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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001 COMMISSION FILE NUMBER: 1-9741
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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 [ ]
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On August 3, 2001 there were 21,075,513 Shares of the Registrant's Common Stock
Outstanding.
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This document contains 16 pages.
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INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................. 3
Unaudited Consolidated Statements of Income................. 4
Unaudited Consolidated Statement of Stockholders' Equity.... 6
Unaudited Consolidated Statements of Cash Flows............. 7
Notes to the Consolidated Financial Statements.............. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 10
AND RESULTS OF OPERATIONS..........................................
ITEM 3. MARKET RISK.................................................. 12
PART II. OTHER INFORMATION.......................................... 13
</Table>
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PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLION'S EXCEPT PER SHARE DATA)
<Table>
<Caption>
UNAUDITED
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18.0 $ 22.3
Trade accounts receivable, net of allowances for doubtful
accounts and returns of $7.1 and $7.1.................. 43.0 40.3
Inventories, net.......................................... 38.5 34.8
Prepaid expenses and other current assets................. 6.4 6.0
Deferred income taxes..................................... 21.0 18.8
------ ------
Total current assets.............................. 126.9 122.2
------ ------
Net property and equipment.................................. 36.2 26.3
Goodwill -- Collagen, net of amortization of $10.4 and
$7.5...................................................... 152.3 155.2
Patents and license agreements, net of amortization of $2.7
and $1.0.................................................. 46.7 48.5
Investments and other assets................................ 29.0 33.7
------ ------
Total assets................................................ $391.1 $385.9
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt.............................................. $ 8.7 $ 11.2
Accounts payable.......................................... 21.7 22.0
Income taxes payable...................................... 8.7 8.8
Accrued liabilities and other............................. 34.1 29.4
------ ------
Total current liabilities......................... 73.2 71.4
------ ------
Long-term debt and capital leases........................... 113.4 98.6
Other Long Term Liabilities................................. 41.8 48.4
Stockholders' equity:
Common stock, $.01 par value. authorized 50.0 and 25.0
shares; issued 21.0 and 20.6; outstanding 20.0 and
20.3................................................... 0.2 0.2
Additional paid-in capital................................ 165.6 161.8
Accumulated other comprehensive loss...................... (12.5) (7.8)
Retained earnings......................................... 33.4 22.1
Less: Treasury stock, at cost (1.0 and 0.3
shares)......................................... (24.0) (8.8)
------ ------
Stockholders' equity.............................. 162.7 167.5
------ ------
Total liabilities and stockholders' equity.................. $391.1 $385.9
====== ======
</Table>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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4
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLION'S EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Net sales................................................... $62.5 $67.6
Cost of goods sold.......................................... 16.5 19.1
----- -----
Gross profit...................................... 46.0 48.5
----- -----
Operating expenses:
Sales and marketing....................................... 13.6 13.2
General and administrative................................ 11.1 10.3
Research and development.................................. 2.9 2.1
Amortization of intangibles and other non-cash charges.... 2.6 2.4
----- -----
Total operating expenses.......................... 30.2 28.0
Operating profit.................................. 15.8 20.5
----- -----
Other income (expense):
Net interest expense and debt costs....................... (2.8) (1.6)
Foreign currency transaction gains (losses)............... 0.6 0.4
Royalty income and other.................................. 1.7 1.4
----- -----
Other income (expense):..................................... (0.5) 0.2
----- -----
Income before income tax expense............................ 15.3 20.7
Income tax expense.......................................... 5.4 4.5
----- -----
Net income........................................ $ 9.9 $16.2
===== =====
Net income per share of common stock
Basic..................................................... $0.49 $0.79
===== =====
Diluted................................................... $0.46 $0.69
===== =====
Weighted average shares outstanding:
Basic..................................................... 20.2 20.5
===== =====
Diluted................................................... 21.7 23.3
===== =====
</Table>
See accompanying notes to consolidated financial statements.
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 MILLION'S EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Net sales................................................... $120.4 $127.9
Cost of goods sold.......................................... 31.7 34.8
------ ------
Gross profit...................................... 88.7 93.1
------ ------
Operating expenses:
Sales and marketing....................................... 26.5 26.4
General and administrative................................ 22.4 22.2
Research and development.................................. 5.8 4.3
Restructuring expense..................................... 8.3 0.0
Amortization of intangibles and other non-cash charges.... 5.2 4.8
------ ------
Total operating expenses.......................... 68.2 57.7
------ ------
Operating profit.................................. 20.5 35.4
------ ------
Other income (expense):
Net interest expense and debt costs....................... (5.5) (6.1)
Foreign currency transaction gains (losses)............... 0.4 0.6
Royalty income and other.................................. 2.7 3.4
------ ------
Other income (expense):..................................... (2.4) (2.1)
------ ------
Income before income tax expense............................ 18.1 33.3
Income tax expense.......................................... 6.8 9.1
------ ------
Net income........................................ $ 11.3 $ 24.2
====== ======
Net income per share of common stock
Basic..................................................... $ 0.56 $ 1.19
====== ======
Diluted................................................... $ 0.52 $ 1.04
====== ======
Weighted average shares outstanding:
Basic..................................................... 20.3 20.4
====== ======
Diluted................................................... 21.8 23.3
====== ======
</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 MILLION'S)
<Table>
<Caption>
ACCUMULATED
OTHER TOTAL
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
--------------- PAID-IN INCOME RETAINED TREASURY EQUITY
SHARES AMOUNT CAPITAL (LOSS) EARNINGS STOCK (DEFICIT)
------ ------ ---------- ------------- ------------ -------- -------------
BALANCE, DECEMBER 31, 2000...... 20.6 $0.2 $161.8 $ (7.8) $22.1 $ (8.8) $167.5
Comprehensive income:
Net income.................... 11.3 11.3
Translation adjustment........ (4.7) (4.7)
Total comprehensive income.... 6.6
Repurchase of common stock...... (15.2) (15.2)
Compensation expense on
options....................... (0.2) (0.2)
Tax benefit of option
exercises..................... 2.5 2.5
Exercise of stock options and
warrants...................... 0.4 1.5 1.5
---- ---- ------ ------ ----- ------ ------
BALANCE, JUNE 30, 2001.......... 21.0 $0.2 $165.6 $(12.5) $33.4 $(24.0) $162.7
==== ==== ====== ====== ===== ====== ======
</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 MILLION'S)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
----- ------
Cash flows from operating activities:
Net income.................................................. $11.3 $ 24.2
Net cash provided by operating activities:
Depreciation and amortization............................. 7.6 6.7
Deferred restructuring charges............................ 3.2 --
Non-cash compensation..................................... 0.5 0.8
Provision (benefits) for doubtful accounts, notes and
returns................................................. -- (0.7)
Changes in assets and liabilities:
Trade accounts receivable............................... (2.6) (2.1)
Inventories............................................. (3.7) (7.2)
Prepaid expenses and other current assets............... 1.3 (5.9)
Deferred income taxes................................... 2.3 10.8
Other assets............................................ 2.2 0.3
Accounts payable........................................ (0.3) 3.4
Income taxes payable.................................... (0.1) (1.6)
Acquisition and integration costs....................... (0.3) (11.3)
Trilucent costs......................................... (9.0) (7.3)
Acquired liabilities and other long term liabilities.... 2.8 0.8
Accrued litigation settlement........................... -- (2.0)
----- ------
Net cash provided by operating activities.......... 15.2 8.9
----- ------
Cash flows from investing activities:
Investment in strategic alliances......................... -- (3.0)
Purchase of property and equipment........................ (11.5) (5.6)
----- ------
Net cash used in investing activities..................... (11.5) (8.6)
----- ------
Cash flows from financing activities:
Increases in long-term debt............................... 25.0 83.2
Principal repayment of notes payable and long-term debt... (13.5) (78.3)
Decrease in deferred grants............................... -- (0.2)
Issuance of common stock.................................. 1.5 1.6
Acquisition of treasury shares............................ (16.3) --
----- ------
Net cash (used in) provided by financing
activities........................................ (3.3) 6.3
----- ------
Effect of exchange rate changes on cash............ (4.7) (2.1)
----- ------
Net (decrease) increase in cash and cash
equivalents....................................... (4.3) 4.5
Cash and cash equivalents at beginning of period............ 22.3 17.5
----- ------
Cash and cash equivalents at end of period.................. $18.0 $ 22.0
----- ------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 3.2 $ 9.0
===== ======
Income taxes............................................ $ 4.5 $ 3.3
===== ======
</Table>
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, 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 sells medical devices and components
for breast implants and facial aesthetics).
3 -- INVENTORIES
Inventories are summarized as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Raw materials.......................................... $ 8.8 $ 7.8
Work in process........................................ 7.9 6.0
Finished goods......................................... 23.4 22.4
----- -----
40.1 36.2
Less allowance for obsolescence........................ (1.6) (1.4)
----- -----
$38.5 $34.8
===== =====
</Table>
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
million in the first 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 half of 2001 $4.7 million of the
restructuring accrual was paid out. The remaining $3.6 million is included in
accrued liabilities and other of $2.6 million and in other long term liabilities
of $1.0 million, on the accompanying balance sheet as of June 30, 2001.
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2001
(IN MILLIONS)
5 -- GOODWILL
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. The Company is currently evaluating the effect that adoption of the
provisions of FAS 142 that are effective January 1, 2002 will have on its
results of operations and financial position.
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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 the
Company's results of operations as a percent of net sales for each of the
periods indicated.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED 6/30/01 ENDED 6/30/00
------------- -------------
Net sales................................................... 100% 100%
Gross profit................................................ 74 72
Sales and Marketing......................................... 22 20
General and administrative.................................. 18 15
Research and development.................................... 5 3
Amortization of intangible expenses......................... 4 4
Total operating expenses.................................... 48 41
Other income (expense)...................................... 4 3
Income before interest & taxes.............................. 29 33
Net interest and other financing expense.................... 4 2
Income before income taxes.................................. 24 31
Net income.................................................. 16% 24%
</Table>
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED 6/30/01 ENDED 6/30/00
------------- -------------
Net sales................................................... 100% 100%
Gross profit................................................ 74 73
Sales and Marketing......................................... 22 21
General and administrative.................................. 19 17
Research and development.................................... 5 3
Restructure Charge.......................................... 7 --
Amortization of intangible expenses......................... 4 3
Total operating expenses.................................... 57 45
Other income (expense)...................................... 3 3
Income before interest & taxes.............................. 20 31
Net interest and other financing expense.................... 5 5
Income before income taxes.................................. 15 26
Net income.................................................. 9% 19%
</Table>
SECOND QUARTER
Sales for the three months ended June 30, 2001 totaled $62.5 million, down
7% from the $67.6 million for second quarter 2000. Sales were adversely affected
by exchange rate changes, by approximately $1.3 million for the quarter. Net
sales for the six months ended June 30, 2001 were $120.4 million, reflecting a
decrease of
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$7.5 million or 6% over net sales for the same period in 2000. This decline was
a result of foreign exchange rates, a strong U.S. dollar, weakening economies in
Europe and Japan, and the sluggish U.S. economy. The company believes the softer
sales both domestically and internationally relates to consumers postponing
purchases of discretionary items, such as breast augmentation in U.S. markets
and collagen facial injections outside of the U.S.
Gross margins for the three months ended June 30, 2001 were $46.0 million,
reflecting a decrease of $2.5 million or 5% over the same period in 2000. For
the three months ended June 30, 2001, gross profit as a percentage of sales was
at 74%, reflecting an increase of 2% when compared to the 72% for the same
period in 2000. The improved margins are a direct result of the company's
on-going cost reduction programs. For the six months ended June 30, 2001 gross
margin as a percentage of sales, increased 1% up to 74% from 73% for the same
period in 2000.
Sales and marketing expenses for the three months ended June 30, 2001 were
$13.6 million, an increase of $0.4 million over the same period in 2000. Sales
and marketing expenses for the six months ended June 30, 2001 were $26.5
million, an increase of $0.1 million over the same period in 2000. As a
percentage of sales, marketing expenses were 22% in the three months ended June
30, 2001 compared to 20% for the three months ended June 30, 2000. For the six
months ended June 30, 2001 the sales and marketing expenses as a percentage of
sales were 22% compared to 21% in the same period in 2000.
General and administrative expenses for the three months ended June 30,
2001 were $11.1 million, an increase of $0.8 million or 8% from the same period
of 2000. This increase is associated with the Lap-Band approval and launch.
General and administrative expenses for the six months ended June 30, 2001 were
$22.4 million, an increase of $0.2 million from the same period in 2000. As a
percentage of sales, general and administrative expenses were 18% in the three
months ended June 30, 2001 and 15% in the three months ended June 30, 2000. For
the six months ended June 30, 2001 general and administrative expenses were 19%
and 17% for the same period ended June 30, 2000.
Research and development expenses of $2.9 million for the three months
ended June 30, 2001 reflected an increase of $0.8 million from the same period
in 2000 due to an increase in Reconstructive Technologies, Inc. (RTI)
development expenses of $0.5 million and $0.3 million in silicone clinical
trials. Research and development expenses of $5.8 million for the six months
ended June 30, 2001, were $1.5 million higher than the same period in 2000 due
to the increase in Reconstructive Technologies, Inc. (RTI) development expenses
of $0.9 million and $0.6 million in silicone clinical trials. As a percentage of
sales, research and development costs were 5%, an increase of 2% for the three
and six months ended June 30, 2001 as compared to 3% for the same period in
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 first 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 half of 2001 $4.7 million of the restructuring accrual was paid out. 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 for the quarter ended March
31, 2001 and $0.28 per basic share and $0.26 per diluted share for the six
months ended June 30, 2001.
Amortization of intangibles and other non-cash charges for the three months
ended June 30, 2001 was $2.6 million and $5.2 million for the six months ended
June 30, 2001 reflecting an increase of $0.2 million compared to the three
months ended June 30, 2000 and $0.4 million compared to the six months ended
June 30, 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 and was offset by the
elimination of $0.5 million in quarterly amortization incurred in both the first
and second quarter of 2000 related to the Collagen distribution agreements.
These agreements were fully amortized in the second quarter of 2000. Other
non-cash charges include compensation expense on stock options of $0.3 million
per quarter in 2001.
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Other income of $2.3 million was up by $0.5 million for the three months
ended June 30, 2001 compared to the prior year primarily due to higher Bard
royalty income and an increase in foreign exchange gains. For the six months
ended June 30, 2001 other income was $3.1 million reflecting a decrease of $0.9
million over the same period in 2000 due to lower Bard royalties and lower
foreign exchange gains. As a percentage of sales, other income and expense was
4%, an increase of 1% for the three month period, whereas the six months ended
June 30, 2001 remained flat at 3% as compared to the same period in 2000.
Income before interest and taxes for the three months ended June 30, 2001
totaled $18.1 million, a decrease of $4.2 million or 19% over income before
interest and taxes for the same period in 2000. For the six months ended June
30, 2001 income before interest and taxes totaled $23.6 million, a decrease of
$15.8 million or 40% over the six months period ended June 30, 2000. As a
percentage of sales, income before interest and taxes was 29%, a decrease of 4%
for the three months ended June 30, 2001 as compared to the same period in 2000.
For the six months ended June 30, 2001, income before interest and taxes as a
percentage of sales was 20% compared to 31% for the same period in 2000.
Net interest expense was $2.8 million for the three months ended June 30,
2001, reflecting an increase of $1.2 million from $1.6 million for the same
period in 2000. In the second quarter of 2000, interest income of $0.6 million
was received which reduced net interest expense from $2.2 million to $1.6
million. Whereas interest expense for the six months ended June 30, 2001 was
$5.5 million, reflecting a decrease of $0.6 million over the same period in
2000.
Income tax expense of $5.4 million and $4.5 million for the second quarter
of 2001 and 2000 respectively, both reflect an effective tax rate of 35%. In the
second quarter of 2000, an income tax refund of $2.8 million was received and
reduced tax expense from $7.3 million to $4.5 million. For the six months ended
June 30, 2001 the income tax expense was $6.8 million, reflecting a decrease of
$2.3 million over the same period in 2000.
Net income for the second quarter of 2001 totaled $9.9 million, or $0.46
per diluted share, compared with $16.2 million or $0.69 per diluted share in the
second quarter of the prior year. Net income for the six months ended June 30,
2001 was $11.3 million, reflecting a $12.9 million decrease over $24.2 million
for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, net cash provided by operations
was $15.2 million compared to $8.9 million used in operations for the same
period in 2000. The cash used in investing activities of $11.5 million in the
first half of 2001 was related primarily to fixed asset expenditures associated
with new manufacturing facilities. During this period, cash used in financing
activities was $3.3 million and included the repurchase of $16.3 million in
common stock and the repayment of $13.5 million of debt payments, partially
offset by an increase of $25.0 million in term 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 $9.0 million in the first half
of 2001. 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.
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PART II. OTHER INFORMATION
ITEMS 1. LEGAL PROCEEDINGS
Patent and License Litigation
In Inamed Corp. et al. vs. Lubomyr I. Kuzmak, on May 15, 2001, the United
States Court of Appeals for the Federal Circuit granted the Company's appeal,
reversing an order entered by the United States District Court for the Central
District of California dismissing this action for lack of personal jurisdiction,
and remanding the case for further proceedings. The District Court has set a
scheduling conference for October 2, 2001. The Company continues to believe
that, pursuant to a January 24, 2000 letter agreement between counsel for the
respective parties, the Company and Dr. Kuzmak agreed to a comprehensive
settlement of the California action and related matters. To date, Dr. Kuzmak,
through counsel, has disagreed with the Company's position in this regard. Under
the January 24, 2000 letter agreement, which contemplated further, executed
settlement documentation between the parties, the Company would owe Dr. Kuzmak
$400,000 on execution of such documentation, $250,000 within 90 days thereafter,
and, given FDA pre-marketing approval of the Lap-Band System(R) on June 5, 2001,
$2 million as an advance against royalties for Lap-Bands(R) sold in the United
States. Given Dr. Kuzmak's position with respect to the January 24, 2000 letter
agreement, however, further litigation may be likely. In the event that a court
should determine that the January 24, 2000 letter agreement is unenforceable,
the Company would defend this action and any related litigation and/or
arbitration vigorously.
In SADUC v. Collagen Corporation, the evidentiary hearing and final
arguments have been conducted and concluded. The parties are awaiting a decision
from the arbitral panel.
Litigation Relating to Medical Device Alliance, Inc.
Chieftain, LLC vs. Medical Device Alliance, Inc., pending in state court in
California, remains stayed. On May 25, 2001, the receiver of Medical Device
Alliance, Inc. ("MDA"), filed a first amended complaint in George C. Swarts, et
al. vs. Donald K. McGhan, et al., Case No. A408801, pending in District Court,
Clark County, Nevada. The pleading purports to assert claims against Inamed for
fraud and related theories arising out of Inamed's July, 1998 repayment of
approximately $9.9 million, plus interest, advanced to Inamed by an entity
controlled by Donald K. McGhan, International Integrated Industries, LLC
("Industries"), in April 1997-January 1998. See Note 12 to the Company's
consolidated balance sheet and related financial statements for the years ended
December 31, 2000, 1999. After Industries began to lend those monies to the
Company, Mr. McGhan represented to the Board of Directors that those funds were
derived from personal financial resources. In early 1998, however, in connection
with Mr. McGhan's unsuccessful efforts to negotiate a payment schedule for the
interest and principal of the loan, Mr. McGhan for the first time advised other
directors that approximately two-thirds of the monies lent by Industries to the
Company were in fact derived from loans made to Industries by MDA. The Company's
Board of Directors has been advised by legal counsel: (a) that the Company has
no responsibility whatsoever to the outside investors in MDA for the monies
which Mr. McGhan arranged to loan Industries, which in turn were loaned by
Industries to the Company, and (b) that Mr. McGhan, as the controlling person of
both MDA and Industries at the times those loans were made, is solely
responsible to the outside investors in MDA for his actions with respect to
those monies.
The Company has moved to dismiss the Swarts pleading on the grounds inter
alia that in August, 2000, the Company and the receiver entered into a
definitive settlement of substantially all of the claims alleged in the pleading
(the "August, 2000 Putative Settlement"). The MDA receiver has opposed that
motion, claiming that the Chieftain plaintiffs were necessary signatories to the
August, 2000 Putative Settlement, and the matter is currently before the Nevada
state court for determination. If the Court denies the Company's motion, the
Company intends to defend this action vigorously. Under the August, 2000
settlement documentation, executed by both the Company and the MDA receiver,
Inamed would be obligated to lend MDA between $1.3 and $1.5 million.
In April 2001, amended complaints were filed in Ahr, et al. vs. Medical
Device Alliance, Inc., et al., District Court, Clark County, Nevada, Case No.
A400852 and Andrikos, et al. vs. Medical Device Alliance,
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Inc., et al., District Court, Clark County, Nevada, Case No. A427315, each
purporting to assert claims against Inamed for unjust enrichment and violation
of the Nevada Fraudulent Transfer Act. The claims against the Company in these
matters, which have been consolidated with the Swarts action, described above,
also arise from the $9.9 million loan and/or the repayment thereof. Inamed has
answered the operative complaints in these cases, denying their material
allegations, and moved to dismiss them by reason of the August, 2000 Putative
Settlement. The plaintiffs in these consolidated actions seek unspecified
millions of dollars in damages from the Company. If the Court denies the
Company's motion to dismiss, the Company intends to defend these actions
vigorously.
LITIGATION RELATING TO TRILUCENT IMPLANT
On June 15, 2001, the United States District Court for the Northern
District of California granted the Company's motions to dismiss Rachel Kerr vs.
Collagen Aesthetics, Inc., et al. and Sarah Jane Crane vs. Collagen Aesthetics,
Inc., et al. on forum non conveniens grounds. Kerr is a putative class action,
brought by a U.K. resident, allegedly on behalf of some 9,000 women who received
the Trilucent breast implant worldwide. Crane is an individual action, also
brought by a U.K. resident. The dismissals are conditioned on the Company's
undertaking to submit to jurisdiction in England in the event Crane or Kerr
elect to sue there and to pay any resulting English judgment. The Company and
its required affiliates have filed the required undertaking. Crane and Kerr have
taken appeals from the June 15, 2001 rulings.
The plaintiff in a parallel proceeding, Karen Elizabeth Campbell vs. Inamed
Corporation, et al., Case No. 01-CV-0392 (U.S. Dist. Ct., N.D. Cal.), has
stipulated that her claims will be governed by the outcome of the forum non
conveniens ruling in Kerr and Crane. The Company and certain affiliates are also
parties to Deborah D. Vaernes vs. Inamed Corporation, et al., Case No.
00-CV-4727 (U.S. Dist. Ct., N.D. Cal.), a putative class action brought on
behalf of the approximately 165 U.S. and Canadian women who received Trilucent
breast implants pursuant to an Investigational Device Exemption granted by the
FDA and its Canadian counterpart Vaernes alleges that she suffered personel
injuries as a result of these implants. In June, 2001, the Company and its
affiliates moved to dismiss some of the claims and some of the defendants. That
motion is scheduled to be heard by the Court on August 14, 2001. Even if that
motion is granted in full, however, certain claims will remain pending against
affiliates of the Company. The Company and its affiliates intend to defend this
action vigorously.
Other Litigation
In June, 2001, an action known as Vickie Sager and Elizabeth Weichshel vs.
Inamed Corporation, et al. was filed against the Company and its McGhan Medical
subsidiary in the Superior Court of the State of California for Santa Barbara
County, Case No. 01043771. Plaintiffs, who purport to represent a putative class
of women who received the McGhan Style 468 shaped implant from approximately
1994 to the summer of 2000, allege that McGhan Medical engaged in unfair and/or
fraudulent business practices by representing that the Style 468 provides a more
natural and superior appearance after implantation than round implants when,
according to the plaintiffs, this is not case. Plaintiffs seek both equitable
and restitutionary relief that would require the Company to refund to the
plaintiff class the difference in price between the Style 468 implants and less
expensive round implants, as well as punitive damages. The Company has not yet
responded to the complaint, but intends to defend itself vigorously.
In May, 2001, a hearing was held and concluded before a panel of
arbitrators under the rules of the American Arbitration Association in a matter
known as Thomas Pilholksi vs. Inamed Corporation. Pilholski alleges that the
Company lacked good grounds to terminate his employment as the Company's Chief
Financial Officer in March, 1998 and seeks in excess of one million dollars in
compensatory damages (among other things, for the loss of certain stock options
and warrants), as well as punitive damages. The Company intends to defend itself
vigorously.
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ITEMS 2 THROUGH 3.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 2001, the Company held its annual stockholders' meeting (the
"Meeting"), whereby the stockholders (i) elected six directors; (ii) amended the
Company's 2000 Employee Stock Option Plan; (iii) ratified the appointment of
Arthur Andersen, LLP as the Company's independent accountants for fiscal year
2001. The vote on such matters was as follows:
1. ELECTION OF DIRECTORS
<Table>
<Caption>
TOTAL VOTE OF TOTAL VOTE
EACH WITHHELD
NOMINEE FROM EACH NOMINEE
------------- -----------------
Richard G. Babbitt.......................................... 15,195,093 2,210,914
James E. Bolin.............................................. 17,350,918 55,089
Malcolm R. Currie, Ph.D..................................... 17,351,698 54,309
John F. Doyle............................................... 17,351,218 54,789
Mitchell S. Rosenthal, M.D.................................. 17,351,718 54,289
David A. Tepper............................................. 17,351,718 54,289
</Table>
2. AMENDMENT TO COMPANY'S 2000 EMPLOYEE STOCK OPTION PLAN
<Table>
For......................................................... 13,462,163
Against..................................................... 3,934,966
Abstaining.................................................. 8,878
Broker Non-Votes............................................ 0
</Table>
3. APPOINTMENT OF ARTHUR ANDERSEN, LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
FOR FISCAL YEAR 2001
<Table>
For......................................................... 17,320,824
Against..................................................... 77,531
Abstaining.................................................. 7,652
</Table>
ITEM 5. OTHER INFORMATION
In May, 2001, the Company entered into an agreement with BSMD Ventures,
Inc. ("BSMD") terminating the January, 2001 supply agreement between them. Under
the termination agreement, the Company paid $500,000, and obtained a full
release of any and all claims by BSMD and its affiliates against the Company and
its affiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K dated April 30, 2001 -- The Company announced it's financial
results for the first quarter ended March 31, 2001.
Form 8-K dated May 29, 2001 -- The Company announced it's mid-quarter sales
update for the second quarter ending June 30, 2001.
Form 8-K dated June 6, 2001 -- The Company announced that it's BioEnterics
Corp. subsidiary had received Pre-Market Approval clearance by the Food and Drug
Administration for the LAP-Band Adjustable Gastric Banding System for the
treatment of severe obesity.
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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
(Principal Financial and
Accounting Officer)
August 10, 2001
By: /s/ RICHARD G. BABBITT
------------------------------------
Richard G. Babbitt, Chairman of the
Board of
Directors and Chief Executive
Officer
(Principal Executive Officer)
<Table>
August 10, 2001
</Table>
16