<PAGE>
As filed with the Securities and Exchange Commission on October 11, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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THERASENSE, INC.
(Exact name of Registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
California 3841 94-3267373
(Prior to reincorporation) (I.R.S. Employer (Primary Standard Industrial
Delaware Identification Number) Classification Code Number)
(After reincorporation)
(State or other jurisdiction of
incorporation or organization)
</TABLE>
TheraSense, Inc.
1360 South Loop Road
Alameda, California 94502
(510) 749-5400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
W. Mark Lortz
President and Chief Executive Officer
TheraSense, Inc.
1360 South Loop Road
Alameda, California 94502
(510) 749-5400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
Karen A. Dempsey, Esq. Faye H. Russell, Esq.
George F. Parker, Esq. John A. de Groot, Esq.
Helen E. Quinn, Esq. Jeffrey C. Thacker, Esq.
Wilson Sonsini Goodrich & Rosati Brobeck, Phleger & Harrison LLP
Professional Corporation 12390 El Camino Real
One Market San Diego, California 92130
Spear Street Tower, Suite 3300 (858) 720-2500
San Francisco, California 94105
(415) 947-2000
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities to Aggregate Offering Amount of
be Registered Price(1) Registration Fee
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<S> <C> <C>
Common stock, $.001 par value....... $86,250,000 $22,770
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 11, 2000
PRELIMINARY PROSPECTUS
Shares
[Logo of Therasense]
Common Stock
------------
This is an initial public offering of shares of common stock of
TheraSense, Inc. We are selling all of the shares of common stock offered under
this prospectus.
We expect the public offering price for our common stock to be between $
and $ per share. There is currently no public market for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "THER."
See "Risk Factors" beginning on page 5 about the risks you should consider
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds to TheraSense, Inc. ....................................... $ $
</TABLE>
------------
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock from us at the initial public
offering price less the underwriting discounts and commissions.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York on , 2000.
------------
Bear, Stearns & Co. Inc.
Lehman Brothers
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
[GateFold Artwork]
People of all ages are experiencing just how painless testing can be with
FreeStyle.
[Picture depicting an extended hand with the index finger slightly bent
forward, emphasizing FreeStyle's alternative to painful fingersticks.]
[Picture depicting a sleeping child who, due to being tested with FreeStyle,
does not have to endure painful fingersticks in the middle of the night.]
[Picture depicting a pensive business woman who has her mind on matters other
than the residual pain generated by fingerstick testing.]
<PAGE>
[GateFold Artwork]
The reduction in pain is just one of the many reasons people like FreeStyle.
[A picture of a man on a fixed income in swimming attire, appreciative to hear
that there are fewer wasted test strips associated with the use of FreeStyle.]
[A picture of a young student doing schoolwork with no trouble since FreeStyle
allows him to test on his forearms.]
[A picture of two young individuals downloading test results from their
computer using the FreeStyle Connect data management system.]
[A picture of a mother with her child in her right arm as she comfortably
reads from FreeStyle's easy-to-read screen using her left hand.]
<PAGE>
[GateFold Artwork]
[Graphic depicting the important functions of FreeStyle.]
[Three-step graphic depicting FreeStyle's testing procedure. The first picture
depicts the hands of an individual inserting the FreeStyle test strip in the
FreeStyle meter. The second picture depicts a lanced forearm with FreeStyle
pressed on top. The third picture depicts a blood sample applied to the
FreeStyle test strip for testing.]
[Picture of a FreeStyle test strip with an arrow pointing to where blood is
"pulled" and easily fills the test strip.]
[Graphic depicting the sample sizes required by other meters along with the
sample size required by FreeStyle, which is shown to be significantly
smaller.]
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the financial statements and notes to those statements
appearing elsewhere in this prospectus, before deciding to invest in our common
stock.
Our Business
We develop and sell easy to use glucose self-monitoring systems that
dramatically reduce the pain of testing for people with diabetes. Our systems
utilize patented technologies that can accurately measure glucose
concentrations in very small volumes of blood or other body fluids. We believe
our proprietary technologies will enable us to both penetrate and expand the
glucose self-monitoring market by reducing pain--one of the most significant
barriers to testing for people with diabetes. Frequent testing is a critical
first step in managing glucose levels and thereby minimizing the enormous
physical, psychological and social costs of diabetes. The blood glucose self-
monitoring market is the largest self-test market for medical diagnostic
products in the world, with a size of approximately $1.9 billion in the United
States and $3.3 billion worldwide in 1999. The world market has grown rapidly
over the past 15 years and is expected to grow at an estimated rate of 12% per
year through 2004.
Diabetes is a chronic, life-threatening and currently incurable disease that
requires constant vigilance. The failure to frequently monitor and control
blood glucose levels, which can fluctuate dramatically in people with diabetes,
can lead to an array of serious medical complications, including higher rates
of heart disease, stroke, amputations, kidney failure, blindness and nerve
damage. According to the American Diabetes Association, the total health care
costs in the United States associated with the treatment of diabetes and its
complications were estimated to be $98.0 billion in 1997. Everyday activities
such as eating, exercise, travel and sleep may be severely impacted. Diabetes
can also affect personal relationships, lifestyle and morale.
Diabetes currently afflicts close to 16 million people in the United States,
although only 10 million, or approximately 66%, are diagnosed. The share of the
U.S. population with diabetes increased 33% between 1990 and 1998, primarily
due to increasingly sedentary lifestyles, inappropriate diets leading to
obesity and the aging of the population. Obese people are four times more
likely to develop diabetes than people who are not obese. Diabetes is also on
the rise in the United States in a younger population base, including children,
teenagers, and most rapidly in adults ages 30 through 39. Worldwide, the
population diagnosed with diabetes is expected to increase from 175 million to
239 million by 2010, with most of the increase occurring in developing
countries due to improved rates of diagnosis and changing lifestyles.
Government studies in the United States and the United Kingdom have shown
that complications from diabetes can be significantly reduced through regular
testing--upwards of four times a day for Type 1 and between two and four times
a day for Type 2--and improved therapy. Self-monitoring of blood glucose has
become a standard of care and glucose self-monitoring devices are typically
fully-reimbursable. Despite the ability to significantly reduce complications
of diabetes through regular testing and treatment and the availability of
reimbursement for testing, many people with diabetes under-test or fail to test
at all. We believe that pain and the fear of pain are leading factors that
discourage people with diabetes from testing as recommended. In addition to
pain, requiring people with diabetes to obtain a large sample of blood from
their fingertips can be inconvenient, messy and embarrassing in social
situations.
Our Solution
Our first product, FreeStyle, received FDA clearance in January 2000, and we
began selling FreeStyle in the United States in June 2000. FreeStyle accurately
measures glucose from a tiny blood sample, 0.3 microliters, which is a fraction
of the size required by other glucose self-monitoring systems. The extremely
1
<PAGE>
small volume of blood required enables people using FreeStyle to obtain blood
from their forearm--and thereby avoid the pain associated with drawing a larger
blood sample from their fingertip. As evidence of this benefit, nine out of
10 people in our clinical studies found using FreeStyle less painful than their
current fingerstick based system. Our FreeStyle System kit includes a FreeStyle
meter, an initial supply of proprietary FreeStyle test strips, a FreeStyle
lancing device, FreeStyle lancets and FreeStyle control solution. We believe
FreeStyle provides the following significant advantages over existing blood
glucose monitors:
. reduction in pain;
. reduction in chronic soreness from testing; and
. improved quality of life.
Our direct sales force promotes FreeStyle in the United States to health
care professionals who may recommend it to their patients. We also distribute
and sell FreeStyle in the United States to national retailers such as Wal-Mart,
Walgreens and CVS, to health care institutions and directly to end users over
the telephone and our website. In September 2000, we entered into an
international distribution agreement with Disetronic Group for the exclusive
distribution of FreeStyle in selected European countries. Disetronic's products
account for approximately 80% of the insulin pump market in Europe. Insulin
pump users are typically highly motivated insulin-dependent diabetes patients
who frequently test blood glucose levels.
We are also developing a continuous glucose monitoring system that utilizes
a miniaturized sensor that can be inserted under the skin by the user to
continuously monitor glucose levels and store the results for further analysis.
The ability of people with diabetes to adjust insulin dose, oral medication,
diet and exercise according to the glucose readings obtained from the system
should result in significantly improved health.
Our Strategy
Our objective is to be a leading provider of innovative glucose monitoring
products that reduce the pain of testing, are easy to use, accurate and cost
effective and improve the lives of people with diabetes. To achieve this
objective, we are pursuing the following business strategies:
. establish FreeStyle as a leading blood glucose self-monitoring device;
. accelerate mass market distribution;
. focus on our core competencies in electrochemistry and sensor
manufacturing technologies;
. provide high quality customer service;
. establish an international presence for FreeStyle; and
. leverage our proprietary technology platform.
Additional Information
We were incorporated in California in 1996 and intend to reincorporate in
Delaware prior to the completion of this offering. Our principal executive
offices are located at 1360 South Loop Road, Alameda, California 94502. Our
telephone number at this location is (510) 749-5400. Our Internet address is
www.therasense.com. The information contained on our website is not a part of
this prospectus.
TheraSense(TM), FreeStyle(TM), The Technology of Caring(TM), NanoSample(TM),
and Wired Enzyme(TM) are trademarks and service marks of ours. Other service
marks, trademarks and trade names referred to in this prospectus are the
property of their respective owners.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us................. shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds............................ We intend to use the net proceeds from this
offering for additional sales and marketing
efforts and research and development as
well as for working capital and other
general corporate purposes.
Proposed Nasdaq National Market symbol..... THER
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on 25,170,239 shares outstanding as of September 30, 2000, and
excludes:
. 521,013 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.07 per share;
. 3,791,709 shares issuable upon exercise of outstanding options under our
1997 Stock Plan at a weighted average exercise price of $2.65 per share;
. shares issuable to Disetronic Group upon conversion of a $2.5
million convertible promissory note, assuming an offering price of $
per share; and
. a total of 8,307,196 shares available for future issuance under our
employee stock plans.
Except as otherwise noted, we have presented the information in this
prospectus based on the following assumptions:
. the underwriters do not exercise their over-allotment option;
. our reincorporation from California to Delaware, to occur prior to
completion of the offering;
. the filing of our amended and restated certificate of incorporation;
. the 2-for-1 reverse stock split to be effected in connection with the
reincorporation; and
. the conversion of each share of preferred stock into one share of common
stock immediately prior to the closing of this offering.
3
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth summary financial data for our company. You
should read this information in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues.................. $ -- $ 60 $ 85 $ -- $ 511
Cost of products sold .......... -- -- -- -- 296
------- ------- -------- ------- --------
Gross profit.................... -- 60 85 -- 215
------- ------- -------- ------- --------
Operating expenses:
Research and development...... 977 3,056 7,672 2,989 5,841
Selling, general and
administrative............... 703 1,810 5,557 2,126 9,787
------- ------- -------- ------- --------
Total operating expenses.... 1,680 4,866 13,229 5,115 15,628
------- ------- -------- ------- --------
Loss from operations............ (1,680) (4,806) (13,144) (5,115) (15,413)
Interest income, net............ 163 142 86 162 354
------- ------- -------- ------- --------
Net loss........................ (1,517) (4,664) (13,058) (4,953) (15,059)
Dividend related to beneficial
conversion feature of preferred
stock.......................... -- -- -- -- (14,773)
------- ------- -------- ------- --------
Net loss available to common
stockholders................... $(1,517) $(4,664) $(13,058) $(4,953) $(29,832)
======= ======= ======== ======= ========
Net loss per common share, basic
and diluted.................... $ (1.66) $ (2.31) $ (4.32) $ (1.79) $ (8.03)
======= ======= ======== ======= ========
Weighted-average shares used in
computing net loss per common
share, basic and diluted....... 914 2,015 3,024 2,766 3,713
Pro forma net loss per common
share, basic and diluted....... $ (0.91) $ (0.68)
======== ========
Weighted-average shares used in
computing pro forma net loss
per common share, basic and
diluted........................ 14,393 22,206
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 29,624 $ 29,624 $
Working capital............................... 30,168 30,168
Total assets.................................. 43,810 43,810
Deferred revenue(1)........................... 657 657
Long-term obligations, less current portion... 4,971 4,971
Convertible preferred stock................... 62,883 --
Deferred stock-based compensation, net........ (5,727) (5,727)
Accumulated deficit........................... (34,190) (34,190)
Total stockholders' equity (deficit).......... (32,692) 30,191
</TABLE>
--------
(1) As of March 31, 2000, deferred revenue totaled $11.
The pro forma information in the tables reflects the conversion of all of
our outstanding shares of convertible preferred stock into shares of common
stock. The pro forma as adjusted column of the balance sheet data also reflects
the sale of shares of common stock offered by us at an assumed initial
public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, and the conversion of a promissory note into shares of common stock
upon the closing of the offering.
4
<PAGE>
RISK FACTORS
An investment in our common stock offered by this prospectus involves a
substantial risk of loss. You should carefully consider these risk factors,
together with all of the other information included in this prospectus, before
you decide to purchase shares of our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also impair our operations. The occurrence of any of the following risks
could harm our business. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
Risks Related to our Business
We have limited operating experience and a history of net losses and may never
achieve or maintain profitability.
We have a limited history of operations that has focused primarily on
research and development, product engineering, clinical trials and seeking FDA
regulatory clearance to market our products. We received FDA clearance for
FreeStyle in January 2000. We have generated only limited revenues from the
sale of our products to date and have incurred losses every year since we began
operations. We incurred losses of $4.7 million in 1998, $13.1 million in 1999
and $15.1 million in the six months ended June 30, 2000. As of June 30, 2000,
we had an accumulated deficit of approximately $34.2 million. Through June 30,
2000, we have generated only nominal revenue from sales of FreeStyle, our
initial product, and it is possible that we will never generate significant
revenues from product sales in the future. Even if we do achieve significant
revenues from our product sales, we expect that increased operating expenses
will result in significant operating losses over the next several years as we,
among other things:
. expand our domestic and international selling and marketing activities as
we attempt to gain market share for FreeStyle;
. increase our research and development efforts to improve our existing
products and develop new products such as our continuous glucose
monitoring system;
. perform clinical research and trials in an effort to obtain governmental
clearance and approval for the commercial sale of our products; and
. hire additional personnel to aid our research and development, and sales
and marketing efforts.
We will need to significantly increase the revenues we receive from sales of
our products. We may be unable to do so and therefore may never achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
Because we expect to derive substantially all of our future revenue from sales
of FreeStyle, a product we recently introduced, any failure of this product to
generate significant revenues and achieve market acceptance could seriously
harm our business.
Currently, the primary products we market are the FreeStyle System kit,
lancets and test strips, all of which we commercially introduced in June 2000.
Our FreeStyle products are expected to account for substantially all of our
revenues for at least the next several years. Accordingly, our success depends
upon the acceptance by people with diabetes, as well as health care providers
and third-party payors, in the United States and foreign markets of FreeStyle
as a preferred blood glucose self-monitoring device.
To date, FreeStyle has been used only by a limited number of people and
there can be no assurance that people with diabetes or the medical community
will endorse FreeStyle as a preferred blood glucose self-monitoring device. In
addition, there can be no assurance that FreeStyle will achieve market
acceptance on a timely basis, if at all, due to the influence of established
glucose monitoring products, the ability of some of our
5
<PAGE>
competitors to price products below a price at which we can competitively
manufacture and sell our products, cost constraints and the introduction or
acceptance of competing products or technologies. Furthermore, we cannot
guarantee that FreeStyle will encourage more active testing or that any
increased market segments will not gravitate toward more established brands. If
we are unable to successfully market and sell our FreeStyle products, we may
not be able to generate revenues because we do not have alternative products,
and our business would be seriously harmed.
In addition, to encourage market acceptance of our products, we have decided
to currently sell the FreeStyle System kit at a financial loss. In order to
generate sufficient revenues in the future, we will therefore have to rely on
recurring revenue from the repeated purchase of our proprietary FreeStyle test
strips. If FreeStyle does not gain market share and we do not generate
significant recurring revenue from the sale of our test strips, our business
would be seriously harmed.
We have limited experience manufacturing our FreeStyle test strips in
substantial quantities, and if we are unable to hire sufficient additional
personnel, purchase additional equipment or are otherwise unable to meet
customer demand, our business could suffer.
To be successful, we must manufacture our products in substantial quantities
and at acceptable costs. If we do not succeed in manufacturing sufficient
quantities of our test strips to meet customer demand, we could lose customers
and our business could suffer. We currently assemble our FreeStyle test strips
using an assembly process with which we have limited experience. If demand for
FreeStyle increases, we will need to hire additional personnel and purchase
additional equipment to increase the output volume of our test strips. If we
are unable to sufficiently staff our manufacturing operations or are otherwise
unable to effectively assemble our test strips and meet customer demand for our
products, our business could suffer.
We face competition from competitors with greater resources, which may make it
difficult for us to achieve significant market penetration.
The market for medical devices is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We compete directly with Roche
Diagnostics, LifeScan, Inc., a division of Johnson & Johnson, Bayer
Corporation, and MediSense, a division of Abbott Laboratories. Each of these
companies produces a glucose monitoring device, is either publicly traded or a
division of a publicly-traded company, and enjoys several competitive
advantages, including:
. significantly greater name recognition;
. established relations with health care professionals, customers and
third-party payors;
. additional lines of products, and the ability to offer rebates or bundle
products to offer higher discounts or incentives to gain a competitive
advantage;
. established distribution networks and relationships with retailers; and
. greater resources for product development, sales and marketing and patent
litigation.
At any time, other companies may develop products that compete directly with
our products. In addition, our competitors spend significantly greater funds
for the research, development, promotion and sale of new or existing products,
thereby allowing them to respond more quickly to new or emerging technologies
and changes in customer requirements. For all the foregoing reasons, we may not
be able to compete successfully against our current and future competitors.
6
<PAGE>
If we or our suppliers fail to comply with the FDA's Quality System Regulation,
our manufacturing operations could be delayed, and our business could be
harmed.
Our manufacturing processes for our FreeStyle test strips, as well as the
manufacturing processes utilized by our suppliers of FreeStyle meters, lancing
devices and lancets, are required to comply with the FDA's Quality System
Regulation, or QSR, which covers the methods and documentation of the design,
testing, production, control, quality assurance, labeling, packaging and
shipping of our products. The FDA enforces the QSR through unannounced
inspections. We have never been through a QSR inspection, and we cannot assure
you that we would pass. Our manufacturing line at Flextronics International USA
Inc. for our FreeStyle meters has also not been inspected to date. If we or one
of our suppliers fail a QSR inspection, our operations could be disrupted and
our manufacturing delayed. Failure to take adequate corrective action in
response to a QSR inspection could force a shut-down of our manufacturing
operations and a recall of our products, which would cause our product sales
and profitability to suffer. Furthermore, we cannot assure you that our key
component suppliers are or will continue to be in compliance with applicable
regulatory requirements, will not encounter any manufacturing difficulties or
will be able to maintain compliance with regulatory requirements.
If we become subject to product liability claims, we may be required to pay
damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are
inherent in the testing, production, marketing and sale of human diagnostic
products. While we believe that we are reasonably insured against these risks,
there can be no assurance that we will be able to obtain insurance in amounts
or scope sufficient to provide us with adequate coverage against all potential
liabilities. A product liability claim in excess of our insurance coverage or a
recall of one of our products would have to be paid out of cash reserves.
Our inability to continue to develop innovative products in the glucose
monitoring market could have a material adverse impact on our business.
There can be no assurance that we will be able to compete effectively
against our current or potential competitors in the glucose monitoring market,
or that such competitors will not succeed in developing or marketing products
that will be technologically superior to ours. Our products may also be
rendered obsolete by technological breakthroughs in diabetes monitoring or
treatment.
We are currently developing additional enhancements for FreeStyle, as well
as new products such as our continuous glucose monitoring system. Marketing of
these products will require FDA and other regulatory approvals, and their
development will require additional research and development expenditures. We
cannot assure you that we will be successful in developing, marketing or
manufacturing these new products.
In addition, several of our competitors are in various stages of development
of products similar to our continuous glucose monitoring system. If any of our
competitors succeed in developing a commercially viable product and obtains
government approval, this could have a material adverse effect on our business
and financial condition.
We currently depend on single suppliers and manufacturers for our FreeStyle
products, and the loss of any of these suppliers or manufacturers could harm
our business.
Our FreeStyle meters, along with our FreeStyle lancing devices and lancets,
are each currently manufactured according to our specifications by single
third-party manufacturers. The meters, lancing devices and lancets are
manufactured from components purchased from outside suppliers, and some of
these components are currently single-sourced. Our FreeStyle test strips, which
we assemble ourselves, are comprised of several components obtained from
single-source suppliers. In the event we are unable, for whatever reason, to
obtain components from suppliers, or if our contract manufacturers are unable
to meet our manufacturing requirements, we may not be able to obtain components
from alternate suppliers or engage an additional
7
<PAGE>
manufacturer in a timely manner. Any disruption or delay in shipments of
FreeStyle meters, test strips, lancing devices or lancets would negatively
affect our revenues.
We have limited sales and marketing experience and any failure to sell our
products may impact future revenues.
We currently have limited experience in marketing and selling our products
and only received regulatory clearance for our initial product in January 2000.
We currently sell our products in the United States directly, rather than
through distributors, using a sales organization that we assembled this year.
Our products require a complex marketing and sales effort targeted at health
care professionals, diabetes educators, persons with diabetes, as well as
retail pharmacists. We intend to expand our sales and marketing teams
significantly over the next 12 months. We will face significant challenges and
risks in building and managing these teams, including managing geographically
dispersed efforts and adequately training our people in the use and benefits of
our products. We cannot be certain that we will be able to hire sufficient
personnel to create demand for our products. In addition, to the extent that we
enter into distribution arrangements for the sale of our products
internationally, we will be dependent upon the sales and marketing efforts of
third-party distributors. We cannot assure you that these distributors will
commit the necessary resources to effectively market and sell our products, or
that they will be successful in selling our products. To the extent our
marketing and sales efforts are unsuccessful, we may not achieve expected
revenues.
The amounts that we raise in this offering may not be adequate to take us to
profitability. If we require future capital we may not be able to secure
additional funding in order to expand our operations and develop new products.
We may require supplemental financing in addition to the net proceeds of
this offering before we achieve profitable operations. We may seek additional
funds from public and private stock offerings, borrowings under lease lines of
credit or other sources. Such additional financing may not be available on a
timely basis on terms acceptable to us, or at all, or such financing may be
dilutive to stockholders. We expect that our current resources, together with
the proceeds from this offering and future operating revenue, will be
sufficient to fund our operations through the next 12 months. The amount of
money we will need will depend on many factors, including:
. revenues generated by sales of FreeStyle and our future products, if any;
. expenses we incur in developing and selling our products;
. the commercial success of our research and development efforts; and
. the emergence of competing technological developments.
If adequate funds are not available, we may have to delay development or
commercialization of our products or license to third parties the rights to
commercialize products or technologies that we would otherwise seek to
commercialize ourselves. We also may have to reduce marketing, customer support
or other resources devoted to our products, which could have a material adverse
effect on our business.
Our failure to obtain or maintain necessary FDA clearances or approvals could
hurt our ability to commercially distribute and market our products in the
United States.
Our products are medical devices that are subject to extensive regulation in
the United States and in foreign countries where we intend to do business.
Unless an exemption applies, each medical device that we wish to market in the
United States must first receive either 510(k) clearance or premarket approval
from the FDA. Either process can be lengthy and expensive. The FDA's 510(k)
clearance process usually takes from four to twelve months, but may take
longer. The premarket approval, or PMA, process is much more costly, lengthy
and uncertain. It generally takes from one to three years or even longer.
Although we have obtained 510(k) clearance for our initial product, FreeStyle,
our 510(k) clearance can be revoked if safety or
8
<PAGE>
effectiveness problems develop. We may not be able to obtain additional
clearances or approvals in a timely fashion, or at all. We expect that our
continuous glucose monitoring system under development will require PMA
approval. Delays in obtaining clearance or approval could adversely affect our
revenues and profitability.
Modification to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances are obtained.
Any modification to an FDA cleared device that could significantly affect
its safety or effectiveness, or that would constitute a major change in its
intended use, requires a new FDA 510(k) clearance or, possibly PMA approval.
The FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any such decision. We have modified aspects of
FreeStyle since receiving regulatory approval, but we believe that new 510(k)
clearances are not required. We may modify future products after they have
received clearance or approval, and, in appropriate circumstances, we may
determine that new clearance or approval is unnecessary. We cannot assure you
that the FDA would agree with any of our decisions not to seek new clearance or
approval. If the FDA requires us to seek 510(k) clearance or PMA approval for
any modifications to a previously cleared product, we also may be required to
cease marketing or recall the modified device until we obtain such clearance or
approval. Also, in such circumstances, we may be subject to significant
regulatory fines or penalties.
We are currently seeking additional clearances or approvals to market FreeStyle
for alternative testing sites, which we may not obtain.
The FDA prohibits the marketing of approved medical devices for unapproved
uses. FreeStyle is currently cleared for testing on the forearm or finger. We
are currently seeking additional 510(k) clearance for testing on alternative
sites such as the thigh, upper arm or calf. We may not receive such clearance
or approval in a timely fashion or at all. We are in the process of providing
additional information and results of clinical tests requested by the FDA.
Our products carry return policies that make us unable to recognize revenue
from sales to retailers and wholesalers prior to resale to end users.
Our return policy allows end users to return FreeStyle System kits for any
reason to us for a full refund within 30 days of purchase. In addition, sales
of our FreeStyle System kits and test strips to our retailers and wholesalers
are made under arrangements allowing rights to return product where the shelf
life has expired. Our FreeStyle System kits and test strips currently have an
18 month shelf life, and retailers and wholesalers can return these products to
us within six months of such expiration date. As a result of these rights to
return and the unavailability of historical return rates, we defer revenue
recognition on sales of test strips until resold by the retailers and
wholesalers to end users, and we defer revenues on FreeStyle System kits until
30 days after purchase by the end user. If we experience significant returns
from retailers, wholesalers and end users, this could seriously harm our
business and results of operations.
Because we lack a historical basis from which we could estimate return
rates, we are required to rely on data estimates provided to us by a third-
party data provider in order to recognize revenue from sales to end users by
retailers and wholesalers. These data estimates may cause imprecise revenue
recognition and we do not know how long we will be required to rely on these
estimates. Further, we have not yet contracted with a third-party data
provider, and cannot assure you that any such provider will provide consistent,
reliable data acceptable for such purposes or on a cost-effective basis.
Our products are subject to product recalls even after receiving FDA clearance.
The FDA and similar governmental authorities in other countries have the
authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture. A government mandated or
voluntary recall by us could occur as a result of component failures,
manufacturing errors or design defects. Any recall of product could harm our
business.
9
<PAGE>
Complying with international regulatory requirements is an expensive and time-
consuming process.
International sales of our products will be subject to strict regulatory
requirements. The regulatory review process varies from country to country.
Together with our marketing partner, Disetronic Group, we are currently
pursuing regulatory clearance to market our products in several countries in
Europe, but we have not obtained any international regulatory approvals,
including CE Marks, at this time. To do so, we will need to demonstrate the
clinical efficacy of our products in particular foreign markets. This can be a
lengthy and expensive process. We may not obtain such clearances and approvals
on a timely basis, or at all.
If we do not provide quality customer service, we could lose customers and our
operating results could suffer.
Our ability to provide superior customer service to our customers, health
care professionals and educators is critical. Our marketing plan requires that
we build strong brand awareness among our customers. To do so, we will need to
provide customer service representatives who are able and available to provide
our customers with answers to questions regarding our products. This will
require us to continue to build and maintain customer service operations, for
which we currently rely on a third-party provider. We will require increased
staff at our third-party provider to further support expected new customers.
Any failures or disruption to our
<PAGE>
customer services operations, or the termination of our contract with our
third-party provider, would harm our business.
Adverse changes in reimbursement procedures by Medicare and other third-party
payors may limit our ability to market and sell our products.
In the United States, purchasers of medical devices generally rely on
Medicare, Medicaid, private health insurance plans, health maintenance
organizations and other sources of reimbursement for health care costs to
reimburse all or part of the cost of the product. Many of these third-party
payors are moving toward a managed-care system in which they contract to
provide comprehensive health care for a fixed cost per person. The fixed cost
per person established by these third-party payors may be independent of the
cost of the specific device used. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
In the United States, glucose self-monitoring devices and test strips are
generally covered by Medicare and other third-party payors. We believe that the
FreeStyle System will be covered under existing policies. International market
acceptance of our products may depend, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance. We cannot assure you that any international reimbursement approvals
will be obtained in a timely manner, if at all. Our failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of our products in the international markets in which such
approvals are sought.
We believe that in the future, reimbursement will be subject to increased
restrictions both in the United States and in international markets. We further
believe that the overall escalating cost of medical products and services will
continue to lead to increased pressures on the health care industry, both
domestic and international, to reduce the cost of products and services,
including our current products and products under development. There can be no
assurance that third-party reimbursement and coverage will be available or
adequate in either the United States or international markets or that future
legislation, regulation or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for our existing products or products
currently under development by us or our ability to sell our products on a
profitable basis. The unavailability of third-party payor coverage or the
inadequacy of reimbursement could have a material adverse effect on our
business, financial condition and results of operations.
We outsource several key parts of our operations and any interruption in the
services provided could harm our business.
We currently outsource several aspects of our business, including the
manufacture of FreeStyle meters, lancing devices and lancets, the operation of
our website, the functioning of our procurement systems, and our customer
service support staff. Since outsourcing leaves us without direct control over
these business functions, interruptions in the services of our third-party
providers may be difficult or impossible to remedy in a timely fashion. In
addition, we may be unable to obtain the necessary resources from our third-
party providers to meet realized growth in our business.
We may have warranty claims that exceed our reserves.
We may face warranty exposure, which could adversely affect our operating
results. FreeStyle carries a 5-year warranty against defects in materials and
workmanship. We will be responsible for all claims, actions, damages, liens,
liabilities, costs and expenses for defects attributable to this product. We
have established reserves for the liability associated with product warranties.
However, any unforeseen warranty exposure could adversely affect our operating
results.
10
<PAGE>
We currently have only one distributor in Europe, and if we lose this
distributor or are unable to attract additional distributors, we may never
realize international revenues.
We recently entered into an agreement for the exclusive marketing and sale
of FreeStyle in several European countries, subject to regulatory approval by
each of those countries. We will be substantially dependent on this distributor
in these markets. We also intend to attract other distributors in additional
international markets, and if we fail to do so, we may never realize
significant international revenues.
We are subject to additional risks associated with international operations.
Foreign regulatory agencies often establish requirements different from
those in the United States. Fluctuations in exchange rates of the U.S. dollar
against foreign currencies may affect demand for our products overseas. In
addition, our international sales may be adversely affected by export license
requirements, the imposition of governmental controls, political and economic
instability, trade restrictions, changes in tariffs and difficulties in
staffing and managing international operations.
All our operations are currently conducted at a single facility, and a disaster
at this facility is possible and could result in a prolonged interruption of
our business.
We currently conduct all our scientific, manufacturing and management
activities at a single facility in Alameda, California near known earthquake
fault zones. Our sole supplier of FreeStyle meters is also currently
manufacturing these devices in the San Francisco Bay Area. In addition, we are
located adjacent to a major international airport. We have taken precautions to
safeguard our facilities, including insurance, health and safety protocols, and
off-site storage of computer data and biological inventories. However, a
natural disaster, such as an earthquake, fire, flood, outbreak of infectious
disease or an airplane runway disaster, could cause substantial delays in our
operations, cause us to incur additional expenses and adversely affect our
reputation with customers.
Risks Related to Operating in our Industry
Our industry is subject to rapid technological change, which could make our
products obsolete or cause us to lose our competitive advantage over our
competitors.
In order to be successful, we must continue to develop innovative products
in our field that are technologically superior to those of our competitors. Our
present or future products could be rendered obsolete or uneconomical by
technological advances by one or more of our current or future competitors. In
addition, the introduction or announcement of new products by us or others
could result in a delay or decrease in sales of existing products, as customers
evaluate these new products. Our future success will depend on our ability to
compete effectively against current technologies as well as respond effectively
to technological advances. Furthermore, if a cure for diabetes is established,
our monitoring products would no longer be necessary.
Our success will depend on our ability to attract and retain key personnel and
scientific staff.
We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining scientists, engineers and
other highly skilled personnel. Our employees are at-will and not subject to
employment contracts. Hiring qualified management and technical personnel will
be difficult due to the limited number of qualified professionals. Competition
for these types of employees is intense. We have in the past experienced
difficulty in recruiting qualified personnel. Failure to attract and retain
personnel, particularly management and technical personnel, would materially
harm our business.
If we fail to protect our intellectual property rights, our competitors may
take advantage of our ideas and compete directly against us.
We rely on patent protection, as well as a combination of copyright, trade
secret and trademark laws, and nondisclosure, confidentiality agreements and
other contractual restrictions to protect our proprietary technology. However,
these legal means afford only limited protection and may not adequately protect
our
11
<PAGE>
rights or permit us to gain or keep any competitive advantage. For example, our
patents may be challenged, invalidated or circumvented by third parties. Our
patent applications and the notices of allowance we have received may not be
issued as patents in a form that will be advantageous to us. We may not be able
to prevent the unauthorized disclosure or use of our technical knowledge or
other trade secrets by employees. Furthermore, the laws of foreign countries
may not protect our intellectual property rights to the same extent as the laws
of the United States. Even if our intellectual property rights are adequately
protected, litigation may be necessary to enforce our intellectual property
rights, which could result in substantial costs to us and result in a
substantial diversion of management attention. If our intellectual property is
not adequately protected, our competitors could use our intellectual property
to enhance their products and compete more directly with us, which could result
in a decrease in our market share.
Because the medical device industry is litigious, we may be sued for allegedly
violating the intellectual property rights of others.
The medical device industry is characterized by a substantial amount of
litigation over patent and other intellectual property rights. Determining
whether a product infringes a patent involves complex legal and factual issues,
and the outcome of patent litigation actions is often uncertain. Our
competitors may assert that our products and the methods we employ in the use
of our products are covered by U.S. or foreign patents held by them. In
addition, because patent applications can take many years to issue, there may
be applications now pending of which we are unaware, which may later result in
issued patents which our products may infringe. There could also be existing
patents that one or more of our products may inadvertently be infringing of
which we are unaware.
To address patent infringement or other intellectual property claims, we may
have to enter into licensing agreements or agree to pay royalties at a
substantial cost to our business. We may be unable to obtain necessary
licenses. If we are unsuccessful in our defense against such a claim, and if we
are unable to license the technology at issue or to design around the patent,
we could be prevented from selling our products and our business would suffer.
Our rights to the use of technologies licensed to us by third-parties are not
within our control, and without these technologies, our products may not be
successful and our business would be harmed.
We rely on licenses to use various technologies that are material to our
business. We do not own the patents that underlie these licenses. Our rights to
use these technologies and employ the inventions claimed in the licensed
patents are subject to our licensors abiding by the terms of those licenses and
not terminating them. In most cases, we do not control the prosecution or
filing of the patents to which we hold licenses. Instead, we rely upon our
licensors to prevent infringement of those patents. Some of the licenses under
which we have rights, such as the license from the University of Texas at
Austin, provide us with exclusive rights in specified fields, but we cannot
assure you that the scope of our rights under these and other licenses will not
be subject to dispute by our licensors or third-parties.
Risks Related to this Offering
Our common stock has not been publicly traded, and we expect that the price of
our common stock will fluctuate substantially.
Prior to this offering, there has been no public market for shares of our
common stock. An active public trading market may not develop following
completion of this offering or, if developed, may not be sustained. The price
of the shares of common stock sold in this offering will be determined by
negotiation between the underwriters and us. This price will not necessarily
reflect the market price of the common stock following this offering. The
market price for the common stock following this offering will be affected by a
number of factors, including:
. the announcement of new products or product enhancements by us or our
competitors;
. announcements of technological or medical innovations in the monitoring
or treatment of diabetes;
12
<PAGE>
. product liability claims or other litigation;
. quarterly variations in our or our competitors' results of operations;
. changes in governmental regulations or in the status of our regulatory
approvals or applications;
. regulatory or reimbursement developments in the United States or other
countries;
. changes in earnings estimates or recommendations by securities analysts;
and
. general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
There is a large number of shares that may be sold in the market following this
offering which may cause the price of our common stock to decline.
After this offering, we will have approximately shares of common
stock outstanding, or shares if the underwriters' over-allotment is
exercised in full. The shares sold in this offering, or
shares if the underwriters' over-allotment is exercised in full, will be freely
tradeable without restriction or further registration under the federal
securities laws unless purchased by our affiliates. The remaining 25,170,239
shares of common stock outstanding after this offering and 4,312,722 shares
issuable upon exercise of outstanding options and warrants to purchase shares
of common stock, will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date of Availability for Sale
--------- -----------------------------
<C> <S>
0 Immediately after the date of this prospectus
25,170,239 180 days after the effective date of the registration statement
containing this prospectus (subject in some cases to volume and
other limitations)
4,312,722 At various times after 180 days following the effective date of
the registration statement containing this prospectus
</TABLE>
The above table assumes the effectiveness of the lock-up agreements with the
underwriters under which holders of substantially all of our common stock have
agreed not to sell or otherwise dispose of their shares of common stock.
Approximately 13.3 million of the shares that will be available for sale after
the expiration of the lock-up period will be subject to volume restrictions
because they are held by our affiliates. In addition, Bear, Stearns & Co. Inc.
may waive these lock-up restrictions prior to the expiration of the lock-up
period without prior notice.
If our common stockholders sell substantial amounts of common stock in the
public market, or the market perceives that such sales may occur, the market
price of our common stock could fall. After this offering, the holders of
approximately 20,599,805 shares of common stock will have rights, subject to
some conditions, to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file
for ourselves or other stockholders. Furthermore, if we were to include in a
company-initiated registration statement shares held by those holders pursuant
to the exercise of their registration rights, those sales could impair our
ability to raise needed capital by depressing the price at which we could sell
our common stock.
13
<PAGE>
You will experience immediate and substantial dilution.
We expect the initial public offering price of our shares to be
substantially higher than the net tangible book value per share of the
outstanding common stock. Accordingly, investors purchasing shares of common
stock in this offering will:
. pay a price per share that substantially exceeds the value of our assets
after subtracting liabilities; and
. contribute % of the total amount invested to date to fund us, but will
own only % of the shares of common stock outstanding. To the extent
outstanding stock options or warrants are exercised, there will be
further dilution to new investors.
Our principal stockholders, executive officers and directors own a significant
percentage of our stock, and as a result, the trading price for our shares may
be depressed and these stockholders can take actions that may be adverse to
your interests.
Our executive officers and directors and entities affiliated with them will,
in the aggregate, beneficially own approximately % of our common stock
following this offering. This significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with controlling
stockholders. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders, including the election and removal of directors and any proposed
merger, consolidation or sale of all or substantially all of our assets. In
addition, they could dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination that could be favorable to you.
Our charter documents and Delaware law may inhibit a takeover that stockholders
consider favorable and could also limit the market price of your stock.
Our amended and restated certificate of incorporation and by-laws will
contain provisions that could delay or prevent a change in control of our
company. Some of these provisions:
. authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock; and
. provide for a classified board of directors.
In addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us. These and other provisions in our amended and
restated certificate of incorporation and by-laws and under Delaware law could
reduce the price that investors might be willing to pay for shares of our
common stock in the future and result in the market price being lower than it
would be without these provisions.
We do not expect to pay dividends in the foreseeable future and stockholders
must rely on stock appreciation for any return on investment.
We do not intend to pay dividends on our common stock for the foreseeable
future. As a result, only the appreciation, if any, of the price of our common
stock will provide a return to investors.
14
<PAGE>
INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" may contain forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "intends," "potential," "continue" or the negative of these terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined
under "Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform our prior
statements to actual results.
15
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock that we are selling in this offering will be approximately $ million
based on the assumed initial public offering price of $ per share, the
mid-point of the range on the front cover of this prospectus, and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us. If the underwriters' over-allotment option is
exercised in full, we estimate that we will receive net proceeds of
approximately $ million.
We intend to use the net proceeds of this offering, together with our cash
on hand, primarily to fund continued sales and marketing efforts and for
research and development activities. We expect to use the remainder of the net
proceeds for working capital and general corporate purposes, including capital
expenditures. Pending the uses outlined above, we will invest the net proceeds
of this offering in short-term, interest-bearing, investment grade securities.
The amounts actually expended for such purposes may vary significantly and
will depend on a number of factors, including the amount of our future revenues
and the other factors described under "Risk Factors." Accordingly, we will
retain broad discretion in the allocation of the net proceeds of this offering.
In addition, should we determine to employ cash resources for the acquisition
of complementary businesses, products or technologies, the amounts available
for the purposes cited above may be significantly reduced. Although we evaluate
potential acquisitions in the ordinary course of business, we have no specific
understandings, commitments, or agreements with respect to any acquisition or
investment at this time.
DIVIDEND POLICY
Since the formation of TheraSense, Inc., we have never declared or paid
dividends on our capital stock. We currently expect to retain our future
earnings, if any, for use in the operation and expansion of our business and do
not anticipate paying any dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
2000. Our capitalization is also presented:
. on a pro forma basis to give effect to the conversion of all outstanding
shares of convertible preferred stock into shares of common stock
immediately prior to the completion of this offering; and
. on a pro forma as adjusted basis to reflect the sale in this offering of
shares of common stock at an assumed initial public offering price of
$ per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, the issuance
of shares to Disetronic Group upon conversion of a $2.5
million promissory note and the filing of an amendment to our certificate
of incorporation.
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
(unaudited)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 4,971 $ 4,971 $4,971
-------- -------- ------
Convertible preferred stock, $0.001 par value;
20,609,647 shares authorized, 20,078,792
shares issued and outstanding, actual; no
shares authorized, issued and outstanding, pro
forma and pro forma as adjusted............... 62,883 -- --
-------- -------- ------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares
authorized, issued or outstanding, actual and
pro forma; 5,000,000 shares authorized, no
shares issued or outstanding, pro forma as
adjusted...................................... -- -- --
Common stock, $0.001 par value; 200,000,000
shares authorized; 5,008,559 shares issued and
outstanding, actual; 25,087,351 shares issued
and outstanding, pro forma; shares issued
and outstanding, pro forma as adjusted........ 5 25
Additional paid-in capital..................... 7,515 70,378
Notes receivable from stockholders............. (295) (295)
Deferred stock-based compensation, net......... (5,727) (5,727)
Accumulated deficit............................ (34,190) (34,190)
-------- -------- ------
Total stockholders' equity (deficit)......... (32,692) 30,191
-------- -------- ------
Total capitalization........................... $ 35,162 $ 35,162 $
======== ======== ======
</TABLE>
In addition to the shares of common stock to be outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
. 521,013 shares issuable upon exercise of outstanding warrants as of June
30, 2000 at a weighted average exercise price of $2.07 per share;
. 2,672,948 shares issuable upon exercise of outstanding options under our
1997 Stock Plan at a weighted average exercise price of $1.73 per share
as of June 30, 2000; and
. a total of 8,307,196 shares available for future issuance under our
employee stock plans.
You should read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
financial statements and related notes beginning on page F-1.
17
<PAGE>
DILUTION
Our pro forma net tangible book value at June 30, 2000 was approximately
$30.2 million, or $1.20 per share, after giving effect to the conversion of all
outstanding shares of our convertible preferred stock into shares of common
stock upon completion of this offering. Pro forma net tangible book value per
share is equal to our total tangible assets less our total liabilities, divided
by the total number of shares of our common stock outstanding. After giving
effect to the sale of the shares of our common stock offered in this
offering at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma as adjusted net tangible book
value at June 30, 2000 would have been approximately $ , or $ per share.
This represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share to
new investors purchasing shares of our common stock in this offering.
The following table illustrates the per share dilution to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share at June 30, 2000..... $1.20
Increase in pro forma net tangible book value per share
attributable to this offering...................................
-----
Pro forma net tangible book value per share as adjusted after
this offering...................................................
---
Dilution per share to new investors in this offering............. $
===
</TABLE>
If the underwriters exercise their over-allotment option in full, there will
be an increase in pro forma net tangible book value to $ per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ to new investors.
The following table summarizes, on a pro forma basis as of June 30, 2000,
the total number of stockholders and new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid and
the average price per share paid by the existing stockholders and by the new
investors in this offering before deducting the underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Numbers Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 25,087,351 % $63,250,415 % $2.52
New investors.................. % % $
---------- --- ----------- ---
Total...................... 100% $ 100%
========== === =========== ===
</TABLE>
If the underwriters exercise their over-allotment option in full, our
existing stockholders would own % and our new investors would own % of the
total number of shares of our common stock outstanding after this offering.
Assuming the exercise in full of all options and warrants outstanding and
exercisable as of June 30, 2000, the average price per share paid by our
existing stockholders would be reduced by $ per share to $ per share.
The preceding discussion and tables assume no exercise of stock options or
warrants outstanding as of June 30, 2000. As of June 30, 2000, there were:
. 521,013 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.07 per share;
. 2,672,948 shares issuable upon exercise of outstanding options under our
1997 Stock Plan at a weighted average exercise price of $1.73 per share,
. shares issuable to Disetronic Group upon conversion of a
convertible promissory note; and
. a total of 8,307,196 shares available for future issuance under our
employee stock plans.
After this offering and assuming the exercise in full of all options and
warrants outstanding and exercisable as of June 30, 2000, our pro forma net
tangible book value per share as of June 30, 2000 would be $ per share,
representing an immediate increase in net tangible book value of $ per share
to existing stockholders and an immediate dilution in net tangible book value
of $ per share to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The selected financial data set forth below are derived from our financial
statements. The statement of operations data for the fiscal years ended
December 31, 1996, and the balance sheet data as of December 31, 1996 and 1997
are derived from our audited financial statements not included in this
prospectus. The statement of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from our audited financial statements included in
this prospectus. The statement of operations data for the six months ended
June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are
derived from our unaudited financial statements included in this prospectus.
Our unaudited financial statements have been prepared by us on a basis
consistent with our audited financial statements and, in management's opinion,
include all adjustments necessary, consisting only of normal recurring
adjustments, for a fair presentation of such information. The results of
operations for the six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the entire fiscal year, for any
other interim period or for any future fiscal year. The selected financial data
set forth below should be read in conjunction with our financial statements,
the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
April 3, 1996 Six Months Ended
(inception) to Years Ended December 31, June 30,
December 31, -------------------------- -----------------
1996 1997 1998 1999 1999 2000
-------------- ------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Research grant revenue.. $618 $ -- $ 60 $ 60 $ -- $ 3
Product sales........... -- -- -- 25 -- 8
License income.......... -- -- -- -- -- 500
---- ------- ------- -------- ------- --------
Total revenues...... 618 -- 60 85 -- 511
Cost of products sold... -- -- -- -- -- 296
---- ------- ------- -------- ------- --------
Gross profit............ 618 -- 60 85 -- 215
---- ------- ------- -------- ------- --------
Operating expenses:
Research and
development.......... 228 977 3,056 7,672 2,989 5,841
Selling, general and
administrative....... 199 703 1,810 5,557 2,126 9,787
---- ------- ------- -------- ------- --------
Total operating
expenses........... 427 1,680 4,866 13,229 5,115 15,628
---- ------- ------- -------- ------- --------
Income (loss) from
operations............. 191 (1,680) (4,806) (13,144) (5,115) (15,413)
Interest income
(expense), net......... (9) 163 142 86 162 354
---- ------- ------- -------- ------- --------
Net income (loss)....... 182 (1,517) (4,664) (13,058) (4,953) (15,059)
---- ------- ------- -------- ------- --------
Dividend related to
beneficial conversion
feature of preferred
stock.................. -- -- -- -- -- (14,773)
Net income (loss)
available to common
stockholders........... $182 $(1,517) $(4,664) $(13,058) $(4,953) $(29,832)
==== ======= ======= ======== ======= ========
Net income (loss) per
common share, basic and
diluted................ $ (1.66) $ (2.31) $ (4.32) $ (1.79) $ (8.03)
======= ======= ======== ======= ========
Weighted-average shares
used in computing net
loss per common share,
basic and diluted...... 914 2,015 3,024 2,766 3,713
Pro forma net loss per
common share, basic and
diluted (unaudited).... $ (0.91) $ (0.68)
======== ========
Weighted-average shares
used in computing pro
forma net loss per
common share, basic and
diluted (unaudited).... 14,393 22,206
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------- June 30,
1996 1997 1998 1999 2000
---- ------- ------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $122 $ 4,088 $11,438 $ 2,322 $ 29,624
Working capital.................. 121 3,595 10,956 792 30,168
Total assets..................... 178 4,680 12,379 7,281 43,810
Deferred revenue................. -- 72 11 512 657
Long-term obligations, less
current portion................. -- -- 520 2,576 4,971
Convertible preferred stock...... -- 5,526 17,361 20,472 62,883
Deferred stock-based
compensation, net............... -- -- -- (1,244) (5,727)
Retained earnings (accumulated
deficit)........................ 107 (1,410) (6,074) (19,132) (34,190)
Total stockholders' equity
(deficit)....................... 129 (1,387) (6,047) (18,159) (32,692)
</TABLE>
See our financial statements and related notes for a description of the
calculation of the historical and pro forma net loss per common share and the
weighted-average number of shares used in computing the historical and
pro forma per common share data.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes appearing elsewhere in this prospectus. This
discussion may contain forward-looking statements based upon current
expectations that involve risks and uncertainties. Our actual results and the
timing of selected events could differ materially from those anticipated in
these forward-looking statements as a result of selected factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We develop and sell easy to use glucose self-monitoring systems that
dramatically reduce the pain of testing for people with diabetes. Our initial
product, FreeStyle, received FDA clearance in January 2000, and we commenced
commercial shipments on June 28, 2000. We are marketing and selling FreeStyle
in the United States through wholesalers, retailers, health care professionals
and direct to consumers over the telephone and our website. To date, we have
generated nominal revenues.
Since our inception in 1996, we have devoted substantially all of our
resources to research and development activities. We have incurred significant
operating losses and negative cash flows from operations in each full fiscal
year since inception. We have incurred net losses of $1.5 million in 1997, $4.7
million in 1998, $13.1 million in 1999 and $15.1 million for the six months
ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of
$34.2 million. We expect to incur significant additional losses as we expand
our product launch and related sales and marketing efforts and continue to
develop new products.
Revenues are generated from sales of our FreeStyle System kit and from the
recurring sales of test strips and lancets. Our return policy allows end users
to return FreeStyle System kits to us for a full cash refund within 30 days of
purchase. In addition, sales of our FreeStyle System kit and test strips to our
retailers and wholesalers are made under arrangements allowing rights to return
these products where the shelf life has expired. Our FreeStyle System kit and
test strips currently have an 18 month shelf life, and retailers and
wholesalers can return these products to us up to six months beyond such
expiration date. As a result of these rights of return and the current
unavailability of historical trends in sales and product returns, we defer
revenue recognition on sales of test strips until resold by the retailers and
wholesalers to end users, and we defer revenues on FreeStyle System kits until
30 days after purchase by the end user. We recognize revenue on direct product
sales over the telephone or our website to end users upon shipment for test
strips and lancets, and 30 days after purchase on sales of FreeStyle System
kits. Our current sales terms to retailers and wholesalers provide for customer
payment within 60 days of shipment on initial orders and payment within 30 days
for subsequent orders. We believe our terms to retailers, wholesalers and end
users, including their rights to return, are similar to our competitors' terms.
Manufacturers typically sell their glucose monitoring devices at substantial
discounts to list prices or offer customer rebates to expand their installed
base of products and thus increase the market for their disposable test strips
and lancets. Similarly, we have been offering and expect to continue to offer
such discounts and rebates on our FreeStyle System kits to establish an
installed base of systems from which we expect to generate recurring revenues
from our disposable test strips and lancets. Due to the recent commencement of
our initial sales, we do not have significant historical trends in rebates
claimed by end users. As a result, we record an allowance for 100% of the
allowable rebate as a reduction of revenues reported. As we accumulate trend
data in rebates claimed, we may change the percentage of the allowable rebate
recorded as a reduction of revenues.
The initial product mix of FreeStyle System kits when compared to test
strips and lancets will negatively impact our gross margins for the foreseeable
future, as FreeStyle System kits have lower gross margins. Due to these lower
margins, as well as the investment in inventory and receivables required in
connection with our FreeStyle product launch, we will require a substantial
amount of additional working capital. In the event we establish an installed
base of systems, we expect to generate a substantial portion of revenues
through recurring sales of our FreeStyle test strips and lancets, as well as
sales of FreeStyle System kits to new users.
20
<PAGE>
Cost of products sold consists of payments to our manufacturing and
distribution partners, expenses relating to our disposable test strip
manufacturing, internal operations, warranties, amortization of deferred stock-
based compensation and royalties payable under technology licenses. We offer a
five-year warranty on our FreeStyle meter. We manufacture our disposable test
strips ourselves at our facility in Alameda, California. We outsource the
manufacturing, packaging and testing of our FreeStyle meters to Flextronics, an
electronics
<PAGE>
contract manufacturer. Our FreeStyle lancing device and disposable lancets are
manufactured by Gainor Medical North America LLC, a wholly-owned subsidiary of
Matria Healthcare, Inc. Our distribution services are performed by Livingston
Health Care Systems Inc.
Research and development expenses include costs associated with the design,
development, testing and enhancement of our products. These costs consist
primarily of salaries and related personnel expenses, fees paid to outside
service providers, expenditures for purchases of laboratory supplies and
clinical trials, amortization of deferred stock-based compensation and overhead
allocated to product development. Commencing in June 2000, we transitioned the
recording of manufacturing-related costs from research and development expense
to cost of revenues. All research and development costs are expensed as
incurred. Our research and development efforts are periodically subject to
significant non-recurring costs and fees that can cause significant variability
in our quarterly research and development expenses.
Selling, general and administrative expenses primarily consist of salaries,
commissions and related expenses for personnel engaged in sales, marketing,
customer service and administrative functions, costs associated with
advertising, promotional and other marketing activities, tradeshow expenses,
legal expenses, regulatory fees, amortization of deferred stock-based
compensation and general corporate expenses.
Deferred stock-based compensation consists of amortization of deferred
compensation in connection with stock option grants and sales of stock to
employees and non-employees at exercise or sales prices below the estimated
fair market value of our common stock. As of June 30, 2000, we have recorded
aggregate deferred stock-based compensation of $6.3 million, of which $5.7 will
be amortized to expenses on a straight line basis through 2004. This amount is
being amortized over the respective vesting periods of these equity
instruments, which is typically four years. Deferred stock-based compensation
has been allocated according to employees and their respective departments.
In September 2000, we entered into a five-year exclusive distribution
agreement with Disetronic Group for FreeStyle in Germany, Switzerland, Denmark,
Austria, Sweden, Finland, Norway and the Netherlands. In connection with this
agreement, we received an advance purchase order from Disetronic of $1.5
million, which will be recognized as products are shipped. In addition, we
issued Disetronic a note for $2.5 million which is automatically convertible
into shares of common stock upon the completion of this offering.
Results of Operations
Six Months Ended June 30, 1999 and June 30, 2000
Total revenues. No revenues were reported for the six months ended June 30,
1999. Revenues reported for the six months ended June 30, 2000 totaled $0.5
million, principally consisting of a distribution license fee payment. The
income recognized related to a specific non-refundable negotiation fee on a
potential distribution arrangement, which was never consummated. For the
majority of the product shipped during our FreeStyle product launch, which
commenced on June 28, 2000, revenues were deferred awaiting sale through to end
users. As of June 30, 2000, deferred revenues approximated $0.7 million,
attributable to one significant retail trade customer.
Cost of products sold. No cost of products sold was reported for the
six months ended June 30, 1999. Cost of products sold for the six months ended
June 30, 2000 was $0.3 million, or 58% of total revenues. Cost of products sold
principally related to start-up production costs, as there was no cost
associated with the license fee income earned. There was no stock-based
compensation expense reported in cost of products sold as the amount
attributable to June 2000 was insignificant. Prior to our product launch on
June 28, 2000, costs associated with start-up manufacturing-related activities,
including stock-based compensation expense, were reported as research and
development expenses.
Gross profit. No gross profit was reported for the six months ended June 30,
1999. Gross profit for the six months ended June 30, 2000 was $0.2 million, or
42% of total revenues.
21
<PAGE>
Research and development expenses. Research and development expenses
increased from $3.0 million for the six months ended June 30, 1999 to $5.8
million for the six months ended June 30, 2000, representing an increase of
$2.8 million or 95%. This increase was primarily attributable to the hiring of
additional personnel, overhead costs associated with our new facility,
materials and supplies used in the product development efforts and the payment
of fees to outside service providers. Amortization of deferred stock-based
compensation was $0.2 million for the six months ended June 30, 2000. Stock-
based compensation expense for the corresponding period in 1999 was
insignificant.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $2.1 million for the six months ended
June 30, 1999 to $9.8 million for the six months ended June 30, 2000,
representing an increase of $7.7 million, or 360%. This increase was primarily
attributable to recruiting and hiring our U.S. direct sales force, advertising,
marketing activities and other spending associated with the launch of
FreeStyle, higher facilities rent and overhead costs, increased travel costs
primarily attributable to our new sales force, and establishing customer
service and support operations. Amortization of deferred stock-based
compensation was $0.3 million for the six months ended June 30, 2000. Stock-
based compensation expense for the corresponding period in 1999 was
insignificant.
Interest income, net. Net interest income increased from $0.2 million for
the six months ended June 30, 1999 to $0.4 million for the six months ended
June 30, 2000, representing an increase of $0.2 million or 118%. Interest
income results from our interest on cash and cash equivalents, while interest
expense is associated with borrowings under lines of credit and capital lease
obligations. Interest income for the six months ended June 30, 2000 increased
due to higher average cash and cash equivalents balances, resulting from the
net proceeds of a private equity offering completed in February 2000. Interest
expense for the six months ended June 30, 2000 increased to a lesser extent,
reflective of additional borrowings under available lines of credit,
amortization of discount associated with warrants issued in connection with
certain lines of credit and capital lease obligations arising under a sale and
leaseback transaction.
Years Ended December 31, 1997, 1998 and 1999
Total revenues. Revenues recorded in 1998 and 1999 principally related to
research grants and the sale of clinical evaluation units. There was no cost of
products sold and nominal gross profits recorded in fiscal years 1997, 1998 and
1999.
Research and development expenses. Research and development expenses
increased from $1.0 million in 1997 to $3.1 million in 1998 and to $7.7 million
in 1999. The increase in research and development expenses from 1997 to 1998
was primarily attributable to expansion in the product development efforts on
both FreeStyle and our continuous glucose monitoring system. The increase in
research and development expenses from 1998 to 1999 was principally due to the
hiring of additional personnel and increased spending associated with the
development of FreeStyle.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $0.7 million in 1997 to $1.8 million in
1998 and $5.6 million in 1999. The increase from 1997 to 1998 was primarily
attributable to increased personnel costs. The increase from 1998 to 1999 was
primarily attributable to increased personnel costs, marketing expenses, and
costs associated with moving into our new facility in August 1999.
Interest income, net. Net interest income remained relatively comparable at
$0.2 million in 1997 and $0.1 million in 1998 and 1999, respectively. Interest
income results from our interest on cash and cash equivalents, while interest
expense is associated with borrowings under lines of credit and capital lease
obligations. Interest expense increased in 1999 attributable to increased
borrowings under lines of credit and purchase of office equipment under a
capital lease.
Provision for income taxes. We incurred net operating losses for the years
ended December 31, 1997, 1998 and 1999, and, accordingly, we did not pay any
federal or state income taxes. As of December 31, 1999,
22
<PAGE>
we had accumulated approximately $17.5 million in both federal and state net
operating loss carryforwards, respectively, to reduce future taxable income. We
also had federal and state research and development tax credit carryforwards as
of December 31, 1999 of approximately $0.5 million and $0.4 million
respectively. If not utilized, the federal carryforward will expire in various
amounts beginning in 2018. The state research credit can be carried forward
indefinitely. Our utilization of the net operating losses may be subject to
substantial annual limitations under Section 382 of the Internal Revenue Code
of 1986, as amended. The annual limitations may result in the expiration of net
operating losses prior to utilization. We have not recorded a benefit from our
net operating loss carryforwards because we believe that it is uncertain that
we will have sufficient income from future operations to realize the
carryforwards prior to their expiration. Accordingly, we have established a
valuation allowance against the deferred tax asset arising from the
carryforwards.
Liquidity and Capital Resources
Since our inception we have financed our operations primarily through
private placements of convertible preferred stock resulting in net proceeds of
$62.9 million. We have also financed our operations through equipment financing
arrangements and other loans with $7.3 million in principal outstanding at June
30, 2000. Borrowings under these arrangements are repaid monthly at interest
rates of between 8.5% and 16.6% per annum. As of June 30, 2000, we had cash and
cash equivalents of $29.6 million.
Net cash used in operating activities was approximately $1.1 million, $4.5
million, $11.8 million and $17.0 million for the years ended December 31, 1997,
1998, 1999 and for the six months ended June 30, 2000, respectively. For such
periods, net cash used in operating activities resulted primarily from net
losses. In addition, cash used in operations for the six months ended June 30,
2000 reflects our investment in working capital, principally inventories to
support the launch of FreeStyle.
Net cash used in investing activities was approximately $0.5 million, $0.6
million, $3.3 million for the years ended December 31, 1997, 1998, and 1999,
respectively. These investing activities consisted of capital expenditures. The
increase in fiscal year 1999 was the result of purchases of machinery and
equipment for manufacturing our FreeStyle disposable test strips in addition to
expenses associated with our move into a new facility in August 1999. For the
six months ended June 30, 2000, net cash provided by investing activities of
$0.2 million included $1.6 million in proceeds from the sale of capital assets
under a sale and leaseback transaction.
Net cash provided by financing activities was approximately $5.5 million,
$12.5 million, $6.0 million and $44.1 million for the years ended December 31,
1997, 1998, 1999 and the six months ended June 30, 2000, respectively. The net
cash provided by financing activities was primarily attributable to the
proceeds from private placements of equity securities and proceeds from long-
term borrowings.
We expect to have negative cash flow from operations for at least the next
12 months. We also expect increasing sales and marketing expenses related to
the introduction of FreeStyle, increasing research and development expenses, as
well as expenses for additional personnel and product enhancement efforts. Our
future capital requirements will depend on a number of factors, including
market acceptance of FreeStyle, the resources we devote to developing and
supporting our products, continued progress of our research and development of
potential products, the need to acquire licenses to technology and the
availability of other financing. Our capital expenditures for the year ended
December 31, 1999 were $3.3 million, and our anticipated capital requirements
for the next 12 months will be at a comparable level. We believe that our
current cash balances, together with the net proceeds of this offering and
revenue to be derived from sales of FreeStyle, will be sufficient to fund our
operations for at least the next 12 months. To the extent our capital resources
are insufficient to meet our future capital requirements, we will need to raise
additional capital or incur indebtedness to fund our operations. Additional
equity or debt financing, if required, may not be available on acceptable
terms, or at all. If we are unable to obtain additional capital, we may be
required to reduce our selling and marketing activities for FreeStyle, delay,
reduce the scope of or eliminate our research and development programs, or
relinquish rights to technologies or products that we might otherwise seek to
develop
23
<PAGE>
or commercialize. In the event that we do raise additional equity financing,
investors in this offering will be further diluted.
Quantitative and Qualitative Discussion of Market Risk
Although we transact our business in U.S. dollars, future fluctuations in
the value of the U.S. dollar may affect the price competitiveness of our
products, particularly once we commence sales in Europe. However, we do not
believe that we currently have any significant direct foreign currency exchange
rate risk and have not hedged exposures denominated in foreign currencies or
any other derivative financial instruments.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our invested cash
without significantly increasing risk of loss. As of June 30, 2000, our cash
and cash equivalents consisted primarily of money market funds maintained at
one major U.S. financial institution. The recorded carrying amounts of cash and
cash equivalents approximate fair value due to their short-term maturities. We
do not believe that an increase in market rates would have any significant
negative impact on the realized value of our investments, but an increase in
market rates could negatively impact the interest expense associated with our
long-term debt.
Inflation
The impact of inflation on our business has not been material for the fiscal
years ended December 31, 1997, 1998 and 1999 or for the six months ended June
30, 2000.
Recently Issued Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB 25. This interpretation
clarifies the definition of the employee for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan,
the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
No. 44 is not expected to have a material impact on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We have
complied with the guidance in SAB 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
or SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. To date, we
have not engaged in derivative and hedging activities and do not believe that
the implementation of SFAS No. 133 will have any significant impact on our
financial position or results of operations. We will adopt SFAS No. 133, as
amended, in fiscal year 2001.
24
<PAGE>
BUSINESS
This prospectus may contain forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
Overview
We develop and sell easy to use glucose self-monitoring systems for people
with diabetes that dramatically reduce the pain of testing. Using our
proprietary technologies, we have developed products that are less painful to
use than current products on the market. FreeStyle, our first product, can
accurately measure glucose levels in a blood sample that is a fraction of the
sample size required by other systems. This small sample requirement enables
users to obtain the sample from their forearms, and thereby dramatically
reduces the pain and inconvenience associated with a larger blood sample taken
from their fingertips. Our FreeStyle blood glucose monitoring system received
FDA clearance in January 2000. We began selling FreeStyle in the United States
in June 2000.
The cost to the health care system associated with the treatment of diabetes
and its complications is significant. According to the American Diabetes
Association, the total health care costs in the United States of treating
people with diabetes were estimated to be $98.0 billion in 1997. The blood
glucose market is the largest self-test market for medical diagnostic products
in the world. The size of the blood glucose self-monitoring market is
approximately $1.9 billion in the United States and $3.3 billion worldwide. The
world market has grown rapidly over the past 15 years and is expected to grow
at an estimated rate of 12% per year through 2004. Self-monitoring of blood
glucose has become a standard of care and glucose self-monitoring devices are
typically fully reimbursable.
We believe that FreeStyle is well positioned to capture a substantial share
of the blood glucose self-monitoring market. In addition, we believe that
FreeStyle and other products based on our proprietary technologies can expand
this market by eliminating pain, one of the major obstacles to frequent
testing. We are also developing a continuous glucose monitoring device that
will enable people with diabetes to accurately and discretely measure their
glucose levels on a continuous basis.
Our goal is to market our products wherever blood glucose monitors are sold.
Our direct sales force sells and promotes FreeStyle in the United States. We
distribute and sell FreeStyle through wholesalers and national retailers, such
as Wal-Mart, Walgreens and CVS, to health care institutions, as well as over
the telephone and our website. In September 2000, we entered into an
international distribution agreement with Disetronic Group for the distribution
of FreeStyle in selected European countries. Disetronic's products account for
approximately 80% of the insulin pump market in Europe. Insulin pump users are
typically highly motivated insulin-dependent diabetes patients who frequently
test blood glucose levels. In addition, we plan to sell our products
internationally through relationships with other partners that have strong
distribution networks to our target markets.
Market Opportunity
Diabetes is a chronic, life-threatening disease for which there is no known
cure. People with diabetes suffer from high or low levels of blood glucose
resulting from deficiencies in the production of, or response to, insulin.
Diabetes currently afflicts close to 16 million people in the United States
although only 10 million, or approximately 66%, are diagnosed. The share of the
U.S. population diagnosed with diabetes increased 33% between 1990 and 1998,
primarily due to increasingly sedentary lifestyles, inappropriate diets leading
to obesity, and the aging of the population. Worldwide approximately 175
million people, or 3% of the population, have been diagnosed with diabetes.
Further, the reported prevalence of diabetes worldwide is expected to increase
to 239 million by 2010, with most of the increase occurring in developing
countries due to improved rates of diagnosis and changing lifestyles.
25
<PAGE>
Diabetes and its Complications
Food is broken down into glucose, or sugar, which is used by the body to
generate energy. Insulin, a hormone produced by specialized cells in the
pancreas, allows the cells of the body to convert available glucose into
energy. People with diabetes do not fully break down or metabolize glucose
because their cells are resistant to insulin or insulin-producing cells in
their pancreases are destroyed or exist in reduced numbers. This results in
dramatically fluctuating glucose levels in the body.
People with diabetes experience significant short-term and long-term
negative effects on health and life expectancy at both high levels of glucose,
known as hyperglycemia, and low levels of glucose, known as hypoglycemia.
Recurring high glucose levels inhibit the immune system and result in fatigue,
slow healing and lower resistance to infection. In severe cases, high glucose
levels can lead to coma and death. Low glucose levels can lead to fainting,
weakness and, in severe cases, unconsciousness, permanent loss of cognitive
power, and death.
Type 1 and Type 2 Diabetes. Diabetes is typically classified into two
primary types. Type 1 diabetes, sometimes referred to as juvenile onset
diabetes, is the more serious form of the disease and is characterized by a
severe lack of insulin secretion by the pancreas. Type 1 diabetes usually
appears in people under the age of 35, and most commonly in children between
the ages of 10 and 16. In the United States, approximately 1.5 million people
suffer from Type 1 diabetes. To maintain body chemistry balance and sustain
life, people with Type 1 diabetes require frequent monitoring and life-long,
daily insulin injections or the use of an insulin pump. The predominant risk
factor for Type 1 diabetes is family history of diabetes.
Type 2 diabetes, sometimes referred to as adult onset diabetes, is the most
prevalent form of the disease. In Type 2 diabetes, the pancreas produces some
insulin, but glucose levels are still not adequately controlled because the
cells have become less receptive to insulin. There is a spectrum of severity in
Type 2 diabetes, from people whose disease is mild and even undiagnosed, to
people who manage their disease by diet and exercise, to people who use various
oral medications and to people who require the use of insulin. In the United
States, approximately 14.5 million people suffer from Type 2 diabetes. The
predominant risk factors for Type 2 diabetes are:
.genetic predisposition, including family history and ethnicity;
.lifestyle, including diet, physical inactivity, obesity and stress;
.aging; and
.history of diabetes during pregnancy.
Diabetes is on the rise in the United States, particularly among a younger
population base including children, teenagers, and most rapidly in adults ages
30 through 39. We believe the number of people afflicted with Type 2 diabetes
will steadily grow as a result of the growing number of obese people. The
correlation between Type 2 diabetes and obesity is overwhelming. A recent study
conducted by the Centers for Disease Control and Prevention found that obese
people were four times more likely to develop diabetes than people of normal
weight. The percentage of people in the United States considered obese rose
from 12% to 18% of the general population from 1991 to 1998. In addition to
obesity, we believe that the number of people who develop diabetes will
naturally grow as the U.S. population ages. The prevalence of diabetes in
people 65 years of age or greater is 18% in the United States.
Physical Complications. Diabetes is the sixth leading direct cause of death
by disease in the United States, with a death due to diabetic complications
occurring every three minutes. The failure to frequently monitor and control
blood glucose levels can also lead to an array of serious medical complications
including:
.heart disease, with death rates two to four times higher than people
without diabetes;
.stroke, with incidence rates two to four times higher than people without
diabetes;
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. amputations, with more than half the number of lower limb amputations
occurring among people with diabetes;
. kidney failure, with more than 40% of new cases of end-stage kidney
disease occurring among people with diabetes;
.blindness, with up to 24,000 new cases annually; and
. nerve damage, with 60% to 70% of people with diabetes suffering from mild
to severe forms of nervous system disease.
Psychological and Social Complications. Diabetes is a disease that requires
constant vigilance. Everyday activities such as eating, exercise, travel and
sleep may be severely impacted. This may affect personal relationships,
lifestyle and morale. People with diabetes, like patients with other chronic
diseases, are more than five times as likely to experience depression than the
general population. Additionally, social stigmas and lifestyle complications
associated with blood glucose self-monitoring are significant. For example:
. Every night many children with diabetes and their parents must wake up in
the middle of the night to test the child's glucose levels to avoid
dangerous episodes of sleeping hypoglycemia.
. Children at school may suffer the embarrassment of being repeatedly
excused from class to test themselves in the nurse's office before and
after meals and prior to playing sports.
. Adults should test themselves before driving to ensure they will not
become hypoglycemic while driving, which could cause them to lose
concentration or consciousness.
Importance of Glucose Monitoring
Every person's glucose level varies during the course of a day depending
upon factors such as diet, insulin availability, exercise, stress, and illness.
Normal blood glucose levels fluctuate between 80 to 120 milligrams per
deciliter, or mg/dL. In a person with diabetes, these levels can fluctuate
dramatically from less than 20 mg/dL to more than 1000 mg/dL. To successfully
manage glucose levels within the normal range, a person with diabetes must
first measure his or her glucose level and then manage this level by adjusting
insulin intake, oral medication, diet and exercise.
Several studies have confirmed that through increased blood glucose
monitoring of at least four tests per day followed by intensive treatment with
insulin, people with diabetes can maintain near-normal glucose levels and
eliminate or reverse the complications of the disease. The U.S. multi-year,
multi-site Diabetes Complications and Control Trial, or the DCCT, determined
that close control of blood glucose levels could prevent the onset and the
progression of severe, long-term complications of Type 1 diabetes. This
landmark study concluded that:
. serious consequences of diabetes were reduced significantly for the
intensively managed patient group as a whole; and
. progression of the three primary conditions that were evaluated was
significantly reduced in the intensively managed group relative to the
conventional group: eye disease by 76%, kidney disease by 50% and nerve
disease by 60%.
Similarly, the United Kingdom Prospective Diabetes Study found that
intensively-managed Type 2 patients had a 25% reduction in the risks of
selected clinical complications, such as eye disease and kidney disease, over a
10-year period.
Limitations of Existing Glucose Monitoring Products
Notwithstanding the proven benefits of frequent monitoring and intensive
management of glucose levels, a significant number of people with diabetes fail
to test at their recommended frequency, or at all. We believe this
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under testing is due to the limitations of existing products, many of which are
painful and inconvenient to use. To obtain a sample, users are generally
required to prick one of their fingertips with a lancing device, which
typically consists of a spring-loaded needle that penetrates a measured
distance into the finger. Users must then draw a sample of blood from the
finger, which often requires squeezing of the fingertips and may require
another finger prick if a sufficient volume of blood is not obtained the first
time. After drawing a blood sample, users generally are required to drop the
blood sample on a disposable test strip or place the test strip on the blood
sample.
Although fingertips provide a good source for a blood sample, they also
contain many specialized sensory nerve endings that experience pain from both
the lancing and the manipulation of the finger. The level of pain and
discomfort is compounded by the fact that fingertips offer limited surface
area, and therefore, tests are often conducted in areas that are sore from
repeated daily tests. Users may also suffer pain or discomfort after the test
is complete when the wound caused by the lancing device is touched or disturbed
during the users' normal daily activities.
In addition to the problems with pain, requiring people with diabetes to
obtain a large sample of blood from their fingertips can be inconvenient and
may cause discomfort in social situations. Generally, the larger the blood
sample the messier the clean up following the test. Occasionally, blood
continues to ooze from the wound on the fingertip following the test, which can
lead to contamination of contacted objects. Drawing a large amount of blood in
public can be especially embarrassing to school-age children who often avoid,
or may be prevented from, playing with their classmates following a test
because of the fear that the excess blood may cause contamination. Many
frequent testers develop calluses on their fingertips that cause a loss of
sensation, are unattractive and make subsequent testing more difficult.
The evolution of blood glucose self-monitoring has been characterized by
incremental technological improvements in ease of testing, accuracy and in the
reduction in blood sample size. The few notable improvements often resulted in
a significant increase in market size and share gains for innovators. Since the
mid-1980s, however, there have been only minor enhancements to blood glucose
self-monitoring products. Manufacturers have generally decreased the size of
the meter and developed additional meter features but have largely failed to
address what we believe to be the most significant barrier to testing--the pain
from drawing large blood samples from fingertips.
The major technology limitation of currently available products has been the
requirement of a minimum blood sample volume of 1.5 to 10 microliters to
accurately measure blood glucose levels. Current strip technology either
measures the rate of the blood glucose reaction on an electrochemical test
strip or the color change on an optical test strip. These types of measurements
require a relatively large blood sample and are prone to inaccuracy from
interfering substances in the blood or external factors such as temperature or
altitude extremes.
People with Type 1 diabetes are encouraged to test four or more times a day,
and those with Type 2 diabetes are typically expected to test two or more times
per day. However, a study conducted by Yankelovich Partners on our behalf
surveyed 505 people with diabetes in April 2000 and found that pain and the
fear of pain were leading factors in deterring testing at the recommended
levels. The study concluded that 34% of people with diabetes do not test often
enough or at all, with painful finger sticks being a major reason. In addition,
68% of these people said that they would test more frequently if testing were
not painful.
As a result, we believe a significant market opportunity exists for a
glucose self-monitoring system that requires a sufficiently small sample of
blood so users can avoid the pain, inconvenience and social embarrassment of
drawing large blood samples from their fingertips.
The TheraSense Solution
We develop and sell glucose self-monitoring systems that dramatically reduce
the pain of testing based on patented sensor technologies that can measure
glucose concentrations in very small volumes of blood or other
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body fluids. Because our proprietary electrochemistry technology enables us to
develop products that reduce the pain and inconvenience of glucose testing for
people with diabetes, we believe we will be able to gain market share and
expand the established blood glucose monitoring market. Our diabetes products,
both those already available commercially and others under development, should
help to reduce the serious complications of diabetes by removing one of the
most significant barriers to more compliant testing--pain.
We are developing a series of products based on our core technologies in
electrochemical sensors. While our initial products are designed to measure
glucose, these technologies can be used to measure a wide variety of
biochemicals in body fluids. Our initial product, FreeStyle, is an in vitro, or
outside of the body, blood glucose monitoring product that we believe offers
the following significant advantages over existing blood glucose self-
monitoring devices:
. Reduction in Pain. Our product maintains accurate glucose measurements
while requiring a tiny blood sample of 0.3 microliters, just a fraction
of the sample size required by other systems. The extremely small volume
of blood required enables people using FreeStyle to obtain blood not only
from their fingertips as required by most other systems on the market
today, but alternatively from their forearm, a process that is
considerably less painful. As evidence of this benefit, nine out of 10
people in our clinical studies found using FreeStyle less painful than
their current finger stick based system.
. Reduction in Chronic Soreness from Testing. An alternative location also
eliminates the pain and soreness associated with repeated daily testing
on a small surface area. In addition, our easy to use system does not
require pumping, squeezing or other methods to remove a sufficient amount
of blood to obtain an accurate reading.
. Improved Quality of Life. The ability to test on the forearm using
FreeStyle may afford people with diabetes more discretion, reducing many
of the social limitations that have deterred people with diabetes from
testing in the past. Due to the small blood sample required, FreeStyle
allows users to test their glucose levels without the inconvenience and
embarrassment that results from the large blood samples required by other
systems. By using FreeStyle, people with diabetes generally experience
less disruption in their day to day lives from the testing procedure.
There are other important attributes of blood glucose monitoring systems that
are expected in a high-quality, cost-effective product. We believe that
FreeStyle meets or exceeds these attributes as follows:
. Ease of Use. FreeStyle offers a testing method that allows people with
diabetes to quickly and efficiently obtain blood and measure their blood
glucose levels in about 15 seconds, among the quickest in the industry.
The lancing device and monitor are compact and portable, allowing active
people with diabetes to conveniently carry the system to test anywhere at
anytime.
. Accuracy. The unique electrochemical measurement technique embodied in
our proprietary technology allows FreeStyle to produce accurate and
precise results from a tiny sample of blood. The accuracy of FreeStyle is
unaffected by temperature fluctuations within its operating range or
interfering substances such as acetaminophen and Vitamin C in the blood.
Other systems require a relatively large blood sample to get an accurate
reading and some are prone to inaccuracy from temperature fluctuations
and interfering substances. In addition, the FreeStyle meter beeps when
there is an adequate blood sample for an accurate reading resulting in
less wasting of under-filled strips. Other systems may provide inaccurate
glucose measurements because they do not precisely indicate when there is
enough blood on the strip.
. Full-Feature Capability. FreeStyle has competitive feature capabilities.
For example, FreeStyle can store 250 test results with dates and times,
provide a 14-day glucose average, and in the future will connect to a
personal computer through FreeStyle Connect, a data management system for
analyzing glucose levels on an ongoing basis.
. Competitively Priced. FreeStyle offers its advanced technologies at a
price comparable to other products on the market and is in a class of
products approved for reimbursement by Medicare and many other third-
party payors.
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We believe that our continuous glucose monitoring system under development
will offer significant advantages over other current methods. Our system would
improve people with diabetes' ability to normalize glucose levels, warn against
dangerously high or low glucose levels, improve people with diabetes'
compliance and enable health care professionals to establish improved treatment
protocols.
Our Strategy
Our objective is to be a leading provider of innovative glucose self-
monitoring products that reduce the pain of testing, are easy to use, accurate
and cost effective, and improve the lives of people with diabetes. To achieve
this objective, we are pursuing the following business strategies:
. Establish FreeStyle as a leading blood glucose self-monitoring device. We
plan to create global awareness of the advantages of FreeStyle among
health care professionals, people with diabetes and the people who
influence them. We intend to continue to expand our health care
professional sales force and multi-media communication outreach programs
to stimulate awareness and demand for FreeStyle. We believe an increased
awareness of FreeStyle's less painful, more discrete and easy process
will lead many current testers to switch to FreeStyle. In addition, we
believe we can expand the market to those people who have been diagnosed
with diabetes but are currently not testing or are under-testing.
. Accelerate mass market distribution. We intend to market, sell and
distribute our products wherever blood glucose monitors are sold. We will
expand our national accounts sales force in the United States to ensure
broad retail distribution. Our products are currently being sold by
national retailers such as Wal-Mart, Walgreens, Eckerd and CVS. In
addition, we intend to expand our e-Business strategy to establish a
platform for awareness, self-referral, and distribution.
. Focus on our core competencies in electrochemistry and sensor
manufacturing technologies. We plan to continue to focus our internal
resources on our core competencies--electrochemistry and sensor
manufacturing technologies. Consequently, we have entered into strategic
partnerships to enhance speed to market and cost effectiveness for those
business functions not included in our core competencies. For example, we
have a strategic relationship with Flextronics International, which
assisted us with the FreeStyle meter development and is currently
manufacturing our meters and assembling our FreeStyle System kits. By
partnering, we believe that we will be able to quickly and efficiently
build infrastructure and services needed to meet anticipated market
demand.
. Provide high quality customer service. We intend to continue to provide
all of our customers with easy, comprehensive access to our products and
services through the use of innovative technologies and partnerships
supported by an educated and caring customer service team. Our approach
is to partner with a service organization while maintaining a small team
of in-house service specialists to monitor quality. We offer 24x7
customer service with access to dedicated representatives via telephone
or Internet. In addition, we use the Internet as a platform to enable
customers to purchase our products online, enhance awareness for our
products, establish e-mail management, facilitate loyalty programs, and
provide product support and training.
. Establish an international presence for FreeStyle. We intend to expand
our international sales efforts for FreeStyle and enter new global
markets by forming relationships with international partners who have
established relationships with health care professionals and have
developed distribution channels. For example, we recently entered into an
alliance with Disetronic Group for the distribution of FreeStyle in
Germany, Switzerland, Denmark, Austria, Sweden, Norway, Finland and the
Netherlands.
. Leverage our proprietary technology platform. We intend to leverage our
proprietary electrochemical sensor technologies to develop new glucose
monitoring products. We intend to expand our current FreeStyle product
family by developing enhanced versions of FreeStyle, as well as
potentially developing a less-featured, low-priced version of FreeStyle
and a hospital version of FreeStyle for multiple users. We are also
developing a continuous glucose monitoring system that is intended to
provide continuous glucose readings through the use of a small self-
insertable sensor, which will
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alert the user if glucose levels are too high or too low. We intend to
focus on developing new applications for our core technologies, including
their potential use as a self-test device to support treatment of other
diseases and monitoring drug concentrations in the body.
Our Products
FreeStyle Blood Glucose Monitoring System. Our initial product, the
FreeStyle Blood Glucose Monitoring System, received FDA clearance in January
2000, and we began selling FreeStyle in June 2000. The FreeStyle System kit
includes: a FreeStyle meter, an initial supply of proprietary FreeStyle test
strips, a FreeStyle lancing device, FreeStyle lancets, FreeStyle control
solution and instructional materials.
. FreeStyle meter. The FreeStyle meter contains a large display screen to
read test results, a slot where the test strip is inserted to get a blood
glucose reading, and buttons to change the calibration code and review
results in memory. It also contains a data port for interfacing with
FreeStyle Connect data management software, which allows users to
download information from the meter to personal computers and analyze
glucose levels on an ongoing basis. The ergonomically designed meter fits
easily in the hand and weighs 2.1 ounces. The meter displays blood
glucose results in a range of 20 to 500 mg/dl. From the time the sample
is acquired until the result is displayed on the meter takes about
15 seconds. The meter has the ability to store the last 250 blood glucose
test results and to display a 14-day blood glucose average.
. FreeStyle test strips. FreeStyle test strips are proprietary disposable
sensors that are used with the FreeStyle meter to measure glucose. The
test strips are clearly marked to indicate proper placement in the meter.
Inserting the test strip into the meter activates the system and either
side of the test strip can be used for measurement. The FreeStyle meter
beeps when sufficient blood has been drawn into the test strip, and beeps
twice when the test is complete. The FreeStyle meter may only be used
with proprietary FreeStyle test strips.
. FreeStyle lancing device and lancets. The FreeStyle lancing device is
proprietary and designed specifically to make blood sample acquisition
from the forearm reliable and convenient. It requires no mechanical or
vacuum assistance. The lancing device offers five adjustable depth
settings to allow for comfort and adequate sample size. Although
FreeStyle lancets are available, other standard lancets are compatible
with the system. A new, sterile lancet is inserted into the lancing
device every time a test is administered.
. FreeStyle control solution. The FreeStyle control solution contains a
fixed amount of glucose that may be used periodically to ensure the
FreeStyle System is functioning correctly and users are following correct
testing procedures.
FreeStyle Connect. In May 2000, we received FDA clearance for FreeStyle
Connect, a data management software product that will be available in two
versions for health care professionals and end users later this year. FreeStyle
Connect downloads data from FreeStyle to a personal computer and displays
glucose values in eight different statistical reports, including the number of
blood glucose values above, within, and below a given target range. The
FreeStyle meter stores up to 250 glucose values each with time and date. This
data will allow health care providers to help multiple patients adjust their
diet, exercise and medication to improve and maintain their health.
Products Under Development
Additional FreeStyle Products. We plan to continue developing products that
will extend our technology platform such as a premium system with enhanced
features including more memory and a record of diabetes management events. We
may also develop a low-priced system with less features for the price-sensitive
consumer as well as a hospital version of FreeStyle for multiple users. We will
also continue to identify and develop products that fulfill unmet consumer
needs and address strategic or competitive issues.
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Continuous Glucose Monitoring System. We are also developing a continuous
monitoring device that will utilize a miniaturized electrochemical sensor that
can be inserted under the skin by the user to continuously measure and display
glucose levels and store the results for further analysis by the user or a
physician. The increased number of glucose readings will allow people with
diabetes to more effectively adjust insulin, oral medication, diet and exercise
and should result in significantly improved health outcomes for people with
diabetes. The continuous system is being designed to offer people with diabetes
the following benefits:
.accurate and discrete measurement of glucose levels on a continuous
basis;
.elimination of the anxiety of not knowing glucose levels between
periodic measurements;
.minimally invasive insertion procedure and comfortable to wear;
.warnings against dangerously high or low glucose levels, even while
sleeping; and
.ability to improve health through intensively managed therapy from
continuous glucose information.
We believe each sensor used with our system, by sampling the fluid between
cells, will provide up to three days of continuous glucose measurement. The
accuracy and precision of a continuous glucose monitoring system will be
dependent on the initial calibration. Therefore, our system will have a built-
in FreeStyle meter that will allow for accurate and convenient calibration
using FreeStyle test strips. The integrated calibration will help eliminate the
risk of human errors during data entry. The display, which will be worn as a
pager, will translate the sensor's information into a numerical value and
periodically, or on demand, display the glucose level and the trend. Such
information will allow users to determine whether glucose levels are rising,
falling or remaining stable. Since there are no wires connecting the display
unit and the sensor system, the display unit can be conveniently worn on the
belt, carried in a purse or left on a bed stand at night.
Clinical trials are expected to commence in the next 12 months. We expect
that our continuous glucose monitoring system will require PMA approval which
is a considerably more extensive and uncertain regulatory approval process than
the 510(k) clearance process that was applicable to FreeStyle. Therefore, even
if the product is successfully developed, it will not be commercially available
for several years.
Our Sensor Technologies
We have developed and patented two miniaturized electrochemical sensor
technologies. The first, NanoSample technology, is used in our FreeStyle
System. The second, Wired Enzyme chemistry, will be used in our continuous
glucose monitoring system, which is under development.
NanoSample Technology
NanoSample technology enables FreeStyle to measure glucose levels in blood
samples of only 0.3 microliters, a fraction of the sample size required by
leading competitive products. We have pioneered techniques to obtain high
accuracy and precision as well as fast response times when measuring glucose in
sub-microliter, or nanoliter, sample sizes. This technology allows us to
measure the total electrical charge generated by the reaction of all of the
glucose in the sample, a process referred to as coulometry. In contrast,
competitors' products generally determine the glucose level by taking a
measurement of the current generated by the sensor at a point in time, a
process referred to as amperometry, which requires the use of a larger blood
sample to achieve accurate results. Use of coulometry with our chemistry
substantially eliminates some of the errors frequently associated with
amperometry, such as dependence of sensor output on temperature and other
commonly found substances in the blood, such as acetaminophen or Vitamin C,
which can distort the glucose measurement.
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Wired Enzyme Chemistry
Our Wired Enzyme chemistry is allowing us to develop miniaturized, self-
insertable, biocompatible sensors. We are currently using this technology to
develop our continuous glucose monitoring system. Our glucose monitoring system
sensor, which will be inserted under the skin by the user, will react with the
glucose near or at the implant site to produce an electrical signal that
enables glucose concentration measurement. We believe our technology will
successfully address the core technical issues that have limited the
performance of other implantable glucose sensors, as reported in technical
literature. We also believe our system will be calibrated easily and
accurately.
Marketing and Sales
United States
We have developed a marketing and sales approach to generate awareness of
FreeStyle and penetrate and expand the glucose self-monitoring market. Our
primary targets are people with diabetes, people who know people with diabetes
and health care professionals. Following FDA clearance in January 2000, we
recruited and hired a national sales force of approximately 50 people that
covers the major population regions of the United States. The sales force calls
on the health care professionals who strongly influence the health care
decisions made by people with diabetes, a group which includes
endocrinologists, certified diabetes educators, internal medicine physicians,
family and general practitioners, and pharmacists. The goal of our sales force
is to educate and train health care professionals on the benefits of our
products. This, we believe, will ultimately result in recommendations and
referrals for our products. We believe that our strategy of selling through our
own direct sales force is an important factor in market penetration.
Our direct-to-consumer advertising campaign is aimed at health care
professionals, people with diabetes, and people who know people with diabetes.
Our belief is that pain is such an important issue in glucose testing that it
is recognized and understood not only by people with diabetes, but also their
co-workers, friends, and families, each of whom will be willing to tell others.
To further generate awareness and penetrate the market, our sales and marketing
organization provides a wide range of programs, support materials and events
that support our national sales force. These include public relations efforts,
product training, conference and trade show attendance, and educational and
promotional literature.
We sell our products through traditional retail channels and distributors.
We also sell directly to end users through customer phone orders and through
our website. Although there is substantial competition from existing products,
the consolidation of the retail industry has reduced the need for a substantial
direct retail sales force. Examples of the top retailers and distributors in
each of our distribution channels to which we have sold products include:
<TABLE>
<S> <C> <C>
. Wal-Mart .Walgreens .CVS
. Longs .Eckerd .Rite Aid
. Meijer .Bergen Brunswig .McKesson
. Cardinal .AmeriSource .American Sales
. Drugstore.com .SelfCare.com .DrugEmporium.com
</TABLE>
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International
We intend to expand our international sales efforts for FreeStyle and enter
new global markets by establishing relationships with international partners
who have established relationships with healthcare professionals and developed
distribution channels. For example, in September 2000, we entered into an
agreement with Disetronic Group for the exclusive distribution of FreeStyle in
Germany, Austria, Switzerland, Denmark, Sweden, Finland, Norway and the
Netherlands. Disetronic is a leading international supplier of drug delivery
systems, including insulin injection pens and insulin pumps used to
continuously deliver insulin to intensively managed diabetes patients.
Disetronic products represent approximately 80% of the insulin pump market in
Europe. Insulin pump users are typically highly motivated insulin-dependent
diabetes patients who frequently test blood glucose levels. Under terms of the
agreement, Disetronic will have exclusive responsibility for sales, marketing
and customer service in its territory in Europe. Disetronic will market
FreeStyle to Disetronic's pump users in Europe and North America.
Distribution
To establish a worldwide distribution capability for end users, health care
professionals and retail customers, we have established relationships with
expert distribution partners. For retail order management and shipping of all
products, we have partnered with Livingston Healthcare Services, Inc., a
company that specializes in providing outsource distribution services for large
pharmaceutical and medical device companies. Livingston has an extensive
network of distribution centers and a sophisticated order management and
product tracking system. Livingston also manages our billing process utilizing
our web based e-Business system or a direct phone-order system from our
customer services department. Our relationship with Livingston allows us to
meet shipment, delivery and billing expectations while minimizing our internal
infrastructure requirements. This allows customers access to products with the
broadest range of options currently available in the marketplace--retail, web
and direct phone supply.
Customer Service
We have implemented a responsive and extensive 24x7 customer service support
system, a standard of service expected in the industry, through our
relationship with ICT. ICT is an international telemarketing and e-support
company, with a medical marketing division which has developed a special
facility and dedicated customer care agents for us. ICT's agents have the
systems capability to handle large volumes of our customer contacts at any
time, both through the phone or our web site. We select and train the ICT
agents who work on our account, as well as maintain in-house customer service
personnel that monitor quality.
e-Business Strategy
We launched a web site for our customers in March 2000, prior to the launch
of FreeStyle. We believe that our e-Business plans will have an important
impact on our future product offerings, as well as enhance our distribution,
support and marketing efforts. Via our web site, customers can order products,
ask support questions, obtain shipping information and watch product
demonstration videos. We will continue to expand our web capabilities and
support for all customer types by providing retail customers a unique business-
to-business solution for ordering and shipment tracking, and offer health care
providers specialized services and content. Through our web presence we have
developed direct marketing relationships with all our customer classes:
retailers, end users and health care providers. In addition, we have partnered
with ProCure.com to develop, implement, host, maintain and expand our web
presence.
Manufacturing
The primary components of the FreeStyle system kit are the FreeStyle meter,
FreeStyle test strips, FreeStyle lancing devices, FreeStyle lancets and control
solution. Flextronics is solely responsible for manufacturing the meter and
assembling the kits. Flextronics assisted us in the design of the meter.
Flextronics has more than 11 years experience building blood glucose meters,
and has facilities in Asia, Europe and the
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Americas. Flextronics has demonstrated strong process control and knowledge of
just-in-time and total quality management techniques and has software tools to
handle product tracking. We have an on-site manager at Flextronics who is
responsible for the day-to-day interface between the two businesses. Production
release to finished goods inventory is done through our quality assurance
department. Our contract with Flextronics expires in November 2005, and is
renewable annually thereafter.
The FreeStyle test strips are manufactured at our facility in Alameda,
California. We have developed a high volume manufacturing process for the test
strips that we believe is robust, cost effective, and scaleable to meet the
anticipated growth of the business. The test strip is composed of chemicals,
adhesive and printed Melinex, a polyester similar to the material used in
credit cards. The FreeStyle lancing device, lancets and control solution are
manufactured by outside suppliers. These partnerships minimize our capital
investment, help to keep our costs down and allow us to compete cost-
effectively with larger volume manufacturers of blood glucose self-monitoring
systems.
Gainor Medical North America LLC, a wholly-owned subsidiary of Matria
Healthcare, is a supplier for the lancing device industry that distributes
approximately half of the world's lancets. We jointly developed with Gainor
Medical the lancing device used to obtain our blood samples. Gainor Medical
also manufactures the lancing device and distributes our lancets. Gainor
Medical has an exclusive right to manufacture the lancing device for a period
of seven years. In addition, the lancing device can use conventional lancets,
which are widely available.
Each of the production processes utilized in the manufacture of our products
has been verified and validated, as required by the FDA's quality system
regulations. As a medical device manufacturer, our manufacturing facility and
the facilities of Flextronics and Gainor Medical are subject to periodic
unannounced inspection by regulatory authorities and such operations may
undergo compliance inspections conducted by the FDA and corresponding state
agencies. In addition, we are currently pursuing ISO registration.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other measures
to protect our proprietary rights. As of September 30, 2000, we had 15 issued
U.S. patents, had received notices of allowance with respect to nine U.S.
patent applications, and had numerous additional U.S. patent applications
pending. The issued and allowed patents cover, among other things: coulometric
measurement of small samples of body fluid; the Wired Enzyme chemistry; one
point calibration of the continuous glucose monitoring system product;
manufacturing processes for the continuous glucose monitoring system sensor;
and the components of the continuous glucose monitoring system product. We have
filed numerous foreign patent applications on our technology. We have applied
to register the trademarks TheraSense, FreeStyle, The Technology of Caring,
NanoSample and Wired Enzyme.
In addition to developing our own technology, we have entered into several
license agreements. We have acquired patents from the University of Texas at
Austin, or UTA, developed by Professor Adam Heller, a co-founder of our
company, and his collaborators. We also fund ongoing research at UTA in the
field of biosensors, and we obtain some of the intellectual property rights to
resulting inventions. We have also obtained non-exclusive, worldwide licenses
to patents related to medical diagnostic devices. We pay for these licenses
through a combination of fixed payments and royalties on sales of covered
products. In addition to these in-licenses, we have out-licensed exclusive
rights to specific patents to two companies for use in measuring specific
biochemicals outside the diabetes field. We do not expect these out-license
agreements to generate material income for us.
Research and Development
Our research and development efforts are currently focused on developing
further enhancements to FreeStyle as well as developing our continuous glucose
monitoring product. Our research and development staff consists of 35,
including five who hold Ph.D. degrees. Our research and development staff has
extensive
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experience in the glucose monitoring industry and has been instrumental in
technology development and commercialization of current glucose monitoring
products. Collectively, we have over 200 years experience in developing test
strip technology. Research and development expenses, including clinical and
regulatory expenses, were $1.0 million for 1997, $3.1 million in 1998, $7.7
million in 1999 and $5.8 million for the six months ended June 30, 2000. We
expect research and development expenses to increase in the future as we seek
to enhance our existing products and develop additional products.
We also fund biosensor research under a Sponsored Research Agreement with
UTA. We have specific rights with regards to inventions resulting from the
research. The research is currently under the direction of Professor Adam
Heller and is focused on improvements to implantable glucose sensors and on
extension of the Wired Enzyme technology to measurement of other biochemicals.
Competition
The medical device industry is subject to intense competition. Four
companies, Roche Diagnostics, Lifescan, Inc., a division of Johnson & Johnson,
Bayer Corporation and MediSense, a division of Abbott Laboratories, currently
account for over 90% of sales of all blood glucose self-monitoring systems. In
addition, other companies are developing and/or marketing minimally invasive or
noninvasive glucose monitoring devices and technologies that could compete with
our proposed continuous glucose monitoring product. There are also a number of
academic and other institutions involved in various phases of our industry's
technology process. Many of these competitors have significantly greater
financial and human resources than we do.
We believe that the principal competitive factors in our market include:
.improved outcomes for people with diabetes through painless and
accurate testing methods;
.technological leadership and superiority;
.ease of use;
.customer focus and service;
.effective marketing and distribution;
.acceptance by health care professionals;
.speed to market; and
.exclusivity agreements between third-party payors and competitive
brands.
Government Regulation
Our products are medical devices subject to extensive regulation by the FDA
and other regulatory bodies. FDA regulations govern, among other things, the
following activities that we will perform:
.product design and development;
.product testing;
.product manufacturing;
.product labeling;
.product storage;
.premarket clearance or approval;
.advertising and promotion; and
.product sales and distribution.
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FDA's Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially
distribute in the United States will require either prior 510(k) clearance or
prior PMA approval from the FDA. Devices deemed to pose lower risk are placed
in either class I or II, which requires the manufacturer to submit a premarket
notification requesting permission for commercial distribution; this is known
as 510(k) clearance. Some low risk devices are exempted from this requirement.
Devices deemed by FDA to pose the greatest risk, such as life-sustaining, life-
supporting or implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device or a pre-amendment class III
device for which PMA applications have not been called for by the FDA, are
placed in class III, requiring PMA approval.
510(k) Clearance Pathway. To obtain 510(k) clearance, we must submit a
premarket notification demonstrating that the proposed device is substantially
equivalent to a previously cleared 510(k) device or a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet
called for the submission of PMA applications. The FDA's 510(k) clearance
pathway usually takes from four to twelve months from the date the application
is submitted, but it can take significantly longer.
Blood glucose testing systems have generally qualified for clearance under
510(k) procedures. We received 510(k) clearance for FreeStyle in January 2000
for use on the forearm. We also have obtained 510(k) clearance for FreeStyle
Connect, our data management system that enables downloading of blood glucose
data stored in a user's FreeStyle monitor to a personal computer for use by the
user or their health care provider. In February 2000, we submitted a 510(k)
application that would permit FreeStyle to be used on alternate testing sites,
including the thigh, calf, upper arm, and hand. There can be no assurance,
however, that this submission will receive 510(k) clearance in a timely
fashion, or at all.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If the FDA disagrees with a manufacturer's decision not to seek a new 510(k)
clearance, the FDA may require a manufacturer to seek 510(k) clearance or PMA
approval. The FDA also can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance or PMA approval is obtained.
We have made and plan to continue to make additional product enhancements to
our FreeStyle System that we believe do not require new 510(k) clearances.
PMA Approval Pathway. If the FDA denies 510(k) clearance for one of our
products or if one of our products is not eligible for 510(k) clearance, we
must follow the PMA approval pathway for that product before marketing
commences. A PMA application requires proof of the safety and effectiveness of
the device to the FDA's satisfaction. A PMA application must provide extensive
pre-clinical and clinical trial data and also information about the device and
its components, including, among other things, device design, manufacturing and
labeling. After approval of a PMA, a new PMA or PMA supplement is required in
the event of a significant modification to the device, it's labeling or its
manufacturing process. The PMA pathway is much more costly, lengthy and
uncertain than 510(k) clearance. It generally takes from one to three years or
even longer from submission.
We anticipate that our continuous glucose monitoring systems will require
PMA approval. We are currently completing pre-clinical testing of this device
and anticipate beginning clinical trials in the next 12 months. No assurance
can be given that a PMA application will ever be submitted, or if submitted,
that approval will ever be obtained for this device in a timely fashion, if at
all.
Clinical Trials. A clinical trial is almost always required to support a PMA
application and is sometimes required for a 510(k) premarket notification. Such
trials generally require submission of an application for an Investigational
Device Exemption, or IDE, to the FDA. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results, showing that
it is safe to test the device in humans and that the testing protocol is
scientifically sound. The IDE must be approved in advance by the FDA for a
specified
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number of patients, unless the product is deemed a non-significant risk device
and eligible for more abbreviated IDE requirements. Clinical trials may begin
once the IDE application is approved by the FDA and the appropriate
institutional review boards at the clinical trial sites. We anticipate that we
will be required to file an IDE application to test our continuous glucose
monitoring system in humans. No assurance can be given that an IDE application
will ever be submitted or approval obtained to study the continuous glucose
monitoring systems in humans, or if obtained, that the results of any clinical
testing will result in approval of the product Our clinical trials must be
conducted in accordance with FDA regulations.
Pervasive and Continuing FDA Regulation
After a device is placed on the market, numerous regulatory requirements
apply. These include: the quality system regulation, or QSR, which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures during the manufacturing process; labeling
regulations; the FDA's general prohibition against promoting products for
unapproved or "off-label" uses and other restrictions on labeling; and the
Medical Device reporting regulations, which require that manufacturers report
to the FDA if their device may have caused or contributed to a death or serious
injury or malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to recur.
We are subject to unannounced inspection by the FDA and the Food and Drug
Branch of the California Department of Health Services. Neither the FDA nor the
California Department of Health Services has inspected our manufacturing
facilities nor the manufacturing lines of our subcontractors, and neither we
nor our subcontractors can assure you that we will successfully pass such an
inspection or achieve or maintain compliance in the future. Failure to comply
with applicable regulatory requirements can result in enforcement action by the
FDA, which may include the following sanctions:
.fines, injunctions, and civil penalties;
.recall or seizure of our products;
.operating restrictions, partial suspension or total shutdown of
production;
.refusing our request for 510(k) clearance or PMA approval of new
products;
.withdrawing 510(k) clearance or PMA approvals that are already granted;
and
.criminal prosecution.
International
International sales of medical devices are subject to foreign government
regulations, which vary substantially from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may differ. The primary
regulatory environment in Europe is that of the European Union, which consists
of 15 countries encompassing most of the major countries in Europe. Other
countries, such as Switzerland, have voluntarily adopted laws and regulations
that mirror those of the EU with respect to medical devices. The EU has adopted
numerous directives and standards regulating the design, manufacture, clinical
trial, labeling, and adverse event reporting for medical devices. Devices that
comply with the requirements of a relevant directive will be entitled to bear
CE conformity marking, indicating that the device conforms with the essential
requirements of the applicable directives and, accordingly, can be commercially
distributed throughout Europe. The method of assessing conformity varies
depending on the class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment by a "Notified
Body." This third-party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the manufacturer's
product. An assessment by a Notified Body in one country within the EU is
required in order for a manufacturer to commercially distribute the product
throughout the EU. During this process, we must demonstrate compliance with
designated manufacturing and quality requirements known as the "ISO"
requirements.
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We intend to pursue a CE Mark from the EU for FreeStyle. We also intend to
pursue certification of our manufacturing facilities to ISO 9001/EN46001
quality system requirements. While no additional premarket approvals in
individual EU countries are required, prior to marketing of a device bearing
the CE Mark, practical complications with respect to market introduction may
occur. For example, differences among countries have arisen with regard to
labeling requirements.
Third-Party Reimbursement
Self-monitoring of blood glucose is a standard of care in the United States
and other developed countries. The costs associated with the purchase of blood
glucose monitoring products such as meters and test strips by people with
diabetes are generally reimbursed. FreeStyle is currently being reimbursed
through Medicare, Medicaid, open formulary plans, and certain preferred
provider organizations in the United States. International market acceptance of
our products may depend, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include
both government-sponsored health care and private insurance. Reimbursement has
not yet been determined for our continuous glucose monitoring system.
Advisory Boards
Medical Advisory Board
We have established a medical advisory board, consisting of individuals with
recognized expertise in fields relating to diabetes treatment, to advise us
concerning long-term product planning, research, development and marketing.
Members of our medical advisory board consult and meet formally and informally
with us. Several of the members of our medical advisory board are employed by
academic institutions and may have commitments to or agreements with other
entities that may limit their availability to us. Members of our medical
advisory board may also serve as consultants to other medical product
companies. The members of our medical advisory board have agreed, however, to
maintain the confidentiality of all proprietary information we disclose to
them. In addition, any ideas, inventions, developments, improvements and works
of authorship developed by the members of our medical advisory board relating
to diabetes testing devices are our property.
Currently, the following persons comprise our medical advisory board:
Richard Bergenstal, MD is an endocrinologist and is currently the Executive
Director of the International Diabetes Center in Minneapolis, Minnesota. Dr.
Bergenstal's focus has been the development of diabetes treatment algorithms
and education of primary care physicians to improve the level of clinical care
for people with diabetes. Dr. Bergenstal received the Charles H. Best Medal
from the American Diabetes Association for distinguished service for his role
as an investigator in the Diabetes Control and Complications Trial.
John B. Buse, MD, Ph.D. is an endocrinologist and is currently an Associate
Professor, Division of Endocrinology, at the University of North Carolina
Medical School, Chapel Hill, North Carolina. Dr. Buse has both a large clinical
practice as Director of the Diabetes Program and research practice as Director
of Endocrinology Clinics at UNC. Dr. Buse has published widely on diabetes and
drug therapies and is a frequent presenter at professional conferences around
the world.
Alan Moses, MD is an endocrinologist and is currently the Chief Medical
Officer of the Joslin Clinic and Diabetes Center in Boston, Massachusetts. Dr.
Moses is also an Associate Professor of Medicine at Harvard Medical School and
participates in the administration and leadership of numerous diabetes related
clinical and research initiatives. Dr. Moses' research is focused on severe
insulin resistance and novel routes of drug delivery and therapies for
diabetes. He is known as being a vocal advocate for issues involving children
with diabetes.
Anne L. Peters, MD is an endocrinologist and is currently a Director of the
University of Southern California Diabetes Program in Los Angeles, California.
She has researched and published on diabetes drug therapies, clinical treatment
of diabetes and has a particular research interest in outcomes studies in
diabetes.
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Philip Raskin, MD is an endocrinologist and is currently a Professor of
Medicine for the Department of Internal Medicine at Southwestern Medical
School, University of Texas Health Science Center in Dallas. Dr. Raskin was
involved in the DCCT study and was recognized for achieving the best clinical
results among all the clinical study sites.
Harry Shamoon, MD is an endocrinologist and is currently a Professor for the
Department of Medicine, Division of Endocrinology and Metabolism at the Albert
Einstein College of Medicine in New York. Dr. Shamoon is a leading expert on
hypoglycemia and diabetes and was involved as an investigator in the DCCT. He
is on the National Board of Directors for the American Diabetes Association and
the American Board of Endocrinology and Metabolism.
Educator Advisory Board
We have also established an educator advisory board of consultants with
expertise in educating people with diabetes. The educator advisory board meets
formally and informally and provides us advice on training materials,
patient/product acceptance criteria and product marketing. The members of the
educator advisory board have agreed to maintain the confidentiality of all
proprietary information we disclose to them.
Currently the following persons comprise our educator advisory board:
Nancy Bristow, RN, BSN, CDE is the Clinical Nurse of the Diabetes and
Endocrine Associates of Tarrant County in Fort Worth, Texas. She supports
numerous people with diabetes and endocrinologists and has been involved in
clinical studies with several local universities and major diabetes related
companies.
Nedra Christensen, RD, Ph.D. is an Assistant Professor at Utah State
University, Logan, Utah. She has practiced diabetes clinical dietetics with the
Joslin Clinic, Vanderbilt University and children's diabetes camps. Dr.
Christensen publishes extensively on diabetes treatment and dietetics.
Carol H. Homko, RN, CDE, MS, Ph.D. is the Clinical Nurse Practitioner at the
General Clinical Research Center at Temple University Hospital in Philadelphia.
Her academic and clinical focus has been on diabetes and pregnancy.
Judy Kohn, RN, CDE is the Program Coordinator for the Diabetes Center at the
John Muir Medical Center in Walnut Creek, California. She has an active
clinical diabetes practice and teaches classes around the country to both
people with diabetes and healthcare professionals.
Marsha McCleskey, RD, MS, CDE is the Clinical Dietitian for the Diabetes and
Endocrine Associates of Tarrant Co. in Fort Worth, Texas. She teaches people in
a large clinical practice, consults and speaks extensively on diabetes care.
She has a particular interest in diabetes data management.
Jim Pichert, Ph.D. is the Diabetes Education Program Director of the
Diabetes Research and Training Center at the Vanderbilt University Medical
Center, in Nashville, Tennessee. He has researched and published extensively on
educational methods that improve diabetes care. He has held numerous national
positions in diabetes professional organizations and is a popular speaker on
improved diabetes outcomes with innovative teaching methods.
Employees
As of September 30, 2000, we had 137 full-time employees, including 57 in
sales and marketing, 26 in operations and manufacturing, 35 in research and
development, six in customer service and 13 in general and administrative
functions. None of our employees are represented by a collective bargaining
agreement and we have never experienced any work stoppage. We believe that our
employee relations are good.
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Facilities
We lease approximately 54,500 square feet of manufacturing and office space
in Alameda, California under a lease expiring in April 2009. We believe that
this facility will meet our space requirements for research, development and
administration, as well as manufacturing of sensors, for approximately the next
12 months. We also have an option to acquire additional contiguous space to
expand our facilities as necessary and believe this will be satisfactory for
the next twelve months.
Legal Proceedings
We are not currently subject to any material pending or threatened legal
proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth, as of September 30, 2000, information about
our executive officers, directors and our Chief Scientific Advisor:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
W. Mark Lortz........... 49 Chairman of the Board, Chief Executive Officer and President
Adam Heller, Ph.D. ..... 67 Co-Founder and Chief Scientific Advisor
Charles T. Liamos....... 41 Vice President and Chief Financial Officer
Ephraim Heller.......... 38 Co-Founder, Vice President of Business Development and Director
Tae Andrews............. 38 Vice President of Marketing and Sales
Eve Conner, Ph.D........ 55 Vice President of Quality Assurance and Regulatory Affairs
Holly Kulp.............. 43 Vice President of Professional Relations and Customer Services
Claire Heiss............ 53 Vice President of Operations
Timothy Goodnow,
Ph.D. ................. 39 Vice President of Research and Development
Annette J. Campbell-
White(1)............... 53 Director
Mark J. Gainor.......... 44 Director
Ross A. Jaffe,
M.D.(2)(1)............. 42 Director
Michael McNamara(1)..... 43 Director
Robert R. Momsen(2)..... 53 Director
Richard P. Thompson(2).. 48 Director
</TABLE>
--------
(1) Member of Compensation Committee
(2) Member of Audit Committee
W. Mark Lortz has served as our President and Chief Executive Officer since
December 1997 and Chairman of the Board since October 1998. From July 1991 to
October 1997, Mr. Lortz held several positions at LifeScan, a Johnson & Johnson
diversified healthcare company, including Vice President, Operations and Group
Vice President, Worldwide Business Operations and International Franchise
Development. Mr. Lortz holds an M.B.A. in Management from Xavier University and
a B.S. in Engineering Science from Iowa State University.
Adam Heller, Ph.D. co-founded TheraSense with Ephraim Heller in December
1996 and has served as our Chief Scientific Advisor since the founding. Since
August 1988, Dr. Heller has been the Ernest Cockrell, Sr. Chair in Engineering
at the University of Texas at Austin. He is a Member of the National Academy of
Engineering of the United States of America. Dr. Heller was awarded an honorary
doctorate by Sweden's Uppsala University and major awards of the American
Chemical Society, the Royal Society of Chemistry (U.K.) and The Electrochemical
Society. Dr. Heller has a Ph.D. in Chemistry, and an M.Sc. in Chemistry and
Physics from the Hebrew University in Jerusalem. He did postdoctoral research
at the University of California, Berkeley and at Bell Laboratories.
Charles T. Liamos joined TheraSense in April 1998 as our Director of
Purchasing and Finance, and in July 1999 he was promoted to Vice President and
Chief Financial Officer. From May 1995 to April 1998, Mr. Liamos was Director,
Worldwide Sourcing at LifeScan. He holds a B.S. in Business Administration from
the University of Vermont and is a graduate of the General Electric Financial
Management Program.
Ephraim Heller served as our President from our founding in December 1996
until October 1997, and currently serves as a director and as our Vice
President of Business Development. Prior to co-founding TheraSense, from August
1991 to December 1996, Mr. Heller was the Founder and President of E. Heller &
Company, a company involved in the development and commercialization of new
technologies in material science. Mr. Heller holds an M.B.A. from Yale
University and a B.A. in Physics from Harvard University.
Tae Andrews has served as our Vice President of Marketing and Sales since
May 1999. From January 1997 to May 1999, Mr. Andrews was the Vice President of
Marketing for Enamelon, Inc., a start-up oral care
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technology company. From July 1994 to January 1997, Mr. Andrews was the Senior
Product Manager for Kraft Foods. Before embarking on his marketing career, Mr.
Andrews was a U.S. Air Force Intelligence Officer responsible for leading teams
of electrical engineers in developing intelligence collection systems and
gathering military intelligence worldwide. Mr. Andrews holds an M.B.A. from
Columbia University and a B.S. in Engineering and Political Science from the
United States Naval Academy.
Eve Conner, Ph.D. has served as our Vice President of Quality Assurance and
Regulatory Affairs since January 1998. From June 1996 to December 1998 she
served as Vice President, Clinical/Regulatory Affairs and Quality Assurance for
Somnus Medical Technologies, a manufacturer of electrosurgical devices used in
connection with upper airway obstruction management. From October 1991 to June
1996, Ms. Conner was Vice President, Regulatory/Clinical Affairs and Quality
Assurance for Baxter Healthcare's Novacor Division, a manufacturer of
implantable heart assist devices. Ms. Conner holds a Ph.D. in Pharmacology from
the University of Minnesota and a B.A. in Biology from Keuka College.
Holly Kulp has served as our Vice President of Professional Relations and
Customer Service since January 1999. From October 1986 to December 1998, she
held numerous positions at LifeScan, including the position of Vice President
of Quality Assurance, Regulatory Affairs and Legal from April 1994 through
December 1998. Ms. Kulp holds an M.Ed. in Medical Education from Vanderbilt
University and a B.S. in Dietetics and Distributed Sciences from David Lipscomb
University.
Claire Heiss has served as our Vice President of Operations since August
1999. Most recently, Ms. Heiss served as the Vice President and General Manager
of Cooking Products for AB Electrolux's Frigidaire Company from May 1994 to
November 1997. Ms. Heiss holds a B.S. in Industrial Engineering from the
University of Illinois.
Timothy Goodnow, Ph.D. will join as our Vice President of Research and
Development in November 2000. Prior to joining TheraSense, from July 1998 to
June 1999, Dr. Goodnow served in the capacity of Vice President of Research and
Development for ZymeQuest, Inc., a start-up company specializing in the
development of enzymic blood conversion processing systems for use in blood
transfusion medicine. From June 1999 to October 2000, Dr. Goodnow held the
position of Vice President of Research and Development for Verax Biomedical, a
blood safety start-up company. He also served in various positions of
increasing responsibility, including Vice President of Research Development for
Baxter Healthcare/Dade Behring from January 1983 to July 1998. Dr. Goodnow
holds a B.S. and Ph.D. in Chemistry from the University of Miami.
Annette J. Campbell-White has served on our board of directors since April
1997. She has been the Managing Partner of MedVenture Associates I, II and III,
which are venture partnerships investing primarily in early stage businesses in
the health care field, since May 1986. Ms. Campbell-White currently serves on
the board of directors of ArthroCare Corporation. Ms. Campbell-White holds a
B.S. degree and an M.S. degree in Chemical Engineering, both from the
University of Cape Town, South Africa.
Mark J. Gainor has served on our board of directors since January 2000. Mr.
Gainor currently serves as President of Lucor Holdings, LLC, a private
investment company investing primarily in health care technology companies.
From January 1999 to August 2000, Mr. Gainor served as President of the
diabetes management services subsidiary of Matria Healthcare, Inc. From 1986 to
January 1999, Mr. Gainor was President and Chief Executive Officer of Gainor
Medical Management LLC, a multi national manufacturer and distributor of
diabetic supplies, which was acquired by Matria Healthcare, Inc. in January
1999. Mr. Gainor serves on the board of Matria. Mr. Gainor has a degree in
Business Administration and Commerce from the University of Alberta, Canada.
Ross A. Jaffe, M.D. has served on our board of directors since October 1998.
Dr. Jaffe joined Brentwood Venture Capital in August 1990, and continues to
serve as a Managing Member of Brentwood VIII Ventures LLC, the general partner
of Brentwood Associates VIII, L.P. and Brentwood Affiliates Fund II, L.P. Dr.
Jaffe is a Managing Director of Versant Ventures, a healthcare-focused venture
capital firm that was formed in
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November 1999. Dr. Jaffe holds an M.D. from the Johns Hopkins University School
of Medicine and completed his residency in internal medicine at the University
of California, San Francisco. He received an M.B.A. from Stanford University
and an A.B. in Policy Studies from Dartmouth College.
Michael McNamara has served on our board of directors since May 1997. He has
served as President, Americas Operations of Flextronics International Ltd.
since April 1994. Mr. McNamara received a B.S. from the University of
Cincinnati and an M.B.A. from Santa Clara University.
Robert R. Momsen has served on our board of directors since October 1998. He
has been a General Partner at InterWest Partners, a private venture capital
firm, since August 1981. Mr. Momsen serves as a director of ArthroCare
Corporation and Coulter Pharmaceutical Inc. Mr. Momsen received a B.S. in
electrical engineering and an M.B.A., both from Stanford University.
Richard P. Thompson has served on our board of directors since November
1998. He has been President, Chief Executive Officer and a director of Aradigm
Corporation since 1994 and was Chief Financial Officer of Aradigm from April
1996 until December 1996. He was named Chairman of the Board of Aradigm in
August 1999. From 1991 to 1994, Mr. Thompson was President of LifeScan, Inc. In
1981, Mr. Thompson founded LifeScan, which was sold to Johnson & Johnson
Company in 1986. Mr. Thompson holds a B.S. in biological sciences from the
University of California at Irvine and an M.B.A. from California Lutheran
University.
Executive officers are appointed by our board of directors and serve until
their successors have been duly elected and qualified. Ephraim Heller, our Vice
President of Business Development and a Director, is the son of Dr. Adam
Heller, our Chief Scientific Advisor. There are no other family relationships
among any of our directors, executive officers or advisors.
Board of Directors
We currently have nine authorized directorships, one of which is vacant. In
accordance with the terms of our amended and restated certificate of
incorporation, the terms of office of the directors are divided into three
classes:
. Class I, whose term will expire at the annual meeting of stockholders to
be held in 2001;
. Class II, whose term will expire at the annual meeting of stockholders to
be held in 2002; and
. Class III, whose term will expire at the annual meeting of stockholders
to be held in 2003.
The Class I directors are Mr. Ephraim Heller and Ms. Campbell-White, the
Class II directors are Messrs. Lortz and Gainor and Dr. Jaffe and the Class III
directors are Messrs. McNamara, Momsen and Thompson. At each annual meeting of
stockholders, or special meeting in lieu thereof, after the initial
classification of the board of directors, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors or a super-majority vote of the
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management.
Board Committees
Our audit committee consists of Messrs. Momsen and Thompson and Dr. Jaffe.
The audit committee reviews and monitors our financial statements and internal
accounting procedures, makes recommendations to our board of directors
regarding the selection of independent accountants and consults with and
reviews the services provided by our independent accountants.
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Our compensation committee will consist of Ms. Campbell-White, Mr. McNamara
and Dr. Jaffe. The compensation committee reviews and recommends to the board
of directors the compensation and benefits of our executive officers and
administers our stock plans and employee benefit plans.
We have two option committees--a primary option committee and a secondary
option committee. The primary option committee is comprised of Mr. Lortz, and
the secondary option committee is comprised of Mr. Ephraim Heller. The function
of the primary option committee is to determine stock option grants for
employees and consultants who are not executive officers or directors. The
secondary option committee fulfills this function when the primary option
committee is unavailable.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.
Director Compensation
We reimburse our non-employee directors for their expenses incurred in
connection with attending board and committee meetings, but do not compensate
them for their services as board or committee members. In the past, we have
granted non-employee directors options to purchase our common stock under our
1997 Stock Plan. Specifically, during fiscal 1997, the board granted Mr.
McNamara an option to purchase 43,334 shares of our common stock with an
exercise price of $0.14 per share, and, during fiscal 1998, the board granted
Mr. Thompson an option to purchase 30,000 shares of our common stock with an
exercise price of $0.28 per share. In September 2000, the board granted each of
Messrs. Gainor, McNamara, Momsen, Thompson, Ms. Campbell-White and Dr. Jaffe an
option to purchase 30,000 shares of our common stock with an exercise price of
$5.00 per share.
Our board continues to have discretion to grant options to non-employee
directors from time to time under our 2000 Stock Plan. Each non-employee
director who joins our board following this offering will receive a
nondiscretionary, automatic grant of options to purchase 30,000 shares of our
common stock upon joining our board of directors. In addition, each of our non-
employee directors will receive yearly nondiscretionary, automatic grants of
options to purchase 10,000 shares of our common stock, pursuant to our 2000
Stock Plan.
45
<PAGE>
Executive Compensation
The following table summarizes the compensation earned for services rendered
to us in all capacities for the year ended December 31, 1999 by our chief
executive officer and our four other most highly paid executive officers. These
executives are referred to as the named executive officers elsewhere in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
1999 Annual Long-Term
Compensation Compensation
---------------- ------------
Securities
Underlying
Name and Position Salary Bonus Options
----------------- -------- ------- ------------
<S> <C> <C> <C>
W. Mark Lortz................................ $218,334 -- 144,990
Chief Executive Officer
Charles T. Liamos............................ $141,875 -- 117,875
Vice President Finance and Chief Financial
Officer
Eve Conner, Ph.D. ........................... $150,000 $15,000 --
Vice President Quality Assurance and
Regulatory Affairs
Holly Kulp................................... $137,500 $15,000 150,000
Vice President Customer Service and
Professional Relations
Fredric C. Colman(1)......................... $152,000 $18,000 38,475
Former Vice President Research and
Development
</TABLE>
--------
(1) Mr. Colman's employment with us terminated as of June 2000.
1999 Option Grants
The following table summarizes the stock options granted to each named
executive officer during the year ended December 31, 1999, including the
potential realizable value over the 10-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent our estimate of future stock price.
Actual gains, if any on stock option exercises will be dependent on the future
performance of our common stock. The assumed 5% and 10% rates of stock
appreciation are based on the assumed initial public offering price of $
per share, the mid-point of the range on the cover of this prospectus.
In the year ended December 31, 1999, we granted options to purchase up to an
aggregate of 1,568,245 shares to employees, directors and consultants. All
options were granted under our 1997 Stock Plan at exercise prices at or above
the fair market value of our common stock on the date of grant, as determined
in good faith by our board of directors. Option shares generally vest over four
years.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates
Number of of Stock Price
Securities Percent of Appreciation for
Underlying Total Options Option Term
Options Granted to Exercise Price Expiration ---------------------
Name Granted Employees Per Share Date 5% 10%
---- ---------- ------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Mark Lortz........... 144,990 9.65% $0.50 03/05/09
Charles T. Liamos....... 87,500 5.82% $0.70 07/16/09
30,375 2.02% $0.50 03/05/09
Eve Conner, Ph.D. ...... -- -- -- --
Holly Kulp.............. 150,000 9.98% $0.50 01/15/09
Fredric C. Colman(1).... 38,475 2.56% $0.50 03/05/09
</TABLE>
--------
(1) Mr. Colman's employment with us terminated as of June 2000.
46
<PAGE>
Aggregate Option Exercises and Option Values
The following table describes for the named executive officers their option
exercises for the year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
The value realized and the value of unexercised in-the-money options at
December 31, 1999 are based on the assumed initial public offering price of
$ per share, the mid-point of the range on the cover of this prospectus,
less the per share exercise price, multiplied by the number of shares issued or
issuable, as the case may be, upon exercise of the option. All options were
granted under our 1997 Stock Plan.
<TABLE>
<CAPTION>
Number Number of Securities
of Underlying Unexercised Value of Unexercised In-
Shares Options at The-Money Options at
Acquired December 31, 1999 December 31, 1999
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Mark Lortz........... 144,990 $ -- -- -- --
Charles T. Liamos....... 117,875 $ -- -- -- --
Holly Kulp.............. -- -- -- 150,000 $ $
Eve Conner, Ph.D. ...... -- -- 40,625 109,375 $ $
Frederic C. Colman(1)... 38,475 $ -- -- -- --
</TABLE>
--------
(1) Mr. Colman's employment with us terminated as of June 2000.
Change of Control and Severance Agreements
We have agreements with each of our executive officers that contain
provisions that will be triggered in the event of a change of control. Upon a
change of control, our executive officers will receive accelerated vesting on
75% of their then unvested shares and the remaining unvested shares will vest
in the event their employment relationship is terminated thereafter. In
addition, Mr. Lortz is entitled to receive a severance payment equal to six
months of his then current salary in the event he is terminated without cause.
Benefit Plans
1997 Stock Plan
Our 1997 Stock Plan was adopted by our board of directors in March 1997, and
our stockholders initially approved the plan in April 1997. Our 1997 Stock Plan
provides for the grant of incentive stock options, which may provide for
preferential tax treatment, to our employees, and for the grant of nonstatutory
stock options to our employees, directors and consultants. We have reserved an
aggregate of 5,493,556 shares of our common stock for issuance under this plan.
As of September 30, 2000, 1,394,651 shares had been issued pursuant to the
exercise of options, options to purchase 3,791,709 shares of common stock were
outstanding, and 307,196 shares were available for future grant. Following this
offering, we will not grant any additional stock options under our 1997 Stock
Plan. Instead we will grant options under our 2000 Stock Plan. The 1997 Stock
Plan provides that in the event of a change in control, each outstanding option
will be assumed or an equivalent option will be granted in its place by the
successor corporation. If the successor corporation refuses to assume or
substitute for the options, the options will terminate as of the closing of the
merger or sale of assets.
2000 Stock Plan
In connection with this offering, our board of directors approved the 2000
Stock Plan in September 2000, and the Plan will be submitted to our
stockholders for approval prior to the completion of this offering. Our 2000
Stock Plan provides for the grant of incentive stock options to our employees,
and for the grant of nonstatutory stock options and stock purchase rights to
our employees, directors and consultants.
47
<PAGE>
Number of Shares of Common Stock Available under the 2000 Stock Plan. We
have reserved a total of 7,000,000 shares of our common stock for issuance
pursuant to the 2000 Stock Plan plus (i) any shares which have been reserved
but not issued under our 1997 Stock Plan and (ii) any shares returned to our
1997 Stock Plan as a result of termination of options, each as of the effective
date of termination of the 1997 Stock Plan. In addition, our 2000 Stock Plan
provides for annual increases in the number of shares available for issuance
under our 2000 Stock Plan on the first day of each fiscal year, beginning with
our fiscal year 2002, equal to the lesser of 5% of the outstanding shares of
common stock on the first day of our fiscal year, 2,500,000 shares or a lesser
amount as our board may determine.
Administration of the 2000 Stock Plan. Our board of directors or a committee
of our board administers the 2000 Stock Plan. In the case of options intended
to qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as amended, or the Code, the
committee will consist of two or more "outside directors" within the meaning of
Section 162(m) of the Code. The administrator has the power to determine the
terms of the options or stock purchase rights granted, including the exercise
price, the number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise.
Options. The administrator determines the exercise price of options granted
under the 2000 Stock Plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code and all incentive stock options, the exercise price
must at least be equal to the fair market value of our common stock on the date
of grant. The term of an incentive stock option generally may not exceed ten
years and the administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an additional option to purchase up to 1,000,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our 2000 Stock Plan. Unless the
administrator determines otherwise, the restricted stock purchase agreement
will grant us a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase will
generally be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The administrator
determines the rate at which our repurchase option will lapse.
Transferability of Options and Stock Purchase Rights. Our 2000 Stock Plan
generally does not allow for the transfer of options or stock purchase rights
and only the optionee may exercise an option and stock purchase right during
his or her lifetime.
Automatic Option Grants to Non-Employee Directors. Our 2000 Stock Plan also
provides for the automatic grant of 30,000 shares of common stock to a director
who first becomes a non-employee director (except those directors who become
non-employee directors by ceasing to be employee directors) on or after the
date of this offering. This option will vest as to one-third of the shares
subject to the option on each anniversary of the date of grant. Each non-
employee director will automatically be granted an option to purchase
10,000 shares each year following the date of our annual stockholder's meeting
(except after the first such annual meeting if it is held within six months of
the date of this offering) if on such date, he or she will have served on our
board of directors for at least the previous six months. This option will vest
as to 100% of the shares subject to the option on each anniversary of the date
of grant. All options automatically granted to
48
<PAGE>
non-employee directors will have a term of 10 years and the exercise price will
be 100% of the fair market value per share of common stock on the date of
grant.
Adjustments upon Merger or Asset Sale. Our 2000 Stock Plan provides that in
the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute an equivalent option or right for each outstanding option or stock
purchase right. If there is no assumption or substitution of outstanding
options or stock purchase rights, all such options and stock purchase rights
shall immediately vest and the administrator will provide notice to the
optionee that he or she has the right to exercise the option or stock purchase
right as to all of the shares subject to the option or stock purchase right,
including shares which would not otherwise be exercisable, for a period of 15
days from the date of the notice. The option or stock purchase right will
terminate upon the expiration of the 15-day period.
Amendment and Termination of our 2000 Stock Plan. Our 2000 Stock Plan will
automatically terminate in 2010, unless we terminate it sooner. In addition,
our board of directors has the authority to amend, suspend or terminate the
2000 Stock Plan provided it does not adversely affect any option previously
granted under it.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan. Our board of directors approved the 2000 Employee Stock Purchase
Plan in September 2000, and the Plan will be submitted to our stockholders for
approval prior to the completion of this offering.
Number of Shares of Common Stock Available under the Purchase Plan. A total
of 1,000,000 shares of our common stock will be made available for sale. In
addition, our Employee Stock Purchase Plan provides for annual increases in the
number of shares available for issuance under the Employee Stock Purchase Plan
on the first day of each fiscal year, beginning with our fiscal year 2002,
equal to the lesser of 1.5% of the outstanding shares of our common stock on
the first day of the fiscal year, 1,000,000 shares, or such lesser amount as
may be determined by our board of directors.
Administration of the Purchase Plan. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Employee Stock Purchase Plan and determine eligibility.
Eligibility to Participate. All of our employees are eligible to participate
if they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, an employee may not be granted an option to purchase stock if such
employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions. Our Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Code and contains consecutive,
overlapping 24-month offering periods. Each offering period includes four six-
month purchase periods. The offering periods generally start on the first
trading day on or after February 1 and August 1 of each year, except for the
first such offering period which will commence on the first trading day on or
after the effective date of this offering and will end on the last trading day
on or before February 1, 2003.
Our Employee Stock Purchase Plan permits participants to purchase common
stock through payroll deductions of up to 15% of their eligible compensation
which includes only a participant's base salary, wages, commissions, shift
premium and overtime. A participant may purchase a maximum of 10,000 shares
during a six-month purchase period.
49
<PAGE>
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period or after a purchase period
end. If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, participants will be
withdrawn from the current offering period following their purchase of shares
on the purchase date and will be automatically re-enrolled in a new offering
period. Participants may end their participation at any time during an offering
period, and will be paid their payroll deductions to date. Participation ends
up to three months after termination of employment with us.
Transferability of Rights. A participant may not transfer rights granted
under the Employee Stock Purchase Plan other than by will, the laws of descent
and distribution or as otherwise provided under the Purchase Plan.
Adjustments upon Merger or Change in Control. In the event of our merger
with or into another corporation or change in control, a successor corporation
may assume or substitute each outstanding option. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened, and a new exercise date will be set.
Amendment and Termination of the Purchase Plan. Our Employee Stock Purchase
Plan will terminate in 2010. However, our board of directors has the authority
to amend or terminate our Purchase Plan, except that, subject to certain
exceptions described in the Purchase Plan, no such action may adversely affect
any outstanding rights to purchase stock under our Purchase Plan.
50
<PAGE>
RELATED PARTY TRANSACTIONS
Common Stock Issuances
In April 1997, we issued 3,129,375 shares of our common stock to E. Heller &
Co. at a price of $0.066 per share. E. Heller & Co. is controlled by Ephraim
Heller, our Vice President of Business Development and a member of our board of
directors. The shares issued to E. Heller & Co. are subject to a restricted
stock purchase agreement. The terms of the agreement provide that the shares
are subject to a right of repurchase in our favor, which lapses over a four
year period. As of September 30, 2000, 2,764,452 of the shares are fully
vested, and 364,923 of the shares remain subject to our right of repurchase.
In December 1997, we issued 447,500 shares of our common stock to W. Mark
Lortz, our President, Chief Executive Officer and Chairman of the Board, at a
price of $0.14 per share. In March 1999, we issued Mr. Lortz 144,990 shares of
our common stock at a price of $0.50 per share. The shares issued to Mr. Lortz
are subject to restricted stock purchase agreements. The agreements provide
that the shares are subject to a right of repurchase in our favor, which right
lapses over a four year period. As of September 30, 2000, an aggregate of
359,005 of the shares are fully vested, and 233,485 of the shares remain
subject to our right of repurchase.
In July 1998, we issued 62,500 shares of our common stock to Charles T.
Liamos, our Chief Financial Officer, at a price of $0.28 per share. In March
1999, we issued Mr. Liamos 30,375 shares of our common stock at a price of
$0.50 per share, and, in September 1999, we issued Mr. Liamos 87,500 shares of
our common stock at a price of $0.70 per share. The shares issued to Mr. Liamos
are subject to restricted stock purchase agreements. The agreements provide
that the shares are subject to a right of repurchase in our favor, which right
lapses over a four year period. As of September 30, 2000, an aggregate of
72,735 of the shares are fully vested, and 107,640 of the shares remain subject
to our right of repurchase.
Preferred Stock Issuances
From April 1997 through February 2000, we sold shares of our preferred stock
in private financings as follows:
. 4,445,775 shares of Series A preferred stock at a price of $1.254 per
share in April 1997;
. 7,142,857 shares of Series B preferred stock at a price of $2.10 per
share in October 1998 and February 1999; and
. 8,490,160 shares of Series C preferred stock at a price of $5.00 per
share in February 2000.
Each share of preferred stock will convert automatically into one share of
common stock upon the closing of this offering. The purchasers of these shares
of preferred stock are entitled to certain registration rights. See
"Description of Capital Stock--Registration Rights." The investors in these
financings included the following executive officers, directors and holders of
more than 5% of our securities and their affiliated entities:
<TABLE>
<CAPTION>
Investor Series A Series B Series C
-------- --------- --------- ---------
<S> <C> <C> <C>
Delphi Investors and affiliates................... 1,794,258 238,095 800,000
Sequoia Capital and affiliates.................... 1,794,257 -- --
Brentwood Venture Capital(1)...................... -- 3,123,236 400,000
InterWest Partners(2)............................. -- 3,123,237 1,254,160
Lehman Brothers and affiliates.................... -- -- 1,999,999
MedVentures Associates II(3)...................... 797,448 476,190 200,000
MJG Partners, L.P.(4)............................. 800,000
EGI-Fund (00) Investors, L.L.C. .................. -- -- 1,260,000
Claire Heiss...................................... -- -- 10,000
</TABLE>
--------
(1) Ross A. Jaffe, M.D., one of our directors, is a Managing Member of
Brentwood VIII Ventures LLC, the General Partner of Brentwood Associates
VIII, L.P. and Brentwood Affiliates Fund II, L.P. The Brentwood Venture
Capital shares include shares purchased by Brentwood Associates VIII, L.P.
and Brentwood Affiliates Fund II, L.P.
51
<PAGE>
(2) Robert R. Momsen, one of our directors, is a General Partner of InterWest
Partners VI, L.P and InterWest Investors VI, L.P. The InterWest Partners
shares include shares purchased by InterWest Partners VII, L.P., InterWest
Partners VI, L.P., InterWest Investors, VII, L.P., and InterWest Investors,
VI, L.P.
(3) Annette J. Campbell-White, one of our directors, is the Managing Partner of
MedVentures Associates II.
(4) Mark J. Gainor, one of our directors, is President of MJG Partners, L.P.
Indemnification Agreements of Officers and Directors
Our amended and restated certificate of incorporation and by-laws provide
that we will indemnify each of our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law. Further, we intend to enter
into indemnification agreements with each of our directors and officers prior
to the completion of this offering. For further information, see "Description
of Capital Stock--Limitation of Liability and Indemnification Matters."
Loans to Directors and Executive Officers
In December 1997 and March 1999, we loaned an aggregate of $135,145 to W.
Mark Lortz, our President, Chief Executive Officer and Chairman of the Board,
in connection with the purchase of an aggregate of 592,490 shares of our
restricted common stock. The loans were made pursuant to two full-recourse
promissory notes in the amounts of $62,650 and $72,495, respectively. The notes
do not bear interest and are secured by the underlying shares of common stock.
The notes are payable upon the earlier of December 1, 2001 and March 5, 2003,
respectively, or termination of Mr. Lortz's employment with or services to us.
In July 1998, March 1999 and September 1999, we loaned an aggregate of
$93,937.50 to Charles T. Liamos, our Chief Financial Officer, in connection
with the purchase of an aggregate of 180,375 shares of our restricted common
stock. The loans were made pursuant to three full-recourse promissory notes in
the amounts of $17,500, $15,187.50 and $61,250, respectively. The notes do not
bear interest and are secured by the underlying shares of common stock. The
notes are payable upon the earlier of April 6, 2002, March 5, 2003 and
September 1, 2003, respectively, or termination of Mr. Liamos' employment with
or services to us.
Agreement with Flextronics
In November 1999 we entered into an agreement with Flextronics International
related to the manufacturing of the FreeStyle meter. Flextronics is exclusively
responsible for building the FreeStyle meter and assembling the FreeStyle
System kits. We have an on-site manager at Flextronics who is responsible for
the day-to-day interface between the two businesses. Production release to
finished goods inventory is done through our quality assurance department.
Pricing is based on production. Our contract with Flextronics expires in
November 2005, and is renewable annually thereafter. Michael McNamara, a member
of our board of directors, is President of Americas Operations of Flextronics.
Agreement with Gainor
Pursuant to an agreement with Gainor Medical North America LLC entered into
in December 1998, Gainor Medical has provided financial support for the
development of some of our glucose monitoring systems and related products. In
exchange for such funding, we granted Gainor Medical the exclusive right to
manufacture the components associated with the development of these products
for a period of seven years from the date of the agreement. Mark J. Gainor, a
principal of Gainor Medical Management LLC and a director and minority
shareholder of Matria Healthcare, Inc., which wholly owns Gainor Medical
Management LLC, is a member of our board of directors.
Agreement with E. Heller & Co.
In October 2000, we entered into a Technology Purchase Agreement with E.
Heller & Co., providing for the transfer and assignment of several licences and
rights to us in exchange for $500,000. E. Heller & Co. is controlled by Ephraim
Heller, a co-founder, our Vice President of Business Development and member of
our board of directors.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth information about the beneficial ownership of
our common stock on September 30, 2000, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:
. each person known to us to be the beneficial owner of more than 5% of our
common stock;
. each named executive officer;
. each of our directors; and
. all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on
the tables is c/o TheraSense, Inc., 1360 South Loop Road, Alameda, CA 94501. We
have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 25,170,239 shares of common stock
outstanding on September 30, 2000 and shares of common stock
outstanding upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of September 30, 2000. We
did not deem these shares outstanding, however, for the purpose of computing
the percentage ownership of any other person.
Executive Officers And Directors
<TABLE>
<CAPTION>
Number of Shares Percentage
Underlying Options of Shares
Number of Exercisable Within Outstanding
Shares 60 Days of -------------
Beneficial Owner Owned September 30, 2000 Before After
---------------- ---------- ------------------ ------ -----
<S> <C> <C> <C> <C>
Five Percent Stockholders
Delphi Ventures(1)................ 2,832,354 -- 11.25%
Sequoia Capital(2)................ 1,794,257 -- 7.13%
Brentwood Venture Capital(3)...... 3,523,236 -- 14.00%
InterWest Partners(4)............. 4,377,397 -- 17.39%
MedVentures Associates II(5)...... 1,473,639 -- 5.85%
Lehman Brothers(6)................ 1,999,999 -- 7.95%
EGI-Fund Investors, L.L.C......... 1,260,000 -- 5.01%
E. Heller & Co. .................. 3,129,375 -- 12.43%
Directors and Named Executive
Officers
W. Mark Lortz(7).................. 592,490 91,145 2.71%
Charles T. Liamos................. 180,375 13,593 *
Fredric C. Colman................. 153,514 -- *
Eve Conner, Ph.D. ................ 68,500 17,906 *
Holly Kulp........................ -- 76,353 *
Ephraim Heller(8)................. 3,129,375 -- 12.43%
Annette J. Campbell-White(5)...... 1,473,639 1,666 5.86%
Mark J. Gainor(9)................. 800,000 1,666 3.18%
Ross A. Jaffe, M.D.(3)............ 3,523,236 1,666 14.00%
Michael McNamara.................. 43,344 1,666 *
Robert R. Momsen(4)............... 3,329,507 1,666 13.23%
Richard Thompson.................. 30,000 1,666 *
All directors and executive
officers as a group (14 people).. 13,333,980 327,326 53.58%
</TABLE>
53
<PAGE>
--------
* Less than one percent
(1) The Delphi Ventures shares include 2,389,337 shares purchased by Delphi
Ventures III, L.P., 391,920 shares purchased by Delphi Ventures IV, L.P.,
8,080 shares purchased by Delphi BioInvestments III, L.P., and 43,017
shares purchased by Delphi BioInvestments IV, L.P. The managing members of
Delphi Management Partners III, L.L.C., which is the general partner of
Delphi Ventures III, L.P. and Delphi BioInvestments III, L.P., disclaim
beneficial ownership except to the extent of their pecuniary interest
therein. The managing members of Delphi Management Partners IV, L.L.C.,
which is the general partner of Delphi Ventures VI, L.P. and Delphi
BioInvestments IV, L.P., disclaim beneficial ownership except to the extent
of their pecuniary interest therein. The address of Delphi Ventures is 3000
Sand Hill Road, Building 1, Suite 135, Menlo Park, California 94025.
(2) The Sequoia Capital shares include 1,618,421 shares purchased by Sequoia
Capital VII, 78,947 shares purchased by Sequoia Technology Partners VII,
52,033 shares purchased by Sequoia 1997, LLC, and 44,856 shares purchased
by Sequoia International Partners. The address of Sequoia Capital is 3000
Sand Hill Road, Building 4, Suite 280, Menlo Park, California 94025.
(3) The Brentwood Venture Capital shares include 3,382,306 shares purchased by
Brentwood Associates VIII, L.P. and 140,930 shares purchased by Brentwood
Affiliates Fund II, L.P. Dr. Jaffe is a managing member of Brentwood VIII
Ventures LLC, the General Partner of Brentwood Associates VIII, L.P. and
Brentwood Affiliates Fund II, L.P. Dr. Jaffe disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein. The
address of Brentwood Venture Capital is 3000 Sand Hill Road, Building 1,
Suite 260, Menlo Park, California 94025.
(4) The InterWest Partners shares include 1,000,000 shares purchased by
InterWest Partners VII, L.P., 3,228,290 shares purchased by InterWest
Partners VI, L.P., 47,890 shares purchased by InterWest Investors, VII,
L.P., and 101,217 shares purchased by InterWest Investors, VI, L.P. Mr.
Momsen is a general partner of InterWest Partners VI, L.P. and InterWest
Investors VI, L.P., and a limited partner of InterWest Investors VIII, L.P.
Mr. Momsen disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein. The address of InterWest Partners
is 3000 Sand Hill Road, Building 3, Suite 255, Menlo Park, California
94025.
(5) Represents 1,473,639 shares owned by MedVentures Associates II. Ms.
Campbell-White is a member of MedVenture Associates Management II Co., LLC,
which is the general partner of MedVenture Associates II. Ms. Campbell-
White disclaims beneficial ownership of these shares except to the extent
of her pecuniary interest therein.
(6) The Lehman Brothers shares include 828,364 shares purchased by LB I Group,
Inc., 729,480 shares purchased by Lehman Brothers Venture Partners L.P.,
and 442,155 shares purchased by Lehman Brothers Venture Capital Partners I,
L.P. The address of Lehman Brothers is 3 World Financial Center, 8th Floor,
New York, New York 10285-0800.
(7) Includes 592,490 shares held by the W. Mark Lortz And Patrice Rae Lortz,
Co-Trustees or Successor Trustee, of the W. Mark Lortz and Patrice Rae
Lortz Revocable Living Trust, under Agreement Dated February 10, 1999, as
community property.
(8) Represents 3,129,375 shares owned by E. Heller & Co., of which Ephraim
Heller is the controlling stockholder. Mr. Heller disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(9) Represents 800,000 shares owned by MJG Partners, L.P., of which Mr. Gainor
is president. Mr. Gainor disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock, after
giving effect to the conversion of all outstanding preferred stock into common
stock and the amendment of our certificate of incorporation, will consist of
200,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value. The following description summarizes the
most important terms of our capital stock. Because it is only a summary, it
does not contain all the information that may be important to you. For a
complete description you should refer to our certificate of incorporation and
by-laws, effective upon completion of this offering, copies of which have been
filed as exhibits to the registration statement of which the prospectus is a
part.
Common Stock
As of September 30, 2000, there were 25,170,239 shares of common stock
outstanding and held by approximately 106 stockholders of record, assuming the
automatic conversion of each outstanding share of preferred stock upon the
closing of this offering. After this offering, there will be shares of
our common stock outstanding, or shares if the underwriters exercise
their over-allotment option in full.
The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose. Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors
out of legally available funds. Upon our liquidation, dissolution or winding
up, the holders of common stock will be entitled to share ratably in the net
assets legally available for distribution to stockholders after the payment of
all of our debts and other liabilities of our company, subject to the prior
rights of any preferred stock then outstanding. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking funds provisions applicable to the common stock. All
outstanding shares of common stock are, and the common stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.
Preferred Stock
As of September 30, 2000, there were 20,078,792 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock will be converted into common stock. Following the conversion,
our certificate of incorporation will be restated to delete all references to
the prior series of preferred stock, and 5,000,000 shares of undesignated
preferred stock will be authorized.
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and the
qualifications or restrictions thereof. The preferences, powers, rights and
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions, and purchase funds and
other matters. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
affect adversely the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of TheraSense.
Warrants
As of September 30, 2000, there were warrants outstanding to purchase 54,348
shares of Series A preferred stock and 466,665 shares of Series B preferred
stock at a per share weighted average exercise price of $1.84 and $2.10,
respectively, which, upon completion of this offering will be exercisable into
an aggregate of 521,013 shares of common stock, at a per share weighted average
exercise price of $2.07. The warrant
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<PAGE>
exercisable to purchase 54,348 shares of Series A preferred stock can be
exercised at any time prior to December 31, 2001, at a per share exercise price
of $1.84. Warrants exercisable to purchase 380,952, 47,619, 3,809, and 34,285
shares of Series B preferred stock, respectively, can be exercised at any time
prior to the earlier of five years after the effective date of this offering,
or October 7, 2009, August 24, 2008, April 1, 2007, or April 1, 2007,
respectively, at a per share exercise price of $2.10.
Registration Rights
After this offering, the holders of 20,599,805 shares of common stock issued
upon conversion of our preferred stock, and upon exercise of outstanding
warrants, are entitled to rights with respect to the registration of such
shares under the Securities Act of 1933, as amended. These shares are referred
to as registrable securities. The registration rights provide that if we
propose to register any of our securities under the Securities Act for our own
account, holders of common stock issuable upon conversion of the Series A,
Series B and Series C preferred stock, or issuable upon exercise of outstanding
warrants, are entitled to notice of such registration and are entitled to
include their registrable securities in that registration, subject to various
conditions. The underwriters of any such offering have the right to limit the
number of shares included in such registration. These registration rights have
been waived with respect to this offering.
In addition, commencing 180 days after the effective date of the
registration statement of which this prospectus is a part, holders of at least
50% of the registrable securities may require us to prepare and file a
registration statement under the Securities Act at our expense covering at
least 50% of the registrable securities, provided that the shares to be
included in such registration will generate anticipated aggregate net proceeds
to TheraSense of at least $7,500,000. Under these demand registration rights,
we are required to use our best efforts to cause the shares requested to be
included in the registration statement, subject to customary conditions and
limitations. We are not obligated to effect more than two of these stockholder-
initiated registrations.
Once we become eligible to file a registration statement on Form S-3, the
holders of registrable securities may require us to register all or a portion
of their securities on a registration statement on Form S-3 and may participate
in a Form S-3 registration by us, subject to specific conditions and
limitations. Registration rights terminate no later than five years after this
offering.
Anti-Takeover Effects of Provisions of our Amended and Restated Certificate of
Incorporation and By-Laws and Delaware Law
Our amended and restated certificate of incorporation and by-laws, effective
upon completion of this offering, contain provisions that could deter hostile
takeovers or delay changes in control or management of TheraSense. The
existence of these provisions, which are intended to enhance the likelihood of
continuity and stability in the composition of, and policies formulated by, our
board, could limit the price that investors might otherwise pay in the future
for shares of our common stock.
Blank Check Preferred Stock. As noted above, our board of directors, without
stockholder approval, will have the authority under our amended and restated
certificate of incorporation to authorize the issuance of preferred stock,
commonly referred to as "blank check" preferred stock with rights senior to
those of common stock. As a result, preferred stock could be issued quickly and
easily, could impair the rights of holders of common stock and could be issued
with terms calculated to delay or prevent a change of control or make removal
of management more difficult.
Stockholder Meetings. Our amended and restated certificate of incorporation
and by-laws provide that stockholders may not call a special meeting of the
stockholders. Rather, special meetings of stockholders may only be called by
the chairman of the board, the chief executive officer or the president of our
company or by a resolution adopted by a majority of our board of directors. Our
amended and restated by-laws also provide that stockholders may only conduct
business at special meetings of stockholders that was specified in the notice
of
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<PAGE>
the meeting. These provisions may discourage another person or entity from
making a tender offer, even if it acquired a majority of our outstanding voting
stock, because the person or entity could only take action at a duly called
stockholders' meeting relating to the business specified in the notice of
meeting.
Requirements For Advance Notification Of Stockholder Nominations And
Proposals. Our amended and restated by-laws provide that a stockholder seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice of this intention in writing. To be timely, a stockholder
must deliver or mail the notice and we must receive the notice at our principal
executive offices not less than 60 days nor more than 90 days prior to the
anniversary of the date on which we first mailed our proxy materials for the
preceeding year's annual meeting of stockholders, except that in the case of
our first annual meeting of stockholders as a public company, we must receive
notice not less than 60 nor more than 90 days prior to March 31, 2001. The
amended and restated by-laws also include a similar requirement for making
nominations at special meetings and specify requirements as to the time, form
and content of the stockholder's notice. These provisions could delay
stockholder actions that are favored by the holders of a majority of our
outstanding stock until the next stockholders' meeting.
Super-Majority Voting. Delaware law generally provides that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation, unless a corporation's
certificate of incorporation requires a greater percentage. We have provisions
in our certificate of incorporation which require a vote of at least 66 2/3% of
the stockholders entitled to vote in the election of directors to amend in any
respect or repeal the anti-takeover provisions of our certificate of
incorporation and a vote of at least 66 2/3% of the voting power of the
stockholders or board of directors to adopt, amend or repeal the by-laws of our
company.
Delaware Anti-Takeover Statute. Section 203 of the Delaware General
Corporation Law prohibits persons deemed "interested stockholders" from
engaging in a "business combination" with a Delaware corporation for three
years following the date these persons become interested stockholders.
Interested stockholders generally include:
. persons who are the beneficial owners of 15% or more of our outstanding
voting stock; and
. persons who are our affiliates or associates and who hold 15% or more of
our outstanding voting stock at any time within three years before the
date on which such person's status as an interested stockholder is
determined.
Subject to some exceptions, a "business combination" includes, among other
things:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market
value of all our outstanding stock;
. transactions that result in our issuance or transfer of any of our stock
to the interested stockholder, except pursuant to exercises, exchanges,
conversions, distributions or offers to purchase with respect to
securities outstanding prior to the time that the interested stockholder
became such and that, generally, do not increase the interested
stockholder's proportionate share of any class or series of our stock;
. any transaction involving us that has the effect of increasing the
proportionate share of our stock of any class or series, or securities
convertible into the stock of any class or series, that is owned directly
or indirectly by the interested stockholder; or
. any receipt by the interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits which we provided.
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Section 203 does not apply to a business combination if:
. before a person becomes an interested stockholder, our board approves the
transaction in which the interested stockholder became an interested
stockholder or approves the business combination;
. upon consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of our voting stock outstanding at the time
the transaction commences (other than specific, excluded shares); or
. following a transaction in which the person became an interested
stockholder, the business combination is approved by our board and
authorized at a regular or special meeting of stockholders (and not by
written consent) by the affirmative vote of the holders of at least two-
thirds of our outstanding voting stock not owned by the interested
stockholder.
These provisions of Delaware law and our amended and restated certificate of
incorporation and by-laws could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they may also inhibit
temporary fluctuations in the market price of our common stock that often
result from actual or rumored hostile takeover attempts. Such provisions may
also have the effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
Limitations of Liability and Indemnification Matters
We have adopted provisions in our amended and restated certificate of
incorporation that limit the liability of our directors for monetary damages
for breach of their fiduciary duties, except for liability that cannot be
eliminated under the Delaware General Corporation Law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for
any of the following:
. any breach of their duty of loyalty to the corporation or the
stockholder;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and by-laws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our by-laws
covers at least negligence and gross negligence on the part of indemnified
parties. Our by-laws also permit us to secure insurance on behalf of any
officer, directors employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether our by-laws would permit
indemnification.
We have entered into separate indemnification agreements with our directors
and executive officers, in addition to indemnification provided for in our by-
laws. These agreements among other things, will provide for indemnification of
our directors and executive officers for expenses, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding
arising out of such person's services as a director or executive officer or at
our request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to
contractual and legal restrictions on resale. Nevertheless, sales of our common
stock in the public market after the restrictions lapse, or the perception that
such sales may occur, could adversely affect the prevailing market price.
Sale of Restricted Shares and Lock-Up Agreements
Upon completion of this offering, we will have an aggregate of
outstanding shares of common stock, or shares if the underwriters
exercise the over-allotment option in full. As of September 30, 2000, we had:
. 3,791,709 outstanding stock options to employees, consultants and
directors for the purchase of an aggregate of 3,791,709 shares of common
stock; and
. outstanding warrants to purchase 521,013 shares of preferred stock which
will automatically convert into warrants to purchase an equal number of
shares of common stock upon the completion of this offering.
The shares of common stock being sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless the shares are purchased by affiliates of our company,
as that term is defined in Rule 144 of the Securities Act. All remaining shares
were issued and sold by us in private transactions and are eligible for public
sale if registered under the Securities Act or sold in accordance with Rule 144
or Rule 701 thereunder.
Eligibility of Restricted Shares for Sale in the Public Market
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements under which they will agree not to transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for shares of common
stock, for a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Bear, Stearns
& Co. Inc.
Following the expiration of the lock-up period, approximately 29,482,961
shares of common stock, including shares issuable upon the exercise of
outstanding options and warrants, will be available for sale in the public
market subject to compliance with Rule 144, Rule 144(k) or Rule 701.
Rule 144
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous one year, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the then outstanding common stock, which represents approximately
shares immediately after this offering, assuming no exercise of
the underwriters' over-allotment option; or
. the average weekly trading volume of the common stock on The Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the SEC.
Sales under Rule 144 are subject to requirements relating to manner of sale,
notice and availability of current public information about us.
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Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the ninety days preceding a sale, and who has beneficially owned
the shares to be sold for at least two years, is entitled to sell those shares
without regard to the volume, manner-of-sale or other limitations contained in
Rule 144.
Rule 701
Rule 701 may be relied upon with respect to the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisers prior to the closing of this offering and pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons. In addition, the SEC has indicated that Rule 701 will apply to
stock options granted by us before this offering, along with the shares
acquired upon exercise of such options. Securities issued in reliance on Rule
701 are deemed to be restricted shares and, beginning 90 days after the date of
this prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with the holding period requirements. As of September 30,
2000, 1,394,651 of our outstanding shares of common stock had been issued as a
result of exercise of stock options, and all of these shares are subject to 180
day lock-up agreements.
Stock Options
We intend to file registration statements under the Securities Act covering
approximately 12,098,905 shares of common stock reserved for issuance under our
1997 Stock Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan. These
registration statements are expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing. Accordingly,
shares registered under such registration statements will be available for sale
in the open market, unless such shares are subject to vesting restrictions with
us or are otherwise subject the contractual restrictions described above.
Registration Rights
In addition, after this offering, the holders of preferred shares and
warrants convertible into an aggregate of 20,599,805 shares of common stock
will be entitled to rights to cause us to register the sale of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares, other than shares purchased by our affiliates,
becoming freely tradable without restriction under the Securities Act.
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UNDERWRITING
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Bear, Stearns & Co. Inc., Lehman Brothers, Inc. and U.S.
Bancorp Piper Jaffray Inc. has severally agreed to purchase from us the
aggregate number of shares of our common stock set forth opposite its name
below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Lehman Brothers, Inc...............................................
U.S. Bancorp Piper Jaffray Inc.....................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including, among others, delivery of legal
opinions by our counsel and the accuracy of the representations and warranties
made by us in the underwriting agreement. Under the underwriting agreement, the
underwriters are obliged to purchase and pay for all of the above shares of our
common stock if any are purchased.
Public Offering Price
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
Public offering price................. $ $
Underwriting discounts and commissions
payable by us........................
Proceeds, before expenses, to us......
</TABLE>
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The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ million.
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Lock-Up Agreements
All of our directors, officers and substantially all of our stockholders
have agreed that they will not offer, sell, or agree to offer or sell, directly
or indirectly, or otherwise dispose of any shares of common stock in the public
market without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this prospectus. Bona fide gifts by
individuals to immediate family members or transfers by a partnership to its
partners are excepted from the restrictions of the lock-up agreements, provided
the transferee agrees to be bound by similar restrictions.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell, agree to offer or sell, or otherwise dispose
of any shares of common stock, except that we may issue, and grant options to
purchase, shares of common stock under our stock option plans and employee
stock purchase plan as long as the recipients of such securities are subject to
the 180 day lock-up period. During this lock-up period, subject to various
conditions, we may also issue additional equity securities in connection with
collaborative and licensing arrangements, so long as the recipients of such
securities are also subject to the 180 day lock-up period.
Nasdaq National Market Quotation
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock was
determined by negotiations between us and the representatives of the
underwriters. Among the factors that were considered in those negotiations, the
primary factors were our results of operations in recent periods, estimates of
our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied to have our common stock approved for quotation on
the Nasdaq National Market under the symbol "THER." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market after this
offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock.
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The underwriters may over-allot shares of our common stock in connection
with this offering, thus creating a short position for their own account. Short
sales involve the sale by the underwriters of a greater number of shares than
they are committed to purchase in the offering. A short position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made in an amount not greater than the underwriters' over-allotment
option to purchase additional shares in the offering described above. The
underwriters may close out any covered short position by either exercising
their over-allotment option or purchasing shares in the open market. In
determining the source of shares to close the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short sales are sales
in excess of the over-allotment option. The underwriters may close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering.
Accordingly, to cover these short sales positions or to stabilize the market
price of our common stock, the underwriters may bid for, and purchase, shares
of our common stock in the open market. These transactions may be effected on
the Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer. Similar to other purchase transactions, the
underwriters' purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising or maintaining
the market price of our common stock or preventing or mitigating a decline in
the market price of our common stock. As a result, the price of the shares of
our common stock may be higher than the price that might otherwise exist in the
open market. No representation is made as to the magnitude or effect of any
such stabilization or other activities. The underwriters are not required to
engage in these activities and, if commenced, may end any of these activities
at any time.
Directed Share Program
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of common stock to be sold in this
offering for sale to our directors, officers, employees, business associates,
vendors and related persons. Purchases of reserved shares are to be made
through an account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns
& Co. Inc.'s procedures for opening an account and transacting in securities.
The number of shares available for sale to the general public will be reduced
to the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.
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LEGAL MATTERS
Various legal matters with respect to the validity of the common stock
offered by this prospectus will be passed upon for us by Wilson Sonsini
Goodrich & Rosati, P.C. San Francisco, California. An investment partnership
comprised of members of Wilson Sonsini Goodrich & Rosati owns an aggregate of
33,157 shares of our common stock assuming conversion of all outstanding shares
of preferred stock. Karen Dempsey, a member of Wilson Sonsini Goodrich &
Rosati, is the Secretary of TheraSense. Various legal matters relating to the
offering will be passed upon for the underwriters by Brobeck, Phleger &
Harrison LLP, San Diego, California.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included in this
Prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
by writing to the Securities and Exchange Commission and paying a duplicating
fee. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. The Commission maintains
a World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and Web site
of the Commission referred to above.
64
<PAGE>
THERASENSE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of TheraSense, Inc.
The reincorporation and reverse stock split described in Note 12 to the
financial statements has not been consummated at October 11, 2000. When it has
been consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of TheraSense, Inc.
(the "Company") at December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion."
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 24, 2000, except for Note 12
as to which the date is October , 2000
F-2
<PAGE>
THERASENSE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma at
December 31, June 30,
------------------------- June 30, 2000
1998 1999 2000 (see Note 9)
----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $11,438,200 $ 2,322,424 $ 29,623,684
Accounts receivable... -- 25,000 599,848
Inventories........... -- -- 5,771,598
Deferred cost of
products sold........ -- -- 491,753
Prepaid expenses and
other current
assets............... 62,306 836,005 2,329,073
----------- ------------ ------------
Total current
assets.............. 11,500,506 3,183,429 38,815,956
Property and equipment,
net.................... 878,119 3,998,451 4,892,672
Other assets............ -- 98,711 100,930
----------- ------------ ------------
Total assets......... $12,378,625 $ 7,280,591 $ 43,809,558
=========== ============ ============
LIABILITIES, CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...... $ 129,393 $ 678,684 $ 4,030,467
Accrued liabilities... 234,394 585,160 2,210,062
Deferred revenue...... 11,341 511,341 657,003
Current portion of
capital lease
obligations.......... -- 109,356 223,015
Current portion of
borrowings under
lines of credit...... 169,086 507,276 1,527,798
----------- ------------ ------------
Total current
liabilities......... 544,214 2,391,817 8,648,345
Capital lease
obligations, less
current portion........ -- 219,367 1,810,263
Borrowings under lines
of credit, less current
portion................ 520,060 2,356,166 3,160,400
----------- ------------ ------------
Total liabilities.... 1,064,274 4,967,350 13,619,008
----------- ------------ ------------
Commitments (Note 5)
Convertible preferred
stock, $0.001 par
value:
Authorized: 12,109,647
shares;
Issued and
outstanding:
10,104,065 shares in
1998, 11,588,632
shares in 1999 and
20,078,792 shares at
June 30, 2000
(unaudited) and none
pro forma (unaudited)
(Liquidation
preferences:
$17,457,410,
$20,575,002 and
$63,025,802 at
December 31, 1998,
1999 and June 30,
2000 (unaudited),
respectively)........ 17,361,342 20,471,813 62,882,739 $ --
----------- ------------ ------------ ------------
Stockholders' equity
(deficit):
Common stock: $0.001
par value:
Authorized: 25,000,000
shares
Issued and
outstanding:
4,582,750 shares in
1998, 4,976,932
shares in 1999 and
5,008,559 shares at
June 30, 2000
(unaudited) and
25,087,351 shares
pro forma
(unaudited).......... 4,583 4,977 5,009 25,087
Additional paid-in
capital.............. 160,923 2,543,858 7,515,353 70,378,014
Notes receivable from
stockholders......... (138,425) (331,195) (294,750) (294,750)
Deferred stock-based
compensation, net.... -- (1,244,418) (5,727,174) (5,727,174)
Accumulated deficit... (6,074,072) (19,131,794) (34,190,627) (34,190,627)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit).... (6,046,991) (18,158,572) (32,692,189) $ 30,190,550
----------- ------------ ------------ ============
Total liabilities,
convertible
preferred stock and
stockholders' equity
(deficit)........... $12,378,625 $ 7,280,591 $ 43,809,558
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THERASENSE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Research grant revenue.. $ -- $ 60,296 $ 60,296 $ -- $ 3,000
Product sales........... -- -- 25,000 -- 8,251
License income.......... -- -- -- -- 500,000
----------- ----------- ------------ ----------- ------------
Total revenues........ -- 60,296 85,296 -- 511,251
Cost of products sold
and start-up
manufacturing costs.... -- -- -- -- 296,020
----------- ----------- ------------ ----------- ------------
Gross profit............ -- 60,296 85,296 -- 215,231
----------- ----------- ------------ ----------- ------------
Operating expenses:
Research and
development............ 976,739 3,055,819 7,672,517 2,989,696 5,841,296
Selling, general and
administrative......... 702,879 1,809,978 5,556,708 2,125,710 9,786,893
----------- ----------- ------------ ----------- ------------
Total operating
expenses............. 1,679,618 4,865,797 13,229,225 5,115,406 15,628,189
----------- ----------- ------------ ----------- ------------
Loss from operations.... (1,679,618) (4,805,501) (13,143,929) (5,115,406) (15,412,958)
Interest income......... 162,742 167,312 295,307 208,590 811,986
Interest and other
expense................ -- (25,762) (209,100) (46,252) (457,861)
----------- ----------- ------------ ----------- ------------
Net loss................ (1,516,876) (4,663,951) (13,057,722) (4,953,068) (15,058,833)
Dividend related to
beneficial conversion
feature of preferred
stock.................. -- -- -- -- (14,772,878)
----------- ----------- ------------ ----------- ------------
Net loss available to
common stockholders.... $(1,516,876) $(4,663,951) $(13,057,722) $(4,953,068) $(29,831,711)
=========== =========== ============ =========== ============
Net loss per common
share, basic and
diluted................ $ (1.66) $ (2.31) $ (4.32) $ (1.79) $ (8.03)
=========== =========== ============ =========== ============
Weighted-average shares
used in computing net
loss per common share,
basic and diluted...... 913,875 2,015,032 3,023,636 2,766,159 3,712,999
=========== =========== ============ =========== ============
Pro forma net loss per
common share, basic and
diluted (unaudited).... $ (0.91) $ (0.68)
============ ============
Weighted-average shares
used in computing pro
forma net loss per
common share, basic and
diluted (unaudited).... 14,392,632 22,205,717
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THERASENSE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Limited
Liability Notes Retained Total
Corporation Common Stock Additional Receivable Deferred Earnings/ Stockholders'
Interests ----------------- Paid-In from Stock-Based Accumulated Equity
Amount Shares Amount Capital Stockholders Compensation Deficit (Deficit)
----------- --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... $ 21,821 -- $ -- $ -- $ -- $ -- $ 106,755 $ 128,576
Issuance of common stock
in March 1997 in
exchange for equity
interest in TheraSense
L.L.C.................. (21,821) 3,750,000 3,750 18,071 -- -- -- --
Exercise of stock
options in exchange for
services received and
notes receivable from
stockholders........... -- 669,794 670 93,101 (91,993) -- -- 1,778
Net loss................ -- -- -- -- -- -- (1,516,876) (1,516,876)
-------- --------- ------ -------- -------- ----- ----------- -----------
Balances, December 31,
1997................... -- 4,419,794 4,420 111,172 (91,993) -- (1,410,121) (1,386,522)
Repurchase and
retirement of common
stock for cash......... -- (53,203) (53) (3,353) -- -- -- (3,406)
Exercise of stock
options for cash and in
exchange for notes
receivable from
stockholders........... -- 216,159 216 53,104 (52,500) -- -- 820
Repayment of notes
receivable from
stockholders........... -- -- -- -- 6,068 -- -- 6,068
Net loss................ -- -- -- -- -- -- (4,663,951) (4,663,951)
-------- --------- ------ -------- -------- ----- ----------- -----------
Balances, December 31,
1998................... -- 4,582,750 4,583 160,923 (138,425) -- (6,074,072) (6,046,991)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THERASENSE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000--(Continued)
<TABLE>
<CAPTION>
Limited
Liability Notes Retained Total
Corporation Common Stock Additional Receivable Deferred Earnings Stockholders'
Interests ----------------- Paid-In from Stock-Based (Accumulated Equity
Amount Shares Amount Capital Stockholders Compensation Deficit) (Deficit)
----------- --------- ------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1998.................. -- 4,582,750 4,583 160,923 (138,425) -- (6,074,072) (6,046,991)
Exercise of stock
options for cash and
in exchange for notes
receivable from
stockholders.......... -- 394,182 394 198,566 (192,770) -- -- 6,190
Issuance of warrants to
purchase Series B
preferred stock....... -- -- -- 819,760 -- -- -- 819,760
Deferred stock-based
compensation.......... -- -- -- 1,364,609 -- (1,364,609) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 120,191 -- 120,191
Net loss............... -- -- -- -- -- -- (13,057,722) (13,057,722)
------ --------- ------ ------------ --------- ----------- ------------- ------------
Balances, December 31,
1999.................. -- 4,976,932 4,977 2,543,858 (331,195) (1,244,418) (19,131,794) (18,158,572)
Exercise of stock
options for cash and
in exchange for notes
receivable from
stockholders
(unaudited)........... -- 82,838 83 17,511 (6,068) -- -- 11,526
Repurchase of shares
and cancellation of
stockholder loan
(unaudited)........... -- (51,211) (51) (14,333) 14,384 -- -- --
Repayment of notes
receivable from
stockholders
(unaudited)........... -- -- -- -- 28,129 -- -- 28,129
Deferred stock-based
compensation
(unaudited)........... -- -- -- 4,968,317 -- (4,968,317) -- --
Amortization of
deferred stock-based
compensation
(unaudited)........... -- -- -- -- -- 485,561 -- 485,561
Beneficial conversion
feature related to
issuance of Series C
convertible preferred
stock (unaudited)..... 14,772,878 14,772,878
Deemed dividend related
to beneficial
conversion feature of
Series C convertible
preferred stock
(unaudited)........... (14,772,878) (14,772,878)
Net loss (unaudited)... -- -- -- -- -- -- (15,058,833) (15,058,833)
------ --------- ------ ------------ --------- ----------- ------------- ------------
Balances, June 30, 2000
(unaudited)........... $ -- 5,008,559 $5,009 $ 7,515,353 $(294,750) $(5,727,174) $(34,190,627) $(32,692,189)
====== ========= ====== ============ ========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THERASENSE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(1,516,876) $(4,663,951) $(13,057,722) $(4,953,068) $(15,058,833)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 9,544 253,700 569,074 199,434 618,665
Amortization of
discount on
borrowings under
lines of credit...... -- -- 74,268 3,573 134,238
Exercise of stock
options for services
received............. 1,778 -- -- -- --
Loss on sale of
property and
equipment............ -- -- 132 -- 5,637
Amortization of
deferred stock-based
compensation......... -- -- 120,191 16,837 485,561
Changes in operating
assets and
liabilities:
Accounts receivable.. -- -- (25,000) -- (574,848)
Prepaid expenses and
other current
assets.............. (13,173) (37,466) (773,699) (434,764) (1,493,068)
Inventories.......... -- -- -- -- (5,771,598)
Deferred cost of
products sold....... -- -- -- -- (491,753)
Other assets......... (23,025) 70,089 (98,711) -- (2,219)
Accounts payable..... 315,993 (218,012) 549,291 243,094 3,351,783
Accrued liabilities.. 115,400 111,988 350,766 44,125 1,624,902
Deferred revenue..... 60,296 (60,296) 500,000 -- 145,662
----------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities......... (1,050,063) (4,543,948) (11,791,410) (4,880,769) (17,025,871)
----------- ----------- ------------ ----------- ------------
Cash flows from
investing activities:
Purchase of property
and equipment........ (508,975) (634,309) (3,323,407) (490,631) (1,364,944)
Proceeds from sale of
property and
equipment............ -- -- -- -- 1,603,769
----------- ----------- ------------ ----------- ------------
Net cash provided by
(used in) investing
activities.......... (508,975) (634,309) (3,323,407) (490,631) 238,825
----------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of convertible
preferred stock,
net.................. 5,525,502 11,835,840 3,110,471 3,110,471 42,410,926
Proceeds from issuance
of common stock and
exercise of stock
options.............. -- 820 6,190 3,208 11,526
Proceeds from lines of
credit............... -- 758,590 3,090,953 321,404 2,000,000
Principle payments on
lines of credit...... -- (69,444) (171,163) (70,028) (309,482)
Repurchase and
retirement of common
stock................ -- (3,406) -- -- --
Principle payments on
capital lease
obligation........... -- -- (37,410) -- (52,793)
Repayment of notes
receivable from
stockholders......... -- 6,068 -- -- 28,129
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing
activities.......... 5,525,502 12,528,468 5,999,041 3,365,055 44,088,306
----------- ----------- ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... 3,966,464 7,350,211 (9,115,776) (2,006,345) 27,301,260
Cash and cash
equivalents, beginning
of period............. 121,525 4,087,989 11,438,200 11,438,200 2,322,424
----------- ----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period................ $ 4,087,989 $11,438,200 $ 2,322,424 $ 9,431,855 $ 29,623,684
=========== =========== ============ =========== ============
Noncash financing
activities:
Common stock issued
for notes receivable
from stockholders.... $ 91,993 $ 52,500 $ 192,770 $ -- $ 6,068
Repurchase of
restricted common
stock and
cancellation of notes
receivable........... $ -- $ -- $ -- $ -- $ 14,384
Issuance of warrants
to purchase Series B
preferred stock in
connection with
borrowings under
lines of credit...... $ -- $ -- $ 819,760 $ 57,167 $ --
Acquisition of
property and
equipment under
capital lease........ $ -- $ -- $ 366,133 $ -- $ 1,757,348
Deferred stock-based
compensation......... $ -- $ -- $ 1,364,609 $ 288,771 $ 4,968,317
Cash paid for
interest.............. $ -- $ 25,762 $ 134,833 $ 46,252 $ 434,668
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:
TheraSense, L.L.C. was formed in the state of California on April 3, 1996.
TheraSense, Inc. was incorporated in the State of California and in March of
1997, all assets and liabilities of TheraSense L.L.C. were transferred to
TheraSense, Inc. TheraSense, L.L.C. and TheraSense, Inc. are collectively
referred to as the "Company." The Company develops and sells easy to use
glucose self-monitoring systems that dramatically reduce the pain of testing
for people with diabetes. In 2000, the Company commenced planned principal
operations and emerged from the development stage.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim results
The accompanying balance sheet as of June 30, 2000, the statements of
operations and of cash flows for the six months ended June 30, 1999 and 2000,
and the statement of stockholders' equity (deficit) for the six months ended
June 30, 2000 are unaudited. The unaudited interim financial statements have
been prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and results of operations and cash flows for the six months ended June
30, 1999 and 2000. The financial data and other information disclosed in these
notes to financial statements related to the six-month periods are unaudited.
The results for the six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the year ending December 31, 2000.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
Inventories
Inventories are stated at the lower of cost (computed using first-in, first-
out method) or market value.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally two to five years.
Amortization of leased assets and leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful life of the related assets, typically three to seven years.
Upon sale or retirement of assets, the cost and related accumulated
depreciation and amortization are removed from the balance sheet and the
resulting gain or loss is reflected in operations.
F-8
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets, whenever
events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. When such an event occurs, management
determines whether there has been an impairment by comparing the anticipated
undiscounted future net cash flows to the related asset's carrying value. If
an asset is considered impaired, the asset is written down to fair value,
which is determined based either on discounted cash flows or appraised value,
depending on the nature of the asset.
Concentration of credit risk and other risks and uncertainties
The Company's cash and cash equivalents are maintained with one major
financial institution in the United States. Deposits in this institution may
exceed the amount of insurance provided on such deposits.
For financial instruments consisting of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities included in the Company's
financial statements, the carrying amounts approximate fair value due to their
short maturities. Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of notes payable and capital
lease obligations approximate fair value.
The Company's accounts receivable are derived from revenue earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers.
Revenues from one customer accounted for 100% of total revenues for the
year ended December 31, 1998.
Revenues from two customers accounted for 71% and 29% of total revenues for
the year ended December 31, 1999. One of these customers accounted for 100% of
total accounts receivable at December 31, 1999.
The Company's products require clearance or approval from the United States
Food and Drug Administration ("FDA") or international regulatory agencies
prior to commercial sales. There can be no assurance the Company's products
will receive the necessary approvals, or maintain such approvals once
received. If the Company was denied approval or approval was delayed or
revoked, it may have a material adverse impact on the Company. In January
2000, the Company received FDA approval for their first product, FreeStyle.
The Company is subject to risks common to companies in the medical
diagnostic industry including, but not limited to, new technological
innovations, dependence on key personnel, protection of proprietary
technology, compliance with government regulations, uncertainty of market
acceptance of products, product liability and the need to obtain additional
financing.
The Company subcontracts the manufacturing of a majority of its products
through one subcontractor in California. The Company believes that there are a
number of alternative contract manufacturers that could produce the Company's
products, but in the event of a reduction or interruption of supply, it could
take a significant period of time to qualify an alternative subcontractor and
commence manufacturing. The effect of such reduction or interruption in supply
on results of operations would be material.
F-9
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The Company's return policy allows end users to return products within 30
days of purchase. The Company defers revenues on direct product sales over the
telephone or the website to end users, until return rights have lapsed. At that
time, the Company recognizes revenues net of allowances for customer rebates.
Sales to retailers and wholesalers are made under arrangements allowing rights
to return product where the expected shelf life has expired. As a result of
this return right, the Company defers revenue recognition on these sales until
products are resold by the retailers and wholesalers to the end user and the
thirty-day return period has lapsed.
The Company recognizes license and other upfront fees on a ratable basis
over the term of the respective agreement. Any amounts received in advance of
performance are recorded as deferred revenue.
Research and development grant agreements provide for periodic payments in
support of the Company's research activities. Grant revenue is recognized as
earned based on actual costs incurred or as milestones are achieved.
Research and development
Research and development costs are charged to operations as incurred.
Advertising costs
Advertising costs included in selling, general and administrative expenses,
are expensed as incurred. No expenses were incurred in 1997, 1998 and 1999.
Income taxes
The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current tax laws and rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Segments
The Company operates in one segment, using one measurement of profitability
to manage its business. As of December 31, 1998 and 1999, all long-lived assets
are maintained in the United States. All revenue was generated in the United
States during the years ended December 31, 1997, 1998 and 1999.
Accounting for stock-based compensation
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," in
accounting for its employee stock options, and presents disclosure of pro forma
information required under Statement of Financial Accounting Standards No. 123
or ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18. "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," which require that such equity instruments be recorded at their fair
value on the measurement date. The measurement of stock-based compensation is
subject to periodic adjustment as the underlying equity instruments vest.
F-10
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net loss per common share
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted-average number of vested common stock
shares outstanding for the period. Diluted net loss per share is computed
giving effect to all potential dilutive common stock, including options,
warrants and convertible preferred stock. Options, warrants, common stock
subject to repurchase and convertible preferred stock were not included in the
computation of diluted net loss per share because the effect would be
antidilutive.
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss per common
share, basic and
diluted:
Net loss.............. $(1,516,876) $(4,663,951) $(13,057,722) $(4,953,068) $(15,058,833)
Dividend related to
beneficial conversion
feature of preferred
stock................ -- -- -- -- (14,772,878)
----------- ----------- ------------ ----------- ------------
Net loss available to
common stockholders.... $(1,516,876) $(4,663,951) $(13,046,125) $(4,953,068) $(29,831,711)
=========== =========== ============ =========== ============
Weighted-average common
stock outstanding...... 3,829,083 4,439,214 4,840,006 4,748,319 5,036,141
Less: Weighted-average
shares subject to
repurchase............. (2,915,208) (2,424,182) (1,816,370) (1,982,160) (1,323,142)
----------- ----------- ------------ ----------- ------------
Weighted-average shares
used in computing basic
and diluted net loss
per common share....... 913,875 2,015,032 3,023,636 2,766,159 3,712,999
=========== =========== ============ =========== ============
</TABLE>
The following outstanding options, common stock subject to repurchase,
convertible preferred stock and warrants were excluded from the computation of
diluted net loss per share as they had an antidilutive effect:
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Options to purchase
common stock........... 190,844 502,094 1,644,718 1,041,147 2,672,948
Common stock subject to
repurchase............. 2,816,875 2,073,503 1,562,751 1,890,817 1,040,190
Convertible preferred
stock.................. 4,445,775 10,104,065 11,588,632 11,588,632 20,078,792
Warrants................ 54,348 101,967 521,013 140,062 521,013
</TABLE>
Recent accounting pronouncements
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB 25. This interpretation
clarifies the definition of the employee for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan,
the accounting consequence of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange of
stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000, but certain
F-11
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. The adoption of FIN No. 44 is not expected to have a material
impact on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has complied with the guidance in SAB 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS No. 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company, to
date, has not engaged in derivative and hedging activities and does not believe
that the implementation of SFAS No. 133 will have a significant impact on its
financial position or results of operations. The Company will adopt SFAS No.
133, as amended, in fiscal year 2001.
NOTE 3--BALANCE SHEET ACCOUNTS:
At December 31, 1998 and 1999, the Company held no inventory. At June 30,
2000, inventory consists of the following:
<TABLE>
<CAPTION>
June 30,
2000
-----------
(unaudited)
<S> <C>
Raw materials.................................................. $3,505,282
Finished goods................................................. 2,266,316
----------
$5,771,598
==========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Laboratory equipment................................. $ 430,708 $ 997,964
Leasehold improvements............................... 135,337 909,542
Office equipment..................................... 107,995 513,747
Computer equipment................................... 483,403 895,779
Tooling.............................................. -- 434,832
Manufacturing equipment.............................. -- 958,141
---------- ----------
1,157,443 4,710,005
Less: Accumulated depreciation and amortization...... (279,324) (711,554)
---------- ----------
$ 878,119 $3,998,451
========== ==========
</TABLE>
Included in office equipment are assets acquired under capital leases with a
cost of $366,133 and accumulated amortization of $50,852 as of December 31,
1999. At December 31, 1998, there were no assets acquired under capital leases.
F-12
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Accrued salaries and related expense...................... $ 75,303 $220,838
Accrued professional services............................. 79,746 34,065
Accrued other outside services............................ 14,260 103,403
Accrued other liabilities................................. 65,085 226,854
-------- --------
$234,394 $585,160
======== ========
</TABLE>
NOTE 4--LINES OF CREDIT:
During 1998, the Company entered into an equipment line of credit agreement
with a financial institution under which the Company could borrow up to
$500,000 prior to July 10, 1998, for equipment purchases. Borrowings under the
equipment line of credit are collateralized by the equipment purchased, accrue
interest at the prime rate plus 1.25% (9.75% at December 31, 1999) and are
repayable in monthly installments through June 2001.
During 1998, the Company entered into an equipment line of credit agreement
under which the Company could borrow up to $2,500,000 for equipment purchases
prior to December 31, 1999. During 1998, the Company executed two promissory
notes under this agreement for $184,711 and $73,879 which accrue interest at
the rate of 8.5% and 9.5%, respectively, and are repayable in forty-eight and
thirty-six monthly installments, respectively. During 1999, the Company
executed an additional two promissory notes under this agreement for $35,833
and $285,574 which accrue interest at the rate of 9.5% and 8.5%, respectively,
and are repayable in thirty-six and forty-eight monthly installments,
respectively. All borrowings under the equipment line of credit are
collateralized by the equipment purchased. In connection with this agreement,
the Company issued warrants to purchase 47,619 Series B preferred shares (Note
6).
During 1999, the Company entered into a subordinated debt agreement with a
lending company, under which the Company could borrow up to $5,000,000 for
equipment purchases prior to July 7, 2000. In December of 1999, the Company
executed a $2,000,000 promissory note under this agreement. The note accrues
interest at an annual rate of 11.5% and is due in thirty-six monthly
installments. All borrowings under the equipment line of credit are
collateralized by the equipment purchased. In connection with this agreement,
the Company issued warrants to purchase 380,952 Series B preferred shares (Note
6).
During 1999, the Company entered into a senior loan and security agreement
with a lending company to borrow up to $2,000,000 for equipment purchases prior
to December 31, 1999. The Company executed three promissory notes under this
agreement for $253,864, $253,055 and $262,625. Principal and interest are
payable in consecutive monthly installments, each of which are equal to 1.0% of
the principal sum for months one through twelve and 3.075% of the principal sum
for months thirteen through forty-eight yielding an annual effective interest
rate of 16.58%. All borrowings under the equipment line of credit are
collateralized by the equipment purchased. In connection with this agreement,
the Company issued warrants to purchase 38,094 Series B preferred shares (Note
6).
F-13
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Aggregate future principal payments under the lines of credit are as
follows:
<TABLE>
<S> <C>
2000........................................................... $ 775,766
2001........................................................... 1,183,891
2002........................................................... 1,210,474
2003........................................................... 438,803
----------
3,608,934
Less: Current portion, net of discount ........................ (507,276)
Less: Current portion of discount associated with warrants
issued........................................................ (268,490)
Less: Discount associated with warrants issued, non-current
portion....................................................... (477,002)
----------
$2,356,166
==========
</TABLE>
Sale and leaseback transaction
During February 2000, the Company entered into a sale and leaseback
transaction whereby the Company sold and leased back under capital lease
agreements, assets with a net book value of $1,607,557 for total proceeds of
$1,603,769, recognizing a loss on the sale of $3,788. In addition the Company
leased $153,579 of computer equipment under a capital lease agreement.
NOTE 5--COMMITMENTS:
Facility lease
The Company leases its facilities under an operating lease agreement which
expires in April 2009. The Company has the option to terminate the lease in
April 2006. Under the terms of the agreement, the initial base monthly rent
shall be adjusted every two and one-half years based on changes in the Consumer
Price Index by amounts not to be less than 5%, nor exceed 7.5%, over each two
and one-half year period. At the expiration of the lease term, the Company has
the option to extend the facility lease for an additional five years. Future
minimum facility lease payments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 750,000
2001.............................................................. 756,250
2002.............................................................. 787,500
2003.............................................................. 787,500
2004.............................................................. 813,748
Thereafter........................................................ 3,686,462
----------
$7,581,460
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$113,614, $223,892 and $619,766, respectively.
F-14
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Capital lease obligations
During 1999, the Company acquired office furniture under a capital lease.
Payments, comprising both principal and interest, are due in thirty-six equal
monthly installments through July 2002. As of December 31, 1999, total future
minimum lease payments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 148,179
2001.............................................................. 148,179
2002.............................................................. 98,785
---------
Minimum payments.................................................. 395,143
Less: Amount representing interest................................ (66,420)
---------
Principal amount of minimum payments.............................. 328,723
Less: Current portion............................................. (109,356)
---------
$ 219,367
=========
</TABLE>
Licensing agreements
The Company has entered into several licensing agreements with various
universities, institutions and companies under which it obtained rights to
certain patent, patent applications, and other technology. Future payments
pursuant to these agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000.......................................................... $ 220,000
2001.......................................................... 420,000
2002.......................................................... 620,000
2003.......................................................... 620,000
2004.......................................................... 620,000
----------
$2,500,000
==========
</TABLE>
In addition to the payments summarized above, the Company is required to
make royalty payments based upon a percentage of net sales of any products
developed from certain of the licensed technologies and milestone payments upon
the occurrence of certain events as defined by the related agreements.
At June 30, 2000, the Company has included a $2.0 million paid-up licensing
fee in prepaid expenses and other current assets, which will be amortized
ratably to cost of product sales over the term of the license. At the Company's
option the Company can extend this non-exclusive paid-up licensing agreement
with future license payments.
NOTE 6--CONVERTIBLE PREFERRED STOCK:
Under the Company's Certificate of Incorporation, the Company's convertible
preferred stock is issuable in series. The Company's Board of Directors is
authorized to determine the rights, preferences and terms of each series. As of
December 31, 1997, the convertible preferred stock comprised:
<TABLE>
<CAPTION>
Number of Number of Proceeds, Net Liquidation Annual
Shares Shares Issued of Issuance Preference Dividends
Authorized and Outstanding Costs per Share per Share
---------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A..... 4,500,123 4,445,775 $5,525,502 $1.25 $0.10
========= ========= ==========
</TABLE>
F-15
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, the convertible preferred stock comprised:
<TABLE>
<CAPTION>
Number of Number of Proceeds, Net Liquidation Annual
Shares Shares Issued of Issuance Preference Dividends
Authorized and Outstanding Costs per Share per Share
---------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A..... 4,500,123 4,445,775 $ 5,525,502 $1.25 $0.10
Series B..... 7,609,524 5,658,290 11,835,840 $2.10 $0.16
---------- ---------- -----------
12,109,647 10,104,065 $17,361,342
========== ========== ===========
</TABLE>
As of December 31, 1999, the convertible preferred stock comprised:
<TABLE>
<CAPTION>
Number of Number of Proceeds, Net Liquidation Annual
Shares Shares Issued of Issuance Preference Dividends
Authorized and Outstanding Costs per Share per Share
---------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A..... 4,500,123 4,445,775 $ 5,525,502 $1.25 $0.10
Series B..... 7,609,524 7,142,857 14,946,311 $2.10 $0.16
---------- ---------- -----------
12,109,647 11,588,632 $20,471,813
========== ========== ===========
</TABLE>
As of June 30, 2000, the convertible preferred stock comprised (unaudited):
<TABLE>
<CAPTION>
Number of Number of Proceeds, Net Liquidation Annual
Shares Shares Issued of Issuance Preference Dividends
Authorized and Outstanding Costs per Share per Share
---------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A..... 4,500,123 4,445,775 $ 5,525,502 $1.25 $0.10
Series B..... 7,609,524 7,142,857 14,946,311 $2.10 $0.16
Series C..... 8,500,000 8,490,160 42,410,926 $5.00 $0.40
---------- ---------- -----------
20,609,647 20,078,792 $62,882,739
========== ========== ===========
</TABLE>
Dividends
The holders of Series A, Series B and Series C convertible preferred stock
are entitled to receive dividends, out of any assets legally available, prior
and in preference to any declaration or payment of any dividend for the common
stock, at the rate stated above per share per annum, or, if greater (as
determined on a per annum basis and on an as converted basis for the Series A,
Series B and Series C preferred stock), an amount equal to that paid on any
other outstanding stock of the Company. Such dividends are payable when, as and
if declared by the Board of Directors, and are not cumulative. As of June 30,
2000, no dividends have been declared.
In February 2000, the Company issued 8,490,160 shares of Series C
convertible preferred stock at $5.00 per share for gross cash proceeds of
$42,450,800. The issuance resulted in a beneficial conversion feature of
$14,772,878, calculated in accordance with Emerging Issues Task Force No. 98-5
("EITF No. 98-5"), "Accounting for Convertible Securities with Beneficial
Conversion Features." The beneficial conversion feature is reflected as a
preferred stock dividend in the Statement of Operations for the six months
ended June 30, 2000.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B and Series C
convertible preferred stock are entitled to receive, prior and in
F-16
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
preference to any distribution of any of the assets of the Company to the
holders of common stock by reason of their ownership, an amount per share equal
to the rates stated above per share, (as adjusted for any stock splits,
combinations, reorganizations and the like) plus any declared but unpaid
dividends on such shares.
After payment has been made to the holders of the convertible preferred
stock, any remaining assets and funds are to be distributed among the holders
of common stock pro rata based on the number of shares of common stock held by
each stockholder.
Mergers
A merger, reorganization or sale of all or substantially all of the assets
of the Company in which the stockholders of the Company immediately prior to
the transaction do not possess more than 50% of the voting power of the
surviving entity (or its parent) immediately after the transaction shall be
deemed to be a liquidation, dissolution or winding up.
Voting
The holders of the convertible preferred stock are entitled to the number of
votes equal to the number of common stock into which the convertible preferred
stock could be converted on the record date for the vote or written consent of
stockholders, except as otherwise required by law.
Conversion
Each share of Series A, Series B and Series C convertible preferred stock,
at the option of the holder and at any time after the date of issuance, is
convertible into the number of fully paid and nonassessable common stock which
results from dividing the convertible preferred stock issuance price by the
conversion price at the time of conversion. The per share conversion price of
Series A, Series B and Series C convertible preferred stock is $2.50, $4.20 and
$5.00, respectively.
Conversion is automatic at its then effective conversion rate (i)
immediately upon the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, in which the public offering price equals or exceeds $10.00
per share (as adjusted for any stock dividends, stock splits or
recapitalizations) and the aggregate proceeds raised, equal or exceed
$15,000,000, or (ii) at the election of stockholders of a majority of the
outstanding Series A and Series B preferred shares and a majority of the
outstanding Series C preferred shares.
Warrants
During April 1997, the Company issued warrants to purchase 54,348 shares of
Series A convertible preferred stock at $1.84 per share in connection with the
Series A financing. The warrants are exercisable at any time after July 31,
1997, and expire December 31, 2001. The Company has reserved 54,348 shares of
Series A convertible preferred stock for issuance in the event of exercise.
During August 1998, the Company issued warrants to purchase 47,619 shares of
its Series B convertible preferred stock at $2.10 per share in connection with
the execution of an equipment line of credit agreement. The warrants are
exercisable at any time and expire in August 2008 or five years from the
effective date of the Company's initial public offering, whichever is earlier.
The Company has reserved 47,619 shares of Series B convertible preferred stock
for issuance in the event of exercise.
The fair value of the above warrants was calculated using the Black-Scholes
pricing model and deemed to be insignificant.
F-17
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During April 1999, the Company issued warrants to purchase 38,094 shares of
Series B convertible preferred stock at $2.10 per share in connection with the
execution of an equipment line of credit. The warrants are exercisable at any
time and expire in April 2007 or five years from the effective date of the
Company's initial public offering, whichever is later. The fair value of the
warrants calculated using the Black-Scholes pricing model, of $57,167, has been
reflected as a discount on the debt and accreted as interest expense over the
life of the line of credit. The Company has reserved 38,094 shares of Series B
convertible preferred stock for issuance in the event of exercise.
During October 1999, the Company issued warrants to purchase a total of
380,952 shares of Series B convertible preferred stock at $2.10 per share in
connection with the execution of an equipment line of credit. The warrants are
exercisable at any time and expire in October 2009 or five years from the
effective date of the Company's initial public offering, whichever is earlier.
The fair value of the warrants calculated using the Black-Scholes pricing
model, of $762,592, has been reflected as a discount on the debt and accreted
as interest expense over the life of the line of credit. The Company has
reserved 380,952 shares of Series B convertible preferred stock for issuance in
the event of exercise.
NOTE 7--STOCKHOLDERS' EQUITY (DEFICIT):
Common stock
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior
rights of holders of all classes of stock outstanding.
The Company has issued a total of 4,758,334 shares of common stock under
restrictive stock purchase agreements, under which the Company has the option
to repurchase unvested shares of stock upon the termination of employment or
severance of relationship with the Company. The number of shares subject to
repurchase is generally reduced by 1/48th of the initial number subject to
repurchase for each month that the holder continues to serve as a consultant,
employee or director. As of December 31, 1999 and June 30, 2000, 1,562,751 and
1,040,190 (unaudited) shares of common stock are subject to repurchase,
respectively.
Incentive Stock Plan
In March 1997, the Company approved the 1997 Stock Option Plan (the "Plan")
under which the officers of the Company are authorized to enter into stock
option agreements with selected individuals. The Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the term and exercise price (which cannot be less than estimated fair market
value at date of grant for incentive stock options or 85% of estimated fair
market value for nonqualified stock options). If an employee owns stock
representing more than 10% of the outstanding shares, the price of each share
shall be at least 110% of estimated fair market value, as determined by the
Board of Directors. Options granted under the Plan generally become exercisable
1/4 on the first anniversary of the vesting commencement date and an additional
1/48 of the total number of shares subject to the option shares shall become
exercisable on the last day of each calendar month thereafter until all of the
shares have become exercisable.
F-18
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Weighted
Shares Average
Available Number of Exercise Aggregate
for Grant Shares Price Price
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Shares reserved at Plan
inception........................ 1,436,170
Options granted................... (864,388) 864,388 $0.14 $ 121,014
Options exercised................. -- (669,794) $0.14 (93,771)
Options canceled.................. 3,750 (3,750) $0.14 (525)
---------- --------- ----------
Balances, December 31, 1997....... 575,532 190,844 $0.14 26,718
Additional shares reserved........ 500,000 -- -- --
Options granted................... (532,700) 532,700 $0.28 147,056
Options exercised................. -- (216,159) $0.25 (53,320)
Options canceled.................. 5,291 (5,291) $0.15 (811)
---------- --------- ----------
Balances, December 31, 1998....... 548,123 502,094 $0.24 119,643
Additional shares reserved........ 1,500,000 -- -- --
Options granted................... (1,568,245) 1,568,245 $0.77 1,211,198
Options exercised................. -- (394,182) $0.50 (198,960)
Options canceled.................. 31,439 (31,439) $0.33 (10,291)
---------- --------- ----------
Balances, December 31, 1999....... 511,317 1,644,718 $0.68 1,121,590
Additional shares reserved
(unaudited)...................... 1,057,385 -- -- --
Options granted (unaudited)....... (1,179,800) 1,179,800 $3.05 3,601,300
Options exercised (unaudited)..... -- (82,838) $0.21 (17,594)
Options canceled/repurchased
(unaudited)...................... 119,642 (68,732) $1.06 (73,193)
---------- --------- ----------
Balances, June 30, 2000
(unaudited)...................... 508,544 2,672,948 $1.73 $4,632,103
========== ========= ==========
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------
Weighted Average
Remaining Options
Exercise Number Contractual Life Currently
Price Outstanding (Years) Exercisable
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.14 124,594 7.53 76,664
0.28 297,229 8.76 52,000
0.50 394,770 9.14 18,472
0.70 218,500 9.44 --
1.10 609,625 9.77 8,385
--------- -------
1,644,718 155,521
========= =======
</TABLE>
F-19
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The options outstanding and currently exercisable by exercise price at June
30, 2000 (unaudited) are as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------
Weighted Average
Remaining Options
Exercise Number Contractual Life Currently
Price Outstanding (Years) Exercisable
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.14 62,656 7.14 45,442
0.28 265,625 8.24 71,307
0.50 362,349 8.64 63,081
0.70 218,500 8.95 27,312
1.10 598,844 9.27 83,276
3.00 1,042,624 9.70 --
3.50 122,350 9.93 --
--------- -------
2,672,948 290,418
========= =======
</TABLE>
Stock-based compensation
The Company has adopted the disclosure only provisions of SFAS No. 123. The
Company calculated the fair value of each option on the date of grant using the
minimum value method as prescribed by SFAS No. 123 with the following
assumptions:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
December 31, June 30,
---------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate...................... 5.97% 4.80% 5.55% 5.21% 6.48%
Expected life (in years)..................... 4 4 4 4 4
Dividend yield............................... -- -- -- -- --
</TABLE>
As the determination of fair value of all options granted after such time as
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding table, the following
results may not be representative of future periods.
Had compensation costs been determined based upon the fair value at the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been as follows:
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss available to
common stockholders-as
reported............... $(1,516,876) $(4,663,951) $(13,057,722) $(4,953,068) $(29,831,711)
=========== =========== ============ =========== ============
Net loss available to
common stockholders-pro
forma.................. $(1,517,062) $(4,666,570) $(13,101,987) $(4,971,579) $(29,998,389)
=========== =========== ============ =========== ============
Net loss per common
share, basic and
diluted-as reported.... $ (1.66) $ (2.31) $ (4.32) $ (1.79) $ (8.03)
=========== =========== ============ =========== ============
Net loss per common
share, basic and
diluted-pro forma...... $ (1.66) $ (2.32) $ (4.33) $ (1.80) $ (8.08)
=========== =========== ============ =========== ============
</TABLE>
F-20
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The weighted average grant date fair value of options granted during the
years ended December 31, 1997, 1998 and 1999 was $0.01, $0.02 and $0.15,
respectively.
Deferred stock-based compensation
During 1999 and 2000, the Company issued options to certain employees under
the Plan with exercise prices below the deemed fair market value of the
Company's common stock at the date of grant. In accordance with the
requirements of APB 25, the Company has recorded deferred stock-based
compensation for the difference between the exercise price of the stock options
and the fair market value of the Company's stock at the date of grant. This
deferred stock-based compensation is amortized to expense on a straight line
basis over the period during which the Company's right to repurchase the stock
lapses or the options become vested, generally four years. At December 31, 1999
and June 30, 2000, the Company had recorded deferred compensation related to
these options in the amounts of $1,118,400 and $4,454,182 (unaudited) net of
cancellations, respectively, of which $76,121 and $396,087 (unaudited) had been
amortized to expense during 1999 and the six months ended June 30, 2000,
respectively.
Stock-based compensation expense related to stock options granted to non-
employees is recognized on a straight line basis, as the stock options are
earned. The Company believes that the fair value of the stock options is more
reliably measurable than the fair value of the services received. The fair
value of the stock options granted is calculated at each reporting date using
the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following assumptions:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended June
December 31, 30,
---------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate...................... 5.79% 4.93% 6.05% 5.81% 6.03%
Expected life (in years)..................... 10 10 10 10 10
Dividend yield............................... -- -- -- -- --
Expected volatility.......................... 70% 70% 70% 70% 70%
</TABLE>
The stock-based compensation expense will fluctuate as the fair market value
of the common stock fluctuates. In connection with the grant of stock options
to non-employees, the Company recorded deferred stock-based compensation of
none, none and $246,209 for the years ended December 31, 1997, 1998 and 1999
and $514,135 (unaudited) for the six months ended June 30, 2000, of which none,
none and $44,070 has been amortized to expense in 1997, 1998 and 1999 and
$89,474 (unaudited) has been amortized to expense in the six months ended June
30, 2000.
Notes receivable from stockholders
During 1997, 1998 and 1999, the Company sold common stock to certain of its
officers in exchange for full recourse notes receivable. The notes are non-
interest bearing, have due dates through March 2003, and are collateralized by
the underlying shares of common stock.
NOTE 8--INCOME TAXES:
At December 31, 1999, the Company has approximately $17.5 million in both
federal and state net operating loss carryforwards to reduce future taxable
income. If not utilized, these carryforwards will expire in various amounts
beginning in the year 2018 for federal and 2006 for state.
F-21
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the Company has research credit carryforwards of
approximately $454,000 and $371,000 for federal and state income tax purposes,
respectively. If not utilized, the federal carryforward will expire in various
amounts beginning in 2018. The state research credit can be carried forward
indefinitely.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in the case of an "ownership change" of a corporation. Any
ownership changes, as defined, may restrict utilization of carryforwards.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................. $ 1,793,000 $ 6,985,000
Tax credit carryforwards......................... 227,000 776,000
Capitalized start-up costs....................... 629,000 489,000
Depreciation and amortization.................... 9,000 (8,000)
Other accruals and reserves not currently
deductible for tax purposes..................... -- 64,000
Valuation allowance.............................. (2,658,000) (8,306,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
NOTE 9--UNAUDITED PRO FORMA NET LOSS PER SHARE AND PRO FORMA:
Pro forma basic and diluted net loss per share have been computed to give
effect to convertible preferred stock that will convert to common stock upon
the closing of the Company's initial public offering (using the as-if-converted
method) for the year ended December 31, 1999 and the six months ended June 30,
2000. A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Pro forma net loss per common share, basic and
diluted:
Net loss......................................... $(13,057,722) $(15,058,833)
============ ============
Weighted-average shares used in computing net loss
per common share, basic and diluted............... 3,023,636 3,712,999
Adjustments to reflect the effect of the assumed
conversion of the preferred stock from the date of
issuance.......................................... 11,368,996 18,492,718
------------ ------------
Weighted-average shares used in computing pro forma
net loss per common share, basic and diluted...... 14,392,632 22,205,717
============ ============
Pro forma net loss per common share, basic and
diluted........................................... $ (0.91) $ (0.68)
============ ============
</TABLE>
F-22
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Since April 1997 Dr. Adam Heller, the Chief Scientific Advisor, has
performed consulting services for the Company. The terms of the consulting
agreements provide that the Company pay Dr. Heller a consulting fee of $1,200
per day, plus reimbursement for travel and business expenses. The agreement has
a term of four years, and is terminable by Dr. Heller upon thirty days written
notice. The agreement is also terminable by the Company for cause if Dr. Heller
refuses or is unable to perform consulting services or otherwise breaches the
agreement. Dr. Heller has also agreed not to consult with or be employed by one
of the Company's competitors, or otherwise compete with the Company during the
term of the agreement. Dr. Adam Heller is the father of Ephriam Heller. During
1997, 1998 and 1999, the Company paid Dr. Heller $31,965, $55,260 and $85,760,
respectively, in connection with these agreements.
Pursuant to an agreement with Gainor Medical North America LLC ("Gainor
Medical") entered into in December 1998, Gainor Medical has provided financial
support for the development of some of the Company's glucose monitoring systems
and related products. In exchange for such funding, the Company granted Gainor
Medical the exclusive right to manufacture the components associated with the
development of these products for a period of seven years from the date of the
agreement. A principal of Gainor Medical Management LLC , is a member of the
Company's Board of Directors. During 1999, purchases from Gainor totaled $4,675
and Gainor funded approximately $200,000 of product development costs.
In November 1999 the Company entered into an agreement with Flextronics
International related to the manufacturing of the FreeStyle meter. The
Company's contract with Flextronics expires in November 2005, and is renewable
annually thereafter. A member of the Company's Board of Directors, is President
of Americas Operations of Flextronics. During 1999, the Company paid $261,195
under this agreement. Approximately $32,606 is included in accounts payable at
December 31, 1999.
NOTE 11--EMPLOYEE BENEFIT PLAN:
In October 1997, the Company adopted a defined contribution retirement plan
(the "Plan"), which qualifies under Section 401(k) of the Internal Revenue Code
of 1986. The Plan covers essentially all employees. Eligible employees may make
voluntary contributions to the Plan up to 15% of their annual compensation,
subject to statutory annual limitations, and the employer is allowed to make
discretionary contributions. The Company has made no contributions to date.
NOTE 12--STOCK SPLIT AND REINCORPORATION
Stock split
In September 2000, the Board of Directors approved a two-for-one reverse
stock split of its common and convertible preferred stock, subject to
stockholder approval. All convertible preferred and common stock data and
common stock option plan information in these financial statements has been
restated to reflect the split. In addition, the conversion prices of the
Company's preferred stock have also been adjusted to reflect the effect of the
split.
Reincorporation
In September 2000, the Company's Board of Directors authorized the
reincorporation of the Company in the state of Delaware. Following the
reincorporation, the Company will be authorized to issue 200,000,000 shares of
$0.001 par value common stock and 5,000,000 shares of $0.001 par value
preferred stock. The Board of Directors has the authority to issue the
undesignated preferred stock in one or more series and to fix the rights
preferences, privileges and restrictions thereof. The accompanying financial
statements have been retroactively restated to give effect to the
reincorporation.
F-23
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 13--SUBSEQUENT EVENTS (Unaudited):
Option grants
From July 1 to September 29, 2000, the Company issued a total of 1,217,650
options to purchase shares of common stock under the 1997 Stock Option Plan to
employees and non-employees at exercise prices ranging from $4.00 to $5.00 per
share. The total deferred stock-based compensation related to these grants
amounted to $6,067,179 and will be amortized to expense over the vesting
period.
Initial public offering
In September 2000, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell its common stock to the public. Upon completion of
the Company's initial public offering, all of the outstanding convertible
preferred stock will be converted into shares of common stock.
2000 Stock Plan
In September 2000, the Board of Directors adopted the 2000 Stock Plan ("2000
Plan"), subject to stockholder approval. The 2000 Plan, which will terminate no
later than 2010, provides for the granting of incentive stock options to
employees and nonstatutory stock options to employees, directors and
consultants. 7,000,000 shares of common stock are reserved for issuance plus
any shares which have been reserved but not issued under the 1997 Stock Plan
and any shares returned thereafter. In addition, the number of shares available
for issuance will be increased on the first day of each fiscal year, commencing
in 2002, by an amount equal to the lesser of (i) 2,500,000, (ii) 5.0% of the
outstanding shares of common stock on the last day of the preceeding fiscal
year or (iii) an amount as determined by the Board of Directors.
Under the terms of the 2000 Plan, on, or after the effectiveness of an
initial public offering of the Company's stock, each newly-elected non-employee
director will be granted a nonstatutory option to purchase 30,000 shares of
common stock which vest annually over a three year period. Thereafter, on an
annual basis, on the date of the annual stockholder meeting, commencing in
2002, each non-employee director will be granted a nonstatory option to
purchase 10,000 shares of common stock which vest after one year. The exercise
price of an option shall not be less than 100% of the fair market value of the
common stock on the date of grant and the term shall not exceed 10 years.
2000 Employee Stock Purchase Plan
In September 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan ("2000 ESPP"), subject to stockholder approval, under which
eligible employees are permitted to purchase common stock at a discount through
payroll deductions. 1,000,000 shares of common stock are reserved for issuance
and will be increased on the first day of each fiscal year, commencing in 2002,
by an amount equal to the lesser of (i) 1,000,000, (ii) 1.5% of the outstanding
shares of common stock on such date or (iii) an amount as determined by the
Board of Directors.
The 2000 ESPP contains consecutive, overlapping twenty-four month offering
periods. Each offering period includes four six-month purchase periods. The
price of the common stock purchased shall be the lower of 85% of the fair
market value of the common stock at the beginning of an offering period or at
the end of a purchase period. The initial offering period will commence on the
effective date of the Company's initial public offering.
F-24
<PAGE>
THERASENSE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Distribution Agreement
In September 2000, the Company entered into an agreement for the exclusive
distribution of its products in certain European countries and the nonexclusive
distribution in North America. Under the terms of the agreement, the Company
received a $1.5 million nonrefundable pre-payment which has been deferred and
will be recognized as revenue as products are shipped. In connection with the
agreement, the Company issued a $2.5 million convertible promissory note. The
note bears interest at 7.0% per annum and upon completion of an equity
financing with aggregate proceeds of $10,000,000, both principal and interest
will be automatically converted into shares of the equity securities sold and
at a price per share equal to the price of the equity securities sold. If the
Company does not complete an equity offering both principal and interest will
be due and payable upon the earlier of (i) the third anniversary of the note
(ii) an event of default, as defined in the agreement or (iii) the occurrence
of a redemption event, as set forth in the agreement.
Technology Purchase Agreement
In October 2000, the Company entered into a Technology Purchase Agreement
with E. Heller & Co., providing for the transfer and assignment of several
licenses and rights to the Company in exchange for $500,000. E. Heller & Co. is
controlled by one of the Company's founders, who is also a member of the
Company's Board of Directors.
F-25
<PAGE>
[GRAPHIC APPEARS HERE]
[Graphic depicting the front of a FreeStyle box with four other different
FreeStyle product boxes below it. Three columns of our retailers, wholesalers
and "E"-tailers surround the boxes.]
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that con-
tained in this prospectus. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this pro-
spectus or any sale of our common stock.
Until , 2000, all dealers that effect transactions of these securi-
ties, whether or not participating in this offering, may be required to de-
liver a prospectus. This is in addition to the obligation of dealers to de-
liver a prospectus when acting as underwriters and with respect to their un-
sold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Information Regarding Forward-Looking Statements......................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 25
Management............................................................... 42
Related Party Transactions............................................... 51
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find Additional Information................................ 64
Financial Statements..................................................... F-1
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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[LOGO OF THERASENSE]
Shares
Common Stock
---------------------
PROSPECTUS
---------------------
Bear, Stearns & Co. Inc.
Lehman Brothers
U.S. Bancorp Piper Jaffray
, 2000
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses payable in connection
with the registration of the common stock hereunder. All of the amounts shown
are estimates except for the SEC registration fee, the NASD filing fee and The
Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
-------
<S> <C>
SEC Registration Fee................................................ $22,770
NASD Filing Fee..................................................... $ 9,125
Nasdaq National Market Listing Fee.................................. $95,000
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Transfer Agent and Registrar Fees and Expenses...................... *
Blue Sky fees and expenses.......................................... *
Miscellaneous Expenses.............................................. *
-------
Total............................................................. *
=======
</TABLE>
--------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VIII of our amended and restated certificate of incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of our amended and restated by-laws provides for the
indemnification of officers, directors and third parties acting on our behalf
if such person acted in good faith and in a manner reasonably believed to be in
and not opposed to our best interest, and, with respect to any criminal action
or proceeding, the indemnified party had no reason to believe his or her
conduct was unlawful.
We intend to enter into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our by-laws,
and we intend to enter into indemnification agreements with any new directors
and executive officers in the future.
The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of us and our executive officers and directors, and
indemnification of the underwriters by us for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in the
registration statement.
We intend to purchase and maintain insurance on behalf of any person who is
or was a director or officer against any loss arising from any claim asserted
against him or her and incurred by him or her in any such capacity, subject to
certain exclusions.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
(a) Within the last three years, and through September 30, 2000, we have
issued and sold the following unregistered securities:
. On August 24, 1998, we issued a warrant to acquire 47,619 shares of
Series B preferred stock to Comdisco Ventures, at an exercise price of
$2.10 per share.
. On October 23, 1998, we sold an aggregate of 6,400,573 shares of our
Series B preferred stock at a price of $2.10 per share to twenty
investors and their affiliates.
. On October February 23, 1999, we sold 742,284 shares of our Series B
preferred stock at a price of $2.10 per share to Brentwood Associates.
. On April 1, 1999, we issued a warrant to acquire 3,809 shares of Series B
preferred stock to Robert Kingsbrook, a principal of Phoenix Capital, and
a warrant for 34,285 shares of Series B preferred stock to Phoenix
Capital, both at an exercise price of $2.10 per share.
. On October 7, 1999, we issued a warrant to acquire 380,952 shares of
Series B preferred stock to Comdisco Ventures, at an exercise price of
$2.10 per share.
. On February 3, 2000, we sold an aggregate of 8,490,160 shares of our
Series C preferred stock at a price of $5.00 per share to forty investors
and their affiliates.
. On September 13, 2000, we issued a convertible promissory note in the
amount of $2,500,000 to Disetronic Holding AG.
(b) Since our inception and through September 30, 2000, we have granted
options to purchase 5,366,853 shares of common stock to employees, directors
and consultants under our 1997 Stock Plan at exercise prices ranging from $0.14
to $5.00 per share. Of the 5,366,853 shares granted, 3,791,709 remain
outstanding, 1,394,651 shares of common stock have been purchased pursuant to
exercises of stock options and 180,493 shares have been canceled and returned
to the 1997 Stock Plan.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with TheraSense, to
information about us.
(c) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a)
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1(a) Certificate of Incorporation of TheraSense, Inc., a Delaware
corporation, as currently in effect
3.1(b) Amended and Restated Certificate of Incorporation of TheraSense, Inc.
to be filed upon completion of the offering
3.2(a) By-Laws of TheraSense, Inc. as currently in effect
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- -----------------------
<C> <S>
3.2(b) By-Laws of TheraSense, Inc. as in effect upon completion of the
offering
*4.1 Specimen Common Stock Certificate
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 1997 Stock Plan and forms of agreements thereunder
10.2 2000 Stock Plan and forms of agreements thereunder
10.3 2000 Employee Stock Purchase Plan and forms of agreement thereunder
10.4 Form of Director and Executive Officer Indemnification Agreement
10.5 Employment Letter from TheraSense, Inc. to W. Mark Lortz, dated as
of October 6, 1997
+10.6 Technology Purchase Agreement between TheraSense and E. Heller & Co.
dated as of October 10, 2000
+10.7 Cooperative Development Agreement between TheraSense, Inc. and
Gainor Medical North America LLC, dated as of December 1, 1998
10.8 Standard Industrial/Commercial Single-Tenant Lease between
TheraSense, Inc. and PlyProperties, a Partnership, dated as of
February 26, 1999, and addendum thereto
+10.9 Master Purchase Agreement between TheraSense and Flextronics
International USA, Inc., dated as of November 3, 1999
+10.10 Assignment of Patent Rights and Technology by and among Board of
Regents of the University of Texas System, an agency of the State of
Texas, Dr. Adam Heller, E. Heller & Company and ThersSense Inc.
dated August 1, 1991
+10.11 First Amendment, dated March 19, 1998, to the Agreement entitled
Assignment of Patent Rights and Technology by and among Board of
Regents of the University of Texas System, an agency of the State of
Texas, Dr. Adam Heller, E. Heller & Company and TheraSense Inc.
dated August 1, 1991.
+10.12 License Agreement between TheraSense, Inc. and Asulab SA., dated
February 23, 2000
10.13 Promissory Note dated December 1, 1997 for the principal aggregate
amount of $62,650 issued by W. Mark Lortz to TheraSense
10.14 Promissory Note dated March 5, 1999 for the principal aggregate
amount of $72,495 issued by W. Mark Lortz to TheraSense
10.15 Promissory Note dated July 30, 1998 for the principal aggregate
amount of $17,500 issued by Charles T. Liamos to TheraSense
10.16 Promissory Note dated March 5, 1999 for the principal aggregate
amount of $15,187.50 issued by Charles T. Liamos to TheraSense
10.17 Promissory Note dated September 1, 1999 for the principal aggregate
amount of $61,250 issued by Charles T. Liamos to TheraSense
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
*23.2 Consent of Counsel (included in exhibit 5.1)
24.1 Power of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
--------
*To be filed by amendment
+Confidential treatment has been requested for portions of this exhibit
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings
Insofar as indemnification by TheraSense for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons of TheraSense, we have been advised that in the opinion of the
II-3
<PAGE>
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by TheraSense of expenses incurred or paid by any of our directors,
officers or controlling persons in the successful defense of any action, suit
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) We will provide to the underwriters at the closing as specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from a form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by TheraSense pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
THERASENSE, Inc. has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Alameda, State of California, on the 11th day of October, 2000.
THERASENSE, INC.
/s/ W. Mark Lortz
By___________________________________
W. Mark Lortz
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints W. Mark Lortz, Charles Liamos and Holly Kulp,
and each of them, his attorneys-in-fact, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933,
and all post-effective amendments thereto, and to file the same, with all
exhibits thereto in all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Mark Lortz President, Chief Executive October 11, 2000
______________________________________ Officer and Director
W. Mark Lortz (Principal Executive
Officer)
/s/ Charles T. Liamos Chief Financial Officer October 11, 2000
______________________________________ (Principal Financial and
Charles T. Liamos Accounting Officer)
/s/ Annette J. Campbell-White Director October 11, 2000
______________________________________
Annette J. Campbell-White
/s/ Mark J. Gainor Director October 11, 2000
______________________________________
Mark J. Gainor
/s/ Ross A. Jaffe, M.D. Director October 11, 2000
______________________________________
Ross A. Jaffe, M.D.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael McNamara Director October 11, 2000
______________________________________
Michael McNamara
/s/ Robert R. Momsen Director October 11, 2000
______________________________________
Robert R. Momsen
/s/ Ephraim Heller Director October 11, 2000
______________________________________
Ephraim Heller
/s/ Richard P. Thompson Director October 11, 2000
______________________________________
Richard P. Thompson
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1(a) Certificate of Incorporation of TheraSense, Inc., a Delaware
corporation, as currently in effect
3.1(b) Amended and Restated Certificate of Incorporation of TheraSense,
Inc. to be filed upon completion of the offering
3.2(a) By-Laws of TheraSense, Inc. as currently in effect
3.2(b) By-Laws of TheraSense, Inc. as in effect upon completion of the
offering
*4.1 Specimen Common Stock Certificate
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 1997 Stock Plan and forms of agreements thereunder
10.2 2000 Stock Plan and forms of agreements thereunder
10.3 2000 Employee Stock Purchase Plan and forms of agreement thereunder
10.4 Form of Director and Executive Officer Indemnification Agreement
10.5 Employment Letter from TheraSense, Inc. to W. Mark Lortz, dated as
of October 6, 1997
+10.6 Technology Purchase Agreement between TheraSense and E. Heller & Co.
dated as of October 10, 2000
+10.7 Cooperative Development Agreement between TheraSense, Inc. and
Gainor Medical North America LLC, dated as of December 1, 1998
10.8 Standard Industrial/Commercial Single-Tenant Lease between
TheraSense, Inc. and PlyProperties, a Partnership, dated as of
February 26, 1999, and addendum thereto
+10.9 Master Purchase Agreement between TheraSense and Flextronics
International USA, Inc., dated as of November 3, 1999
+10.10 Assignment of Patent Rights and Technology by and among Board of
Regents of the University of Texas System, an agency of the State of
Texas, Dr. Adam Heller, E. Heller & Company and ThersSense Inc.
dated August 1, 1991
+10.11 First Amendment, dated March 19, 1998, to the Agreement entitled
Assignment of Patent Rights and Technology by and among Board of
Regents of the University of Texas System, an agency of the State of
Texas, Dr. Adam Heller, E. Heller & Company and TheraSense Inc.
dated August 1, 1991.
+10.12 License Agreement between TheraSense, Inc. and Asulab SA., dated
February 23, 2000
10.13 Promissory Note dated December 1, 1997 for the principal aggregate
amount of $62,650 issued by W. Mark Lortz to TheraSense
10.14 Promissory Note dated March 5, 1999 for the principal aggregate
amount of $72,495 issued by W. Mark Lortz to TheraSense
10.15 Promissory Note dated July 30, 1998 for the principal aggregate
amount of $17,500 issued by Charles T. Liamos to TheraSense
10.16 Promissory Note dated March 5, 1999 for the principal aggregate
amount of $15,187.50 issued by Charles T. Liamos to TheraSense
10.17 Promissory Note dated September 1, 1999 for the principal aggregate
amount of $61,250 issued by Charles T. Liamos to TheraSense
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*23.2 Consent of Counsel (included in exhibit 5.1)
24.1 Power of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
--------
*To be filed by amendment
+Confidential treatment has been requested for portions of this exhibit
