1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO.1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 1, 1999
Inamed Corporation
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 001-09741 59-0920629
- --------------------------------------------------------------------------------
(State or Other Juris- (Commission File (IRS Employer
diction of Incorporation) Number) Identification No.)
5540 Ekwill Street - Suite D, Santa Barbara, California 93111-2919
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (805) 692-5400
N/A
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
2
Inamed Corporation (the "Company"), hereby files this Amendment No. 1 to its
Current Report on Form 8-K, filed with the Commission on September 15, 1999, and
supplies financial information on Collagen Aesthetics Inc. ("Collagen") and pro
forma information reflecting the Company's acquisition of Collagen on September
1, 1999.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired:
The financial statements of Collagen required to be set forth herein are
attached hereto as Annex A and are incorporated herein by reference.
(b) Pro Forma Financial Information:
The pro forma financial statements of the Company required to be set forth
herein are attached hereto as Annex B and are incorporated herein by reference.
(c) Exhibits:
Exhibit Description
2.1 Agreement and Plan of Merger, dated as of July 31, 1999, by and
among Inamed Corporation, Inamed Acquisition Corporation and
Collagen Aesthetics, Inc. (incorporated by reference to Exhibit
(c)(1) to Schedule 14D-1 filed by Inamed Corporation and Inamed
Acquisition Corporation with the Commission on August 4, 1999).
4.1 Loan Agreement, dated as of September 1, 1999, among Inamed
Corporation and Inamed Acquisition Corporation, as Borrowers, the
Initial Lenders named therein, as Initial Lenders, and Ableco
Finance LLC, as Administrative Agent.*
99.1 Press Release issued by Inamed Corporation, dated September 2,
1999.*
* Previously filed as an exhibit to the Current Report on Form 8-K
filed with the Commission on September 15, 1999.
2
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INAMED CORPORATION
Date: November 8, 1999 By: /s/ Ilan K. Reich
---------------------
Name: Ilan K. Reich
Title: President
3
4
ANNEX A
ITEM 7(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Collagen Aesthetics, Inc.
We have audited the accompanying consolidated balance sheets of Collagen
Aesthetics, Inc. (formerly Collagen Corporation) as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conduct our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a text basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position for Collagen
Aesthetics, Inc. (formerly Collagen Corporation) at June 30, 1999 and 1998, and
the consolidated results of its operations and its cash flows, for each of the
three years in the period ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 30, 1999
6
COLLAGEN AESTHETICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 16,741 $ 7,916
Short-term investments................................. 7,890 8,011
Accounts receivable, less allowance for doubtful
accounts ($439 in 1999 and $505 in 1998).............. 14,283 13,764
Inventories, net....................................... 11,690 12,101
Inventories of discontinued operations, net............ -- 417
Other current assets, net.............................. 7,455 11,016
-------- --------
Total current assets.............................. 58,059 53,225
Property and equipment, net............................... 12,877 14,448
Intangible assets, net.................................... 8,877 6,861
Investment in Boston Scientific Corporation............... -- 73,979
Investment in Devices, Inc................................ -- 7,027
Investment in Pharming, B.V............................... -- 7,010
Loans to officers and employees, net...................... 54 259
Other investments and assets, net......................... 5,967 3,530
-------- --------
$ 85,834 $166,339
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 7,206 $ 3,561
Accrued compensation................................... 3,166 4,749
Accrued liabilities.................................... 6,871 11,913
Provision for disposal of discontinued operations,
current............................................... 4,431 1,193
Income taxes payable................................... 15,666 10,606
Liabilities of discontinued operations, net............ -- 781
-------- --------
Total current liabilities......................... 37,340 32,803
Long-term liabilities:
Deferred income taxes..................................... -- 30,589
Provision for disposal of discontinued operations,
long-term.............................................. 5,495 914
Other long-term liabilities............................... 1,170 1,393
-------- --------
Total long-term liabilities....................... 6,665 32,896
Commitments and contingencies...............................
Minority interest........................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value, authorized: 5,000,000
shares; none issued or outstanding..................... -- --
Common shares, $.01 par value, authorized: 28,950,000
shares, issued: 11,046,359 shares (10,937,830 shares in
1998), outstanding: 8,592,359 shares (8,864,930 shares
in 1998)............................................... 110 109
Additional paid-in capital................................ 56,036 69,619
Retained earnings......................................... 34,710 32,128
Cumulative translation adjustment......................... (2,084) (2,030)
Unrealized gain on available-for-sale investments......... -- 43,833
Treasury stock, 2,454,000 shares in 1999 (2,072,900 shares
in 1998)............................................... (46,943) (43,019)
-------- --------
Total stockholders' equity........................ 41,829 100,640
-------- --------
$ 85,834 $166,339
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Product sales............................................. $ 86,389 $ 82,772 $68,335
Costs and expenses:
Cost of sales............................................. 24,559 23,958 17,223
Selling, general and administrative....................... 41,120 42,535 38,792
Research and development.................................. 7,889 22,715 14,087
Restructuring expense..................................... -- 1,541 --
Purchased in-process research and development............. -- 10,587 --
-------- -------- -------
73,568 101,336 70,102
-------- -------- -------
Income (loss) from operations............................... 12,821 (18,564) (1,767)
Other income (expense):
Net gain on investments, principally Boston Scientific
Corporation............................................ 3,721 19,096 9,063
Net gain on investment in Prograft Medical, Inc........... -- -- 15,395
Equity in losses of other affiliates...................... (35) (151) (970)
Interest income........................................... 591 988 1,110
Interest expense.......................................... (64) (56) (473)
-------- -------- -------
Income before income taxes, minority interest and
discontinued operations................................... 17,034 1,313 22,358
Provision for income taxes.................................. 7,010 3,207 8,325
Minority interest........................................... 1 (16) (765)
-------- -------- -------
Income (loss) from continuing operations.................... 10,023 (1,878) 14,798
Discontinued operations:
Loss from operations...................................... -- (5,279) (9,145)
Benefit for income taxes.................................. -- 1,630 1,718
-------- -------- -------
Loss from discontinued operations, net of taxes........ -- (3,649) (7,427)
Provision for disposal.................................... (11,500) (11,045) --
Benefit for income taxes.................................. 4,059 2,489 --
-------- -------- -------
Provision for disposal, net of taxes................... (7,441) (8,556) --
-------- -------- -------
Total loss from discontinued operations, net of
taxes................................................ (7,441) (12,205) (7,427)
-------- -------- -------
Net income (loss)........................................... $ 2,582 $(14,083) $ 7,371
======== ======== =======
Net income (loss) per share -- Basic:
Continuing operations..................................... $ 1.16 $ (0.21) $ 1.68
Discontinued operations................................... (0.86) (1.37) (0.84)
======== ======== =======
Net income (loss) per share -- Basic................... $ 0.30 $ (1.58) $ 0.84
======== ======== =======
Net income (loss) per share -- Diluted:
Continuing operations..................................... $ 1.15 $ (0.21) $ 1.66
Discontinued operations................................... (0.85) (1.37) (0.83)
======== ======== =======
Net income (loss) per share -- Diluted................. $ 0.30 $ (1.58) $ 0.83
======== ======== =======
Shares used in calculating per share information -- Basic... 8,650 8,913 8,804
======== ======== =======
Shares used in calculating per share
information -- Diluted.................................... 8,714 8,913 8,930
======== ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
GAIN ON
ADDITIONAL CUMULATIVE AVAILABLE- TOTAL
YEARS ENDED JUNE 30, COMMON PAID-IN RETAINED TRANSLATION FOR-SALE TREASURY STOCKHOLDERS'
1999, 1998 AND 1997 STOCK CAPITAL EARNINGS ADJUSTMENT INVESTMENTS STOCK EQUITY
- -------------------- ------ ---------- -------- ----------- ----------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE AT JUNE 30, 1996... $106 $ 64,844 $ 42,378 $ (649) 34,549 $(38,220) $103,008
Sale of common stock under
options and employee
stock purchase plans..... 2 1,871 -- -- -- -- 1,873
Tax benefit relating to
stock options............ -- 489 -- -- -- -- 489
Foreign currency
translation adjustment... -- -- -- (880) -- -- (880)
Dividends declared ($.20
per share)............... -- -- (1,750) -- -- -- (1,750)
Treasury stock purchased... -- -- -- -- -- (2,546) (2,546)
Unrealized gain on
available-for-sale
investments.............. -- -- -- -- 12,520 -- 12,520
Net income................. -- -- 7,371 -- -- -- 7,371
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1997... 108 67,204 47,999 (1,529) 47,069 (40,766) 120,085
Sale of common stock under
options and employee
stock purchase plans..... 1 1,843 -- -- -- -- 1,844
Tax benefit relating to
stock options............ -- 572 -- -- -- -- 572
Foreign currency
translation adjustment... -- -- -- (501) -- -- (501)
Dividends declared ($.20
per share)............... -- -- (1,788) -- -- -- (1,788)
Treasury stock purchased... -- -- -- -- -- (2,253) (2,253)
Unrealized loss on
available-for-sale
investments.............. -- -- -- -- (3,236) -- (3,236)
Net loss................... -- -- (14,083) -- -- -- (14,083)
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1998... 109 69,619 32,128 (2,030) 43,833 (43,019) 100,640
Sale of common stock under
options and employee
stock purchase plans..... 1 1,168 -- -- -- -- 1,169
Tax benefit relating to
stock options............ -- 68 -- -- -- -- 68
Spinoff of Cohesion........ -- (14,819) -- -- (43,833) -- (58,652)
Foreign currency
translation adjustment... -- -- -- (54) -- -- (54)
Treasury stock purchased... -- -- -- -- -- (3,924) (3,924)
Net income................. -- -- 2,582 -- -- -- 2,582
---- -------- -------- ------- ------- -------- --------
BALANCE AT JUNE 30, 1999... $110 $ 56,036 $ 34,710 $(2,084) -- $(46,943) $ 41,829
==== ======== ======== ======= ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
9
COLLAGEN AESTHETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss)......................................... $ 2,582 $(14,083) $ 7,371
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Purchased in-process research and development........... -- 10,587 --
Depreciation and amortization........................... 4,890 4,899 4,419
Equity in losses of affiliates.......................... 35 151 969
Gain on investments, net of taxes paid of $1.5 million,
none and $10.8 million in 1999, 1998 and 1997,
respectively.......................................... (2,195) (19,096) (13,625)
Deferred income taxes................................... (7,087) (2,979) (1,463)
Tax benefit relating to stock options................... 68 572 489
Write-down of purchased intangibles of discontinued
operations............................................ -- 6,078 --
Write-down of inventory and property and equipment of
discontinued operations............................... -- 5,261 --
Decrease (increase) in assets:
Accounts receivable................................... (869) (3,042) (1,225)
Inventories........................................... 333 (1,928) (2,245)
Other................................................. 6,965 (105) 2,820
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other....... 8,923 9,361 271
Income taxes payable.................................. 5,360 1,230 1,788
Other long-term liabilities........................... (206) (2,473) 1,529
Net changes in assets and liabilities of discontinued
operations.......................................... -- (239) (2,387)
------- -------- --------
Total adjustments................................... 16,217 8,277 (8,660)
------- -------- --------
Net cash provided by (used in) operating activities..... 18,799 (5,806) (1,289)
------- -------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific Corp. stock,
net of taxes paid....................................... 2,139 20,442 5,578
Net proceeds from sale of other affiliate stock, net of
taxes paid.............................................. 508 704 9,771
Proceeds from sales and maturities of short-term
investments............................................. 8,888 9,413 6,634
Purchases of short-term investments....................... (9,783) (12,308) (7,968)
Expenditures for property and equipment................... (3,676) (5,029) (3,360)
Increase in intangible and other assets................... (4,929) (5) (2,726)
Equity investments and loans to affiliates................ -- (3,075) (1,928)
Acquisition of interest in Cohesion Corporation, net of
cash balances........................................... -- (10,587) --
------- -------- --------
Net cash provided (used in) by investing activities..... (6,853) (445) 6,001
------- -------- --------
Cash flows from financing activities:
Repurchase of common stock................................ (3,924) (2,253) (2,546)
Net proceeds from issuance of common stock................ 1,169 1,844 1,873
Cash dividends paid....................................... (896) (1,774) (1,750)
Cohesion Technologies, Inc. Spinoff....................... 530 -- --
Repayments of bank borrowings............................. -- (2,031) (5,000)
------- -------- --------
Net cash used in financing activities................... (3,121) (4,214) (7,423)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 8,825 (10,465) (2,711)
Cash and cash equivalents at beginning of period............ 7,916 18,381 21,092
------- -------- --------
Cash and cash equivalents at end of period.................. $16,741 $ 7,916 $ 18,381
======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Collagen
Aesthetics, Inc. (formerly Collagen Corporation), ("Collagen" or the "Company"),
a Delaware corporation, and its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated subsidiaries, and other investments in which the
Company has a 20% to 50% interest or otherwise has the ability to exercise
significant influence, are accounted for under the equity method. Investments in
companies in which the Company has less than a 20% interest with either no
readily determinable fair value or with transfer restrictions are carried at
cost or estimated realizable value, if less, and those unrestricted investments
with a readily determinable fair value are carried at market value with the
unrealized gains or losses, net of tax, recorded as a component of stockholders'
equity.
On August 18, 1998 (the "Distribution Date"), the Company spun off ("the
Spinoff"), in a one-for-one distribution of common stock to the Company's
stockholders, Cohesion Technologies, Inc. ("Cohesion"), which previous to the
Spinoff was a wholly-owned subsidiary of the Company. The transaction resulted
in the distribution of 100% of the outstanding shares of Cohesion in a tax-free
transaction. For fiscal year 1999, the Company has included Cohesion's results
through the Distribution Date. Included in the June 30, 1998 balance sheet are
assets and liabilities related to Cohesion -- See Note 13, "Cohesion
Technologies."
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. As of June 30, 1999, the Company has a provision for
discontinued operations of $9,926,000, which represents management's best
estimate of additional current and future losses related to the discontinued
operations. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
Cash equivalents, short-term investments and other investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.
The Company invests its excess cash in deposits with major banks and in
money market securities of companies with strong credit ratings and from a
variety of industries. These securities are typically short-term in nature and,
therefore, bear minimal risk. The Company has not experienced any losses on its
money market investments.
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. All of the Company's debt and equity securities are
classified as available-for-sale. The carrying value of available-for-sale debt
securities approximates fair value because of the short-term maturity of these
investments. Both realized and unrealized gains and losses on debt securities
were immaterial as of June 30, 1999, 1998 and 1997 and for the years ended June
30, 1999, 1998 and 1997.
11
Unrestricted available-for-sale equity securities with a readily
determinable fair value in which the Company has a less than 20% interest,
which, prior to the Spinoff of Cohesion, included Cohesion's holdings in Boston
Scientific Corporation ("Boston Scientific"), Innovasive Devices, Inc.
("Innovasive Devices"), and Medarex, Inc., are carried at fair value with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Restricted equity securities in which the Company has less
than a 20% interest are carried at cost or estimated realizable value, if less,
and are included in "other investments and assets" in the accompanying balance
sheets. (See Note 13, "Cohesion Technologies", for discussion related to the
Investment in Boston Scientific and the Investment in Innovasive Devices) The
cost of securities sold is based on the specific identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income or expense. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale debt securities are
included in interest income or expense. Interest and dividends on securities
classified as available-for-sale are included in interest income.
Inventories
Inventories are valued at the lower of cost, determined on a standard cost
basis which approximates average cost, or market.
Property and equipment
Depreciation and amortization of property and equipment, which is stated at
cost, are provided on the straight-line method over estimated useful lives as
follows:
Machinery and equipment............................... 3 - 7 years
Leasehold improvements................................ Term of lease
Intangible assets
Intangible assets are amortized using the straight-line method. Purchased
product distribution rights and a non-compete covenant are amortized over the
lesser of the estimated useful life or the contract period. Patents acquired
prior to October 1996 are amortized over a seventeen-year period beginning with
the effective date or over the remainder of such period from the date acquired
and patents purchased thereafter are expensed when acquired. Trademarks acquired
prior to fiscal 1996 are amortized over a twenty-year period beginning with the
trademark filing dates and trademarks purchased thereafter are expensed when
acquired. The effect of changes in accounting for patents and trademarks were
not material to the accompanying financial statements.
Loans to officers and employees
Principal plus accrued interest due from current and former employees
totaled, prior to reserves, approximately $54,000 and $1.5 million at June 30,
1999 and 1998, respectively, and principal plus accrued interest due from
officers totaled approximately $167,000 at June 30, 1998. There were no loans to
officers at June 30, 1999. Included within the amounts due from current and
former employees at June 30, 1998 are promissory notes totaling, prior to
reserves, $1.2 million due from the Company's former Chairman and Chief
Executive Officer. Due to uncertainties regarding collection, loans to the
former Chairman and Chief Executive Officer were fully reserved as of June 30,
1997. These promissory notes were transferred to Cohesion in connection with the
Spinoff.
Summary of Fair Value of Financial Instruments
The table below summarizes the carrying value and fair value of the
Company's financial instruments which are all held for purposes other than
trading.
12
JUNE 30,
------------------------------------------
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Assets:
Cash equivalents and short-term investments (See
Note 3)........................................... $15,992 $15,992 $14,802 $14,802
Boston Scientific stock (See Note 13)*.............. -- -- 73,979 73,979
Innovasive Devices stock (See Note 13)*............. -- -- 7,027 7,916
Medarex stock*...................................... -- -- 1,920 1,920
Pharming B.V. stock*................................ -- -- 7,010 7,010
Other non-public equity securities.................. 1,000 1,000 1,364 1,364
Loans to officers and employees..................... 54 54 259 259
Equity Collar Instruments*.......................... -- -- -- 96
- ---------------
* Asset was transferred to Cohesion in connection with the Spinoff.
Revenue Recognition
Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.
Concentration of Credit and Other Risk
The Company sells its facial aesthetics products primarily to physicians
and pharmacies in North America, Europe and the Pacific Rim. The Company sells
Contigen(R) Bard collagen implant ("Contigen implant") to C.R. Bard, Inc.
("Bard"), its marketing partner for Contigen implant. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations.
All of the Company's manufacturing capacity for collagen products, the
majority of its research and development activities, its corporate headquarters,
and other critical business functions are located near major earthquake faults.
In addition, all of the manufacturing capacity for collagen-based products is
located in one primary facility with the Company currently maintaining only
limited amounts of finished product inventory. While the Company has some
limited protection in the form of disaster recovery programs and basic insurance
coverage, the Company's operating results and financial condition would be
materially adversely affected in the event of a major earthquake, fire or other
similar calamity affecting its manufacturing facilities.
Advertising costs
The Company expenses advertising costs as incurred. Total advertising
expense was $668,000, $975,000 and $900,000 for 1999, 1998 and 1997,
respectively.
Stock based compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for employee stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
13
Comprehensive income
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes new rules
for the reporting and display of comprehensive income and its components. The
components of comprehensive income, net of related tax, are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Net income (loss)............................. $2,582 $(14,083) $ 7,371
Change in unrealized losses on securities..... -- (3,236) 12,520
Foreign currency translation adjustments...... (54) (501) (880)
------ -------- -------
Comprehensive income (loss)................... $2,528 $(17,820) $19,011
====== ======== =======
The movement in unrealized losses in securities in years ended June 30,
1998 and 1997 relate to the investments in Boston Scientific and Innovasive
Devices, which were transferred to Cohesion in connection with the Spinoff.
Earnings per share
Beginning with fiscal year 1998, basic earnings per share (EPS) and diluted
EPS are computed using the methods required by Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic EPS
is calculated using the weighted average number of common shares outstanding for
the period. The computation of diluted EPS includes the effects of stock
options, warrants and convertible preferred stock, if such effect is dilutive.
Prior period amounts have been restated to conform with the presentation
requirements of SFAS 128. Below is a reconciliation between the basic and
diluted weighted average common and common-equivalent shares for 1999, 1998 and
1997:
YEARS ENDED JUNE 30,
-----------------------
1999 1998 1997
----- ----- -----
(IN THOUSANDS)
Basic weighted average common shares outstanding.... 8,650 8,913 8,804
Weighted average common stock options outstanding... 64 -- 126
----- ----- -----
Diluted weighted average shares outstanding......... 8,714 8,913 8,930
===== ===== =====
Foreign currency translation
The functional currency for each foreign subsidiary is its respective
foreign currency. Accordingly, all assets and liabilities related to these
operations are translated at the current exchange rates at the end of each
period. The resulting cumulative translation adjustments are recorded directly
to the accumulated foreign currency translation adjustment account included in
stockholders' equity. Revenues and expenses are translated at average exchange
rates in effect during the period. Foreign currency transaction gains and losses
are included in results of operations.
At June 30, 1999 and 1998, no foreign currency transaction exposures were
hedged. Unhedged net foreign assets were $6.1 million and $6.5 million at June
30, 1999 and 1998, respectively.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS 133 is effective for
years beginning June 15, 2000 and is not anticipated to have an impact on the
Company's results of operations or financial condition when adopted.
14
2. BALANCE SHEET INFORMATION
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Other current assets:
Deferred taxes....................................... $ 2,811 $ 6,925
Other................................................ 4,644 4,091
-------- --------
$ 7,455 $ 11,016
======== ========
Property and equipment:
Machinery and equipment.............................. $ 32,851 $ 37,286
Leasehold improvements............................... 4,371 6,404
-------- --------
37,222 43,690
Less accumulated depreciation and amortization....... (24,345) (29,242)
-------- --------
$ 12,877 $ 14,448
======== ========
Intangible assets:
Patents, trademarks, distribution rights and
non-compete covenant.............................. $ 12,611 $ 9,387
Organization costs................................... 1,865 1,865
-------- --------
14,476 11,252
Less accumulated amortization........................ (5,599) (4,391)
-------- --------
$ 8,877 $ 6,861
======== ========
Accrued liabilities:
Accrued rent......................................... $ 598 $ 599
Sales and property taxes payable..................... 528 444
Benefits payable..................................... 208 474
Dividends payable.................................... -- 896
Accrued restructuring charges........................ -- 1,541
Other accrued liabilities............................ 5,537 7,959
-------- --------
$ 6,871 $ 11,913
======== ========
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale debt securities at
amortized cost, which approximates estimated fair value:
JUNE 30,
----------------
1999 1998
------ ------
(IN THOUSANDS)
Cash Equivalents:
Money market funds....................................... $8,102 $3,121
Corporate obligations.................................... -- 3,670
------ ------
$8,102 $6,791
====== ======
Short-term investments:
Corporate obligations.................................... $7,890 $8,011
====== ======
During the years ended June 30, 1999, 1998 and 1997, the Company sold
available-for-sale debt securities with a fair value at the dates of sale of
$8.9 million, $9.4 million, and $6.6 million, respectively.
15
Both gross realized and unrealized gains and losses on these securities were
insignificant. The Company uses amortized cost as the basis for recording gains
and losses from securities transactions. Contractual maturities of the debt
securities do not exceed one year at June 30, 1999.
4. INVENTORIES
Inventories consist of the following:
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Raw materials............................................ $ 2,330 $ 1,765
Work-in-process.......................................... 3,684 3,948
Finished goods........................................... 5,676 6,388
------- -------
$11,690 $12,101
======= =======
5. DISCONTINUED OPERATIONS OF LIPOMATRIX
On June 30, 1998, the Board of Directors of the Company approved the
discontinuation of the operations of LipoMatrix, Inc. ("LipoMatrix") of
Neuchatel, Switzerland, and authorized efforts to sell the wholly-owned
subsidiary and all rights related to the Trilucent(R) breast implant ("Trilucent
implant") that LipoMatrix manufactured, thereby allowing the Company's
aesthetics operations to dedicate further resources to its core business. As a
result, in fiscal 1998 the Company recorded a provision of $8.6 million, net of
an income tax benefit of $2.5 million, for the loss on disposal of net assets of
LipoMatrix including estimated future costs. On November 6, 1998, the Company
sold LipoMatrix to Sierra Medical Technologies ("Sierra") of Carson City,
Nevada. Consideration to the Company included a cash payment and the right to
receive royalties on future worldwide breast implant sales. Sierra was also
granted the option to purchase the U.S. Trilucent implant patent portfolio and
marketing rights for additional cash consideration. The Company retains
responsibility for Trilucent implants sold prior to November 6, 1998.
On March 8, 1999, the United Kingdom Medical Devices Agency ("MDA")
announced the voluntary suspension of marketing and voluntary withdrawal of the
Trilucent implant in the United Kingdom. The MDA stated that its actions were
taken for precautionary reasons and did not identify any immediate hazard
associated with the use of the product. Subsequently, LipoMatrix's notified body
in Europe suspended the product's CE Mark pending further assessment of the
long-term safety of the product. Sierra has since stopped sales of the product.
In the quarter ended June 30, 1999, the Company agreed with the United
Kingdom National Health Service to perform certain product surveillance for a
specified period of time with respect to United Kingdom patients implanted with
the Trilucent implant and, after conferring with the MDA, the Company determined
the nature, timing and scope of work intended to address safety concerns about
the product. On June 30, 1999, the Company recorded an additional provision for
the loss on disposal of LipoMatrix of $7.4 million, net of an income tax benefit
of $4.1 million. Approximately $2.5 million of the additional provision was
incurred in fiscal year 1999 and approximately $9.0 million is expected to be
paid over the next several years. The adjustment represents management's best
estimate based on current information of the most likely costs and provides for
additional current and future losses related to ongoing clinical follow-up for
multi-year studies in the U.S. and Europe, the withdrawal of the Trilucent
implant from the European and U.K. markets, safety studies and a patient
surveillance program in the U.K.
Results of operations for LipoMatrix and the breast implant business have
been presented separately as discontinued operations. The following table
summarizes the revenues, loss from operations and loss per share of LipoMatrix
for the three fiscal years ended June 30.
16
YEARS ENDED JUNE 30,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ -- $ 3,871 $ 3,477
======== ======== =======
Discontinued operations:
Loss from operations.............................. $ -- $ (5,279) $(9,145)
Benefit for income taxes.......................... -- 1,630 1,718
-------- -------- -------
Loss from discontinued operations, net of
taxes........................................ -- (3,649) (7,427)
Provision for disposal............................ (11,500) (11,045) --
Benefit for income taxes.......................... 4,059 2,489 --
-------- -------- -------
Provision for disposal, net of taxes........... (7,441) (8,556) --
-------- -------- -------
Total loss from discontinued operations, net of
taxes........................................ $ (7,441) $(12,205) $(7,427)
======== ======== =======
Net loss per share -- Basic:
Loss from discontinued operations of LipoMatrix,
Inc............................................ $ -- $ (0.41) $ (0.84)
Loss from disposal of LipoMatrix, Inc............. (0.86) (0.96) --
-------- -------- -------
Net loss per share -- Basic.................... $ (0.86) $ (1.37) $ (0.84)
======== ======== =======
Net loss per share -- Diluted:
Loss from discontinued operations of LipoMatrix,
Inc............................................ $ -- $ (0.41) $ (0.83)
Loss from disposal of LipoMatrix, Inc............. (0.85) (0.96) --
-------- -------- -------
Net loss per share -- Diluted.................. $ (0.85) $ (1.37) $ (0.83)
======== ======== =======
6. RESTRUCTURING EXPENSE
In June 1998, the Company decided to restructure its domestic and
international operations to improve operational efficiency by reducing costs and
facilitating a product refocus. The international effort included moving the
Company's European headquarters from Switzerland to the United Kingdom and
terminating eleven employees. The domestic effort was substantially smaller and
included the reorganization of the North American Sales force and termination of
one employee. As a result of these actions, on June 30, 1998 the Company
recorded $1.5 million in restructuring charges, consisting of approximately
$735,000 for severance costs and approximately $806,000 for facility commitments
and moving expenses associated with fixed assets. At June 30, 1999, all of the
activities contemplated had been completed and actual costs incurred were
substantially equivalent to the original restructuring charges.
7. COMMITMENTS
Minimum lease payments
Future minimum lease payments under noncancelable operating leases at June
30, 1999 are as follows (in thousands):
FISCAL YEAR AMOUNT
- ----------- -------
2000....................................................... $ 4,090
2001....................................................... 3,816
2002....................................................... 2,923
2003....................................................... 2,789
2004....................................................... 2,634
Thereafter................................................. 1,372
-------
Total minimum lease payments............................... $17,624
=======
17
Rental expense was $4.1 million, $5.0 million and $4.6 million in fiscal
1999, 1998 and 1997, respectively.
8. LEGAL MATTERS
The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of the Company's technology or products
has resulted in adverse effect, particularly with respect to claims regarding
Trilucent implant, which was sold in a medical field (breast augmentation,
reconstruction and replacement) in which there have been sizable product
liability claims. As discussed in Note 5 "Discontinued Operations of
LipoMatrix", the Company retains responsibility for Trilucent implants sold
prior to November 6, 1998.
The risk of product liability claims will exist even with respect to those
products that have received or in the future may receive regulatory approval for
commercial sale. There can be no assurance that the Company will avoid
significant product liability claims and negative publicity. Furthermore, there
can be no assurance that present insurance coverage will be adequate or that
adequate insurance coverage will remain available at acceptable costs, if at
all, or that a product liability claim or recall would not adversely affect the
future business or financial condition of the Company. A successful claim
brought against the Company for which coverage is denied or in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is involved in legal actions, including product liability
claims, arising in the ordinary course of business. While the outcome of these
matters is currently not determinable, it is management's opinion that these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of its operations.
9. STOCKHOLDERS' EQUITY
Stock Options
The Company has various stock option plans under which incentive stock
options or non-statutory stock options may be granted to officers, directors,
key employees and consultants to purchase the Company's common stock. The
options are granted at no less than the fair market value at the dates of grant
and generally expire after ten years. Incentive stock options become exercisable
at the rate of two percent each month beginning the first full month after the
date of grant unless accelerated by the Board of Directors. Non-statutory stock
options become exercisable on a monthly or yearly basis as determined by the
Board of Directors at the date of grant.
At June 30, 1999, the total number of shares of common stock reserved for
issuance under the Company's current stock option plans was 1,935,497.
18
Stock option activities under the stock option plans were as follows:
WEIGHTED
AVERAGE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------------- --------- -----------
Outstanding at June 30, 1996............ 1,481,673 $ 4.69 - $28.25 $17.88 976,896
Granted................................. 549,250 16.75 - 20.75 18.76
Exercised............................... (146,552) 16.56 - 22.75 9.09
Forfeitures or expired.................. (162,468) 7.25 - 28.25 20.22
---------
Outstanding at June 30, 1997............ 1,721,903 4.69 - 28.25 18.69 1,016,326
Granted................................. 282,115 16.63 - 21.38 17.80
Exercised............................... (145,955) 4.69 - 20.50 9.02
Forfeitures or expired.................. (325,810) 5.50 - 28.25 19.49
---------
Outstanding at June 30, 1998............ 1,532,253 6.38 - 28.25 19.27 1,010,275
Granted................................. 647,385 8.63 - 13.40 10.00
Exercised............................... (50,508) 9.50 - 13.22 11.05
Forfeitures or expired.................. (477,345) 6.38 - 22.00 13.62
---------
Outstanding at June 30, 1999............ 1,651,785 $ 8.63 - $20.06 $12.39 962,611
=========
Available for grant at June 30, 1999.... 283,712
=========
Stock Purchase Plan
Prior to the Spinoff, employees purchased the Company's common stock on an
annual basis from the 1985 Employee Stock Purchase Plan (the "1985 Purchase
Plan") under which 700,000 shares were reserved for issuance to employees. For
fiscal 1999, 1998 and 1997, shares issued under the 1985 Purchase Plan were
24,358, 34,053 and 34,769, respectively, with an average issuance price per
share of $13.88, $15.52, $15.52, respectively. In August 1998, subsequent to the
Spinoff, the Company's stockholders approved the adoption of the 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") under which 125,000 shares were
reserved for issuance to employees and purchases of the Company's common stock
can be made by employees twice a year. Under both the 1985 Purchase Plan and the
1998 Purchase Plan, the Company's employees, subject to certain restrictions,
may purchase shares at a price per share that is the lesser of 85 percent of the
fair market value as of the beginning or close of the offering period. For
fiscal 1999, total shares issued under the 1998 Purchase Plan were 33,663 with
an average issuance price per share of $7.65.
Stock Compensation
The Company has elected to follow Accounting Principles Board Statement No.
25 ("APB No. 25") and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is generally recognized.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123 and determined as if the Company had accounted for its
employee stock options granted subsequent to June 30, 1995 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1999, 1998 and
1997: risk-free interest rate of 5.1%, 5.75% and 6.34%, respectively; volatility
factor of the expected market price of the Company's
19
Common Stock of 50%, 41% and 43%, respectively; no dividend payments; and a
weighted-average expected life of the option of 6.0, 4.6 and 4.0 years,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
The Company's pro forma information follows:
YEARS ENDED JUNE 30,
-------------------------------------
1999 1998 1997
--------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net income (loss)............................ $1,265 $(15,703) $5,545
Pro forma net income (loss) per share -- Basic......... $ 0.15 $ (1.76) $ 0.63
Pro forma net income (loss) per share -- Diluted....... $ 0.15 $ (1.76) $ 0.62
The following table summarizes information about stock options outstanding
at June 30, 1999:
WEIGHTED AVERAGE OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE PRICES NUMBER EXERCISE PRICE CONTRACTUAL NUMBER EXERCISE PRICE
PER SHARE OUTSTANDING PER SHARE LIFE EXERCISABLE PER SHARE
- ------------------- ----------- -------------- ----------- ----------- --------------
$ 8.63 - $ 8.88 198,499 $ 8.81 9.47 24,249 $ 8.81
9.00 - 9.00 10,000 9.00 9.52 1,000 9.00
9.84 - 9.84 280,330 9.84 9.23 51,287 9.84
10.12 - 12.07 251,849 11.85 6.61 208,247 11.90
12.16 - 12.65 172,604 12.54 6.88 112,350 12.49
12.69 - 13.40 191,918 13.01 6.79 81,222 13.03
13.49 - 14.02 220,996 13.87 6.30 159,235 13.89
14.11 - 15.62 167,262 15.00 3.04 166,694 15.00
15.71 - 18.82 153,027 16.60 3.73 153,027 16.60
20.06 - 20.06 5,300 20.06 1.64 5,300 20.06
--------- -------
$ 8.63 - $20.06 1,651,785 $12.39 6.78 962,611 $13.53
========= =======
The weighted-average fair values of options granted during the years ended
June 30, 1999, 1998 and 1997 were $4.09, $5.87 and $5.75 per share,
respectively.
In December 1998, the Company's Board of Directors approved the repricing
of options previously granted with an exercise price equal to or greater than
$14.50 per share. As a result, 151,254 shares were repriced to $8.88 per share
in December 1998.
Stock Repurchase Program
In August 1998, the Company's Board of Directors approved a continuation of
the stock repurchase program previously approved in February 1993 and authorized
the repurchase of up to an additional 500,000 shares having a value not to
exceed $5 million. In fiscal years 1999, 1998 and 1997, the Company repurchased
381,100, 125,000 and 147,900 shares at average acquisition prices of
approximately $10, $18 and $17 per share, respectively. As of June 30, 1999, up
to 168,900 additional shares could be repurchased
20
under the Board of Directors' authorization. The Company plans to retain
repurchased shares as treasury stock.
Stockholder Rights Plan
The Company has a stockholder rights plan which would entitle stockholders
to purchase stock in the Company or in an acquiror of the Company at a
discounted price in the event of certain hostile efforts to acquire control of
the Company. The rights may only be exercised, if at all, upon the occurrence of
certain events unless earlier redeemed pursuant to the plan. The rights expire
on November 28, 2004.
10. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. The Company operates its
business in two reportable segments, facial aesthetics and stress urinary
incontinence. Each of the Company's major facial aesthetics product lines have
similar economic characteristics, technology, manufacturing processes, customers
distribution and marketing strategies, as well as a similar regulatory
environment. In fiscal years 1999, 1998 and 1997, 82%, 85% and 95% of facial
aesthetic product sales or 67%, 65% and 80% of total product sales,
respectively, were derived from Zyderm(R) and Zyplast(R)collagen implant
products. The Contigen implant revenues to the Company from its marketing
partner, Bard, represented 100% of the stress urinary incontinence product sales
in fiscal years 1999, 1998 and 1997.
Information by reporting segment is noted below (in thousands).
FACIAL STRESS URINARY
AESTHETICS INCONTINENCE OTHER CONSOLIDATED
---------- -------------- -------- ------------
1999
Product sales............................... $70,772 $14,279 $ 1,338 $86,389
Income (loss) from operations............... 3,921 10,257 (1,357) 12,821
Total assets................................ 84,351 1,483 -- 85,834
1998
Product sales............................... 63,028 17,701 2,043 82,772
Income (loss) from operations............... 767 12,152 (31,483) (18,564)
Total assets................................ 69,957 1,608 94,774 166,339
1997
Product sales............................... 57,915 7,893 2,527 68,335
Income (loss) from operations............... 7,655 6,936 (16,358) (1,767)
Total assets................................ 68,453 1,583 114,604 184,640
21
Geographic Information
Net sales and property and equipment by major geographic area are
summarized below:
NORTH
AMERICA* INTERNATIONAL ASIA PACIFIC DISTRIBUTORS/OTHER CONSOLIDATED
-------- ------------- ------------ ------------------ ------------
(IN THOUSANDS)
NET SALES
1999...................... $51,539 $23,092 $8,629 $3,129 $86,389
1998...................... 51,083 21,136 6,882 3,671 82,772
1997...................... 36,008 22,968 5,172 4,187 68,335
PROPERTY AND EQUIPMENT
1999...................... $11,954 $ 690 $ 233 $ -- $12,877
1998...................... 11,489 886 -- 2,073 14,448
1997...................... 11,337 1,042 -- 1,566 13,945
- ---------------
* North America includes the sales of Contigen to Bard, the stress urinary
incontinence segment.
Major Customer
Sales realized from the Company's marketing partner, Bard, represented 17%,
21% and 12% of total product sales in fiscal years 1999, 1998 and 1997. No other
customer accounted for ten percent or more of total sales in any fiscal year.
11. INCOME TAXES
The Company uses the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of June 30, 1999 and June
30, 1998 are presented below:
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Unrealized gain on marketable securities............... $ -- $30,061
Investments............................................ 2,010 1,888
Intangible assets...................................... 145 12
Foreign earnings and credits (net)..................... 82 214
------- -------
Total deferred tax liabilities................. 2,237 32,175
------- -------
22
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Equity in losses of affiliates......................... 5,669 5,700
Accrued liabilities relating to disposal of
LipoMatrix.......................................... 6,554 2,935
Non-deductible accruals................................ 3,428 3,561
State income taxes..................................... 368 488
Accounts receivable.................................... 210 676
Inventories............................................ 603 482
Property, plant & equipment............................ 165 207
Other.................................................. 279 436
Valuation allowance.................................... (6,503) (5,974)
------- -------
Total deferred tax assets...................... 10,773 8,511
------- -------
Net deferred tax liabilities (assets).......... $(8,536) $23,664
======= =======
The valuation allowance increased by $529,000 and $93,000 in fiscal years
1999 and 1998, respectively, and decreased by $59,000 in fiscal year 1997.
Significant components of the provision for income taxes, including discontinued
operations, are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current:
Federal............................................. $ 4,824 $ 1,103 $ 5,442
Foreign............................................. 738 544 553
State............................................... 1,128 420 2,075
------- ------- -------
Total current............................... 6,690 2,067 8,070
------- ------- -------
Deferred:
Federal............................................. (3,054) (2,328) (971)
State............................................... (685) (651) (492)
------- ------- -------
Total deferred.............................. (3,739) (2,979) (1,463)
------- ------- -------
Provision (benefit) for income taxes, net............. $ 2,951 $ (912) $ 6,607
======= ======= =======
For financial reporting purposes, income (loss), including discontinued
operations, before income taxes includes the following components:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Domestic operations................................... $2,302 $(12,033) $15,498
Foreign operations.................................... 3,232 (2,978) (2,285)
------ -------- -------
$5,534 $(15,011) $13,213
====== ======== =======
23
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows:
YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------ -------- -------
(IN THOUSANDS)
Income (loss) before income taxes (including
discontinued operations)............................ $5,534 $(15,011) $13,213
====== ======== =======
Expected tax at 35%................................... $1,937 $ (5,254) $ 4,625
State income tax, net of federal benefit.............. 287 (223) 741
In-process research and development................... -- 2,375 --
Non-deductible intangibles............................ -- 1,699 --
Non-deductible accruals............................... 560 -- --
Net operating losses of subsidiaries for which no
current benefit is realizable....................... 197 164 1,176
Equity in losses of affiliates........................ (5) 76 (222)
Goodwill/intangible amortization...................... 290 428 530
Research and development credit....................... (306) (150) (125)
Other................................................. (9) (27) (118)
------ -------- -------
Provision (benefit) for income taxes, net............. $2,951 $ (912) $ 6,607
====== ======== =======
12. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
YEARS ENDED JUNE 30,
-------------------------
1999 1998 1997
------- ---- ------
(IN THOUSANDS)
Cash paid during the year for:
Interest................................................ $ 64 $ 56 $ 473
Income taxes (net of refunds)........................... (3,060) (65) 5,068
Non-cash financing activity:
Dividends declared...................................... $ -- $896 $ 881
13. COHESION TECHNOLOGIES
Acquisition of Cohesion Corporation
Cohesion Corporation was a privately-held company developing novel
biomaterials with superior performance characteristics in the area of hemostats,
biosealants, and adhesion prevention barriers for surgical applications located
in Palo Alto, California. The Company acquired ownership of Cohesion Corporation
in a series of transactions and integrated it with the Company's Technologies
division to create Cohesion Technologies. In connection with the Company's
purchases of Cohesion Corporation shares, substantially all of the purchase
price was allocated to in-process research and development and was expensed at
the time of the purchases. The $10.5 million December 1997 purchase price
includes $3.8 million of cash compensation amounts associated with the purchase
of certain vested employee stock options, which amounts were expensed in
accordance with the Accounting Principles Board Opinion No. 25. After allocation
of the purchase amounts to in-process technology, there was no goodwill
recorded.
The Company determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
The Company concluded that the in-process technology had no alternative future
use after taking into consideration the potential for both usage of the
technology in different products and for resale of the technology.
24
The unaudited pro forma results of operations of the Company for fiscal
years 1998 and 1997, assuming the acquisition of Cohesion Corporation shares
occurred on July 1, 1995, on the basis described above with all material
intercompany transactions eliminated, are as follows:
JUNE 30,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................. $82,772 $68,335
Income from continuing operations........................ 8,709 14,798
Net income (loss)........................................ (3,496) 7,371
Net income (loss) per share -- Basic..................... $ (0.39) 0.84
Net income (loss) per share -- Diluted................... $ (0.39) 0.83
The unaudited pro forma net income (loss) and per share amounts above do
not include the charges for in-process research and development aggregating
$13.6 million arising from the acquisitions of shares of Cohesion Corporation.
The unaudited pro forma information is not necessarily indicative of the actual
results of operations had the transaction occurred at the beginning of the
periods indicated, nor should it be used to project the Company's results of
operations for any future dates or periods.
Spinoff
On August 18, 1998, the Company spun off, in a one-for-one distribution of
common stock to the Company's stockholders, Cohesion Technologies, Inc., which
previous to the Spinoff was a wholly-owned subsidiary of the Company. The
transaction resulted in the distribution of 100% of the outstanding shares of
Cohesion in a tax-free transaction. For fiscal year 1999, the Company included
Cohesion's results through the Distribution Date. Included in the June 30, 1998
balance sheet are assets and liabilities related to Cohesion.
Intercompany Agreements
Allocation of assets and liabilities to Cohesion. Effective January 1,
1998, the Company entered into certain agreements with Cohesion which (i)
provided for the transfer, effective January 1, 1998, of certain assets and
liabilities relating to the businesses previously conducted by the Cohesion
division to Cohesion, and (ii) established contractual arrangements between the
Company and Cohesion described below. The business activities of the Cohesion
division focused on the design, development, manufacture and commercialization
of innovative resorbable biomaterials, adhesive technologies, and delivery
systems in the fields of tissue repair and regeneration.
Under the agreements, substantially all investments in affiliates,
(including Boston Scientific and Innovasive Devices), and specifically
identifiable trade receivables, notes receivable, loans to officers and
employees, fixed assets and employee related liabilities (including a separation
agreement with the Company's former CEO and related costs) were allocated to
Cohesion. For assets and liabilities where it was not practical to use the
specific identification method, Cohesion was allocated a specified percentage of
these assets and liabilities.
Contractual Arrangements between the Company and Cohesion. The Company
also entered into supply, services, research and development, benefits, tax
allocation, and distribution agreements with Cohesion. Under the Collagraft
Supply Agreement, the Company will supply Cohesion's requirements of Collagraft
necessary for Cohesion to fulfill its obligations under its agreement with
Zimmer, Inc. at a price that is the greater of a percentage of the sales price
or a defined multiplier of the Company's cost. In accordance with the Collagen
Supply Agreement, the Company will supply Cohesion products, intermediates and
finished materials at a price equal to a multiplier of Collagen's cost. Under
the Services Agreement, which was effective through June 30, 1999, Cohesion
provided the Company with services in the following areas: facilities,
telephone, library, investor relations, research and development services (to
the extent not provided for by the research and development agreement), and
clinical and regulatory. The
25
Company provided Cohesion with certain services in the following areas:
financial and tax services, health and welfare benefits administration and
administration of the 401(k) Savings Plan, administrative, legal, regulatory,
quality assurance, medical affairs, and manufacturing services. In accordance
with the Recombinant Technology and Development License Agreement, the Company
and Cohesion will collaborate to develop recombinant human collagen and provide
for cost sharing for the project until certain milestones are met. The Benefits
Agreement provided for the continuation or replacement of benefits for the
employees transferred to Cohesion and employees remaining with the Company. The
Tax Allocation Agreement provided that the Company will be responsible for all
taxes prior to the Distribution Date and Cohesion will be responsible for all of
its tax liabilities subsequent to that date. Under the Vitrogen International
Distribution Agreement, Collagen International, Inc., a subsidiary of the
Company, shall act as Cohesion's distributor in Germany for Vitrogen.
Investment in Boston Scientific
At June 30, 1998, the Company owned approximately 1.0 million shares of
Boston Scientific common stock. Boston Scientific is a leading manufacturer of
catheter-based devices that can be inserted through small body openings and are
used in heart surgery and other operations. Boston Scientific common stock is
quoted on the New York Stock Exchange under the symbol BSX. On June 30, 1998,
the closing price of Boston Scientific common stock was $71.63 per share. In
fiscal 1998, the Company sold 332,340 shares of Boston Scientific common stock
for a pre-tax gain of approximately $19.0 million and in fiscal 1997, the
Company sold 330,000 shares of Target Therapeutics, Inc. (the predecessor of
Boston Scientific) common stock for a pre-tax gain of approximately $9.2
million.
The Company's investment in shares of Boston Scientific common stock at
June 30, 1998 was classified as available-for-sale and was recorded at fair
value. The unrealized gains (estimated fair value less cost) on these
available-for-sale securities have been reported as a separate component of
stockholders' equity, net of tax. The following is a summary of the aggregate
estimated fair value, gross unrealized gains and amortized cost of the Company's
investment in Boston Scientific common stock.
JUNE 30,
1998
--------------
(IN THOUSANDS)
Amortized cost......................................... $ 4,468
Gross unrealized gains................................. 69,511
-------
Estimated fair value................................... $73,979
=======
In order to manage the risk of market fluctuations in this stock, the
Company entered into certain costless collar instruments ("collars"), to hedge a
portion (725,000 shares at June 30, 1998) of the Boston Scientific equity
securities against changes in market value. A costless collar instrument is a
form of equity collar instrument consisting of a purchased put option and a
written call option on a specific equity security such that the cost of the
purchased put and the proceeds of the written call offset each other; therefore,
there is no initial cost or cash outflow for these instruments. The Company
purchased the collars with expiration dates and numbers of shares so that the
potential adverse impact of movements in market price of the stock will be at
least partially offset by an associated increase in the value of the collars.
Realized gains and losses on the collars are recorded in other income
(expense) with the related gains from the sale of stock. Unrealized gains and
losses on these instruments, net of tax, are recorded as an adjustment to
unrealized gains and losses on available-for-sale investments, a component of
stockholder's equity, with a corresponding receivable or payable recorded.
Equity collar instruments that do not qualify for hedge accounting and early
termination of these instruments with the sale of the underlying stock, would be
recognized in other income (expense). For early termination with the sale of the
underlying stock, the intrinsic value will adjust the cost basis of the
underlying security. At June 30, 1998, the notional amount of the put and call
options were $46.0 million and $70.7 million, respectively. The fair value of
the equity collars at June 30, 1998 was $96,000. The fair value of the purchased
puts and the written calls were determined based on quoted market prices at that
date.
26
Investment in Innovasive Devices
At June 30, 1998, Cohesion owned approximately 844,000 shares of Innovasive
Devices common stock. Innovasive Devices designs, develops, manufactures and
markets proprietary tissue repair systems which facilitate the repair of soft
tissue injuries. Innovasive Devices' common stock is quoted on The Nasdaq Stock
Market under the symbol IDEA. The closing price of Innovasive Devices' common
stock at June 30, 1998, was $9.38 per share. Restrictions which prevented the
sale of any of Cohesion's shares of common stock of Innovasive Devices were no
longer applicable to 650,000 shares at June 30, 1998. The Company carried the
portion of Cohesion's investment in Innovasive Devices, which could be sold
within one year, as an available-for-sale investment at market value, or $6.1
million at June 30, 1998, reflecting an unrealized gain of $3.0 million ($6.1
million estimated fair value less $3.1 million cost), which was included in a
separate component of stockholders' equity, net of tax. The remaining 194,000
shares of common stock were valued at cost of $934,000.
During fiscal 1998 and 1997, the Company did not sell any of Cohesion's
shares of common stock of Innovasive Devices.
14. SUBSEQUENT EVENTS (UNAUDITED)
On August 2, 1999, the Company and Inamed Corporation ("Inamed") each
announced the signing of a definitive agreement to merge whereby Inamed made a
cash tender offer to acquire all of the outstanding common stock of the Company
for approximately $142 million, or $16.25 a share. The Boards of Directors of
both companies unanimously approved the definitive merger agreement. The tender
offer was subject to a majority of the Company's fully diluted shares being
validly tendered and not withdrawn and other customary conditions. The
transaction was not subject to financing contingencies. In that regard, Inamed
obtained a secured bridge loan commitment for $155 million from a group of
financial institutions. The transaction was completed on September 1, 1999.
Inamed is a global surgical and medical device company engaged in the
development, manufacturing and marketing of medical devices for the plastic,
reconstructive and aesthetic surgery markets, as well as devices to treat
obesity. Inamed common stock was quoted on the OTC Bulletin Board, and since
September 30, 1999 has been quoted on the Nasdaq National Market, under the
symbol IMDC.
27
ANNEX B
ITEM 7(B) PRO FORMA FINANCIAL INFORMATION
28
The following historical and unaudited pro forma consolidated financial
information gives effect to the September 1, 1999 merger transaction whereby
Collagen Aesthetics Inc. ("Collagen") became a wholly-owned subsidiary of Inamed
Corporation (the "Company"). The information has been derived from consolidated
historical financial statements of the Company for the year ended December 31,
1998 and the nine months ended September 30, 1999, and Collagen's consolidated
historical financial statements for the years ended June 30, 1999 and June 30,
1998, and Collagen's consolidated historical financial statements for the six
months ended December 31, 1997 and 1998 and the two months ended August 31,
1999. In preparing these pro forma data, the Company has used what it believes
are reasonable methods to conform the bases of presentation of the Company's and
Collagen's historical financial statements.
The Company has accounted for the Collagen acquisition using the purchase
method. Under the purchase method of accounting, tangible and intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price, including estimated fees and expenses related
to the acquisition, over the net assets acquired has been classified as
goodwill. The estimated fair values and useful lives of assets acquired and
liabilities assumed are based on a preliminary valuation. The Company's in the
process of having an appraisal performed of the net assets acquired. Based
upon this appraisal some assets and other intangibles may be amortized over a
shorter life than the goodwill amortization period of 30 years.
The unaudited pro forma statement of operations for the periods presented
has been prepared by combining the Company's audited statement of income for the
year ended December 31, 1998 and its unaudited statement of income for the nine
months ended September 30, 1999 with Collagen's unaudited statement of
operations for the twelve months ended December 31, 1998 and the eight months
ended August 31, 1999, giving effect to the acquisition as though it occurred on
January 1, 1998. The unaudited consolidated balance sheet data also reflects the
September 1, 1999 acquisition of Collagen by the Company. The unaudited pro
forma financial statements do not reflect management's anticipated cost savings
resulting from the integration of Collagen's business and operations into the
Company's existing business and operations.
The pro forma information is presented for informational purposes only and
is not necessarily indicative of actual results that would have been achieved
had the Collagen acquisition been consummated on the dates or for the periods
indicated and do not purport to indicate results of operations as of any future
period. This unaudited pro forma consolidated financial information should be
read in conjunction with the Company's consolidated financial statements and
the related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the Company's
Form 10-K for the year ended December 31, 1998 and Form 10-Q for the quarter
ended September 30, 1999.
29
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
================================================================================
Unaudited Audited
September 30, 1999 December 31, 1998
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 15,474 $ 11,873
Trade accounts receivable, net of allowance for
doubtful accounts and returns and allowances
of $6,513 and $6,158 38,337 23,169
Inventories 28,098 17,855
Prepaid expenses and other current assets 15,038 1,337
Income tax refund receivable 960 726
Deferred income taxes 19,103 8,000
--------- ---------
Total current assets 117,010 62,960
--------- ---------
Property and equipment, at cost:
Machinery and equipment 27,160 14,170
Furniture and fixtures 25,412 3,418
Leasehold improvements 17,033 11,986
--------- ---------
69,605 29,574
Less accumulated depreciation
and amortization (43,408) (16,751)
--------- ---------
Net property and equipment 26,197 12,823
--------- ---------
Notes receivable, net of allowance of $467 2,765 2,769
Intangible assets, net 147,912 1,015
Deferred income taxes 4,278 --
Other assets, at cost 20,698 1,140
--------- ---------
Total assets $ 318,860 $ 80,707
========= =========
(continued)
See accompanying Notes to Unaudited Pro Forma Financial Statements.
30
INAMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
================================================================================
Unaudited Audited
September 30, 1999 December 31, 1998
------------------ -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 14 $ 51
Notes payable to bank 1,372 1,186
Accounts payable 16,519 12,226
Accrued liabilities:
Salaries, wages, and payroll taxes 12,954 2,681
Interest 1,469 2,032
Self-insurance 4,123 3,649
Merger and integration costs 28,070 --
Provision for disposal of discontinued operations 4,431 --
Other 17,875 10,244
Royalties payable 3,455 5,061
Taxes payable 23,350 1,318
Note payable, escrow agent -- 25,500
--------- ---------
Total current liabilities 113,632 63,948
--------- ---------
Long-term debt 155,000 27,767
Provision for disposal of discontinued operations 5,495 --
Deferred grant income 1,025 1,235
Deferred income taxes 687 382
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 17,187,594 and 11,010,290 172 110
Additional paid-in capital 74,778 37,605
Accumulated other comprehensive (loss) income (3,410) 269
Accumulated deficit (28,519) (53,609)
--------- ---------
Stockholders' equity (deficiency) 43,021 (15,625)
--------- ---------
Total liabilities and stockholders' equity $ 318,860 $ 80,707
========= =========
See accompanying Notes to Unaudited Pro Forma Financial Statements.
31
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
COLLAGEN
ACQUISITION
PRO FORMA PRO FORMA
INAMED COLLAGEN ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ---------------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Net sales................................... $131,566 $82,128 $ -- $213,694
Cost of goods sold.......................... 47,954 22,777 -- 70,731
-------- ------- -------- --------
Gross profit.............................. 83,612 59,351 -- 142,963
-------- ------- -------- --------
Operating expenses
Selling, general and
administrative.......................... 61,577 40,354 -- 101,931
Amortization of goodwill.................. -- 414 4,648(A) 5,062
Research and development.................. 9,366 6,359 -- 15,725
Restructuring expense..................... 4,202 1,541 -- 5,743
-------- ------- -------- --------
Total operating expenses............ 75,145 48,668 4,648 128,461
-------- ------- -------- --------
Operating income (loss)..................... 8,467 10,683 (4,648) 14,502
Net interest income (expense) and other
financing costs........................... (3,812) 589 (17,825)(C) (21,048)
Amortization of deferred financing costs.... -- -- (6,975)(B) (6,975)
Net gain on investments..................... -- 314 -- 314
Other income (expense)...................... 686 (46) -- 640
-------- ------- -------- --------
Income (loss) before income tax expense
(benefit)................................. 5,341 11,540 (29,448) (12,567)
Provision (benefit) for income taxes........ (8,432) 6,726 (2,441)(D) (4,147)
Minority interest........................... -- 12 -- 12
-------- ------- -------- --------
Income (loss) from continuing operations.... $ 13,773 $ 4,802 $(27,007) $ (8,432)
======== ======= ======== ========
Earnings per share from continuing
operations
Basic..................................... $ 1.33 $ (0.81)
======== ========
Diluted................................... $ 1.05 $ (0.81)
======== ========
Weighted average common shares
outstanding(F)
Basic..................................... 10,387 10,387
Diluted(G)................................ 14,185 14,185
See accompanying Notes to Unaudited Pro Forma Financial Statements.
32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
INAMED COLLAGEN COLLAGEN
NINE MONTHS EIGHT MONTHS ACQUISITION
ENDED ENDED PRO FORMA PRO FORMA
SEPTEMBER 30, 1999 AUGUST 31, 1999 ADJUSTMENTS CONSOLIDATED
------------------ --------------- ----------- ------------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Net sales.................... $123,722 $57,390 $ -- $181,112
Cost of goods sold........... 36,597 17,044 -- 53,641
-------- ------- -------- --------
Gross profit................. 87,125 40,346 -- 127,471
-------- ------- -------- --------
Operating expenses
Selling, general and
administrative........... 49,940 26,820 -- 76,760
Amortization of goodwill... 69 552 3,486(A) 4,107
Research and development... 6,802 2,997 -- 9,799
-------- ------- -------- --------
Total operating
expenses........... 56,811 30,369 3,486 90,666
-------- ------- -------- --------
Operating income (loss)...... 30,314 9,977 (3,486) 36,805
Net interest income (expense)
and other financing
costs...................... (5,186) 254 (13,369)(C) (18,301)
Other income (expense)....... (38) -- -- (38)
-------- ------- -------- --------
Income (loss) before income
tax expense (benefit)...... 25,090 10,231 (16,855) 18,466
Provision (benefit) for
income taxes............... -- 4,062 2,032(D) 6,094
-------- ------- -------- --------
Income (loss) from continuing
operations................. $ 25,090 $ 6,169 $(18,887) $ 12,372
======== ======= ======== ========
Earnings per share from
continuing operations
Basic...................... $1.74 $0.86
======== ========
Diluted(F)................. $1.39 $0.68
======== ========
Weighted average common
shares outstanding(E)
Basic...................... 14,444 14,444
Diluted(F)................. 18,063 18,063
See accompanying Notes to Unaudited Pro Forma Financial Statements.
33
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA INCOME STATEMENT ADJUSTMENTS
(A) Records adjustment to depreciation and amortization expense as follows:
Goodwill acquired totalled approximately $140,000 and represents the
excess of purchase price over the identifiable and intangible assets of
Collagen. We are in the process of having an independent appraisal
performed. Based upon the results of the appraisal, the amount allocated to
goodwill based on management's estimates in the accompanying pro forma
financial statements may change and the amortization period may be shorter,
which may have a material impact on the pro forma financial statements.
Goodwill is to be amortized over its estimated useful life of 30 years
consistent with our established policy.
The 30-year estimated useful life of goodwill is derived from management's
analysis of:
- the historical lives and future estimated lives of customer
relationships which are the core of our business;
- the longevity and continuing use of the base practice management
systems; and
- the relatively minor impact of technological obsolescence on our
core products and services.
(B) To record the amortization of deferred financing fees related to the
bridge loan facility over its nine-month term.
(C) Interest expense on the Company's $155,000 bridge loan facility based on
average LIBOR interest rate of 5.5% plus 600 basis points. If the interest rate
fluctuated by 1.0%, the effect on interest expense would be $1,550 annually.
(D) Adjusts the provision for income taxes based on other pro forma
adjustments. As disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company has available net operating loss
carryforwards, which are available to offset future taxable income. During 1998,
the Company adjusted its valuation allowance with respect to its ability to
recognize currently a portion of the future tax benefits resulting from the
utilization of the net operating loss carryforwards. Accordingly, the Company
recognized an income tax benefit in 1998 and no tax expense for the nine months
ended September 30, 1999. Assuming continued profitability in the future, the
Company's effective tax rate will approximate a tax rate consistent with its
earnings (assume 33% effective tax rate).
(E) As of October 20, 1999 there were 17,202,594 shares of common stock
outstanding.
(F) Had the Company's pretax net income been taxed using an effective rate
of 33%, the Company would have had diluted earnings per share of $0.93 for the
nine months ended September 30, 1999 and diluted earnings per share of $0.13 for
the nine months ended September 30, 1998.