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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 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
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
------------------------
On November 7, 2000 there were 20,615,454 Shares of the Registrant's Common
Stock Outstanding.
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This document contains 20 pages.
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INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
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 15
AND RESULTS OF OPERATIONS..................................
ITEM 3. MARKET RISK.................................................. 17
PART II. OTHER INFORMATION.......................................... 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Inamed
Corporation, a Delaware Corporation, as of September 30, 2000, and the related
consolidated statements of income for the three-month and the nine-month periods
then ended and the consolidated cash flows for the nine-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
November 6, 2000
New York, New York
3
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLION'S)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21.6 $ 17.5
Trade accounts receivable, net of allowance for doubtful
accounts and returns and allowances of $6.8 and $6.4... 41.3 44.4
Inventories............................................... 34.1 25.3
Prepaid interest.......................................... 3.4 1.6
Prepaid expenses and other current assets................. 6.8 3.1
Income tax refund receivable.............................. -- 0.2
Deferred income taxes..................................... 29.3 32.8
------ ------
Total current assets.............................. 136.5 124.9
------ ------
Property and equipment, at cost:
Machinery and equipment................................... 23.6 21.6
Furniture and fixtures.................................... 4.9 6.4
Leasehold improvements.................................... 17.3 14.6
------ ------
45.8 42.5
Less accumulated depreciation and amortization............ (21.5) (18.4)
------ ------
Net property and equipment........................ 24.3 24.1
------ ------
Notes receivable, net of allowance of $0.5.................. 2.6 2.7
Goodwill -- Collagen, net................................... 156.6 139.2
Patents and license agreements, net......................... 52.0 11.5
Other intangibles, net...................................... 1.5 1.7
Deferred income taxes, long term............................ 12.0 --
Other assets................................................ 2.8 5.3
------ ------
Total assets................................................ $388.3 $309.4
====== ======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
<PAGE> 5
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN MILLION'S)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 0.9 $ 0.1
Notes payable............................................. 16.3 1.1
Accounts payable.......................................... 22.1 16.7
Accrued liabilities:
Salaries, wages, and payroll taxes..................... 7.7 8.4
Interest............................................... 0.9 1.2
Acquisition and integration costs...................... 7.5 16.1
Other.................................................. 17.1 21.6
Income taxes payable................................... 10.9 18.7
------ ------
Total current liabilities......................... 83.4 83.9
------ ------
Long-term debt.............................................. 81.4 77.2
Acquired liabilities........................................ 22.5 5.4
Long term warranty reserve.................................. 5.9 5.3
Other long term notes payable............................... 12.5 --
Other long term liabilities................................. 1.6 2.0
Deferred income taxes....................................... 23.6 1.5
Stockholders' equity:
Common stock, $0.01 par value Authorized 25,000,000
shares; issued and outstanding 20,586,462 and
20,200,114............................................. 0.2 0.2
Additional paid-in capital................................ 155.9 152.8
Accumulated other comprehensive loss...................... (9.6) (4.0)
Accumulated surplus/(deficit)............................. 16.9 (14.9)
------ ------
Stockholders' equity.............................. 163.4 134.1
Less cost of common stock in treasury (183,500
shares)......................................... (6.0) --
------ ------
Total liabilities and stockholders' equity.................. $388.3 $309.4
====== ======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
<PAGE> 6
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLION'S EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net sales................................................... $54.4 $44.0
Cost of goods sold.......................................... 15.3 12.7
----- -----
Gross profit...................................... 39.1 31.3
----- -----
72.0% 71.2%
Operating expenses:
Selling................................................... 12.5 10.7
General and administrative................................ 11.8 7.4
Research and development.................................. 2.7 2.8
Amortization of intangible assets......................... 1.8 0.5
----- -----
Total operating expenses.......................... 28.8 21.4
----- -----
Operating income.................................. 10.3 9.9
----- -----
Other income (expense):
Foreign currency transaction gains (losses)............... 0.5 (0.1)
Royalty and other income (expense)........................ 1.8 0.9
----- -----
Net other income (expense)........................ 2.3 0.8
----- -----
Income before interest and taxes............................ 12.6 10.7
Interest and other financing expense, net................... (2.0) (2.2)
----- -----
Income before income tax expense............................ 10.6 8.5
Income tax expense.......................................... 3.0 --
----- -----
Net income........................................ $ 7.6 $ 8.5
===== =====
Net income per share of common stock
Basic..................................................... $0.37 $0.50
===== =====
Diluted................................................... $0.33 $0.44
===== =====
Weighted average common shares outstanding basic............ 20.5 17.1
===== =====
Weighted average common shares outstanding diluted.......... 23.0 19.5
===== =====
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
6
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLION'S EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net sales................................................... $182.3 $123.7
Cost of goods sold.......................................... 50.0 36.6
------ ------
Gross profit...................................... 132.3 87.1
------ ------
72.6% 70.4%
Operating expenses:
Selling................................................... 39.0 27.1
General and administrative................................ 34.9 22.2
Research and development.................................. 7.0 6.9
Amortization of intangible assets......................... 5.7 0.6
------ ------
Total operating expenses.......................... 86.6 56.8
------ ------
Operating income.................................. 45.7 30.3
------ ------
Other income (expense):
Foreign currency transaction gains (losses)............... 1.1 0
Royalty and other income (expense)........................ 5.2 (0)
------ ------
Net other income (expense)........................ 6.3 (0)
------ ------
Income before interest and taxes............................ 52.0 30.3
Interest and other financing expense, net................... (8.1) (5.2)
------ ------
Income before income tax expense............................ 43.9 25.1
Income tax expense.......................................... 12.1 --
------ ------
Net income........................................ $ 31.8 $ 25.1
====== ======
Net income per share of common stock
Basic..................................................... $ 1.56 $ 1.74
====== ======
Diluted................................................... $ 1.38 $ 1.39
====== ======
Weighted average common shares outstanding basic............ 20.4 14.4
====== ======
Weighted average common shares outstanding diluted.......... 23.1 18.1
====== ======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
7
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLION'S)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net income (loss)........................................... $ 7.6 $ 8.5
Other comprehensive (loss) income, net of tax: Cumulative
foreign currency translation gains (losses)............... (3.5) (2.0)
----- -----
Comprehensive income (loss)................................. $ 4.1 $ 6.5
===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net income (loss)........................................... $31.8 $25.1
Other comprehensive (loss) income, net of tax: Cumulative
foreign currency translation gains (losses)............... (5.6) (3.7)
----- -----
Comprehensive income (loss)................................. $26.2 $21.4
===== =====
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
8
<PAGE> 9
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN MILLION'S)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY TOTAL
--------------- PAID-IN COMPREHENSIVE RETAINED STOCK STOCKHOLDERS
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS PURCHASE EQUITY
------ ------ ---------- ------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000..... 20.2 0.2 152.8 (4.0) (14.9) -- 134.1
Comprehensive income:
Net income................... -- -- -- -- 31.8 -- 31.8
Translation adjustment....... -- -- -- (5.6) -- -- (5.6)
Total comprehensive income... -- -- -- -- -- -- 26.2
Treasury stock purchase...... -- -- -- -- -- (6.0) (6.0)
Stock compensation plans..... -- -- 1.2 -- -- -- 1.2
Exercise of stock options.... 0.4 -- 1.9 -- -- -- 1.9
---- --- ----- ---- ----- ---- -----
BALANCE, SEPTEMBER 30, 2000.. 20.6 0.2 155.9 (9.6) 16.9 (6.0) 157.4
==== === ===== ==== ===== ==== =====
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
9
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLION'S)
================================================================================
Nine Months ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------ -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31.8 $ 25.1
------ -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10.8 4.3
Deferred taxes 14.2 (2.5)
Provision for asset impairment -- 0.6
Non-cash financing cost -- 2.0
Changes in assets and liabilities:
Trade accounts receivable (0.4) (1.2)
Inventories (10.5) 0.2
Insurance settlement 1.3 --
Acquisition and integration costs (12.5)
Acquired liabilities (12.4)
Other (3.1) (1.3)
------ -------
Total adjustments (12.6) 2.1
------ -------
Net cash provided by operating activities 19.2 27.2
------ -------
Cash flows from investing activities:
Business acquisitions, net of cash acquired -- (132.5)
Acquisition of patents and license rights -- (9.1)
Purchases of property and equipment, net (8.3) (3.3)
Disposal of property and equipment, net -- --
------ -------
Net cash used in investing activities $ (8.3) (144.9)
------ -------
</TABLE>
(continued)
The Notes to Consolidated Financial Statements are an integral part of this
statement.
-10-
<PAGE> 11
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
(IN MILLION'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt............. 82.5 155.0
Payment of note in escrow for litigation settlement....... (25.5)
Principal repayment of notes payable and long-term debt... (79.6) (27.8)
Payment of redeemable common stock in escrow.............. -- (3.0)
Repurchase of common stock................................ (6.0) --
Proceeds from the exercise of warrants and options........ 1.9 (25.5)
(Decrease) Increase in deferred grants.................... -- (0.2)
------ ------
Net cash provided by financing activities......... (1.2) 125.0
------ ------
Effect of exchange rate changes on cash........... (5.6) (3.7)
------ ------
Net (decrease) increase in cash and cash
equivalents...................................... 4.1 3.6
Cash and cash equivalents at beginning of period............ 17.5 11.9
------ ------
Cash and cash equivalents at end of period.................. $ 21.6 $ 15.5
------ ------
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest............................................... $ 11.3 $ 9.2
====== ======
Income taxes........................................... $ 4.2 $ --
====== ======
Supplemental schedule of non-cash investing and financing
activities:
Increase in MPDI patents and increase in notes payable.... $ 28.3
</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.
11
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
($ IN MILLION'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. Certain
reclassifications have been made to the prior year's financial statements to
conform to the 2000 presentation. 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 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
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials...................................... $ 8.5 $ 7.4
Work in process.................................... 6.0 7.2
Finished goods..................................... 22.1 13.5
----- -----
36.6 28.1
Less allowance for obsolescence.................... (2.5) (2.8)
----- -----
$34.1 $25.3
===== =====
</TABLE>
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 $77.0
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 $25.0 million.
12
<PAGE> 13
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During the third quarter the Company effectively converted $30 million
of its five-year USD term loan to fixed rate EUR debt. An additional $20.0
million of the five-year term loan was effectively converted from variable
rate USD debt to fixed rate USD debt. These conversions contributed to
reducing the Company's term interest rate (before fee amortization) from
approximately 10.2% to approximately 9.2%.
During the third quarter the Company amended its five-year term loan
to allow for the purchase of common stock not to exceed $25 million between
August 21, 2000 and February 1, 2005. In addition the company may spend an
amount in excess of $25 million in the event that consolidated domestic net
income for the preceding two fiscal years exceeds $100 million.
Net interest and other financing expenses for the nine months ended
September 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.
5 -- PATENT PURCHASE
As part of the purchase of various texturing patents from Medical Products
Development, Inc. (MPDI) the company will pay $6.0 million in the fourth
quarter, an additional $10.0 million over the next year and $14.0 million in
2002 through 2004. Separately, the company has signed a licensing agreement with
Reconstructive Technologies, Inc. (RTI) and will make a $3.0 million cash
investment in this company in the fourth quarter. Each of these transactions
requires our lenders' approval. The Company is currently in the process of
obtaining those approvals.
13
<PAGE> 14
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 the
Company's results of operations as a percent of net sales for each of the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED 9/30/00 ENDED 9/30/99 ENDED 9/30/00 ENDED 9/30/99
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................. 100% 100% 100% 100%
Gross profit.............................. 72 71 73 70
S, G & A.................................. 50 48 44 46
Amortization of intangible expenses....... 3 1 3 --
Total operating expenses.................. 53 49 47 46
Other income (expense).................... 4 2 3 --
Income before interest & taxes............ 23 24 29 24
Net interest and other financing
expense................................. 4 5 5 4
Income before income taxes................ 19 19 24 20
Net income................................ 14% 19% 17% 20%
</TABLE>
THIRD QUARTER
Sales for the third quarter totaled $54.4 million, up 24% from the prior
year. Excluding the effect of owning Collagen for approximately one-third of the
prior year third quarter, and the effects of changes in foreign exchange rates,
sales are up by approximately five percentage points in the quarter.
Gross margins for the quarter, at 72% of sales, reflect continuing
manufacturing improvements, pricing discipline, and improvements in product mix.
Selling, general and administrative expenses were 50% of sales, up by two
percentage points. The increase in the 2000 third quarter was due primarily to
higher legal and tax consulting fees, timing of incentive provisions, and
premiums associated with expanded business insurance.
Other income of $2.3 million was up by $1.6 million from the prior year,
due to the inclusion of a full quarter of royalties from Collagen products, and
foreign exchange gains.
Interest expense for the quarter of $2.0 million, consistent with
expectations and the prior year.
Income tax expense of $3.0 million for the third quarter reflects an
improved effective tax rate of 28%, consistent with the effective rate through
the first half of 2000. The earnings of the third quarter of 1999 were not
tax-effected, as a tax asset associated with prior losses had not been fully
recognized as of September 1999.
Net income for the third quarter of 2000 totaled $7.6 million, or $0.33 per
diluted share, compared with $8.5 million or $0.44 per diluted share in the
third quarter of the prior year.
14
<PAGE> 15
As noted above, the prior year net income was not tax-effected, as a tax
asset associated with prior losses had not been recognized. If taxes had been
provided, the prior year earnings per diluted share would have been $0.29.
FIRST NINE MONTHS
Sales through the first nine months of 2000 reached $182.3 million,
exceeding the prior year by 47%. Approximately forty-one percentage points of
this increase were derived from the inclusion of the acquired Collagen
Aesthetics, Inc. sales from September 1, 1999 forward. Foreign exchange effects,
lead by the declining Euro, adversely effected the top line, by approximately
three percentage points. The base business, excluding Collagen, grew at more
than 9% through the first nine months, in local currencies.
The gross margin rose from 70.4% in the prior year to 72.6% through the
first nine months of 2000. This margin gain was driven by manufacturing
efficiency improvements, increased volume through the factories, pricing
discipline, and favorable sales mix shifts.
Selling, general administrative expenses totaled $80.8 million or 44% of
sales, favorable to the prior year rate by approximately one percentage point.
Other income of $6.3 million derived principally from royalties from
acquired Collagen products and foreign exchange gains.
Interest expense of $8.1 million was in line with expectations and includes
$2.2 million in one-time financing expenses incurred in the first quarter of
2000.
Income taxes were accrued at $12.1 million using a worldwide effective tax
rate of 28%.
Net income for the first nine months of 2000 totaled $31.8 million or $1.38
per diluted share, compared to $25.1 million in net income and $1.39 per diluted
share in the prior year. The prior year did not include a provision for income
taxes for reasons noted above, and earnings per diluted share in 1999 would have
been approximately $0.95 per diluted share, had taxes been provided.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, net cash provided by
operations was $44.1 million before expenditures relating to the integration of
Collagen Asethetics Inc. This compares to $27.2 million provided by operations
for the same period in 1999. The Cash used in investing activities of $8.3
million in the first three quarters was related to fixed asset expenditures
associated with new manufacturing facilities, computer equipment and building
renovations. During this period, cash used by financing activities was $1.2
million and included the repurchase of $6.0 million in common stock.
In the third quarter the company repurchased 183,500 shares of common stock
at an average price of approximately $32.70 per share, as authorized by the
Board of Directors. Management does not anticipate any further purchases in the
fourth quarter. Payments related to Trilucent medical claims and administrative
fees were $12.4 million through the third quarter; these amounts were charged to
applicable reserves and did not affect the Company's reported earnings. The
company has now met the applicable self-insured retention under the medical
reimbursement policy, and is now due to receive reimbursement of $5.4 million of
that amount for covered Trilucent medical claims during the fourth quarter. See
"Legal Proceedings", below, for further information about Trilucent.
As part of the purchase of various texturing patents from Medical Products
Development, Inc. (MPDI) the company will pay $6.0 million in the fourth
quarter, an additional $10.0 million over the next year and $14.0 million in
2002 through 2004. Separately, the company has signed a licensing agreement with
Reconstructive Technologies, Inc. (RTI) and will make a $3.0 million cash
investment in this company in the fourth quarter.
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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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date until the first
fiscal year ending on or after June 30, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS No. 138 amends certain terms and conditions of SFAS
133. Implementation of SFAS 133, as amended by SFAS 138, is not expected to have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Trilucent Breast Implant Matters. On June 6, 2000, the United Kingdom
Medical Devices Agency (MDA) issued a hazard notice recommending that surgeons
and their patients consider explanting the Trilucent soybean oil filled 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." In fact, any swelling or inflammation relating to the
Trilucent implants appears to resolve upon explantation.
Approximately 10,000 women received Trilucent implants during the period
from 1995 until commercial sales ceased in March 1999; roughly one-half reside
in the United Kingdom. In the U.S., a total of 165 women received Trilucent
breast implants in two clinical studies; enrollment in both studies ended by
June 1997.
Concurrently with the MDA announcement of 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 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-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 Breast Implants".
During the third quarter of 2000, the Company received notice of two
Trilucent-related lawsuits, brought by the same plaintiffs' counsel in federal
district court in San Francisco, California, on behalf of two U.K. women. In
one, Rachel Kerr v. Collagen Aesthetics, Inc. et al., the plaintiff seeks to
certify an international class of Trilucent implant recipients alleged to
include over 9,000 women. The Inamed defendants are currently scheduled to
respond to the complaints by November 15, 2000 and intend to move to dismiss
these actions on the grounds that U.K. provides an adequate remedy, has a much
greater interest in the controversy and is a more convenient forum. The Company
expects that its motions to dismiss these cases will be heard in January 2001.
Also in the third quarter of 2000, the Company and its subsidiaries
received notices of claim from European women, the vast majority of them
residents of the United Kingdom, seeking compensation for general and special
damages arising from "unnecessary" or "premature" surgery conducted to remove
the Trilucent implants. AEI, Inc. is currently engaged in discussions, both with
its insurers and with the lead solicitor for the United Kingdom claimants, over
a settlement protocol for the fair and efficient resolution of these claims.
As of September 30, 2000, the Company had $33 million of reserves to cover
potential expenses and liabilities arising from Trilucent, and in excess of $65
million of insurance coverage for product liability claims or medical expenses
incurred by women with Trilucent breast implants. Based on these reserves and
insurance policies, the Company does not believe that Trilucent will have a
material adverse effect on its business, results of operations, financial
position, or future prospects.
ITEMS 2 THROUGH 4
Not applicable.
ITEM 5. OTHER INFORMATION
On October 12, 2000 the Company announced that it had received inquiries
from several companies which are interested in discussing an acquisition of the
Company. The Board of Directors has retained an investment banker to assist in
evaluating acquisition proposals as well as the Company's strategic options.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K/A dated July 28, 2000 -- The Company amended its 8-K dated April
20, 2000 and amended on May 4, 2000 by including a letter from BDO
Seidman, LLP dated July 27, 2000.
Form 8-K dated August 2, 2000 -- The Company issued a press release
announcing that it has been authorized by its Board of Directors to
institute a stock repurchase program.
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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
By: /s/ MICHAEL J. DOTY
------------------------------------
Michael J. Doty, Senior Vice
President
and Chief Financial Officer
November 14, 2000
By: /s/ ILAN K. REICH
------------------------------------
Ilan K. Reich, President
and Co-Chief Executive Officer
November 14, 2000
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