<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to______
Commission file number 0-26268
MINIMED INC.
(Exact Name of Registrant as Specified in its Charter)
---------------
Delaware 95-4408171
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
12744 SAN FERNANDO ROAD, SYLMAR,
CA 91342 (Address of Principal
Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (818) 362-5958
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT AUGUST 13, 1998
--------------------------------- ------------------------------
Common Stock, $.01 par value 13,366,886
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<PAGE> 2
INDEX
MINIMED INC.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Consolidated Balance Sheets (Unaudited) - January 2, 1998 and July 3, 1998 3
Consolidated Statements of Income (Unaudited) -- Three months and six months ended
June 27, 1997 and July 3, 1998 4
Consolidated Statements of Cash Flows (Unaudited) -- Six months ended June 27, 1997
and July 3, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
INDEX TO EXHIBIT 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
MINIMED INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JULY 3, 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 22,282,000 $ 13,344,000
Short-term investments ...................................................... 18,713,000 9,468,000
Accounts receivable, net of allowance for doubtful accounts of $6,250,000 and
$5,451,000 at January 2, 1998 and July 3, 1998, respectively .............. 24,661,000 25,668,000
Inventories ................................................................. 10,672,000 13,424,000
Amounts due on research and development contract ............................ -- 1,500,000
Deferred income taxes ....................................................... 5,803,000 6,798,000
Prepaid expenses and other current assets ................................... 1,279,000 2,093,000
------------- -------------
Total current assets ............................................ 83,410,000 72,295,000
LONG-TERM INVESTMENTS ......................................................... 4,118,000 2,245,000
OTHER ASSETS .................................................................. 1,348,000 5,124,000
LAND, BUILDINGS, PROPERTY AND EQUIPMENT - Net ................................. 16,943,000 23,863,000
------------- -------------
TOTAL ......................................................................... $ 105,819,000 $ 103,527,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable ............................................ $ 2,453,000 $ 275,000
Accounts payable ............................................................ 4,371,000 1,861,000
Accrued salaries and related benefits ....................................... 3,719,000 3,518,000
Accrued sales commissions ................................................... 1,943,000 966,000
Accrued warranties .......................................................... 3,498,000 3,626,000
Income taxes payable ........................................................ 276,000 1,441,000
Other accrued expenses ...................................................... 3,741,000 1,174,000
------------- -------------
Total current liabilities ........................................ 20,001,000 12,861,000
------------- -------------
Deferred Tax Liabilities .................................................... 2,007,000 1,665,000
Notes payable ............................................................... 728,000 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 40,000,000 shares authorized; 13,260,240
and 13,354,966 shares issued and outstanding as of January 2, 1998
and July 3, 1998, respectively ........................................... 135,000 136,000
Additional capital ......................................................... 73,806,000 75,830,000
Cumulative foreign currency translation .................................... (312,000) (310,000)
Unrealized gain on marketable securities ................................... 1,371,000 209,000
Retained earnings .......................................................... 8,083,000 13,136,000
------------- -------------
Total stockholders' equity ...................................... 83,083,000 89,001,000
------------- -------------
TOTAL ......................................................................... $ 105,819,000 $ 103,527,000
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
MINIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ----------------------------------
JUNE 27, JULY 3, JUNE 27, JULY 3,
1997 1998 1997 1998
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES ................................... $ 22,921,000 $ 31,715,000 $ 42,082,000 $ 58,081,000
COST OF SALES ............................... 9,425,000 13,656,000 17,081,000 23,440,000
------------ ------------ ------------ ------------
GROSS PROFIT ................................ 13,496,000 18,059,000 25,001,000 34,641,000
OPERATING EXPENSES:
Selling, general and administrative ....... 9,655,000 11,930,000 17,664,000 23,320,000
Research and development .................. 1,928,000 3,737,000 3,932,000 7,054,000
Research and development contract income... -- (1,500,000) -- (3,000,000)
------------ ------------ ------------ ------------
Total operating expenses ........ 11,583,000 14,167,000 21,596,000 27,374,000
------------ ------------ ------------ ------------
OPERATING INCOME ............................ 1,913,000 3,892,000 3,405,000 7,267,000
OTHER INCOME, Including interest income ..... 406,000 436,000 515,000 727,000
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................. 2,319,000 4,328,000 3,920,000 7,994,000
PROVISION FOR INCOME TAXES .................. 792,000 1,581,000 1,362,000 2,941,000
------------ ------------ ------------ ------------
NET INCOME .................................. $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000
============ ============ ============ ============
BASIC EARNINGS PER SHARE .................... $ 0.12 $ 0.21 $ 0.20 $ 0.38
============ ============ ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING ... 13,154,000 13,313,000 12,584,000 13,297,000
============ ============ ============ ============
DILUTED EARNINGS PER SHARE .................. $ 0.11 $ 0.20 $ 0.19 $ 0.36
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.. 13,723,000 14,053,000 13,243,000 13,990,000
============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MINIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 2,558,000 $ 5,053,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation .................................................... 1,326,000 1,604,000
Deferred income taxes ........................................... (655,000) (625,000)
Changes in operating assets and liabilities:
Accounts receivable, net ...................................... 679,000 (1,007,000)
Inventories ................................................... (2,014,000) (2,752,000)
Amounts due under research and development contract ........... -- (1,500,000)
Prepaid expenses and other current assets ..................... 205,000 (814,000)
Other assets .................................................. (246,000) (56,000)
Accounts payable .............................................. (51,000) (2,510,000)
Income taxes payable .......................................... (198,000) 2,315,000
Accrued expenses .............................................. (1,281,000) (3,617,000)
------------ ------------
Net cash provided by (used in) operating activities ........... $ 323,000 (3,909,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Short-term investments ........................................ (5,674,000) 9,245,000
Long-term investments ......................................... (2,000,000) --
Acquisition of Dartec A.B ..................................... -- (2,580,000)
Issuance of notes receivable .................................. -- (1,140,000)
Purchase of land, buildings, property and equipment ........... (2,243,000) (8,530,000)
------------ ------------
Net cash used in investing activities ......................... $ (9,917,000) $ (3,005,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Repayment of notes payable .................................... (155,000) (2,905,000)
Proceeds from public offering, net of expenses ................ 22,169,000 --
Proceeds from exercises of warrants ........................... 2,600,000 --
Proceeds from stock option exercises .......................... 25,000 412,000
Proceeds from issuance of common stock under employee
stock plan ................................................. 280,000 467,000
------------ ------------
Net cash provided by (used in) financing activities ......... $ 24,919,000 $ (2,026,000)
------------ ------------
Effect of cumulative foreign currency translation
adjustment on cash and equivalents .......................... (278,000) 2,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..............
15,047,000 (8,938,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................
10,405,000 22,282,000
============ ============
CASH AND CASH EQUIVALENTS, END OF PERIOD ..........................
$ 25,452,000 $ 13,344,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest ........................................................ $ 100,000 $ 38,000
Income taxes .................................................... $ 1,995,000 $ 3,159,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - During the six months
ended July 3, 1998, the Company recorded an unrealized holding loss of
$1,161,000, net of estimated taxes, on marketable securities classified as
long-term investments available for sale. The Company has recognized a reduction
in income taxes payable of $74,000 and $1,150,000 during the six months ended
June 27, 1997 and July 3, 1998, respectively, related to the exercise of
nonqualified stock options.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of MiniMed Inc.
("MiniMed" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
audited financial statements included in the Annual Report of MiniMed Inc. filed
on Form 10-K with the Securities and Exchange Commission for the year ended
January 2, 1998. The results of operations for the six months ended July 3, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending January 1, 1999.
NOTE 2. INCOME TAXES
Net income and earnings per share reflect income taxes which have
been recorded at the Company's estimated effective tax rate for the year. This
estimated income tax rate has been determined by giving consideration to the
pretax earnings and losses applicable to foreign and domestic tax jurisdictions.
NOTE 3. WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
In accordance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128), basic earnings per share for the three and
six months ended June 27, 1997 and July 3, 1998, were computed by dividing net
income by weighted average common shares outstanding during the periods
presented. Diluted earnings per share for the periods presented were computed by
dividing net income by weighted average common and common equivalent shares
outstanding, computed in accordance with the treasury stock method. The
computation of basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 27, JULY 3, JUNE 27, JULY 3,
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net income applicable to common stock $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000
----------- ----------- ----------- -----------
Denominator:
Weighted average common shares outstanding 13,154,000 13,313,000 12,584,000 13,297,000
----------- ----------- ----------- -----------
Basic earnings per share $ 0.12 $ 0.21 $ 0.20 $ 0.38
=========== =========== =========== ===========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to common stock $ 1,527,000 $ 2,747,000 $ 2,558,000 $ 5,053,000
----------- ----------- ----------- -----------
Denominator:
Weighted average common shares outstanding 13,154,000 13,313,000 12,584,000 13,297,000
Effect of dilutive securities
Stock options 569,000 740,000 659,000 693,000
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding 13,723,000 14,053,000 13,243,000 13,990,000
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.11 $ 0.20 $ 0.19 $ 0.36
=========== =========== =========== ===========
</TABLE>
6
<PAGE> 7
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998
NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
JANUARY 2, JULY 3,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Inventories:
Raw materials ................. $ 5,152,000 $ 4,781,000
Work-in-progress .............. 1,819,000 3,086,000
Finished goods ................ 3,701,000 5,557,000
------------ ------------
Total ......................... $ 10,672,000 $ 13,424,000
============ ============
Property, plant and equipment:
Land, buildings and
improvements ................ $ 10,625,000 $ 11,553,000
Machinery and equipment ....... 8,533,000 13,199,000
Tooling and molds ............. 2,493,000 2,069,000
Furniture and fixtures ........ 1,948,000 4,438,000
------------ ------------
23,599,000 31,259,000
Less accumulated depreciation.. (6,656,000) (7,396,000)
------------ ------------
Total ......................... $ 16,943,000 $ 23,863,000
============ ============
Other assets:
Technology license ............ $ 197,000 $ 171,000
Inventory components, non
current .................... 999,000 999,000
Dartec A.B. goodwill .......... -- 2,580,000
Note receivable ............... -- 1,140,000
Other ......................... 152,000 234,000
------------ ------------
Total ......................... $ 1,348,000 $ 5,124,000
============ ============
</TABLE>
NOTE 5. CONTINGENCIES
On September 11, 1996, the Company filed an action against Fimed,
Inc. ("Fimed") seeking rescission of a product distribution contract. Subsequent
to the filing of this action, Fimed filed a counterclaim seeking compensatory
damages of approximately $400 million, plus punitive damages. The Company
believes that it has meritorious defenses to the counterclaim asserted by Fimed.
Fact discovery on the litigation has been largely completed, and trial has been
set to commence March 1999. The Company has been pursuing its claims and
defending Fimed's claims vigorously.
During the normal course of business, the Company may be subject to
litigation involving various business matters. Management believes that an
adverse outcome of any such known matters would not have a material adverse
impact to the Company.
7
<PAGE> 8
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 27, 1997 AND SIX MONTHS ENDED JULY 3, 1998
NOTE 6. SUBSEQUENT EVENT
On July 31, 1998, the Company entered into an agreement with Medical
Research Group, LLC ("MRG"), an entity originally founded by Alfred E. Mann, the
Company's Chairman and Chief Executive Officer, who continues to own a
substantial equity interest in MRG. Under the terms of the agreement, the
Company will sell the operating assets of its implantable pump business to MRG,
and will be granted an option to acquire distribution rights to a long-term
implantable glucose sensor under development by MRG. MRG will pay the Company
approximately $3.6 million pursuant to a promissory note for the inventory and
equipment relating to the implantable pump business, and will license certain
underlying technology to MRG. The promissory note will bear interest at 7%, be
due and payable on December 31, 2003, and payment will be secured by the
underlying assets and guaranteed by Mr. Mann.
Pursuant to the agreement, the Company will act as MRG's distributor
of implantable pumps for insulin and other compounds to treat diabetes, HIV/AIDS
and for various other applications. Subject to certain conditions and purchase
volume requirements, the Company will retain exclusive distribution rights for
such applications. MRG has been developing an implantable long term glucose
sensor for use with an implantable insulin pump, and will grant to MiniMed an
option to acquire, for a $30 million fee, the exclusive marketing rights to the
sensor, which may be exercised by MiniMed if MRG successfully completes a human
implant utilizing the technology. Pursuant to the agreement, MRG is also to
develop certain technology to enhance the operation of the implantable pump,
including technology necessary to allow the interface between the implantable
pump and MRG's implantable glucose sensor.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of MiniMed should be read in conjunction with the consolidated
financial statements and the related notes thereto incorporated by reference
herein. Any statements released by the Company that are forward looking,
including statements relating to future operating results, product development
and research activities, pharmaceutical product sales, pharmacy restructuring,
regulatory approvals, implantable pump margins, research and development
expenditures, the filing of documentation with the FDA, adequacy of working
capital and cash requirements, capital expenditures and requirements,
manufacturing trends, product and service offerings and the financing of new
facilities are made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may affect the
Company's business and prospects, including changes in economic and market
conditions, healthcare legislation, the ability to obtain licensing and
regulatory approvals, progress in MiniMed's alliances with pharmaceutical
companies, the development of competing drug delivery systems, management of
growth, the effective integration of HMS into the Company, and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
GENERAL
Product development has focused upon four product lines: external
insulin pumps and related disposables, implantable insulin pumps, continuous
glucose monitoring systems, and therapy delivery systems for other chronic
medical conditions. Sales and profits to date have been generated primarily
through the sale of external pumps and disposable products used to deliver
insulin for the intensive management of diabetes. With its acquisition of Home
Medical Supply, Inc. and several affiliated entities (collectively, "HMS")
effective January 2, 1998, the Company's consolidated operating results also
include sales related to the distribution of other diabetes supplies and
pharmaceutical products.
RESULTS OF OPERATIONS
The following table sets forth, for the three and six month periods ended
July 3, 1998 and June 27, 1997, the percentage relationship to net sales of
certain items in the Company's consolidated statements of income and the
percentage change in the dollar amount of such items on a comparative basis.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- ------------------------------------
JULY 3, JUNE 27, % INCREASE JULY 3, JUNE 27, % INCREASE
1998 1997 (DECREASE) 1998 1997 (DECREASE)
----- -------- ---------- ------- ------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 38.4% 100.0% 100.0% 38.0%
Cost of sales 43.1 41.1 44.9 40.4 40.6 37.2
----- ----- ----- ----- ----- -----
Gross profit 56.9 58.9 33.8 59.6 59.4 38.6
Operating expenses:
Selling, general and administrative 37.6 42.1 23.6 40.2 42.0 32.0
Research and development 11.8 8.4 93.8 12.1 9.3 79.4
Research and development contract (4.7) 0.0 n/a (5.2) 0.0 n/a
----- ----- ----- ----- ----- -----
Total operating expenses 44.7 50.5 22.3 47.1 51.3 26.8
----- ----- ----- ----- ----- -----
Operating income 12.2% 8.4% 103.5% 12.5% 8.1% 113.4%
===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth domestic and international net sales and
gross profits related to the Company's primary product lines for the three and
six month periods ended June 27, 1997 and July 3, 1998.
9
<PAGE> 10
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS % OF NET SALES
-------------------- --------------
THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------- --------------------- -------------------
JULY 3, JUNE 27, JULY 3, JUNE 27, JULY 3, JUNE 27, JULY 3, JUNE 27,
1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- ----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC AND
INTERNATIONAL NET SALES
External pumps and
related disposables
Domestic $ 24,991 $ 16,047 $ 44,327 $ 29,848 78.8% 70.0% 76.3% 70.9%
International 2,200 1,525 4,956 3,081 6.9 6.7 8.5 7.4
-------- -------- -------- -------- ----- ----- ----- -----
Subtotal 27,191 17,572 49,283 32,929 85.7 76.7 84.8 78.3
Other diabetes supplies 1,951 1,946 2,970 3,246 6.2 8.5 5.1 7.7
Pharmaceutical products 2,456 3,221 5,489 5,521 7.7 14.1 9.5 13.1
Implantable Pumps 117 182 339 386 0.4 0.7 0.6 0.9
-------- -------- -------- -------- ----- ----- ----- -----
Net Sales $ 31,715 $ 22,921 $ 58,081 $ 42,082 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ===== ===== ===== =====
GROSS PROFITS
External pumps and
related disposables $ 18,001 $ 12,712 $ 33,967 $ 23,512 56.7% 55.5% 58.5% 55.8%
Other diabetes supplies 682 721 1,174 1,438 2.1 3.1 2.0 3.4
Pharmaceutical products 142 483 863 829 0.5 2.1 1.4 2.0
Implantable pumps (766) (420) (1,363) (778) (2.4) (1.8) (2.3) (1.8)
-------- -------- -------- -------- ----- ----- ----- -----
Total $ 18,059 $ 13,496 $ 34,641 $ 25,001 56.9% 58.9% 59.6% 59.4%
======== ======== ======== ======== ===== ===== ===== =====
</TABLE>
NET SALES
Net sales increased 38.4% during the three months ended July 3, 1998
over the three months ended June 27, 1997 to approximately $31,715,000 from
approximately $22,921,000, and 38.0% to approximately $58,081,000 from
approximately $42,082,000 from the first half of 1997 to the first half of 1998.
This sales growth is principally the result of an increase of 54.7%, or
approximately $9,619,000, in the sales volume of external pumps and related
disposables for the second quarter of 1998 over the second quarter of 1997, with
sales of these products increasing approximately $16,354,000 or 49.7% for the
first half of 1998 over the corresponding period of 1997. Domestic sales of
these products grew 55.7% or approximately $8,944,000 in the second quarter of
1998 compared to the second quarter of 1997, while international sales increased
44.3% or approximately $675,000 during the same period. For the first half of
1998, domestic and foreign sales of external pumps and related disposable
products increased by 48.5% and 60.9%, respectively, over the comparable period
of 1997. Domestic net sales growth resulted primarily from increased volume of
external pumps and related disposables, with some of the domestic sales increase
attributable to an increase in the average sales price of external pumps. The
price increase is generally the result of a continued shift of external pump
sales from independent dealers to internal sales, thus eliminating the discount
given to such independent dealers. International sales of external pumps and
related disposable products grew primarily due to greater sales volumes of
external pumps. The Company has realized a slight decrease in the average sales
price realized on international pump sales, as some independent dealers are
being utilized to seed specific international markets. Domestic and
international pricing for disposable products did not change materially from the
first half of 1997 to the first half of 1998.
Pharmaceutical product sales decreased 23.8% or approximately
$765,000 to approximately $2,456,000 in the second quarter of 1998 compared to
approximately $3,221,000 in the second quarter of 1997 and were relatively flat
for the first half of 1998 compared to the first half of 1997. The Company
anticipates that pharmaceutical product sales will decrease slightly or remain
flat for the remainder of 1998 compared to 1997, as the pharmacy operations are
being restructured to better serve MiniMed's diabetes business. Such
restructuring includes the discontinuation of certain product lines previously
offered by the pharmacy. Sales of other diabetes supplies were flat for the
second quarter of 1998 compared to the 1997 second quarter and have decreased by
8.5% or approximately $276,000 to approximately $2,970,000 during the first six
months of 1998 compared to approximately $3,246,000 in the comparable period of
1997. While sales volumes of other diabetes supplies have increased, the Company
has experienced pricing pressures in this competitive market.
Sales of implantable pumps decreased from the second quarter of 1997
to the second quarter of 1998 and have decreased for the first half of 1998
compared to the first half of 1997. Regulatory approval for the implantable pump
and special insulin utilized in the implantable system is still pending.
Although
10
<PAGE> 11
the Company received certification under the applicable directives issued by the
European Union (the "EU") and received the CE Mark in March 1995 for the
implantable pump (permitting commercial sale throughout the EU), separate
approval from the EU is required for commercial sale of the insulin and this
approval is not expected until late 1998, at the earliest. The implantable pump
and the special insulin remain subject to regulatory review and approval in the
United States. No assurance can be given that such approvals will be received in
1998, if at all.
OPERATING RESULTS
Cost of Sales and Gross Profits--Cost of sales increased 44.9% during
the three months ended July 3, 1998 as compared to the three months ended June
27, 1997 to approximately $13,656,000 from approximately $9,425,000, and
increased 37.2% to approximately $23,440,000 from approximately $17,081,000 for
the six months ended July 3, 1998 as compared to the six months ended June 27,
1997. As a percentage of net sales, cost of sales in the 1998 second quarter
increased to 43.1% from 41.1% in the comparable period of 1997, with cost of
sales as a percentage of net sales consistent for the first half of 1998
compared to the first half of 1997. Gross margins on external pumps and
disposables decreased to 66.2% of such sales during the 1998 second quarter,
compared to 72.3% for this product line during the 1997 second quarter.
Quarterly gross margins on these products were affected by several factors. The
Company has added a disposable product line which is not manufactured in-house,
therefore resulting in lower margins. The Company intends to continue to
purchase and sell various disposable products manufactured by third party
manufacturers and will achieve better margins on these products when certain
purchase volumes have been met. In an effort to seed international growth, the
Company has realized a reduction in average pump selling prices outside of the
United States. Gross margins in 1998 have also decreased for the pharmaceutical
products and other diabetes supplies product lines for the second quarter of
1998 and on a year-to-date basis as compared to the second quarter and first six
months of 1997. The reduction in pharmaceutical products gross margins is the
result of the restructuring of the pharmacy operations and discontinuation of
certain pharmaceutical product lines. Other diabetes supplies gross margins have
decreased due to the lower average selling prices described above.
The Company's gross profits have been adversely impacted by the
implantable pump product line during the six months ended July 3, 1998 due to
continued limited sales prior to such product's full commercial release. Such
limited sales have inhibited the Company's ability to realize manufacturing
efficiencies on this product line and have caused unfavorable manufacturing
variances. On July 31, 1998, the Company entered into an agreement with Medical
Research Group, LLC ("MRG"), an entity originally founded by Alfred E. Mann, the
Company's Chairman and Chief Executive Officer, who continues to own a
substantial equity interest in MRG. Under the terms of the agreement, the
Company will sell the operating assets of its implantable pump business to MRG,
and will be granted an option to acquire distribution rights to a long-term
implantable glucose sensor under development by MRG. MRG will pay the Company
approximately $3.6 million pursuant to a promissory note for the inventory and
equipment relating to the implantable pump business, and will license certain
underlying technology to MRG. Pursuant to agreement,the Company will act as
MRG's distributor of implantable pumps for insulin and other compounds to treat
diabetes, HIV/AIDS and for various other applications. Subject to certain
conditions and purchase volume requirements, the Company will retain exclusive
distribution rights for such applications. The Company believes that gross
margins on this product line will improve as a result of the transfer of such
business activity to MRG. The Company's research and development expenses
related to the implantable product line should also decrease in future periods
as a result of this agreement. (See -- "Notes to Consolidated Financial
Statements -- Subsequent Event.")
Operating Expenses--Selling, general and administrative expenses
increased 23.6% during the three months ended July 3, 1998 as compared to the
three months ended June 27, 1997 to approximately $11,930,000 from approximately
$9,655,000. For the six months ended July 3, 1998, selling, general and
administrative expenses grew 32.0% to approximately $23,320,000 from
approximately $17,664,000 for the six months ended June 27, 1997. As a
percentage of net sales, these expenses decreased to 37.6% and 40.2% during the
three and six month periods ended July 3, 1998 compared to 42.1% and 42.0% for
the comparable three and six month periods ended June 27, 1997. These expenses
have decreased as a percentage of sales due to the Company's increased sales
volumes. The overall increase in spending is also related primarily to the
increase in sales activities during such periods.
Research and development expenses grew 93.8% during the three months
ended July 3, 1998 over the three months ended June 27, 1997 to approximately
$3,737,000 from approximately $1,928,000, with research and development expenses
increasing 79.4% to approximately $7,054,000 for the first half
11
<PAGE> 12
of 1998 compared to approximately $3,932,000 for the first half of 1997. As a
percentage of sales, research and development expenses increased to 11.8% during
the three months ended July 3, 1998 from 8.4% during the comparable period in
1997, and increased to 12.1% from 9.3% of net sales during the first half of
1998 as compared to the first half of 1997. The 1998 increase in research and
development costs resulted from greater resources directed to the development of
continuous glucose monitoring systems, start-up manufacturing operations of the
continuous glucose monitoring systems, future generation external insulin pumps
and disposable products, data communication capabilities for external pumps and
continuous glucose monitoring systems and the Company's joint development
project with Roche Diagnostics/Boehringer Mannheim Corporation. The Company
filed an application with the Food and Drug Administration ("FDA") for 510(k)
clearance for the first continuous glucose monitoring system for ambulatory use
during the fourth quarter of 1997. As a result of discussions between the
Company and the FDA, this application has been converted to an application for
premarket approval which will require additional documentation to be submitted
by the Company to the FDA prior to approval of the first generation of
continuous glucose monitoring systems. This additional documentation is near
completion. The FDA has granted the Company expedited review status on this
product. Future research and development costs on the continuous glucose
monitoring systems relate to continued refinement of the products prior to
regulatory approval, establishment of a continuous glucose monitoring systems
manufacturing operation and development of the next generation of continuous
glucose monitoring systems products. The Company anticipates that research and
development expenditures for future periods are expected to increase as more of
its new technological innovations approach commercialization. The Company
achieved the necessary milestone on its research and development contract with
American Medical Instruments, Inc., a member of The Marmon Group of Companies,
("AMI"), and appropriately recognized $1.5 million in research and development
contract revenues as a reduction of operating expenses.
Other--Other income during the three and six months ended July 3,
1998 and during the three and six months ended June 27, 1997 consists primarily
of interest income generated from the Company's cash, cash equivalents, and
short-term investment balances. Other income will fluctuate in future periods
based upon the funds available to the Company for investment.
The Company's effective tax rate during the first half of 1998 and
1997 has been computed giving consideration to the pretax earnings and losses
applicable to the Company's foreign and domestic tax jurisdictions. Inflation
has not significantly impacted the Company's results of operations for the past
two years.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 3, 1998, the Company used cash in
operations of approximately $3,909,000 compared to approximately $323,000
provided by operations in the comparable period in 1997. Cash used in operations
increased primarily due to increased receivables related to sales growth,
increased inventory levels required to support planned sales growth, product
introductions and payment of several current liabilities, including the payment
of all fiscal 1997 bonuses and the retirement of trade debt owed to several
significant vendors associated with HMS operations. The Company also used
approximately $2.6 million of cash to complete its acquisition of Dartec A.B., a
Scandinavian distributor. The increase in capital expenditures to approximately
$8,530,000 compared to approximately $2,243,000 spent during the comparable
period in 1997, resulted primarily from building continuous glucose monitoring
systems manufacturing capacity, as well as other building improvements, to
support growth, manufacturing expansion, research and development engineering
equipment and information systems requirements. The Company anticipates that
future capital expenditures will continue to increase to support the Company's
new product activities and to build the infrastructure necessary to accommodate
the Company's anticipated growth. The Company also used cash of approximately
$2.9 million to retire some existing debt related to the HMS operations, with
approximately $275,000 of debt remaining outstanding as of July 3, 1998.
There were no significant equity transactions during the first six
months of 1998. The Company maintains an unsecured line of credit which
enables the Company to borrow up to $10.0 million through January 31, 1999. The
Company has not drawn any funds under such line of credit. The line of
12
<PAGE> 13
credit, if used, bears interest at an adjustable rate equal to the 30-day
commercial paper rate plus 2.15% (7.67% as of August 7, 1998). The Company is
also required to maintain certain cash, net worth and debt covenants under the
provisions of this line of credit. The Company is currently in compliance with
all of these covenants. In the process of integrating certain HMS operations,
the Company discovered certain business practices implemented by prior
ownership that may potentially result in liability. The Company has corrected
such practices and, while the amount of such liability, if any, is unclear, the
Company believes that any liability related to such practices will not have a
material adverse effect on the results of operations or financial condition of
the Company. The Company also is involved in certain litigation, the
financial impact of which is uncertain. See -- "Notes to Consolidated Financial
Statements."
Management expects that the Company's current level of cash and cash
equivalents will be sufficient to meet its needs for working capital and capital
expenditures for at least one year. However, the requirements for additional
capital and working capital are subject to change and will depend upon numerous
factors, including the level of capital expenditures, research and development
activities and results, competitive and technological developments, health care
reimbursement trends, and the availability for acquisition by the Company of
complementary additional distribution channels, products, and technologies.
During future periods, the Company may require significant amounts of
cash to exploit opportunities and promote continued growth and expansion. Under
terms of its research and development contract with AMI the Company
received $1.5 million during the first six months of 1998 and had recorded a
receivable for an additional $1.5 million as of July 3, 1998. The Company also
has the right to purchase the technologies developed at prices ranging from an
aggregate of $13.5 million to $19.0 million during certain periods through July
30, 2002. The Company may elect to pay royalties on sales of these products in
lieu of purchasing the technologies. The Company has entered into an agreement
by which, among other transactions, the Company expects to acquire an option to
purchase the exclusive world-wide marketing rights to a long-term glucose sensor
developed by MRG for $30.0 million. (See -- "Notes to Consolidated Financial
Statements -- Subsequent Event.") The Company does not anticipate exercising
this option prior to 2000. In the event that the Company pursues either of these
opportunities, additional capital resources will be required.
The Company plans to develop a new corporate headquarters in Southern
California, not far from the current Sylmar location. Substantial capital
resources will be required to construct and equip this facility. The Company
anticipates that the construction of the initial phases of this facility will be
financed under a synthetic lease, with a separate operating lease on the land
for 40 years plus renewal opportunities.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 21, 1998, The Company held its 1998 Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting, stockholders of the
Company voted on proposals to (1) elect seven directors for a term of one year
and until their respective successors are elected and qualified ("Proposal
One"); and, (2) ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending January 1, 1999 ("Proposal
Two").
(b)-(c) In total, 13,286,582 shares of Common Stock were eligible to vote at
the Annual Meeting, and holders of 10,403,362 shares of Common Stock were
represented in person or by proxy at the Annual Meeting, constituting 78.3% of
the eligible shares. Following is voting information for both matters voted upon
at the Annual Meeting:
Proposal One - The following individuals, all being directors of the
Company prior to such election, were reelected as directors of the Company at
the Annual Meeting: Alfred E. Mann; David Chernof, M.D.; Carolyne Kahle Davis;
William R. Grant; David H. MacCallum; Thomas R. Testman; and John C. Villforth.
Each such director, except for Mr. Mann and Dr. Chernof received 10,397,747
votes (representing 99.95% of the votes cast) in favor of their election with
5,615 votes (.05%) withheld. Mr. Mann received 10,397,732 votes (99.95%) in
favor of his election with 5,630 votes (.05%) withheld. Dr. Chernof received
10,367,747 votes (99.66%) in favor of his election with 35,615 votes (.34%)
withheld. None of the Company's directors received any votes against their
reelection nor were any broker non-votes received.
Proposal Two - At the Annual Meeting, Deloitte & Touche LLP was
ratified as the Company's independent auditor for the fiscal year ending January
1 1999 Deloitte and Touche LLP received 10,367,227 votes (99.65%) for such
ratification with 2,855 votes (.03%) received against and 33,280 votes (.32%)
withheld. No broker non-votes were received.
ITEM 5. OTHER INFORMATION
Not applicable.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------------- --------------------------------------------------
<S> <C>
27.1 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MiniMed Inc.
Date: August 17, 1998 /s/ KEVIN R. SAYER
-------------------------------------------
Kevin R. Sayer
Senior Vice President, Finance &
Chief Financial Officer
16
<PAGE> 17
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial data schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-1-1999
<PERIOD-START> JAN-3-1998
<PERIOD-END> JUL-3-1998
<CASH> 13,344
<SECURITIES> 9,468
<RECEIVABLES> 31,119
<ALLOWANCES> 5,451
<INVENTORY> 13,424
<CURRENT-ASSETS> 72,295
<PP&E> 31,259
<DEPRECIATION> 7,396
<TOTAL-ASSETS> 103,527
<CURRENT-LIABILITIES> 12,861
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 88,865
<TOTAL-LIABILITY-AND-EQUITY> 103,527
<SALES> 58,081
<TOTAL-REVENUES> 58,808
<CGS> 23,440
<TOTAL-COSTS> 50,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (799)
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 7,994
<INCOME-TAX> 2,941
<INCOME-CONTINUING> 5,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,053
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.36
</TABLE>
