SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2003 Commission File Number 000-31191 The Medicines Company (Exact Name of Registrant as Specified in Its Charter) Delaware 04-3324394 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8 Campus Drive, Parsippany, NJ 07054 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 656-9898 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No __ As of April 30, 2003, the registrant had 46,796,043 shares of Common Stock, $0.001 par value per share, outstanding. THE MEDICINES COMPANY TABLE OF CONTENTS PART I. FINANCIAL INFORMATION.............................................. 1 ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........... 1 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 10 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 29 ITEM 4 - CONTROLS AND PROCEDURES......................................... 29 PART II. OTHER INFORMATION................................................. 30 ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS....................... 30 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................ 30 SIGNATURES.................................................................. 31 CERTIFICATIONS.............................................................. 32 EXHIBIT INDEX............................................................... 35 PART I. FINANCIAL INFORMATION ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THE MEDICINES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 2003 2002 ------------- ------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 116,519,727 $ 36,777,007 Available for sale securities 14,314,065 6,731,728 Accrued interest receivable 218,658 129,414 Accounts receivable, net of allowances of approximately $0.72 million and $0.64 million at March 31, 2003 and December 31, 2002, respectively 13,875,311 15,078,488 Inventories 10,169,350 14,178,660 Prepaid expenses and other current assets 866,926 660,720 ------------- ------------- Total current assets 155,964,037 73,556,017 Fixed assets, net 1,214,765 924,497 Other assets 233,854 233,854 ------------- ------------- Total assets $ 157,412,656 $ 74,714,368 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,340,861 $ 8,291,995 Accrued expenses 13,108,934 11,092,134 ------------- ------------- Total current liabilities 15,449,795 19,384,129 Deferred revenue 1,364,583 1,395,833 Commitments and contingencies -- -- ------------- ------------- Total liabilities 16,814,378 20,779,962 Stockholders' equity: Preferred stock, $1.00 par value per share, 5,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.001 par value per share, 75,000,000 shares authorized at March 31, 2003 and December 31, 2002, respectively; 46,695,932 and 39,894,285 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively 46,696 39,894 Additional paid-in capital 446,677,857 354,239,193 Deferred compensation (2,432,846) (3,125,494) Accumulated deficit (303,690,473) (297,274,830) Accumulated other comprehensive (loss) income (2,956) 55,643 ------------- ------------- Total stockholders' equity 140,598,279 53,934,406 ------------- ------------- Total liabilities and stockholders' equity $ 157,412,656 $ 74,714,368 ============= ============= See accompanying notes to unaudited condensed consolidated financial statements. Page 1 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS ENDED MARCH 31, 2003 2002 ------------ ------------ Net revenue $ 16,705,292 $ 7,714,901 Operating expenses: Cost of revenue 6,262,755 1,085,489 Research and development 7,250,397 9,309,072 Selling, general and administrative 9,779,216 9,331,837 ------------ ------------ Total operating expenses 23,292,369 19,726,398 Loss from operations (6,587,077) (12,011,497) Other income (expense): Interest income 171,433 378,177 Interest expense -- (7,986) ------------ ------------ Net loss (6,415,643) (11,641,306) ============ ============ Basic and diluted net loss per common share $ (0.16) $ (0.34) ============ ============ Shares used in computing net loss per common share: Basic and diluted 41,091,244 34,627,723 ============ ============ See accompanying notes to unaudited condensed consolidated financial statements. Page 2 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) THREE MONTHS ENDED MARCH 31, -------------------------------- 2003 2002 ------------- ------------- Cash flows from operating activities: Net loss $ (6,415,643) $ (11,641,306) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 148,247 132,367 Amortization of premiums on available for sale securities (32,411) -- Amortization of deferred stock compensation 565,351 984,611 Loss on disposals of fixed assets 2,127 -- Changes in operating assets and liabilities: Accrued interest receivable (89,244) 6,743 Accounts receivable 1,203,177 (1,309,747) Inventory 4,009,310 (2,883,463) Prepaid expenses and other current assets (206,200) (267,142) Other assets -- (1,395) Accounts payable (5,951,487) 3,388,681 Accrued expenses 2,015,184 397,841 Deferred revenue (31,250) 1,489,583 ------------- ------------- Net cash used in operating activities (4,782,839) (9,703,227) Cash flows from investing activities: Purchases of available for sale securities (8,768,329) -- Maturities and sales of available for sale securities 1,200,000 -- Purchase of fixed assets (439,474) (6,182) ------------- ------------- Net cash used in investing activities (8,007,803) (6,182) Cash flows from financing activities: Proceeds from revolving line of credit borrowings -- 10,000,000 Proceeds from issuances of common stock, net 92,572,768 1,285,554 ------------- ------------- Net cash provided by financing activities 92,572,768 11,285,554 Effect of exchange rate changes on cash (39,406) 3,546 ------------- ------------- Increase in cash and cash equivalents 79,742,720 1,579,691 Cash and cash equivalents at beginning of period 36,777,007 53,884,376 ------------- ------------- Cash and cash equivalents at end of period $ 116,519,727 $ 55,464,067 ============= ============= See accompanying notes to unaudited condensed consolidated financial statements. Page 3 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS The Medicines Company (the Company) was incorporated in Delaware on July 31, 1996. The Company is a specialty pharmaceutical company engaged in the acquisition, development and commercialization of late-stage development drugs or drugs approved for marketing. In December 2000 the U.S. Food and Drug Administration approved Angiomax(R) (bivalirudin), the Company's first product, for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary angioplasty. The Company commenced sales of Angiomax in the United States in the first quarter of 2001. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. The results of operations for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2003. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain reclassifications have been made to the prior year's information to conform to the 2003 presentation. Page 4 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Cash, Cash Equivalents and Available for Sale Securities The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at March 31, 2003 and December 31, 2002 consist of investments in money market funds. These investments are carried at cost, which approximates fair value. The Company considers securities with original maturities of greater than three months to be available for sale securities. Securities under this classification are recorded at fair market value and unrealized gains and losses are recorded as a separate component of stockholders' equity. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. The cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity. At March 31, 2003, the Company held various certificates of deposit, corporate bonds and United States government agency notes with fair value totaling $14.3 million, $5.0 million of which had original maturities of more than one year but less than two years and $9.3 million of which had original maturities of more than three months and less than one year. Revenue Recognition The Company sells its products primarily to wholesalers and distributors who, in turn sell to hospitals. Revenue from product sales is not recognized until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Also, because the Company's products are sold with limited rights of return, revenue is not recognized until the price to the buyer is fixed, the buyer is obligated to pay the Company and the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligations to bring about sale of the product and the amount of returns can be reasonably be estimated. The Company reserves for estimated returns at the time of sale and revenues are reported net of such amounts. The Company records allowances for product returns, rebates and discounts at the time of sale, and reports revenue net of such allowances. The Company must make significant judgments and estimates in determining the allowances. For instance: - The Company's customers have the right to return any unopened product during the 18 month period beginning six months prior to the labeled expiration date and ending 12 months after the labeled expiration date. As a result, in calculating the allowance for product returns, the Company must estimate the likelihood that product sold to wholesalers might remain in their inventory to within six months of expiration and determine if it will be returned. The Company bases its estimates on information from customers, historic patterns of returns, industry data and on the expiration dates of product currently being shipped. Page 5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Certain hospitals purchasing the Company's products from wholesalers have the right to receive a discounted price and a volume-based rebate if they participate in a group purchasing organization that has a contract with the Company. As a result, the Company must estimate the likelihood that product sold to wholesalers might be ultimately sold to a participating hospital. The Company bases its estimates on information from customers, industry data, historic patterns of discounts and customer rebate thresholds. If actual results differ, the Company will likely be required to make adjustments to these allowances in the future. Revenue from collaborative agreements may include non-refundable fees or milestone payments. These payments are recorded as deferred revenue until contractual performance obligations have been satisfied, and they are recognized ratably over the term of these agreements. When the period of deferral cannot be specifically identified from the contract, the Company must estimate the period based upon other critical factors contained within the contract. The Company reviews these estimates at least annually, which could result in a change in the deferral period. Inventories Inventory is recorded upon the transfer of title from our vendors. Inventory is stated at the lower of cost or market value with cost determined using a weighted average of costs. All costs associated with the manufacture of Angiomax bulk drug product and finished product to which the title transferred to us prior to FDA approval of Angiomax and of its original manufacturing process were expensed as research and development. In December 2000, we received FDA approval for Angiomax and its original manufacturing process. Any Angiomax bulk drug product manufactured according to its original manufacturing process to which we took title after FDA approval is recorded as inventory. Together with UCB Bioproducts, the Company has developed, but not yet received FDA approval of, a second generation chemical synthesis process, the Chemilog process, for the manufacture of Angiomax bulk drug substance. All Angiomax bulk drug product manufactured using the Chemilog process to which title has transferred to the Company to date has been expensed as research and development. The Company reviews the inventory for slow moving or obsolete amounts based on expected revenues. If actual revenues are less than expected, allowances for excess amounts may be required in the future. Page 6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, DECEMBER, 31 INVENTORIES 2003 2002 ----------- ----------- Raw materials ...................... $ 241,582 4,126,870 Work-in-progress ................... 7,130,341 8,370,949 Finished Goods ..................... 2,797,427 1,680,841 ----------- ----------- TOTAL ......................... $10,169,350 $14,178,660 =========== =========== Research and Development Expenditures for research and development costs are expensed as incurred. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" requires the disclosure of the impacts of SFAS No. 123 in quarterly reports. The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition and share based compensation costs provisions of SFAS No. 123 and SFAS No. 148 to stock-based employee compensation: THREE MONTHS ENDED MARCH 31, ------------------------------ 2003 2002 ------------ ------------ Net loss - As reported $ (6,415,643) $(11,641,306) Add: Total stock-based employee compensation expense included in net income as reported 565,351 $ 984,611 Less: Total stock-based compensation expense determined under fair value based method for all stock option awards and discounts under the 2000 Employee Stock Purchase Plan (2,667,294) (1,082,008) Net loss - Proforma (8,517,586) (11,738,702) ============ ============ Net loss per share - As reported $ (0.16) $ (0.34) ============ ============ Net loss per share - Proforma $ (0.21) $ (0.34) ============ ============ Page 7 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: THREE MONTHS ENDED MARCH 31, ------------------------ --- 2003 2002 ---- ---- Expected dividend yield 0% 0% Expected stock price volatility 86% 90% Risk-free interest rate 2% 3% Expected option term 2.74 2.79 3. NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share for the three months ended March 31, 2003 and 2002. THREE MONTHS ENDED MARCH 31, ------------------------------ 2003 2002 ------------ ------------ BASIC AND DILUTED Net loss $ (6,415,643) $(11,641,306) Weighted average common shares outstanding 41,097,330 34,645,176 Less: unvested restricted common shares outstanding (6,086) (17,453) ------------ ------------ Weighted average common shares used to compute net loss per share 41,091,244 34,627,723 ============ ============ Basic and diluted net loss per share $ (0.16) $ (0.34) ============ ============ Options to purchase 4,967,107 and 4,548,677 shares of common stock outstanding as of March 31, 2003 and 2002, respectively, have not been included in the computation of diluted net loss per share, as their effect would have been antidilutive. Outstanding warrants to purchase 805,146 and 2,873,688 shares of common stock as of March 31, 2003 and 2002, respectively, were also excluded from the computation of diluted net loss per share as their effect would have been antidilutive. During the period January 1, 2000 to September 30, 2000, the Company issued 2,273,624 options at exercise prices below the estimated fair value of the Company's common stock as of the date of grant of such options based on the price of the Company's common stock in Page 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS connection with the Company's initial public offering. The total deferred stock compensation associated with these options is approximately $17.3 million. No additional deferred stock compensation was recorded during the three months ended March 31, 2003 or during the full year 2002 because all grants of stock options during these periods were issued at the fair market value on the date of grant. The Company amortizes deferred stock compensation over the respective vesting periods of the individual stock options. Total deferred compensation is reduced when the associated options are cancelled prior to exercise. During the three months ended March 31, 2003, cancellation of options that had not been exercised resulted in a reduction in the total deferred stock compensation of approximately $127,000. Included in the results of operations for the three months ended March 31, 2003 and 2002 is compensation expense of approximately $565,000 and $985,000, respectively, associated with such options. We expect to record amortization expense for the remaining deferred stock compensation as follows: approximately $1.7 million for the remainder of 2003, and approximately $800,000 in 2004, assuming the continued vesting of the associated options. 4. SALE OF COMMON STOCK On March 19, 2003, the Company sold through a public offering 5.6 million shares of its common stock at a price of $17.50 per share. The Company is using and expects to continue to use the $91.6 million net proceeds from the sale of common stock to fund further clinical development and commercialization of Angiomax, to fund research and development of clevidipine and for working capital and other general corporate purposes. 5. COMPREHENSIVE LOSS Comprehensive losses are primarily comprised of net losses, unrealized losses on available for sales securities and currency translation adjustments. Comprehensive losses for the three months ended March 31, 2003 and 2002 were $6.5 million and $11.6 million, respectively. Page 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes in this quarterly report. In addition to the historical information, the discussion in this quarterly report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to factors including, but not limited to, those set forth under "Factors That May Affect Future Results" below. OVERVIEW We are a specialty pharmaceutical company with growing revenue from sales of our first product, Angiomax, a direct thrombin inhibitor used as an anticoagulant in patients undergoing coronary angioplasty. The U.S Food and Drug Administration, or FDA, approved Angiomax in December 2000 for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary angioplasty, and we began selling the product in the United States in January 2001. Since our inception we have generated significant losses. We expect to continue to spend significant amounts on the development of our products and on the sales and marketing of Angiomax in the balance of 2003 and thereafter. In the remainder of 2003, we plan on increasing our sales and marketing expenses in connection with anticipated increased customer demands, including expenses related to the increase in the size of our sales force from 86 to 97 persons. We also plan to continue to invest in clinical studies to expand the use of Angiomax and to develop clevidipine, an intravenous compound for the short-term control of high blood pressure in patients undergoing cardiac surgery. Additionally, we plan to continue to evaluate possible acquisitions of development-stage or approved products that would fit within our growth strategy. Accordingly, we will need to generate significantly greater revenues to achieve and then maintain profitability. Our revenues to date have been generated almost entirely from sales of Angiomax in the United States. In November 2002, we announced the results of our REPLACE-2 clinical trial, which was designed to evaluate Angiomax as the foundation anticoagulant for coronary angioplasty within the context of modern therapeutic products and technologies, including coronary stents. Since that time, sales of Angiomax have increased significantly, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. We believe that continued increased use of Angiomax by existing hospital customers, as well as penetration to new hospitals, will be critical elements of our ability to increase revenues. In March 2003, we received $91.6 million in net proceeds from a public offering of 5.6 million shares of our common stock at a price of $17.50 per share. We are using and expect to continue to use the proceeds from the offering to fund further clinical development and commercialization of Angiomax, to fund research and development of clevidipine and for working capital and other general corporate purposes. Page 10 In March 2002, we entered into a study and exclusive option agreement with AstraZeneca AB relating to the further study and potential licensing, development and commercialization of clevidipine. Prior to our signing this agreement, AstraZeneca conducted Phase 2 clinical trials of clevidipine. These clinical trials demonstrated that clevidipine acts to reduce blood pressure rapidly after intravenous infusion. In March 2003, we agreed with AstraZeneca to accelerate our acquisition of clevidipine, for which we now hold exclusive worldwide (excluding Japan) license rights. We plan to commence a Phase 3 program in 2003 in patients undergoing cardiac surgery to investigate the potential of clevidipine to simplify and improve the treatment of these patients. Most of our expenditures to date have been for research and development activities and selling, general and administrative expenses. Research and development expenses represent costs incurred for product acquisitions, clinical trials, and activities relating to regulatory filings and manufacturing development efforts. We outsource our clinical trials and manufacturing development activities to independent organizations to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with promotion and marketing activities. APPLICATION OF CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations. Our significant accounting policies are more fully described in the Notes to Unaudited Consolidated Financial Statements section of this quarterly report on Form 10-Q and in Note 2 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2002. Not all of these significant accounting policies, however, require management to make difficult, complex or subjective judgments or estimates. We believe that our accounting policies relating to revenue recognition and inventory, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies" in our annual report on Form 10-K for the year ended December 31, 2002, fit the definition of "critical accounting estimates and judgments." Page 11 RESULTS OF OPERATIONS Three Months Ended March 31, 2003 and 2002 Net Revenue. Net revenue increased 117% to $16.7 million for the three months ended March 31, 2003 as compared to $7.7 million for the three months ended March 31, 2002. Virtually all the revenue was from U.S. sales of Angiomax. The growth in 2003 was due primarily to increased use of Angiomax by existing hospital customers and penetration to new hospitals. Since we announced the results of the REPLACE-2 clinical trial in November 2002, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. Cost of Revenue. Cost of revenue for the three months ended March 31, 2003 was $6.3 million, or 37% of net revenue, compared to $1.1 million, or 14% of net revenue, for the three months ended March 31, 2002. Cost of revenue for the three months ended March 31, 2003 consisted of expenses in connection with the manufacture of the Angiomax sold, which represented 70% of the 2003 cost of revenue, royalty expenses under our agreement with Biogen which represented 20% of the 2003 cost of revenue and the logistics costs of selling Angiomax, such as distribution, storage, and handling, which represented 10% of the 2003 cost of revenue. Cost of revenue for the three months ended March 31, 2002 consisted of expenses in connection with the manufacture of the Angiomax sold, which represented 29% of the 2002 cost of revenue, royalty expenses under our agreement with Biogen, which represented 56% of the 2002 cost of revenue, and the logistics costs of selling Angiomax, such as distribution, storage, and handling, which represented 15% of the 2002 cost of revenue. Prior to obtaining FDA approval for Angiomax and its original manufacturing process, all costs of manufacturing Angiomax were expensed as research and development costs. In late 2000, after obtaining FDA approval for Angiomax and its original manufacturing process, we began recording the costs of manufacturing Angiomax as a cost of revenue rather than as research and development expense. As a result, our cost of manufacturing as a percentage of net revenue increased substantially in 2003 because all of the product we sold in the three months ended March 31, 2003 was product manufactured after the date of FDA approval of Angiomax. We have developed with UCB Bioproducts S.A. a second-generation process for the production of Angiomax bulk drug substance, which we refer to as the Chemilog process. During 2002 and for the three months ended March 31, 2003, we took delivery of drug material manufactured using the Chemilog process, which we expensed as research and development. The Chemilog process must be approved by the FDA before we can sell product manufactured using this process to the public. Since the Chemilog process has not yet received FDA approval, we have expensed all costs of manufacturing Angiomax using the Chemilog process as research and development. If we receive FDA approval of the Chemilog process by July 2003, we expect to begin selling in the third or fourth quarter of 2003 Angiomax produced by the Chemilog process whose cost of manufacturing was previously expensed. In that case, we would expect our cost of manufacturing as a percentage of net revenue to remain at current levels through the third quarter and then, subject to FDA approval of the Chemilog process, decrease substantially by the end of 2003. We have partially funded development activities relating to the Chemilog process, paying Page 12 total development expenses through March 31, 2003 of approximately $13.2 million, which includes validation and process batch costs of approximately $4.8 million, $6.7 million and $1.1 million incurred in 2001, 2002 and 2003, respectively, and approximately $600,000 of other development costs. We expensed all of these development costs as research and development in the appropriate period. We are committed to purchase approximately $8.6 million of additional drug material manufactured using the Chemilog process during the remainder of 2003. To the extent UCB Bioproducts transfers title to this drug material to us prior to FDA approval of the Chemilog process, we will expense these costs as research and development. Research and Development Expenses. Research and development expenses for the three months ended March 31, 2003 decreased 22% to $7.3 million, from $9.3 million for the three months ended March 31, 2002. The decrease in research and development expenses was primarily due to lower development costs relating to clinical trials and manufacturing. We incurred $2.8 million less in the 2003 period than in the 2002 period for our REPLACE-2 trial, and we incurred $1.4 million less in the 2003 period than in the 2002 period for receipt of Angiomax manufacturing using the Chemilog process. These lower costs were partly offset by the $1.0 million license fee payable to Astra Zeneca in connection with the licensing of clevidipine and related start-up costs of our planned Phase 3 trial program of clevidipine, and other Angiomax clinical development program costs. We have a number of clinical trial programs currently underway, or about to commence, for expanding the applications of Angiomax for use as an intravenous anticoagulant in the treatment of arterial thrombosis. As of the date of this quarterly report, we: - have recently completed enrollment in a Phase 3 trial program studying the use of Angiomax in the treatment of patients with an clinical condition known as heparin-induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS, undergoing coronary angioplasty, the results of which we expect to report in 2003; - are conducting a Phase 2/3 trial program studying the use of Angiomax as an anticoagulant in patients undergoing coronary artery bypass graft surgery, or CABG, with and without the use of a bypass pump, and in HIT/HITTS patients undergoing CABG, with and without the use of a bypass pump; - plan to start a randomized Phase 3 trial program to study the use of Angiomax in patients presenting to the emergency department with coronary syndromes who may be medically managed or ultimately treated in the catheterization laboratory or operating room; - are conducting a Phase 2 trial program to study the use of Angiomax in neonates and infants up to six months old with active thrombosis; and - are supporting a number of investigations, including clinical studies, of Angiomax in patients undergoing percutaneous peripheral angioplasties. The funding for Angiomax has represented and will continue to represent a significant portion Page 13 of research and development spending. For the three months ended March 31, 2003 and 2002, research and development expenses related to Angiomax included the costs of clinical trials, development manufacturing costs for the bulk drug product and the cost associated with preparation of U.S. and worldwide marketing applications. For the three months ended March 31, 2003, research and development expenses relating to clevidipine consisted of a non-recurring license fee and start-up costs relating to the planned Phase 3 clinical trial. The amount of future research and development expenses associated with Angiomax and clevidipine is not reasonably certain as these costs are dependent upon the clinical trial process, the regulatory process and, in the case of Angiomax, the timing for obtaining marketing approval for other applications of the product in the United States and other countries. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 5% to $9.8 million for the three months ended March 31, 2003, from $9.3 million for the three months ended March 31, 2002. The increase in selling, general and administrative expenses of $447,000 was primarily due to additional administrative and recruiting expenses. Deferred Stock Compensation. In connection with our initial public offering, during the year ended December 31, 2000, we recorded deferred stock compensation on the grant of stock options of approximately $17.3 million, representing the difference between the exercise price of such options and the fair market value of our common stock at the date of grant of such options. The exercise prices of these options were below the estimated fair market value of our common stock as of the date of grant based on the estimated price of our common stock in our initial public offering. No additional deferred compensation was recorded during the three months ended March 31, 2003 or during the full year 2002 because all of the exercise prices of all grants of stock options during these periods were at the fair market value of our common stock on the date of grant. We amortize the deferred stock compensation that was recorded in 2000 over the respective vesting periods of the individual stock options. We recorded amortization expense for deferred compensation of approximately $565,000 and $985,000 for the three months ended March 31, 2003 and March 31, 2002, respectively. We expect to record additional amortization expense for the deferred compensation of approximately $1.7 million in 2003 and approximately $800,000 in 2004. The amortization expense is included in our operating expenses in the consolidated statements of operations. Other Income and Expense. Interest income decreased 55% to $171,000 for the three months ended March 31, 2003, from $378,000 for the three months ended March 31, 2002. The decrease in interest income of $207,000 was primarily due to lower average cash and available for sale securities balances and lower available interest rates on securities. For the three months ended March 31, 2003, interest income was attributable to the investment of the remaining proceeds of our sales of shares of common stock in a private placement in May 2001 and in public offerings in 2002 and 2003. In the three months ended March 31, 2002, interest income was primarily attributable to the investment of the remaining proceeds of our initial public offering in August and September 2000 and our private placement in May 2001. We had no interest expense during the three months ended March 31, 2003 as compared to interest expense of $8,000 during the three months ended March 31, 2002 that was associated Page 14 with the draw down of our revolving line of credit at the end of March 2002. We terminated the revolving line of credit in August 2002. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity. Since our inception, we have financed our operations through the sale of common and preferred stock, sales of convertible promissory notes and warrants, interest income and revenues from sales of Angiomax. In March 2002, we entered into a collaboration agreement with Nycomed Danmark A/S, a European pharmaceutical company, under which Nycomed will serve as the exclusive distributor of Angiomax in 35 countries, including 12 countries in the European Union. Under the agreement, Nycomed paid us an initial non-refundable fee of $1.5 million and agreed to pay up to $2.5 million in additional milestones based on regulatory approvals in Europe. In addition, Nycomed purchased 79,428 shares of our common stock for a total purchase price of approximately $1.0 million. In March 2003, we filed registration statements on Forms S-3 with the Securities and Exchange Commission registering 5.6 million shares of our common stock, including 697,280 shares that the underwriters had the option to purchase to cover over-allotments. We sold all 5.6 million shares of the common stock on March 19, 2003 at a price to the public of $17.50 per share. Net proceeds from the sale totaled $91.6 million. Cash Flows. As of March 31, 2003, we had $116.5 million in cash and cash equivalents, as compared to $36.8 million as of December 31, 2002. The major uses of cash during the three months ended March 31, 2003 included net cash used in operating activities of $4.8 million and net cash used in investing activities of $8.0 million, which was offset by $92.6 million received from financing activities. We used net cash of $4.8 million in operating activities during the three months ended March 31, 2003. This use of cash consisted of funding a net loss of $6.4 million and a decrease in accounts payable of $6.0 million, partly offset by a decrease in accounts receivable of $1.2 million, a decrease in inventory of $4.0 million and increases in accrued expenses of $2.0 million, non-cash stock compensation of $565,000, and depreciation of $148,000. The decrease in accounts payable can be largely attributed to the $4.2 million payment for UCB for Chemilog product purchased in December 2002. The decrease in inventory can be largely attributed to growth in product sales and the continued expensing of Chemilog product purchases prior to FDA approval. During the three months ended March 31, 2003, we used $8.0 million in cash in net investing activities, which consisted principally of the purchase of available for sale securities. Cash provided by financing activities of $92.6 million during the three months ended March 31, 2003 consisted primarily of the proceeds of the public offering of 5.6 million shares of our common stock in March 2003 that resulted in net proceeds of $91.6 million. In addition, employees purchased stock related to option exercises and our employee stock purchase plan for Page 15 aggregate net proceeds to us of approximately $947,000. Funding Requirements. We expect to devote substantial resources to our research and development efforts and to our sales, marketing and manufacturing programs associated with the commercialization of our products. Our funding requirements will depend on numerous factors including: - whether Angiomax is commercially successful; - the progress, level and timing of our research and development activities related to our additional clinical trials with respect to Angiomax and to our other product candidates; - the cost and outcomes of regulatory reviews; - the continuation or termination of third party manufacturing or sales and marketing arrangements; - the cost and effectiveness of our sales and marketing programs; - the status of competitive products; - our ability to defend and enforce our intellectual property rights; and - the establishment of additional strategic or licensing arrangements with other companies or acquisitions. We believe, based on our operating plan as of the date of this quarterly report, which includes anticipated revenues from Angiomax and interest income, that our current cash, cash equivalents and available for sale securities will be sufficient to fund our operations for the foreseeable future. However, we expect to periodically assess our financing alternatives and access the capital markets opportunistically. In addition, if our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated revenues from Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Our long-term contractual commitments consist of operating leases for our facilities in Parsippany, New Jersey and Cambridge, Massachusetts, which expire in January 2013 and August 2003, respectively. Future annual minimum payments under these operating leases are: Page 16 MINIMUM OPERATING LEASE OBLIGATION YEAR(S) AMOUNT ---------- 2003 ....................................................... $ 541,000 2004 ....................................................... 554,000 2005 ....................................................... 508,000 2006 ....................................................... 505,000 2007 ....................................................... 511,000 Later years ................................................ 2,690,000 ---------- Total operating lease obligation ................. $5,309,000 ========== In addition to amounts accrued or payable as of March 31, 2003, we have commitments to make payments to UCB Bioproducts of a total of $8.6 million during the remainder of 2003 for Angiomax bulk drug substance to be produced using the Chemilog process. We also have $2.1 million in contractual commitments for 2003 related to research and development activities. FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include our "critical accounting estimates" and the risk factors set forth below under the caption "Factors That May Affect Future Results." Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report. FACTORS THAT MAY AFFECT FUTURE RESULTS RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR ADDITIONAL NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY We have incurred net losses since our inception, including net losses of approximately $6.4 million for the three months ended March 31, 2003. At March 31, 2003, we had an accumulated deficit of approximately $303.7 million. We expect to make substantial expenditures to further develop and commercialize our products, including costs and expenses associated with clinical trials, regulatory approval and commercialization. We will need to generate significantly greater revenues to achieve and then maintain profitability. However, we remain unsure as to when we Page 17 will become profitable, if at all. And, if we do become profitable, we may not remain profitable for any substantial period of time. If we fail to achieve profitability within the time frame expected by investors or securities analysts, the market price of our common stock may decline. OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX Angiomax is our only commercial product and, we expect, will account for almost all of our revenues for the foreseeable future. The commercial success of Angiomax will depend upon its acceptance by regulators, physicians, patients and other key decision-makers as a safe, therapeutic and cost-effective alternative to heparin and other products used in current practice, or currently being developed. If Angiomax is not commercially successful, we will have to find additional sources of funding or curtail or cease operations. NEAR-TERM GROWTH IN OUR SALES OF ANGIOMAX IS HIGHLY DEPENDENT ON PHYSICIAN ACCEPTANCE OF THE REPLACE-2 TRIAL In the fall of 2002, we completed a 6,002 patient post-marketing Phase 3b/4 clinical trial of Angiomax in coronary angioplasty called REPLACE-2. In November 2002, the principal investigators of the clinical trial announced that, based on 30-day patient follow-up results, Angiomax met all of the primary and secondary objectives of the trial. In March 2003 we released the results of the detailed cost analysis study to examine per-patient total hospital resource consumption at U.S. clinical trial sites. We believe that the near-term commercial success of Angiomax will depend upon the extent to which physicians, patients and other key decision-makers accept the results of the REPLACE-2 trial. Since the results were announced, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. We cannot be certain, however, that these trends will continue. Some commentators have challenged various aspects of the trial design of REPLACE-2, the conduct of the study and the analysis and interpretation of the results from the study, including how we define bleeding and the clinical relevance of types of ischemic events. If physicians, patients and other key decision-makers do not accept the trial results, adoption of Angiomax may suffer, and our business will be materially adversely affected. We are continuing to follow the patients involved in the REPLACE-2 trial for six-month and one-year follow-up periods. If the extended follow-up data are less favorable than the 30-day patient follow-up data announced to date physician adoption of Angiomax may be adversely affected. IF WE DO NOT SUCCEED IN OBTAINING TIMELY APPROVAL FOR A SECOND-GENERATION PROCESS FOR THE PRODUCTION OF ANGIOMAX BULK DRUG SUBSTANCE, WE MAY NOT BE ABLE TO SUPPLY OUR CUSTOMERS All Angiomax bulk drug substance used to date has been produced by UCB Bioproducts by means of a chemical synthesis process. Using this validated manufacturing process, UCB Bioproducts has completed the manufacture of bulk drug substance to meet our anticipated commercial supply requirements through the third quarter of 2003. As of the date of this quarterly report, we do not intend to purchase any additional product manufactured using this process. Page 18 We have developed, with UCB Bioproducts, a second-generation process for the production of Angiomax bulk drug substance, which is referred to as the Chemilog process. This process involves changes to the early manufacturing steps of our current process and, we expect, will reduce our Angiomax manufacturing costs in the future. We received approvable letters from the FDA with respect to the Chemilog process on March 14, 2002 and December 12, 2002. In August 2002, we responded to the March 2002 approvable letter. In the December 2002 approvable letter to us and in a corresponding letter to UCB Bioproducts, the FDA requested additional data. In February 2003, we submitted what we believe to be the additional data requested by the FDA from us. Concurrently, UCB Bioproducts submitted what we believe to be the additional data requested by the FDA from UCB Bioproducts. If the FDA does not approve the Chemilog process by July 2003, we would expect to consider purchasing additional product produced using our current process, but potentially on less favorable terms. This product would likely not be available for a significant period of time, and we could be forced to reject or limit customer orders for Angiomax until such product is available. In such event, sales of Angiomax would suffer and our business would be materially adversely affected. WE CANNOT EXPAND THE INDICATIONS FOR WHICH WE ARE MARKETING ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL FOR EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL LIMIT THE SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX In December 2000, we received approval from the FDA for the use of Angiomax as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary angioplasty. One of our key objectives is to expand the indications for which Angiomax is approved for marketing by the FDA. In order to market Angiomax for these expanded indications, we will need to complete our clinical trials that are currently underway, conduct additional clinical trials, obtain positive results from those trials and obtain FDA approval for such proposed indications. If we are unsuccessful in expanding the approved indications for the use of Angiomax, the size of the commercial market for Angiomax will be limited. FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT US FROM MARKETING ANGIOMAX ABROAD We intend to market Angiomax through distribution partners in international markets, including Europe. In order to market Angiomax in the European Union and many other foreign jurisdictions, we or our distribution partners must obtain separate regulatory approvals. Obtaining foreign approvals may require additional trials and expense. In February 1998, we submitted a Marketing Authorization Application, or MAA, to the European Agency for Evaluation of Medicinal Products, or the EMEA, for use of Angiomax in unstable angina patients undergoing coronary angioplasty. Following extended interaction with European regulatory authorities, the Committee of Proprietary Medicinal Products of the EMEA voted in October 1999 not to recommend Angiomax for approval in coronary angioplasty. We withdrew our application to the EMEA in 1999 and plan to resubmit an MAA with the results of the REPLACE-2 trial. We may not be able to obtain approval or may be delayed in obtaining approval from any or all of the jurisdictions in which we seek approval to market Angiomax. THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS Our development and commercialization strategy entails entering into arrangements with Page 19 corporate and academic collaborators, contract research organizations, distributors, third-party manufacturers, licensors, licensees and others to conduct development work, manage our clinical trials, manufacture our products and market and sell our products outside of the United States. We do not have the expertise or the resources to conduct such activities on our own and, as a result, are particularly dependent on third parties in most areas. We may not be able to maintain our existing arrangements with respect to the commercialization of Angiomax or establish and maintain arrangements to develop and commercialize clevidipine or any additional product candidates or products we may acquire on terms that are acceptable to us. Any current or future arrangements for development and commercialization may not be successful. If we are not able to establish or maintain agreements relating to Angiomax, clevidipine or any additional products we may acquire on terms which we deem favorable, our results of operations would be materially adversely affected. Third parties may not perform their obligations as expected. The amount and timing of resources that third parties devote to developing, manufacturing and commercializing our products are not within our control. Furthermore, our interests may differ from those of third parties that manufacture or commercialize our products. Disagreements that may arise with these third parties could delay or lead to the termination of the development or commercialization of our product candidates, or result in litigation or arbitration, which would be time consuming and expensive. If any third party that manufactures or supports the development or commercialization of our products breaches or terminates its agreement with us, or fails to conduct its activities in a timely manner, such breach, termination or failure could: - - delay or otherwise adversely impact the development or commercialization of Angiomax, clevidipine, our other product candidates or any additional product candidates that we may acquire or develop; - - require us to undertake unforeseen additional responsibilities or devote unforeseen additional resources to the development or commercialization of our products; or - - result in the termination of the development or commercialization of our products. FAILURE TO ACHIEVE OUR REVENUE TARGETS OR RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS We will need to generate significantly greater revenues to achieve and then maintain profitability. The clinical development and regulatory approval of Angiomax for additional indications, the clinical development and regulatory approval of clevidipine and the acquisition and development of additional product candidates by us will require a commitment of substantial funds. Our future funding requirements depend upon many factors, including our ability to achieve our revenue targets, and may be significantly greater than we expect. As of the date of this quarterly report, we believe, based on our current operating plan, which includes anticipated revenues from Angiomax and interest income that our current cash, cash Page 20 equivalents and available for sale securities will be sufficient to fund our operations for the foreseeable future. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated sales of Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. In addition, in order to obtain additional financing, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish. WE DEPEND ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX BULK DRUG SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH ACTIVITIES FOR ANGIOMAX We do not manufacture any of our products and do not plan to develop any capacity to manufacture them. As of the date of this quarterly report, we obtain all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts, and rely on another manufacturer, Ben Venue Laboratories, to carry out all fill-finish activities for Angiomax, which includes final formulation and transfer of the drug into vials where it is then freeze-dried and sealed. The terms of our agreement with UCB Bioproducts require us to purchase a substantial portion of our Angiomax bulk drug product from UCB Bioproducts, which could hinder our ability to obtain an additional supplier for Angiomax. The FDA requires that all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA's cGMP regulations and guidelines. There are a limited number of manufacturers that operate under cGMP regulations capable of manufacturing Angiomax. As of the date of this quarterly report, we do not have alternative sources for production of Angiomax bulk drug substance or to carry out fill-finish activities. In the event that either UCB Bioproducts or Ben Venue is unable to carry out its respective manufacturing obligations, we may be unable to obtain alternative manufacturing, or obtain such manufacturing on commercially reasonable terms or on a timely basis. If we were required to transfer manufacturing processes to other third party manufacturers, we would be required to satisfy various regulatory requirements, which could cause us to experience significant delays in receiving an adequate supply of Angiomax. Any delays in the manufacturing process may adversely impact our ability to meet commercial demands for Angiomax on a timely basis and supply product for clinical trials of Angiomax. WE DO NOT OWN THE TECHNOLOGY UNDERLYING THE CHEMILOG PROCESS AND MAY BE UNABLE TO UTILIZE THE CHEMILOG PROCESS IF UCB BIOPRODUCTS BREACHES OUR AGREEMENT Our agreement with UCB Bioproducts for the supply of Angiomax bulk drug substance provides that UCB Bioproducts owns all of the proprietary technology that was used to develop and that is employed in the Chemilog process. Although the agreement requires that UCB Bioproducts transfer this technology to a secondary supplier of Angiomax bulk drug substance or to us or an Page 21 alternate supplier at the expiration of the agreement, if UCB Bioproducts fails or is unable to transfer successfully this technology, we would be unable to employ the Chemilog process to manufacture our Angiomax bulk drug substance, which could cause us to experience delays in the manufacturing process and increase our manufacturing costs in the future. CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME-CONSUMING, AND THE RESULTS OF THESE TRIALS ARE UNCERTAIN Before we can obtain regulatory approvals to market any product for a particular indication, we will be required to complete pre-clinical studies and extensive clinical trials in humans to demonstrate the safety and efficacy of such product for such indication. We are evaluating Angiomax in clinical trials for additional uses in open vascular surgery such as CABG, in medical conditions that require urgent treatment such as unstable angina, in patients with heparin allergy, in children and in peripheral angioplasty. There are numerous factors that could delay our clinical trials or prevent us from completing our trials successfully. We, or the FDA, may suspend a clinical trial at any time on various grounds, including a finding that patients are being exposed to unacceptable health risks. The rate of completion of clinical trials depends in part upon the rate of enrollment of patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. In particular, the patient population targeted by some of our clinical trials may be small. Delays in future planned patient enrollment may result in increased costs and program delays. In addition, clinical trials, if completed, may not show a product candidate to be safe or effective for the intended use. Results obtained in pre-clinical studies or early clinical trials are not always indicative of results that will be obtained in later clinical trials. Moreover, data obtained from pre-clinical studies and clinical trials may be subject to varying interpretations. As a result, the FDA or other applicable regulatory authorities may not approve a product in a timely fashion, or at all. Even if regulatory approval to market a product is granted, the regulatory approval may impose limitations on the indicated use for which the product may be marketed. OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED PRODUCTS WILL IMPAIR OUR ABILITY TO GROW As part of our growth strategy, we intend to acquire and develop additional product candidates or approved products. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical products that meet the criteria we have established. Because we neither have, nor intend to establish, internal scientific research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license product candidates to us. Any product candidate we acquire will require additional research and development efforts prior to commercial sale, including extensive pre-clinical and/or clinical testing and approval by the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the Page 22 risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be safe, non-toxic and effective or approved by regulatory authorities. In addition, we cannot assure you that any approved products that we develop or acquire will be: - - manufactured or produced economically; - - successfully commercialized; or - - widely accepted in the marketplace. In addition, proposing, negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all. A BREACH OF ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS COULD CAUSE US TO LOSE LICENSE RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS OR SUBJECT US TO CLAIMS BY OUR LICENSORS We license rights to products and technology that are important to our business, and we expect to enter into additional licenses in the future. For instance, we have exclusively licensed the patents and patent applications relating to Angiomax from Biogen and relating to clevidipine from AstraZeneca. Under these agreements, we are subject to commercialization and development, sublicensing, royalty, patent prosecution and maintenance, insurance and other obligations. Any failure by us to comply with any of these obligations or any other breach by us of these license agreements could give the licensor the right to terminate the license in whole, terminate the exclusive nature of the license or bring a claim against us for damages. Any such termination or claim, particularly relating to our agreement with Biogen, could have a material adverse effect on our business. Even if we contest any such termination or claim and are ultimately successful, our stock price could suffer. In addition, upon any termination of a license agreement, we may be required to license to the licensor any related intellectual property that we developed. WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFECTIVELY IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS Page 23 Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on our ability to attract and retain qualified personnel for the acquisition, development and commercialization activities we conduct or sponsor. If we lose one or more of the members of our senior management, including our executive chairman, Dr. Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key employees or consultants, our ability to implement successfully our business strategy could be seriously harmed. Our ability to replace these key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate such additional personnel. BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY NOT OBTAIN WIDESPREAD USE We have positioned Angiomax as a replacement for heparin, which is a widely used, inexpensive, generic drug used in patients with arterial thrombosis. Because heparin is inexpensive and has been widely used for many years, physicians and medical decision-makers may be hesitant to adopt Angiomax. In addition, due to the high incidence and severity of cardiovascular diseases, competition in the market for thrombin inhibitors is intense and growing. There are a number of direct and indirect thrombin inhibitors currently on the market, awaiting regulatory approval and in development, including orally administered agents. The thrombin inhibitors on the market include products for use in the treatment of patients with a clinical condition known as HIT/HITTS, patients with unstable angina and patients with deep vein thrombosis. ANGIOMAX MAY COMPETE WITH ALL GROUPS OF ANTICOAGULANT DRUGS, INCLUDING PLATELET INHIBITORS AND FIBRINOLYTIC DRUGS, WHICH MAY LIMIT THE USE OF ANGIOMAX In general, anticoagulant drugs may be classified into four groups: drugs that directly target and inhibit thrombin, drugs that indirectly target and inhibit thrombin, drugs that target and inhibit platelets and drugs that break down fibrin. Because each group of anticoagulants acts on different components of the clotting process, we believe that there will be continued clinical work to determine the best combination of drugs for clinical use. We expect Angiomax to be used with aspirin alone or in conjunction with platelet inhibitors or fibrinolytic drugs. Although platelet inhibitors and fibrinolytic drugs may be complementary to Angiomax, we recognize that Angiomax may compete with these and other anticoagulant drugs to the extent Angiomax and any of these anticoagulant drugs are approved for the same indication. In addition, platelet inhibitors and fibrinolytic drugs may compete with Angiomax for the use of hospital financial resources. For example, many U.S. hospitals receive a fixed reimbursement amount per procedure for the angioplasties and other treatment therapies they perform. Because this amount is not based on the actual expenses the hospital incurs, hospitals may be forced to use either Angiomax or platelet inhibitors or fibrinolytic drugs but not necessarily several of the drugs together. Page 24 WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING, DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO Our industry is highly competitive. Our success will depend on our ability to acquire and develop products and apply technology, and our ability to establish and maintain markets for our products. Potential competitors in the United States and other countries include major pharmaceutical and chemical companies, specialized pharmaceutical companies and biotechnology firms, universities and other research institutions. Many of our competitors have substantially greater research and development capabilities and experience, and greater manufacturing, marketing and financial resources, than we do. Accordingly, our competitors may develop or license products or other novel technologies that are more effective, safer or less costly than existing products or technologies or products or technologies that are being developed by us or may obtain FDA approval for products more rapidly than we are able. Technological development by others may render our products or product candidates noncompetitive. We may not be successful in establishing or maintaining technological competitiveness. FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK Our operating results may vary from period to period based on the amount and timing of sales of Angiomax, the availability and timely delivery of a sufficient supply of Angiomax, the timing and expenses of clinical trials, announcements regarding clinical trial results and product introductions by us or our competitors, the availability and timing of third-party reimbursement and the timing of regulatory approvals. If our operating results do not match the expectations of securities analysts and investors as a result of these and other factors, the trading price of our common stock will likely decrease. WE MAY UNDERTAKE STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY DIFFICULTIES FROM INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN PROFITABILITY We may acquire additional businesses and products that complement or augment our existing business. Integrating any newly acquired business or product could be expensive and time-consuming. We may not be able to integrate any acquired business or product successfully or operate any acquired business profitably. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses or products, which may result in dilution for stockholders and the incurrence of indebtedness. OUR REVENUES ARE SUBSTANTIALLY DEPENDENT ON A LIMITED NUMBER OF WHOLESALERS TO WHICH WE SELL ANGIOMAX, AND SUCH REVENUES MAY FLUCTUATE FROM QUARTER TO QUARTER BASED ON THE BUYING PATTERNS OF THESE WHOLESALERS We sell Angiomax primarily to a limited number of national medical and pharmaceutical distributors and wholesalers with distribution centers located throughout the United States. During the quarter ended March 31, 2003, revenues from the sale of Angiomax to three wholesalers totaled approximately 96% of our net revenues. Our reliance on this small number of wholesalers could cause our revenues to fluctuate from quarter to quarter based on the buying patterns of these wholesalers. In addition, if any of these wholesalers fails to pay us on a timely basis or at all, our financial position and results of operations could be materially adversely affected. Page 25 RISKS RELATED TO OUR INDUSTRY IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO STRINGENT PENALTIES Except for Angiomax, which has been approved for sale in the United States for use as an anticoagulant in patients undergoing coronary angioplasty and which has been approved for sale in Canada, Israel and New Zealand for indications similar to those approved by the FDA, we do not have a product approved for sale in the United States or any foreign market. We must obtain approval from the FDA in order to sell our product candidates in the United States and from foreign regulatory authorities in order to sell our product candidates in other countries. We must successfully complete our clinical trials and demonstrate manufacturing capability before we can file with the FDA for approval to sell our products. The FDA could require us to repeat clinical trials as part of the regulatory review process. Delays in obtaining or failure to obtain regulatory approvals may: - delay or prevent the successful commercialization of any of our product candidates; - diminish our competitive advantage; and - defer or decrease our receipt of revenues or royalties. The regulatory review and approval process is lengthy, expensive and uncertain. Extensive pre-clinical data, clinical data and supporting information must be submitted to the FDA for each additional indication to obtain such approvals, and we cannot be certain when we will receive these regulatory approvals, if ever. In addition to initial regulatory approval, our product and product candidates are subject to extensive and rigorous ongoing domestic and foreign government regulation of, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our products and product candidates. Any approvals, once obtained, may be withdrawn if compliance with regulatory requirements is not maintained or safety problems are identified. Failure to comply with these requirements may also subject us to stringent penalties. WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS, AND WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS The patent positions of pharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual issues. Our success depends significantly on our ability to: - obtain and maintain U.S. and foreign patents; - protect trade secrets; Page 26 - operate without infringing the proprietary rights of others; and - prevent others from infringing our proprietary rights. We may not have any patents issued from any patent applications that we own or license. If patents are granted, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed or maintained patent applications for technology used by us or covered by our pending patent applications without our being aware of these applications. We exclusively license U.S. patents and patent applications and corresponding foreign patents and patent applications relating to Angiomax and clevidipine. As of the date of this quarterly report, we exclusively license six issued U.S. patents relating to Angiomax and three issued U. S. patents relating to clevidipine. The principal U.S. patent that covers Angiomax expires in 2010. The U.S. Patent and Trademark Office has rejected our application for an extension of the term of the patent beyond 2010 because the application was not filed on time. We are exploring an alternative to extend the term of the patent, but we can provide no assurance that we will be successful. We have not yet filed any independent patent applications. We may not hold proprietary rights to some patents related to our product candidates. In some cases, others may own or control these patents. As a result, we may be required to obtain licenses under third-party patents to market some of our product candidates. If licenses are not available to us on acceptable terms, we will not be able to market these products. We may become a party to patent litigation or other proceedings regarding intellectual property rights. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. If any patent litigation or other intellectual property proceeding in which we are involved is resolved unfavorably to us, we may be enjoined from manufacturing or selling our products without a license from the other party, and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms, or at all. IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US We rely significantly upon unpatented proprietary technology, information, processes and know-how. We seek to protect this information by confidentiality agreements with our employees, consultants and other third-party contractors, as well as through other security measures. We may not have adequate remedies for any breach by a party to these confidentiality agreements. In addition, our competitors may learn or independently develop our trade secrets. Page 27 WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of human healthcare products. Product liability claims might be made by patients in clinical trials, consumers, health care providers or pharmaceutical companies or others that sell our products. These claims may be made even with respect to those products that are manufactured in licensed and regulated facilities or otherwise possess regulatory approval for commercial sale. These claims could expose us to significant liabilities that could prevent or interfere with the development or commercialization of our products. Product liability claims could require us to spend significant time and money in litigation or pay significant damages. As of the date of this quarterly report, we are covered, with respect to our commercial sales in the United States, Israel and New Zealand and our clinical trials, by primary product liability insurance in the amount of $20.0 million per occurrence and $20.0 million annually in the aggregate on a claims-made basis. This coverage may not be adequate to cover any product liability claims. As we commercialize our products, we may wish to increase our product liability insurance. Product liability coverage is expensive. In the future, we may not be able to maintain or obtain such product liability insurance on reasonable terms, at a reasonable cost or in sufficient amounts to protect us against losses due to product liability claims. OUR ABILITY TO GENERATE FUTURE REVENUE FROM PRODUCTS WILL DEPEND ON REIMBURSEMENT AND DRUG PRICING Acceptable levels of reimbursement of drug treatments by government authorities, private health insurers and other organizations will have an effect on our ability to successfully commercialize, and attract collaborative partners to invest in the development of, product candidates. We cannot be sure that reimbursement in the United States or elsewhere will be available for any products we may develop or, if already available, will not be decreased in the future. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize our products, and may not be able to obtain a satisfactory financial return on our products. Third-party payers increasingly are challenging prices charged for medical products and services. Also, the trend toward managed health care in the United States and the changes in health insurance programs, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for pharmaceutical products, including any products that may be offered by us. Cost-cutting measures that health care providers are instituting, and the effect of any health care reform, could materially adversely affect our ability to sell any products that are successfully developed by us and approved by regulators. Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Page 28 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is confined to our cash, cash equivalents and available for sale securities. We place our investments in high-quality financial instruments, primarily money market funds, corporate debt and U.S. government agency securities with maturities or auction dates of less than one year, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. At March 31, 2003, we held $130.8 million in cash, cash equivalents and available for sale securities, of which 96% were due within one year and had an average interest rate of approximately 1.0%. Most of our transactions are conducted in U.S. dollars. We do have certain development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in U.S. dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under certain other of these agreements are conducted in the local foreign currency. If the applicable exchange rate undergoes a change of 10.0%, we do not believe that it would have a material impact on our results of operations or cash flows. ITEM 4 - CONTROLS AND PROCEDURES a.) Evaluation of disclosure controls and procedures. Based on their evaluation of the our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q, our principal executive officers and principal financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. b.) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. Page 29 PART II.OTHER INFORMATION ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended March 31, 2003, we received notices of the following exercises of outstanding common stock purchase warrants: - On January 13, 2003, an existing investor exercised warrants covering an aggregate of 3,352 shares of our common stock; - On February 14, 2003, an existing investor exercised warrants covering an aggregate of 843,604 shares of our common stock; - On March 27, 2003, existing investors exercised warrants covering an aggregate of 200,081 shares of our common stock. In each of these warrant exercises, the purchase price of $5.92 per share was paid in the form of cancellation of a portion of the warrants, in accordance with the cashless exercise provision included in the warrants; accordingly, we received no proceeds from the issuance of the shares. In each case, the shares were issued to an "accredited investor" without registration under the Securities Act of 1933, as amended, or the securities laws of certain states, in reliance on the exemptions provided by Section 3(a)(9) of the Securities Act and in reliance on similar exemptions under applicable state laws. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by this reference. (b) Reports on Form 8-K On February 13, 2003, we filed a current report on Form 8-K with the SEC in connection with our announcement of financial results for the quarter and full year periods ended December 31, 2002. Page 30 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, thereunto duly authorized. THE MEDICINES COMPANY Date: May 13, 2003 By: /s/ Steven H. Koehler ---------------------- Steven H. Koehler Chief Financial Officer Page 31 CERTIFICATIONS I, Clive A. Meanwell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Clive A. Meanwell ------------------------------------ Dated: May 13, 2003 Clive A. Meanwell Executive Chairman Page 32 I, David M. Stack, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David M. Stack ------------------------------------ Dated: May 13, 2003 David M. Stack President and Chief Executive Officer Page 33 I, Steven H. Koehler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Steven H. Koehler ------------------------------------ Dated: May 13, 2003 Steven H. Koehler Chief Financial Officer Page 34 EXHIBIT INDEX Exhibit Number Description -------------- ----------- 10.1 2000 Outside Director Stock Option Plan, as amended 99.1 Executive Chairman - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Executive Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Chief Financial Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 35