-----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, RjEpQsQg1BeTJS6cDV5r76XOkDbMbco1+LXvLI544UCFf1M0PXimH4b49pAFOU1a 0d5l0qR4w6UBapVD8nV3lA== 0000950148-98-002042.txt : 19980818 0000950148-98-002042.hdr.sgml : 19980818 ACCESSION NUMBER: 0000950148-98-002042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980703 FILED AS OF DATE: 19980817 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: 98693071 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 July 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 AUGUST 13, 1998 --------------------------------- ------------------------------ Common Stock, $.01 par value 13,366,886 ================================================================================ 2 INDEX MINIMED INC.
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Consolidated Balance Sheets (Unaudited) - January 2, 1998 and July 3, 1998 3 Consolidated Statements of Income (Unaudited) -- Three months and six months ended June 27, 1997 and July 3, 1998 4 Consolidated Statements of Cash Flows (Unaudited) -- Six months ended June 27, 1997 and July 3, 1998 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION 14 Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 16 INDEX TO EXHIBIT 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES MINIMED INC. CONSOLIDATED BALANCE SHEETS JANUARY 2, 1998 AND JULY 3, 1998 ASSETS
1997 1998 ------------- ------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents ................................................... $ 22,282,000 $ 13,344,000 Short-term investments ...................................................... 18,713,000 9,468,000 Accounts receivable, net of allowance for doubtful accounts of $6,250,000 and $5,451,000 at January 2, 1998 and July 3, 1998, respectively .............. 24,661,000 25,668,000 Inventories ................................................................. 10,672,000 13,424,000 Amounts due on research and development contract ............................ -- 1,500,000 Deferred income taxes ....................................................... 5,803,000 6,798,000 Prepaid expenses and other current assets ................................... 1,279,000 2,093,000 ------------- ------------- Total current assets ............................................ 83,410,000 72,295,000 LONG-TERM INVESTMENTS ......................................................... 4,118,000 2,245,000 OTHER ASSETS .................................................................. 1,348,000 5,124,000 LAND, BUILDINGS, PROPERTY AND EQUIPMENT - Net ................................. 16,943,000 23,863,000 ------------- ------------- TOTAL ......................................................................... $ 105,819,000 $ 103,527,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable ............................................ $ 2,453,000 $ 275,000 Accounts payable ............................................................ 4,371,000 1,861,000 Accrued salaries and related benefits ....................................... 3,719,000 3,518,000 Accrued sales commissions ................................................... 1,943,000 966,000 Accrued warranties .......................................................... 3,498,000 3,626,000 Income taxes payable ........................................................ 276,000 1,441,000 Other accrued expenses ...................................................... 3,741,000 1,174,000 ------------- ------------- Total current liabilities ........................................ 20,001,000 12,861,000 ------------- ------------- Deferred Tax Liabilities .................................................... 2,007,000 1,665,000 Notes payable ............................................................... 728,000 -- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.01; 40,000,000 shares authorized; 13,260,240 and 13,354,966 shares issued and outstanding as of January 2, 1998 and July 3, 1998, respectively ........................................... 135,000 136,000 Additional capital ......................................................... 73,806,000 75,830,000 Cumulative foreign currency translation .................................... (312,000) (310,000) Unrealized gain on marketable securities ................................... 1,371,000 209,000 Retained earnings .......................................................... 8,083,000 13,136,000 ------------- ------------- Total stockholders' equity ...................................... 83,083,000 89,001,000 ------------- ------------- TOTAL ......................................................................... $ 105,819,000 $ 103,527,000 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 4 MINIMED INC. CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------------- ---------------------------------- JUNE 27, JULY 3, JUNE 27, JULY 3, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ (Unaudited) NET SALES ................................... $ 22,921,000 $ 31,715,000 $ 42,082,000 $ 58,081,000 COST OF SALES ............................... 9,425,000 13,656,000 17,081,000 23,440,000 ------------ ------------ ------------ ------------ GROSS PROFIT ................................ 13,496,000 18,059,000 25,001,000 34,641,000 OPERATING EXPENSES: Selling, general and administrative ....... 9,655,000 11,930,000 17,664,000 23,320,000 Research and development .................. 1,928,000 3,737,000 3,932,000 7,054,000 Research and development contract income... -- (1,500,000) -- (3,000,000) ------------ ------------ ------------ ------------ Total operating expenses ........ 11,583,000 14,167,000 21,596,000 27,374,000 ------------ ------------ ------------ ------------ OPERATING INCOME ............................ 1,913,000 3,892,000 3,405,000 7,267,000 OTHER INCOME, Including interest income ..... 406,000 436,000 515,000 727,000 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ................. 2,319,000 4,328,000 3,920,000 7,994,000 PROVISION FOR INCOME TAXES .................. 792,000 1,581,000 1,362,000 2,941,000 ------------ ------------ ------------ ------------ NET INCOME .................................. $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000 ============ ============ ============ ============ BASIC EARNINGS PER SHARE .................... $ 0.12 $ 0.21 $ 0.20 $ 0.38 ============ ============ ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING ... 13,154,000 13,313,000 12,584,000 13,297,000 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE .................. $ 0.11 $ 0.20 $ 0.19 $ 0.36 ============ ============ ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.. 13,723,000 14,053,000 13,243,000 13,990,000 ============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 5 MINIMED INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998
1997 1998 ------------ ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................ $ 2,558,000 $ 5,053,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation .................................................... 1,326,000 1,604,000 Deferred income taxes ........................................... (655,000) (625,000) Changes in operating assets and liabilities: Accounts receivable, net ...................................... 679,000 (1,007,000) Inventories ................................................... (2,014,000) (2,752,000) Amounts due under research and development contract ........... -- (1,500,000) Prepaid expenses and other current assets ..................... 205,000 (814,000) Other assets .................................................. (246,000) (56,000) Accounts payable .............................................. (51,000) (2,510,000) Income taxes payable .......................................... (198,000) 2,315,000 Accrued expenses .............................................. (1,281,000) (3,617,000) ------------ ------------ Net cash provided by (used in) operating activities ........... $ 323,000 (3,909,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES - Short-term investments ........................................ (5,674,000) 9,245,000 Long-term investments ......................................... (2,000,000) -- Acquisition of Dartec A.B ..................................... -- (2,580,000) Issuance of notes receivable .................................. -- (1,140,000) Purchase of land, buildings, property and equipment ........... (2,243,000) (8,530,000) ------------ ------------ Net cash used in investing activities ......................... $ (9,917,000) $ (3,005,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES - Repayment of notes payable .................................... (155,000) (2,905,000) Proceeds from public offering, net of expenses ................ 22,169,000 -- Proceeds from exercises of warrants ........................... 2,600,000 -- Proceeds from stock option exercises .......................... 25,000 412,000 Proceeds from issuance of common stock under employee stock plan ................................................. 280,000 467,000 ------------ ------------ Net cash provided by (used in) financing activities ......... $ 24,919,000 $ (2,026,000) ------------ ------------ Effect of cumulative foreign currency translation adjustment on cash and equivalents .......................... (278,000) 2,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. 15,047,000 (8,938,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 10,405,000 22,282,000 ============ ============ CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 25,452,000 $ 13,344,000 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest ........................................................ $ 100,000 $ 38,000 Income taxes .................................................... $ 1,995,000 $ 3,159,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - During the six months ended July 3, 1998, the Company recorded an unrealized holding loss of $1,161,000, net of estimated taxes, on marketable securities classified as long-term investments available for sale. The Company has recognized a reduction in income taxes payable of $74,000 and $1,150,000 during the six months ended June 27, 1997 and July 3, 1998, respectively, related to the exercise of nonqualified stock options. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 6 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of MiniMed Inc. ("MiniMed" or 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. filed on Form 10-K with the Securities and Exchange Commission for the year ended January 2, 1998. The results of operations for the six months ended July 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 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 and six months ended June 27, 1997 and July 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 ENDED SIX MONTHS ENDED JUNE 27, JULY 3, JUNE 27, JULY 3, 1997 1998 1997 1998 ----------- ----------- ----------- ----------- (Unaudited) BASIC EPS COMPUTATION Numerator: Net income applicable to common stock $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000 ----------- ----------- ----------- ----------- Denominator: Weighted average common shares outstanding 13,154,000 13,313,000 12,584,000 13,297,000 ----------- ----------- ----------- ----------- Basic earnings per share $ 0.12 $ 0.21 $ 0.20 $ 0.38 =========== =========== =========== =========== DILUTED EPS COMPUTATION Numerator: Net income applicable to common stock $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000 ----------- ----------- ----------- ----------- Denominator: Weighted average common shares outstanding 13,154,000 13,313,000 12,584,000 13,297,000 Effect of dilutive securities Stock options 569,000 740,000 659,000 693,000 ----------- ----------- ----------- ----------- Diluted weighted average shares outstanding 13,723,000 14,053,000 13,243,000 13,990,000 ----------- ----------- ----------- ----------- Diluted earnings per share $ 0.11 $ 0.20 $ 0.19 $ 0.36 =========== =========== =========== ===========
6 7 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998 NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS Certain balance sheet components are as follows:
JANUARY 2, JULY 3, 1998 1998 ------------ ------------ (Unaudited) Inventories: Raw materials ................. $ 5,152,000 $ 4,781,000 Work-in-progress .............. 1,819,000 3,086,000 Finished goods ................ 3,701,000 5,557,000 ------------ ------------ Total ......................... $ 10,672,000 $ 13,424,000 ============ ============ Property, plant and equipment: Land, buildings and improvements ................ $ 10,625,000 $ 11,553,000 Machinery and equipment ....... 8,533,000 13,199,000 Tooling and molds ............. 2,493,000 2,069,000 Furniture and fixtures ........ 1,948,000 4,438,000 ------------ ------------ 23,599,000 31,259,000 Less accumulated depreciation.. (6,656,000) (7,396,000) ------------ ------------ Total ......................... $ 16,943,000 $ 23,863,000 ============ ============ Other assets: Technology license ............ $ 197,000 $ 171,000 Inventory components, non current .................... 999,000 999,000 Dartec A.B. goodwill .......... -- 2,580,000 Note receivable ............... -- 1,140,000 Other ......................... 152,000 234,000 ------------ ------------ Total ......................... $ 1,348,000 $ 5,124,000 ============ ============
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 March 1999. 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 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998 NOTE 6. SUBSEQUENT EVENT On July 31, 1998, the Company entered into an agreement with Medical Research Group, LLC ("MRG"), an entity originally founded by Alfred E. Mann, the Company's Chairman and Chief Executive Officer, who continues to own a substantial equity interest in MRG. Under the terms of the agreement, the Company will sell the operating assets of its implantable pump business to MRG, and will be granted an option to acquire distribution rights to a long-term implantable glucose sensor under development by MRG. MRG will pay the Company approximately $3.6 million pursuant to a promissory note for the inventory and equipment relating to the implantable pump business, and will license certain underlying technology to MRG. The promissory note will bear interest at 7%, be due and payable on December 31, 2003, and payment will be secured by the underlying assets and guaranteed by Mr. Mann. Pursuant to the agreement, the Company will act as MRG's distributor of implantable pumps for insulin and other compounds to treat diabetes, HIV/AIDS and for various other applications. Subject to certain conditions and purchase volume requirements, the Company will retain exclusive distribution rights for such applications. MRG has been developing an implantable long term glucose sensor for use with an implantable insulin pump, and will grant to MiniMed an option to acquire, for a $30 million fee, the exclusive marketing rights to the sensor, which may be exercised by MiniMed if MRG successfully completes a human implant utilizing the technology. Pursuant to the agreement, MRG is also to develop certain technology to enhance the operation of the implantable pump, including technology necessary to allow the interface between the implantable pump and MRG's implantable glucose sensor. 8 9 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 the Company that are forward looking, including statements relating to future operating results, product development and research activities, pharmaceutical product sales, pharmacy restructuring, regulatory approvals, implantable pump margins, research and development expenditures, the filing of documentation with the FDA, adequacy of working capital and cash requirements, capital expenditures and requirements, manufacturing trends, product and service offerings and the financing of new facilities 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, the ability to obtain licensing and regulatory approvals, 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 for 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 and six month periods ended July 3, 1998 and June 27, 1997, the percentage relationship to net sales of certain items in the Company's consolidated statements of income and the percentage change in the dollar amount of such items on a comparative basis.
PERCENTAGE OF NET SALES ---------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------------- ------------------------------------ JULY 3, JUNE 27, % INCREASE JULY 3, JUNE 27, % INCREASE 1998 1997 (DECREASE) 1998 1997 (DECREASE) ----- -------- ---------- ------- ------- ---------- (Unaudited) Net sales 100.0% 100.0% 38.4% 100.0% 100.0% 38.0% Cost of sales 43.1 41.1 44.9 40.4 40.6 37.2 ----- ----- ----- ----- ----- ----- Gross profit 56.9 58.9 33.8 59.6 59.4 38.6 Operating expenses: Selling, general and administrative 37.6 42.1 23.6 40.2 42.0 32.0 Research and development 11.8 8.4 93.8 12.1 9.3 79.4 Research and development contract (4.7) 0.0 n/a (5.2) 0.0 n/a ----- ----- ----- ----- ----- ----- Total operating expenses 44.7 50.5 22.3 47.1 51.3 26.8 ----- ----- ----- ----- ----- ----- Operating income 12.2% 8.4% 103.5% 12.5% 8.1% 113.4% ===== ===== ===== ===== ===== =====
The following table sets forth domestic and international net sales and gross profits related to the Company's primary product lines for the three and six month periods ended June 27, 1997 and July 3, 1998. 9 10
DOLLARS IN THOUSANDS % OF NET SALES -------------------- -------------- THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- --------------------- ------------------- JULY 3, JUNE 27, JULY 3, JUNE 27, JULY 3, JUNE 27, JULY 3, JUNE 27, 1998 1997 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- ----- ----- ----- ----- (Unaudited) DOMESTIC AND INTERNATIONAL NET SALES External pumps and related disposables Domestic $ 24,991 $ 16,047 $ 44,327 $ 29,848 78.8% 70.0% 76.3% 70.9% International 2,200 1,525 4,956 3,081 6.9 6.7 8.5 7.4 -------- -------- -------- -------- ----- ----- ----- ----- Subtotal 27,191 17,572 49,283 32,929 85.7 76.7 84.8 78.3 Other diabetes supplies 1,951 1,946 2,970 3,246 6.2 8.5 5.1 7.7 Pharmaceutical products 2,456 3,221 5,489 5,521 7.7 14.1 9.5 13.1 Implantable Pumps 117 182 339 386 0.4 0.7 0.6 0.9 -------- -------- -------- -------- ----- ----- ----- ----- Net Sales $ 31,715 $ 22,921 $ 58,081 $ 42,082 100.0% 100.0% 100.0% 100.0% ======== ======== ======== ======== ===== ===== ===== ===== GROSS PROFITS External pumps and related disposables $ 18,001 $ 12,712 $ 33,967 $ 23,512 56.7% 55.5% 58.5% 55.8% Other diabetes supplies 682 721 1,174 1,438 2.1 3.1 2.0 3.4 Pharmaceutical products 142 483 863 829 0.5 2.1 1.4 2.0 Implantable pumps (766) (420) (1,363) (778) (2.4) (1.8) (2.3) (1.8) -------- -------- -------- -------- ----- ----- ----- ----- Total $ 18,059 $ 13,496 $ 34,641 $ 25,001 56.9% 58.9% 59.6% 59.4% ======== ======== ======== ======== ===== ===== ===== =====
NET SALES Net sales increased 38.4% during the three months ended July 3, 1998 over the three months ended June 27, 1997 to approximately $31,715,000 from approximately $22,921,000, and 38.0% to approximately $58,081,000 from approximately $42,082,000 from the first half of 1997 to the first half of 1998. This sales growth is principally the result of an increase of 54.7%, or approximately $9,619,000, in the sales volume of external pumps and related disposables for the second quarter of 1998 over the second quarter of 1997, with sales of these products increasing approximately $16,354,000 or 49.7% for the first half of 1998 over the corresponding period of 1997. Domestic sales of these products grew 55.7% or approximately $8,944,000 in the second quarter of 1998 compared to the second quarter of 1997, while international sales increased 44.3% or approximately $675,000 during the same period. For the first half of 1998, domestic and foreign sales of external pumps and related disposable products increased by 48.5% and 60.9%, respectively, over the comparable period of 1997. Domestic net sales growth resulted primarily from increased volume of external pumps and related disposables, with some of the domestic sales increase attributable to an increase in the average sales price of external pumps. The price increase is generally 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. The Company has realized a slight decrease in the average sales price realized on international pump sales, as some independent dealers are being utilized to seed specific international markets. Domestic and international pricing for disposable products did not change materially from the first half of 1997 to the first half of 1998. Pharmaceutical product sales decreased 23.8% or approximately $765,000 to approximately $2,456,000 in the second quarter of 1998 compared to approximately $3,221,000 in the second quarter of 1997 and were relatively flat for the first half of 1998 compared to the first half of 1997. The Company anticipates that pharmaceutical product sales will decrease slightly or remain flat for the remainder of 1998 compared to 1997, as the pharmacy operations are being restructured to better serve MiniMed's diabetes business. Such restructuring includes the discontinuation of certain product lines previously offered by the pharmacy. Sales of other diabetes supplies were flat for the second quarter of 1998 compared to the 1997 second quarter and have decreased by 8.5% or approximately $276,000 to approximately $2,970,000 during the first six months of 1998 compared to approximately $3,246,000 in the comparable period of 1997. While sales volumes of other diabetes supplies have increased, the Company has experienced pricing pressures in this competitive market. Sales of implantable pumps decreased from the second quarter of 1997 to the second quarter of 1998 and have decreased for the first half of 1998 compared to the first half of 1997. Regulatory approval for the implantable pump and special insulin utilized in the implantable system is still pending. Although 10 11 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. OPERATING RESULTS Cost of Sales and Gross Profits--Cost of sales increased 44.9% during the three months ended July 3, 1998 as compared to the three months ended June 27, 1997 to approximately $13,656,000 from approximately $9,425,000, and increased 37.2% to approximately $23,440,000 from approximately $17,081,000 for the six months ended July 3, 1998 as compared to the six months ended June 27, 1997. As a percentage of net sales, cost of sales in the 1998 second quarter increased to 43.1% from 41.1% in the comparable period of 1997, with cost of sales as a percentage of net sales consistent for the first half of 1998 compared to the first half of 1997. Gross margins on external pumps and disposables decreased to 66.2% of such sales during the 1998 second quarter, compared to 72.3% for this product line during the 1997 second quarter. Quarterly gross margins on these products were affected by several factors. The Company has added a disposable product line which is not manufactured in-house, therefore resulting in lower margins. 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 purchase volumes have been met. In an effort to seed international growth, the Company has realized a reduction in average pump selling prices outside of the United States. Gross margins in 1998 have also decreased for the pharmaceutical products and other diabetes supplies product lines for the second quarter of 1998 and on a year-to-date basis as compared to the second quarter and first six months of 1997. The reduction in pharmaceutical products gross margins is the result of the restructuring of the pharmacy operations and discontinuation of certain pharmaceutical product lines. Other diabetes supplies gross margins have decreased due to the lower average selling prices described above. The Company's gross profits have been adversely impacted by the implantable pump product line during the six months ended July 3, 1998 due to continued limited sales prior to such product's full commercial release. Such limited sales have inhibited the Company's ability to realize manufacturing efficiencies on this product line and have caused unfavorable manufacturing variances. On July 31, 1998, the Company entered into an agreement with Medical Research Group, LLC ("MRG"), an entity originally founded by Alfred E. Mann, the Company's Chairman and Chief Executive Officer, who continues to own a substantial equity interest in MRG. Under the terms of the agreement, the Company will sell the operating assets of its implantable pump business to MRG, and will be granted an option to acquire distribution rights to a long-term implantable glucose sensor under development by MRG. MRG will pay the Company approximately $3.6 million pursuant to a promissory note for the inventory and equipment relating to the implantable pump business, and will license certain underlying technology to MRG. Pursuant to agreement,the Company will act as MRG's distributor of implantable pumps for insulin and other compounds to treat diabetes, HIV/AIDS and for various other applications. Subject to certain conditions and purchase volume requirements, the Company will retain exclusive distribution rights for such applications. The Company believes that gross margins on this product line will improve as a result of the transfer of such business activity to MRG. The Company's research and development expenses related to the implantable product line should also decrease in future periods as a result of this agreement. (See -- "Notes to Consolidated Financial Statements -- Subsequent Event.") Operating Expenses--Selling, general and administrative expenses increased 23.6% during the three months ended July 3, 1998 as compared to the three months ended June 27, 1997 to approximately $11,930,000 from approximately $9,655,000. For the six months ended July 3, 1998, selling, general and administrative expenses grew 32.0% to approximately $23,320,000 from approximately $17,664,000 for the six months ended June 27, 1997. As a percentage of net sales, these expenses decreased to 37.6% and 40.2% during the three and six month periods ended July 3, 1998 compared to 42.1% and 42.0% for the comparable three and six month periods ended June 27, 1997. These expenses have decreased as a percentage of sales due to the Company's increased sales volumes. The overall increase in spending is also related primarily to the increase in sales activities during such periods. Research and development expenses grew 93.8% during the three months ended July 3, 1998 over the three months ended June 27, 1997 to approximately $3,737,000 from approximately $1,928,000, with research and development expenses increasing 79.4% to approximately $7,054,000 for the first half 11 12 of 1998 compared to approximately $3,932,000 for the first half of 1997. As a percentage of sales, research and development expenses increased to 11.8% during the three months ended July 3, 1998 from 8.4% during the comparable period in 1997, and increased to 12.1% from 9.3% of net sales during the first half of 1998 as compared to the first half of 1997. The 1998 increase in research and development costs resulted from greater resources directed to the development of continuous glucose monitoring systems, start-up manufacturing operations of the continuous glucose monitoring systems, future generation external insulin pumps and disposable products, data communication capabilities for external pumps and continuous glucose monitoring systems and the Company's joint development project with Roche Diagnostics/Boehringer Mannheim Corporation. The Company filed an application with the Food and Drug Administration ("FDA") for 510(k) clearance for the first continuous glucose monitoring system for ambulatory use during the fourth quarter of 1997. As a result of discussions between the Company and the FDA, this application has been converted to an application for premarket approval which will require additional documentation to be submitted by the Company to the FDA prior to approval of the first generation of continuous glucose monitoring systems. This additional documentation is near completion. The FDA has granted the Company expedited review status on this product. Future research and development costs on the continuous glucose monitoring systems relate to continued refinement of the products prior to regulatory approval, establishment of a continuous glucose monitoring systems manufacturing operation and development of the next generation of continuous glucose monitoring systems products. The Company anticipates that research and development expenditures for future periods are expected to increase as more of its new technological innovations approach commercialization. The Company achieved the necessary milestone on its research and development contract with American Medical Instruments, Inc., a member of The Marmon Group of Companies, ("AMI"), and appropriately recognized $1.5 million in research and development contract revenues as a reduction of operating expenses. Other--Other income during the three and six months ended July 3, 1998 and during the three and six months ended June 27, 1997 consists primarily of interest income generated from the Company's cash, cash equivalents, and short-term investment balances. Other income will fluctuate in future periods based upon the funds available to the Company for investment. The Company's effective tax rate during the first half of 1998 and 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 six months ended July 3, 1998, the Company used cash in operations of approximately $3,909,000 compared to approximately $323,000 provided by operations in the comparable period in 1997. Cash used in operations increased primarily due to increased receivables related to sales growth, increased inventory levels required to support planned sales growth, 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 $2.6 million of cash to complete its acquisition of Dartec A.B., a Scandinavian distributor. The increase in capital expenditures to approximately $8,530,000 compared to approximately $2,243,000 spent during the comparable period in 1997, resulted primarily from building continuous glucose monitoring systems manufacturing capacity, as well as other building improvements, to support 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 $2.9 million to retire some existing debt related to the HMS operations, with approximately $275,000 of debt remaining outstanding as of July 3, 1998. There were no significant equity transactions during the first six months of 1998. The Company maintains an unsecured line of credit which enables the Company 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 12 13 credit, if used, bears interest at an adjustable rate equal to the 30-day commercial paper rate plus 2.15% (7.67% as of August 7, 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. In the process of integrating certain HMS operations, the Company discovered certain business practices implemented by prior ownership that may potentially result in liability. The Company has corrected such practices and, while the amount of such liability, if any, is unclear, the Company believes that any liability related to such practices will not have a material adverse effect on the results of operations or financial condition of the Company. The Company also is involved in certain litigation, the financial impact of which is uncertain. See -- "Notes to Consolidated Financial Statements." Management expects that the Company's 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. During future periods, the Company may require significant amounts of cash to exploit opportunities and promote continued growth and expansion. Under terms of its research and development contract with AMI the Company received $1.5 million during the first six months of 1998 and had recorded a receivable for an additional $1.5 million as of July 3, 1998. 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 certain periods through July 30, 2002. The Company may elect to pay royalties on sales of these products in lieu of purchasing the technologies. The Company has entered into an agreement by which, among other transactions, the Company expects to acquire an option to purchase the exclusive world-wide marketing rights to a long-term glucose sensor developed by MRG for $30.0 million. (See -- "Notes to Consolidated Financial Statements -- Subsequent Event.") The Company does not anticipate exercising this option prior to 2000. In the event that the Company pursues either of these opportunities, additional capital resources will be required. The Company plans to develop a new corporate headquarters in Southern California, not far from the current Sylmar location. Substantial capital resources will be required to construct and equip this facility. The Company anticipates that the construction of the initial phases of this facility will be financed under a synthetic lease, with a separate operating lease on the land for 40 years plus renewal opportunities. 13 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 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 (a) On May 21, 1998, The Company held its 1998 Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, stockholders of the Company voted on proposals to (1) elect seven directors for a term of one year and until their respective successors are elected and qualified ("Proposal One"); and, (2) ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending January 1, 1999 ("Proposal Two"). (b)-(c) In total, 13,286,582 shares of Common Stock were eligible to vote at the Annual Meeting, and holders of 10,403,362 shares of Common Stock were represented in person or by proxy at the Annual Meeting, constituting 78.3% of the eligible shares. Following is voting information for both matters voted upon at the Annual Meeting: Proposal One - The following individuals, all being directors of the Company prior to such election, were reelected as directors of the Company at the Annual Meeting: Alfred E. Mann; David Chernof, M.D.; Carolyne Kahle Davis; William R. Grant; David H. MacCallum; Thomas R. Testman; and John C. Villforth. Each such director, except for Mr. Mann and Dr. Chernof received 10,397,747 votes (representing 99.95% of the votes cast) in favor of their election with 5,615 votes (.05%) withheld. Mr. Mann received 10,397,732 votes (99.95%) in favor of his election with 5,630 votes (.05%) withheld. Dr. Chernof received 10,367,747 votes (99.66%) in favor of his election with 35,615 votes (.34%) withheld. None of the Company's directors received any votes against their reelection nor were any broker non-votes received. Proposal Two - At the Annual Meeting, Deloitte & Touche LLP was ratified as the Company's independent auditor for the fiscal year ending January 1 1999 Deloitte and Touche LLP received 10,367,227 votes (99.65%) for such ratification with 2,855 votes (.03%) received against and 33,280 votes (.32%) withheld. No broker non-votes were received. ITEM 5. OTHER INFORMATION Not applicable. 14 15 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. 15 16 SIGNATURE 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 thereunto duly authorized. MiniMed Inc. Date: August 17, 1998 /s/ KEVIN R. SAYER ------------------------------------------- Kevin R. Sayer Senior Vice President, Finance & Chief Financial Officer 16 17 INDEX TO EXHIBIT
Exhibit No. Description ----------- ----------- 27.1 Financial data schedule
17 EX-27 2 EXHIBIT 27
5 1,000 6-MOS JAN-1-1999 JAN-3-1998 JUL-3-1998 13,344 9,468 31,119 5,451 13,424 72,295 31,259 7,396 103,527 12,861 0 0 0 136 88,865 103,527 58,081 58,808 23,440 50,814 0 (799) 38 7,994 2,941 5,053 0 0 0 5,053 0.38 0.36
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