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 MARCH 31, 2001 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 May 7, 2001 there were 20,466,422 Shares of the Registrant's Common Stock
Outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This document contains 12 pages.
2
INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................. 3
Unaudited Consolidated Income Statements.................... 4
Unaudited Consolidated Statement of Stockholders' Equity.... 5
Unaudited Consolidated Statements of Cash Flows............. 6
Notes to the Consolidated Financial Statements.............. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
AND RESULTS OF OPERATIONS..........................................
ITEM 3. MARKET RISK.................................................. 10
PART II. OTHER INFORMATION.......................................... 11
2
3
PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLION'S EXCEPT PER SHARE DATA)
UNAUDITED
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19.1 $ 22.3
Trade accounts receivable, net of allowances for doubtful
accounts and returns of $7.1 and $7.1.................. 41.2 40.4
Inventories, net.......................................... 35.4 34.8
Prepaid expenses and other current assets................. 4.7 6.0
Deferred income taxes..................................... 19.8 18.8
------ ------
Total current assets.............................. 120.2 122.3
------ ------
Net property and equipment.................................. 30.8 26.2
Goodwill -- Collagen, net of amortization of $8.9 and
$7.4...................................................... 153.8 155.3
Patents and license agreements, net of amortization of $1.9
and $1.0.................................................. 47.9 48.5
Investments and other assets................................ 35.2 33.6
------ ------
Total assets................................................ $387.9 $385.9
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt.............................................. $ 8.5 $ 11.2
Accounts payable.......................................... 22.2 22.0
Income taxes payable...................................... 9.7 8.9
Accrued liabilities and other............................. 33.2 29.3
------ ------
Total current liabilities......................... 73.6 71.4
------ ------
Long-term debt and capital leases........................... 105.8 98.6
Other Long Term Liabilities................................. 44.1 48.4
Stockholders' equity:
Common stock, $.01 par value. authorized 50.0 and 25.0
shares; issued 21.0 and 20.6; outstanding 20.4 and
20.3................................................... 0.2 0.2
Additional paid-in capital................................ 165.3 161.8
Accumulated other comprehensive loss...................... (11.0) (7.8)
Retained earnings......................................... 23.6 22.1
Less: Treasury stock, at cost (0.6 and 0.3
shares)......................................... (13.7) (8.8)
------ ------
Stockholders' equity.............................. 164.4 167.5
------ ------
Total liabilities and stockholders' equity.................. $387.9 $385.9
====== ======
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
4
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLION'S EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
Net sales................................................... $57.8 $60.3
Cost of goods sold.......................................... 15.2 15.7
----- -----
Gross profit...................................... 42.6 44.6
----- -----
Operating expenses:
Sales and marketing....................................... 12.9 13.2
General and administrative................................ 11.5 12.3
Research and development.................................. 2.8 2.3
Restructuring expense..................................... 8.3 0.0
Amortization of intangible assets......................... 2.3 1.9
----- -----
Total operating expenses.......................... 37.8 29.7
----- -----
Operating profit.................................. 4.8 14.9
----- -----
Other income (expense):
Net interest expense and debt costs....................... (2.7) (4.5)
Foreign currency transaction gains (losses)............... (0.2) 0.2
Royalty income and other.................................. 1.0 2.0
----- -----
Other income (expense):..................................... (1.9) (2.3)
----- -----
Income before income tax expense............................ 2.9 12.6
Income tax expense.......................................... 1.4 4.6
----- -----
Net income........................................ $ 1.5 $ 8.0
===== =====
Net income per share of common stock
Basic..................................................... $0.07 $0.40
===== =====
Diluted................................................... $0.07 $0.34
===== =====
Weighted average shares outstanding:
Basic..................................................... 20.4 20.3
===== =====
Diluted................................................... 22.2 23.3
===== =====
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
5
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN MILLION'S)
ACCUMULATED
OTHER RETAINED TOTAL
COMMON STOCK ADDITIONAL COMPREHENSIVE EARNINGS TREASURY STOCKHOLDERS'
--------------- PAID-IN INCOME (ACCUMULATED STOCK EQUITY
SHARES AMOUNT CAPITAL (LOSS) DEFICIT) PURCHASE (DEFICIT)
------ ------ ---------- ------------- ------------ -------- -------------
BALANCE, DECEMBER 31, 2000...... 20.6 $0.2 $161.8 $ (7.8) $22.1 $ (8.8) $167.5
Comprehensive income:
Net income.................... 1.5 1.5
Translation adjustment........ (3.2) (3.2)
Total comprehensive income.... (1.7)
Repurchase of common stock...... (4.9) (4.9)
Compensation expense on
options....................... (0.4) (0.4)
Tax benefit of option
exercises..................... 2.5 2.5
Exercise of stock options and
warrants...................... 0.4 1.4 1.4
---- ---- ------ ------ ----- ------ ------
BALANCE, MARCH 31, 2001......... 21.0 $0.2 $165.3 $(11.0) $23.6 $(13.7) $164.4
==== ==== ====== ====== ===== ====== ======
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
6
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLION'S)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
----- -----
Cash flows from operating activities:
Net income................................................ $ 1.5 $ 8.2
Net cash provided by (used in) operating activities:
Depreciation and amortization............................. 3.8 3.3
Restructuring Charge...................................... 2.7 --
Non-cash compensation..................................... 0.3 0.1
Provision (benefits) for doubtful accounts, notes and
returns................................................ -- (0.1)
Changes in assets and liabilities:
Trade accounts receivable.............................. (0.9) (0.8)
Inventories............................................ (0.6) (2.6)
Prepaid expenses and other current assets.............. 1.3 (2.5)
Deferred income taxes.................................. (1.1) (1.0)
Other assets........................................... 1.2 0.3
Accounts payable....................................... (1.9) 2.0
Income taxes payable................................... 0.9 4.4
Acquisition and integration costs...................... 0.2 (6.6)
Trilucent costs........................................ (5.5) (5.1)
Acquired liabilities and other long term............... 4.6 (3.2)
----- -----
Net cash provided by (used in) operating
activities....................................... 6.5 (3.6)
----- -----
Cash flows from investing activities:
Investment in Strategic Alliances......................... -- (1.0)
Purchase of property and equipment........................ (6.1) (3.6)
----- -----
Net cash used in investing activities..................... $(6.1) $(4.6)
----- -----
The Notes to Consolidated Financial Statements are an integral part of this
statement.
6
7
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
(IN MILLION'S)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
----- ------
Cash flows from financing activities:
Increases in long-term debt............................... 12.0 82.5
Increases in leases and notes payable..................... -- 1.0
Principal repayment of notes payable and long-term debt... (7.9) (78.5)
(Decrease) Increase in deferred grants.................... -- (0.1)
Issuance of common stock.................................. 1.4 0.9
Acquisition of treasury shares............................ (6.0) --
----- ------
Net cash provided by financing activities......... (0.5) 5.8
----- ------
Effect of exchange rate changes on cash........... (3.1) (1.9)
----- ------
Net (decrease) increase in cash and cash
equivalents...................................... (3.2) (4.3)
Cash and cash equivalents at beginning of year.............. 22.3 17.5
----- ------
Cash and cash equivalents at end of year.................... $19.1 $ 13.2
----- ------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 1.8 $ 6.8
===== ======
Income taxes........................................... $ 1.8 $ 1.5
===== ======
The Notes to Consolidated Financial Statements are an integral part of this
statement.
7
8
INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(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 2001 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, 2000 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:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials........................................ $ 6.2 $ 7.8
Work in process...................................... 7.2 6.0
Finished goods....................................... 23.7 22.4
----- -----
37.4 36.2
Less allowance for obsolescence...................... (1.7) (1.4)
----- -----
$35.4 $34.8
===== =====
4 -- RESTRUCTURING CHARGE
In the first quarter the Company announced the resignation of its President
and Co-CEO, the planned closing of its New York City office and a reduction in
workforce at the Company's McGhan Medical subsidiary in Santa Barbara,
California. As a result the Company recognized a restructuring charge of $8.3 in
the quarter. The restructuring charge is primarily comprised of severance costs
for 5 employees in the New York office and 85 in Santa Barbara, as well as a
smaller portion related to lease termination expenses of the Company's New York
office. In the first quarter $5.6 million of the restructure accrual was paid
out. The remaining $2.7 million is included in accrued liabilities and other
($1.7 million) and in other long term liabilities ($1.0 million), on the
accompanying balance sheet as of March 31, 2001.
8
9
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.
THREE MONTHS THREE MONTHS
ENDED 3/31/01 ENDED 3/31/00
------------- -------------
Net sales................................................... 100% 100%
Gross profit................................................ 74 74
Sales and Marketing......................................... 22 22
General and administrative.................................. 20 20
Research and development.................................... 5 4
Amortization of intangible expenses......................... 4 3
Restructure Charge.......................................... 14 --
Total operating expenses.................................... 65 49
Other income (expense)...................................... 1 4
Income before interest & taxes.............................. 10 28
Net interest and other financing expense.................... 5 7
Income before income taxes.................................. 5 21
Net income.................................................. 3% 13%
FIRST QUARTER
Sales for the first quarter totaled $57.8 million, down 4% from the prior
year. This decline was related to consumers delaying some purchases of
discretionary items, such as breast augmentation in U.S. markets and collagen
facial injections outside of the U.S. In addition, a product mix shift in the
U.S. implant business continues, reducing average revenue per unit.
Gross margins for the quarter, at 74% of sales were flat to last year, as
the adverse effects of the mix shift mentioned above, were largely offset by
improved manufacturing efficiencies.
Sales and marketing expenses for the three months ended March 31, 2001 were
$12.9 million, a decrease of $0.3 million over the same period in 2000. This
decrease was primarily related to lower royalty expenses. As a percentage of
sales, marketing expenses were 22% in both the three months ended March 31, 2001
and 2000.
General and administrative expenses for the three months ended March 31,
2001 were $11.5 million, a decrease of $0.8 million from the same period of
2000, due primarily to the decrease in legal fees and bonus accruals. As a
percentage of sales, general and administrative expenses were 20% in both the
three months ended March 31, 2001 and 2000.
Research and development expenses of $2.8 million for the three months
ended March 31, 2001, reflected a 22% increase from the same period in 2000 due
primarily to the increase in Reconstructive Technologies,
9
10
Inc. (RTI) development expenses. As a percentage of sales, research and
development costs were 5%; an increase of 1% for the three months ended March
31, 2001 as compared to 4% for the same period in 2000.
Amortization of intangible assets for the three months ended March 31, 2001
were $2.3 million, an increase of $0.4 million from the same period of 2000.
This increase was primarily due to the addition of $0.6 million of quarterly
amortization related to the Medical Products Development, Inc. (MPDI) patents
purchased in the third quarter of 2000.
Restructuring charge of $8.3 million -- In the first quarter the Company
announced the resignation of its President and Co-CEO, the planned closing of
its New York City office and a reduction in workforce at the Company's McGhan
Medical subsidiary in Santa Barbara, California. As a result the Company
recognized a restructuring charge of $8.3 million in the quarter. The
restructuring charge is comprised primarily of severance costs for 5 employees
in the New York office and 85 in Santa Barbara, as well as a smaller portion
related to lease termination expenses of the Company's New York office. In the
first quarter $5.6 million of the restructure accrual was paid out. The closing
of the New York City office and the reduction in workforce were the result of
management's ongoing effort to reduce its cost structure. On an earning per
share basis, the after tax impact of the restructuring charge was $0.27 per
basic share and $0.25 per diluted share.
Other income of $0.8 million was down by $1.4 million from the prior year,
primarily due to lower royalty income, which was the result of lower Contigen
sales.
Interest expense for the quarter of $2.7 million, consistent with
expectations and $1.8 million lower than the prior year. In the first quarter of
2000, the Company refinanced the bridge loan obtained to finance the Collagen
acquisition and incurred about $2.2 million in charges related to the early
retirement of this loan.
Income tax expense of $1.4 million and $4.6 million for the first quarter
of 2001 and 2000 respectively, both reflect a tax rate of 33%, when excluding
the effects of goodwill amortization.
Net income for the first quarter of 2001 totaled $1.5 million, or $0.07 per
diluted share, compared with $8.0 million or $0.34 per diluted share in the
first quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, net cash provided by
operations was $6.9 million compared to $3.6 million used in operations for the
same period in 2000. The Cash used in investing activities of $6.4 million in
the first quarter was related primarily to fixed asset expenditures associated
with new manufacturing facilities. During this period, cash used by financing
activities was $0.5 million and included the repurchase of $6.0 million in
common stock and the repayment of $8.0 million of scheduled debt payments,
partially offset by an increase of $12.0 million in revolving debt.
As discussed in the Company's 10-K for the year ended December 31, 2000,
through the acquisition of the Company's Collagen subsidiary in 1999, the
Company assumed liabilities related to Collagen's Trilucent breast implants.
Payments related to Trilucent medical claims were $5.5 million in the first
quarter. These amounts were charged to applicable reserves and did not affect
the Company's reported earnings.
IMPACT OF INFLATION
Management believes that inflation has had a negligible effect on
operations.
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.
10
11
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 4
Not applicable.
ITEM 5. OTHER INFORMATION
Pursuant to a January, 1999 agreement, the Company licensed worldwide
rights to market ArthroCare's Coblation(TM) Cosmetic Surgery System and related
products using ArthroCare's patented radio frequency ("RF") technology. In
October 1999, this agreement was amended. As amended, the Company's license was
broadened to include exclusive rights to sell such technology, among others, to
all physicians in the fields of dermatology, cosmetic and aesthetic surgery to
the extent permitted by the FDA. ArthroCare retained responsibility for
manufacturing and product development. Pursuant to the agreement as amended, to
preserve its rights of exclusivity, the Company had to make certain minimum
purchases and must pay certain minimum royalties following FDA approval of a
licensed RF product for general dermatological use for skin resurfacing and
wrinkle reduction. The Company did not meet the required minimums for the
royalty year ended March 31, 2001, permitting ArthroCare to convert the
Company's exclusive licenses into non-exclusive ones. ArthroCare, however, has
claimed the right to terminate the licenses entirely. The Company has rejected
ArthroCare's position. Under the agreement as amended, ArthroCare is also to
supply a microdermabrasion product and an RF liposuction product, FDA approval
of which increases the Company's minimum purchase and royalty requirements and
obligates the Company to make a prompt stocking order. Management believes these
events will not have a material effect on the Company's financial position or
results of operations.
In January, 2001, the Company contracted with a newly-formed affiliate of
BioSphere Medical, Inc., BSMD Ventures, Inc. ("BSMD"), for the supply of
patented bioengineered microspheres for possible use with the Company's
injectable products. Pursuant to that agreement, the Company paid $250,000 in
the first quarter and is obligated to make a further payment of $750,000 in May,
2001. The Company would also owe $1 million to BSMD upon the approval by the FDA
of Inamed's PMA and an additional $1 million upon FDA approval that the product
is durable "in vivo" for a period of at least twelve months. In addition, under
the contract, if and when there is an approved product, the Company would be
obligated to pay BSMD certain fixed percentages of net sales based on gross
margin.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K dated January 17, 2001 -- The Company announced that Ilan
Reich had resigned as President and co-Chief Executive Officer and
as a member of the Inamed Board of Directors.
11
12
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
(Principal Financial and
Accounting Officer)
May 15, 2001
By: /s/ RICHARD G. BABBITT
------------------------------------
Richard G. Babbitt, Chairman of the
Board of
Directors and Chief Executive
Officer
(Principal Executive Officer)
May 15, 2001
12