bank 1,087 1,186
Accounts payable 10,095 12,226
Accrued liabilities:
Salaries, wages, and payroll taxes 3,491 2,681
Interest 508 2,032
Self-insurance 4,138 3,649
Other 7,834 4,523
Royalties payable 4,111 5,061
Taxes payable 2,663 1,318
Accrued legal --- 5,721
Note payable, escrow agent --- 25,500
-------- --------
Total current liabilities 33,952 63,948
-------- --------
Convertible and other long-term debt,
excluding current installments 17,047 27,767
Deferred grant income 1,035 1,235
Deferred income taxes 454 382
Commitments and contingencies
Redeemable common stock, $.01 par value
426,323 shares issued and outstanding
stated at redemption value $7.04 per share --- 3,000
Stockholders' equity:
Common stock, $0.01 par value.
Authorized 20,000,000 shares; issued
and outstanding 17,120,437 and 11,010,290 171 110
Additional paid-in capital 74,662 37,605
Accumulated other comprehensive (loss) income (1,649) 269
Accumulated deficit (37,045) (53,609)
-------- --------
Stockholders' equity (deficiency) 36,139 (15,625)
-------- --------
Total liabilities and stockholders' equity $ 88,627 $ 80,707
======== ========
</TABLE>
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)
<TABLE>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Net sales $ 79,753 $ 66,980
Cost of goods sold 23,920 23,294
-------- --------
Gross profit 55,833 43,686
-------- --------
Operating expenses:
Marketing 16,414 18,296
General and administrative 14,934 15,653
Research and development 4,102 4,110
-------- --------
Total operating expenses 35,450 38,059
-------- --------
Operating income 20,383 5,627
-------- --------
Other income (expense):
Foreign currency transaction gains (losses) 100 (1,068)
Miscellaneous loss (880) (113)
-------- --------
Net other expense (780) (1,181)
-------- --------
Income before interest and taxes 19,603 4,446
Interest and other financing expense, net 3,039 1,854
Income before income tax expense 16,564 2,592
Income tax expense --- 104
-------- -------
Net income $ 16,564 $ 2,488
======== ========
Net income per share of common stock
Basic $ 1.27 $ 0.26
====== =======
Diluted $ 1.11 $ 0.26
====== =======
Weighted average common shares outstanding basic 13,074,191 9,726,013
========== =========
Weighted average common shares outstanding diluted 14,883,189 9,726,013
========== =========
</TABLE>
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, 1999 June 30, 1998
<TABLE>
<S> <C> <C>
Net sales $ 42,165 $ 36,928
Cost of goods sold 12,020 11,002
-------- --------
Gross profit 30,145 25,926
-------- --------
Operating expenses:
Marketing 8,580 9,945
General and administrative 7,452 9,055
Research and development 2,075 2,070
-------- --------
Total operating expenses 18,107 21,070
-------- --------
Operating income 12,038 4,856
-------- --------
Other income (expense):
Foreign currency transaction losses (7) (41)
Miscellaneous loss (566) (186)
-------- --------
Net other expense (573) (227)
-------- --------
Income before interest and taxes 11,465 4,629
Interest and other financing expense, net 2,399 853
Income before income tax expense 9,066 3,776
Income tax expense --- 3
-------- --------
Net income $ 9,066 $ 3,773
======== ========
Net income per share of common stock
Basic $ 0.62 $ 0.38
====== =======
Diluted $ 0.54 $ 0.38
====== =======
Weighted average common shares outstanding
basic 14,660,690 9,987,705
========== =========
Weighted average common shares outstanding
diluted 16,677,955 9,987,705
========== =========
</TABLE>
The Notes to Financial Statements are an integral part of
this statement.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in 000's)
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
<TABLE>
<S> <C> <C>
Net income $ 9,066 $ 2,488
Other comprehensive (loss) income, net of tax:
Cumulative foreign currency translation losses (912) 288
------- -------
Comprehesive income $ 8,154 $ 2,776
------- -------
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
Net income $ 16,564 $ 2,448
Other comprehensive income (loss), net of tax:
Cumulative foreign currency translation
(losses) gains (1,918) 679
-------- -------
Comprehesive income $ 14,646 $ 3,127
-------- -------
</TABLE>
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, 1999 and 1998
Increase in Cash and Cash Equivalents
<TABLE>
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 16,564 $ 2,488
-------- -------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,609 1,814
Deferred income taxes (1,062) 205
Provision for doubtful accounts, notes & returns 367 ---
Provision for obsolescence of inventory 97 ---
Provision for asset impairment 600 ---
Non-cash compensation --- 230
Non-cash financing cost 1,977 ---
Changes in assets and liabilities:
Trade accounts receivable (2,205) (8,243)
Notes receivable (66) 3
Inventories 109 2,603
Prepaid expenses and other current assets (765) (485)
Income tax refund receivable 31 (57)
Other assets (3,825) (1,224)
Accounts payable, accrued and other liabilities 954 533
Royalties payable (950) 1,841
Taxes payable 1,345 (436)
Accrued litigation settlement (5,721) (33)
-------- -------
Total adjustments (6,629) (3,249)
-------- ------
Net cash provided by (used in) operating
activities 9,935 (761)
-------- ------
Cash flows from investing activities:
Purchases of property and equipment, net (2,043) (1,143)
-------- ------
Net cash used in investing activities (2,043) (1,143)
-------- ------
</TABLE>
(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, 1999 and 1998
Increase in Cash and Cash Equivalents
1999 1998
<TABLE>
Cash flows from financing activities:
<S> <C> <C>
Payment of note in escrow for litigation settlement $ (25,500) $ ---
Increases in notes payable and long-term debt --- 579
Principal repayment of notes payable
and long-term debt (46) (15)
Payment of redeemable common stock in escrow
for litigation settlement (3,000) ---
Increase (decrease) in related party payables --- 1,038
Proceeds from the exercise of warrants 26,419 60
(Decrease) Increase in deferred grants (200) 290
-------- -------
Net cash (used in) provided by financing activities (2,327) 1,952
-------- -------
Effect of exchange rate changes on cash (3,896) 1,190
-------- -------
Net increase in cash and cash equivalents 1,669 1,238
Cash and cash equivalents at beginning of period 11,873 1,946
-------- -------
Cash and cash equivalents at end of period $ 13,542 $ 3,184
-------- -------
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 2,741 $ 1,736
======== =======
Income taxes $ 11 $ 97
======== =======
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.
Non-cash transactions: 1999 1998
Common stock exchanged for junior secured notes $ 10,700 ---
</TABLE>
The Notes to Financial Statements are an integral part of
this statement.
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
($ in 000's)
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, 1998 as filed with the Securities and Exchange
Commission on Form 10-K.
Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies
The accompanying consolidated financial statements include the
accounts of Inamed International Corp. and each of its wholly
owned subsidiaries (the "Company"). Intercompany transactions
are eliminated in consolidation.
The Company
Inamed Corporation's subsidiaries are organized into three
business units: United States Plastic and Reconstructive Surgery
(consisting primarily of McGhan Medical Corporation, Flowmatrix
Corporation and CUI Corporation, which develop, manufacture and
sell medical devices and components); BioEnterics Corporation,
which develops, manufactures and sells medical devices and
associated instrumentation to the bariatric and general surgery
fields; and International (consisting of Inamed International
Corp. and its subsidiaries which are engaged in manufacturing and
distribution through McGhan Limited (based in Ireland) and sales
subsidiaries in various countries, including Holland, Germany,
Italy, United Kingdom, France, and Spain, which sell products for
both the plastic and bariatric surgery fields).
Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Earnings Per Share
During 1998, 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, 1998. 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 and
warrants. As required by this Statement, all periods presented
have been restated to comply with the provisions of SFAS No. 128.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130") established standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Segment Reporting
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", ("SFAS No. 131") which supersedes SFAS No.
14, Financial Reporting for Segments of a Business Enterprise.
SFAS No. 131 establishes standards for the way public companies
report information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.
SFAS No. 131 defines operating segments as components of a
company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance.
Taxes
The Company reduced the valuation allowance on the deferred tax
asset by $5.5 million and $3.0 million for the six months and
three months ended June 30, 1999, respectively, based on future
short-term income projections. The Company has a $10.0 million
allowance remaining as of June 30, 1999.
New Accounting Standards
In June 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which requires entities to recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure these instruments at fair value. SFAS No.
133 is effective for all fiscal years beginning after June 15,
1999. The Company is currently reviewing SFAS No. 133 and has of
yet been unable to fully evaluate the impact, if any, it may have
on future operating results or financial statement disclosures.
Reclassification
Certain reclassifications were made to the 1998 consolidated
financial statements to conform to the 1999 presentation.
Note 3 - Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
<TABLE>
June 30, 1999 December 31, 1998
<S> <C> <C>
Accounts receivable $ 31,532 $ 29,327
Allowance for doubtful accounts (1,166) (1,402)
Allowance for returns and credits (5,359) (4,756)
--------- ---------
Net accounts receivable $ 25,007 $ 23,169
========= =========
Notes receivable $ 3,302 $ 3,236
Allowance for doubtful notes (467) (467)
--------- ---------
Net notes receivable $ 2,835 $ 2,769
========= =========
Note 4 - Inventories
Inventories are summarized as follows:
June 30, 199 December 31, 1998
Raw materials $ 4,899 $ 3,764
Work in process 4,731 3,931
Finished goods 9,285 11,329
-------- --------
18,915 19,024
Less allowance for
obsolescence (2,142) (1,169)
-------- --------
$ 16,773 $ 17,855
======== =========
</TABLE>
Note 5 - Long Term Debt
The following is a summary of the Company's significant long-term
debt:
$8,000 of senior secured notes, at an interest rate of 10%.
These notes mature on September 1, 2000. The proceeds were
received by the Company on October 2, 1998. In connection with
this financing the Company issued 590,000 four-year warrants to
purchase common stock at $6.50 per share. $3,000 of the proceeds
of this financing were deposited in a court-supervised escrow as
part of the consideration for the litigation settlement (see
Notes 6 and 7); the balance is available for use by the Company
in specific capital improvement projects and working capital
uses. These senior notes are anticipated to be retired in
connection with the new financing resulting from the Company's
proposed acquisition of Collagen Aesthetics, Inc. (See footnote
8 for subsequent events.)
$8,882 of junior secured notes, at an interest rate of 11%.
These notes were issued in an exchange offer completed in
November 1998 for a similar amount of senior secured convertible
notes that were originally issued in January 1996. These notes
mature on September 1, 2000. The $5.50 per share conversion
feature of the original notes was replaced with an equivalent
number of new, four-year warrants to purchase common stock at
$5.50 per share, and the holders of the original notes received
500,000 four-year warrants to purchase common stock at $7.50 per
share in settlement of an anti-dilution adjustment. In connection
with the financing of the breast implant litigation, the Company
offered a rebate of $0.70 for the exercise of the $5.50 warrants
prior to April 30, 1999, to compensate those holders for their
cost of funds until the maturity of those warrants. All but
53,506 of the 3.7 million $5.50 warrants were exercised. Of the
original $19,548 exchange notes, $10,666 principal amount was
used as payment for the exercise of the exchange warrants. The
remaining junior secured exchange notes are anticipated to be
retired in connection with the new financing resulting from the
Company's proposed acquisition of Collagen Aesthetics, Inc. (See
footnote 8 for subsequent events.)
Subsequent to quarter end the Company obtained a secured bridge
loan commitment for $155 million from a group of financial
institutions. This commitment was obtained to finance the
purchase of 100% of Collagen Aesthetics, Inc. for approximately
$150 million. (See footnote 8 for subsequent events.)
Note 6 - Equity financing and non-cash compensation charge:
During the second quarter of 1999, the Company completed a $31.1
million equity financing, in which 5.4 million new shares of
common stock were issued to various holders of $5.50 and $7.50
warrants in exchange for the payment of $20.4 million of cash and
the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to
exercise at this time participated in the transaction. The
Company also received $3 million of cash from its noteholders,
which was used to purchase on their behalf the 426,323 shares of
common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that
restricts transferability absent compliance with or an exemption
under Rule 144 (after the one-year holding period) or an
effective registration statement. In addition, the Company
incurred a one-time $2.0 million finance charge against earnings
in connection with the exercise of warrants to fund the
litigation settlement.
Note 7 - Commitments and Contingencies
Final payment to plaintiffs in the mandatory class action
settlement of the breast implant litigation:
In May of 1999, the Company completed the final payment of all of
the monies owed to the court-appointed escrow agent on behalf of
the plaintiffs in the mandatory class action settlement of the
breast implant litigation. The payment was $29.9 million in
cash, and included $25.5 million as full payment of the 6%
promissory note which was issued in June 1998 at the time the
settlement received preliminary approval, $1.4 million of accrued
interest on that note, and $3 million to repurchase the 426,323
shares of common stock which were also issued in June 1998 to the
escrow agent. As a result of this payment, approximately $30
million of liabilities relating to the breast implant litigation
that was recorded on the Company's balance sheet as of the end of
the first quarter of 1999 has now have been eliminated.
Note 8 - Subsequent Events
Subsequent to quarter end the Company entered a definitive merger
agreement to acquire Collagen Aesthetics, Inc. for $16.25 per
share in cash, for a total of approximately $150 million. The
Company has commenced a cash tender offer for all outstanding
shares of common stock of Collagen Aesthetics. Following
completion of the tender offer all remaining Collagen Aesthetics
shares will be acquired in a cash merger at the same price. It
is anticipated that these transactions will be completed by the
end of the third quarter of 1999.
The tender offer is subject to a majority of Collagen Aesthetics'
fully diluted shares (approximately 10.2 million shares as of
July 30, 1999) being validly tendered and not withdrawn, as well
as the expiration of the Hart-Scott-Rodino premerger notification
waiting period and other customary conditions.
The Company obtained a secured bridge loan commitment for $155
million from a group of financial institutions. The Company
anticipates that the bridge loan will be refinanced during 1999
with proceeds of a long-term debt financing. Upon completion of
the tender offer the Company will retire its existing debt, so
that the combined company will have only $155 million of bridge
debt outstanding. Neither the tender offer nor the second step
merger is subject to financing contingencies.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to
continue its expansion strategy, changes in costs of raw
materials, labor, and employee benefits, as well as general market
conditions, competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report
will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements including
herein, the inclusion of such information should not be regarded
as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Results of Operations
Summary financial table. Set forth below is a table which
shows the individual components of the Company's results of
operations, both in dollars (in thousands) and as a percent of net
sales; and including the percentage increase (decrease) for the
three and six months ended June 30, 1999 and 1998.
Three Months Ended
June 30, 1999 June 30, 1998
<TABLE>
(in 000's) %Inc.
<S> <C> <C> <C>
Sales 42,165 14% 36,928
Cost of Goods Sold 12,020 9% 11,002
Gross Profit 30,145 16% 25,926
As a % of sales 72% 70%
Marketing 8,580 (14%) 9,945
As a % of sales 20% 27%
G&A 7,452 (18%) 9,055
As a % of sales 18% 25%
R&D 2,075 --% 2,070
As a % of sales 5% 6%
Operating expenses 18,107 (14)% 21,070
As a % of sales 43% 57%
Operating income 12,038 148% 4,856
As a % of sales 29% 13%
Six Months Ended
June 30, 1999 June 30, 1998
(in 000's) %Inc.
Sales 79,753 19% 66,980
Cost of Goods Sold 23,920 (3%) 23,294
Gross Profit 55,833 28% 43,686
As a % of sales 70% 65%
Marketing 16,414 (10%) 18,296
As a % of sales 21% 27%
G&A 14,934 (5%) 15,653
As a % of sales 19% 23%
R&D 4,102 --% 4,110
As a % of sales 5% 6%
Operating expenses 35,450 (7%) 38,059
As a % of sales 44% 57%
Operating income 20,383 262% 5,627
As a % of sales 26% 8%
</TABLE>
Sales for the three months ended June 30, 1999 totaled $42.2
million, an increase of $5.2 million or 14% over the same period
in 1998. Sales for the six months ended June 30, 1999 totaled
$79.8 million, an increase of $12.8 million or 19% over sales for
the same period in 1998 which totaled $67.0 million. Increased
sales from all business units and primarily increased demand for
saline and gel implants in the U.S. and International Plastic and
Reconstructive Surgery markets contributed to the increase in
sales volume which the Company believes exceeds the industry
growth rate for the second quarter and first six months of 1999.
During the second quarter there was a slowdown in sales growth due
to the development of backorders in selected product lines in the
United States plastic surgery business. This situation arose
due to production capacity issues for a limited number of products
which the Company is working to expeditiously address and expects
to have largely remedied by the end of the third quarter.
Sales in the United States accounted for 62% and 68% of total
net sales for the second quarter and six months ended June 30,
1999, respectively, as compared to 65% for both the second quarter
and six months ended June 30, 1998. International sales accounted
for 38% and 32% of total net sales for the second quarter and six
months ended June 30, 1999, respectively. International sales for
the second quarter and six months ended June 30, 1998 were 35% of
total net sales.
Gross profit for the three months ended June 30, 1999 totaled
$30.1 million, an increase of $4.2 million or 16% over gross
profit for the same period in 1998. Gross profit for the six
months ended June 30, 1999 totaled $55.8 million, an increase of
$12.1 million or 28% over the same period in 1998. As a
percentage of revenues, gross profit increased 2% for the second
quarter of 1999 up from 70% for the same period of 1998. For the
six months ended June 30, 1999 gross profit as a percentage of
revenues increased 5% up to 70% from 65% for the same period in
1998. Margins increased primarily due to increased production
efficiencies, resulting in higher yields and increased through-put
in all business units along with increased sales volumes of higher
margin gel products for reconstructive surgery markets. Strong
cost reduction measures at all production facilitities, which
include material cost reductions and strategic alliances with key
company suppliers, reduction in headcount, discontinuance or sale
of certain smaller unprofitable product lines, improved asset
management (especially receivables and inventory), also
contributed to an overall reduction of cost of goods sold which
positively impacted gross margins for the second quarter and first
six months of 1999.
Gross Margins in 1998 were negatively impacted by pending FDA
audits and manufacturing inefficiencies caused by idle time at
both U.S. and International Plastic and Reconstructive Surgery
operations.
Marketing expenses for the three months ended June 30, 1999
were $8.5 million, a decrease of $1.3 million or 14% over the same
period in 1998. As a percentage of sales marketing expenses
decreased 7% from 27% in the second quarter of 1998 down to 20%
for the second quarter of 1999. Marketing expenses for the six
months ended June 30, 1999 were $16.4 million, a decrease of $1.8
million or 10% under 1998 expenses for the same period. As a
percentage of sales, 1999 marketing expenses for the six months
ended June 30, 1999 were 21% and 27% for the first six months of
1999 and 1998, respectively. New management's goals of growing
the sales and reducing costs, which included the restructuring of
the entire company during 1998 and strong cost containment
procedures, have helped to dramatically reduce the Company's
marketing expenses in 1999 from 1998 levels. The Company
currently anticipates that marketing expenses will increase in
future quarters but may decrease as a percentage of sales. The
actual amount spent will depend on a variety of factors, including
the Company's level of operations, and the number of new markets
the Company attempts to enter, either geographically or through
acquisitions, joint ventures or strategic alliances for new
products.
During the second quarter of 1999, the Company entered into a
strategic alliance with Advanced Tissue Sciences, Inc. (ATS) for
development and marketing of human based, tissue-engineered
products for aesthetic and cosmetic surgery, cartilage for plastic
and reconstructive surgery, and for use in breast reconstruction.
In addition, the Company received an option to license rights to
use human collagen for soft tissue augumentation (wrinkle and
cosmetic correction) and as a bulking agent for treatment of
urinary incontinence. Assuming the option is exercised, ATS would
receive $10 million during 1999: one half for license payments and
one half for the purchase of common stock and warrants at a
premium to market. Once each of the marketed products receives
FDA approval, ATS will receive a $2 million milestone payment and
royalties on a sliding scale based on overall product sales. ATS
will be responsible for the development of the products and the
related manufacturing processes, while the Company will be
responsible for clinical and regulatory activities, as well as
sales and marketing. ATS will have the right to manufacturing the
products developed under the agreement. The Company has agreed to
hold any investment in ATS common stock until at least October
2002.
General and administrative expenses for the three months
ended
June 30, 1999 totaled $7.4 million, a decrease of $1.6 million or
18% from the same period in 1998. General and administrative
expenses for the six months ended June 30, 1999 were $14.9
million, a decrease of $0.7 million or 5% from the same period of
1998. General and administrative expense decreased as a
percentage of sales from 25% down to 18% for the three months
ended June 30, 1999 and from 23% down to 19% for the six months
ended June 30, 1999 as compared to the same periods in 1998. The
decrease in expenses is attributable to the Company's strong
comittment to reduce costs through elimination of unprofitable
business areas, reduction in headcount as necessary, streamlining
the organizational structure from multiple domesitic and
international business subsidiaries into three business units,
elimination of underutilized corporate offices, and budgeting and
review of all expenses.
Research and development expenses remained consistent at $2.1
million for the three months ended June 30, 1999 and 1998.
Research and development costs of $4.1 million remained constant
in absolute dollars for the six months ended June 30, 1999 and
1998, respectively. As a percentage of sales, research and
development costs were 5%, a decrease of 1% down for both the
three and six months ended June 30, 1999 as compared to 6% for the
same periods in 1998. The Company currently anticipates that
research and development expenses will increase in future quarters
and may increase as a percentage of sales. The actual amount
spent will depend on a variety of factors, including the Company's
level of operations, and the number of product development
projects that it embarks upon, including through acquistions,
strategic alliances and joint ventures for new products. Research
and development expenses consist of ongoing research and
development expenses for new product development in all business
units, as well as necessary regulatory and clinical costs
associated with testing and approving new product introductions in
the United States and throughout the world.
Net interest and other financing expense for the three months
ended June 30, 1999 totaled $2.4 million, an increase of $1.5
million over the same period of 1998. Net interest and other
financing costs were $3.0 million for the six months ended June
30, 1999, an increase of $1.2 million from $1.8 million for the
six months ended June 30, 1998. Net interest and other financing
expenses for the three months and six months ended June 30, 1999
include a one-time financing charge of $2.0 million incurred in
connection with the exercise of warrants to fund the litigation
settlement. Without the charge, net interest and other financing
expenses would have decreased $0.8 million and $0.5 million for
the six and three months ended June 30, 1999, as compared to the
same period in 1998. This decrease resulted from the $31.1
million equity financing used to fund the litigation settlement,
which resulted in a $10.7 million reduction in the Company's 11%
junior secured notes.
Foreign currency translation gains and losses. During the
second quarter of 1999 the Company converted the non-U.S.
intercompany debts among its subsidiaries to the capital of the
respective subsidiaries. This step substantially eliminated the
significant translation adjustments which occurred in prior years.
For the six months ended June 30, 1999 the Company's foreign
currency translation resulted in a gain of $100,000 as compared to
a $1.0 million loss for the same period in 1998.
Income Taxes and earnings per share. The Company reduced
the valuation allowance on the deferred tax asset based on future
short-term income projections. The Company is currently the
beneficiary of a substantial net operating loss (NOL) carryforward
for financial reporting purposes. In order to provide investors
with a perspective on its earnings per share on a normalized
basis, assuming it accrued taxes at a 33% effective rate, the
Company's earnings for the second quarter and first six months of
1999 would have been $0.41 and $0.85 per basic share,
respectively, and $0.36 and $0.75 per diluted share, respectively.
Excluding the one-time financing charge of $2.0 million, the
Company's earnings for the second quarter and first half of 1999,
on a normalized tax basis, would have been $0.50 and $0.95 per
basic share, respectively, and $0.44 and $0.83 per diluted share,
respectively,
Financial Condition
Liquidity. During the first six months of 1999, net cash
provided by operations was $10.0 million compared to $0.8 million
used in operations for the same period in 1998. Positive cash
from operations was offset by $2.0 million used in investing
activies due to fixed asset purchases for the first six months of
1999. Cash used in financing activities of $2.3 million primarily
related to breast implant litigation settlement and debt payments
which worked to partially offset positive operating cash. The
positive cash from operations resulted from the high operating
profit margin and the continued emphasis on the efficient
management of working capital.
During the second quarter of 1999, the Company completed a $31.1
million equity financing, in which 5.4 million new shares of
common stock were issued to various holders of $5.50 and $7.50
warrants in exchange for the payment of $20.4 million of cash and
the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to
exercise at this time participated in the transaction. The
Company also received $3 million of cash from its noteholders,
which was used to purchase on their behalf the 426,323 shares of
common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that
restricts transferability absent compliance with or an exemption
under Rule 144 (after the one-year holding period) or an
effective registration statement. In addition, the Company
incurred a one-time $2.0 million finance charge against earnings
in connection with the exercise of warrants to fund the
litigation settlement.
During the second quarter of 1999, the Company also made its
final payment of all monies owed to the court-appointed escrow
agent on behalf of the plaintiffs in the mandatory class action
settlement of the breast implant litigation. The payment was
$29.9 million in cash, and consisted of $25.5 million as full
payment of the 6% promissory note issued in June 1998, $1.4
million in accrued interest on the note, and $3 million to
repurchase 426,323 shares of common stock which were also issued
in June 1998 to the escrow agent. As a result of this payment,
approximately $30 million of liabilities relating to the breast
implant litigation that was recorded on the Company's balance
sheet as of the end of the first quarter of 1999 has now been
eliminated. (See footnote 6 for equity transaction.)
ITEM 3. Market Risk
The Company conducts operations and/or business in various
foreign countries throughout the world. Global and regional
economic factors and potential changes in laws and regulations
affecting the Company's business, including without limitation,
currency fluctuations, changes in monetary policy and tariffs,
and federal, state and international laws, could impact the
Company's financial condition or future results of operations.
The Company does not currently conduct any hedging activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company has been
advised by the Securities and Exchange Commission that
it is conducting a formal investigation of the matters
disclosed in the Current Report on Form 8-K dated March
6, 1998 relating to the resignation of Coopers &
Lybrand LLP as the Company's independent accountant.
The Company is cooperating fully in this investigation.
Furthermore, the Company believes that all of the
procedural and substantive issues raised in that filing
have been addressed through a variety of steps,
including the appointment of a new senior management
team, the continual oversight by an audit committee,
and the conversion into equity of the $10.8 million of
indebtedness (including accrued interest) owed to an
entity controlled by the former Chairman at a
significant discount, which more than adequately
reflects the dollar value of any and all known related
party transactions. The Company does not believe that
this investigation will give rise to any material
costs, and is seeking to pursue a prompt resolution of
this matter.
In February 1999 the Company and certain of its
subsidiaries were named as respondents (collectively
"the Inamed Parties") in an arbitration commenced by
Dr. Lubomyr I. Kuzmak ("Kuzmak") at the American
Arbitration Association. Kuzmak alleges that he is
owed approximately $400,000 in unpaid royalties with
respect to various United States patents in the field
of gastric banding. Inamed has moved to be dismissed
from the arbitration. The other Inamed Parties have
denied Kuzmak's material allegations and asserted
affirmative defenses and counterclaims. The
evidentiary portion of the arbitration hearing is
scheduled to begin in December 1999. In addition, in
February 1999 the Inamed Parties filed an action in the
United States District Court for the Central District
of California against Kuzmak, No. CV 99-02160 MMM,
seeking a declaratory judgment of invalidity,
unenforceability, and non-infringement of various
Kuzmak patents. Kuzmak has moved to dismiss the action
for lack of personal jurisdiction. That motion is set
for hearing in September 1999.
In January 1999 Medical Products Development Inc.
("MPDI") instituted an action against the Company's
subsidiary, McGhan Medical Corporation ("McGhan") in
the United States District Court for the Central
District of California, No. 99-VC-00053 JSL. MPDI
alleges that McGhan has infringed on certain of its
U.S. patents and has breached an agreement between
McGhan and MPDI that exclusively licensed those patents
to McGhan. The patents pertain to textured silicone
elastomer mammary prostheses and methods of making such
prostheses. MPDI is seeking unspecified damages,
including enhanced damages for alleged willful
infringement, and an injunction. McGhan answered
MPDI's complaint, denying all of its material
allegations, and raising affirmative defenses and
counterclaims of non-infringement, invalidity,
unenforceability of the patents and breach of contract.
In August 1999, the Court granted MPDI's motion to
dismiss certain of the counterclaims and, on its own
motion, dismissed the remaining counterclaims.
Discovery is currently ongoing, and no trial date has
been set.
ITEMS 2. THROUGH 5.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K dated April 2, 1999 (incorporated herein by reference to the Company's
filing with the Commission dated April 9, 1999)
Form 8-K dated May 10, 1999 (incorporated herein by reference to the Company's
filing with the Commission dated May 12, 1999)
INAMED CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INAMED CORPORATION
August 12, 1999 By: /s/ Richard G. Babbitt
Richard G. Babbitt, Chairman of the
Board and Chief Executive Officer
August 12, 1999 By: /s/ Michael J. Doty
Michael J. Doty, Senior Vice
President and Chief Financial Officer
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