1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NUMBER: 1-9741
INAMED CORPORATION
State of Incorporation: Delaware I.R.S. Employer Identification No.:59-0920629
5540 Ekwill Street, Suite D, Santa Barbara, California 93111-2919
Telephone Number: (805) 692-5400
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No_____
On August 12, 1999 there were 17,120,437 Shares of the Registrant's
Common Stock Outstanding.
This document contains 21 pages.
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INAMED CORPORATION AND SUBSIDIARIES
FORM 10-Q/A
Quarter Ended June 30, 1999
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Unaudited Consolidated Income Statements 5
Unaudited Consolidated Statements of Comprehensive Income 7
Unaudited Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Market Risk 19
PART II - OTHER INFORMATION 20
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PART I. FINANCIAL INFORMATION
ITEM 1.
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
Unaudited Audited
June 30, 1999 December 31, 1998
------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 13,542 $ 11,873
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $6,525 and $6,158 25,007 23,169
Inventories 16,773 17,855
Prepaid expenses and other current assets 2,102 1,337
Income tax refund receivable 695 726
Deferred income taxes 9,134 8,000
-------- --------
Total current assets 67,253 62,960
-------- --------
Property and equipment, at cost:
Machinery and equipment 14,984 14,170
Furniture and fixtures 3,362 3,418
Leasehold improvements 11,933 11,986
-------- --------
30,279 29,574
Less accumulated depreciation
and amortization (17,589) (16,751)
-------- --------
Net property and equipment 12,690 12,823
-------- --------
Notes receivable, net of allowance of $467 2,835 2,769
Intangible assets, net 884 1,015
Other assets, at cost 4,965 1,140
-------- --------
Total assets $ 88,627 $ 80,707
======== ========
(continued)
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
Unaudited Audited
June 30, 1999 December 31, 1998
------------- -----------------
Liabilities and Stockholders' Deficiency Equity
Current liabilities:
Current installments of long-term debt $ 25 $ 51
Notes payable to bank 1,087 1,186
Accounts payable 10,095 12,226
Accrued liabilities:
Salaries, wages, and payroll taxes 3,491 2,681
Interest 508 2,032
Self-insurance 4,138 3,649
Other 7,834 4,523
Royalties payable 4,111 5,061
Taxes payable 2,663 1,318
Accrued legal -- 5,721
Note payable, escrow agent -- 25,500
-------- --------
Total current liabilities 33,952 63,948
-------- --------
Convertible and other long-term debt,
excluding current installments 17,047 27,767
Deferred grant income 1,035 1,235
Deferred income taxes 454 382
Commitments and contingencies
Redeemable common stock, $.01 par value
426,323 shares issued and outstanding
stated at redemption value $7.04 per share -- 3,000
Stockholders' equity:
Preferred stock, $0.01 par value -- --
Authorized 1,000,000 shares; none issued
Common stock, $0.01 par value
Authorized 25,000,000 shares; issued
and outstanding 17,120,437 and 11,010,290 171 110
Additional paid-in capital 74,662 37,605
Accumulated other comprehensive (loss) income (1,649) 269
Accumulated deficit (37,045) (53,609)
-------- --------
Stockholders' equity (deficiency) 36,139 (15,625)
-------- --------
Total liabilities and stockholders' equity $ 88,627 $ 80,707
======== ========
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 79,753 $ 66,980
Cost of goods sold 23,920 23,294
----------- ----------
Gross profit 55,833 43,686
----------- ----------
Operating expenses:
Marketing 16,414 18,296
General and administrative 14,934 15,653
Research and development 4,102 4,110
----------- ----------
Total operating expenses 35,450 38,059
----------- ----------
Operating income 20,383 5,627
----------- ----------
Other income (expense):
Foreign currency transaction gains (losses) 100 (1,068)
Miscellaneous loss (880) (113)
----------- ----------
Net other expense (780) (1,181)
----------- ----------
Income before interest and taxes 19,603 4,446
Interest and other financing expense, net 3,039 1,854
Income before income tax expense 16,564 2,592
Income tax expense --- 104
----------- ----------
Net income $ 16,564 $ 2,488
=========== ==========
Net income per share of common stock
Basic $ 1.27 $ 0.26
=========== ==========
Diluted $ 0.98 $ 0.26
=========== ==========
Weighted average common shares outstanding basic 13,074,191 9,726,013
=========== ==========
Weighted average common shares outstanding diluted 16,952,167 9,726,013
=========== ==========
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
Net sales $ 42,165 $ 36,928
Cost of goods sold 12,020 11,002
------------ ------------
Gross profit 30,145 25,926
------------ ------------
Operating expenses:
Marketing 8,580 9,945
General and administrative 7,452 9,055
Research and development 2,075 2,070
------------ ------------
Total operating expenses 18,107 21,070
------------ ------------
Operating income 12,038 4,856
------------ ------------
Other income (expense):
Foreign currency transaction losses (7) (41)
Miscellaneous loss (566) (186)
------------ ------------
Net other expense (573) (227)
------------ ------------
Income before interest and taxes 11,465 4,629
Interest and other financing expense, net 2,399 853
Income before income tax expense 9,066 3,776
Income tax expense -- 3
------------ ------------
Net income $ 9,066 $ 3,773
============ ============
Net income per share of common stock
Basic $ 0.62 $ 0.38
============ ============
Diluted $ 0.51 $ 0.38
============ ============
Weighted average common shares outstanding basic 14,660,690 9,987,705
============ ============
Weighted average common shares outstanding diluted 17,818,406 9,987,705
============ ============
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN 000'S)
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
Net income $ 9,066 $ 2,488
Other comprehensive (loss) income, net of tax:
Cumulative foreign currency translation losses (912) 288
-------- --------
Comprehensive income 8,154 2,776
-------- --------
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
Net income $ 16,564 $ 2,448
Other comprehensive income (loss), net of tax:
Cumulative foreign currency translation (losses) gains (1,918) 679
-------- --------
Comprehensive income 14,646 3,127
-------- --------
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)
Six Months ended June 30, 1999 and 1998
Increase in Cash and Cash Equivalents
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $ 16,564 $ 2,488
-------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,609 1,814
Deferred income taxes (1,062) 205
Provision for doubtful accounts, notes & returns 367 --
Provision for obsolescence of inventory 973 --
Provision for asset impairment 600 --
Non-cash compensation -- 230
Non-cash financing cost 1,977 --
Changes in assets and liabilities:
Trade accounts receivable (2,205) (8,243)
Notes receivable (66) 3
Inventories 109 2,603
Prepaid expenses and other current assets (765) (485)
Income tax refund receivable 31 (57)
Other assets (3,825) (1,224)
Accounts payable, accrued and other liabilities 954 533
Royalties payable (950) 1,841
Taxes payable 1,345 (436)
Accrued litigation settlement (5,721) (33)
-------- --------
Total adjustments (6,629) (3,249)
-------- --------
Net cash provided by (used in) operating activities 9,935 (761)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (2,043) (1,143)
-------- --------
Net cash used in investing activities (2,043) (1,143)
-------- --------
(continued)
The Notes to Financial Statements are an integral part of this statement.
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INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)
Six Months ended June 30, 1999 and 1998
Increase in Cash and Cash Equivalents
1999 1998
---- ----
Cash flows from financing activities:
Payment of note in escrow for litigation settlement $(25,500) $ --
Increases in notes payable and long-term debt -- 579
Principal repayment of notes payable
and long-term debt (46) (15)
Payment of redeemable common stock in escrow
for litigation settlement (3,000)
Increase (decrease) in related party payables -- 1,038
Proceeds from the exercise of warrants 26,419 60
(Decrease) Increase in deferred grants (200) 290
-------- --------
Net cash (used in) provided by financing activities (2,327) 1,952
-------- --------
Effect of exchange rate changes on cash (3,896) 1,190
-------- --------
Net increase in cash and cash equivalents 1,669 1,238
Cash and cash equivalents at beginning of period 11,873 1,946
-------- --------
Cash and cash equivalents at end of period $ 13,542 $ 3,184
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 2,741 $ 1,736
======== ========
Income taxes $ 11 $ 97
======== ========
Disclosure of accounting policy:
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents.
Non-cash transactions:
1999 1998
---- ----
Common stock exchanged for junior secured notes $ 10,700 --
The Notes to 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, 1999
(IN 000'S)
================================================================================
Note 1 - Interim Financial Statements
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for fair presentation of the results of
operations for the periods presented. Interim results are not necessarily
indicative of the results to be expected for a full year.
Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as allowed by Form 10-Q. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 1998 as filed with the Securities and Exchange Commission on
Form 10-K.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Inamed International Corp. and each of its wholly owned subsidiaries (the
"Company"). Intercompany transactions are eliminated in consolidation.
The Company
Inamed Corporation's subsidiaries are organized into three business units:
United States Plastic and Reconstructive Surgery (consisting primarily of McGhan
Medical Corporation, Flowmatrix Corporation and CUI Corporation, which develop,
manufacture and sell medical devices and components); BioEnterics Corporation,
which develops, manufactures and sells medical devices and associated
instrumentation to the bariatric and general surgery fields; and International
(consisting of Inamed International Corp. and its subsidiaries which are engaged
in manufacturing and distribution through McGhan Limited (based in Ireland) and
sales subsidiaries in various countries, including Holland, Germany, Italy,
United Kingdom, France, and Spain, which sell products for both the plastic and
bariatric surgery fields).
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (CONTINUED)
(IN 000'S)
================================================================================
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Earnings Per Share
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", ("SFAS No. 128")
which provides for the calculation of "basic" and "diluted" earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1998. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects, in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options and warrants. As required
by this Statement, all periods presented have been restated to comply with the
provisions of SFAS No. 128.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Segment Reporting
In June 1998, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("SFAS
No. 131") which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
Taxes
The Company reduced the valuation allowance on the deferred tax asset by $5.5
million and $3.0 million for the six months and three months ended June 30,
1999, respectively, based on future short-term income projections. The Company
has a $10.0 million allowance remaining as of June 30, 1999.
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (CONTINUED)
(IN 000'S)
================================================================================
New Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which requires entities to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair value. SFAS No. 133 is effective
for all fiscal years beginning after June 15, 1999. The Company is currently
reviewing SFAS No. 133 and has of yet been unable to fully evaluate the impact,
if any, it may have on future operating results or financial statement
disclosures.
Reclassification
Certain reclassifications were made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
Note 3 - Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
June 30, 1999 December 31, 1998
-------------- -----------------
Accounts receivable $ 31,532 $ 29,327
Allowance for doubtful accounts (1,166) (1,402)
Allowance for returns and credits (5,359) (4,756)
-------- --------
Net accounts receivable $ 25,007 $ 23,169
======== ========
Notes receivable $ 3,302 $ 3,236
Allowance for doubtful notes (467) (467)
-------- --------
Net notes receivable $ 2,835 $ 2,769
======== ========
Note 4 - Inventories
Inventories are summarized as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 4,899 $ 3,764
Work in process 4,731 3,931
Finished goods 9,285 11,329
-------- --------
18,915 19,024
Less allowance for
obsolescence (2,142) (1,169)
-------- --------
$ 16,773 $ 17,855
======== ========
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (CONTINUED)
(IN 000'S)
================================================================================
Note 5 - Long Term Debt
The following is a summary of the Company's significant long-term debt:
$8,000 of senior secured notes, at an interest rate of 10%. These notes mature
on September 1, 2000. The proceeds were received by the Company on October 2,
1998. In connection with this financing the Company issued 590,000 four-year
warrants to purchase common stock at $6.50 per share. $3,000 of the proceeds of
this financing were deposited in a court-supervised escrow as part of the
consideration for the litigation settlement (see Notes 6 and 7); the balance is
available for use by the Company in specific capital improvement projects and
working capital uses. These senior notes are anticipated to be retired in
connection with the new financing resulting from the Company's proposed
acquisition of Collagen Aesthetics, Inc. (See footnote 8 for subsequent events.)
$8,882 of junior secured notes, at an interest rate of 11%. These notes were
issued in an exchange offer completed in November 1998 for a similar amount of
senior secured convertible notes that were originally issued in January 1996.
These notes mature on September 1, 2000. The $5.50 per share conversion feature
of the original notes was replaced with an equivalent number of new, four-year
warrants to purchase common stock at $5.50 per share, and the holders of the
original notes received 500,000 four-year warrants to purchase common stock at
$7.50 per share in settlement of an anti-dilution adjustment. In connection with
the financing of the breast implant litigation, the Company offered a rebate of
$0.70 for the exercise of the $5.50 warrants prior to April 30, 1999, to
compensate those holders for their cost of funds until the maturity of those
warrants. All but 53,506 of the 3.7 million $5.50 warrants were exercised. Of
the original $19,548 exchange notes, $10,666 principal amount was used as
payment for the exercise of the exchange warrants. The remaining junior secured
exchange notes are anticipated to be retired in connection with the new
financing resulting from the Company's proposed acquisition of Collagen
Aesthetics, Inc. (See footnote 8 for subsequent events.)
Subsequent to quarter end the Company obtained a secured bridge loan commitment
for $155 million from a group of financial institutions. This commitment was
obtained to finance the purchase of 100% of Collagen Aesthetics, Inc. for
approximately $150 million. (See footnote 8 for subsequent events.)
Note 6 - Equity financing and non-cash compensation charge:
During the second quarter of 1999, the Company completed a $31.1 million equity
financing, in which 5.4 million new shares of common stock were issued to
various holders of $5.50 and $7.50 warrants in exchange for the payment of $20.4
million of cash and the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to exercise at this
time participated in the transaction. The Company also received $3 million of
cash from its noteholders, which was used to purchase on their behalf the
426,323 shares of common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that restricts
transferability absent compliance with or an exemption under Rule 144 (after the
one-year holding period) or an effective registration statement. In addition,
the Company incurred a one-time $2.0 million finance charge against earnings in
connection with the exercise of warrants to fund the litigation settlement.
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INAMED CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (CONTINUED)
(IN 000'S)
================================================================================
Note 7 - Commitments and Contingencies
Final payment to plaintiffs in the mandatory class action settlement of the
breast implant litigation:
In May of 1999, the Company completed the final payment of all of the monies
owed to the court-appointed escrow agent on behalf of the plaintiffs in the
mandatory class action settlement of the breast implant litigation. The payment
was $29.9 million in cash, and included $25.5 million as full payment of the 6%
promissory note which was issued in June 1998 at the time the settlement
received preliminary approval, $1.4 million of accrued interest on that note,
and $3 million to repurchase the 426,323 shares of common stock which were also
issued in June 1998 to the escrow agent. As a result of this payment,
approximately $30 million of liabilities relating to the breast implant
litigation that was recorded on the Company's balance sheet as of the end of the
first quarter of 1999 has now have been eliminated.
Note 8 - Subsequent Events
Subsequent to quarter end the Company entered a definitive merger agreement to
acquire Collagen Aesthetics, Inc. for $16.25 per share in cash, for a total of
approximately $150 million. The Company has commenced a cash tender offer for
all outstanding shares of common stock of Collagen Aesthetics. Following
completion of the tender offer all remaining Collagen Aesthetics shares will be
acquired in a cash merger at the same price. It is anticipated that these
transactions will be completed by the end of the third quarter of 1999.
The tender offer is subject to a majority of Collagen Aesthetics' fully diluted
shares (approximately 10.2 million shares as of July 30, 1999) being validly
tendered and not withdrawn, as well as the expiration of the Hart-Scott-Rodino
premerger notification waiting period and other customary conditions.
The Company obtained a secured bridge loan commitment for $155 million from a
group of financial institutions. The Company anticipates that the bridge loan
will be refinanced during 1999 with proceeds of a long-term debt financing. Upon
completion of the tender offer the Company will retire its existing debt, so
that the combined company will have only $155 million of bridge debt
outstanding. Neither the tender offer nor the second step merger is subject to
financing contingencies.
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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 including
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
RESULTS OF OPERATIONS
SUMMARY FINANCIAL TABLE. Set forth below is a table which shows the
individual components of the Company's results of operations, both in dollars
(in thousands) and as a percent of net sales; and including the percentage
increase (decrease) for the three and six months ended June 30, 1999 and 1998.
THREE MONTHS ENDED
------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(in 000's) %INC.
Sales 42,165 14% 36,928
Cost of Goods Sold 12,020 9% 11,002
Gross Profit 30,145 16% 25,926
As a % of sales 72% 70%
Marketing 8,580 (14%) 9,945
As a % of sales 20% 27%
G&A 7,452 (18%) 9,055
As a % of sales 18% 25%
R&D 2,075 --% 2,070
As a % of sales 5% 6%
Operating expenses 18,107 (14)% 21,070
As a % of sales 43% 57%
Operating income 12,038 148% 4,856
As a % of sales 29% 13%
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SIX MONTHS ENDED
----------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(in 000's) %INC.
Sales 79,753 19% 66,980
Cost of Goods Sold 23,920 (3%) 23,294
Gross Profit 55,833 28% 43,686
As a % of sales 70% 65%
Marketing 16,414 (10%) 18,296
As a % of sales 21% 27%
G&A 14,934 (5%) 15,653
As a % of sales 19% 23%
R&D 4,102 --% 4,110
As a % of sales 5% 6%
Operating expenses 35,450 (7%) 38,059
As a % of sales 44% 57%
Operating income 20,383 262% 5,627
As a % of sales 26% 8%
SALES for the three months ended June 30, 1999 totaled $42.2 million, an
increase of $5.2 million or 14% over the same period in 1998. Sales for the six
months ended June 30, 1999 totaled $79.8 million, an increase of $12.8 million
or 19% over sales for the same period in 1998 which totaled $67.0 million.
Increased sales from all business units and primarily increased demand for
saline and gel implants in the U.S. and International Plastic and Reconstructive
Surgery markets contributed to the increase in sales volume which the Company
believes exceeds the industry growth rate for the second quarter and first six
months of 1999. During the second quarter there was a slowdown in sales growth
due to the development of backorders in selected product lines in the United
States plastic surgery business. This situation arose due to production capacity
issues for a limited number of products which the Company is working to
expeditiously address and expects to have largely remedied by the end of the
third quarter.
Sales in the United States accounted for 62% and 68% of total net sales
for the second quarter and six months ended June 30, 1999, respectively, as
compared to 65% for both the second quarter and six months ended June 30, 1998.
International sales accounted for 38% and 32% of total net sales for the second
quarter and six months ended June 30, 1999, respectively. International sales
for the second quarter and six months ended June 30, 1998 were 35% of total net
sales.
GROSS PROFIT for the three months ended June 30, 1999 totaled $30.1
million, an increase of $4.2 million or 16% over gross profit for the same
period in 1998. Gross profit for the six months ended June 30, 1999 totaled
$55.8 million, an increase of $12.1 million or 28% over the same period in 1998.
As a percentage of revenues, gross profit increased 2% for the second quarter of
1999 up from 70% for the same period of 1998. For the six months ended June 30,
1999 gross profit as a percentage of revenues increased 5% up to 70% from 65%
for the same period in 1998. Margins increased primarily due to increased
production efficiencies, resulting in higher yields and increased through-put in
all business units along with increased sales volumes of higher margin gel
products for reconstructive surgery markets. Strong cost reduction measures at
all production facilities, which include material cost reductions and strategic
alliances with key company suppliers, reduction in headcount, discontinuance or
sale of certain smaller unprofitable product lines, improved asset management
(especially receivables and inventory), also contributed to an overall reduction
of cost of goods sold which positively impacted gross margins for the second
quarter and first six months of 1999.
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Gross Margins in 1998 were negatively impacted by pending FDA audits and
manufacturing inefficiencies caused by idle time at both U.S. and International
Plastic and Reconstructive Surgery operations.
MARKETING EXPENSES for the three months ended June 30, 1999 were $8.5
million, a decrease of $1.3 million or 14% over the same period in 1998. As a
percentage of sales marketing expenses decreased 7% from 27% in the second
quarter of 1998 down to 20% for the second quarter of 1999. Marketing expenses
for the six months ended June 30, 1999 were $16.4 million, a decrease of $1.8
million or 10% under 1998 expenses for the same period. As a percentage of
sales, 1999 marketing expenses for the six months ended June 30, 1999 were 21%
and 27% for the first six months of 1999 and 1998, respectively. New
management's goals of growing the sales and reducing costs, which included the
restructuring of the entire company during 1998 and strong cost containment
procedures, have helped to dramatically reduce the Company's marketing expenses
in 1999 from 1998 levels. The Company currently anticipates that marketing
expenses will increase in future quarters but may decrease as a percentage of
sales. The actual amount spent will depend on a variety of factors, including
the Company's level of operations, and the number of new markets the Company
attempts to enter, either geographically or through acquisitions, joint ventures
or strategic alliances for new products.
During the second quarter of 1999, the Company entered into a strategic alliance
with Advanced Tissue Sciences, Inc. (ATS) for development and marketing of human
based, tissue-engineered products for aesthetic and cosmetic surgery, cartilage
for plastic and reconstructive surgery, and for use in breast reconstruction. In
addition, the Company received an option to license rights to use human collagen
for soft tissue augmentation (wrinkle and cosmetic correction) and as a bulking
agent for treatment of urinary incontinence. Assuming the option is exercised,
ATS would receive $10 million during 1999: one half for license payments and one
half for the purchase of common stock and warrants at a premium to market. Once
each of the marketed products receives FDA approval, ATS will receive a $2
million milestone payment and royalties on a sliding scale based on overall
product sales. ATS will be responsible for the development of the products and
the related manufacturing processes, while the Company will be responsible for
clinical and regulatory activities, as well as sales and marketing. ATS will
have the right to manufacturing the products developed under the agreement. The
Company has agreed to hold any investment in ATS common stock until at least
October 2002.
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30,
1999 totaled $7.4 million, a decrease of $1.6 million or 18% from the same
period in 1998. General and administrative expenses for the six months ended
June 30, 1999 were $14.9 million, a decrease of $0.7 million or 5% from the same
period of 1998. General and administrative expense decreased as a percentage of
sales from 25% down to 18% for the three months ended June 30, 1999 and from 23%
down to 19% for the six months ended June 30, 1999 as compared to the same
periods in 1998. The decrease in expenses is attributable to the Company's
strong commitment to reduce costs through elimination of unprofitable business
areas, reduction in headcount as necessary, streamlining the organizational
structure from multiple domestic and international business subsidiaries into
three business units, elimination of underutilized corporate offices, and
budgeting and review of all expenses.
RESEARCH AND DEVELOPMENT EXPENSES remained consistent at $2.1 million for
the three months ended June 30, 1999 and 1998. Research and development costs of
$4.1 million remained constant in absolute dollars for the six months ended June
30, 1999 and 1998, respectively. As a percentage of sales, research and
development costs were 5%, a decrease of 1% down for both the three and six
months ended June 30, 1999 as compared to 6% for the same periods in 1998. The
Company currently anticipates that research and development expenses will
increase in future quarters and may increase as a percentage of sales. The
actual amount spent will depend on a variety of factors, including the Company's
level of operations, and the number of product development projects that it
embarks upon, including through acquisitions, strategic alliances and joint
ventures for new products. Research and development expenses consist of ongoing
research and development expenses for new product development in all business
units,
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as well as necessary regulatory and clinical costs associated with testing and
approving new product introductions in the United States and throughout the
world.
NET INTEREST AND OTHER FINANCING EXPENSE for the three months ended June
30, 1999 totaled $2.4 million, an increase of $1.5 million over the same period
of 1998. Net interest and other financing costs were $3.0 million for the six
months ended June 30, 1999, an increase of $1.2 million from $1.8 million for
the six months ended June 30, 1998. Net interest and other financing expenses
for the three months and six months ended June 30, 1999 include a one-time
financing charge of $2.0 million incurred in connection with the exercise of
warrants to fund the litigation settlement. Without the charge, net interest and
other financing expenses would have decreased $0.8 million and $0.5 million for
the six and three months ended June 30, 1999, as compared to the same period in
1998. This decrease resulted from the $31.1 million equity financing used to
fund the litigation settlement, which resulted in a $10.7 million reduction in
the Company's 11% junior secured notes.
FOREIGN CURRENCY TRANSLATION GAINS AND LOSSES. During the second quarter
of 1999 the Company converted the non-U.S. intercompany debts among its
subsidiaries to the capital of the respective subsidiaries. This step
substantially eliminated the significant translation adjustments which occurred
in prior years. For the six months ended June 30, 1999 the Company's foreign
currency translation resulted in a gain of $100,000 as compared to a $1.0
million loss for the same period in 1998.
INCOME TAXES AND EARNINGS PER SHARE. The Company reduced the valuation
allowance on the deferred tax asset based on future short-term income
projections. The Company is currently the beneficiary of a substantial net
operating loss (NOL) carryforward for financial reporting purposes. In order to
provide investors with a perspective on its earnings per share on a normalized
basis, assuming it accrued taxes at a 33% effective rate, the Company's earnings
for the second quarter and first six months of 1999 would have been $0.41 and
$0.85 per basic share, respectively, and $0.34 and $0.65 per diluted share,
respectively. Excluding the one-time financing charge of $2.0 million, the
Company's earnings for the second quarter and first half of 1999, on a
normalized tax basis, would have been $0.50 and $0.95 per basic share,
respectively, and $0.42 and $0.73 per diluted share, respectively,
FINANCIAL CONDITION
LIQUIDITY. During the first six months of 1999, net cash provided by operations
was $10.0 million compared to $0.8 million used in operations for the same
period in 1998. Positive cash from operations was offset by $2.0 million used in
investing activities due to fixed asset purchases for the first six months of
1999. Cash used in financing activities of $2.3 million primarily related to
breast implant litigation settlement and debt payments which worked to partially
offset positive operating cash. The positive cash from operations resulted from
the high operating profit margin and the continued emphasis on the efficient
management of working capital.
During the second quarter of 1999, the Company completed a $31.1 million equity
financing, in which 5.4 million new shares of common stock were issued to
various holders of $5.50 and $7.50 warrants in exchange for the payment of $20.4
million of cash and the surrender of $10.7 million of 11% junior secured notes.
Virtually all of the holders of warrants who were eligible to exercise at this
time participated in the transaction. The Company also received $3 million of
cash from its noteholders, which was used to purchase on their behalf the
426,323 shares of common stock held by the court-appointed escrow agent. All of
those 5.8 million shares of common stock contain a legend that restricts
transferability absent compliance with or an exemption under Rule 144 (after the
one-year holding period) or an effective registration statement. In addition,
the Company incurred a one-time $2.0 million finance charge against earnings in
connection with the exercise of warrants to fund the litigation settlement.
During the second quarter of 1999, the Company also made its final payment of
all monies owed to the court-appointed escrow agent on behalf of the plaintiffs
in the mandatory class action settlement of the breast implant litigation. The
payment was $29.9 million in cash, and consisted of $25.5 million as full
payment of
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the 6% promissory note issued in June 1998, $1.4 million in accrued interest on
the note, and $3 million to repurchase 426,323 shares of common stock which were
also issued in June 1998 to the escrow agent. As a result of this payment,
approximately $30 million of liabilities relating to the breast implant
litigation that was recorded on the Company's balance sheet as of the end of the
first quarter of 1999 has now been eliminated. (See footnote 6 for equity
transaction.)
ITEM 3. MARKET RISK
The Company conducts operations and/or business in various foreign
countries throughout the world. Global and regional economic factors and
potential changes in laws and regulations affecting the Company's business,
including without limitation, currency fluctuations, changes in monetary policy
and tariffs, and federal, state and international laws, could impact the
Company's financial condition or future results of operations. The Company does
not currently conduct any hedging activities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company has been advised
by the Securities and Exchange Commission that it is
conducting a formal investigation of the matters disclosed in
the Current Report on Form 8-K dated March 6, 1998 relating to
the resignation of Coopers & Lybrand LLP as the Company's
independent accountant. The Company is cooperating fully in
this investigation. Furthermore, the Company believes that all
of the procedural and substantive issues raised in that filing
have been addressed through a variety of steps, including the
appointment of a new senior management team, the continual
oversight by an audit committee, and the conversion into
equity of the $10.8 million of indebtedness (including accrued
interest) owed to an entity controlled by the former Chairman
at a significant discount, which more than adequately reflects
the dollar value of any and all known related party
transactions. The Company does not believe that this
investigation will give rise to any material costs, and is
seeking to pursue a prompt resolution of this matter.
In February 1999 the Company and certain of its
subsidiaries were named as respondents (collectively "the
Inamed Parties") in an arbitration commenced by Dr. Lubomyr I.
Kuzmak ("Kuzmak") at the American Arbitration Association.
Kuzmak alleges that he is owed approximately $400,000 in
unpaid royalties with respect to various United States patents
in the field of gastric banding. Inamed has moved to be
dismissed from the arbitration. The other Inamed Parties have
denied Kuzmak's material allegations and asserted affirmative
defenses and counterclaims. The evidentiary portion of the
arbitration hearing is scheduled to begin in December 1999. In
addition, in February 1999 the Inamed Parties filed an action
in the United States District Court for the Central District
of California against Kuzmak, No. CV 99-02160 MMM, seeking a
declaratory judgment of invalidity, unenforceability, and
non-infringement of various Kuzmak patents. Kuzmak has moved
to dismiss the action for lack of personal jurisdiction. That
motion is set for hearing in September 1999.
In January 1999 Medical Products Development Inc.
("MPDI") instituted an action against the Company's
subsidiary, McGhan Medical Corporation ("McGhan") in the
United States District Court for the Central District of
California, No. 99-VC-00053 JSL. MPDI alleges that McGhan has
infringed on certain of its U.S. patents and has breached an
agreement between McGhan and MPDI that exclusively licensed
those patents to McGhan. The patents pertain to textured
silicone elastomer mammary prostheses and methods of making
such prostheses. MPDI is seeking unspecified damages,
including enhanced damages for alleged willful infringement,
and an injunction. McGhan answered MPDI's complaint, denying
all of its material allegations, and raising affirmative
defenses and counterclaims of non-infringement, invalidity,
unenforceability of the patents and breach of contract. In
August 1999, the Court granted MPDI's motion to dismiss
certain of the counterclaims and, on its own motion, dismissed
the remaining counterclaims. Discovery is currently ongoing,
and no trial date has been set.
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ITEMS 2. THROUGH 5.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Forms 8-K dated April 2 and May 10, 1999.
INAMED CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INAMED CORPORATION
October 27, 1999 By: /s/ Richard G. Babbitt
-------------------------------------------------
Richard G. Babbitt, Chairman of the Board
and Chief Executive Officer
October 27, 1999 By: /s/ Michael J. Doty
-------------------------------------------------
Michael J. Doty, Senior Vice President
and Chief Financial Officer