1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NUMBER 0-26268
MINIMED INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 95-4408171
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
IDENTIFICATION NO.) INCORPORATED OR ORGANIZATION)
18000 DEVONSHIRE STREET, NORTHRIDGE, CA 91342
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 362-5958
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT MAY 9, 2001
------------------- --------------------------
COMMON STOCK, $.01 PAR VALUE 64,734,216
===============================================================================
2
INDEX
MINIMED INC.
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes.................................... 3
Consolidated Balance Sheets (Unaudited) -- December 29, 2000 and March 30, 2001.......... 3
Consolidated Statements of Income (Unaudited) -- Three months ended March 31, 2000
and March 30, 2001..................................................................... 4
Consolidated Statements of Cash Flows (Unaudited) -- Three months ended
March 31, 2000 and March 30, 2001...................................................... 5
Notes to Consolidated Financial Statements (Unaudited)................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 19
PART II. OTHER INFORMATION........................................................................ 19
Item 1. Legal Proceedings........................................................................ 19
Item 2. Changes in Securities and Use of Proceeds................................................ 19
Item 3. Defaults Upon Senior Securities.......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders...................................... 19
Item 5. Other Information........................................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
SIGNATURE......................................................................................... 20
INDEX TO EXHIBITS................................................................................. 21
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
MINIMED INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 29, 2000 AND MARCH 30, 2001
ASSETS
2000 2001
-------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 105,612,000 $ 57,907,000
Short-term investments ..................................................... 81,976,000 75,229,000
Accounts receivable, net of allowance for doubtful accounts of $16,240,000
and $17,075,000 at December 29, 2000 and March 30, 2001, respectively .... 89,153,000 86,844,000
Inventories ................................................................ 31,863,000 35,018,000
Deferred income taxes ...................................................... 8,424,000 8,600,000
Income taxes receivable .................................................... 3,568,000 1,608,000
Prepaid expenses and other current assets .................................. 11,271,000 12,411,000
------------- -------------
Total current assets ........................................... 331,867,000 277,617,000
NOTE RECEIVABLE FROM AFFILIATE ............................................... 3,600,000 --
LONG-TERM INVESTMENTS ........................................................ 6,655,000 35,893,000
DEFERRED INCOME TAXES ........................................................ 19,063,000 17,082,000
OTHER ASSETS - Net ........................................................... 18,820,000 52,462,000
LAND, BUILDINGS, PROPERTY AND EQUIPMENT - Net ................................ 71,346,000 73,501,000
------------- -------------
TOTAL ASSETS ................................................................. $ 451,351,000 $ 456,555,000
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 6,739,000 $ 6,281,000
Accrued salaries and related benefits ...................................... 8,016,000 6,359,000
Accrued sales commissions .................................................. 1,863,000 861,000
Accrued warranties ......................................................... 3,681,000 3,690,000
Accrued related party purchase commitment obligations ...................... 3,285,000 3,085,000
Other accrued expenses ..................................................... 1,380,000 2,599,000
------------- -------------
Total current liabilities ....................................... 24,964,000 22,875,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 100,000,000 shares authorized; 64,547,080 and
64,664,116 shares issued and outstanding as of December 29, 2000 and March
30, 2001, respectively ................................................... 656,000 656,000
Additional capital ........................................................ 337,751,000 339,515,000
Accumulated other comprehensive income (loss) ............................. 1,800,000 (2,422,000)
Retained earnings ......................................................... 86,180,000 95,931,000
------------- -------------
Total stockholders' equity ..................................... 426,387,000 433,680,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 451,351,000 $ 456,555,000
============= =============
See notes to consolidated financial statements.
3
4
MINIMED INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001
2000 2001
----------- -----------
(UNAUDITED)
NET SALES ..................................................... $60,338,000 $80,007,000
COST OF SALES ................................................. 19,592,000 26,075,000
----------- -----------
GROSS PROFIT .................................................. 40,746,000 53,932,000
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative ......................... 25,903,000 37,493,000
Research and development .................................... 7,804,000 9,969,000
----------- -----------
Total operating expenses .......................... 33,707,000 47,462,000
----------- -----------
OPERATING INCOME .............................................. 7,039,000 6,470,000
OTHER INCOME, Including interest income ....................... 2,722,000 7,655,000
----------- -----------
INCOME BEFORE INCOME TAXES .................................... 9,761,000 14,125,000
PROVISION FOR INCOME TAXES .................................... 3,514,000 4,374,000
----------- -----------
NET INCOME .................................................... $ 6,247,000 $ 9,751,000
=========== ===========
BASIC EARNINGS PER SHARE ...................................... $ 0.10 $ 0.15
=========== ===========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING ................................................ 62,850,000 64,594,000
=========== ===========
DILUTED EARNINGS PER SHARE .................................... $ 0.09 $ 0.15
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING ................................................ 66,374,000 66,693,000
=========== ===========
See notes to consolidated financial
statements.
4
5
MINIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001
2000 2001
------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES -
Net income ................................................................... $ 6,247,000 $ 9,751,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............................................. 2,534,000 3,807,000
Directors fees paid in common stock ........................................ 20,000 49,000
Deferred income taxes ...................................................... 1,916,000 3,313,000
Tax benefit from exercise of non-qualified stock options ................... 4,971,000 903,000
Changes in operating assets and liabilities:
Accounts receivable, net ................................................. 1,584,000 1,964,000
Inventories .............................................................. (3,955,000) (3,462,000)
Prepaid expenses and other current assets ................................ 961,000 (1,170,000)
Other assets ............................................................. 17,000 (46,000)
Accounts payable ......................................................... 771,000 (416,000)
Accrued salaries and related benefits .................................... (2,408,000) (1,622,000)
Accrued sales commissions ................................................ (2,322,000) (1,002,000)
Accrued warranties ....................................................... (222,000) 9,000
Income taxes receivable................................................... 943,000 1,960,000
Accrued software refurbishment costs ..................................... (1,200,000) --
Accrued related party purchase commitment obligations..................... -- (200,000)
Other accrued expenses ................................................... (474,000) 1,233,000
------------- -------------
Net cash provided by operating activities ................................ 9,383,000 15,071,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Short-term investments ................................................... (14,944,000) 6,747,000
Sale of marketable securities ............................................ 38,000 641,000
Note receivable from affiliate ........................................... -- 3,600,000
Investment in Medical Research Group, Inc. ("MRG") ....................... -- (31,753,000)
Investment in Diabetes Manager.com ....................................... -- (3,000,000)
Acquisition of Magnolia Medical .......................................... -- (3,726,000)
Purchase of technology license ........................................... -- (30,000,000)
Purchase of land, buildings, property and equipment ...................... (10,148,000) (5,831,000)
------------- -------------
Net cash used in investing activities .................................... (25,054,000) (63,322,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from stock option exercises ..................................... 6,153,000 812,000
------------- -------------
Net cash provided by financing activities ................................ 6,153,000 812,000
------------- -------------
Effect of foreign exchange rates on cash ................................. 5,000 (266,000)
NET DECREASE IN CASH AND CASH
EQUIVALENTS ............................................................. (9,513,000) (47,705,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD .................................................................. 92,718,000 105,612,000
============= =============
CASH AND CASH EQUIVALENTS, END OF
PERIOD .................................................................. $ 83,205,000 $ 57,907,000
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the period for:
Interest ................................................................ $ -- $ --
Income taxes ............................................................ $ -- $ 193,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - The Company recorded an
unrealized holding gain of $5,424,000 during the three months ended March 31,
2000, net of estimated income taxes on marketable securities classified as
long-term investments available for sale. The Company issued 502 and 1,357
shares of common stock to certain Directors in lieu of fees during the three
months ended March 31, 2000 and March 30, 2001, respectively.
See notes to consolidated financial statements.
5
6
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
- ----------- ----------------
2001............................................................ December 28, 2001
2000............................................................ December 29, 2000
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of MiniMed Inc. (the
"Company" or "MiniMed") have been prepared in accordance with accounting
principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 29, 2000. The results of operations for the three months ended March
30, 2001 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 28, 2001.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain reclassifications have been made to various
balances in the 2000 financial statements to conform with current year
presentation.
Income Taxes - Net income and earnings per share for the three months ended
March 31, 2000 and March 30, 2001 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.
Adoption of SFAS No. 133 - Effective December 30, 2000, MiniMed adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), as amended. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. To date, MiniMed has not invested in
derivative instruments or engaged in hedging activities. Consequently, the
adoption of SFAS No. 133 did not have a material effect on the Company's
financial statements.
NOTE 3. WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
In accordance with SFAS No. 128, "Earnings Per Share", basic earnings per
share ("EPS") for the three months ended March 31, 2000 and March 30, 2001, 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
MARCH 31, 2000 MARCH 30, 2001
------------------ ------------------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to common stock ........................... $ 6,247,000 $ 9,751,000
Denominator:
Weighted average common shares outstanding ...................... 62,850,000 64,594,000
----------- -----------
Basic earnings per share ........................................ $ 0.10 $ 0.15
=========== ===========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to common stock ........................... $ 6,247,000 $ 9,751,000
----------- -----------
Denominator:
Weighted average common shares outstanding ...................... 62,850,000 64,594,000
Effect of dilutive securities
Stock options .............................................. 3,524,000 2,099,000
----------- -----------
Diluted weighted average shares outstanding ..................... 66,374,000 66,693,000
----------- -----------
Diluted earnings per share ...................................... $ 0.09 $ 0.15
=========== ===========
6
7
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001 (CONTINUED)
NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
DECEMBER 29, MARCH 30,
2000 2001
-------------- -------------
(UNAUDITED)
Inventories:
Raw materials ............................................................ $ 15,025,000 $ 18,856,000
Work-in-progress ......................................................... 2,143,000 1,854,000
Finished goods............................................................ 14,695,000 14,308,000
------------- -------------
Total....................................................................... $ 31,863,000 $ 35,018,000
============= =============
Land, building, Property and equipment:
Land, buildings and improvements ......................................... $ 18,198,000 $ 17,555,000
Machinery and equipment .................................................. 44,346,000 46,806,000
Tooling and molds ........................................................ 7,091,000 7,662,000
Computer software ........................................................ 12,749,000 14,290,000
Furniture and fixtures ................................................... 16,287,000 18,261,000
------------- -------------
98,671,000 104,574,000
Less accumulated depreciation .............................................. (27,325,000) (31,073,000)
------------- -------------
Total ...................................................................... $ 71,346,000 $ 73,501,000
============= =============
Other assets:
Technology license ....................................................... $ 8,543,000 $ 38,530,000
Goodwill ................................................................. 10,091,000 13,686,000
Other .................................................................... 186,000 246,000
------------- -------------
Total ...................................................................... $ 18,820,000 $ 52,462,000
============= =============
Long-term investments:
Investment in Trimeris common stock - at fair value ...................... $ 5,515,000 $ --
Investment in Diabetes Manager.com - at cost ............................. -- 3,000,000
Investment in MRG common stock - at cost ................................. -- 31,753,000
Investment in PDC common stock - at cost ................................. 1,140,000 1,140,000
------------- -------------
Total ...................................................................... $ 6,655,000 $ 35,893,000
============= =============
The Company has recorded $1,243,000 and $1,385,000 as accumulated amortization
on other assets at December 29, 2000 and March 30, 2001, respectively.
7
8
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001 (CONTINUED)
NOTE 5. COMPREHENSIVE INCOME
The Company's total comprehensive income was as follows:
THREE MONTHS ENDED
----------------------------------
MARCH 31, 2000 MARCH 30, 2001
-------------- --------------
Net income ......................................................... $ 6,247,000 $ 9,751,000
Other comprehensive income (loss):
Foreign currency translation
Adjustments .................................................... 6,000 (858,000)
Unrealized gain on securities:
Unrealized holding gain ...................................... 8,300,000 --
Less: reclassification adjustment for
gain included in net income ............................... (307,000) (4,881,000)
------------ ------------
Other comprehensive income (loss),
before income taxes ............................................ 7,999,000 (5,739,000)
Income tax expense (benefit) related
to items of other comprehensive
income (loss) .................................................. 2,876,000 (1,517,000)
------------ ------------
Other comprehensive income (loss) ................................ 5,123,000 (4,222,000)
============ ============
Total comprehensive income ......................................... $ 11,370,000 $ 5,529,000
============ ============
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 has constructed the first phase of 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 $75,000 during the first quarter of both 2000 and 2001, 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 transaction pursuant to which
it now leases certain buildings constructed on the land described above. The
lessors of the buildings originally committed to fund up to a maximum of $65.0
million for construction of the buildings and provided the Company with a $15.0
million revolving line of credit that has never been drawn. During October 2000,
the Company negotiated an increase of this lease arrangement to $80.0 million in
order to expand the development of this facility. Under the terms of the
transaction, a special purpose trust subleases the land, buildings and
improvements to the Company. The lease has an initial term of five years, with
two one-year renewal options. Under the revised arrangement, the Company is
committed to annual rent payments under this operating lease that are indexed to
market interest rates and currently range from $5.5 million to $6.2 million
commencing on April 1, 2001. The Company began relocating portions of its
operations to the Northridge site late in the third quarter of 2000 and recorded
$1,374,000 as rent expense under this lease during the three months ended March
30, 2001.
In connection with these 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. In
February 2001 the Company made a payment of $30.0 million in connection with the
exercise of an option to acquire the exclusive worldwide marketing rights of a
long-term implantable glucose sensor developed by Medical Research Group, Inc.
("MRG"), which option had been acquired by the Company in 1998. Concurrently,
the Company made a $31.8 million equity investment. In connection with the MRG
transactions, the lessors have provided the Company with a waiver regarding
certain covenants implicated by the transaction.
8
9
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 30, 2001 (CONTINUED)
In September 2000, the Company entered into an agreement to lease certain
computer software and hardware in conjunction with its implementation of a new
enterprise resource planning ("ERP") system. The lessors have agreed to fund up
to $16.0 million for this lease. Upon full funding of this lease, the Company
will be committed to annual payments not to exceed $4.0 million, depending upon
the amounts drawn under this operating lease. Full funding of this lease is not
expected until late 2001. The Company made payments under this lease of $748,000
during the three months ended March 30, 2001.
As part of its ERP activities, the Company entered into a contract with
Siemens Medical Solutions Health Services Corporation, formerly Shared Medical
Systems Corporation ("SMS"), licensing medical billing software and support
services. After significant evaluation of the SMS product it has been determined
that the SMS product will not integrate effectively with the Company's selected
ERP system. When it became clear that the integration issue could not be solved,
the Company notified SMS of its intent to cancel the agreement. SMS responded by
claiming the Company is in breach of the agreement. The parties are currently in
discussions to resolve this situation.
Legal Proceedings - 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 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 is scheduled for September 2001. Discovery
in this litigation is continuing.
During the normal course of business, the Company may be subject to other
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's financial statements.
9
10
NOTE 7. OPERATING SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA
The Company has organized its operating segments around differences in
products offered. The Company conducts business in six operating segments;
external infusion pumps, related disposable products, implantable pumps, other
diabetes supplies, glucose monitoring systems and pharmaceutical products. The
external infusion pumps and related disposable products operating segments
derive their revenues from the manufacture and distribution of drug delivery
systems primarily for the treatment of diabetes. The implantable pumps operating
segment derives its revenues from the distribution of internal drug delivery
systems primarily for the treatment of diabetes. The other diabetes supplies
operating segment generates revenues from the distribution of a broad range of
diabetes treatment products, including blood glucose testing strips and meters.
The pharmaceutical products operating segment derives its revenues from the
distribution of prescription drugs to treat certain medical conditions,
including diabetes and, previously, HIV/AIDS and renal failure.
The Company manages its operating segments through analysis of segment net
sales and gross profit. The external infusion pumps, related disposable
products, implantable pumps, glucose monitoring systems and other diabetes
supplies operating segments are aggregated into the diabetes products operating
segment for purposes of tracking selling, general and administrative expenses,
interest expense, other income, capital expenditures, depreciation expense and
assets and liabilities as the type of customers, the distribution channels and
the nature of the regulatory environment are similar.
In the following tables, net sales by operating segment and geographic area
include sales to customers, as reported in the Consolidated Statements of Income
at sales prices which approximate market.
THREE MONTHS ENDED
OPERATING SEGMENTS MARCH 31, 2000 MARCH 30, 2001
------------------ ---------------- ---------------
Net sales:
Pharmaceutical products................. $ 765,000 $ 674,000
External infusion pumps................. 32,499,000 40,768,000
Related disposable products............. 23,779,000 34,339,000
Implantable pumps....................... 300,000 351,000
Glucose monitoring systems.............. 649,000 690,000
Other diabetes supplies................. 2,346,000 3,185,000
--------------- ---------------
Total net sales................. $ 60,338,000 $ 80,007,000
--------------- ---------------
Gross profit:
Pharmaceutical products................. $ 85,000 $ 156,000
External infusion pumps................. 25,759,000 32,935,000
Related disposable products............. 13,849,000 20,133,000
Implantable pumps....................... (45,000) (581,000)
Glucose monitoring systems.............. 304,000 268,000
Other diabetes supplies................. 794,000 1,021,000
--------------- ---------------
Total gross profit.............. $ 40,746,000 $ 53,932,000
--------------- ---------------
Operating profit (loss):
Pharmaceutical products................. $ (413,000) $ (164,000)
Diabetes products....................... 7,452,000 6,634,000
--------------- ---------------
Total operating profit.......... $ 7,039,000 $ 6,470,000
--------------- ---------------
Other income (including interest income).. 2,722,000 7,655,000
--------------- ---------------
Income before income taxes................ $ 9,761,000 $ 14,125,000
=============== ===============
Identifiable assets: DECEMBER 29, 2000 MARCH 30, 2001
----------------- --------------
Pharmaceutical products................. $ 3,372,000 $ 3,525,000
Diabetes products....................... 447,979,000 453,030,000
--------------- ---------------
Total........................... $ 451,351,000 $ 456,555,000
=============== ===============
Capital expenditures and depreciation expense related to the Company's
pharmaceutical products operations are not material compared to its diabetes
products operations for the three months ended March 31, 2000 and for the three
months ended March 30, 2001.
THREE MONTHS ENDED
GEOGRAPHIC AREAS MARCH 31, 2000 MARCH 30, 2001
---------------- ---------------- ---------------
NET SALES:
North America....................................... $ 56,732,000 $ 73,105,000
Europe.............................................. 3,606,000 6,710,000
Australia........................................... -- 192,000
--------------- ----------------
Consolidated........................................ $ 60,338,000 $ 80,007,000
=============== ===============
OPERATING INCOME (LOSS):
North America....................................... $ 7,023,000 $ 6,347,000
Europe.............................................. 16,000 136,000
Australia........................................... -- (13,000)
--------------- ---------------
Consolidated........................................ $ 7,039,000 $ 6,470,000
=============== ===============
IDENTIFIABLE ASSETS AT END OF PERIOD: DECEMBER 29, 2000 MARCH 30, 2001
----------------- ---------------
North America....................................... $ 434,258,000 $ 439,378,000
Europe.............................................. 16,296,000 16,582,000
Australia........................................... 797,000 595,000
--------------- ---------------
Consolidated........................................ $ 451,351,000 $ 456,555,000
=============== ===============
10
11
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 condensed 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 the anticipated
operating results, growth and financial resources of our company, development,
manufacture, introduction, and commercial acceptance of new products, the
development of new markets, trends relating to certain expenses, obtaining and
maintaining regulatory approval, acceptance of new products, obtaining and
maintaining reimbursement for our products, the impact of the Medicare
reimbursement program on average sales price of our external insulin pumps and
short term operations, the future commercial activities of our pharmacy relating
to disposable pump and pre-filled insulin cartridge product lines and to support
clinical trial activities, the impact of a fully automated manufacturing
operation for our continuous glucose monitoring system on gross margins, our
ability to exercise the option to purchase the leasehold and improvements
relating to our new headquarters, our ability to exercise the option to purchase
certain technical developments from AMI, our ability to manufacture and
distribute our products, our success in maintaining our license agreements with
Medical Research Group, Inc., which we call MRG, and the success of MRG's
product development, manufacturing operations and general performance. The
forward-looking statements are based on assumptions, including assumptions of
future events. Although we believe that our expectations are based on reasonable
assumptions, the actual results and our financial position will vary from those
projected or implied in the forward-looking statements, and the variances may be
material. Such variances result from the risks and uncertainties which affect
our business, including changes in economic and market conditions, acceptance of
our products by health care and reimbursement communities, health care
legislation and regulation, new developments in diabetes therapy, administrative
and regulatory approval and related considerations, competitive developments,
technical risks associated with product development, effective integration of
our acquisitions, maintenance and execution 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 businesses, 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, disposable products used with our external pumps,
continuous glucose monitoring systems, and implantable insulin pumps. Future
development of the external pump and disposable product lines will focus upon
improving the existing technology for its current use in diabetes treatment,
with the ultimate objective of linking the insulin delivery systems to a
continuous glucose monitoring system. Our objective is to create an "artificial
pancreas", capable of controlling glucose levels in patients without significant
patient intervention. Our infusion pump technology may also be used for the
treatment of other medical conditions.
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. 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. We filed an application with the Food and Drug Administration, which
we call the FDA for approval of our consumer version of this product in August
2000. The FDA has indicated that a panel meeting will be required for
recommendation of the consumer device prior to commercial approval. No such
meeting has been scheduled. Additionally, in order for our consumer continuous
glucose monitoring system to be marketed and sold under the labeling that we
have requested, the FDA has required that we provide them with more clinical
data and has indicated that they will not schedule the panel meeting hearing
until the data is provided. We are currently preparing our response to the FDA.
On September 1, 1998, we sold assets and transferred technology related to
our implantable pump program to MRG. Alfred E. Mann, our founder, Executive
Chairman and largest stockholder, also founded MRG and he continues to hold a
substantial equity interest in MRG. As part of the transaction to transfer this
technology, we acquired an option to purchase worldwide exclusive marketing
rights to a long-term glucose sensor being developed by MRG for $30.0 million
and retained exclusive marketing rights to the implantable pump product line for
diabetes and certain other medical conditions. Under these initial arrangements,
we were obligated to make mandatory purchases of implantable pumps from MRG
through 2001 and additional purchases of implantable products in subsequent
periods to retain our exclusivity. In February 2001, we restructured our
agreements with MRG and exercised our $30.0 million option for the worldwide
marketing rights to MRG's
11
12
long-term glucose sensor. Significant terms of the restructured agreements
include a $31.8 million equity investment by us in MRG, a waiver by MRG of our
prior purchase commitments, reduced minimum purchase commitments and purchase
prices, redefinition of funding responsibilities for future joint research and
development programs and the transfer of marketing rights for non-diabetes
medical conditions to MRG (see further discussion in "Liquidity and Capital
Resources"). In recent developments, MRG has encountered difficulties in
manufacturing the implantable pump systems which may impede MRG's ability to
produce and supply implantable pumps under the contract and, as a consequence,
our ability to sell and market this product line.
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
Eli Lilly & Co., which we call Lilly, giving us a worldwide license to package
and sell a 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 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. 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 (including separate
regulatory approval of the insulin to be used in connection with the disposable
infusion system), the timing and certainty of which are not predictable.
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31, 2000
and the three months ended March 30, 2001, the percentage relationship to net
sales of certain items in our condensed 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 MARCH 30, 2001 (DECREASE)
-------------- -------------- ----------
Net sales ........................................................... 100.0% 100.0% 32.6%
Cost of sales ....................................................... 32.5 32.6 33.1%
----- -----
Gross profit ........................................................ 67.5 67.4 32.4%
Operating expenses:
Selling, general and administrative .......................... 42.9 46.8 44.7%
Research and development ..................................... 12.9 12.5 27.7%
----- -----
Total operating expenses ................................. 55.8 59.3 40.8%
----- -----
Operating income .................................................... 11.7% 8.1% (8.1)%
===== =====
12
13
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 March 30, 2001.
DOLLARS IN THOUSANDS % OF NET SALES
--------------------------------------- -------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 30, 2001 MARCH 31, 2000 MARCH 30, 2001
------------------- ------------------- ------------------- ----------------
NET SALES:
External pumps and related
disposables:
External pumps:
Domestic .............................. $ 29,730 $ 35,872 49.3% 44.8%
International ......................... 2,769 4,896 4.6% 6.1%
-------- -------- ----- -----
Subtotal ........................... 32,499 40,768 53.9% 50.9%
Disposable products:
Domestic .............................. 21,941 30,496 36.4% 38.1%
International ......................... 1,838 3,843 3.0% 4.8%
-------- -------- ----- -----
Subtotal ........................... 23,779 34,339 39.4% 42.9%
Total external pumps and
related disposables ........................ 56,278 75,107 93.3% 93.8%
Implantable insulin pumps .................. 300 351 0.5% 0.4%
Other diabetes supplies .................... 2,346 3,185 3.9% 4.0%
Glucose monitoring systems ................. 649 690 1.1% 0.9%
Pharmacy products .......................... 765 674 1.2% 0.9%
-------- -------- ----- -----
TOTAL NET SALES ............................ $ 60,338 $ 80,007 100.0% 100.0%
======== ======== ===== =====
GROSS PROFITS:
External pumps and related
disposables:
External pumps:
Domestic .............................. $ 23,926 $ 29,782 39.7% 37.2%
International ......................... 1,833 3,153 3.0% 3.9%
-------- -------- ----- -----
Subtotal ........................... 25,759 32,935 42.7% 41.1%
Disposable products:
Domestic .............................. 12,666 18,139 21.0% 22.7%
International ......................... 1,183 1,994 2.0% 2.5%
-------- -------- ----- -----
Subtotal ........................... 13,849 20,133 23.0% 25.2%
Total external pumps and
related disposables ........................ 39,608 53,068 65.7% 66.3%
Implantable insulin pumps .................. (45) (581) (0.1%) (0.7)%
Other diabetes supplies .................... 794 1,021 1.3% 1.3%
Glucose monitoring systems ................. 304 268 0.5% 0.3%
Pharmacy products .......................... 85 156 0.1% 0.2%
-------- -------- ----- -----
TOTAL GROSS PROFITS ........................ $ 40,746 $ 53,932 67.5% 67.4%
======== ======== ===== =====
THREE MONTHS ENDED MARCH 30, 2001 AND MARCH 31, 2000
NET SALES
Net sales increased 32.6% during the three months ended March 30, 2001 over
the three months ended March 31, 2000 to $80,007,000 from $60,338,000. This
increase is primarily the result of an increase of 33.5%, or $18,829,000, in
sales of external pumps and related disposable products. Sales of external pumps
grew 25.4% during the first quarter of 2001 with external pump domestic sales
growing 20.7% and external pump international sales increasing 76.8%. The
domestic increase is primarily related to an increase of 25.2% in unit volume
during the three months ended March 30, 2001 over the comparable period in 2000
that was partially offset by a decrease in average selling prices. The increase
in external pump international sales is the result of a 72.6% increase in unit
volume combined with a slight increase in average selling prices as we processed
a greater percentage of international external pump sales through our direct
operations in foreign markets where we realize higher prices during the 2001
first quarter compared to the 2000 first quarter.
13
14
Commencing in the second quarter of 2000, we began selling our programmable
external insulin pumps to qualified Medicare beneficiaries when the Health Care
Financing Administration began covering these products. Shipments of external
pumps to patients who have Medicare as their primary source of reimbursement was
the major factor in the reduction of external pump average sales prices. Revenue
for the Medicare patients is recognized over a payment period ranging from 13 to
15 months. The patient also has the right to return the pump at any time during
the payment period. This is contrasted to our traditional sales model, where
revenue is recognized upon shipment and there is no inherent right of return.
During the first quarter of 2001 approximately 5.4% of our domestic external
pump shipments were billed under the Medicare program. If the Medicare pumps
shipped during the 2001 first quarter had been reimbursed in our more
traditional models, revenues would have increased by approximately $300,000 with
a corresponding increase in gross profits and operating results. The financial
impact to our operating results of the Medicare reimbursement program is more
pronounced as we start up Medicare sales activity. Over time, assuming Medicare
sales volumes remain relatively consistent, the impact of the Medicare
reimbursement program upon our short-term operations should diminish. Domestic
external pump prices remained relatively consistent for units sold to
non-Medicare patients and distributors.
Sales of the related disposable products increased 44.4% during the three
months ended March 30, 2001, with domestic sales growth at 39.0% and
international sales growth at 109.1%. This increase in sales of disposable
products was primarily volume driven in both the domestic and international
markets. This volume increase has been a function of our external pump sales
growth, as the number of patients utilizing our external pumps has almost
doubled over the past two years. Domestic prices have also increased due to two
factors: first, we continue to experience a shift in product mix of the infusion
sets sold, with customers moving to the more expensive models; and second,
domestic average sales prices have increased as a result of processing more
disposable sales directly with third-party payors through our direct sales
organization, as contrasted to sales to independent dealers, which are typically
sold at a discount. International selling prices of disposable products also
increased during the 2001 first quarter due to the shift in customer preferences
to more expensive models of our infusion sets.
Sales of implantable pumps remained consistent during the first quarter of
2001 compared to the first quarter of 2000. Sales activity of this product line
remains limited due to the lack of required regulatory approvals. The original
implantable pump and the current enhanced version of the implantable pump have
received the CE Mark permitting commercial sale in Europe, however, separate
approval is required from the EU for the special insulin. The insulin is
manufactured by an independent pharmaceutical company, which continues to
control the European regulatory filings for its insulin. The applications for
approval of the insulin in EU have been filed and are currently under review. In
February 2001, we submitted to the FDA separate applications for approval of
this device and the special insulin required for its use. The FDA has accepted
for filing our application for regulatory approval of the implantable insulin
pump. Separately, the FDA has informed us that our application for regulatory
approval for the insulin was not accepted. We are in the process of working with
the manufacturer of the special insulin in responding to this action by the FDA.
No assurance can be given as to when any of these approvals will be received, if
at all. Sales of implantable pumps in 2001 have also been adversely impacted by
manufacturing difficulties encountered by MRG. We are currently evaluating this
situation with MRG management and no assurance can be given as to the timing or
ability of MRG to resolve these issues.
Sales of other diabetes supplies increased by 35.8% or $839,000 during the
2001 first quarter compared to the 2000 first quarter. This increase resulted
from overall market growth and the continuation of internal efforts, which
began in 1999, to market these products to our external pump patient base.
Average sales prices for these products decreased during the first quarter of
2001 compared to the first quarter of 2000 due to competitive pressures and the
addition of more Medicare patients to our patient base. Pharmaceutical product
sales decreased slightly during the three months ended March 30, 2001 compared
to the three months ended March 31, 2000. While pharmacy sales continue to
decrease, we maintain this business activity in anticipation of future
commercial activities related to our disposable pump and pre-filled insulin
cartridge product lines and to support clinical trial activity for the use of
other compounds in our current infusion systems.
Sales of the continuous glucose monitoring systems remained consistent
during the first quarter of 2001 compared to the first quarter of 2000. As noted
above, sales of this product line continue to be generated from the physician
version of this product.
14
15
OPERATING RESULTS
Cost of Sales and Gross Profits--Cost of sales increased 33.1% during the
three months ended March 30, 2001 over the three months ended March 31, 2000 to
$26,075,000 from $19,592,000. As a percentage of net sales, cost of sales
remained consistent in the 2001 first quarter compared to the 2000 first
quarter. Our gross margin percentage on external pumps and related disposable
products increased slightly during the first quarter of 2001 compared to the
first quarter of 2000. This improvement was due to increased margins realized on
domestic sales of both external pumps and disposable products that were
partially offset by decreased margins on international sales of these products.
Domestic external pump margins improved to 83.0% of domestic external pump sales
during the 2001 first quarter compared to 80.5% during the 2000 first quarter
due to lower component product costs from several vendors, production
efficiencies related to higher manufacturing volumes and continued improvement
in our warranty return rate experience that were partially offset by the lower
average selling prices noted above. International external pump margins as a
percentage of international external pump sales decreased during the 2001 first
quarter compared to the 2000 first quarter as the higher cost most current
version of the external pump was not available in the foreign markets until
later in 2000.
Domestic disposable products margins improved to 59.5% of domestic
disposable products sales during the 2001 first quarter compared to 57.7% during
the 2000 first quarter due to stronger pricing achieved through our direct sales
efforts and the continued shift of our customers to the higher margin products
combined with continued volume-based cost reduction efforts achieved internally
and with our contract manufacturers. International disposable products margins
decreased during the first quarter of 2001 compared to the first quarter of 2000
due to a greater proportion of international disposable sales being generated by
lower margin disposable products.
Implantable pump gross margins decreased in the 2001 first quarter compared
to the 2000 first quarter and remained negative due to the continuation of
limited sales activity of this product line. 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").
Gross margins realized on other diabetes supplies sales decreased during
the first quarter of 2001 compared to the first quarter of 2000 due to the lower
average selling prices described above. Gross margins on the limited volume of
continuous glucose monitoring system sales during the 2001 first quarter were
38.8% compared to 46.8% for the 2000 first quarter. The fully automated
manufacturing operation related to this product line is currently under
development and will significantly impact future margins, largely depending upon
sales and manufacturing volumes.
Operating Expenses--Selling, general and administrative expenses increased
44.7% during the three months ended March 30, 2001 over the three months ended
March 31, 2000 to $37,493,000 from $25,903,000. As a percentage of net sales,
these expenses increased to 46.8% during the 2001 first quarter compared to
42.9% during the 2000 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. Additionally,
domestic selling and marketing expenses have increased as we continue to target
more of our sales efforts to the general medical market as opposed to diabetes
specialists. Our future continued growth is dependent upon broadening our market
penetration to the general market which treats the majority of diabetes
patients. International selling and marketing expenditures also increased during
the first quarter of 2001, resulting from the establishment of our direct sales
operation in Australia during the second quarter of 2000 and increasing
expenditures related to the operating activities of our European headquarters in
Belgium. General and administrative expenses increased during the 2001 first
quarter primarily due to continued investment in our information systems and
related expenditures combined with increased rent expense for our new corporate
headquarters in Northridge. We commenced a complete information system upgrade
during 2000, with the first phase of the project scheduled to be completed by
the end of 2001. In addition to information systems and rent, our next largest
investment in general and administrative expenses is in reimbursement personnel
increases to support our growth and the continued shift of our domestic business
activities to direct sales.
Research and development expenses increased 27.7% during the three months
ended March 30, 2001 over the three months ended March 31, 2000 to $9,969,000
from $7,804,000. As a percentage of sales, research and development expenses
decreased slightly during the 2001 first quarter compared to the 2000 first
quarter. The 2001
15
16
first quarter increase in research and development costs resulted from increased
expenses in the development of future generations of external pumps and their
related disposable products. We continue to invest in start-up manufacturing
operations for our current and future continuous glucose monitoring systems, the
disposable pump product line and insulin development for all of our insulin
delivery systems. Research and development expenses will continue to rise during
the remainder of 2001 as several products prepare for launch and enter the later
stages of development. These products include our next platform of external
pumps, the consumer version of our continuous glucose monitoring system, several
insulin programs, and our disposable infusion system for the treatment of Type 2
diabetes and other medical conditions.
Other--During the three months ended March 31, 2000, other income consisted
primarily of interest income generated from our cash, cash equivalents, and
short-term investment balances. For the three months ended March 30, 2001, in
addition to interest income, other income includes a $4.9 million gain on the
sale of our investment in Trimeris, Inc., a drug-development company. We
recognized a gain of $11.0 million on the sale of Trimeris shares during 2000
and no longer hold an investment position in Trimeris. Our effective tax rate
during the three months ended March 30, 2001 and March 31, 2000 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 $15,071,000 during the three months
ended March 30, 2001 and $9,383,000 during the three months ended March 31,
2000. Cash flow from operations improved during the first quarter of 2001
compared to the first quarter of 2000 primarily due to increased overall
profitability combined with a reduction in accounts receivable that resulted
from improved cash collections during the 2001 first quarter. We also
experienced a reduction in our income tax receivable that resulted from the
collection of several income tax refunds and an increase in our other accrued
expenses related primarily to rent for our new corporate headquarters in
Northridge. These improvements in the 2001 first quarter cash flows were
partially offset by increased expenditures for inventories to increase safety
stock levels in anticipation of new product launches planned for the second half
of 2001 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 30, 2001 as we
paid out all of 2000 accrued bonuses and sales commissions during the first
quarter of 2001.
Capital expenditures in the first quarter of 2001 decreased to $5,831,000
compared to $10,148,000 spent during the comparable period in 2000. The 2001
first quarter capital expenditures related primarily to furniture and equipment
for our new facility, continued investment in equipment related to our new
product lines, information technology spending to support our growing business
activity and tooling, molds and software necessary for our future product
releases. The 2000 first quarter capital expenditures related primarily to
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 increase in support of our new
product activities and to build the infrastructure to accommodate continuing
growth. Other investing activities during the 2001 first quarter included our
acquisition of Magnolia Medical, LLC for $3,726,000 in cash and an investment
that is convertible into equity in Diabetes Manager.com for $3,000,000 in cash.
During the first quarter of 2001, we completed the first phase of
construction of our corporate headquarters, research and development and
manufacturing facilities on the campus of California State University,
Northridge. The construction of these facilities was financed through an $80.0
million synthetic lease transaction and, in a related transaction with the
lessors, we obtained a revolving line of credit to borrow up to $15.0 million
that has never been drawn. Under the terms of the arrangement, a special purpose
trust subleases the land to us and leases the improvements to us. In connection
with these 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, incurrence of additional debt, capital expenditures,
investments, and other operating considerations. 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. Additionally, we have the option
of purchasing the leasehold and improvements during this period. If we do not
exercise this option, we will be forced to abandon the premises. We anticipate
exercising this option prior to its expiration, which will require additional
resources. The underlying ground lease
16
17
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 that are indexed
to market interest rates and currently range from $5.5 million to $6.2 million,
which commenced on April 1, 2001. 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. 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 September 2000, we entered into an agreement to lease certain computer
software and hardware in conjunction with our implementation of a new enterprise
resource planning system, which we call ERP. The lessors have agreed to fund up
to $16.0 million under this operating lease. Upon full funding of this lease, we
will be committed to annual payments not to exceed $4.0 million, depending upon
the amounts drawn under this operating lease. Full funding of this lease is not
expected until late 2001. We made payments under this lease of $748,000 during
the first quarter of 2001.
As stated previously, we restructured our agreements with MRG in February,
2001 and exercised our option to purchase the exclusive worldwide marketing
rights to MRG's long-term glucose sensor for $30.0 million. The restructured
agreements with MRG included our acquisition of a $31.8 million equity
investment in MRG, which was completed in March, 2001. Our ownership position in
MRG is approximately 8.0%. Additionally, we are required to make mandatory
minimum purchases of implantable pump units from MRG over the next four years in
the following amounts as of March 30, 2001:
Through December 28, 2001.......................... $ 1,692,000
2002............................................... 3,240,000
2003............................................... 4,860,000
2004............................................... 7,020,000
-----------
Total................................ $16,812,000
===========
We have accrued $3,085,000 as of March 30, 2001 related to implantable pump
purchase commitments in excess of expected usage during the four-year period. We
are required to pay additional fees of up to $12 million in periods subsequent
to 2002 related to the implantable pump product line. These amounts may be
reduced to the extent we purchase implantable pumps in excess of the minimum
purchase requirements. In addition to these amounts and the mandatory purchase
commitments, we are required to pay additional license fees of $12.5 million to
MRG related to achievement of development milestones on future products for the
treatment of diabetes which are in the early stages of development. In the event
that we fail to satisfy the minimum purchase commitments in 2003 or 2004 or fail
to render the license fee payments as required, MRG has the right to repurchase
all of the distribution rights for $60.0 million or purchase distribution rights
to MRG's next generation implantable pump for $7.5 million. MRG has agreed to
supplement our funding of the development of the special insulin used in the
implantable system and to fund a greater portion of the clinical trials of the
long-term glucose sensor.
In 1998, we signed a research and development contract with American
Medical Instruments, Inc. which we call AMI, a member of The Marmon Group of
Companies. Under the agreement we performed research and development services
on certain technical developments for our future products, and received $6.0
million in funding in each of 1998 and 1999, upon the achievement of specified
milestones. Subject to the payment of royalties to AMI, we may sell products
utilizing the technologies developed pursuant to the agreement on a worldwide
basis, with the exception of Japan. We also have the right to purchase the
technologies at escalating prices, and currently expect to purchase such
technologies during the second quarter of 2001 for a payment of approximately
$16.5 million.
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:
o the level of capital expenditures, especially related to the
completion of our manufacturing operations for the continuous glucose
monitoring system, the disposable pump operations and our various
insulin projects;
o research and development activities and results;
o competitive and technological developments;
o health care reimbursement trends; and
o the availability for our acquisition of complementary additional
distribution channels, products, and technologies.
17
18
During future periods, we may require significant amounts of cash to pursue
opportunities and promote continued growth and expansion.
18
19
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. To
date, we have not invested in derivative instruments or engaged in hedging
activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 9, 1999, we were 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, and which
we will refer to as IIS. IIS entered into an Educational Dealer Agreement with
us in July, 1997, relating to the distribution of some of our products by IIS.
The agreement expired and we declined to renew that agreement, pursuant to its
terms as of December 31, 1998. IIS is alleging that we 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. We removed the action to Federal Court, filed an answer denying the
material allegations, and filed a counterclaim seeking damages for unfair trade
practices. We have filed an amended counterclaim seeking damages based on IIS's
failure to pay amounts due and owing. We believe that we have meritorious
defenses to the claims asserted by IIS. Trial in the matter has been set for
September 2001. Discovery in this litigation is continuing.
We are not presently a party to any other pending legal proceedings which
we believe are material. From time to time we are subject to various legal
proceedings for product liability, employment and other general business related
claims. These claims arise out the ordinary course of our business. We do not
believe that any of these claims, individually or collectively, will have any
material adverse effect on our business or financial condition, results of
operations or cash flows.
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 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Alfred E. Mann.
10.2 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Terrance H. Gregg.
10.3 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Eric S. Kentor.
10.4 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and David Morely.
10.5 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Kevin R. Sayer.
(b) REPORTS ON FORM 8-K
None.
19
20
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 14, 2001 /s/ KEVIN R. SAYER
--------------------------------------
Kevin R. Sayer
Senior Vice President, Finance & Chief
Financial Officer
20
21
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
- ----------- -------
10.1 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Alfred E. Mann.
10.2 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Terrance H. Gregg.
10.3 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Eric S. Kentor.
10.4 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and David Morely.
10.5 First Amendment To Change Of Control Agreement by and between
MiniMed Inc. and Kevin R. Sayer.
21