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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 0-26268
MINIMED INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 95-4408171
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
12744 SAN FERNANDO ROAD, SYLMAR, CA 91342
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (818) 362-5958
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT MAY 10, 2000
------------------- ---------------------------
Common Stock, $.01 par value 31,747,146
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INDEX
MINIMED INC.
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes 3
Consolidated Balance Sheets -- December 31, 1999 and 3
March 31, 2000 (Unaudited)
Consolidated Statements of Income (Unaudited) -- Three
months ended April 2, 1999 and March 31, 2000 4
Consolidated Statements of Cash Flows (Unaudited) -- Three
months ended April 2, 1999 and March 31, 2000 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market 16
Risk
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
INDEX TO EXHIBITS 18
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
MINIMED INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000 (Unaudited)
ASSETS
1999 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 92,718,000 $ 83,205,000
Short-term investments ............................................................ 77,716,000 92,660,000
Accounts receivable, net of allowance for doubtful accounts of $13,108,000 and
$12,030,000 at December 31, 1999 and March 31, 2000, respectively ............... 65,938,000 64,354,000
Inventories ....................................................................... 19,338,000 23,293,000
Deferred income taxes ............................................................. 9,973,000 7,699,000
Income taxes receivable ........................................................... 5,761,000 4,818,000
Prepaid expenses and other current assets ......................................... 7,602,000 6,641,000
------------ ------------
Total current assets .................................................. 279,046,000 282,670,000
NOTE RECEIVABLE FROM AFFILIATE ...................................................... 3,600,000 3,600,000
LONG-TERM INVESTMENTS ............................................................... 8,552,000 16,507,000
OTHER ASSETS ........................................................................ 17,969,000 17,827,000
LAND, BUILDINGS, PROPERTY AND EQUIPMENT - Net ....................................... 44,631,000 52,370,000
------------ ------------
TOTAL ASSETS ........................................................................ $353,798,000 $372,974,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable .................................................. $ 1,000,000 $ 1,000,000
Accounts payable .................................................................. 3,573,000 4,344,000
Accrued salaries and related benefits ............................................. 7,749,000 5,341,000
Accrued sales commissions ......................................................... 2,964,000 642,000
Accrued warranties ................................................................ 3,859,000 3,637,000
Accrued software refurbishment costs .............................................. 1,200,000 --
Accrued related party purchase commitment obligations ............................. 3,500,000 3,500,000
Other accrued expenses ............................................................ 1,310,000 836,000
------------ ------------
Total current liabilities .............................................. 25,155,000 19,300,000
------------ ------------
DEFERRED INCOME TAXES ............................................................... 1,545,000 4,063,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 100,000,000 shares authorized; 31,150,297 and
31,712,896 shares issued and outstanding as of December 31, 1999
and March 31, 2000, respectively ............................................... 317,000 359,000
Additional capital ............................................................... 280,825,000 291,926,000
Accumulated other comprehensive income ........................................... 2,931,000 8,054,000
Retained earnings ................................................................ 43,025,000 49,272,000
------------ ------------
Total stockholders' equity ............................................ 327,098,000 349,611,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $353,798,000 $372,974,000
============ ============
See notes to consolidated financial statements.
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MINIMED INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 31, 2000
1999 2000
------------ ------------
(Unaudited)
NET SALES ...................................... $ 40,911,000 $ 60,338,000
COST OF SALES .................................. 13,838,000 19,592,000
------------ ------------
GROSS PROFIT ................................... 27,073,000 40,746,000
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative .......... 17,499,000 25,903,000
Research and development ..................... 5,296,000 7,804,000
Research and development contract income ..... (1,500,000) --
------------ ------------
Total operating expenses ........... 21,295,000 33,707,000
------------ ------------
OPERATING INCOME ............................... 5,778,000 7,039,000
OTHER INCOME, Including interest income ........ 294,000 2,722,000
------------ ------------
INCOME BEFORE INCOME TAXES ..................... 6,072,000 9,761,000
PROVISION FOR INCOME TAXES ..................... 2,290,000 3,514,000
------------ ------------
NET INCOME ..................................... $ 3,782,000 $ 6,247,000
============ ============
BASIC EARNINGS PER SHARE ....................... $ 0.13 $ 0.20
============ ============
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING ................................. 28,148,000 31,425,000
============ ============
DILUTED EARNINGS PER SHARE ..................... $ 0.13 $ 0.19
============ ============
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING ................................. 30,024,000 33,187,000
============ ============
See notes to consolidated financial statements.
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MINIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 31, 2000
1999 2000
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES -
Net income ...................................................... $ 3,782,000 $ 6,247,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................. 1,560,000 2,534,000
Directors fees paid in common stock ........................... 32,000 20,000
Deferred income taxes ......................................... (81,000) 1,916,000
Tax benefit from exercise of non-qualified stock options ...... 1,630,000 4,971,000
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (1,457,000) 1,584,000
Inventories ................................................. (821,000) (3,955,000)
Prepaid expenses and other current assets ................... (3,247,000) 961,000
Other assets ................................................ 35,000 17,000
Accounts payable ............................................ 300,000 771,000
Accrued salaries and related benefits ....................... (1,393,000) (2,408,000)
Accrued sales commissions ................................... (1,687,000) (2,322,000)
Accrued warranties .......................................... 57,000 (222,000)
Income taxes payable ........................................ 859,000 943,000
Accrued software refurbishment costs ........................ -- (1,200,000)
Other accrued expenses ...................................... (918,000) (474,000)
------------ ------------
Net cash provided by (used in) operating activities ......... (1,349,000) 9,383,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Short-term investments ...................................... (6,000) (14,944,000)
Long-term investments ....................................... -- 38,000
Purchase of land, buildings, property and equipment ......... (4,724,000) (10,148,000)
------------ ------------
Net cash used in investing activities ....................... (4,730,000) (25,054,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Repayment of notes payable .................................. (278,000) --
Proceeds from stock option exercises ........................ 525,000 6,153,000
------------ ------------
Net cash provided by financing activities ................. 247,000 6,153,000
------------ ------------
Effect of foreign exchange rates on cash .................... (53,000) 5,000
NET DECREASE IN CASH AND CASH
EQUIVALENTS ................................................ (5,885,000) (9,513,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD ..................................................... 27,303,000 92,718,000
============ ============
CASH AND CASH EQUIVALENTS, END OF
PERIOD ..................................................... $ 21,418,000 $ 83,205,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the period for:
Interest ................................................... $ 2,000 $ --
Income taxes ............................................... $ 265,000 $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - The Company recorded an
unrealized holding gain of $195,000 and $5,424,000 during the three months ended
April 2, 1999 and March 31, 2000, respectively, net of estimated income taxes on
marketable securities classified as long-term investments available for sale.
See notes to consolidated financial statements.
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MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 31, 2000
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
- ----------- -----------------
2000....................................... December 29, 2000
1999....................................... December 31, 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of MiniMed Inc. (the
"Company" or "MiniMed") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
audited financial statements included in the Annual Report of MiniMed filed on
Form 10-K with the Securities and Exchange Commission for the year ended
December 31, 1999. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 29, 2000.
NOTE 2. INCOME TAXES
Net income and earnings per share for the three months ended April 2,
1999 and March 31, 2000 reflect income taxes which have been recorded at the
Company's estimated effective tax rate for the year. This estimated income tax
rate has been determined by giving consideration to the pretax earnings and
losses applicable to foreign and domestic tax jurisdictions.
NOTE 3. WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), basic earnings per share for the three months
ended April 2, 1999 and March 31, 2000, were computed by dividing net income by
weighted average common shares outstanding during the periods presented. Diluted
earnings per share for the periods presented were computed by dividing net
income by weighted average common and common equivalent shares outstanding,
computed in accordance with the treasury stock method. The computation of basic
and diluted EPS is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 2, 1999 MARCH 31, 2000
------------------ ------------------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to common stock ................. $ 3,782,000 $ 6,247,000
Denominator:
Weighted average common shares outstanding ............ 28,148,000 31,425,000
----------- -----------
Basic earnings per share .............................. $ 0.13 $ 0.20
=========== ===========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to common stock ................. $ 3,782,000 $ 6,247,000
----------- -----------
Denominator:
Weighted average common shares outstanding ............ 28,148,000 31,425,000
Effect of dilutive securities
Stock options .................................... 1,876,000 1,762,000
----------- -----------
Diluted weighted average shares outstanding ........... 30,024,000 33,187,000
----------- -----------
Diluted earnings per share ............................ $ 0.13 $ 0.19
=========== ===========
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MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 31, 2000
NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(Unaudited)
Inventories:
Raw materials ........................ $ 9,380,000 $ 10,373,000
Work-in-progress ..................... 2,315,000 1,988,000
Finished Goods ....................... 7,643,000 10,932,000
============ ============
$ 19,338,000 $ 23,293,000
============ ============
Property, plant and equipment:
Land, buildings and improvements ..... $ 15,817,000 $ 16,631,000
Machinery and equipment .............. 25,963,000 32,681,000
Tooling and molds .................... 3,355,000 4,667,000
Computer software .................... 7,423,000 8,267,000
Furniture and fixtures ............... 8,062,000 8,522,000
------------ ------------
60,620,000 70,768,000
Less accumulated depreciation .......... (15,989,000) (18,398,000)
============ ============
Total .................................. $ 44,631,000 $ 52,370,000
============ ============
Other assets:
Technology license ................... $ 7,094,000 $ 7,081,000
Goodwill ............................. 10,606,000 10,479,000
Other ................................ 269,000 267,000
------------ ------------
Total .................................. $ 17,969,000 $ 17,827,000
============ ============
Long-term investments:
Investment in Trimeris common
stock - at fair value .............. $ 7,412,000 $ 15,367,000
Investment in PDC common
stock - at cost .................... 1,140,000 1,140,000
============ ============
Total .................................. $ 8,552,000 $ 16,507,000
============ ============
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MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 31, 2000
NOTE 5. COMPREHENSIVE INCOME
The Company's total comprehensive income was as follows:
THREE MONTHS ENDED
---------------------------------------
APRIL 2, 1999 MARCH 31, 2000
------------- --------------
Net income ..................................... $ 3,782,000 $ 6,247,000
Other comprehensive income (loss):
Foreign currency translation
adjustments ................................ (54,000) 6,000
Unrealized gain on securities:
Unrealized holding gain .................. 314,000 8,300,000
Less: reclassification adjustment for
gain included in net income ........... -- (307,000)
------------ ------------
Other comprehensive income,
before income taxes ........................ 260,000 7,999,000
Income tax expense related
to items of other comprehensive
income (loss) .............................. 119,000 2,876,000
------------ ------------
Other comprehensive income ................... 141,000 5,123,000
============ ============
Total comprehensive income ..................... $ 3,923,000 $ 11,370,000
============ ============
NOTE 6. COMMITMENTS AND CONTINGENCIES
Leases - In May 1999, the Company entered into an agreement to lease up
to 28 acres of land located on the campus of California State University,
Northridge, where it is constructing a corporate headquarters, research and
development and manufacturing facility. The ground lease has an initial term of
40 years with renewal options for up to an additional 40 years. Pursuant to the
terms of the ground lease, the Company made payments of $400,000 during 1999 and
is committed to average annual payments in future periods of approximately
$450,000 plus periodic cost of living adjustments.
In May 1999, the Company also entered into a financing transaction
pursuant to which it will lease certain buildings being constructed on the land
described above. The lessors of the buildings have committed to fund up to a
maximum of $65.0 million for the first phase of construction of the buildings.
The Company is in the process of attempting to increase this debt arrangement to
expand upon the development of this facility. Under the terms of the financing
transaction, a special purpose trust subleases the land to the Company and
leases the improvements to the Company. The synthetic lease has an initial term
of five years, with two one-year renewal options. Under this financing
arrangement, the Company is committed to annual payments ranging from $4.5
million to $5.0 million commencing sometime during the second half of 2000.
These lease payments will be recorded as rent expense in future periods. When
the synthetic lease terminates, the Company will be able to assume the
obligations of the special purpose trust as the lessee under the ground lease if
it exercises its option to purchase.
In connection with these financing transactions, the Company pledged
substantially all of its assets as collateral security, and is subject to
various affirmative and negative covenants regarding the conduct of its business
including restrictions on the payment of dividends and the incurrence of
additional debt. These arrangements could adversely affect the Company's ability
to acquire additional capital resources or engage in certain strategic
transactions.
Legal Proceedings -- During 1998, the Company integrated the operations
of Home Medical Supply, Inc. ("HMS"), which the Company acquired in fiscal 1997.
In connection with these activities, the Company discovered certain business
practices relating to charges billed to the State of Florida for health care
services provided through an affiliated pharmacy. These practices were
implemented by HMS' prior owners and may potentially result in liability to the
Company. The Company has received no notice of any action which is
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pending or threatened against it in connection therewith. The Company has
corrected such practices, notified the State of Florida authorities of its
findings, initiated legal action against the prior owners to seek
indemnification for any such liability and is pursuing other legal remedies. On
March 8, 2000 the court granted an order allowing one of the former owners of
HMS to add a counterclaim against the Company and its wholly-owned subsidiary
alleging the publication of false written and oral statements. The Company
believes it has meritorious defenses to the counterclaim. The amount of
liability to the Company, if any, cannot be determined at this time, although
the Company believes that indemnification for such liability would be available
from HMS' prior owners.
On February 9, 1999, the Company was served with a complaint filed in
the Civil District Court For the Parish of Orleans, State of Louisiana, by
Diabetes Resources, Inc., which is also known as Insulin Infusion Specialties
("IIS"). The Company and IIS entered into an Educational Dealer Agreement in
July, 1997, relating to the distribution of certain MiniMed products by IIS. The
Company declined to renew that agreement, pursuant to its terms as of December
31, 1998. IIS is alleging that MiniMed is engaged in unfair competition,
breached the agreement, violated applicable trade secret laws and defamed IIS.
IIS did not specify the amount of damages it is seeking in its complaint. The
Company believes that it has meritorious defenses to IIS's claims. The action
was removed to Federal Court, and the Company has filed an answer denying the
material allegations, and filed a counterclaim seeking damages for unfair trade
practices. The Company has filed an amended counterclaim seeking damages based
on IIS's failure to pay amounts due and owing. The Company believes that it has
meritorious defenses to the claims asserted by IIS. Trial in the matter has been
set for September 25, 2000. Discovery in this litigation is continuing.
During the normal course of business, the Company may be subject to
litigation involving various business matters. Management believes that an
adverse outcome of any such known matters would not have a material adverse
impact on the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this quarterly
report. Some of the information in this quarterly report contains
forward-looking statements, including statements relating to anticipated
operating results, margins, growth, financial resources, capital requirements,
adequacy of the Company's capital resources, trends in spending on research and
development, the development of new markets, the development, regulatory
approval, manufacture, distribution, and commercial acceptance of new products,
future product development efforts, our manufacture and distribution of a new
disposable pump, the exercise of an option to purchase certain technologies or
paid-up licenses and new applications for our existing product lines are made
pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward-looking statements
involve risks and uncertainties which may affect our business and prospects,
including changes in economic and market conditions, acceptance of our products
by the health care and reimbursement communities, health care legislation and
regulation, new developments in diabetes therapy, administrative and regulatory
approval and related considerations, competitive developments, maintenance of
strategic alliances, and other factors discussed in our filings with the
Securities and Exchange Commission.
GENERAL
Our sales and profits have been generated primarily through the sale of
external pumps and related disposable products used to deliver insulin in the
intensive management of diabetes. Additionally, through our acquisition of two
distribution business, we have broadened our product offerings to include other
diabetes supplies and pharmacy products generally used in the treatment of this
disease.
Product development and manufacturing operations have focused on four
product lines: external pumps and related disposables, implantable insulin pumps
and continuous glucose monitoring systems. Future development of the external
pump and disposable product lines will focus upon improving the existing
technology for its current use in diabetes treatment and the utilization of this
technology for the treatment of other medical conditions. On September 1, 1998,
we sold assets and transferred technology related to our implantable pump
program to Medical Research Group, Inc., which we call MRG. MRG was founded by
Alfred E. Mann, founder, Chairman, CEO and our largest stockholder. Mr. Mann
continues to hold a substantial equity interest in MRG. We have retained
exclusive marketing rights to the implantable pump product line for specific
medical conditions, including diabetes. Sales of continuous glucose monitoring
systems commenced in 1999, as we launched a physician version of this product
line after receiving regulatory approval in June, 1999. Our continuous glucose
monitoring system has been characterized as a first of its kind technology, and
full commercialization will be subject to successful implementation of
manufacturing, sales, marketing and reimbursement plans. Our long-term goal is
to link data obtained from our continuous glucose monitoring systems to our
insulin delivery systems and develop an "artificial pancreas," capable of
controlling glucose levels in patients without significant patient intervention.
During 1999, we entered into two strategic relationships that will
affect future product development, manufacturing, sales and marketing efforts,
as well as financial performance. In February 1999, we entered into an agreement
with Lilly giving us a worldwide license to package and sell a new formulation
of Lilly's insulin lyspro for use with our programmable insulin infusion pumps.
We will offer this insulin to our patients in pre-filled cartridges to be used
exclusively in our external programmable insulin infusion pumps. In June 1999,
we entered into agreements with a division of Elan Corporation, plc, which we
call Elan, to manufacture and market exclusively under our name for insulin
delivery a disposable, constant-flow infusion system developed by Elan. Our
current plans are to offer this disposable infusion system to patients with Type
2 diabetes, further broadening our potential markets. We will also manufacture
this infusion system for Elan and its other licensees for use with a variety of
other pharmaceutical compounds. Our ability to market products related to each
of these agreements is subject to regulatory approval, the timing and certainty
of which are not predictable.
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RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31,
2000 and the three months ended April 2, 1999, the percentage relationship to
net sales of certain items in our consolidated statements of income and the
percentage changes in the dollar amounts of such items on a comparative basis.
PERCENTAGE OF NET SALES
-------------------------------
THREE MONTHS THREE MONTHS PERCENTAGE
ENDED ENDED INCREASE
MARCH 31, 2000 APRIL 2, 1999 (DECREASE)
-------------- ------------- ----------
Net sales ...................................... 100.0% 100.0% 47.5%
Cost of sales .................................. 32.5 33.8 41.6
----- ----- ------
Gross profit ................................... 67.5 66.2 50.5
Operating expenses:
Selling, general and administrative ..... 42.9 42.8 48.0
Research and development ................ 12.9 12.9 47.4
Research and development contract revenue -- (3.7) (100.0)
----- ----- ------
Total operating expenses ............ 55.8 52.0 58.3
----- ----- ------
Operating income ............................... 11.7% 14.2% 21.8%
===== ===== ======
The following table sets forth domestic and international net sales and
gross profits related to our primary product lines for the three months ended
March 31, 2000 and for the three months ended April 2, 1999.
Dollars in Thousands % of Net Sales
--------------------------------------- ---------------------------------------
Three Months Ended Three Months Ended Three Months Ended Three Months Ended
March 31, 2000 April 2, 1999 March 31, 2000 April 2, 1999
------------------ ------------------ ------------------ ------------------
NET SALES:
External pumps and related disposables:
External pumps:
Domestic .................................... $ 30,755 $ 19,988 51.0% 48.9%
International ............................... 3,093 2,162 5.1% 5.3%
-------- -------- -------- --------
Subtotal ................................. 33,848 22,150 56.1% 54.2%
Disposable products:
Domestic .................................... 20,452 14,287 33.9% 34.9%
International ............................... 1,978 1,540 3.3% 3.8%
-------- -------- -------- --------
Subtotal ................................. 22,430 15,827 37.2% 38.7%
Total external pumps and related disposables 56,278 37,977 93.3% 92.9%
Implantable insulin pumps ........................ 300 147 0.5% 0.3%
Other diabetes supplies .......................... 2,346 1,617 3.9% 4.0%
Glucose monitoring systems ....................... 649 -- 1.1% 0.0%
Pharmacy products ................................ 765 1,170 1.2% 2.8%
-------- -------- -------- --------
TOTAL NET SALES .................................. $ 60,338 $ 40,911 100.0% 100.0%
======== ======== ======== ========
GROSS PROFITS
External pumps and related disposables:
External pumps:
Domestic .................................... $ 24,213 $ 16,211 40.1% 39.6%
International ............................... 2,086 1,327 3.5% 3.2%
-------- -------- -------- --------
Subtotal ................................. 26,299 17,538 43.6% 42.8%
Disposable products:
Domestic .................................... 12,046 8,173 20.0% 20.0%
International ............................... 1,263 779 2.1% 1.9%
-------- -------- -------- --------
Subtotal ................................. 13,309 8,952 22.1% 21.9%
Total external pumps and related disposables ..... 39,608 26,490 65.7% 64.7%
Implantable insulin pumps ........................ (45) (199) (0.1%) (0.5%)
Other diabetes supplies .......................... 794 391 1.3% 1.0%
Glucose monitoring systems ....................... 304 -- 0.5% --
Pharmacy products ................................ 85 391 0.1% 1.0%
-------- -------- -------- --------
TOTAL GROSS PROFITS .............................. $ 40,746 $ 27,073 67.5% 66.2%
======== ======== ======== ========
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THREE MONTHS ENDED MARCH 31, 2000 AND APRIL 2, 1999
NET SALES
Net sales increased 47.5% during the three months ended March 31, 2000
over the three months ended April 2, 1999 to $60,338,000 from $40,911,000. This
increase is primarily the result of an increase of 48.2%, or $18,301,000, in
sales of external pumps and related disposable products. Sales of external pumps
grew 52.8% during the first quarter of 2000 with external pump domestic sales
growing 53.9% and external pump international sales increasing 43.1%. The
domestic increase is primarily related to an increase of 45.6% in unit volume
during the three months ended March 31, 2000 over the comparable period in 1999
combined with an increase in the average selling prices. The increase in
external pump international sales is unit volume driven, as realized
international average sales prices were slightly lower during the first quarter
of 2000 compared to the first quarter of 1999. The domestic price increase was a
function of our continued efforts to increase the percentage of pump sales
processed directly with third-party payors rather than selling pumps at larger
discounts to independent dealers and market acceptance of price increases on our
pumps related to technological enhancements introduced during the third quarter
of 1999. International average selling prices for pumps and related disposable
products were slightly lower during the first quarter of 2000 compared to the
first quarter of 1999 due to increased sales in emerging foreign markets where
independent dealers are utilized, compared to the prices realized in the markets
where we have direct operations. Sales of the related disposable products
increased 41.7% during the three months ended March 31, 2000, with domestic
sales growth at 43.2% and international sales growth at 28.4%. Similar to our
external pumps, this increase in sales of disposable products was primarily
volume driven in both the domestic and international markets combined with an
increase in domestic average sales prices resulting from processing more sales
directly with third-party payors, as contrasted to sales to independent dealers.
Sales of implantable pumps increased 104.1% or $153,000 from the first
quarter of 1999 to the first quarter of 2000. Sales activity of this product
line remains limited due to the lack of required regulatory approvals, and to
date, sales of implantable pumps have been generated mainly in connection with
clinical trials and compassionate use of the pumps for patients with
particularly difficult cases. The implantable pump and the special insulin
remain subject to regulatory review and approval in the United States, while the
implantable pump has been approved for commercial sale in the European Union,
which we call the EU. No assurance can be given as to when any of these
approvals will be received, if at all.
Sales of other diabetes supplies increased by 45.1% or $729,000 during
the 2000 first quarter compared to the 1999 first quarter. This increase
resulted from overall market growth, the continuation of internal efforts to
market these products to our external pump patient base, and a shift in our
business from lower paying Medicare patients to more private insurance patients.
Pharmaceutical product sales decreased 34.6% or $405,000 during the 2000 first
quarter compared to the 1999 first quarter, a further continuation of our
narrowing and restructuring of the pharmacy operations to better support our
future business activities. Sales of the continuous glucose monitoring systems
were $649,000 during the 2000 first quarter.
OPERATING RESULTS
Cost of Sales and Gross Profits--Cost of sales increased 41.6% during
the three months ended March 31, 2000 over the three months ended April 2, 1999
to $19,592,000 from $13,838,000. As a percentage of net sales, cost of sales in
the 2000 first quarter decreased to 32.5% from 33.8% in the comparable period of
1999. Our overall gross margin percentage improvement during the first quarter
of 2000 was achieved primarily through margin improvement in the disposable
products, implantable pump, and other diabetes supplies product lines.
Implantable pump margins improved primarily due to cost reductions achieved
because of the sale of
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assets and transfer of technology to MRG. Future margins on implantable pumps
may be adversely impacted by a contractual purchase commitment for these
products to MRG (see further discussion in "Liquidity and Capital Resources").
Margin improvements in disposable products are attributable to the increase in
average realized sales prices described above; whereas, margin improvements in
other diabetes supplies are the result of our repositioning of this business to
market these products to our existing external pump patients combined with an
increase in average sales prices. Gross margins on the sale of pharmacy products
decreased during the 2000 first quarter compared to the comparable period in
1999 due to the continued restructuring of this business.
While gross margins on sales of external pumps as a percentage of total
net sales increased during the 2000 first quarter compared to the comparable
period in 1999, external pump gross margins as a percentage of external pump
revenue decreased during this period. This decrease was the result of lower
margins realized on domestic sales of external pumps. While domestic average
sales prices on external pumps increased, manufacturing costs of domestic
external pumps also increased, as our latest model external pump has several
technological advancements over the previous model. The decrease in domestic
external pump gross margins was partially offset by an increase in gross margins
realized on international sales of these products. While international average
sales prices on external pumps decreased, manufacturing costs of international
external pumps also decreased, as we only offered an earlier, less expensive
model external pump to international markets during the 2000 first quarter.
Operating Expenses--Selling, general and administrative expenses
increased 48.0% during the three months ended March 31, 2000 over the three
months ended April 2, 1999 to $25,903,000 from $17,499,000. As a percentage of
net sales, these expenses remained consistent during the 2000 first quarter
compared to the 1999 first quarter. Selling and marketing expenses increased
primarily due to increased sales volumes, which led to increased sales
commissions and other variable field and in-house sales costs. Also, we
continued the expansion of our direct sales organization through the first
quarter of 2000 with the addition of new sales representatives, continued
development of our managed care marketing efforts and an expanding commitment to
field education and training. We also increased international selling and
marketing expenditures to expand our overall international presence,
establishing a new European headquarters in Belgium, and in developing new
international markets. General and administrative expenses increased to support
our growth, primarily in the areas of reimbursement and information systems.
Research and development expenses increased 47.4% during the three
months ended March 31, 2000 over the three months ended April 2, 1999 to
$7,804,000 from $5,296,000. As a percentage of sales, research and development
expenses remained consistent during the 2000 first quarter compared to the 1999
first quarter. The 2000 first quarter increase in research and development costs
resulted from greater resources directed toward the development of continuous
glucose monitoring systems and the related pilot manufacturing operations,
development efforts related to future generations of external pumps, expansion
of the data communication capabilities of our products, support of efforts for
the use of our core technology in the treatment of other medical conditions, and
product development efforts related to our pre-filled insulin cartridge program
and our disposable infusion systems. Research and development expenses will
continue to rise during the remainder of 2000, as we plan to introduce several
new products over the next two years, including the consumer version of our
continuous glucose monitoring system, new generations of external insulin pumps
and related disposable products (including pre-filled insulin cartridges),
expansion of our core technology for the treatment of other medical conditions
and our disposable infusion system, both for the treatment of Type 2 diabetes
and under our commitment to supply this product to Elan and its licensees.
During the 1998 first quarter, we signed a research and development
contract with American Medical Instruments, Inc., a member of The Marmon Group
of Companies, which we call AMI. We completed our obligation under the agreement
in 1999 and received a total of $12.0 million to fund these research projects.
Subject to payment of royalties to AMI, we have the right to sell products
utilizing the technology developed pursuant to the agreement on a world-wide
basis, with the exception of Japan. We also have the right to purchase the
technologies developed at prices ranging from an aggregate of $13.5 million to
$19.0 million during certain periods commencing April 2000 and concluding April
30, 2002. During the first quarter of 1999 we recorded $1.5 million from this
research and development contract as a reduction of operating expenses, as costs
related to completion of the contractual obligations were included in research
and development expense.
Other--During the three months ended March 31, 2000 and the three months
ended April 2, 1999, other income consisted primarily of interest income
generated from our cash, cash equivalents, and short-term investment balances.
These amounts increased due to additional cash from our 1999 offering of common
stock
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which raised $140,588,000 in net proceeds to us. Our effective tax rate during
the three months ended March 31, 2000 and April 2, 1999 has been computed giving
consideration to the pretax earnings and losses applicable to our foreign and
domestic tax jurisdictions and various income tax credits for which we are
eligible. Inflation has not significantly impacted our results of operations for
the past two years.
Liquidity and Capital Resources
We generated cash from operations of $9,383,000 during the three months
ended March 31, 2000 compared to cash used in operations of $1,349,000 during
the three months ended April 2, 1999. Cash flow from operations improved during
the first quarter of 2000 compared to the first quarter of 1999 primarily due to
increased overall profitability combined with the tax benefits from the exercise
of non-qualified stock options and a reduction in accounts receivable that
resulted from improved cash collections during the 2000 first quarter. These
improvements in the 2000 first quarter cash flows were partially offset by
increased expenditures for inventories to increase safety stock levels in
anticipation of our planned move to our new corporate headquarters and
manufacturing facility in Northridge and to prepare for historically higher
sales volumes experienced in the third and fourth quarters. Additionally,
expenditures on accrued salaries and sales commissions increased during the
three months ended March 31, 2000 as we paid out all of 1999 accrued bonuses and
sales commissions during the first quarter of 2000. Our use of cash during the
1999 first quarter was primarily due to increases in inventory balances and
accounts receivable that were driven by sales growth.
The increase in capital expenditures in the first quarter of 2000 to
$10,148,000 compared to $4,724,000 spent during the comparable period in 1999,
resulted primarily from building glucose sensor manufacturing capacity, as well
as other building improvements to service growth, manufacturing expansion,
research and development engineering equipment and information systems
requirements. We anticipate that future capital expenditures will continue to
increase at an even faster rate in support of our new product activities and to
build the infrastructure to accommodate continuing growth.
In 1999, we entered into a financing transaction pursuant to which we
are constructing a corporate headquarters, research and development and
manufacturing facility on the campus of California State University, Northridge,
the first phase of which is being financed with a $65.0 million credit
transaction. We are in the process of increasing this debt arrangement to
further expand this facility. The transaction was structured as a synthetic
lease financing for the facility development and, in a related transaction, we
obtained a revolving line of credit to borrow up to $15.0 million. Under the
terms of the financing, a special purpose trust subleases the land to us and
leases the improvements to us. In connection with these financing transactions,
we pledged substantially all of our assets as collateral security and are
subject to various affirmative and negative covenants regarding the conduct of
our business including restrictions on the payment of dividends and the
incurrence of additional debt. These arrangements could adversely affect our
ability to acquire additional capital resources or engage in certain strategic
transactions. The synthetic lease has an initial term of five years, with two
one-year renewal options. The underlying ground lease has a term of 40 years
with renewal options for up to an additional 40 years. Under these arrangements,
we are committed to annual payments ranging from $4.5 million to $5.0 million
commencing during the second half of 2000. Additionally, we are committed to
average annual payments in future periods of approximately $450,000 plus
periodic cost of living adjustments, per the terms of the ground lease for the
Northridge property. These lease payments will be recorded as rent expense in
future periods. When the synthetic lease terminates, we will be able to assume
the obligations of the special purpose trust as the lessee under the ground
lease if we exercise our option to purchase.
In the process of integrating certain HMS operations, we discovered
certain business practices relating to charges billed to the State of Florida
which were implemented by prior ownership and that may potentially result in
liability to us. These billing activities were related to business activities of
an affiliated pharmacy. We have corrected the practices, notified the State of
Florida of our findings and initiated legal action against the prior owners to
seek indemnification for any related liability that may be incurred by us. The
amount of potential liability, if any, cannot be determined at this time,
although we believe that indemnification for such liability would be available
from the prior owners. We also are involved in certain other litigation, the
financial impact of which is uncertain (see Notes to Consolidated Financial
Statements).
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We have also entered into an agreement by which, among other
transactions, we have acquired an option to purchase the exclusive worldwide
marketing rights to a long-term glucose sensor and related products being
developed by MRG for $30.0 million within 90 days of MRG's first successful full
human implant in a clinical trial performed in accordance with applicable
regulatory requirements. In the event that we pursue either of these
opportunities, additional capital resources may be required.
To retain our exclusive marketing rights for the implantable pump, we
are required to purchase minimum quantities of some products from MRG. Future
minimum purchase commitments for implantable pump units from MRG based upon
current prices are:
Through December 31, 2000 ......... $12,080,000
2001 .............................. 11,280,000
-----------
Total ............................. $23,360,000
===========
The implantable pump and related insulin have not been approved for
commercial distribution in the United States. The implantable pump has been
approved for commercial distribution in the EU, but sales will be limited until
the special insulin used with the pump is approved. We have accrued $3,500,000
as of December 31, 1999 and March 31, 2000 related to implantable pump purchase
commitment obligations in excess of expected usage.
Management believes that our current level of cash and cash equivalents
and short-term investments will be sufficient to meet our needs for working
capital and capital expenditures for the next 24 to 36 months. The requirements
for additional capital and working capital, however, are subject to change and
will depend upon numerous factors, including:
- the level of capital expenditures, especially relating to the new
corporate headquarters and the development of our new insulin
cartridge and disposable pump businesses;
- research and development activities and results;
- competitive and technological developments;
- health care reimbursement trends; and
- the availability for our acquisition of complementary additional
distribution channels, products, and technologies.
During future periods, we may require significant amounts of cash to
pursue opportunities and promote continued growth and expansion.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest excess cash in short-term debt securities that are classified
as available for sale. Two of the main risks associated with these investments
are interest rate risk and credit risk. Typically, when interest rates rise,
there is a corresponding decline in the market value of the debt securities.
Fluctuations in interest rates should not have a material effect on our
financial statements because of the short-term nature of the securities in which
we invest. Credit risk refers to the possibility that the issuer of the debt
securities will not be able to make principal and interest payments. We have
limited our investments to investment grade or comparable securities and have
not experienced any losses on our investments to date due to credit risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
- ----------- -------
10.1 Design and Development Agreement between MiniMed Inc. and
Automation Tooling Systems Inc. dated February 18, 2000.
27.1 Financial data schedule.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MiniMed Inc.
Date: May 15, 2000 /s/ KEVIN R. SAYER
--------------------------------
Kevin R. Sayer
Senior Vice President, Finance &
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
10.1 Design and Development Agreement between MiniMed Inc. and
Automation Tooling Systems Inc. dated February 18, 2000.
27.1 Financial data schedule.
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