<PAGE> 1
================================================================================
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, 2000 COMMISSION FILE NUMBER: 1-9741
INAMED CORPORATION
<TABLE>
<S> <C>
State of Incorporation: Delaware I.R.S. Employer Identification No.: 59-0920629
</TABLE>
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 4, 2000 there were 20,552,857 Shares of the Registrant's Common Stock
Outstanding.
This document contains 20 pages.
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INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
Quarter Ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
-------------------------------------
<S> <C>
Item 1. Financial Statements
Report of Independent Public Accountants 3
Consolidated Balance Sheets 4
Unaudited Consolidated Income Statements 6
Unaudited Consolidated Statements of Comprehensive Income 8
Unaudited Consolidated Statement of Stockholders' Equity 9
Unaudited Consolidated Statements of Cash Flows 10
Notes to the Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Market Risk 17
PART II - OTHER INFORMATION 18
---------------------------------
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of lnamed
Corporation, a Delaware Corporation, as of June 30, 2000, and the related
consolidated statements of income for the three-month and the six-month periods
then ended and the consolidated cash flows for the six-month period ended. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen, LLP
July 20, 2000
New York, New York
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
===============================================================================
<TABLE>
<CAPTION>
Unaudited Audited
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 22,031 $ 17,519
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $5,687 and $6,425 47,272 44,379
Inventories 32,519 25,332
Prepaid interest 3,420 1,637
Prepaid expenses and other current assets 5,860 3,023
Income tax refund receivable 1,450 220
Deferred income taxes 20,911 32,794
------------------ --------------
Total current assets 133,463 124,904
------------------ --------------
Property and equipment, at cost:
Machinery and equipment 21,918 21,568
Furniture and fixtures 6,564 6,377
Leasehold improvements 19,196 14,570
------------------ --------------
47,678 42,515
Less accumulated depreciation
and amortization (20,509) (18,405)
------------------ --------------
Net property and equipment 27,169 24,110
------------------ --------------
Notes receivable, net of allowance of $467 2,636 2,681
Intangible assets, net 163,396 142,335
Other assets 17,922 15,409
------------------ --------------
Total assets $ 344,586 $ 309,439
================== ==============
</TABLE>
(continued)
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
===============================================================================
<TABLE>
<CAPTION>
Unaudited Audited
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Liabilities and Stockholders' Equity
-------------------------------------
Current liabilities:
Current installments of long-term debt $ 876 $ 54
Notes payable to bank 935 1,079
Accounts payable 20,126 16,716
Accrued liabilities:
Salaries, wages, and payroll taxes 7,275 8,369
Interest 906 1,211
Acquisition and integration costs 5,611 16,055
Other 17,729 19,956
Income taxes payable 17,126 18,729
------------------ ---------------
Total current liabilities 70,584 82,169
------------------ ---------------
Long-term debt 81,408 77,196
Acquired liabilities 25,483 5,448
Other long term liabilities 8,102 9,027
Deferred income taxes 378 1,478
Stockholders' equity:
Common stock, $0.01 par value
Authorized 25,000,000 shares; issued
and outstanding 20,539,214 and 20,200,114 205 202
Additional paid-in capital 155,185 152,779
Accumulated other comprehensive loss (6,108) (4,005)
Accumulated deficit 9,349 (14,855)
------------------ ---------------
Stockholders' equity 158,631 134,121
------------------ ---------------
Total liabilities and stockholders' equity $ 344,586 $ 309,439
================== ===============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
===============================================================================
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30,1999
------------- ------------
<S> <C> <C>
Net sales $ 67,627 $ 42,165
Cost of goods sold 19,116 12,020
------------------ -----------------
Gross profit 48,511 30,145
------------------ -----------------
Operating expenses:
Marketing 13,158 8,580
General and administrative 10,736 7,452
Research and development 2,067 2,075
Amortization of intangible assets 2,033 --
------------------ -----------------
Total operating expenses 27,994 18,107
------------------ -----------------
Operating income 20,517 12,038
------------------ -----------------
Other income (expense):
Foreign currency transaction gains (losses) 416 (7)
Royalty and other income (expense) 1,366 (566)
------------------ -----------------
Net other income (expense) 1,782 (573)
------------------ -----------------
Income before interest and taxes 22,299 11,465
Interest and other financing expense, net 1,611 2,399
------------------ -----------------
Income before income tax expense 20,688 9,066
Income tax expense 4,514 --
------------------ -----------------
Net income $ 16,174 $ 9,066
================== =================
Net income per share of common stock
Basic $ 0.79 $ 0.62
================== =================
Diluted $ 0.69 $ 0.51
================== =================
Weighted average common shares outstanding basic 20,510,933 14,660,690
================== =================
Weighted average common shares outstanding diluted 23,274,729 17,818,406
================== =================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
===============================================================================
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30,1999
------------- ------------
<S> <C> <C>
Net sales $ 127,926 $ 79,753
Cost of goods sold 34,786 23,920
------------------ -----------------
Gross profit 93,140 55,833
------------------ -----------------
Operating expenses:
Marketing 26,421 16,414
General and administrative 22,998 14,934
Research and development 4,330 4,102
Amortization of intangible assets 3,943 --
------------------ -----------------
Total operating expenses 57,692 35,450
------------------ -----------------
Operating income 35,448 20,383
------------------ -----------------
Other income (expense):
Foreign currency transaction gains (losses) 566 99
Royalty and other income (expense) 3,390 (879)
------------------ -----------------
Net other income (expense) 3,956 (780)
------------------ -----------------
Income before interest and taxes 39,404 19,603
Interest and other financing expense, net 6,104 3,039
------------------ -----------------
Income before income tax expense 33,300 16,564
Income tax expense 9,096 --
------------------ -----------------
Net income $ 24,204 $ 16,564
================== =================
Net income per share of common stock
Basic $ 1.19 $ 1.27
================== =================
Diluted $ 1.04 $ 0.98
================== =================
Weighted average common shares outstanding basic 20,387,297 13,074,191
================== =================
Weighted average common shares outstanding diluted 23,264,449 16,952,167
================== =================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN 000'S)
===============================================================================
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30,1999
------------- ------------
<S> <C> <C>
Net income (loss) $ 16,174 $ 9,066
Other comprehensive (loss) income, net of tax:
Cumulative foreign currency translation gains (losses) (243) (912)
------------------ -----------------
Comprehensive income (loss) $ 15,931 $ 8,154
================== =================
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30,1999
------------- ------------
<S> <C> <C>
Net income (loss) $ 24,204 $ 16,564
Other comprehensive (loss) income, net of tax:
Cumulative foreign currency translation gains (losses) (2,103) (1,918)
------------------ -----------------
Comprehensive income (loss) $ 22,101 $ 14,646
================== =================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN 000'S)
===============================================================================
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS EQUITY
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 20,200 202 152,779 (4,005) (14,855) 134,121
Comprehensive income:
Net income -- -- -- -- 24,204 24,204
Translation adjustment -- -- -- (2,103) -- (2,103)
------
Total comprehensive income 22,101
======
Stock compensation plans -- -- 789 -- -- 789
Exercise of stock options 339 3 1,617 -- -- 1,620
---------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 20,539 205 155,185 (6,108) 9,349 158,631
=======================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)
===============================================================================
Six Months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,204 $ 16,564
------------------ ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,724 1,609
Deferred income taxes 10,783 (1,062)
Provision for doubtful accounts, notes & returns (738) 367
Provision for obsolescence of inventory (322) 973
Provision for asset impairment --- 600
Non-cash compensation 774 ---
Non-cash financing cost --- 1,977
Non-cash reserve change (25,035) ---
Changes in assets and liabilities:
Trade accounts receivable and notes receivable (2,110) (2,271)
Inventories (6,865) 109
Prepaid expenses and other current assets (5,850) (734)
Intangible and other assets 270 (3,825)
Accounts payable, accrued and other liabilities 9,020 1,349
Accrued litigation settlement (1,966) (5,721)
------------------ ---------------
Total adjustments (15,315) (6,629)
------------------ ---------------
Net cash (used) provided by operating activities 8,889 9,935
------------------ ---------------
Cash flows from investing activities:
Investments in strategic alliances (3,000) ---
Purchases of property and equipment, net (5,592) (2,043)
Disposal of property and equipment, net --- ---
------------------ ---------------
Net cash used in investing activities $ (8,592) $ (2,043)
------------------ ---------------
</TABLE>
(continued)
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)
===============================================================================
Six Months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt 83,219 ---
Principal repayment of notes payable
and long-term debt (78,329) (25,546)
Payment of redeemable common stock in escrow --- (3,000)
Proceeds from the exercise of warrants and options 1,635 26,419
(Decrease) Increase in deferred grants (207) (200)
------------ -----------
Net cash provided (used) by financing activities 6,318 (2,327)
------------ -----------
Effect of exchange rate changes on cash (2,103) (3,896)
------------ -----------
Net (decrease) increase in cash and cash equivalents 4,512 1,669
Cash and cash equivalents at beginning of period 17,519 11,873
------------ -----------
Cash and cash equivalents at end of period $ 22,031 $ 13,542
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 8,988 $ 2,741
============ ===========
Income taxes $ 3,273 $ 11
============ ===========
</TABLE>
Disclosure of accounting policy:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(IN 000'S)
===============================================================================
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 the 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, 1999 as filed with the Securities and Exchange Commission on
Form 10-K.
2 - Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Inamed Corporation and all 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 (for
financial reporting purposes all business units are considered to be one
segment): U.S. Plastic Surgery and Aesthetic Medicine (consisting primarily of
McGhan Medical Corporation, which develops, manufactures and sells medical
devices and components for breast implants and facial aesthetics); BioEnterics
Corporation, which develops, manufactures and sells medical devices and
associated instrumentation to the bariatric and general surgery fields; and
International (consisting primarily of a manufacturing company based in Ireland
- McGhan Limited - and sales subsidiaries in various countries, including
Germany, Italy, United Kingdom, France, Spain, Australia and Japan, which sell
products for both the plastic, aesthetics and bariatric surgery fields).
3 - Inventories
<TABLE>
<CAPTION>
Inventories are summarized as follows:
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 7,200 $ 7,409
Work in process 6,476 7,179
Finished goods 21,322 13,545
----------- ---------
34,998 28,133
Less allowance for
obsolescence (2,479) (2,801)
------------ ---------
$ 32,519 $ 25,332
=========== =========
</TABLE>
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (Continued)
($ IN 000'S)
===============================================================================
4 - Long Term Debt
The following is a summary of the Company's significant long-term debt:
On February 1, 2000, the Company refinanced the remaining $77 million bridge
loan that was obtained to finance the Collagen acquisition, with a new credit
facility comprised of a five-year term loan of $82.5 million and a revolving
credit line of $25 million.
The term loan and advances under the revolving facility will bear interest at
the rate of either (i) the one, two, three or six-month London Interbank Offered
Rate (LIBOR) plus an applicable margin ranging from 3.00% to 3.75% or (ii) prime
rate plus an applicable margin ranging from 2.00% to 2.75%. The applicable
margin is subject to change based on the Company's consolidated leverage ratio.
The term of the loan agreement is five years and the term loans, revolving loans
and other loans are guaranteed on a senior basis by all of the Company's
material U.S. subsidiaries and secured by a lien on substantially all of the
assets of the Company and its material U.S. subsidiaries.
Net interest and other financing expenses for the six months ended June 30, 2000
include $2.2 million incurred in connection with the early retirement of debt in
connection with the bridge loan for the Collagen acquisition.
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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 included
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
Set forth below is a table which shows the individual components of our
actual results of operations as a percent of net sales for each of the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------- --------
2000 1999
---- ----
<S> <C> <C>
Net sales .......................... 100% 100%
Gross profit ....................... 72 71
Marketing expenses ................. 19 20
General and administrative expenses 16 18
Research and development expenses 3 5
Amortization of intangible expenses 3 --
Total operating expenses .......... 41 43
Other income (expense) ............ 3 (1)
Income before interest & taxes 33 27
Net interest and
other financing expense 2 6
Income before income taxes
and extraordinary charges ......... 31 22
Net income ........................ 24% 22%
==== ====
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------ ------------
2000 1999
------- -------
<S> <C> <C>
Net sales................................. 100% 100%
Gross profit.............................. 73 70
Marketing expenses........................ 21 21
General and administrative expenses 18 19
Research and development expenses 3 5
Amortization of intangible expenses 3 --
Total operating expenses.................. 45 44
Other income (expense).................... 3 (1)
Income before interest & taxes 31 25
Net interest and
other financing expense 5 4
Income before income taxes
and extraordinary charges................ 26 21
Net income............................... 19% 21%
==== ====
</TABLE>
Net Sales. Net sales for the three months ended June 30, 2000 were
$67.6 million, reflecting an increase of $25.5 million or 60% over net sales for
the same period in 1999. Approximately 52 percentage points of this increase
were derived from the facial and other products arising from the acquisition of
Collagen Aesthetics, Inc., which was completed in September 1999. Sales of
breast implant products grew approximately 13% in the second quarter of 2000
while sales of facial implant products (due to the Collagen acquisition in
September 1999) were essentially flat in the second quarter of 2000, based on
local currencies. Changes in foreign currency conversion rates also had a $1.3
million adverse effect on reported sales in the second quarter of 2000. Net
sales for the six months ended June 30, 2000 were $127.9 million, reflecting an
increase of $48.2 million or 60% over net sales for the same period in 1999.
Approximately 52 percentage points of this increase were derived from the facial
and other products arising from the acquisition of Collagen. Sales of breast
implant products grew approximately 11% in the first six months of this year,
based on local currencies. A comparison to last year for facial implant products
is not particularly meaningful given the promotional activities which arose last
year, prior to the acquisition, when the second calendar quarter marked the end
of Collagen's fiscal year. Changes in foreign currency conversion rates had a
$2.6 million adverse effect on reported sales in the first six months of 2000.
Cost of Goods Sold; Gross Profit. Cost of goods sold for the three months
ended June 30, 2000 was $19.1 million, reflecting an increase of $7.1 million or
59%, over the same period in 1999. Cost of goods sold, as a percentage of net
sales was 28% in the three months ended June 30, 2000 and 28% in the same period
in 1999. Gross profit for the three months ended June 30, 2000 was $48.5
million, reflecting an increase of $18.4 million or 61% over the same period in
1999. For the three months ended June 30, 2000, gross profit as a percentage of
net sales remained constant at 72% when compared to the same period in 1999.
Gross profit for the six months ended June 30, 2000 was $93.1 million,
reflecting an increase of $37.3 million or 67% over the same period in 1999. For
the six months ended June 30, 2000, gross profit as a percentage of net sales
increased 3% up to 73% from 70% for the same period in 1999.
Marketing Expenses. Marketing expenses for the three months ended June 30,
2000 were $13.2 million, an increase of $4.6 million over the same period in
1999. Marketing expenses for the six months ended June 30, 2000 were $26.4
million, an increase of $10.0 million over the same period in 1999. These
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<PAGE> 16
increases were the result of the higher level of sales, and the concurrent
expansion of sales and marketing personnel and programs, due to the Collagen
acquisition. As a percentage of sales, marketing expenses were 19% in the three
months ended June 30, 2000 and 20% in the three months ended June 30, 1999. As a
percentage of sales, marketing expenses were 21% in both the six months ended
June 30, 2000 and in the same period in 1999.
General and Administrative Expenses. General and administrative expenses
for the three months ended June 30, 2000 were $10.7 million, an increase of $3.3
million from the same period of 1999. General and administrative expenses for
the six months ended June 30, 2000 were $23.0 million, an increase of $8.1
million from the same period of 1999. The increase in both the three and six
month periods was due primarily to the increase in personnel and expenses
arising from the Collagen acquisition. As a percentage of sales, general and
administrative expenses were 16% in the three months ended June 30, 2000 and 18%
in the three months ended June 30, 1999. As a percentage of sales, general and
administrative expenses were 18% in the three months ended June 30, 2000 and 19%
in the six months ended June 30, 1999.
Research and Development Expenses. Research and development expenses of
$2.1 million for the three months ended June 30, 2000, were flat to the same
period in 1999. Research and development expenses of $4.3 million for the six
months ended June 30, 2000, were $0.2 million higher than the same period in
1999. As a percentage of sales, research and development costs were 3%, a
decrease of 2% for both the three and six months ended June 30, 2000 as
compared to 5% for the same period in 1999.
Amortization of Intangible Assets. Amortization of intangible assets of
$2.0 million for the three months ended June 30,2000 and $3.9 million for the
six months ended June 30, 2000 primarily reflects the $1.5 and 2.8 million
amortization of goodwill arising from the Collagen acquisition, which was
completed in September 1999. The $1.5 million and $2.8 million non-cash expense
for Collagen goodwill has a $0.07 per share for the three months ended June 30,
2000 and $0.14 per share for the six months ended June 30, 2000 adverse impact
on earnings per share. In accordance with generally accepted accounting
principles, the Company is in the process of determining the fair market value
of assets, liabilities and contingencies related to the Collagen acquisition,
which will be completed by the Third Quarter of 2000.
Other Income and Expenses. Other income of $1.8 million for the three
months ended June 30, 2000, reflected a significant increase from the $0.6
million expense for the same period in 1999. For the six months ended June 30,
2000 other income was $4.0 million and also reflected a significant increase
from the $0.8 million expense for the same period in 1999. The largest
contributor to the improvement was royalties of $1.1 million for the three
months ended June 30, 2000 and $2.8 million for the six months ended June 30,
2000, from the sale of urinary incontinence product by a licensee. As a
percentage of sales, other income and expense was 3%, an increase of 4% for
both the three and six months ended June 30, 2000 as compared to -1% for the
same periods in 1999.
Income before interest and taxes. Based on the foregoing factors, income
before interest and taxes for the three months ended June 30, 2000 totaled $22.3
million, an increase of $10.8 million or 94% over income before interest and
taxes for the same period in 1999. For the six months ended June 30, 2000 income
before interest and taxes totaled $39.4 million, an increase of $19.8 million or
101% over income before interest and taxes for the same period in 1999. As a
percentage of sales, income before interest and taxes was a record 33%, an
increase of 6 percentage points for the three months ended June 30, 2000 as
compared to 27% for the same period in 1999. For the six months ended June 30,
2000, income before interest and taxes as a percentage of sales was 31% as
compared to 25% for the same period in 1999. These favorable increases reflected
continued growth in sales and gross profit margins and continued control over
expenses.
Interest Expense. Net interest and other financing expense was $1.6
million for the three months ended June 30, 2000, reflecting a decrease of
$0.8 million from $2.4 million for the three months ended June 30, 1999.
Interest expense for the three months ended June 30, 2000 included $0.6 million
in interest income related to a $2.8 million income tax refund arising from the
resolution of audits of the Company's 1992-1995 tax returns. Net interest and
other financing expenses for the six months ended June 30, 2000 include $2.2
million incurred in connection
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<PAGE> 17
with the early retirement of debt in connection with the bridge loan for the
Collagen acquisition. Without these items, net interest and other financing
expenses would have been $4.5 million for the six months ended June 30, 2000.
Income Taxes and Earnings Per Share. Income tax expense for the three
months ended June 30, 2000 was $4.5 million using a 33% effective tax rate and
adding back non-deductible goodwill amortization to income before tax. For the
three months ended June 30, 1999 there was no income tax expense, because at the
time the Company had not fully recognized a tax asset associated with the losses
of 1997 and earlier. In order to provide investors with a perspective on its
earnings per share on a normalized basis, excluding the $2.2 million of interest
expense in the first quarter of 2000 arising from the early retirement of debt
and the $2.8 million tax refund discussed above, our earnings for the three
months ended June 30, 2000 would have been $13.4 million ($0.65 per basic share
and $0.57 per diluted share), as compared to tax-effected net income of $6.1
million for the second quarter of 1999 ($0.41 per basic share and $0.34 per
diluted share). On a proforma basis, net income in the first quarter increased
120% from 1999 to 2000, while earnings per diluted share increased 68%.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, net cash provided by operations
was $8.9 million compared to $9.9 million provided by operations for the same
period in 1999. In the first half of 2000, cash from operations was primarily
impacted by severance and other payment obligations related to the Collagen
acquisition. Cash used in investing activities of $8.6 million in the first half
included an additional investment in our strategic partner, Arthrocare
Corporation, under the terms of a license agreement, as well as fixed asset
expenditures for new manufacturing facilities, computer equipment and building
renovations. During this period, cash provided by financing activities of $6.3
million primarily related to our $82.5 million term debt refinancing, which
replaced the $77.0 million bridge loan used to finance the Collagen acquisition
in the first quarter of 2000.
Capital Expenditures. Expenditures on property and equipment approximated
$5.6 million in the first half of 2000, compared to $2.0 million in 1999, due
primarily to the cost of building new manufacturing facilities which are
necessary to increase capacity and improve efficiency. The Company anticipates
spending approximately $12 million on these activities in 2000, which is
significantly more than capital expenditures in previous years.
IMPACT OF INFLATION
Management believes that inflation has had a negligible effect on
operations. The Company believes that it can offset inflationary increases in
the cost of materials and labor by increasing sales prices and improving
operating efficiencies.
NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities (SFAS 138), which is required to be
adopted in years beginning after June 15, 2000. This statement amends Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, and defers its effective date by one year. The Company
is currently evaluating the impact that the adoption of SFAS 138 will have on
its results of operations and financial position.
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.
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<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Trilucent(R) Breast Implant Matters. On November 6, 1998, Collagen
announced the sale of its LipoMatrix, Inc. subsidiary, manufacturer of the
Trilucent(R) soybean oil filled breast implant, to Sierra Medical Technologies.
Collagen accounted for LipoMatrix as a discontinued operation in its 1998 fiscal
year. On March 8, 1999, the United Kingdom Medical Devices Agency (MDA)
announced the voluntary suspension of marketing and voluntary withdrawal of the
Trilucent(R) implant in the United Kingdom. The MDA stated that its actions were
taken as a precautionary measure and did not identify any immediate hazard
associated with the use of the product. The MDA further stated that it sought
the withdrawal because it had received "reports of local complications in a
small number of women" who have received those implants, involving localized
swelling. The same notice stated that there "has been no evidence of permanent
injury or harm to general health" as a result of these implants. Subsequently,
Lipomatrix's notified body in Europe suspended the product's CE Mark pending
further assessment of the long-term safety of the product. Sierra Medical has
since stopped sales of the product.
Collagen retained certain liabilities for Trilucent(R) implants sold
prior to November 6, 1998. Collagen also agreed with the United Kingdom National
Health Service that, for a period of time, it would perform certain product
surveillance with respect to United Kingdom patients implanted with the
Trilucent(R) implant and pay for explants for any United Kingdom women with
confirmed Trilucent(R) implant ruptures. On June 6, 2000, the MDA issued a
hazard notice recommending that surgeons and their patients consider explanting
the Trilucent breast implants even if the patient is asymptomatic. The MDA also
recommended that women avoid pregnancy and breast-feeding until the
explantation. The hazard notice stressed, however, "that all the above advice is
precautionary. Although there have been reports of breast swelling and
discomfort in some women with these implants, there has been no clinical
evidence of any serious health problems, so far."
Also on June 6, 2000, the Company announced that, through its AEI, Inc.
subsidiary, it had undertaken a comprehensive program of support and assistance
for women who have received the Trilucent(R) breast implants, under which it
will cover medical expenses associated with the removal and replacement of those
implants for women in the European Community, the United States and other
countries. The Company's program, its insurance and reserves and other
Trilucent(R)-related matters are discussed in the Company's Current Report on
Form 8-K, filed with the Commission on June 6, 2000. See section captioned
"Information on Trilucent(R) Breast Implants". Any swelling or inflammation
relating to the Trilucent(R) implants appears to resolve upon explantation.
From time to time Collagen subsidiaries have been named as a party to
lawsuits filed outside the United States brought by patients claiming damages
from the Trilucent(R) breast implant product; to date all of these cases have
been resolved in the ordinary course of business for relatively small
settlements. In the U.S., a total of 165 women received Trilucent(R) breast
implants in two clinical studies; enrollment in both studies ended by June 1997.
No lawsuit has been filed and the Company has not received any notice of legal
claim as a result of the implantation of any Trilucent(R) breast implants in the
U.S.
As of June 30, 2000, Inamed had $35 million of reserves to cover
potential expenses and liabilities arising from Trilucent(R), and in excess of
$65 million of insurance coverage for product liability claims or medical
expenses incurred by women with Trilucent(R) breast implants. Based on these
reserves and insurance policies, the Company does not believe that Trilucent(R)
will have a material adverse effect on its business, results of operations,
financial position, or future prospects.
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<PAGE> 19
ITEMS 2 THROUGH 4
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K dated April 17, 2000 - The Company announced that BDO
Seidman, LLP had resigned as independent certified public
accountants and was replaced by Arthur Andersen LLP.
Form 8-K dated April 20, 2000 - The Company indicated that it
was not aware of any "disagreements" between the Company and
BDO Seidman,LLP or any other "reportable events" during fiscal
1999 or 1998 or the interim period preceeding BDO's Seidman's
resignation as the Company's independent certified public
accountants.
Form 8-K / A dated May 5, 2000 - The Company amended its 8-K
dated April 20, 2000 by including a letter from BDO Seidman,
LLP pursuant to Item 304 (a) (3) of Regulation S-K.
Form 8-K dated June 6, 2000 - The Company issued a press
release commenting on a variety of matters, including earnings
expectations, a recent Trilucent(R) event and a new shelf
registration filing.
Form 8-K dated June 23, 2000 - The Company issued a press
release announcing that an FDA advisory panel on
gastroenterology and urology devices voted 6-4 to recommend
FDA rejection of the Premarket Approval Application (PMA) for
the LAP-BAND(R) System for obesity treatment.
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<PAGE> 20
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 9, 2000 By: /s/ Michael J. Doty
-------------------
Michael J. Doty, Senior Vice President
and Chief Financial Officer
August 9, 2000 By: /s/ Ilan K. Reich
-----------------
Ilan K. Reich, President
and Co-Chief Executive Officer
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