-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DBNhwI/VlAHK1xYFgIzyfsDlwTCxV1JpMotcDit40sXVTTumie99TOmVt2/aVKP6 JYKbTqqgUYixycSUhdK/8g== 0000950148-98-001372.txt : 19980519 0000950148-98-001372.hdr.sgml : 19980519 ACCESSION NUMBER: 0000950148-98-001372 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980403 FILED AS OF DATE: 19980518 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MINIMED INC CENTRAL INDEX KEY: 0000945801 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 954408171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26268 FILM NUMBER: 98627089 BUSINESS ADDRESS: STREET 1: 12744 SAN FERNANDO RD CITY: SYLMAR STATE: CA ZIP: 91342 BUSINESS PHONE: 8183625958 MAIL ADDRESS: STREET 1: 12744 SAN FERNANDO RD CITY: SYLMAR STATE: CA ZIP: 91342 10-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q --------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to______ Commission file number 0-26268 MINIMED INC. (Exact Name of Registrant as Specified in its Charter) --------------- Delaware 95-4408171 (State or other jurisdiction of (I.R.S. Employer incorporated or organization) Identification No.) 12744 SAN FERNANDO ROAD, SYLMAR, CA 91342 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (818) 362-5958 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT MAY 12, 1998 - ---------------------------- ---------------------------- Common Stock, $.01 par value 13,304,749 ================================================================================ 2 INDEX MINIMED INC.
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Consolidated Balance Sheets (Unaudited) - January 2, 1998 and April 3, 1998 3 Consolidated Statements of Income (Unaudited) -- Three months ended March 28, 1997 and April 3, 1998 4 Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 5 28, 1997 and April 3, 1998 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 PART II. OTHER INFORMATION 12 Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 13 INDEX TO EXHIBITS 14
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES MINIMED INC. CONSOLIDATED BALANCE SHEETS JANUARY 2, 1998 AND APRIL 3, 1998 ASSETS
1997 1998 ------------- ------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents ...................................................... $ 22,282,000 $ 24,563,000 Short-term investments ......................................................... 18,713,000 4,631,000 Accounts receivable, net of allowance for doubtful accounts of $6,250,000 and $5,308,000 at January 2, 1998 and April 3, 1998, respectively ................ 24,661,000 23,184,000 Inventories .................................................................... 10,672,000 12,274,000 Deferred income taxes .......................................................... 5,803,000 5,993,000 Prepaid expenses and other current assets ...................................... 1,279,000 895,000 ------------- ------------- Total current assets ............................................... 83,410,000 71,540,000 OTHER ASSETS ..................................................................... 5,466,000 6,449,000 LAND, BUILDINGS, PROPERTY AND EQUIPMENT - Net .................................... 16,943,000 19,285,000 ------------- ------------- TOTAL ............................................................................ $ 105,819,000 $ 97,274,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable ............................................... $ 2,453,000 $ 275,000 Accounts payable ............................................................... 4,371,000 1,876,000 Accrued salaries and related benefits .......................................... 3,719,000 2,684,000 Accrued sales commissions ...................................................... 1,943,000 312,000 Accrued warranties ............................................................. 3,498,000 3,636,000 Income taxes payable ........................................................... 276,000 1,713,000 Other accrued expenses ......................................................... 3,741,000 1,117,000 ------------- ------------- Total current liabilities ........................................... 20,001,000 11,613,000 ------------- ------------- Deferred Tax Liabilities ....................................................... 2,007,000 1,028,000 Notes payable .................................................................. 728,000 94,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.01; 40,000,000 shares authorized; 13,260,240 and 13,284,382 shares issued and outstanding as of January 2, 1998 and April 3, 1998, respectively ............................................. 135,000 135,000 Additional capital ............................................................ 73,806,000 73,806,000 Cumulative foreign currency translation ....................................... (312,000) (165,000) Unrealized gain on marketable securities ...................................... 1,371,000 374,000 Retained earnings ............................................................. 8,083,000 10,389,000 ------------- ------------- Total stockholders' equity ......................................... 83,083,000 84,539,000 ------------- ------------- TOTAL ............................................................................ $ 105,819,000 $ 97,274,000 ============= =============
See notes to consolidated financial statements 3 4 MINIMED INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 28, 1997 AND THREE MONTHS ENDED APRIL 3, 1998
1997 1998 ------------ ------------ (Unaudited) NET SALES .................................. $ 19,161,000 $ 26,366,000 COST OF SALES .............................. 7,656,000 9,784,000 ------------ ------------ GROSS PROFIT ............................... 11,505,000 16,582,000 ------------ ------------ OPERATING EXPENSES: Selling, general and administrative ...... 8,009,000 11,391,000 Research and development ................. 2,005,000 3,317,000 Research and development contract income . -- (1,500,000) ------------ ------------ Total operating expenses ....... 10,014,000 13,208,000 ------------ ------------ OPERATING INCOME ........................... 1,491,000 3,374,000 OTHER INCOME, Including interest income .... 110,000 291,000 ------------ ------------ INCOME BEFORE INCOME TAXES ................ 1,601,000 3,665,000 PROVISION FOR INCOME TAXES ................. 571,000 1,361,000 ------------ ------------ NET INCOME ................................. $ 1,030,000 $ 2,304,000 ============ ============ BASIC EARNINGS PER SHARE ................... $ 0.09 $ 0.17 ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING ............................. 12,015,000 13,281,000 ============ ============ DILUTED EARNINGS PER SHARE ................. $ 0.08 $ 0.17 ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING ............................. 12,764,000 13,927,000 ============ ============
See notes to consolidated financial statements 4 5 MINIMED INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 28, 1997 AND THREE MONTHS ENDED APRIL 3, 1998
1997 1998 ------------ ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................... $ 1,030,000 $ 2,304,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ....................................................... 587,000 1,053,000 Deferred income taxes .............................................. (153,000) (558,000) Changes in operating assets and liabilities: Accounts receivable, net ......................................... 1,804,000 1,477,000 Inventories ...................................................... (926,000) (1,602,000) Prepaid expenses and other current assets ........................ 80,000 384,000 Other assets ..................................................... (103,000) (47,000) Accounts payable ................................................. 357,000 (2,495,000) Income taxes payable ............................................. 194,000 1,438,000 Accrued expenses ................................................. (1,957,000) (5,153,000) ------------ ------------ Net cash provided by (used in) operating ......................... 913,000 (3,199,000) activities ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES - Short-term investments ........................................... 9,265,000 14,081,000 Acquisition of Dartec A.B ........................................ -- (2,544,000) Purchase of land, buildings, property and ........................ (1,014,000) (3,393,000) equipment ------------ ------------ Net cash provided by (used in) investing ......................... 8,251,000 8,144,000 activities ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES - Repayment of notes payable ....................................... (306,000) (2,811,000) Proceeds from stock option exercises ............................. -- -- ------------ ------------ Net cash provided by financing activities ...................... (306,000) (2,811,000) ------------ ------------ Effect of foreign exchange rates on cash ......................... (244,000) 147,000 NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 8,614,000 2,281,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................... 10,405,000 22,282,000 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ............................. $ 19,019,000 $ 24,563,000 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest ........................................................... $ 52,000 $ 35,000 Income taxes ....................................................... $ 676,000 $ 461,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - During the three months ended April 3, 1998, the Company recorded an unrealized holding loss of $997,000, net of estimated taxes, on marketable securities classified as long-term investments available for sale. See notes to consolidated financial statements. 5 6 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 28, 1997 AND THREE MONTHS ENDED APRIL 3, 1998 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of MiniMed Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited financial statements included in the Annual Report of MiniMed Inc. (the "Company") filed on Form 10-K with the Securities and Exchange Commission for the year ended January 2, 1998. The results of operations for the three months ended April 3, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 1999. NOTE 2. INCOME TAXES Net income and earnings per share for the three months ended March 28, 1997 and April 3, 1998 reflect income taxes which have been recorded at the Company's estimated effective tax rate for the year. This estimated income tax rate has been determined by giving consideration to the pretax earnings and losses applicable to foreign and domestic tax jurisdictions. NOTE 3. WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), basic earnings per share for the three months ended March 28, 1997 and April 3, 1998, were computed by dividing net income by weighted average common shares outstanding during the periods presented. Diluted earnings per share for the periods presented were computed by dividing net income by weighted average common and common equivalent shares outstanding, computed in accordance with the treasury stock method. The computation of basic and diluted EPS is as follows:
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 28, APRIL 3, 1997 1998 -------------- -------------- BASIC EPS COMPUTATION Numerator: Net income applicable to common stock ......... $ 1,030,000 $ 2,304,000 -------------- -------------- Denominator: Weighted average common shares outstanding .... 12,015,000 13,281,000 -------------- -------------- Basic earnings per share ...................... $ 0.09 $ 0.17 ============== ============== DILUTED EPS COMPUTATION Numerator: Net income applicable to common stock ......... $ 1,030,000 $ 2,304,000 -------------- -------------- Denominator: Weighted average common shares outstanding .... 12,015,000 13,281,000 Effect of dilutive securities Stock options ............................ 749,000 646,000 -------------- -------------- Diluted weighted average shares outstanding ... 12,764,000 13,927,000 -------------- -------------- Diluted earnings per share .................... $ 0.08 $ 0.17 ============== ==============
6 7 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 28, 1997 AND THREE MONTHS ENDED APRIL 3, 1998 NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS Certain balance sheet components are as follows:
JANUARY 2, APRIL 3, 1998 1998 ------------ ------------ (Unaudited) Inventories: Raw materials .......................... $ 5,152,000 $ 4,393,000 Work-in-progress ....................... 1,819,000 4,079,000 Finished Goods ......................... 3,701,000 3,802,000 ------------ ------------ $ 10,672,000 $ 12,274,000 ============ ============ Property, plant and equipment: Land, buildings and improvements ....... $ 10,625,000 $ 12,009,000 Machinery and equipment ................ 8,533,000 10,010,000 Tooling and molds ...................... 2,493,000 2,648,000 Furniture and fixtures ................. 1,948,000 2,464,000 ------------ ------------ $ 23,599,000 $ 27,131,000 Less accumulated depreciation ............ (6,656,000) (7,846,000) ------------ ------------ Total .................................... $ 16,943,000 $ 19,285,000 ============ ============ Other assets: Technology license ..................... $ 197,000 $ 183,000 Inventory components, non-current ...... 999,000 999,000 Dartec A.B. intangible ................. -- 2,544,000 Investment in Trimeris common stock ............................... 4,118,000 2,510,000 ------------ ------------ Other .................................. $ 152,000 $ 213,000 ------------ ------------ $ 5,466,000 $ 6,449,000 ============ ============
NOTE 5. CONTINGENCIES On September 11, 1996, the Company filed an action against Fimed, Inc. ("Fimed") seeking rescission of a product distribution contract. Subsequent to the filing of this action, Fimed filed a counterclaim seeking compensatory damages of approximately $400 million, plus punitive damages. The Company believes that it has meritorious defenses to the counterclaim asserted by Fimed. Fact discovery on the litigation has been largely completed, and trial has been set to commence October 13, 1998. The Company has been pursuing its claims and defending Fimed's claims vigorously. During the normal course of business, the Company may be subject to litigation involving various business matters. Management believes that an adverse outcome of any such known matters would not have a material adverse impact to the Company. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of MiniMed should be read in conjunction with the consolidated financial statements and the related notes thereto incorporated by reference herein. Any statements released by MiniMed that are forward looking, including statements relating to future operating results, technological innovations, product development and research activities, clinical trials, regulatory approvals, research and development expenditures, capital expenditures and requirements, manufacturing trends, product and service offerings and the development of pharmacy operations are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may affect the Company's business and prospects, including changes in economic and market conditions, healthcare legislation, administration of clinical trials, progress in MiniMed's alliances with pharmaceutical companies, the development of competing drug delivery systems, management of growth, the effective integration of HMS into the Company, and other factors discussed in the Company's filings with the Securities and Exchange Commission. GENERAL Product development has focused upon four product lines: external insulin pumps and related disposables, implantable insulin pumps, continuous glucose monitoring systems, and therapy delivery systems for other chronic medical conditions. Sales and profits to date have been generated primarily through the sale of external pumps and disposable products used to deliver insulin in the intensive management of diabetes. With its acquisition of Home Medical Supply, Inc. and several affiliated entities (collectively, "HMS") effective January 2, 1998, the Company's consolidated operating results also include sales related to the distribution of other diabetes supplies and pharmaceutical products. RESULTS OF OPERATIONS The following table sets forth for the three months ended April 3, 1998 and the three months ended March 28, 1997 the percentage relationship to net sales of certain items in the Company's consolidated statements of operations and the percentage changes in the dollar amounts of such items on a comparative basis.
PERCENTAGE OF NET SALES --------------------------------------------- THREE MONTHS THREE MONTHS PERCENTAGE ENDED ENDED INCREASE APRIL 3, 1998 MARCH 28, 1997 (DECREASE) ------------- -------------- ---------- Net sales 100.0% 100.0% 37.6% Cost of sales 37.1 40.0 27.8 -------- -------- -------- Gross profit 62.9 60.0 44.1 Operating expenses Selling, general and administrative 43.2 41.8 42.2 Research and development 12.6 10.5 65.4 Research and development contract revenue (5.7) -- n/a -------- -------- -------- Total operating expenses 50.1 52.3 31.9 -------- -------- -------- Operating income 12.8% 7.7% 126.3% ======== ======== ========
8 9 The following table sets forth domestic and international net sales and gross profits related to the Company's primary product lines for the three months ended April 3, 1998 and for the three months ended March 28, 1997.
--------------------------------- ------------------------------ Dollars in Thousands % of Net Sales --------------------------------- ------------------------------ Three Months Three Months Three Months Three Months Ended Ended Ended Ended April 3, 1998 March 28, 1997 April 3, 1998 March 28, 1997 ------------- -------------- ------------- -------------- DOMESTIC AND INTERNATIONAL NET SALES External pumps and related disposables Domestic $ 19,336 $ 13,802 73.3% 72.0% International 2,756 1,555 10.5% 8.1% ---------- ---------- ---------- ---------- Subtotal $ 22,092 $ 15,357 83.8% 80.1% Other diabetes supplies 1,020 1,300 3.9% 6.8% Pharmaceutical products 3,033 2,301 11.5% 12.0% Implantable insulin pumps 221 203 0.8% 1.1% ---------- ---------- ---------- ---------- Net Sales $ 26,366 $ 19,161 100.0% 100.0% ========== ========== ========== ========== GROSS PROFITS External pumps and related disposables $ 15,966 $ 10,800 60.6% 56.4% Other diabetes supplies 491 717 1.9 3.7 Pharmaceutical products 721 345 2.7 1.8 Implantable pumps (596) (357) (2.3) (1.9) ---------- ---------- ---------- ---------- Total $ 16,582 $ 11,505 62.9% 60.0% ========== ========== ========== ==========
THREE MONTHS ENDED APRIL 3, 1998 AND MARCH 28, 1997 NET SALES Net sales increased 37.6% during the three months ended April 3, 1998 over the three months ended March 28, 1997 to $26,366,000 from $19,161,000. This increase is principally the result of an increase of 43.9%, or $6,735,000 in the sales volume of external pumps and related disposables. Domestic sales of these products grew 40.1% or $5,534,000 in the first quarter of 1998 as compared to the first quarter of 1997, while international sales increased 77.2% or $1,201,000 during the same period. The domestic net sales growth was derived primarily from increased volume of external pumps and related disposables, with external pump sales growing at a faster rate than disposable sales. The domestic sales increase related to external pumps and disposable products includes an increase in the average sales price of external pumps. The price increase is the result of a continued shift of external pump sales from independent dealers to internal sales, thus eliminating the discount given to such independent dealers. International sales of external pumps and related disposable products grew primarily due to greater sales volumes of external pumps, while pricing of external pumps in the international market remained consistent with the comparable quarter of 1997. Domestic and international pricing for disposable products did not change materially from the first quarter of 1997 to the first quarter of 1998.. Sales of implantable pumps did not increase materially from the first quarter of 1997 to the first quarter of 1998, as regulatory approval for the implantable pump and special insulin utilized in the implantable system is still pending. Although the Company received certification under the applicable directives issued by the European Union (the "EU") and received the CE Mark in March 1995 for the implantable pump (permitting commercial sale throughout the EU), separate approval from the EU is required for commercial sale of the insulin and this approval is not expected until late 1998, at the earliest. The implantable pump and the special insulin remain subject to regulatory review and approval in the United States. No assurance can be given that such approvals will be received in 1998, if at all. Pharmaceutical product sales increased 31.8% or $732,000, while sales of other diabetes supplies decreased by 21.5% or $280,000 during the 1998 first quarter. Although unit sales volumes for pharmaceutical products and other diabetes supplies increased, average sales prices in the first quarter of 1998 were lower than the comparable 1997 period for both product lines, resulting in a net sales decrease. These operating activities were part of HMS. Management believes these product offerings will enhance the Company's ability to meet the total needs of its external pump patient base and prepare MiniMed for future sales of its glucose monitoring products. 9 10 OPERATING RESULTS Cost of Sales and Gross Profits--Cost of sales increased 27.8% during the three months ended April 3, 1998 over the three months ended March 28, 1997 to $9,784,000 from $7,656,000. As a percentage of net sales, cost of sales in the 1998 first quarter decreased to 37.1% from 40.0% in the comparable period of 1997. Gross margins on external pumps and disposables increased to 72.3% of such sales during the 1998 first quarter, compared to 70.3% for this product line during the 1997 first quarter. The gross margin improvement on these products is primarily the result of two factors: continued realization of manufacturing efficiencies through greater economies of scale and increased average selling prices for external pumps. The increase in gross margins as a percent of sales has been realized despite a reduction in gross profits for disposable products. The disposable gross margin decrease is the result of purchasing certain disposable products from a contract manufacturer rather than manufacturing these products through its normal manufacturing operations. The Company intends to continue to purchase and sell various disposable products manufactured by third party manufacturers and will achieve better margins on these products when certain sales and purchase volumes have been met. The Company's gross profits have been adversely impacted by the implantable pump product line during the three months ended April 3, 1998 due to continued limited sales prior to full commercial release. Such limited sales have inhibited the Company's ability to realize manufacturing efficiencies on this product line. The Company expects this trend to continue for the foreseeable future. Gross margins for other diabetes supplies and pharmaceutical products have remained consistent on a combined basis, with margins improving in 1998 on pharmaceutical products, offset by declining gross margins on other diabetes supplies. The Company anticipates that on a combined basis, gross margins for these product lines should be consistent with those achieved in the 1998 first quarter. Operating Expenses--Selling, general and administrative expenses increased 42.2% during the three months ended April 3, 1998 over the three months ended March 28, 1997 to $11,391,000 from $8,009,000. As a percentage of net sales, these expenses increased to 43.2% during the three months ended April 3, 1998 from 41.8% during the three months ended March 28, 1997. Selling and marketing expenses increased primarily due to increased sales volume, the cost of integrating the HMS and MiniMed operations, continued expansion of the Company's domestic sales force and administrative support staff to enhance selling, marketing and education efforts. General and administrative expenses also rose during the three months ended April 3, 1998 over the three months ended March 28, 1997 due to costs associated with staff increases necessary to support the Company's increased business activities. Research and development expenses grew 65.4% during the three months ended April 3, 1998 over the three months ended March 28, 1997 to $3,317,000 from $2,005,000. As a percentage of sales, research and development expenses increased to 12.6% during the three months ended April 3, 1998 from 10.5% during the comparable period in 1997. The 1998 first quarter increase in research and development costs resulted from greater resources directed to the development of glucose monitoring systems, future generation external insulin pumps and disposable products, data communication capabilities for external pumps and glucose monitoring systems and the Company's joint development project with Roche Diagnostics/Boehringer Mannheim Corporation. The Company filed an application to the Food and Drug Administration for 510(k) clearance for the first continuous glucose monitoring system for ambulatory use during the fourth quarter of fiscal 1997. Research and development on the glucose monitoring systems relate to continued refinement of the products prior to regulatory approval, establishment of a glucose monitoring systems manufacturing operations and development of the next generation of glucose monitoring system products. The Company anticipates that research and development expenditures for future periods will continue to increase as more of its new technological innovations approach commercialization. During the 1998 first quarter, the Company signed a research and development contract with American Medical Instruments, Inc., a member of The Marmon Group of companies. Under terms of the agreement, and subject to the achievement of quarterly performance milestones, the Company will receive up to $12.0 million in funding, payable in installments of $1.5 million, for two research and development projects designed primarily by the Company. The Company anticipates completion of its obligations pursuant to the agreement by the end of fiscal 1999. The Company will have the right to sell these products on a world-wide basis, with the exception of Japan, subject to payment of royalties to American Medical Instruments, Inc. The Company also has the right to purchase the technologies developed at prices ranging from an aggregate of $13.5 million to $19.0 million during 10 11 certain periods through April 30, 2002. During the first quarter, the Company recorded $1.5 million from this research and development contract as a reduction of operating expenses, as costs related to completion of the contractual obligations will be included in research and development expense. Other--Other income during the three months ended April 3, 1998 and during the three months ended March 28, 1997 consist primarily of interest income generated from the Company's cash, cash equivalents, and short-term investment balances. Other income increased 164.5% during the three months ended April 3, 1998 over the comparable period of 1997 to $291,000 from $110,000. This increase was due to interest income earned on the Company's cash, cash equivalents, and short-term investment balances due to unused proceeds of a public offering of the Company's common stock that was successfully completed during April 1997. The Company's effective tax rate during the three months ended April 3, 1998 and March 28, 1997 has been computed giving consideration to the pretax earnings and losses applicable to the Company's foreign and domestic tax jurisdictions. Inflation has not significantly impacted the Company's results of operations for the past two years. LIQUIDITY AND CAPITAL RESOURCES During the three months ended April 3, 1998, the Company used cash in operations of $3,199,000 compared to $913,000 provided by operations in the comparable period in 1997. Cash used in operations increased primarily due to increased inventory levels required to support planned sales growth and product introductions and payment of several current liabilities, including the payment of all fiscal 1997 bonuses and the retirement of trade debt owed to several significant vendors associated with HMS operations. The Company also used approximately $2.5 million of cash to complete its acquisition of Dartec A.B., a Scandinavian distributor. The increase in capital expenditures to $3,393,000 compared to $1,014,000 spent during the comparable period in 1997 resulted primarily from building glucose sensor manufacturing capacity, as well as other building improvements to service growth, manufacturing expansion, research and development engineering equipment and information systems requirements. The Company anticipates that future capital expenditures will continue to increase to support the Company's new product activities and to build the infrastructure necessary to accommodate the Company's anticipated growth. The Company also used cash of approximately $2.8 million to retire some existing debt related to the HMS operations, with $369,000 of debt remaining outstanding as of April 3, 1998. There were no significant equity transactions during the first quarters of 1998 or 1997. The Company maintains an unsecured line of credit which enables MiniMed to borrow up to $10.0 million through January 31, 1999. The Company has not drawn any funds under such line of credit. The line of credit, if used, bears interest at an adjustable rate equal to the 30-day commercial paper rate plus 2.15% (7.66% as of April 12, 1998). The Company is also required to maintain certain cash, net worth and debt covenants under the provisions of this line of credit. The Company is currently in compliance with all of these covenants. The Company also is involved in certain litigation, the financial impact of which is uncertain. See "Notes to Consolidated Financial Statements" herein. Management expects that the current level of cash and cash equivalents will be sufficient to meet its needs for working capital and capital expenditures for at least one year. However, the requirements for additional capital and working capital are subject to change and will depend upon numerous factors, including the level of capital expenditures, research and development activities and results, competitive and technological developments, health care reimbursement trends, and the availability for acquisition by the Company of complementary additional distribution channels, products, and technologies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 11 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Exhibit - ----------- --------------------------------------------------- 27.1 Financial data schedule (b) Reports on Form 8-K None. 12 13 SIGNATURE Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MiniMed Inc. Date: May 18, 1998 /s/ KEVIN R. SAYER ----------------------------------- Kevin R. Sayer Senior Vice President, Finance & Chief Financial Officer 13 14 INDEX TO EXHIBITS Exhibit No. Description 27.1 Financial data schedule 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-01-1999 JAN-03-1998 APR-03-1998 24,563 4,631 28,492 5,308 12,274 71,540 27,131 7,846 97,274 11,613 94 0 0 135 84,404 97,274 26,366 26,657 9,784 22,992 0 (942) 35 3,665 1,361 2,304 0 0 0 2,304 0.17 0.17
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