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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1999
REGISTRATION NO. 333-80527
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MINIMED INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4408171
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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12744 SAN FERNANDO ROAD
SYLMAR, CALIFORNIA 91342
(818) 362-5958
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALFRED E. MANN
CHAIRMAN OF THE BOARD AND CEO
MINIMED INC.
12744 SAN FERNANDO ROAD
SYLMAR, CALIFORNIA 91342
(818) 362-5958
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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ERIC S. KENTOR, ESQ. ROY J. SCHMIDT, JR., ESQ. FREDERICK W. KANNER, ESQ.
SENIOR VICE PRESIDENT, GIBSON, DUNN & CRUTCHER LLP DEWEY BALLANTINE LLP
GENERAL COUNSEL AND SECRETARY 333 SOUTH GRAND AVENUE 1301 AVENUE OF THE AMERICAS
MINIMED INC. LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10019
12744 SAN FERNANDO ROAD (213) 229-7000 (212) 259-8000
SYLMAR, CALIFORNIA 91342
(818) 362-5958
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, 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 of 1933, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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 SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS 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 IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS Subject to completion, dated June 24, 1999
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2,250,000 SHARES
LOGO
COMMON STOCK
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We are offering 2,000,000 shares of our common stock and a stockholder
identified in this prospectus is offering 250,000 shares of our common stock. We
will not receive any of the proceeds from the sale of shares of our common stock
by the selling stockholder.
Our common stock is quoted on the Nasdaq National Market under the symbol
"MNMD." On June 10, 1999, the last reported sale price of the common stock was
$71.375 per share.
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
PER SHARE TOTAL
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to MiniMed $ $
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Proceeds, before expenses, to the selling stockholder $ $
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The underwriters may also purchase 337,500 shares of common stock from us and
the selling stockholder at the offering price, less the underwriting discounts
and commissions, within 30 days from the date of this prospectus. This option
may be exercised to cover over-allotments, if any. If the option is exercised in
full, the total underwriting discounts and commissions will be $ , the
proceeds, before expenses, to MiniMed will be $ and the total proceeds,
before expenses, to the selling stockholder will be $ .
The Underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about June , 1999.
The Underwriters are
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
ING BARING FURMAN SELZ LLC
VOLPE BROWN WHELAN & COMPANY
The date of this prospectus is June , 1999.
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Picture of 507C Picture of infusion sets
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Our 507C insulin pump offers patients We offer a complete selection of
programming features which closely infusion sets which provide patients
mimic normal pancreatic activity and with the lifestyle flexibility they
will be able to communicate insulin desire.
dosage activity with a personal
computer.
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[MINIMED LOGO]
MAKING A DIFFERENCE
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Picture of Elan device Picture of data collection system Picture of pre-filled
syringe-cartridge
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This disposable constant flow infusion The data collection system combined We recently entered into an exclusive
system was developed by Elan with proprietary software enables our license to package and sell a new
Corporation, plc and recently licensed 507C external insulin pump and formulation of Eli Lilly's insulin
by MiniMed. We will offer this new continuous glucose monitoring system to lyspro for use with our infusion pumps.
product for the treatment of Type 2 communicate with a personal computer.
diabetes.
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Picture of implantable pump Picture of sensor and dime Picture of monitor
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Our implantable insulin pump delivers Our continuous glucose monitoring system is the first such device approved by the
insulin directly into the peritoneal FDA. The system consists of a monitor and disposable sensors. The first generation
cavity and can be programmed by the system will be used by physicians, with future generations planned to provide
patient with a hand-held transmitter. patients with continuous glucose measurements over a three-day period and alarms for
high and low glucose levels.
</TABLE>
MiniMed's implantable pump, constant flow infusion device and new
formulation of Eli Lilly's insulin lyspro have not been approved by the FDA.
------------------------
As used in this prospectus, the terms "we," "us," "our company," and
"MiniMed" mean MiniMed Inc. and its subsidiaries.
MiniMed(R), "Making a Difference in Diabetes(R)", Soft-set(R), QR(R), and
Polyfin(R) are registered trademarks of ours. This prospectus also includes
trademarks of other companies.
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PROSPECTUS SUMMARY
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This summary highlights information contained elsewhere in this prospectus.
It is not complete and does not contain all of the information that you should
consider before investing in the shares. You should read the entire prospectus
carefully, and you should consider the information set forth under "Risk
Factors."
Some of the information in this prospectus contains forward-looking
statements, including statements relating to the anticipated operating results,
growth, financial resources, development of new products and markets, obtaining
and maintaining regulatory approval, commercial acceptance of new products,
expectations regarding competition from other companies and from other methods
of treating medical conditions and our ability to manufacture and distribute our
products. The forward-looking statements are based on assumptions, including
assumptions of future events. It is likely that some of the assumptions will
prove to be incorrect for reasons which include those set forth under "Risk
Factors." The actual results and our financial position will vary from those
projected or implied in the forward-looking statements, and the variances may be
material.
OUR BUSINESS
We design, develop, manufacture, market and sell advanced microinfusion
systems and continuous glucose monitoring systems for the intensive management
of diabetes. Our primary goal is to continue to be an innovator in designing and
bringing to market advanced medical devices for the treatment of diabetes. We
are also using our drug delivery expertise to develop devices for the treatment
of other chronic medical conditions. Our development efforts are focused on
creating products which will offer patients a comprehensive and integrated
approach to enhanced disease management.
We have been selling external insulin infusion pumps and related supplies
since 1983, and we believe we have established a reputation for quality and
service associated with the MiniMed name. We believe that we are the leading
provider of insulin infusion systems in the world, with a present market share
in the United States of approximately 80% of new product sales. Our net sales of
these external pumps and related disposables has grown at a compounded annual
growth rate of 40.7% from $43.7 million in 1995 to $121.8 million in 1998. In
turn, this growth has driven our overall net income from $2.3 million to $13.0
million over the same period. We intend to leverage our existing customer base
and current distribution channels to introduce new products to satisfy more of
our customers' needs and provide more complete diabetes management solutions.
COMPREHENSIVE DIABETES MANAGEMENT SOLUTION
PROGRAMMABLE INSULIN PUMPS. The primary component of our insulin infusion
systems is a small, lightweight external insulin pump, about the size of a
pager, which is worn under the patient's clothing, on a belt, in a pocket, or
elsewhere in order not to interfere with normal daily activities. The external
insulin pump delivers small quantities of insulin in a controlled, programmable
profile enabling patients to better control their glucose levels, reduce the
serious consequences of diabetes and improve the quality of their lives. The
primary market for our programmable insulin pumps is Type 1 diabetes patients,
whose bodies fail to produce insulin.
Our infusion systems include proprietary disposable products consisting of
a medication reservoir and a range of infusion sets, most of which are labeled
to be replaced every 48 to 72 hours. These disposable products provide us a
continuing source of revenue from each patient using our pump. The
1
<PAGE> 5
current model of our insulin pumps has a retail cost of approximately $5,000,
and a typical patient spends between $800 and $1,500 per year for disposables.
We also have the exclusive worldwide marketing rights to an implantable
programmable pump primarily for treatment of diabetes. This implantable insulin
pump is similar in function to the external pump but is implanted under the skin
in the abdomen and releases insulin directly into the peritoneal cavity, even
more closely simulating normal pancreatic function. The implantable pump has not
been approved for commercial distribution in the United States and will be
available in the European Union only on a limited basis until the special
insulin used with the pump is approved in the European Union.
CONTINUOUS GLUCOSE MONITORING SYSTEMS. We are developing a series of
continuous glucose monitoring systems which are capable of measuring and
recording glucose levels every ten seconds, recording averages over five minute
intervals, and providing alarms that will inform the patient when glucose levels
become too high or too low. We believe that the recorded information will enable
better disease management and significantly improve patient compliance. These
systems rely on a very small, thin, pliable microsensor which is inserted into
the subcutaneous tissue, just beneath the skin, generally in the abdomen or the
upper arm, to detect glucose levels. We expect each sensor to last approximately
three days, after which the patient would replace it with another sensor in a
different location. One of our goals is to develop a system in which the sensor
controls the infusion of insulin by a pump in a "closed loop" without the need
for patient intervention, creating what is essentially an artificial pancreas.
On June 15, 1999, the U.S. Food and Drug Administration approved a first
generation continuous glucose monitoring system designed to be used by
physicians in treating patients with diabetes. Patients can wear this initial
model for several days to enable physicians to analyze retrospectively patients'
glucose levels. Physicians will be able to use the information to modify
patients' treatment, which may include the prescription or reprogramming of an
insulin pump. Subject to receipt of a separate FDA approval, we intend to
introduce a consumer model of the glucose monitoring system that would provide
the patient with continuous glucose readings and enable us to compete in the
worldwide market for glucose strips and meters which we estimate to be $3.0
billion.
NEW DISPOSABLE INFUSION SYSTEM FOR TYPE 2 DIABETES. In June 1999, we
entered into agreements with a division of Elan Corporation, plc to manufacture
and market exclusively under our name a disposable, constant-flow infusion
system developed by Elan to deliver insulin. This product is primarily targeted
at insulin-using Type 2 diabetes patients, whose bodies produce insufficient
quantities of insulin or fail to effectively metabolize glucose. We estimate
that there are approximately 3 million insulin-using Type 2 diabetes patients in
the United States. Our new system continuously infuses a pre-set amount of
insulin. We believe this system will offer these patients better control of
their glucose levels. In addition, because this system must be replaced
approximately every three days, it will provide us with a recurring source of
revenues. We will also manufacture the system for Elan and its other licensees
for use with a variety of other pharmaceutical compounds. Before marketing, FDA
approval will be required for the system.
DISTRIBUTION OF LILLY INSULIN FOR PROGRAMMABLE PUMP USE. In February 1999,
we entered into an agreement with Eli Lilly and Company giving us a worldwide
exclusive license to package and sell a new formulation of Lilly's insulin
lyspro for use with our programmable insulin infusion pumps. Before marketing,
we will be required to obtain FDA approval for this product.
2
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NEW COMMUNICATIONS DEVICE. In order to enable patients and physicians to
capture, analyze and store glucose and insulin data over discreet periods of
time, we have developed a data collection system. This device enables physicians
to download information from our pump and glucose sensor, allowing them to more
closely manage a patient's treatment and better monitor the patient's
compliance.
ACQUISITION OF SUPPLY AND DISTRIBUTION BUSINESSES. In 1998, we acquired two
U.S. distributors to enable us to more effectively distribute our products as
well as other diabetes supplies domestically, such as the strips and meters used
to monitor glucose levels. These businesses include a mail-order pharmacy
operation that will enable us to sell the Lilly insulin lyspro by mail order to
customers throughout the country.
THE DIABETES MARKET
We believe that the most significant development in diabetes care in recent
years was the completion in 1993 of a landmark $165.0 million, ten-year study
conducted under the auspices of the National Institutes of Health. This study,
which is commonly called the DCCT, established that the intensive management of
diabetes -- three or more insulin injections daily or use of an insulin pump and
frequent glucose monitoring -- can prevent or delay the onset of long-term
consequences of diabetes. The total cost to the U.S. health care system of
treating diabetics was estimated to be more than $98.0 billion in 1997. We
believe that the DCCT has made greater numbers of health care professionals and
patients aware of the importance of intensive management of diabetes. Other
clinical studies have demonstrated that the use of insulin pumps offers better
glucose control than multiple daily injections, with reduced acute
complications. The American Diabetes Association, commonly known as the ADA, has
estimated that diabetes affects approximately 16 million people in the United
States or about 6% of the population.
The ADA has estimated that there are approximately 800,000 to 1 million
Type 1 patients in the United States. We believe that only approximately 7% of
these patients currently use insulin pumps. One of our principal strategies is
to expand the market for insulin pumps by educating physicians, patients, and
third-party payors about the benefits of intensive management of diabetes and
the benefits of pump therapy over injection therapy.
Another major market for our products, principally our new disposable
constant-flow infusion system, as well as our continuous glucose monitoring
systems and other diabetic supplies, is the Type 2 diabetes market. We estimate,
based on industry sources, that there are approximately 15 million people in the
United States who have Type 2 diabetes, approximately 5.6% of the total
population, and that approximately 3 million of these patients use insulin. Like
Type 1 patients, Type 2 patients are also at risk for the long-term consequences
of diabetes and benefit from closer management of their glucose levels. Also, a
significant number of Type 2 patients experience a decline in their ability to
metabolize glucose as they get older and could benefit from our programmable
infusion systems.
USE OF OUR INFUSION PUMPS FOR OTHER MEDICAL CONDITIONS
We have gained considerable expertise from our experience with insulin
infusion, and we believe that this expertise can be applied to meet the complex
delivery requirements of many other drugs. Many genetically engineered and
manufactured proteins and peptides have delivery problems similar to insulin. We
are exploring opportunities for applications of our delivery systems for other
drugs with several biopharmaceutical companies and have entered into agreements
with two companies. United
3
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Therapeutics Corporation and MiniMed are jointly designing and developing
therapies for the treatment of pulmonary hypertension. We have an agreement with
Trimeris, Inc. that relates to developing a therapy for HIV/AIDS. While we
believe that these and other new applications of our infusion technology
represent a significant opportunity for the future, our efforts in developing
infusion systems for new applications are at a preliminary stage and involve new
drugs which themselves must be approved in addition to the approval required for
the use of our infusion system to deliver the drugs.
HOW TO CONTACT US
Our principal executive offices are located at 12744 San Fernando Road,
Sylmar, California 91342, and our telephone number is (818) 362-5958. We have
begun construction of a new principal facility on the campus of California State
University Northridge. We were incorporated in 1993 in Delaware.
THE OFFERING
Common stock offered by
us......................... 2,000,000 shares
Common stock to be offered
by the selling
stockholder.............. 250,000 shares
Common stock to be
outstanding after the
offering................. 30,382,846
Use of proceeds of
MiniMed.................... License fees, facilities and manufacturing
equipment for the Type 2 diabetes infusion system;
manufacturing equipment for our continuous glucose
monitoring systems; an information systems and
technology upgrade; furniture and equipment for our
new principal facility; and working capital and
other general corporate purposes. We will not
receive any proceeds from the sale of the common
stock offered by the selling stockholder.
Nasdaq National Market
symbol................... MNMD
The number of shares outstanding after the offering is based on the number
of shares outstanding as of May 31, 1999 and excludes 4,211,146 shares issuable
upon exercise of outstanding stock options with a weighted average exercise
price of $17.88.
All share amounts in this prospectus give retroactive effect to a
two-for-one stock split of our common stock paid on April 16, 1999 and do not
assume exercise of the underwriters' over-allotment option unless otherwise
indicated.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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<CAPTION>
FISCAL YEAR
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1996 1997 1998
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YEAR ENDED THREE MONTHS ENDED
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DECEMBER 27, JANUARY 2, JANUARY 1, APRIL 3, APRIL 2,
1996 1998 1999 1998 1999
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STATEMENT OF OPERATIONS DATA
Net sales................... $ 76,396 $ 99,492 $ 138,577 $ 26,366 $ 40,911
Gross profit................ 44,082 60,788 87,059 16,582 27,073
Operating expenses:
Selling, general and
administrative......... 32,101 41,237 57,059 11,391 17,499
Research and
development............ 7,900 9,447 16,531 3,317 5,296
Research and development
contract............... -- -- (6,000) (1,500) (1,500)
Merger related expenses... -- 1,000 -- -- --
----------- ----------- ----------- ----------- -----------
Operating income............ 4,081 9,104 19,469 3,374 5,778
Net income.................. $ 3,318 $ 6,689 $ 13,043 $ 2,304 $ 3,782
=========== =========== =========== =========== ===========
Basic earnings per share.... $ 0.14 $ 0.26 $ 0.49 $ 0.09 $ 0.13
Basic weighted average
shares outstanding........ 23,882,000 25,810,000 26,880,000 26,562,000 28,148,000
----------- ----------- ----------- ----------- -----------
Diluted earnings per
share..................... $ 0.13 $ 0.25 $ 0.46 $ 0.08 $ 0.13
Diluted weighted average
shares outstanding........ 25,134,000 27,112,000 28,332,000 27,854,000 30,024,000
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The following balance sheet data has been adjusted to give effect to the
receipt of the net proceeds from the sale of 2,000,000 shares of our common
stock we are offering, at an offering price of $71.375 per share, after
deduction of underwriting discounts and commissions and estimated expenses
payable by us in connection with the offering. See "Use of Proceeds" and
"Capitalization".
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APRIL 2, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA
Cash and cash equivalents................................... $ 21,418 $156,418
Working capital............................................. 87,499 222,499
Total assets................................................ 160,900 295,900
Total stockholders' equity.................................. 140,022 275,022
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5
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RISK FACTORS
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You should carefully consider the risks described below together with all
of the other information included in or incorporated by reference into this
prospectus before making an investment decision. The risks and uncertainties
described below are not the only ones facing our company. If any of the
following risks actually occurs, our business, financial condition or results of
operation could be materially adversely affected. In that case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
OUR BUSINESS IS DEPENDENT UPON A NARROW PRODUCT LINE, AND A MORE EFFECTIVE FORM
OF INSULIN DELIVERY AND ABSORPTION OR THE DEVELOPMENT OF AN ALTERNATIVE THERAPY
FOR TYPE 1 DIABETES COULD MAKE OUR PRODUCTS OBSOLETE.
Our revenues are currently derived primarily from the sale of external
insulin pumps and related disposables for Type 1 diabetes. For fiscal 1998,
these products accounted for 88% of our revenues. Our future success will depend
to a large extent on growing acceptance of insulin infusion therapy for
diabetes.
A number of companies and medical researchers are pursuing new delivery
devices, delivery technologies, procedures, drugs and bioengineered therapeutics
for the prevention and treatment of Type 1 diabetes. If any of these
technological innovations are successful, some or all of our products could be
rendered obsolete or the market for our products could be adversely affected.
Because the potential market for glucose sensors is so large, other
companies are attempting to develop competitive continuous glucose sensors. Some
companies are known to be attempting to develop non-invasive and minimally
invasive glucose measurement systems. If any of these efforts are successful,
the resulting products could have a material adverse effect on our glucose
sensor program.
Many of these companies working on alternative technologies for the
prevention and treatment of diabetes and alternatives to our continuous glucose
monitoring system have substantially greater financial, technical and marketing
resources than we do.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE, WHICH MAY CAUSE A DECLINE IN THE
PRICE OF THE STOCK THAT YOU PURCHASE IN THIS OFFERING.
The growth in our revenues and net income over the past several years has
been significant. However, our operating results can be expected to fluctuate
from time to time. Also, changes in the stock market generally could result in
the stock of growth companies like ours trading at prices that reflect a lower
multiple of earnings than presently prevails, and we cannot assure you that the
value of any common stock which you purchase in this offering will not decline.
Some of the factors which may cause these fluctuations include:
- market acceptance of our existing products, as well as products in
development;
- the timing of regulatory approvals;
- our ability to manufacture our products efficiently; and
- the timing of our research and development expenditures.
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IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW AND INNOVATIVE PRODUCTS,
OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We are continually developing new products such as:
- enhanced models of our insulin pumps;
- several types of continuous glucose monitoring system products; and
- new pump products to infuse drugs other than insulin.
In addition, we also plan to introduce an insulin infusion system primarily for
people with Type 2 diabetes as well as a new formulation of Lilly's insulin
lyspro for use with our programmable insulin infusion systems.
Various hurdles remain in the development of these products, and the
marketing of the products will require FDA and other regulatory approvals. The
introduction of the various new products we contemplate will require a
substantial increase in our organization, including marketing and sales and
manufacturing personnel, as well as the addition of personnel in new areas of
expertise. Finding and employing these new people will be a considerable
challenge and presents a significant risk to our successful introduction and
commercialization of these products. In addition, we will face significant
challenges in manufacturing the new products in commercial quantities,
particularly the formulation of Lilly's insulin lyspro and the constant-flow
infusion system, products for which we have no manufacturing experience.
We cannot assure you that we will be successful in developing, marketing or
manufacturing these new products or that these products will be accepted by
health care providers, patients and third-party payors.
WE FACE SUBSTANTIAL COMPETITION FROM OUR PRINCIPAL COMPETITOR AND POTENTIAL
COMPETITION FROM OTHERS PURSUING TECHNOLOGIES FOR THE PREVENTION AND TREATMENT
OF DIABETES.
At present, we consider our primary competition in the Type 1 diabetes
market to be insulin injection therapy. In the sale of external pumps, we
compete with Disetronic Medical Systems AG, a Swiss company which introduced a
competitive external insulin pump in the United States approximately eight years
ago. A number of other companies have pursued the development of programmable
external insulin pumps, and we have been advised that other programmable
external insulin pumps have been developed. We cannot assure you that Disetronic
or any of these other companies will not become more significant competitive
factors in the future.
In the sale of our disposable products, we have encountered competition
from companies who manufacture disposables that can be used with our pumps. If
any of these companies is successful in gaining significant market share, sales
and margins of our disposable products could be materially adversely affected.
Other companies are working on new, faster-acting insulin analogs or
better, more stable insulin formulations. If any of these developments are
successful, our sales of Eli Lilly and Company's insulin lyspro for infusion
pumps could be adversely affected. Likewise the new insulin infusion system for
Type 2 diabetes faces potential competition from new oral medications, inhaled
insulin and possibly a cheaper constant-flow infusor technology.
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In undertaking to manufacture and sell a new formulation of Lilly's insulin
lyspro for use with programmable insulin pumps, we will be competing with major
drug companies and distribution organizations which are well established and
have much greater financial and other resources than we do. Our insulin infusion
system for Type 2 diabetes will compete with oral medications, which are
currently available, and inhaled insulin, which may become available in the
future. Although we think these new products of ours will offer significant
advantages over these others therapies, we recognize that there is considerable
risk in our efforts to compete with these therapies.
THE EXTENT OF REGULATION OF OUR BUSINESS BY THE FDA AND CORRESPONDING STATE AND
FOREIGN AGENCIES RESULTS IN SIGNIFICANT UNCERTAINTY, DELAY AND EXPENSE IN
INTRODUCING NEW PRODUCTS AND PRESENTS A CONTINUING RISK TO OUR ABILITY TO
PRODUCE EXISTING PRODUCTS.
Prior to commercial sale in the United States, products we own or
distribute that are under development must be approved or cleared by the FDA.
Securing those approvals and clearances may require the submission of extensive
clinical data and supporting information to the FDA. The amount of information
and the time required to obtain these approvals may be significantly greater
than usual with respect to the implantable pump because the pump and the
associated insulin may comprise a combined device/drug system, for which
approval must be sought in a single application. See "Business -- Government
Regulation." This may also be true with respect to the use of our external pump
systems to deliver drugs other than insulin. The second generation model of our
continuous glucose sensor monitoring system, which is being designed to be
operated by patients, can be expected to require more data and take more time to
be approved than the model designed for physician use.
The new formulation of Lilly's insulin lyspro will require FDA approval. We
have only limited experience in seeking regulatory approval for new drugs, and
our ability to obtain approval and the timing of doing so are uncertain.
Foreign governments also have review processes for new products that
present many of the same risks.
We cannot assure you that we will be able to obtain necessary regulatory
approvals or clearances on a timely basis for any of our products under
development. We also cannot assure you that Hoechst Marion Roussel, Inc., which
we call Hoechst, will obtain regulatory approval on a timely basis for the
insulin associated with our implantable pump. Delays in the receipt of these
approvals or clearances, the failure to receive these approvals or clearances or
the loss of any previously received approvals or clearances would have a
material adverse effect on our business.
Modifications to our cleared pumps that could significantly affect safety
or effectiveness, or that constitute a major change in intended use, require a
new FDA clearance. We have made modifications to our cleared devices for which
we have concluded 510(k) clearance is not required. We cannot assure you that
the FDA would agree with any of our decisions not to seek 510(k) clearance. If
the FDA requires us to seek 510(k) clearance for any modification, the FDA also
may require us to cease marketing and/or recall the modified device until we
obtain a new 510(k) clearance. We are also required to adhere to FDA regulations
setting forth requirements for Quality Systems Regulation, known as QSR, and
similar regulations in other countries, which include extensive testing, control
and documentation requirements. Manufacturers of the
8
<PAGE> 12
insulin and other drugs used in our infusion systems are subject to similar
requirements. Failure to comply with applicable regulations could result in
sanctions being imposed on us or on the manufacturers of the drugs used in our
infusion systems, including fines, injunctions, civil penalties, failure of the
government to grant approvals or clearances with respect to devices or drugs and
delays, suspensions or withdrawals of these approvals or clearances. Other
sanctions include seizures or recalls of products, the imposition of operating
restrictions and criminal prosecution.
FDA enforcement policy strictly prohibits the marketing of a medical device
or drug for uses other than those for which the product has been approved or
cleared, and product approvals and clearances can be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing.
WE HAVE LIMITED EXPERIENCE IN THE INTENSELY COMPETITIVE PRESCRIPTION DRUG AND
DIABETES SUPPLIES DISTRIBUTION BUSINESS, AND THE VIABILITY OF OUR PLAN FOR THIS
SEGMENT OF OUR BUSINESS IS UNCERTAIN.
We entered into the prescription drug business and the diabetes supplies
distribution business with recent acquisitions. We have limited experience in
these lines of business, both of which are subject to intense competition from
entities such as:
- national mail order pharmacies;
- local and national retail pharmacies;
- managed care companies; and
- other diabetes supplies distributors.
Many of these competitors have substantially greater financial and other
resources than we do. The intense competition in these markets, especially the
prescription drug market, has resulted in companies reducing prices charged for
their services and products. Increased price competition could reduce our profit
margins in these lines of business and could have an adverse effect on our
business.
In addition, the prescription drug business is governed by extensive
Federal and state laws and regulations to which we were not previously subject.
We have limited experience with respect to these laws and regulations. We cannot
assure you that we will not be required to incur significant costs to comply
with these laws and regulations in the future or that these laws and regulations
will not have a material adverse effect on our business.
WE PRESENTLY RELY ON SINGLE SUPPLIERS FOR SOME PRODUCTS AND COMPONENTS, AND THE
LOSS OF ANY ONE OF THESE SINGLE SUPPLIERS COULD ADVERSELY AFFECT OUR BUSINESS.
We presently rely on single suppliers for the integrated circuits used in
our external insulin pumps and for our infusion sets. We will also rely on a
single supplier for Lilly's insulin lyspro. In addition, we expect that we will
be dependent on sole suppliers for other components of our products in the
future. If these suppliers for any reason stop supplying us with these
components, our ability to meet the demand for our products may be compromised.
In situations where we become dependent upon sole-source components, alternative
sources of supply may not be readily available, and the loss of any of these
vendors as a supplier could have a material adverse effect on our business.
9
<PAGE> 13
In 1998, we transferred the technology and operating assets relating to our
implantable pump systems to Medical Research Group, Inc., a company we call MRG
that was founded by Alfred E. Mann, our Chairman, Chief Executive Officer and
principal stockholder. Mr. Mann is also a substantial stockholder of MRG. We
retained the marketing rights to the implantable pump for diabetes and other
specific applications. This transaction, which is described in detail in
"Management -- Compensation Committee Interlocks and Insider Participation,"
means that we are dependent on MRG to continue the development of the
implantable pump and to manufacture it in commercial quantities once the
required regulatory approvals have been obtained. MRG is a recently-formed
company and has limited experience in the development and manufacture of the
implantable pump. Any failure of MRG to do either of these could have a material
adverse effect on our future implantable pump sales.
THE CONSTANT PRESSURE TO CONTROL HEALTH CARE COSTS IN THE UNITED STATES AND
WORLDWIDE COULD RESULT IN THIRD-PARTY PAYORS LIMITING REIMBURSEMENT FOR OUR
PRODUCTS, WHICH WOULD HAVE THE EFFECT OF RESTRICTING PRICING, PROFITABILITY AND
DEMAND FOR PRODUCTS WE OWN OR DISTRIBUTE.
Although third-party payors reimbursed over 90% of the insulin infusion
systems we sold in recent years, government and private efforts to contain or
reduce the costs of health care are likely to continue. We face considerable
uncertainty about reimbursement for our new products, particularly the
constant-flow insulin infusion system for Type 2 diabetes and our continuous
glucose monitoring systems. We are expending considerable resources to address
reimbursement for these products. Additionally, the announcement of legislative
or market initiatives affecting reimbursement could adversely affect our ability
to raise capital and could cause the price of our stock to decline.
Many of our existing and future products are cost-effective because they
are intended to reduce overall health care costs over a long period of time. We
are not certain whether third-party payors will recognize these cost savings or
whether they will merely focus on the lower initial costs associated with other
therapies.
Third-party payors also decline to reimburse for "experimental" procedures
and devices. Devices that are not yet approved by the FDA are usually assumed to
be experimental. Third-party payors may also decline to reimburse for health
care procedures that are determined by the payor to be not "medically
necessary," or not "reasonable." These are subjective standards for which there
is no uniform policy among third-party payors. In the past we have experienced
difficulty in selling our products to some prospective patients because payors
have indicated that reimbursement would be denied under one or more of these
standards. The re-emergence or escalation of limitations on reimbursement could
have a material adverse effect on our business.
We expect the cost of the implantable pump and the related medical
procedure to be higher than the cost of external pumps. Even if the FDA approves
the implantable pump for commercial distribution, third-party payors may not
reimburse for use of the implantable pump on the basis of medical necessity,
reasonableness or otherwise. This could substantially lessen demand for the
product.
10
<PAGE> 14
PRODUCT LIABILITY CLAIMS BROUGHT AGAINST US MAY SUBJECT US TO SIGNIFICANT
MONETARY DAMAGES.
This is an inherent risk of our business. Although we maintain product
liability insurance and have not experienced any material losses to date, we
cannot assure you that there will be no material loss in the future or that
insurance in adequate amounts will continue to be available.
ANY BREAKDOWN IN THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY, OR ANY
DETERMINATION THAT OUR PROPRIETARY TECHNOLOGY INFRINGES THE RIGHTS OF OTHERS,
COULD MATERIALLY AFFECT OUR BUSINESS.
We protect our proprietary technology through a combination of
confidentiality agreements and patents. We license some of our technology under
patents obtained by others. We cannot assure you that our owned and licensed
technology will prove to be enforceable or that our technology does not infringe
the proprietary rights of others. We could also incur substantial costs in
seeking enforcement of our proprietary rights against infringement or in
defending ourselves against claims of infringement by others. Since much of our
technology consists of trade secrets and unpatented know-how, we are exposed to
the risk that others will independently develop similar or superior technologies
or that our trade secrets or know-how will become known to others.
OUR ABILITY TO MAINTAIN OUR COMPETITIVE POSITION DEPENDS UPON OUR ABILITY TO
ATTRACT AND RETAIN HIGHLY QUALIFIED MANAGERIAL, TECHNICAL, MANUFACTURING,
REGULATORY AND SALES AND MARKETING PERSONNEL.
Competition for these qualified people is intense, and we cannot assure you
that we will be able to recruit and retain qualified personnel. We are
particularly dependent upon Alfred E. Mann, our founder, Chairman and Chief
Executive Officer, Terrance H. Gregg, our President and Chief Operating Officer,
and several other key personnel. The loss of any of these people could have a
material adverse effect on our business. We do not have employment agreements
with any of our personnel. We have, however, entered into agreements providing
severance benefits in the event of a change of control of our company with the
following people:
- Messrs. Mann and Gregg;
- Eric Kentor, Senior Vice President, General Counsel and Secretary;
- David Morley, Senior Vice President, Operations; and
- Kevin R. Sayer, Senior Vice President, Finance, and Chief Financial
Officer.
We maintain a key man life insurance policy on the life of Mr. Mann in the
amount of $5.0 million and on the life of Mr. Gregg in the amount of $2.0
million. We also maintain insurance in various amounts on other key employees,
all with benefits payable to our company.
THE COSTS AND RISKS ASSOCIATED WITH THE DEVELOPMENT OF OUR NEW PRINCIPAL
FACILITY IN NORTHRIDGE, CALIFORNIA ARE SIGNIFICANT.
We recently entered into a series of financing transactions involving $65.0
million in connection with the construction and leasing of a new principal
facility for our company.
11
<PAGE> 15
As part of these financing transactions, we pledged substantially all of our
assets as collateral and are subject to various restrictions regarding the
conduct of our business. These restrictions include limitations on or ability to
incur additional debt, make capital expenditures and make strategic
acquisitions. These financing transactions could adversely affect our ability to
obtain needed additional funds or acquire additional capital resources. In
addition, these restrictions could provide the lenders with a preferential
position if there was a default in the financing.
In addition, there are numerous potential risks associated with this
project, including:
- environmental problems,
- cost overruns,
- delays in completion of construction,
- design and construction defects, and
- disruption of our manufacturing and other business operations as a result
of the relocation.
These and other risks could impair our ability to produce sufficient
quantities of our products to meet customer demand or products that meet our
quality requirements, either of which could adversely affect our business.
OUR INCREASED RELIANCE ON SALES OF EXTERNAL INSULIN PUMP SYSTEMS BY OUR OWN
SALES ORGANIZATION INSTEAD OF THROUGH DISTRIBUTORS INCREASES OUR RISK OF
UNCOLLECTIBLE ACCOUNTS RECEIVABLE AND THE AMOUNT OF TIME BETWEEN BILLING AND
COLLECTION.
Our acquisitions of Home Medical Supply, Inc., which we call HMS, and
Dartec AB and the general increase in the size of our sales force allows us to
sell a greater percentage of our external insulin pump systems directly, rather
than through distributors. As a result we are more dependent upon being paid for
each individual system by third-party payors and patients. We expect a higher
percentage of these accounts receivable to be uncollectible because of the
reimbursement practices of third-party payors and the difficulty of collecting
patient deductibles and co-payment amounts. In addition, the amount of time that
such accounts receivable remain outstanding is substantially longer than the
comparable period for accounts receivable of distributors. These uncollectible
receivables and delays in collection could adversely affect our profits from
these products.
THE BILLING PRACTICES OF THE PRIOR OWNERS OF ONE OF THE BUSINESSES WE ACQUIRED
COULD SUBJECT US TO SIGNIFICANT LOSSES AND PENALTIES.
Prior to our acquisition of HMS, the prior owners may have engaged in
billing practices which could be found to have violated regulations of the state
of Florida relating to the Medicaid Program, a health care program administered
by the states and funded in large part by the U.S. government. After we
discovered the billing practices we notified the Florida agency that administers
the program, and we have cooperated fully with that agency. We also terminated
the lines of business substantially involved, ceased all such practices, and
commenced litigation against the prior owners. See "Business -- Litigation." We
are advised that under applicable law the state of Florida could assert claims
against HMS, now owned by us, for reimbursement of amounts paid with respect to
the improper
12
<PAGE> 16
billings and civil penalties. It is also possible that HMS or our entire company
could be barred from the Medicaid Program, the Medicare Program and other health
care programs financed by the federal government as a result of these
infractions, but we believe that this result is highly unlikely in view of the
fact that we had no involvement in the billing practices and actually called the
matter to the attention of the agency. The amounts involved in the billing
practices are not yet known, but they could be as high as $10.0 million, and any
civil fine would be in addition to any required reimbursement. We cannot assure
you that we will be able to recover any such amounts from the prior owners. The
imposition of any reimbursement requirement or fine or the barring of HMS or our
company from the Medicaid Program could have a material adverse effect on our
business.
THE SIZE OF THE MARKET FOR OUR EXTERNAL INSULIN PUMPS IS SOMEWHAT LIMITED
BECAUSE OF THE SOPHISTICATION OF THE PRODUCT.
Physicians do not prescribe external pumps to some patients using intensive
therapy because of concerns as to the patients' motivation and ability to
understand and correctly use the pump technology. To the extent that we cannot
overcome these concerns, our business may be adversely affected.
THE PRICE OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY UNUSUAL VOLUME OF
SALES OF SHARES, INCLUDING A SIGNIFICANT NUMBER OF SHARES HELD BY ONE
STOCKHOLDER.
Substantially all of our outstanding shares can be sold by the holders
without restriction, except those owned beneficially by Mr. Mann. Any imbalance
between the number of shares offered for sale and the number of shares sought to
be purchased would cause the price of our stock to decline. In late 1998, we
sold 1 million shares of our common stock to a wholly-owned subsidiary of
Medtronic, Inc., a large medical device manufacturer. The Medtronic subsidiary
has exercised its right to have the shares registered for sale under the
Securities Act of 1933. Medtronic has, however, declined to sell any of its
shares as part of this offering. In June 1999, we filed a registration statement
with respect to Medtronic's shares which will allow Medtronic to sell its shares
at any time after the effectiveness of the registration statement. Medtronic has
agreed, however, not to sell any of its shares for a period of 60 days after the
commencement of this offering. We cannot assure you that, after the expiration
of the 60 day period, the shares will not be sold in a manner that adversely
affects the price of our stock.
THE LOCATION OF NEARLY ALL OF OUR OPERATIONS IN SOUTHERN CALIFORNIA SUBJECTS US
TO A SIGNIFICANTLY HIGHER RISK OF EARTHQUAKES THAN EXISTS IN OTHER AREAS OF THE
UNITED STATES.
Our principal facilities are now located a few miles north of Northridge,
California, which experienced a significant earthquake in 1994. Beginning in
2000, we will be moving our principal operations to a new facility in
Northridge. We presently carry comprehensive fire and earthquake insurance, but
the earthquake insurance has large deductibles. An earthquake or other
catastrophic loss that causes significant damage to our facilities could have a
material adverse effect on our business, even if it is covered by insurance.
13
<PAGE> 17
AFTER THE OFFERING, ALFRED E. MANN, OUR FOUNDER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, WILL CONTINUE TO BE IN A POSITION TO EXERT SUBSTANTIAL INFLUENCE OVER
THE DIRECTION AND POLICIES OF OUR COMPANY, AND HIS EXERCISE OF THAT INFLUENCE
COULD ADVERSELY EFFECT THE INTERESTS OF THE STOCKHOLDERS.
After this offering Mr. Mann will own approximately 29% of the outstanding
shares of our common stock. As a result he may be able to prevent corporate
transactions such as mergers, consolidations or the sale of substantially all of
our assets that may be favorable from the standpoint of our company or the other
stockholders. Furthermore, Mr. Mann is widely credited with the success of our
company to date, and he has also been successful in founding several other
companies. As a result, his ability to influence the direction and policies of
our company goes well beyond the voting power of his shares.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES WHICH COULD INHIBIT ANY
CHANGE IN CONTROL OF OUR COMPANY AND PREVENT A STOCKHOLDER FROM RECEIVING A
FAVORABLE PRICE FOR HIS OR HER SHARES.
Our certificate of incorporation and bylaws and the Delaware General
Corporation Law include provisions that may have the effect of discouraging
persons from pursuing a non-negotiated takeover of our company and preventing
specific changes of control, including a classified board of directors with
staggered three-year terms. In addition, our board of directors has adopted a
stockholders' rights plan providing for discount purchase rights to some of our
stockholders upon some acquisitions of our common stock. The exercise of these
rights is intended to inhibit specific changes of control of MiniMed. In
addition, we have entered into agreements with Messrs. Mann, Gregg, Kentor,
Morley and Sayer under which they could receive substantial payments in
connection with a change of control of our company.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY IMPACTED BY OUR OWN FAILURE, OR THAT
OF OUR SUPPLIERS OR THIRD-PARTY PAYORS, TO CORRECT THE PROBLEMS WHICH COULD
ARISE AT THE END OF 1999 BECAUSE OF THE INABILITY OF ELECTRONIC DEVICES
CONTAINING MICROPROCESSORS TO PROPERLY RECOGNIZE AND CALCULATE DATES IN THE YEAR
2000 AND BEYOND.
We have made substantial efforts to assess and solve these so-called "Y2K"
problems in our business, and those efforts are described in more detail under
"Management's Discussion and Analysis of Financial Statements -- Year 2000
Compliance." Although we have not yet fixed all of the problems we are aware of
in our own operations, we believe that our biggest risk is the failure of key
suppliers or third-party payors to fix their problems. Any resulting
interruption in the supply of important components of our products, disruption
of payment from third-party payors or any unexpected problems in our own
operations could have a material adverse effect on our business.
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<PAGE> 18
RECENT DEVELOPMENTS
- --------------------------------------------------------------------------------
Since 1998, we have experienced a number of important developments in our
business. The following is a brief description of some of the more significant
of these developments.
NEW COLLABORATIONS WITH STRATEGIC PARTNERS
ELAN CORPORATION. In June 1999, we entered into two agreements with a
division of Elan Corporation, plc. Elan has developed a disposable infusion
system which, if and when approved by the FDA, will be marketed under the
MiniMed name to insulin-using Type 2 diabetes patients. We expect this system to
provide us a significant new market which complements our existing Type 1
diabetes market for our external programmable pumps. We believe this system has
the potential to distinguish itself in the market by its convenience and ease of
use. The system will be replaced every three days, is attached to the body with
an adhesive and delivers a preset rate of drug. We have licensed from Elan
worldwide distribution rights to the system for use with insulin and insulin
analogs in treating diabetes. The system includes a drug cartridge packaged with
the system. Before we can market and sell the device, specific modifications
must be completed, and we must obtain regulatory approval for the system.
Under a separate agreement with Elan, we will be the exclusive worldwide
manufacturer of the disposable system for all applications. Elan has granted
distribution rights to the product to other companies for use with specific
pharmaceutical compounds other than insulin. Elan will transfer the
manufacturing technology to us, and we will be responsible for first
establishing a manual production capability, and later establishing an
automated, high-volume manufacturing line for the product.
ELI LILLY. In February 1999, we entered into a License, Supply and
Distribution Agreement with Eli Lilly and Company, which we call Lilly. This
agreement provides us with an exclusive license to manufacture and distribute a
new formulation of Lilly's insulin lyspro for use in our programmable insulin
pumps. Lilly has also agreed to supply us with insulin lyspro in bulk crystal
form. If and when approved by the FDA, we intend to market insulin lyspro for
use with our programmable insulin infusion pumps, including pre-filled
reservoirs to be used with our external programmable insulin pumps. We believe
that these pre-filled reservoirs will make our external programmable insulin
pump even easier to use.
ACQUISITIONS OF ADDITIONAL DISTRIBUTION CAPABILITY
DOMESTIC ACQUISITIONS. In 1998, we completed the acquisitions of HMS and
Diabetes Support Systems, Inc., which we call DSS, two unrelated privately-held
distributors of diabetes care products based in south Florida. Both HMS and DSS
distributed a broad range of diabetes care products, including our programmable
insulin infusion pumps and associated disposables and glucose meters and strips.
HMS also has pharmacy operations from which we can now distribute prescription
drugs to our diabetes patients by mail order throughout the country. We have
consolidated operations of HMS and DSS in one facility in south Florida with
approximately 150 employees to complement our operations in southern California.
These acquisitions have enhanced our capability to distribute our existing
and future products to our customers as well as our new constant-flow infusion
system for Type 2
15
<PAGE> 19
diabetes, our continuous glucose monitoring systems and a new formulation of
Lilly's insulin lyspro.
INTERNATIONAL ACQUISITION. In 1998, we also acquired our Swedish
distributor, Dartec AB, and created our third international subsidiary to cover
the Scandinavian countries and selected countries in the Baltic region. Dartec
had been our most successful international distributor, and we are also now
beginning to manage the sale of our products in areas in Eastern Europe through
Dartec.
FDA APPROVAL OF CONTINUOUS GLUCOSE MONITORING SYSTEM
On June 15, 1999, the FDA approved our application to market a system to
provide continuous glucose monitoring. The system is designed to be used by
physicians in treating patients with diabetes. The FDA evaluated comprehensive
data collected from our clinical trials, including more than 9,000 comparison
glucose meter measurements recorded over 1,100 patient days.
The sensor is designed to be worn for three days, and is inserted into the
subcutaneous tissue, similar to our insulin pump infusion sets. The system
measures glucose levels every ten seconds and records averages over five minute
intervals, providing 288 glucose measurements for every 24 hours of use. The
product approved by the FDA is designed to assist physicians in treating their
patients by enabling physicians to analyze retrospective glucose levels.
Patients will wear the sensor system for up to three days, and return it to the
physician who will download and evaluate the data. We expect that later versions
of our sensor product will be designed for patient use, will include an alarm to
alert patients when glucose levels drop below or rise above the limits
established by their administering physician, and will be used by the patient as
a replacement for glucose strips and meters used today.
IMPLANTABLE PUMP MARKETING ARRANGEMENT
In September 1998, we sold the assets to our implantable insulin pump
program to MRG, and some of our employees who were working on the program have
become employees of MRG. MRG now acts as an OEM manufacturer of the implantable
pump exclusively for us for use in diabetes, HIV/AIDS, and for drugs
manufactured by specific companies with which we have had business dealings. As
part of the transaction, we also obtained an option to acquire the exclusive
worldwide marketing rights to a long-term implantable glucose sensor system
which MRG has been developing, and which is being designed to work with the
implantable insulin pump.
This transaction has the effect of combining the future development of the
implantable pump with a long-term glucose sensor being developed by MRG. Also,
the transaction shifts a substantial part of the risk and cost of future
development of this product line from us to MRG while allowing us to retain the
marketing rights to the product for diabetes and other specified applications.
As part of the agreement, MRG is now pursuing the development of specific
improvements to the electronic design of the device, which is intended to extend
the battery life. We are obligated to purchase minimum quantities for a
three-year period tied
16
<PAGE> 20
to the successful completion of these new developments, and, thereafter, we are
obligated to purchase minimum quantities in order to preserve our exclusive
distribution rights to the implantable pump. See "Management -- Compensation
Committee Interlocks and Insider Participation."
NEW FACILITY
In May 1999, we finalized financing arrangements relating to the
development of our new worldwide headquarters. The new facility will consist of
approximately 28 acres and up to 710,000 square feet of buildings on the campus
of the California State University, Northridge. The first phase of construction
will consist of approximately 19 acres and 525,000 square feet. Pursuant to the
transaction, we obtained $65.0 million in a lease financing facility for the
construction and development of the facility and a $15.0 million revolving
credit facility for working capital purposes. See "Management's Discussion and
Analysis of Financial Condition -- Liquidity and Capital Resources" and
"Business -- Properties."
17
<PAGE> 21
USE OF PROCEEDS
- --------------------------------------------------------------------------------
Our net proceeds from the sale of 2,000,000 shares of common stock offered
by this prospectus at an assumed offering price of $71.375 per share are
estimated to be approximately $135.0 million after deduction of underwriting
discounts and commissions and estimated expenses payable by us in connection
with the offering. If the underwriters exercise the over-allotment option in
full, and the over-allotment shares are sold by us, our net proceeds are
estimated to be approximately $146.4 million after deduction of underwriting
discounts and commissions and estimated expenses payable by us in connection
with the offering. We will not receive any proceeds from the sale of shares by
the selling stockholder.
Of the proceeds of the offering, we intend to use approximately:
- $30.0 million for license fees, facilities and manufacturing equipment
for our new Type 2 diabetes infusion system;
- $20.0 million for manufacturing equipment for our continuous glucose
monitoring system;
- $15.0 million to upgrade our information systems and technology;
- $15.0 million to purchase furniture and equipment for our new principal
facility; and
- $55.0 million for working capital and other general corporate purposes.
The general corporate purposes are expected to include (1) the financing of
increased levels of accounts receivable and inventory, (2) research and
development related to our continuous glucose monitoring system product line,
(3) further enhancement of our external pump and related disposable product
lines for the treatment of diabetes, (4) the purchase of new technologies for
our external insulin pump, (5) the development of our infusion pump technology
for the treatment of other medical conditions and (6) funding the establishment
of additional strategic relationships and/or business acquisitions. In the
ordinary course of business, we review acquisition opportunities and strategic
relationships from time to time, but no acquisition agreements or letters of
intent are currently in effect.
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<PAGE> 22
PRICE RANGE OF COMMON STOCK
- --------------------------------------------------------------------------------
Our common stock commenced trading on the Nasdaq National Market under the
symbol "MNMD" on July 25, 1995. The following table sets forth, for the periods
indicated, the intra-day high and low sales prices per share of common stock on
the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1999
Second Quarter (through June 10, 1999)............... $75.50 $45.81
First Quarter Ended April 2, 1999.................... 59.38 38.50
1998
Fourth Quarter Ended January 1, 1999................. $59.00 $25.00
Third Quarter Ended October 2, 1998.................. 34.44 20.19
Second Quarter Ended July 3, 1998.................... 29.38 21.38
First Quarter Ended April 3, 1998.................... 22.50 16.00
1997
Fourth Quarter Ended January 2, 1998................. $22.25 $16.63
Third Quarter Ended September 26, 1997............... 19.57 13.13
Second Quarter Ended June 27, 1997................... 13.63 11.25
First Quarter Ended March 28, 1997................... 17.38 12.32
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on June 10, 1999 was $71.375. As of May 31, 1999, there were
approximately 682 stockholders of record of our common stock.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all available funds for use in our business and do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made in the discretion of our
board of directors and will depend on a number of factors, including a future
earnings, capital requirements, financial condition and future prospects and
other factors as the board of directors may deem relevant. Under the terms of
the financing for our new principal facility, we are precluded from paying
dividends.
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<PAGE> 23
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table sets forth as of April 2, 1999, our actual
capitalization and the capitalization as adjusted to reflect the receipt of the
net proceeds from the sale of 2,000,000 shares of common stock we are offering
at the offering price of $71.375. The number of shares issued and outstanding as
adjusted excludes 4,440,836 shares of common stock issuable upon exercise of
outstanding stock options with a weighted average exercise price of $17.48 per
share.
<TABLE>
<CAPTION>
APRIL 2, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of notes payable........................ $ 882 $ 882
======== ========
Notes payable, net of current portion................... $ 1,000 $ 1,000
======== ========
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized and no shares outstanding.................. -- --
Common stock, par value $.01; 40,000,000 shares
authorized; 28,207,356 shares issued and outstanding
as of April 2, 1999; 30,207,356 shares issued and
outstanding as adjusted............................... $ 294 $ 314
Additional capital...................................... 113,941 248,921
Accumulated other comprehensive income.................. 879 879
Retained earnings....................................... 24,908 24,908
-------- --------
Total stockholders' equity......................... $140,022 $275,022
-------- --------
Total capitalization.......................... $141,904 $276,904
======== ========
</TABLE>
In May 1999, we amended our 1994 Stock Incentive Plan to increase the
number of shares as to which stock options and other forms of awards can be
granted to directors, employees, consultants and advisors from 4,500,000 to
7,500,000.
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following table presents some of our selected consolidated financial
data, which should be read in conjunction with our financial statements and
notes thereto included elsewhere in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data as of January 1, 1999, January 2, 1998,
December 27, 1996, December 29, 1995 and December 31, 1994, and for each of the
five fiscal years in the period ended January 1, 1999 have been derived from the
audited financial statements of MiniMed Inc. The audited financial statements
that are included in this prospectus have been audited by Deloitte & Touche LLP,
our independent auditors. The selected consolidated financial data as of and for
the three months ended April 3, 1998 and April 2, 1999 have been derived from
our unaudited financial statements. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations as of such dates and for such periods. The results for the
three month period ended April 2, 1999 are not necessarily indicative of the
results to be expected for the entire year or the quarters following in 1999.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ----------- -----------
YEAR ENDED THREE MONTHS ENDED
---------------------------------------------------------------------- -------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 27, JANUARY 2, JANUARY 1, APRIL 3, APRIL 2,
1994 1995 1996 1998 1999 1998 1999
------------ ------------ ------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 43,105 $ 56,906 $ 76,396 $ 99,492 $ 138,577 $ 26,366 $ 40,911
Cost of sales................ 20,847 22,780 32,314 38,704 51,518 9,784 13,838
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit................. 22,258 34,126 44,082 60,788 87,059 16,582 27,073
Operating expenses:
Selling, general and
administrative........... 17,991 24,379 32,101 41,237 57,059 11,391 17,499
Research and development... 5,372 7,095 7,900 9,447 16,531 3,317 5,296
Research and development
contract................. -- -- -- -- (6,000) (1,500) (1,500)
Merger related expenses.... -- -- -- 1,000 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 23,363 31,474 40,001 51,684 67,590 13,208 21,295
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)...... (1,105) 2,652 4,081 9,104 19,469 3,374 5,778
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest expense............. (564) (418) (163) (237) (47) -- (46)
Other income, including
interest income............ 228 965 1,062 1,851 1,503 291 340
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes...................... (1,441) 3,199 4,980 10,718 20,925 3,665 6,072
Provision for income taxes... -- (854) (1,662) (4,029) (7,882) (1,361) (2,290)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (1,441) $ 2,345 $ 3,318 $ 6,689 $ 13,043 $ 2,304 $ 3,782
=========== =========== =========== =========== =========== =========== ===========
Basic income (loss) per
share...................... $ (0.09) $ 0.12 $ 0.14 $ 0.26 $ 0.49 $ 0.09 $ 0.13
=========== =========== =========== =========== =========== =========== ===========
Basic weighted average shares
outstanding................ 16,286,000 19,336,000 23,882,000 25,810,000 26,880,000 26,562,000 28,148,000
=========== =========== =========== =========== =========== =========== ===========
Diluted income (loss) per
share...................... $ (0.09) $ 0.11 $ 0.13 $ 0.25 $ 0.46 $ 0.08 $ 0.13
=========== =========== =========== =========== =========== =========== ===========
Diluted weighted average
shares outstanding......... 16,286,000 21,436,000 25,134,000 27,112,000 28,332,000 27,854,000 30,024,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, DECEMBER 27, JANUARY 2, JANUARY 1, APRIL 3, APRIL 2,
1994 1995 1996 1998 1999 1998 1999
------------ ------------ ------------ ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $13,428 $32,133 $36,153 $ 63,409 $ 84,771 $59,927 $ 87,499
Total assets.................... 25,422 56,561 64,424 105,819 157,652 92,274 160,900
Notes payable, net of current
portion....................... 7,000 885 1,528 728 1,059 94 1,000
Redeemable, convertible
preferred stock............... 8,513 -- -- -- -- -- --
Retained earnings (accumulated
deficit)...................... (3,758) (1,924) 1,394 8,083 21,126 10,389 24,908
Total stockholders' equity...... 4,907 42,120 48,131 83,083 133,833 84,539 140,022
</TABLE>
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed in the forward-looking statements. See language relating to
forward-looking statements in "Prospectus Summary".
GENERAL
Our sales and profits have been generated primarily through the sale of
external pumps and related disposable products used to deliver insulin in the
intensive management of diabetes. Additionally, through our recent acquisitions
of HMS, Dartec and DSS, we also have broadened our product offerings to include
other diabetes supplies and pharmacy products generally used in the treatment of
this disease. We distribute these products nationally. The HMS acquisition was
accounted for as a pooling of interests, which resulted in our operating results
for the years prior to the acquisition being restated to include the results of
HMS.
Product development and manufacturing operations have focused on three
product lines: external insulin pumps and related disposables, implantable
insulin pumps and continuous glucose monitoring systems. Future development of
the external pump and disposable product line will focus upon improving the
existing technology for its current use in diabetes treatment and the
utilization of this technology for the treatment of other medical conditions.
There have been no sales of continuous glucose monitoring systems to date;
however, on June 15, 1999, we received FDA approval of the first generation of
that product. We intend to initiate sales activity for this product line
shortly, and commercialization will be subject to successful implementation of
manufacturing, sales, marketing and reimbursement plans. On September 1, 1998,
we sold assets and transferred technology related to our implantable pump
program to MRG. We have retained exclusive marketing rights to the implantable
pump product line for specific medical conditions, including diabetes. Sales of
the implantable pump have been and will continue to be limited until full
regulatory approval is obtained.
23
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percentage
relationship to net sales of some items in our consolidated statements of
operations and the percentage changes in the dollar amounts of these items on a
comparative basis for the last three fiscal years and the three month periods
ended April 3, 1998 and April 2, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------- PERCENTAGE INCREASE
THREE MONTHS (DECREASE)
ENDED --------------------------
FISCAL YEAR -------------------- 1996 1997 Q1 1998
----------------------- APRIL 3, APRIL 2, VS. VS. VS.
1996 1997 1998 1998 1999 1997 1998 Q1 1999
----- ----- ----- -------- -------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0% 30.2% 39.3% 55.2%
Cost of sales.................................. 42.3 38.9 37.2 37.1 33.8 19.8 33.1 41.4
----- ----- ----- ----- ----- ----- ------ ----
Gross profit................................... 57.7 61.1 62.8 62.9 66.2 37.9 43.2 63.3
Operating expenses:
Selling, general and administrative.......... 42.0 41.4 41.2 43.2 42.8 28.5 38.4 53.6
Research and development..................... 10.3 9.5 11.9 12.6 12.9 19.6 75.0 59.7
Research and development contract............ 0.0 0.0 (4.3) (5.7) (3.7) n/a 100.0 0.0
Merger related expenses...................... 0.0 1.0 0.0 0.0 0.0 n/a (100.0) n/a
----- ----- ----- ----- ----- ----- ------ ----
Total operating expenses....................... 52.3 51.9 48.8 50.1 52.0 29.2 30.8 61.2
----- ----- ----- ----- ----- ----- ------ ----
Operating income............................... 5.4% 9.2% 14.0% 12.8% 14.2% 123.1% 113.9% 71.3%
===== ===== ===== ===== ===== ===== ====== ====
</TABLE>
The following table sets forth net sales and gross profits for our
significant business activities for the three years ended January 1, 1999 and
the three month periods ended April 3, 1998 and April 2, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET SALES
-------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
FISCAL YEAR ------------------- FISCAL YEAR -------------------
---------------------------- APRIL 3, APRIL 2, --------------------- APRIL 3, APRIL 2,
1996 1997 1998 1998 1999 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- ----- ----- ----- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Diabetes products:
External pumps and related
disposables:
Domestic................... $53,146 $73,697 $110,830 $19,336 $34,275 69.6% 74.1% 80.0% 73.3% 83.8%
International.............. 6,396 6,572 10,926 2,756 3,436 8.4 6.6 7.9 10.5 8.4
------- ------- -------- ------- ------- ----- ----- ----- ----- -----
Subtotal................. 59,542 80,269 121,756 22,092 37,711 78.0 80.7 87.9 83.8 92.2
Implantable insulin pumps.... 1,996 1,578 1,391 221 147 2.6 1.6 1.0 0.8 0.4
Other diabetes supplies...... 5,520 5,835 6,548 1,020 1,882 7.2 5.8 4.7 3.9 4.6
------- ------- -------- ------- ------- ----- ----- ----- ----- -----
Total diabetes products........ 67,058 87,682 129,695 23,333 39,740 87.8 88.1 93.6 88.5 97.2
Pharmacy products.............. 9,338 11,810 8,882 3,033 1,171 12.2 11.9 6.4 11.5 2.8
------- ------- -------- ------- ------- ----- ----- ----- ----- -----
Total net sales.......... $76,396 $99,492 $138,577 $26,366 $40,911 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======== ======= ======= ===== ===== ===== ===== =====
GROSS PROFIT:
Diabetes products:
External pumps and related
disposables................ $41,129 $58,496 $ 85,271 $15,966 $26,378 53.8% 58.8% 61.5% 60.6% 64.5%
Implantable insulin pumps.... (404) (1,489) (1,683) (596) (199) (0.5) (1.5) (1.2) (2.3) (0.5)
Other diabetes supplies...... 2,225 2,416 2,316 491 502 2.9 2.4 1.7 1.9 1.2
------- ------- -------- ------- ------- ----- ----- ----- ----- -----
Total diabetes products........ 42,950 59,423 85,904 15,861 26,681 56.2 59.7 62.0 60.2 65.2
Pharmacy products.............. 1,132 1,365 1,155 721 392 1.5 1.4 0.8 2.7 1.0
------- ------- -------- ------- ------- ----- ----- ----- ----- -----
Total gross profit..... $44,082 $60,788 $ 87,059 $16,582 $27,073 57.7% 61.1% 62.8% 62.9% 66.2%
======= ======= ======== ======= ======= ===== ===== ===== ===== =====
</TABLE>
24
<PAGE> 28
THREE MONTHS ENDED APRIL 2, 1999 AND APRIL 3, 1998
Net Sales
Net sales increased 55.2% during the three months ended April 2, 1999 over
the three months ended April 3, 1998 to $40,911,000 from $26,366,000. This
increase is primarily the result of an increase of 70.7% or $15,619,000 in the
sales volume of external pumps and related disposables. Domestic sales of these
products grew 77.3% or $14,939,000 in the first quarter of 1999 as compared to
the first quarter of 1998, while international sales increased 24.7% or $680,000
during the same period. The domestic net sales growth was derived primarily from
increased volume of external pumps and related disposables combined with an
increase in average prices realized on external pump sales. The higher domestic
external pump price resulted from an increase in the list price for the latest
generation external pump during the second quarter of 1998, combined with our
continued shift of sales through our direct sales organization rather than
through our independent dealers, which receive discounts on these products.
International sales of external pumps and related disposable products grew
primarily due to greater sales volumes of external pumps, while pricing of
external pumps in the international market remained consistent with the
comparable quarter of 1998. Domestic and international pricing for disposable
products did not change materially from the first quarter of 1998 to the first
quarter of 1999.
Sales of implantable pumps decreased 33.5% or $74,000 from the first
quarter of 1998 to the first quarter of 1999, as regulatory approval for the
implantable pump and special insulin utilized in the implantable system is still
pending. We received certification for the implantable pump under the applicable
directives issued by the European Union and received the CE Mark in March 1995,
thus permitting commercial sale throughout the EU. Separate approval from the
EU, however, is required for commercial sale of the insulin for use with the
pump. Commercial distribution of the pump is not feasible until the insulin is
approved. No assurance can be given as to when the EU's approval will be
received, if at all. Sales of implantable pumps to date have been generated
mainly in connection with clinical trials and compassionate use of the pumps.
The implantable pump and the special insulin remain subject to regulatory review
and approval in the United States. No assurance can be given as to when these
approvals will be received, if at all.
Sales of other diabetes supplies increased by 84.5% or $862,000 during the
1999 first quarter compared to the 1998 first quarter. This increase resulted
from overall market growth combined with the addition of sales of these products
by DSS, which we acquired during the fourth quarter of 1998. Average sales
prices have decreased for these products due to reimbursement trends.
Pharmaceutical product sales decreased 61.4% or $1,862,000 during the 1999 first
quarter compared to the 1998 first quarter. The pharmacy operation historically
distributed products to treat a number of medical conditions, including
diabetes, HIV/AIDS and renal failure. The 1999 sales decrease resulted primarily
from our continued narrowing and restructuring of the pharmacy operations.
Operating Results
Cost of Sales and Gross Profit. Cost of sales increased 41.4% during the
three months ended April 2, 1999 over the three months ended April 3, 1998 to
$13,838,000 from $9,784,000. As a percentage of net sales, cost of sales in the
1999 first quarter decreased to 33.8% from 37.1% in the comparable period of
1998. Gross margins on external pumps and disposables decreased to 69.9% of the
pump and disposable sales
25
<PAGE> 29
during the 1999 first quarter, compared to 72.3% for this product line during
the 1998 first quarter. The decline in gross margins on these products is
primarily the result of increased spending to identify alternate supply channels
of raw material components used in our external pumps and to certify vendors for
our quality criteria. The effects on external pump gross margins of this
increased spending on vendor identification and certification was partially
offset by an increase in average selling prices for external pumps. Gross
margins on disposables were consistent between the first quarter of 1998 and the
first quarter of 1999. We have continued to purchase specific disposable
products from a contract manufacturer rather than manufacturing these products
through our internal manufacturing operations.
Our overall gross profits continue to be adversely impacted by the
implantable pump product line due to continued limited sales prior to full
commercial release. However, implantable pump gross margins improved during the
1999 first quarter compared to the comparable period in 1998 due to the transfer
of implantable pump manufacturing operations to MRG on September 1, 1998. We
expect this improvement in margins to continue in the short-term as a result of
the MRG transaction; however, in the long-term, margins may be reduced due to
the transfer of the manufacturing operation to MRG, as our role has been
converted to an exclusive distributor of this product. We are required to
purchase implantable pump units from MRG at negotiated prices, are obligated to
purchase minimum quantities and must purchase minimum quantities in future
periods in order to preserve our exclusivity. The date by which these purchase
commitments must be satisfied may be extended if and to the extent MRG fails to
complete specific technology improvements to the implantable pump by January 1,
2000. Future minimum purchase commitments for implantable pumps based upon
current prices are:
<TABLE>
<S> <C>
Through December 31, 2000................. $11,584,000
In 2001................................... 8,935,000
-----------
Total................................... $20,519,000
===========
</TABLE>
Gross margins for other diabetes supplies decreased to 26.7% of diabetes
supplies sales during the first quarter of 1999 compared to 48.1% of diabetes
supplies sales during the comparable period in 1998. This decrease was due to
the continued effects of lower average sales prices due to reimbursement trends.
Gross profits on pharmaceutical products decreased 45.6% to $392,000 during the
first quarter of 1999, compared to $721,000 during the first quarter of 1998.
This decrease was primarily due to the continued restructuring of the pharmacy
operations as described above. Gross margins on pharmaceutical products,
however, as a percentage of pharmaceutical products sales, increased to 33.5%
during the first quarter of 1999 compared to 23.8% during the first quarter of
1998.
Operating Expenses. Selling, general and administrative expenses increased
53.6% during the three months ended April 2, 1999 over the three months ended
April 3, 1998 to $17,499,000 from $11,391,000. As a percentage of net sales,
these expenses decreased to 42.8% during the 1999 first quarter from 43.2%
during the 1998 first quarter. Selling and marketing expenses increased
primarily due to increased sales volumes, which led to increased sales
commissions and other variable field sales costs. Also, we continued to increase
expenditures to expand our overall international presence, particularly in
Germany. General and administrative expenses also rose during the three months
ended April 2, 1999 over the three months ended April 3, 1998 due to costs
associated with staff increases necessary to support our increased business
activities.
26
<PAGE> 30
Research and development expenses grew 59.7% during the three months ended
April 2, 1999 over the three months ended April 3, 1998 to $5,296,000 from
$3,317,000. As a percentage of sales, research and development expenses
increased to 12.9% during the three months ended April 2, 1999 from 12.6% during
the comparable period in 1998. The 1999 first quarter increase in research and
development costs resulted from greater resources directed to the development of
continuous glucose monitoring systems, start-up manufacturing operations of the
continuous glucose monitoring systems, development of future generation external
insulin pumps and related disposable products and data communication
capabilities for external pumps and continuous glucose monitoring systems. We
anticipate that research and development expenditures for future periods will
continue to increase as more of our new technological innovations approach
commercialization.
During the 1998 first quarter, we signed a research and development
contract with American Medical Instruments, Inc., which we call AMI, a member of
The Marmon Group of companies. Under terms of the agreement, and subject to the
achievement of quarterly performance milestones, we can receive up to $12.0
million in funding, payable in quarterly installments of $1.5 million, for two
research and development projects. Subject to payment of royalties to AMI, we
will have the right to sell products utilizing the technology developed pursuant
to the agreement on a worldwide basis, with the exception of Japan. We also have
the right to either purchase the technologies developed or acquire a fully
paid-up exclusive worldwide license for these technologies, in either case at
prices ranging from an aggregate of $13.5 million to $19.0 million subject to
downward adjustment, during specific periods through April 30, 2002. During each
of the first quarter 1998 and 1999, we recorded $1.5 million from this research
and development contract as a reduction of operating expenses, as costs related
to completion of the contractual obligations will be included in research and
development expense.
Other. During the three months ended April 2, 1999 and the three months
ended April 3, 1998, other income consisted primarily of interest income
generated from our cash, cash equivalents and short-term investment balances.
FISCAL YEAR 1998 AND FISCAL YEAR 1997
Net Sales
Consolidated net sales increased 39.3% in 1998 over 1997 to $138,577,000
from $99,492,000. This increase is primarily the result of an increase of 51.7%
or $41,487,000, in sales of external pumps and related disposable products.
Domestic sales of these products grew 50.4%, or $37,133,000, from $73,697,000 in
1997 to $110,830,000 in 1998, while international sales increased 66.3%, or
$4,354,000 from $6,572,000 in 1997 to $10,926,000 in 1998. The increase in
domestic and international sales of these products was primarily the result of
increased sales volumes, combined with an increase in average prices realized on
domestic external pump sales. The higher domestic external pump price resulted
from an increase in the list price for the latest generation external pump
during 1998, combined with our continued shift of sales through our direct sales
organization rather than through our independent dealers, which receive
discounts on these products. Sales of disposable products also grew in 1998,
consistent with the greater installed base of external insulin pumps. External
pump sales in 1998 grew at a rate in excess of disposable product sales.
Disposable products pricing remained consistent from 1997 to 1998.
Sales of other diabetes supplies increased 12.2%, or $713,000, in 1998 over
1997. This increase resulted from overall market growth, combined with the
addition of sales of these
27
<PAGE> 31
products by Dartec and DSS, each of which we acquired in 1998. Average sales
prices have decreased for these products due to reimbursement trends.
Pharmaceutical products sales decreased 24.8%, or $2,928,000 in 1998 over 1997.
The pharmacy operation historically distributed products to treat a number of
medical conditions, including diabetes, HIV/AIDS and renal failure. The 1998
sales decrease primarily resulted from our narrowing and restructuring of the
pharmacy operations.
Sales of implantable pumps decreased by 11.9%, or $187,000, in 1998 over
1997, primarily due to the lack of required regulatory approvals. Regulatory
approval for the implantable pump and special insulin utilized in the pump is
still pending. Although we received certification for the implantable pump under
the applicable directives issued by the EU and received the CE Mark in March
1995, permitting commercial sale throughout the EU, separate approval from the
EU is required for commercial sale of the insulin. No assurance can be given as
to when the EU's approval will be received, if at all. The implantable pump and
the special insulin remain subject to regulatory review and approval in the
United States. No assurance can be given as to when these approvals will be
received, if at all. Sales of implantable pumps to date have been generated
mainly in connection with clinical trials and compassionate use of the pumps.
Gross margins on implantable pump sales were negative in 1998 and 1997. While we
anticipate improved margins in the short-term as a result of the MRG
transaction, long-term margins may be reduced due to the transfer of the
manufacturing operation to MRG.
Operating Results
Cost of Sales and Gross Profit. Cost of sales increased 33.1% in 1998 over
1997 to $51,518,000 from $38,704,000. As a percentage of net sales, cost of
sales decreased to 37.2% in 1998 from 38.9% in 1997. This improvement in gross
profit margin is directly attributable to the external pump and related
disposable product line. External pump gross profits increased due to an
increase in realized sales prices, continued improvement in product reliability
and economies of scale related to increased volumes. The improvement in external
pump gross profits was partially offset by a decrease in margins on disposable
products. This decrease in margins on disposable products was attributable to
our addition of a new disposable product line which was developed and is being
manufactured for us by an outside vendor. We realize a higher per unit cost on
this product line than on our historical disposable products. As a result of
these factors, gross margins on the external pumps and related disposable
products increased to 61.5% of sales in 1998, compared to 58.8% in 1997.
Gross profits on other diabetes supplies decreased 4.1% to $2,316,000 in
1998, compared to $2,416,000 in 1997. This decrease in gross profit margin for
other diabetes supplies was primarily due to the lower domestic average sales
prices described above. Gross margins, as a percentage of sales, have decreased
for pharmaceutical products during 1998 compared to 1997 as a result of the
restructuring of the pharmacy operations and discontinuation of specific
pharmaceutical product lines which were more profitable but were not consistent
with our long-term plans.
Our gross profits were adversely impacted by the implantable pump product
line during 1998 due to continued limited sales prior to the product's full
commercial release. Such limited sales have inhibited our ability to realize
manufacturing efficiencies on this product line and have caused unfavorable
manufacturing variances.
28
<PAGE> 32
Selling, general and administrative expenses increased 38.4% in 1998 over
1997 to $57,059,000 from $41,237,000. As a percentage of net sales, these
expenses decreased slightly to 41.2% in 1998 from 41.4% in 1997. Selling and
marketing expenses increased primarily due to increased sales volumes, which led
to increased sales commissions and other variable field sales costs.
Additionally, we expanded our direct sales organization during 1998 through the
realignment of sales territories and the hiring of new sales representatives. We
also increased international selling and marketing expenditures to expand our
overall international presence, particularly in Germany. General and
administrative expenses increased as we have continued to build our
infrastructure to manage increasing domestic and international sales activity,
strengthen our collection function and expand information systems capabilities.
Research and development expenses increased 75.0% in 1998 over 1997 to
$16,531,000 from $9,447,000. As a percentage of sales, research and development
expenses increased to 11.9% during 1998 from 9.5% during 1997. The 1998 increase
in research and development costs resulted from greater resources directed
towards the development of continuous glucose monitoring systems, start-up
manufacturing operations of the continuous glucose monitoring systems,
development of future generation external insulin pumps and related disposable
products, data communication capabilities for external pumps and continuous
glucose monitoring systems and our joint development project with Roche
Diagnostics of a hospital glucose management system. Research and development
expenses will continue to increase during 1999. While the increase will be
smaller as a result of the sale of assets and transfer of technology related to
the implantable pump program to MRG described above, future increases in
research and development spending are expected for various continuous glucose
monitoring system products and future generation external pumps and related
disposable products for the treatment of diabetes, as well as the treatment of
other medical conditions.
Future research and development costs with respect to continuous glucose
monitoring systems relate to the continued refinement of the systems prior to
full regulatory approval, continued investment in a continuous glucose
monitoring systems manufacturing operation and development of the next
generation of continuous glucose monitoring system products. As stated above, we
anticipate that research and development expenditures for future periods will
increase as our technological innovations approach commercialization.
From time to time, we invest in new and developing technologies that may
provide improvements to our core technology or that may provide additional
applications for our existing technologies and products. These investments may
be in the form of equity investments, loans, research and development
agreements, and strategic alliances or cooperation agreements. No assurance can
be given as to when these investments will provide useful new technologies or
applications, if at all. Such investments may result in losses that could
adversely affect our future earnings and results of operations.
Other. Other income for 1998 and 1997 consisted primarily of interest
income generated from our cash, cash equivalents, and short-term investment
balances. Interest expense in 1997 and 1998 relates primarily to debt incurred
by HMS to fund operations and to finance its operating facility. Substantially
all of the HMS debt was retired during 1998. In future periods, we expect to
incur interest expense related to the notes payable that were issued in
connection with the purchase of DSS. See "--Liquidity and Capital Resources."
29
<PAGE> 33
Our effective tax rate for 1998 and 1997 has been computed giving
consideration to the pretax results applicable to our foreign and domestic tax
jurisdictions and a continual decrease in our valuation allowance against net
deferred tax assets due to improved operating results. We have not incurred any
material foreign income tax expense to date. Inflation has not significantly
impacted our results of operations for the past three years.
FISCAL YEAR 1997 AND FISCAL YEAR 1996
Net Sales
Consolidated net sales increased 30.2% in 1997 over 1996 to $99,492,000
from $76,396,000. This increase is principally the result of an increase of
34.8% or $20,727,000, in the sales volume of external pumps and related
disposable products. The domestic and international sales increase of these
products resulted primarily from greater sales volumes, combined with an
increase in average prices realized on domestic external pump sales. The higher
domestic external pump price reflected our larger share of sales through our
direct organization rather than through our independent dealers, who receive
discounts on these products. Consistent with 1996 results, 1997 external pump
sales grew at a rate in excess of disposable product sales. The increase in
disposable product sales reflects the larger installed base of insulin pumps as
well as an increased market share resulting from the introduction of new
disposable products. Disposable products pricing remained consistent from 1996
to 1997.
Sales of other diabetes supplies increased 5.7%, or $315,000 in 1997 over
1996. This increase is a reflection of overall market growth. Pharmacy product
sales increased 26.5%, or $2,472,000 in 1997 over 1996. The pharmacy sales
increase reflects higher sales volume, as our reimbursement rates on
pharmaceutical products began to decrease during 1996, with the decrease
continuing through 1997. The decrease relates primarily to products for
dialysis, a line of business that we discontinued during 1998 in connection with
the restructuring of the pharmacy operations.
Sales of implantable pumps decreased by $418,000 in 1997 over 1996.
Operating Results
Cost of Sales and Gross Profit. Cost of sales increased 19.8% in 1997 over
1996 to $38,704,000 from $32,314,000. As a percentage of net sales, cost of
sales decreased to 38.9% in 1997 from 42.3% in 1996. The improvement in gross
profits is directly attributable to the external pump and related disposable
product line. External pump gross profits increased due to higher realized sales
prices, continued improvement in product reliability and economies of scale
related to increased volumes. Margins on disposable products also improved due
to economies of scale and other manufacturing efficiencies. Gross margins as a
percentage of sales on the sale of other diabetes supplies, as well as
pharmaceutical products, were consistent in 1997 and 1996. Our overall gross
profits continued to be adversely impacted by the implantable pump product line
due to continued unpredictable sales, which have inhibited our ability to
realize manufacturing efficiencies.
Selling, general and administrative expenses increased 28.5% in 1997 over
1996 to $41,237,000 from $32,101,000. As a percentage of net sales, these
expenses decreased slightly to 41.4% in 1997 from 42.0% in 1996. Selling and
marketing expenses increased primarily due to increased sales volumes, which led
to higher sales commissions and other variable field sales costs. We also
expended significant amounts in enhancing administra-
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<PAGE> 34
tive support for the field sales organization and in our educational and
marketing programs for patients, physicians and third party payors. We also
increased international selling and marketing expenditures, primarily in the
continued development of our German subsidiary and in expanding our overall
international presence. General and administrative expenses increased as we has
continued to build our infrastructure to serve the greater revenues and customer
base.
Research and development expenses increased 19.6% in 1997 over 1996 to
$9,447,000 from $7,900,000. As a percentage of sales, research and development
expenses decreased to 9.5% in 1997 from 10.3% in 1996. The increase in expenses
is primarily the result of greater resources directed to our subcutaneous
continuous glucose monitoring systems, with our completing and filing a 510(k)
application for pre-market approval for the first of these products in December
1997. We also increased our research and development expenditures on the
development of our external pump and related disposable product technologies for
use in the delivery of compounds to treat other medical conditions. Expenses
related to the implantable insulin pump product line decreased in 1997 due to
the continued irregular sales activity of the product line.
Included in our 1997 operating expenses is $1.0 million in costs related
directly to the acquisition of HMS. These expenses include due diligence and
professional and consulting expenses related directly to the transaction.
Approximately $242,000 of these costs had been paid prior to year-end, with the
remaining amounts included in our accounts payable and accrued expense balances.
Other. Other income for 1997 and 1996 consists primarily of interest income
generated from our cash, cash equivalents, and short-term investment balances.
Interest expense in 1996 and 1997 relates only to debt incurred by HMS to fund
operations and to finance its operating facility. We retired $2.8 million of
this debt in 1998.
Our effective tax rate for 1997 and 1996 has been computed giving
consideration to the pretax results applicable to our foreign and domestic tax
jurisdictions and a continual decrease in our valuation allowance against net
deferred tax assets due to improved operating results. We have not incurred any
material foreign income tax expense to date. Inflation has not significantly
impacted our results of operations for the past three years.
LIQUIDITY AND CAPITAL RESOURCES
We used cash in operations of $1,349,000 during the three months ended
April 2, 1999 and $3,199,000 during the three months ended April 3, 1998. Cash
flow from operations improved during the first quarter of 1999 compared to the
first quarter of 1998 primarily due to a reduction in cash expenditures on
various accounts payable and accrued expenses. During the first quarter of 1998,
we used cash to retire approximately $3,356,000 in current liabilities related
to the HMS acquisition. The improvement in operating cash flow in the first
quarter of 1999 was partially offset by increases in inventory and accounts
receivable balances during the period. We have begun to increase finished goods
inventory levels to support the historically higher sales volumes we have
experienced in the third and fourth quarters.
For 1998, we used cash in operations of $2,921,000 compared to cash
generated from operations of $2,311,000 in 1997 and cash used in operations of
$1,384,000 in 1996. The reduction in operating cash flow in 1998 compared to
1997 was caused by several factors. We used cash to retire approximately
$6,333,000 in current liabilities related to the HMS
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<PAGE> 35
and DSS acquisitions. These liabilities included $1,772,000 in trade payables of
the pharmacy operations, $1,893,000 in trade payables and accrued liabilities
related to DSS operations, $1,910,000 in other accrued liabilities and all of
the accrued but unpaid amounts related to the $1.0 million in merger related
expenses recorded in fiscal 1997. If we had not retired these liabilities, cash
flow from operating activities would have been $3,412,000 rather than the
$2,921,000 reported as cash used in operations. We experienced a significant
increase in accounts receivable caused primarily by our continuing shift to
selling direct to patients through our in-house sales organization rather than
through independent distributors. This sales shift has led to a significant
increase in accounts receivable balances due from third party payors, which are
generally realized over a longer payment cycle. We also experienced an increase
in inventory balances during 1998 in support of higher levels of business
activity.
Capital expenditures were $4,171,000, for 1996, $6,072,000 for 1997 and
$18,570,000 for 1998. Our 1996 and 1997 capital expenditures included continued
building improvements, manufacturing expansion, the acquisition of additional
research and development engineering equipment and information systems upgrades.
Our 1998 capital expenditures related primarily to building manufacturing
capacity for the continuous glucose monitoring systems, as well as other
building improvements, manufacturing expansion, research and development
engineering equipment and information systems upgrades to support growth. We
anticipate that future capital expenditures will continue to increase in support
of our new product activities and to build the infrastructure necessary to
accommodate our anticipated growth. We retired $2.8 million in bank debt related
to HMS operations and used $2.7 million of cash during the first quarter of 1998
to complete our acquisition of Dartec, a Scandinavian distributor. On October
31, 1998, we acquired DSS, a distributor of our products and other diabetes
supplies located in south Florida. We acquired substantially all of the net
assets of DSS for $4.9 million consisting of $3.1 million in cash and $1.8
million in notes payable, $800,000 due in 1999 and $1.0 million in 2000. In
connection with this acquisition, we also assumed specific liabilities and
retired approximately $2.0 million in short-term and long-term debt of DSS
during the 1998 fourth quarter.
In May 1999, we entered into a financing transaction pursuant to which we
will construct a corporate headquarters, research and development and
manufacturing facility on the campus of California State University, Northridge,
the first phase of which will be financed with a $65.0 million credit
transaction. The transaction was structured as a synthetic lease financing for
this facility and, in a related transaction, we obtained a revolving line of
credit to borrow up to $15.0 million. Under the terms of the financing, a
special purpose trust subleases the land to us and leases the improvement to us.
In connection with these financing transactions, we pledged substantially all of
our assets as collateral security, and are subject to various affirmative and
negative covenants regarding the conduct of our business. These arrangements
could adversely affect our ability to obtain additional capital or acquire
additional capital resources. The synthetic lease has a term of five years, with
two one-year renewal options. The underlying ground lease has a term of 40 years
with renewal options for up to an additional 40 years. Under these arrangements,
we are committed to annual payments ranging from $4.5 million to $5.0 million
commencing sometime during the second half of 2000. Additionally, we are
committed to payments of $400,000 during 1999 and to average annual payments in
future periods of approximately $450,000, plus periodic cost of living
adjustments, per the terms of the ground lease for the Northridge property.
These lease payments will be recorded as rent expense in future periods. When
the synthetic lease terminates, we will be able to
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<PAGE> 36
assume the obligations of the special purpose trust as the lessee under the
ground lease if we exercise our option to purchase.
On November 5, 1998, we entered into an agreement with a wholly-owned
subsidiary of Medtronic Inc. enabling Medtronic to purchase $30.0 million of our
common stock at $30.00 per share, the approximate market value of the stock at
that time. Medtronic purchased 1 million shares of unregistered common shares
during the 1998 fourth quarter. Other financing activities during 1998 included
an unsecured line of credit which enabled us to borrow up to $10.0 million. This
line of credit has expired, and we have replaced this with a new credit facility
as described above.
In the process of integrating some of the HMS operations, we discovered
specific business practices relating to charges billed to the state of Florida
which were implemented by prior ownership and that may result in future
liability. These billing activities were related to business activities of an
affiliated pharmacy. We have received no notice of any action which is pending
or threatened against HMS in connection with the billing activities. We have
corrected the practices, notified the state of Florida of our findings and have
initiated legal action against the prior owners to seek indemnification for any
related liability that we may incur. The amount of liability, if any, cannot be
determined at this time, although we believe that indemnification for liability
would be available from the prior owners. We also are involved in other
litigation, the financial impact of which is uncertain. See
"Business -- Litigation."
We received $6.0 million during 1998 and $1.5 million during the first
quarter of 1999 under terms of our research and development contract with AMI.
As indicated above, we have the right to either purchase the technologies
developed or acquire a fully paid-up, exclusive worldwide license for these
technologies, in either case at prices ranging from an aggregate of $13.5
million to $19.0 million, subject to downward adjustment, during specific
periods through April 30, 2002, or may alternatively elect to pay royalties on
sales of products utilizing the technology developed pursuant to the contract.
We have also entered into an agreement by which, among other transactions, we
have acquired an option to purchase the exclusive worldwide marketing rights to
a long-term glucose sensor and related products being developed by MRG for $30.0
million within 90 days of MRG's first successful human implant in a clinical
trial performed in accordance with applicable regulatory requirements. To retain
our exclusive marketing rights, we are required to purchase minimum quantities
of some products from MRG. We do not anticipate exercising this option prior to
2000. In the event that we pursue either of these opportunities, additional
capital resources may be required.
Management believes that our current level of our cash and cash
equivalents, short-term investments and the net proceeds of this offering will
be sufficient to meet our needs for working capital and capital expenditures for
the next 24 to 36 months. The requirements for additional capital and working
capital, however, are subject to change and will depend upon numerous factors,
including:
- the level of capital expenditures, especially relating to the new
corporate headquarters;
- research and development activities and results;
- competitive and technological developments;
- health care reimbursement trends; and
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<PAGE> 37
- the availability for our acquisition of complementary additional
distribution channels, products, and technologies.
During future periods, we may require significant amounts of cash to pursue
opportunities and promote continued growth and expansion.
QUARTERLY RESULTS
The following table sets forth some of our selected consolidated financial
information for our eight most recent quarters. In the opinion of management,
this unaudited financial information has been prepared on the same basis as the
audited financial information, and includes all adjustments, consisting only of
normal, recurring adjustments, necessary to present this information fairly when
read in conjunction with our consolidated financial statements and notes thereto
contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- ------------------------------------- -------
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $22,922 $25,038 $32,371 $26,366 $31,715 $34,897 $45,599 $40,911
Cost of sales..................... 9,425 9,547 12,076 9,784 13,656 13,071 15,007 13,838
------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... $13,497 $15,491 $20,295 $16,582 $18,059 $21,826 $30,592 $27,073
======= ======= ======= ======= ======= ======= ======= =======
Net income........................ $ 1,527 $ 1,879 $ 2,252 $ 2,304 $ 2,747 $ 3,217 $ 4,775 $ 3,782
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.......... $ 0.06 $ 0.07 $ 0.09 $ 0.09 $ 0.10 $ 0.12 $ 0.18 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share........ $ 0.06 $ 0.07 $ 0.08 $ 0.08 $ 0.10 $ 0.11 $ 0.16 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our results of operations have historically fluctuated on a quarterly
basis. These seasonal trends have resulted in sales and earnings for each of the
first three quarters being significantly lower than sales in the fourth quarter.
Fluctuations of earnings from quarter to quarter have and will continue to
result from numerous factors, including:
- response to practices of insurance companies and other third-party payors
with respect to reimbursement for our products, which tend to result in
increased sales of our external infusion pumps later in the calendar
year, after patients' deductibles are satisfied;
- market acceptance of our products;
- timing of regulatory approvals;
- new product introductions;
- competition;
- our ability to manufacture our products efficiently;
- timing of research and development expenditures; and
- the structure of our sales compensation program.
YEAR 2000 COMPLIANCE
The Year 2000 problem refers to the potential of all electronic devices
containing microprocessors to improperly recognize and calculate dates in and
beyond the year 2000. In the second quarter of 1998, we formed a Year 2000
Oversight Committee to evaluate
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our position regarding Y2K. The committee consists of members representing all
of the major operating and administrative departments within MiniMed including
information technology, facilities, manufacturing, research and development,
regulatory, quality assurance, materials, finance and accounting and legal.
The committee established an Action Plan Program to facilitate our Y2K
compliance and minimize the potential effects of Y2K on our operations. The
components of the plan include the following steps:
- assess Y2K compliance of our products;
- inventory our equipment and software, including non-information systems
equipment and software and prioritize according to critical business
functions;
- implement Y2K compliance testing and remediation according to priorities
developed;
- assess vendor and health care payor compliance;
- develop and implement policies to maintain Y2K compliance going forward;
and
- establish contingency plans.
A timetable for the completion of each of these action steps contained in the
plan has been developed by the committee. The committee meets regularly to
assess our efforts to comply with the plan and to address any outstanding Y2K
issues. The committee is also responsible for coordinating all communications
and responding to all inquiries relating to Y2K.
We have completed our evaluation of all of our current product offerings.
Such evaluation has shown that Y2K will not pose operating problems for these
products. In the first quarter of 1999, we completed the process of creating a
master inventory of all equipment and software vulnerable to Y2K and are
identifying the equipment and software attendant to critical business processes.
Once this process is complete, we will be in a position to implement remediation
programs to address potential problems that are identified. We have begun to
remediate non-compliant systems including manufacturing systems, information
technology systems, communication systems, security systems and personal
computers. We currently believe that we will be able to modify, replace, or
mitigate our affected systems in time to avoid any material impact on our
operations.
We have initiated formal communication with our vendors to assess their
compliance with Y2K. Questionnaires have been developed and distributed to
vendors. These questionnaires, when returned by a vendor, have been evaluated to
assess the Y2K risk presented by that vendor. On site evaluations at the most
critical vendors' sites of operations are currently being conducted. We suspect
that our greatest Y2K risk will be vendor compliance. We rely on our vendors to
supply us with critical components necessary for the manufacture of our
products. We are also implementing a program to assess the Y2K compliance of
insurance companies, management service organizations, and other third-party
payors. Once both the internal and external reviews described above are
completed, we will be able to design a contingency plan to address our areas of
greatest exposure.
Our most reasonably likely worst case scenario in the event of a failure to
correct a material Y2K problem could be an interruption in, or failure of,
normal business activities.
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<PAGE> 39
Such failures or interruptions could materially impact our results of
operations, liquidity and financial position. Due to the general uncertainty
inherent in the Y2K problem, resulting primarily from the uncertainty of the Y2K
readiness of our vendors, suppliers and third-party payors, we are unable to
determine at this time whether the consequences of Y2K failures will have a
material adverse impact on us. The plan, implemented by the committee, is
expected to significantly reduce both our level of uncertainty about the Y2K
problem and the possibility of significant interruptions to normal operations.
Management currently believes that the cost of Y2K assessment and
remediation will not be material. We estimate that the implementation of our Y2K
plan and remediation activities related to our internal systems and equipment
will cost approximately $1.0 million. Management currently believes that we have
adequate working capital to fund these activities.
Readers are cautioned that forward looking statements contained in this
Year 2000 Compliance section should be read in conjunction with our cautionary
language relating to forward-looking statements in "Prospectus Summary".
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BUSINESS
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW
We design, develop, manufacture, market and sell advanced microinfusion
systems and continuous glucose monitoring systems for the intensive management
of diabetes. Our primary goal is to continue to be an innovator in designing and
bringing to market advanced medical devices for the treatment of diabetes. We
are also using our drug delivery expertise to develop devices for the treatment
of other chronic medical conditions. Our development efforts are focused on
creating products which will offer patients a comprehensive and integrated
approach to enhanced disease management.
We have been selling external insulin infusion pumps and related supplies
since 1983, and we believe we have established a reputation for quality and
service associated with the MiniMed name. We believe that we are the leading
provider of insulin infusion systems in the world, with a present market share
in the United States of approximately 80% of new product sales. Our net sales of
these external pumps and related disposables has grown at a compounded annual
growth rate of 40.7% from $43.7 million in 1995 to $121.8 million in 1998. In
turn, this growth has driven our overall net income from $2.3 million to $13.0
million over the same period. We intend to leverage our existing customer base
and current distribution channels to introduce new products to satisfy more of
our customers' needs and provide more complete diabetes management solutions.
MARKET OVERVIEW
Diabetes is a chronic, life-threatening disease, for which there is no
known cure. In patients with diabetes, the body does not produce or respond
adequately to insulin, a hormone produced by the pancreas that is critical to
the metabolism of glucose. In the normal digestive process, carbohydrates in
food are broken down into glucose, which is circulated in the bloodstream to the
cells of the body, where it is converted into energy.
The concentration of glucose in the bloodstream must be controlled within a
relatively narrow range to maintain normal health. Insulin, which is secreted by
the islet cells in the pancreas, is the primary regulatory mechanism by which
the body metabolizes glucose. A normal pancreas produces the correct amount of
insulin required to maintain a person's glucose at proper levels. In patients
with diabetes, however, glucose is not fully metabolized. This is either because
insulin-producing cells are destroyed or exist in reduced numbers, the body's
cells do not effectively metabolize glucose, or some combination of both of
these causes.
Although we believe that our most significant growth opportunity is to
expand our diabetes business, we also believe that opportunities involving
application of our technology to the delivery of other drugs will become
increasingly important in the future.
Type 1 Versus Type 2 Diabetes
Diabetes is typically classified into two primary types. Type 1, sometimes
referred to as juvenile onset, is the more severe form of the disease and is
characterized by a complete lack of insulin secretion by the pancreas. In order
to maintain body chemistry balance and sustain life, Type 1 patients require
life-long, daily insulin therapy. In Type 2 diabetes, the more prevalent form of
the disease, sometimes referred to as adult onset, the
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pancreas produces some insulin but glucose levels are still not adequately
controlled. There is a spectrum of the severity in Type 2 diabetes, ranging from
those patients whose disease is mild and even undiagnosed, to those who can
usually manage their disease by diet and exercise, to those who use various oral
medications and to the most serious segment that requires use of insulin.
How Many People Have Diabetes?
According to the ADA, diabetes afflicts approximately 16 million people,
approximately 6% of the total population in the United States, 800,000 to 1
million of whom are estimated by the ADA to suffer from Type 1 diabetes.
Although patients with Type 1 diabetes represent the primary market for our
programmable insulin pumps, there is a small but growing use of programmable
insulin pumps for Type 2 diabetes. Based on industry sources, we estimate that
there are 3 million Type 2 patients using insulin.
The Complications of Diabetes
People with diabetes experience distress at both high levels of
glucose -- "hyperglycemia," -- and low levels of glucose -- "hypoglycemia," with
significant short- and long-term negative impacts on wellness and mortality.
High glucose levels occurring acutely 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. High glucose levels occurring
chronically can result in major, long-term complications such as eye disease,
kidney disease, and nerve disease, male impotence and cardiovascular
complications, including heart attacks and strokes. Low glucose levels can also
lead to complications, including fainting, weakness and, in severe cases,
unconsciousness, permanent loss of cognitive power and death. According to the
ADA, diabetes is a leading cause of
- blindness in adults 25 to 74 years old with 12,000 to 24,000 new cases
annually in the United States;
- renal failure with approximately 27,900 cases in 1997; and
- amputations with approximately 56,000 cases annually.
Based upon data from the ADA, diabetes is the sixth leading direct cause of
death by disease in the United States, accounting for approximately 193,000
deaths in 1996.
Costs to the Health Care System
The costs to the health care system associated with the treatment of
diabetes and its complications are significant. According to the ADA, the total
health care costs in the United States of treating people with all types of
diabetes was estimated to be $98.0 billion in 1997. This included $7.7 billion
for diabetes and acute glycemic care, $11.8 billion for related chronic
complications and $24.6 billion for general medical conditions. Another $54.1
billion was for indirect costs, including premature mortality and disability.
Therapy for Diabetes
To avoid the acute effects of diabetes and to reduce the associated
complications, patients with Type 1 diabetes, and many Type 2 patients, must use
insulin daily to control
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glucose levels. A person's glucose level will vary depending upon food intake,
insulin availability, exercise, stress and illness. To achieve good control a
patient needs a continuous supply of insulin to provide his or her background
metabolic needs, as well as periodic larger amounts for meals, known as bolus
infusions. Patients generally follow one of two therapy protocols:
- conventional, which involves one or two self-administered, daily
injections of long-acting, timed-release, insulin plus diet control and
exercise; or
- intensive, which consists either of (1) pump therapy with fast-acting
insulin or (2) at least three injections per day of mixtures of
long-acting fast-acting insulins.
Pumps can be programmed to better meet these needs because they use only
fast-acting insulin delivered in hundreds of microinfusions throughout the day
in a profile that provides both a constant flow of insulin, or basal rate, and
also bolus infusions when needed. Because of the limited number of injections
and the uneven absorption of timed-release insulins, we believe that in many
patients neither conventional nor multiple injection therapy controls glucose
levels as well as pump therapy. Our products have been shown in clinical trials
to provide reduced glycemic variability and significantly fewer severe
hypoglycemic events than conventional or multiple daily injection therapy.
The Daily Ritual: What the Diabetes Patient Currently Must Do
In order to gauge insulin dosage, a patient should measure his or her
glucose level at least several times per day. Currently, this is done by:
- pricking a finger with a needle;
- drawing a drop of blood;
- placing it on a disposable strip;
- inserting the strip into a small meter about the size of a pager; and
- waiting twelve seconds to two minutes for a number to appear on the
display.
The patient must then assess his or her carbohydrate intake and, using the
measurement of glucose concentration, determine the appropriate amount of
insulin required. If necessary, the patient then administers that amount of
insulin using a syringe, a pen injector or a programmable infusion pump.
We believe that the discomfort, complexity and time associated with this
entire process discourages patient compliance. In addition, the current glucose
monitoring procedure provides measurements at only a few points in time. With
each determination the patient does not know for sure if his or her glucose
level is rising, falling or remaining stable. This can lead to erroneous
conclusions as to the amount of insulin needed. In spite of these limitations,
we estimate the present worldwide market for these glucose meters and strips and
related disposables to be approximately $3.0 billion. The glucose monitoring
technology we are currently developing is intended to compete eventually with
these glucose meters and strips, especially for insulin-using patients, who use
over half of the total worldwide supply of glucose meters and strips. We cannot
assure you, however, that our glucose monitoring systems will prove to be
sufficiently accurate and effective or that we will be able to commercially
market these products.
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NIH Landmark Study: DCCT
In 1984, the NIH started a $165.0 million study, which is generally
referred to as the DCCT, involving 1,441 Type 1 patients who participated over
the entire approximately ten-year term of the study. The study was designed to
determine whether close control of blood glucose levels, approaching "normal"
levels, could prevent the onset and the progression of severe, long-term
complications of Type 1 diabetes. Individuals with diabetes with mild or no
significant complications were randomly divided into two groups:
- the conventionally-managed patients took one or two injections daily of a
variety of types of mixed insulins and were required to measure their
blood glucose levels once or twice per day; and
- the intensively-managed patients were given the choice of multiple daily
injections, three or more injections per day, or use of an insulin pump.
These patients were required to take at least four glucose measurements
daily.
The NIH provided as insulin pumps to the patients our earlier Model 504-S,
although a small number of patients who had already been using other pumps were
permitted to continue using their existing pumps. Among the intensively-managed
patients, 34% overall used external pumps, and at the end of the study 42% of
the intensively-managed patients were using pumps.
In September 1993, The New England Journal of Medicine published the
results of this landmark study, which concluded that:
- Serious consequences of diabetes were reduced significantly for the
intensively-managed patient group as a whole.
- Progression of the three primary conditions that were evaluated was
reduced in the intensive group relative to the conventional group: eye
disease by 76%, kidney disease by 50% and nerve disease by 60%.
- The incidence of hypoglycemic events for the intensively-managed group
was three times higher than for the conventionally-managed group.
- In spite of the finding with respect to hypoglycemic events, the NIH
concluded that Type 1 patients should be treated intensively because the
reduction in long-term complications greatly outweighed the risk of
hypoglycemic events. In fact, the results of the study were so compelling
that the study was terminated a year earlier than planned.
More Recent Clinical Studies
Although the DCCT was not intended to compare the benefits of pump therapy
with multiple daily injections, more recent studies have focused on this
comparison and have concluded that pump therapy has significant advantages.
In April 1996, Diabetes Care, a respected scientific journal, published the
results of a study by Bruce Bode, M.D. and others, involving 55 patients who
managed their glucose levels intensively, using multiple daily injections for at
least 12 months before switching to our external programmable pump for a minimum
of 12 months. The study found that the patients achieved reduced glycemic
variability and a four- to six-fold reduction in severe hypoglycemic events with
the pump.
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The EVADIAC study group in France presented two studies in 1996 which
included a comparison of pump therapy using implantable pumps to multiple daily
injections and external programmable pumps. We manufactured a majority of the
implantable pumps used in the studies. The studies, involving more than 240
patients, found that implantable pumps had significant advantages over
alternative intensive management therapies for Type 1 patients. The studies also
showed that patients with implantable pumps had an even more significant
reduction in severe hypoglycemic events than patients with external pumps.
In October 1996, the Journal of the American Medical Association, generally
known as JAMA, published the results of a prospective, randomized study
performed for the U.S. Department of Veterans Affairs which compared pump
therapy using our implantable pump to multiple daily injections in a total of
105 Type 2 patients. The study found that Type 2 patients with implantable pumps
achieved reduced glycemic variability and reduced risk of hypoglycemic events
without weight gain, as compared to those patients using multiple daily
injections. The study also showed that the pump patients had an enhanced quality
of life.
In 1998, the UK Prospective Diabetes Study published in The Lancet, found,
over a ten-year period, that intensively-managed Type 2 patients had a 25%
reduction in the risks of microvascular clinical complications, such as eye
disease and kidney disease. The only disadvantages according to the study to
intensive management for Type 2 patients were weight gain and risk of
hypoglycemia. There was also no evidence that intensive treatment had any
specific adverse effect on macrovascular disease.
THE MINIMED SOLUTION
We believe our insulin pump and glucose sensor technologies offer patients
with diabetes substantial benefits over the current alternative therapies. In
addition, we believe our technologies for external programmable pumps can be
used in the controlled delivery of other large molecule compounds with
advantages over current treatment options.
Insulin Pump Technologies
Our diabetes products, both those already available commercially and others
under development, reduce the serious complications of diabetes by enabling
patients to more easily, accurately and intensively manage their glucose levels.
Our programmable insulin pumps have substantial advantages over conventional or
intensive injection therapy, because they:
- Result in Fewer Severe Hypoglycemic Events. The Diabetes Care, EVADIAC
and JAMA studies referred to above all demonstrated this using our pumps.
- Enable Rapid Insulin Absorption and Availability. Our pumps use
fast-acting insulin which allows insulin to be more quickly absorbed into
the blood. Regular and timed-release insulins take considerable time
before initiating metabolism of glucose, which means that a patient using
injection therapy must administer an injection well before the insulin is
actually needed. Changing plans can cause problems. For example, a bolus
injection -- a single sizable dose -- of regular insulin should be taken
45 minutes to an hour or more before a meal. If the carbohydrate intake
or the timing changes, glucose control is impaired. In pump therapy,
which uses only fast-acting insulin, only a few minutes of lead time are
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required between the infusion of a bolus and the meal. This time period
is even shorter with the new faster-acting insulin analog which has
recently become available.
- Improve Consistency of Insulin Absorption. Fast-acting insulin delivered
by a pump in tiny microinfusions also has lower variability in
absorption. By contrast, both conventional therapy and multiple daily
injections require the use of timed-release insulins, which vary in
absorption within the same patient by as much as 42% or more from one day
to the next. Fast-acting insulin delivered by pumps has variability
levels of less than 3% in most patients. In addition, injection therapy
requires the patient to administer multiple injections of insulin in
different locations in the body. Each location in the body may have
different absorption characteristics. Pumps, in contrast, deliver the
insulin through an infusion set that is connected for two to three days
to a single site, usually in a patient's abdomen, which provides more
consistent absorption.
- Enhance Control Through Programmable Delivery. Because our pumps are
programmable, they enable the delivery of insulin to be more closely
matched to a patient's needs as they vary throughout the day. This
capability is especially advantageous during sleep. Many patients have
been shown to suffer from a rise in early morning glucose levels. The
patient can program our pumps to address this condition, known as the
Dawn Phenomenon, as well as the many other predictable fluctuations in
glucose levels.
- Provide Continuous Insulin Supply. Our pumps deliver a continuous
infusion of insulin to provide for a patient's background metabolic
needs. Injection therapy, in contrast, requires the repeated
administration of boluses, which form a subcutaneous depot or collection
of insulin and can result in tissue scarring at the injection site. In
pump therapy, fast-acting insulin is delivered in hundreds of
microinfusions throughout the day, thereby reducing the creation of such
depots.
- Improve Patient Quality of Life. In addition to advantages related to
glucose control, we believe our pumps provide patients with a more
flexible lifestyle, an important advantage that makes pumps a
particularly attractive alternative to injection therapy. Because of the
flexibility of infusion pumps to deliver both a continuous background
profile of fast-acting insulin and larger episodic boluses when needed
before meals, patients are not restricted to the fixed schedule of eating
and exercise that is required for both conventional and intensive
injection therapy. They are less likely to have glucose level
fluctuations as the insulin demands of an active life are met. In
addition to these lifestyle benefits, many people using the pump report
that they feel much better with pump therapy.
Glucose Sensor Technology
We are developing a series of continuous glucose monitoring systems which
utilize a small, thin, pliable sensor to be inserted into subcutaneous tissue,
the tissue immediately under the skin, usually in the abdomen or upper arm. The
sensing element produces an electrical signal proportional to glucose in the
interstitial fluid, the fluid in the subcutaneous tissue. The sensor is
connected either by cable to a small recording/display unit for some products,
or to a telemetry device which transmits the signal to a recording/display unit
for other products. We are designing future models of our external
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pumps to receive information from the sensor and react to sensor commands,
although these products, if they are successfully developed, will not be
available for several years.
We believe that our continuous glucose monitoring systems will, if
successful, offer significant advantages over current methods of monitoring
glucose levels because our systems would:
- Improve Patients' Ability to Normalize Glucose Levels. Our continuous
glucose monitoring systems have been shown in limited human trials to
continuously and accurately measure glucose levels as compared to
standard laboratory reference equipment. This information not only
presents quantitative measurements but will allow patients to determine
whether glucose levels are rising, falling or remaining stable. This will
provide the patient a means to better manage his or her glucose level.
- Warn Against Dangerously High or Low Blood Glucose Level. Studies
indicate that patients experience wide swings of glucose levels during a
24-hour period which are not easily detected even by testing with four to
six finger pricks per day. In our next generation continuous glucose
monitoring system product, when a sensor measurement indicates a glucose
level above or below an acceptable range, an alarm will activate. Our
sensing systems will also operate during periods of sleep and will sound
an alarm to wake the patient if his or her glucose level gets too high or
too low.
- Improve Patient Compliance. Our subcutaneous glucose sensor is inserted
through the skin approximately every three days, thereby avoiding
multiple daily finger pricks. Because it is small, thin and pliable, the
microsensor causes little, if any, patient discomfort. By avoiding the
discomfort, complexity and time associated with repeatedly pricking a
finger to draw blood and waiting for a meter reading of the sample, our
continuous glucose monitoring system is expected to remove many of the
obstacles which are believed to deter patient compliance, particularly in
the case of intensive management of diabetes. A patient using our
continuous glucose monitoring system would need only two or three sensor
insertions, and possibly two or three calibrations, per week, as compared
to at least 28 finger pricks per week for recommended monitoring with
strip meters in an intensive management regimen.
- Enable Health Care Professionals to Establish Improved Treatment
Protocols. The challenge of establishing a suitable treatment program for
patients beginning intensive management is great. In some medical
practices, patients are hospitalized for several days so that frequent
glucose measurements can be made to generate a suitable treatment
protocol for a given patient. Even this procedure is limited in its
effectiveness because the patient's behavior in the hospital differs from
his or her normal lifestyle. Continuous sensing and recording outside a
hospital will permit better treatment protocols to be generated at lower
cost and without the need for hospitalization or close surveillance.
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Use of Our Infusion Pump Systems for Other Medical Conditions
We have gained considerable expertise from our experience with insulin
infusion and believe that this expertise can be applied to meet the complex
delivery requirements of many other drugs. Many genetically engineered and
manufactured proteins and peptides have delivery problems similar to insulin.
Delivery for these drugs is difficult because they:
- contain fragile, large molecules;
- cannot be ingested orally;
- have short half-lives in the body;
- require site specific delivery;
- have very narrow effective ranges of concentration; or
- require a profiled delivery pattern or would otherwise require large
amounts of drugs that are either expensive or toxic in the high doses
required to achieve therapeutic value.
We believe that our external programmable pumps used in the controlled
delivery of other large molecule compounds may have advantages as compared to
current treatment options.
BUSINESS STRATEGY
Our primary goal is to continue to be an innovator in bringing to market
advanced medical devices for the treatment of diabetes, but we also intend to
use our drug delivery expertise to develop devices for the treatment of other
chronic medical conditions. To achieve these objectives, we are pursuing the
following business strategy:
- Expand the Market for Insulin Pumps. The NIH and the ADA have established
intensive therapy as the standard of care for most Type 1 patients, in
part as a result of the DCCT. Clinical results have shown that continuous
insulin therapy using programmable insulin pumps is the most effective
way to provide intensive management. Since the benefits of intensive
therapy have only recently been verified, and since many patients are
treated by primary care physicians who do not have the facilities and
support personnel to pursue intensive management, the majority of Type 1
patients and most insulin-using Type 2 patients are still being treated
with conventional therapy. We estimate that in the United States only
approximately 7% of Type 1 patients and a very small number of Type 2
patients are using pump therapy. As a result, we believe that we have a
significant opportunity to expand the market for our insulin pumps.
- Offer Comprehensive Array of Products for the Treatment of Diabetes. With
our acquisition of HMS and DSS, we have established a presence in the
market for additional diabetes products and supplies such as strips and
meters, complimenting our existing distribution network for insulin pumps
and supplies. We also believe that these acquisitions will provide a
means to efficiently distribute our continuous glucose monitoring
systems, as well as a new formulation of Lilly's insulin lyspro for
programmable infusion pump patients, if and when FDA approval for some of
these products is received. The constant-flow infusion system for Type 2
diabetes, if and when approved by the FDA, is expected to provide us a
significant new market. By
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increasing our ability to satisfy more of our customers' needs and
continuing our extensive customer service efforts, we believe that we can
maximize our revenues over the long term and create barriers to entry for
competitors.
- Diversification Into Treatment of Other Medical Conditions. We believe
that there are many opportunities to use our infusion pump technology
with medications other than insulin. Our agreements with Trimeris and UT
are our first two efforts in this regard, and we are having ongoing
discussions with a number of other biotechnology companies.
- Generate Recurring Revenue Stream. Our insulin infusion products include
a variety of disposable products and accessories which are labeled to be
replaced every 48 to 72 hours and provide a continuing source of revenue
from each patient. In addition, both our continuous-flow infusion system
for Type 2 diabetes and our continuous glucose monitoring systems are
also disposable products which are anticipated to be replaced every 72
hours. We will seek to continue to expand our recurring revenue stream by
adding new proprietary disposables and accessories, as well as by
distributing other supplies to our customers, such as pre-filled insulin
cartridges, strips and meters.
While these are the strategies we are pursuing in our business, we cannot
assure you that:
- any of the future products mentioned above products can be successfully
developed or commercialized;
- the various components of any of the systems can be made to work
together;
- regulatory approval for commercial distribution will be obtained;
- reimbursement by third-party payors will be available; or
- the products will be accepted in the marketplace by health care
professionals, patients and third-party payors.
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PRODUCTS
The following table summarizes some information with respect to principal
products we own or distribute and products under development.
<TABLE>
<CAPTION>
TARGET
PRODUCT DESCRIPTION REGULATORY STATUS MARKETS
- ------------------------ ------------------------------- ---------------------------- ----------------
<S> <C> <C> <C>
INFUSION PUMPS AND SYSTEMS
External insulin pump Several models; currently on Commercially available Type 1 patients;
fourth generation insulin-using
Type 2 patients
Type 2 insulin infusion Disposable, constant-flow FDA approval required Insulin-using
system infusion device licensed from Type 2 patients
Elan Corporation, plc
Implantable insulin pump Implanted under the skin of the CE Mark received in EU; FDA Type 1 patients
abdomen; used for insulin approval required
therapy
General purpose infusion Multipurpose drug infusion pump FDA approval required for Pulmonary
pump for non-insulin applications each application hypertension;
HIV infection;
cancer; and
other medical
conditions
DISPOSABLES AND ACCESSORIES
Sof-set infusion set Multiple versions; insulin- Commercially available Type 1 and 2
compatible tubing set with soft patients
cannula, instead of a needle
Polyfin infusion set Two versions; insulin- Commercially available Type 1 and 2
compatible tubing set with patients
needle
Sof-serter Automatic Sof-set cannula Commercially available Type 1 and 2
inserter patients
Silhouette infusion set Insulin-compatible soft-angled Commercially available Type 1 and 2
tubing set with angled soft patients
cannula
Medication reservoir Syringe-like reservoir used Commercially available Type 1 and 2
with external insulin pump patients
Prepackaged insulin Worldwide license to package FDA approval required Type 1 and 2
cartridges and sell a new formulation of patients
Lilly's insulin lyspro for use
with programmable infusion
pumps
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
TARGET
PRODUCT DESCRIPTION FDA STATUS MARKETS
- ------------------------ ------------------------------- ---------------------------- ----------------
<S> <C> <C> <C>
Data collection system Communications cradle to In test marketing; no FDA Physicians who
download patient information approval required treat diabetes
from external insulin pumps
Strips and meters Manufactured by other companies Commercially available Type 1 and 2
and used to measure glucose patients
levels
GLUCOSE MONITORING SYSTEMS
Physician diagnostic To be used by health care Approved by FDA on June 15, Physicians who
device professionals to monitor 1999 treat diabetes
patients continuously for 2-3 patients
days
Patient glucose To be used by the patient to Under development; FDA Type 1 and 2
monitoring system continuously monitor glucose approval required patients
levels, includes a
hypoglycemia/hyperglycemia
alarm
Glucose management Hospital based system to FDA approval required Hospitals who
system control glucose levels; jointly treat diabetes
developed with Roche patients
</TABLE>
Infusion Pumps and Systems
EXTERNAL INSULIN PUMP. We introduced our most recent version, the Model
507C, in June 1998. This model weighs about 3 1/2 ounces and is about the size
of a pager. The pump can accurately deliver, throughout the day, a controlled,
programmable profile of insulin in several hundred microinfusions of one
microliter each. The insulin delivery profile can thus be adjusted to meet
individual needs. Insulin is delivered from the pump through special
insulin-compatible tubing either to a needle or soft cannula, a tiny tube which
penetrates the skin, usually into the subcutaneous tissue of the abdomen.
The Model 507C is an upgrade to the fourth generation of our external
pumps, the first of which was introduced in 1983. We continually seek to improve
our existing external pumps with additional features and capabilities. Our pumps
have many safety features, including numerous alarms, with 50 in the Model 507C,
maximum limitations on the rate and amount of basal and bolus deliveries, and
automatic shut-off mechanisms to prevent excessive delivery of insulin. The
Model 507C stores a record of the timing and size of the last 450 bolus doses
administered plus daily totals for the past 90 days' insulin delivery. It
provides the ability to set a temporary basal rate for particular activities
such as exercise, and it can be programmed to turn itself off if the user does
not enter a command for a specified period of time. It offers an extended bolus
delivery over time, "dual wave" and "square wave" boluses, which can be
especially useful with very fast-acting insulin analogs and for high fat content
foods. The Model 507C also uses a backlight that makes it easier for a patient
to program his or her pump in low light conditions.
In September 1996, we introduced our Model 505 external insulin pump. This
pump is a reduced feature version of the earlier Model 506. It has full bolus
programming
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capability but only a single basal rate. It is intended primarily for more
cost-sensitive markets where more sophisticated technology has not yet been
introduced.
Physicians prescribe insulin pumps and associated disposables to achieve
better control of glucose levels. When a pump is prescribed, a nurse typically
assists in teaching the patient how to use the pump and the related skills, such
as calculating the appropriate amount of insulin for boluses. A patient
typically returns to the physician's office for periodic check-ups and often
contacts our Clinical Services Department for information. While we believe that
our external pumps significantly improve the quality of life of their users and
have also become increasingly easy to use, some physicians do not prescribe
external pumps for patients using intensive therapy because the pumps are a
relatively sophisticated means of delivering insulin. Some patients may not have
the motivation and ability to understand and correctly use them. Also, some
patients, particularly in their teenage and early adult years, may object to
pumps because they do not like the idea of having a device attached to their
bodies. We believe that our educational programs and publicity about our more
famous pump users, such as Nicole Johnson, Miss America 1999, are countering
some of these objections.
TYPE 2 INSULIN INFUSION SYSTEM. In June 1999, we obtained a license for the
distribution rights to a constant-flow disposable infusion system for Type 2
diabetes developed by Elan. The infusion system is attached to the body with an
adhesive and delivers a pre-set constant rate of drug. We believe this pump has
the potential to distinguish itself in the market by its convenience and ease of
use, and we intend to market the device to insulin-using Type 2 diabetes
patients. The device is designed to be used as a system, with a drug cartridge
packaged with the pump. Before we can market and sell the device, some
improvements must be completed, and we must obtain regulatory approval for the
system.
Under a separate agreement, we will be the exclusive worldwide manufacturer
of the constant-flow disposable infusion system for all applications. Elan has
granted distribution rights to the product to other companies for use as a
system with specific pharmaceutical compounds. Elan will transfer the
manufacturing technology to us, and we will be responsible for first
establishing a manual production capability, and later establishing an
automated, high-volume manufacturing line for the product.
IMPLANTABLE INSULIN PUMP. The implantable insulin pump, the MIP 2001, which
we developed and for which we maintain exclusive worldwide marketing rights for
diabetes, is similar in function to the external insulin pump but is implanted
under the skin of the abdomen in a relatively minor surgical procedure. This
pump releases a basal flow of insulin, with larger bolus doses delivered before
meals. The amount of insulin released can be programmed by the patient with a
hand-held communicator to meet individual needs. The communicator uses radio
waves to control the pump. The pump is designed to store approximately a
three-month supply of a special, concentrated insulin and is refilled in the
doctor's office from a special syringe by inserting a needle through the skin
and into the pump, which then automatically draws the insulin into its negative
pressure reservoir. The negative pressure reservoir is a significant safety
feature which virtually prevents the possibility of a spill of the stored
medication from a reservoir leak or during refilling.
On September 1, 1998, we sold assets and transferred technology related to
our implantable pump program to MRG, and also entered into a series of related
transactions. MRG was founded by Alfred E. Mann, founder, Chairman, CEO and our
largest
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stockholder. See "Management -- Compensation Committee Interlocks and Insider
Participation." Mr. Mann continues to hold a substantial equity interest in MRG.
The implantable pump has been approved for commercial distribution in the
EU, but sales will be limited until the special insulin used with the pump is
approved. In the United States, we are preparing to file a combined application
for approval of the pump and the special insulin. We cannot assure you that any
of these approvals will be obtained or as to the timing of obtaining them.
Approximately 1,400 patients have received implantable pumps, including 260
as part of the clinical trials. During the early phase of the trials
approximately 10% to 15% of patients experienced blockage or clogging of the
catheter that delivers the insulin or the collecting of deposits on a pump
valve. These problems were traced to changes in the manufactured insulin. We
believe that the problems have been corrected, but we cannot be sure that they
will not occur again.
GENERAL PURPOSE INFUSION PUMP. We have developed a general purpose
programmable infusion system that we expect to use for non-insulin applications.
Pulmonary Hypertension. In September 1997, we entered into an agreement
with United Therapeutics Corporation, which we call UT, a biopharmaceutical
company, to work together in the design, development and implementation of
therapies for the treatment of pulmonary hypertension. Pulmonary hypertension is
a disease that constricts the blood vessels serving the lungs, slowing oxygen
absorption and ultimately causing heart failure. There is no known cure, and
current treatments are limited to heart/lung transplants or the intravenous
administration in or near the heart of an unstable compound with a half-life of
approximately two minutes in plasma.
Current drug therapy is exceedingly expensive and deters compliance. The
drug formulation must be mixed daily and be delivered from a bulky, refrigerated
unit worn on the patient's back. This arrangement is a cumbersome process and
likely to cause complications.
By contrast, the UT compound appears to be similarly effective at reducing
pulmonary arterial pressure, but can be delivered using a model of our
programmable external infusion pump. UT and we have launched international
trials to test UT's UT-15 compound at nineteen sites within the United States
and in ten countries abroad. Results from early clinical trials have shown a
reduction in pulmonary arterial pressure, and we believe that this therapy will
improve patients' health and quality of life. Although only a relatively small
number of people suffer from this disease, we believe that the UT alliance may
provide us with a discrete patient population for which a new therapy delivery
model can be developed. The terms of our agreement with UT state that both
parties expect that we will be the main distributor for both the delivery system
and the drug.
HIV/AIDS. In April 1997, we announced an agreement with Trimeris, Inc.
relating to a new antiviral compound for the treatment of HIV/AIDS. Trimeris'
proprietary compound, called T-20, is designed to inhibit the spread of HIV by
blocking the virus before it is able to effectively penetrate and infect a
healthy host cell. This process differs from currently approved HIV/AIDS
therapies, which target viral replication only after the host cell is already
infected. The FDA has not yet approved T-20 and may never do so. Laboratory
studies have demonstrated T-20's antiviral effectiveness, and a pilot study in
humans has shown the drug to reduce levels of HIV without serious side effects.
Recent clinical trials showed that T-20 could be delivered either by twice-daily
injection or by
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pump therapy, similar to the current diabetes therapy model. Although we will
benefit from the agreement with Trimeris only if T-20 is administered to
patients by use of a pump, we do not yet know whether pump therapy using T-20
may have advantages over multiple injection therapy or whether there will be
specific groups of patients with characteristics that make our pumps a more
beneficial means of delivery.
Cancer. In 1998, we entered into a letter agreement with CTL
Immunotherapies Corp., which we will call CTL, regarding a potential strategic
alliance. CTL is a biopharmaceutical company involved in the development of
proprietary compounds for the treatment of targeted medical conditions,
including specific forms of cancer. Pursuant to that agreement, we provided
technical support and laboratory space to CTL. We also purchased capital
equipment used in connection with the project and provided CTL with a limited
number of our infusion systems for use in connection with clinical trial
activities. Finally, we provided ancillary support to CTL in its development
efforts. CTL is required to reimburse us for the costs associated with
personnel, supplies, materials and related expenses incurred by us in connection
with the project.
We expect to finalize an agreement with CTL for the development of therapy
systems involving selected CTL compounds and our medication infusion systems. If
therapies utilizing CTL compounds appropriate for infusion delivery are
successfully developed, the parties anticipate that the agreement will provide
for our company to be the exclusive provider of infusion devices and supplies on
terms to be negotiated.
While we believe that new applications for an infusion pump represent a
significant opportunity for the future, our efforts in the area are at a
beginning stage. We cannot assure you that:
- our anticipated cooperative efforts with biopharmaceutical companies will
be commercially implemented;
- the development of new applications for our pumps will be successful; or
- the applications will be approved by the FDA or other regulatory
authorities.
Also, many of the new applications may involve new drugs which themselves
must be approved by the FDA in addition to the approval required for the use of
our infusion systems to deliver the drugs.
DISPOSABLES AND ACCESSORIES
DISPOSABLES FOR INSULIN PUMPS. Our external pumps are used with disposable
elements consisting of a tubing set and a special syringe-type reservoir, which
stores the insulin in the pump. The most popular tubing sets with soft cannulas
have been marketed under the trade name Sof-set. We have introduced more
advanced versions, called:
- the Sof-set QR -- for Quick Release;
- the Sof-set Ultimate QR -- incorporating several enhancements over the
Sof-set QR which are designed to provide greater patient comfort; and
- the Polyfin QR.
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All of these versions incorporate a quick release connector so that
patients can more conveniently and discreetly disconnect the pump for showering,
bathing, swimming, exercise or intimacy. To make the insertion of the cannula
through the skin easier, we have developed other devices, including:
- the Sof-serter, which allows the patient to automatically insert the
cannula; and
- the Silhouette, a new model of infusion set, with an angled cannula to
facilitate insertion into the skin and a disconnect feature.
These disposables provide us with a continuing source of revenue from pump
customers. Most of these products are labeled to be replaced every 48-72 hours.
PRE-PACKAGED INSULIN CARTRIDGES. Our new license agreement will enable us
to manufacture and market a new formulation of Lilly's insulin lyspro for
programmable insulin pumps. We intend to contract with another company to do the
manufacturing, and we propose to offer the insulin analog in cartridges designed
for use with our external insulin pumps.
DATA COLLECTION SYSTEM. We are developing a data collection system which
will permit health care professionals to download to a personal computer
information from our current and future external pumps, process the information
using special software and print out the results in summary or graphical form.
This information will enable the professional to assess the glucose control of
the patient over a three-month period and, where indicated, to adjust the
insulin delivery process for the patient. We are in the process of testing this
product.
GLUCOSE MONITORING SYSTEMS
We are planning a series of glucose monitoring products:
PHYSICIAN DIAGNOSTIC DEVICE. The first product involves our glucose sensor
connected by wire to a recording and display device and is designed for use by
health care professionals. It will record but not display actual glucose
readings, including glucose levels and trends for two to three days. The data
can be downloaded by the professional into a personal computer for evaluation.
In using this system, the patient will be asked to use various prompts to input
times of meals, amounts of carbohydrate, exercise times, and other events
affecting glucose metabolism.
On June 15, 1999, the FDA approved a first generation continuous glucose
monitoring system product designed to be used by health care professionals in
treating patients with diabetes. Patients can wear this initial model for
several days to enable the health care professional to analyze retrospectively
the patient's glucose levels and modify the patient's treatment, which may
include the prescription or reprogramming of an insulin pump. The FDA's approval
of our continuous glucose monitoring system is subject to post-approval clinical
studies and standard post-approval requirements. The system is intended for
prescription use only and for occasional use rather than everyday use. This
product is only a supplement to, and not a replacement for, standard invasive
measurement of glucose levels. This product will allow identification of
patterns of glucose level excursions above or below the desired range,
facilitating therapy adjustments, which may minimize these excursions. As
discussed below, we intend to develop and seek approval for a consumer model of
the continuous glucose monitoring system that would
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provide the patient with continuous glucose readings and enable us to compete in
the worldwide market for glucose strips and meters, which we estimate to be $3.0
billion.
PATIENT GLUCOSE MONITORING SYSTEM. After obtaining additional clinical
experience with this initial product, we anticipate filing for FDA approval for
a product that will be used by patients to continuously monitor glucose levels.
We expect to make the display unit smaller for this device so that it can be
worn like a wristwatch or carried in a pocket. Future products will include
telemetry, to permit wireless communication between the sensor and the recording
and display device. They will also include a programmable hypoglycemia and
hyperglycemia alarm, designed to alert patients when glucose levels drop below
or rise above limits established by the administering physician. Although our
development and regulatory efforts are at a relatively advanced stage, we cannot
assure you that the development of these products will be successful or that
they will be approved for commercial distribution. We have not completed the
development and production engineering of these products and various
accessories, including the introducer, the transmitter and the receiver/display
devices. If we receive FDA clearance, we plan to conduct a field trial before
general release.
We believe that there will be a substantial market for our continuous
glucose monitoring systems even if the cost of the sensors exceeds the cost of
the glucose strips that they would replace. However, to maximize penetration of
the glucose meter and strip market, we believe that it may be necessary for the
price of our sensors over their useful lives to be reasonably comparable to the
cost of presently available strips. We cannot assure you that we will achieve
this price, particularly if glucose meter companies try to compete with us by
drastically reducing prices. Also, because the potential market is large, many
other companies are attempting to develop non-invasive and/or continuous glucose
measuring systems.
GLUCOSE MANAGEMENT SYSTEM. We are developing a glucose management system in
collaboration with Roche Diagnostics for use primarily in hospitals. The system
is designed to enable health care professionals to better control the glucose
levels of their patients. We expect to submit this device to the FDA for
approval through the 510(k) process. Our submission has been delayed, however,
because the FDA has indicated that it may require a separate approval of the use
of insulin to be delivered intravenously. Roche and we are in discussions with
the FDA and insulin manufacturers regarding this issue. We are uncertain as to
whether the problem with delivery of the insulin can be overcome.
RESEARCH AND DEVELOPMENT
Our research and development activities are performed primarily by our
research and development organization, which consisted of 97 persons as of May
31, 1999. We obtain our product ideas from our staff, patients, health care
professionals and our Medical Advisory Board, all of whose opinions on products
we actively seek through surveys, field visits, medical symposia, focus groups
and personal relationships. We expense all research and development costs as we
incur them. Research and development expenses were $7.9 million for 1996, $9.4
million for 1997 and $16.5 million for 1998.
From time to time, we attempt to obtain U.S. governmental grants to
strengthen our research and development efforts on technically difficult
projects. These grants allow us to pursue the development of new and novel
products with less financial risk. In 1998, we were awarded a three year, $2.0
million grant under the Advanced Technology Program, which we refer to as ATP,
by the National Institute of Standards and Technology. With
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this money and $1.5 million in matching research and development expenses, we
plan to develop and test components for a simple, accurate, minimally invasive
system for measuring glucose levels which uses different technology from our
existing sensor and may be appropriate for Type 2 diabetes patients. The new
chemistries, materials, and devices developed under this research award may also
serve as a platform for the development of other sensing applications. We were
also awarded two multi-year NIH grants aggregating approximately $1,050,000 that
will help us strengthen the research being conducted under the ATP award. We
will own all new technology resulting from these activities.
MARKETING AND SALES
Patients in the United States usually place orders for our external insulin
pumps upon the advice and recommendation of their physicians, who provide the
prescriptions. Our marketing focus is on endocrinologists, diabetologists and
other health care professionals who treat diabetes patients and on third-party
payors. We have also started to focus our efforts on primary care physicians who
treat relatively large numbers of diabetes patients in managed care
organizations. We believe that more than 90% of our revenues from the sale of
our external pumps and related disposables are reimbursed by third-party payors,
subject to applicable deductible and copayment amounts.
Our marketing efforts include sponsoring educational symposia in intensive
diabetes management for physicians, other health care professionals and
third-party payors, to teach the benefits of, and provide training in, pump
therapy. We have trained over 5,000 health care professionals in the use of our
insulin pumps for intensive management of patients. In 1999, we intend to
conduct 60 one-day and nine two-day symposia in the United States and 25
symposia internationally. Roche Diagnostics and Eli Lilly contribute to the
funding of these educational programs. We also conduct numerous presentations to
case managers for managed care organizations.
Under our co-promotion agreement, Roche and we each send targeted
advertising to patients describing the other's products. The materials sent by
Roche include descriptions of our patient service and support network.
AGREEMENT WITH MISS AMERICA, NICOLE JOHNSON. We have entered into an
agreement with the reigning Miss America, Nicole Johnson, and the Miss America
Organization to further promote early diagnosis and aggressive treatment of
diabetes. Miss Johnson was diagnosed with Type 1 diabetes at the age of 19 and
uses our external insulin pump to treat her diabetes. Together with Miss Johnson
and the Miss America Organization, we have developed a program to educate
physicians, particularly primary care physicians, and the public at large
regarding diabetes diagnosis and treatment. As part of this program, we will
sponsor Miss Johnson's personal appearances at several diabetes related events.
Also, Miss Johnson is an important part of a print advertisement campaign aimed
at advancing Miss Johnson's platform of increasing diabetes awareness, including
awareness of pump therapy. Miss Johnson is also involved in similar promotional
arrangements with other companies with diabetes businesses, such as Eli Lilly,
which do not compete directly with us.
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CUSTOMER SERVICE AND SUPPORT NETWORK. We also seek to develop patient
interest in and demand for our diabetes products by providing patients with
access to our service and support network, including:
- services of an experienced clinical services department available by
telephone, toll-free, 24-hours per day, seven days per week, to answer
patient questions and provide guidance, advice and trouble-shooting
regarding daily pump use;
- free, short-term replacement pumps sent within 48 hours or less to
promote continuous therapy;
- an insurance assistance department consisting of 57 people as of May 31,
1999 to answer questions, simplify and expedite claims processing and
assist patients in obtaining third-party reimbursement;
- participation in a patient advocacy program which works with the American
Association of Clinical Endocrinologists;
- an extensive Internet web site at www.minimed.com;
- advertisements in targeted media; and
- free videotapes and other educational material.
MANAGED CARE. We continue to increase our presence in the managed care
marketplace. Field insurance managers are responsible for relationships with,
and the solicitation and negotiation of contracts from third-party payors. In
1998, we more than doubled the number of arrangements we have entered into with
third-party payors. The number of contracts with managed care entities and other
third-party payors providing for reimbursement for our external pumps and
disposables and other diabetes supplies is now more than 180. We have also
recently expanded our insurance support activities to better address the growing
managed care segment of health care payors in the United States.
EXPANDED SALES FORCE. We market our diabetes products and serve customers
through our direct sales organization and distributors. We significantly
increased the size of our sales force with the purchase of HMS and DSS. In
addition to senior sales and marketing management and an extensive in-house
support staff, as of May 31, 1999, our direct sales organization in the United
States consisted of four regional directors, four regional managers and 102
field staff personnel, including a Director of Managed Care and ten field
insurance managers. These representatives are extensively trained and specialize
in diabetes therapy and the use of our products. We compensate our sales
representatives in the United States with a base salary, a sales commission and
an annual bonus based on meeting performance objectives. In the United States,
we also contract with nurse educators who are certified pump trainers to assist
in educating potential patients about use of our external pumps.
USE OF DISTRIBUTORS. We believe that our strategy of maintaining our own
direct sales force dedicated to diabetes is an important factor in market
development and an important competitive advantage. Nevertheless, we also use
independent distributors in the United States to strengthen our direct sales
force and increase the number of physicians served. Some third-party payors in
the United States require that some classes of purchases be made through
specified distributors, and some distributors in the United States and
internationally maintain a substantial infrastructure to support physician and
patient needs. Internationally, independent distributors are used to provide
sales coverage in geographic
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areas not served by our direct sales force. In 1998, we increased the relative
percentage of sales processed directly through us. As a result of our continued
investment in our internal reimbursement capabilities, our acquisition of HMS
and DSS and the activities of our field insurance managers, we expect the
percentage of our sales made through our direct sales force will continue to
rise.
INTERNATIONAL SALES. We have our own international sales organizations
consisting of 46 people as of May 31, 1999, including administrative staff, for
France, Germany, the Netherlands, Belgium, Scandinavia and the Baltic region. We
also have a distribution manager in the United Kingdom and use independent
distributors in other countries. We believe that the international market
provides a large opportunity for growth and are seeking to expand our
international sales. International sales of diabetes products increased over 66%
to $10.9 million in 1998. Also, we expect that some of our new products and new
applications will be introduced in foreign countries before being introduced in
the United States because the regulatory approval process in other countries has
generally been less time consuming and less expensive than in the United States.
In January 1998, we acquired all of the assets of Dartec A.B., a
distributor of diabetes products located in Sweden for $2.7 million in cash.
Dartec had been a distributor of our products, and the acquisition of its
business gives us a direct sales organization covering the Scandinavian
countries and the Baltic region.
MANUFACTURING
We purchase most of our components, some subassemblies and various services
used in the manufacture of our products from outside vendors. These outside
vendors generally produce their items to our specifications and in many
instances to our designs. We then assemble the components into finished
products. We purchase some disposable products from OEM suppliers.
Our Quality Assurance Department provides guidance to vendors and inspects
and tests products at various steps in the manufacturing cycle. This ensures
that products comply with our stringent specifications. The manufacturing
facilities are subject to periodic inspection by regulatory authorities.
We have received approvals from the International Standards Organization,
which we refer to as ISO, that allow us to introduce quickly some products into
the EU based on annual certification of our quality system. These approvals are
the ISO 9002 relating to quality standards, which we received in 1995 and the
ISO 9001 relating to design control standards, which we received in 1996.
We rely on single sources for some important parts, including hybrid
circuits, integrated circuits, special insulin formulations and various
disposable products and components. We also have a sole source subcontract
arrangement for sterilization services.
We have tried to establish secondary source suppliers in some circumstances
when appropriate, and we create safety stocks to address changes in market
demand. Arrangements for additional or replacement suppliers for some of these
parts could not be accomplished quickly. The loss of any of these critical sole
source vendors could harm our business, financial condition and results of
operations. In 1998, we established and validated a state-of-the-art,
semi-automated sensor manufacturing department to address initial market
requirements.
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COMPETITION
We currently consider our primary competition in the diabetes market to be
injection therapy. We compete against injection therapy chiefly by educating
doctors, nurses, patients, managed care organizations and other third-party
payors about the need for intensive management of glucose levels and the
advantages of pump therapy over multiple daily injections.
INSULIN PUMPS. In the sale of our external pumps, we compete with
Disetronic Medical Systems, Inc., which we will call Disetronic, which
introduced a competitive external pump product in the United States
approximately eight years ago. We estimate that Disetronic currently has less
than 20% of the U.S. market for external pumps for new patients but is still the
dominant supplier for the EU market. We believe that our success will encourage
other companies to enter this market, although we believe that there are
substantial barriers to entry including access to technology and the need for
extensive distribution and customer service organizations.
Internationally, in addition to Disetronic, we compete in the insulin pump
market against several smaller suppliers which generally offer less
sophisticated products. We compete with other pump makers primarily on the basis
of product design, quality and utility, physician and patient education and
support services and price. We cannot assure you that past, current and
potential makers of competitive pumps, some of which may have substantially
greater financial, technical, marketing and other resources, will not become
more significant factors in the future. We believe that we may be faced with
additional competition in the near future.
A number of companies and medical researchers are working on new delivery
devices, delivery technologies, procedures, drugs and bioengineered therapeutics
for the treatment and prevention of diabetes, such as for example, pancreas
transplantation and insulin-producing islet and beta cell preparations and
devices. If successful, these technologies and/or medical procedures could
adversely affect our business and results of operations, and could possibly make
our products obsolete.
DIABETES SUPPLIES AND PRESCRIPTION DRUGS. We believe that our most
significant competition in the areas of diabetes supplies and prescription drugs
comes from national mail order pharmacies, local and national retail and
hospital pharmacies, cost containment and managed care companies and other
distributors of diabetes supplies. Many of these companies have substantially
greater resources than we have. Moreover, companies in the health care industry,
and in the provider segment in particular, are consolidating to a significant
extent. This trend could produce additional competitors with larger and
substantially greater resources. Competitive pressure could adversely affect our
market share, and we could experience significant price erosion. We compete in
this segment on the basis of customer service, convenience, product
availability, and price. We believe that our installed base of pump patients
offers a significant opportunity for these sales.
In the field of diabetes supplies, Polymedica Industries, Inc., Chronimed
Inc., Coram Healthcare Corp. and Transworld Home Healthcare, Inc. are
publicly-held companies that compete with us. We expect to have direct
competition in our pharmacy operations from other national mail service
companies such as Merck/Medco Managed Care, L.L.C., Express Scripts Inc., PCS
Health Systems, Inc. and Diversified Pharmaceutical Services, Inc., as we seek
to redirect focus on distribution of prescription drugs by mail order. We
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will also begin to concentrate on the distribution of pharmaceuticals to which
we have proprietary rights.
GLUCOSE MEASUREMENT. Numerous companies, some of which have substantially
greater financial, technical, manufacturing, marketing and other resources, are
attempting to develop a variety of products for glucose measurement. Some of
these products and their corresponding technologies are directed toward
non-invasive measurement systems. They generally use infrared light directed
through tissue, analyzing the reflectance from an arm or transmission through a
finger inserted into a well, through an ear lobe or through other tissue. These
products appear to face substantial technical obstacles, and to date none has
been approved by the FDA for commercial distribution. If, however, any of these
products are successfully developed and if universal calibration is
possible -- so far all reports indicate that even with extensive, individual
calibration, results are not adequate -- then applications that can be
sufficiently served by intermittent measurements, such as measurements in
doctors' offices, might be served with these instruments.
There are also several efforts aimed at reducing the discomfort associated
with the finger pricks required with current glucose meter systems. These
efforts include reducing the depth of penetration of the needle, using a laser
and/or using other methods to breach the outer derma layers to extract
interstitial fluid rather than blood. Still other approaches are being pursued
for glucose level determination including attempts to draw out interstitial
fluid by electrical or chemical means and then measuring the glucose. We know of
at least three other efforts that are being directed toward subcutaneous
measurement with electrochemical sensors. It is possible that some patients
might prefer these systems to our continuous glucose monitors for routine
monitoring. The successful development and acceptance of non-invasive or
minimally invasive glucose measurement systems or systems without pain could
adversely affect our glucose sensor program.
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
We file patent applications to protect technology, inventions and
improvements that we consider important to the development of our business. We
prosecute and manage our patent portfolio using our in-house patent counsel and
technical advisors as well as outside patent counsel. We currently hold over 100
issued U.S. patents and foreign patents. Many U.S. and foreign patent
applications that cover various aspects of our technology are also pending. In
addition, we have exclusive licenses under a number of patents.
Litigation may be necessary to enforce patents issued to us, to protect
trade secrets or know-how owned by us or to determine the enforceability, scope
and validity of the proprietary rights of others. Although we know of no
infringement of patents held by others, it is always possible that a third-party
may assert infringement. We believe that we own or have the right to use all
technology incorporated into our products, but an adverse determination in any
litigation or interference proceeding to which we may become a party could
subject us to significant liabilities to third parties or require us to seek
licenses from third parties.
Although patent and intellectual property disputes in the medical device
area have often been settled through licensing or similar arrangements,
associated costs may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to us on satisfactory terms or at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and selling some of our
products
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or planned products, which would adversely affect our business, diversification
opportunities, financial condition and results of operations.
We own the trademarks MiniMed, Sof-set, QR, Polyfin, Silhouette, "Making a
Difference," "Making a Difference in Diabetes" and other trademarks. We also
rely on trade secrets and proprietary know-how that we seek to protect, in part,
through confidentiality agreements with our employees and consultants. We cannot
assure that any unprotected information will not also be developed by others.
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. In the United States, we are required
to register as a medical device manufacturer with the FDA and state agencies
such as the Food and Drug Branch of the California Department of Health
Services. We are subject to inspection on a routine basis by both the FDA and
the California Department of Health for compliance with the FDA's Quality System
Regulation, which is commonly referred to as QSR. These regulations impose
procedural and documentation requirements upon us with respect to manufacturing
and quality assurance activities.
Unless an exemption applies, each medical device that we wish to market in
the United States must receive either "510(k)" clearance or "PMA approval" in
advance from the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The
FDA's 510(k) clearance process usually takes from four to twelve months, but it
can last longer. The process of obtaining PMA approval is much more costly,
lengthy and uncertain. The FDA's PMA approval process generally requires from
one to three years or even longer. No assurance can be given that 510(k)
clearance or PMA approval will ever be obtained for any product we propose to
market.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination of whether the product is within a type of device that is similar
to devices that are already legally marketed. Those devices deemed to pose
relatively less risk are placed in either class I or II, which require the
manufacturer to submit a premarket notification requesting 510(k) clearance
unless an exemption applies. The premarket notification must demonstrate that
the proposed device is substantially equivalent in intended use and in safety
and effectiveness to a legally marketed "predicate device" that is either in
class I, class II, or is a "pre-amendments" class III device, for example, one
that was in commercial distribution before May 18, 1976, for which the FDA has
not yet decided to require PMA approval. In contrast, devices deemed by the FDA
to pose the greatest risk, or to be novel devices lacking a legally marketed
predicate, are placed in class III and are required to undergo the PMA approval
process. This process requires the manufacturer to file a PMA application
presenting extensive clinical testing data and other information to prove the
safety and effectiveness of the device to the FDA's satisfaction, and FDA's
completion of satisfactory QSR inspection of the manufacturing facilities. In
addition, a new PMA or PMA supplement is required in the event of a modification
to a PMA device, its labeling or its manufacturing process affecting the safety
or effectiveness of the device.
External pumps have generally qualified for clearance under the 510(k)
process, although some features of advanced pumps may require clinical
validation. Our Models
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507C, 507, 506, and 505 external pumps have all been cleared by the FDA pursuant
to the 510(k) process. Our second generation glucose monitoring system is going
through the PMA process.
We cannot assure you that future models of our external pumps will qualify
for 510(k) clearance as opposed to the more extensive PMA process.
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 the intended use of the device, requires a new 510(k) clearance.
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 agency may
retroactively require the manufacturer to submit a premarket notification
requiring 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance is obtained.
We have made modifications to our cleared devices for which we have concluded
510(k) clearance is not required. We cannot assure you that the FDA would agree
with any of our decisions not to seek 510(k) clearance. If the FDA requires us
to seek 510(k) clearance for any modification, the FDA also may require us to
cease marketing and/or recall the modified device until we obtain a new 510(k)
clearance.
Under the Federal Food, Drug, and Cosmetic Act, a non-biologic drug for
human use requires regulatory approval of a New Drug Application, or NDA, before
it may be commercialized. This process is lengthy, expensive and uncertain.
Among other things, it requires adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product and a satisfactory
FDA inspection of the drug manufacturing facilities to assess compliance with
Current Good Manufacturing Practice or GMP, which includes elaborate testing,
control, documentation and other quality assurance procedures. We cannot assure
you that FDA approval of any NDA that we or Hoechst submit will be granted on a
timely basis, or at all. After approval is obtained, a supplemental NDA approval
is generally required for each proposed new indication, often accompanied by
data similar to that submitted with the original NDA.
After the FDA grants a manufacturer approval to bring a device or drug to
market, a number of postmarket regulatory requirements apply, including labeling
regulations, the QSR, and the Medical Device Reporting regulation which requires
that manufacturers report to the FDA certain types of adverse events involving
their products. Class II devices can be subject to additional special controls,
for example performance standards, postmarket surveillance, patient registries,
and FDA guidelines that do not apply to class I devices. Clearances and
approvals restrict devices and drugs to specifically labeled uses, and the FDA
actively enforces regulations prohibiting marketing of products for unapproved
or "off label" uses. Changes in existing requirements or adoption of new
requirements could have a material adverse effect on our business.
The FDA also conducts inspections to determine whether we conform with QSR,
and subsequent QSR inspections will continue after the FDA clearance or
approval. The FDA completed an inspection in May 1997 under the Good
Manufacturing Practices regulations for devices, which are the predecessor of
QSR. We received only minor citations, which have all been corrected. A further
inspection may be conducted relative to any PMA application submitted by us for
other products or pursuant to the FDA's practice of performing periodic
inspections.
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If we fail to comply with the FDA's requirements, the agency can institute
a wide variety of enforcement actions. The FDA sometimes issues a public warning
letter, which could have an adverse impact on our business. The FDA also can
pursue stronger remedies, such as:
- refusing our requests for 510(k) clearance or PMA approval of new
products, withdrawing product approvals already granted, requiring us to
recall products;
- asking a court to require us to pay civil penalties or criminal fines or
adhere to operating restrictions; or
- close down our operations.
Ultimately, criminal prosecution is available to the FDA as punishment for the
most serious offenses. Any FDA enforcement action could have an adverse effect
on our business, financial condition and results of operations.
The FDA can withdraw an NDA or PMA approval if new evidence or new
information shows the drug or device is no longer safe or effective, or if the
FDA discovers that the NDA or PMA contains any untrue statement of material
fact. Other reasons justifying withdrawal of an NDA or PMA by the FDA include,
but are not limited to, failure to maintain required records or to file records
and reports, new questions regarding manufacturing, and whether labeling is
false or misleading.
Our implantable pump will require PMA approval, and Hoechst's insulin for
this pump will require NDA approval. This is the first time that Hoechst has
sought FDA approval to market insulin in the United States. Even after approval,
each batch of insulin product by Hoechst would require the FDA's certification
that the batch meets requisite strength, quality and purity standards.
In late 1991, the FDA adopted new procedures for the review of products
that involve both devices and drugs, permitting clinical investigation and
approval to be coordinated by a lead center of the FDA. At that time, we
withdrew our initial PMA application, expecting that we and Hoechst would file a
single application containing an NDA element for the insulin and a PMA element
for the pump. Under this scenario, we expect that the FDA's Center for Drug
Evaluation and Research will be the lead center and responsible for reviewing
the NDA portion of the application, while the Center for Devices and
Radiological Health will be responsible for reviewing the PMA portion; the FDA's
approval would consist of an approved NDA for the insulin and an approved PMA
for the pump. The FDA has indicated that there would be only one holder of the
approved application for the pump and insulin combination product. The holder
would be the entity to file supplements. We believe that Hoechst will permit us
to be the holder of the approved application.
Recently, however, we submitted a written request to the FDA asking that
the PMA for the pump and the NDA for the insulin be reviewed separately, rather
than pursuant to a single application. Under this approach, our hope is that our
PMA application and Hoechst's NDA application would proceed separately through
the regulatory process, although both would rely upon the same clinical data.
Also, we would own the ultimate PMA approval for the pump and Hoechst would own
the NDA approval for its insulin, and each product would be labeled for use with
the other. We would have the right to seek necessary supplemental approvals for
the PMA, but would depend upon Hoechst to obtain necessary supplemental
approvals for the NDA. The FDA has not ruled on our request.
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Exports of products subject to 510(k) notification requirements, but not
yet cleared to market, are permitted without FDA export approval, if statutory
requirements are met. Unapproved products subject to PMA requirements must
receive prior FDA export approval unless they are approved for use by any member
country of the EU and other countries, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland and South Africa, in which case they can be
exported to any country without prior FDA approval.
International sales are subject to foreign government regulation, the
requirements of 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 EU requires
that a company must obtain the CE Mark prior to sale within the EU of some
medical devices, including implantable products. During this process, the
sponsor must demonstrate compliance with designated manufacturing and quality
requirements known as the "ISO" requirements. We received approval for use of
its implantable insulin pump in France in June 1993. In March 1995, we obtained
the CE Mark to market the implantable pump throughout the EU, but commercial
distribution of the implantable pump in the EU will be limited until the special
insulin required for use in the pump is approved and made available. In March
1995, we received certification under quality standards known as the ISO 9002
standards, and in July 1996, we received certification under the ISO 9001 design
control standards. As is the case with QSR inspections in the United States,
inspections by various foreign bodies continue in the EU on a periodic basis
after receipt of the CE Mark.
We are also subject to numerous federal, state and local laws relating to
matters as billing third-party payors, avoiding unlawful inducements to purchase
or prescribe our products, safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Additionally, we must comply with various FDA,
and in some cases Federal Trade Commission, requirements for design, safety,
advertising, labeling, record keeping and reporting of adverse experiences with
the use of a product. We cannot assure you that we will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a material adverse effect upon our
ability to do business.
With our acquisition of the pharmacy businesses of HMS, we are now subject
to various federal and state regulatory requirements relating to the
distribution of prescription pharmaceuticals. For example, the U.S. Drug
Enforcement Administration, which we call the DEA, regulates controlled drug
substances, such as narcotics, under the Controlled Substances Act and the
Controlled Substances Import and Export Act. Manufacturers, distributors and
dispensers of controlled substances must be registered and inspected by the DEA
and are subject to reporting and record keeping requirements. We cannot assure
you that we will not be required to incur significant costs to comply with such
laws and regulations in the future or that such laws or regulations will not
have a material adverse effect upon our ability to do business.
THIRD-PARTY REIMBURSEMENT
In the United States, our products are generally purchased directly by
patients and dealers and in some cases physicians, physician groups, and/or
hospitals. In many cases, on behalf of the patients, we bill third-party payors,
including private insurance companies, health maintenance organizations,
preferred provider organizations, other managed care
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providers, and, to a limited extent, Medicaid. Under the Medicaid program,
states generally reimburse for approved procedures on a reasonable cost or fee
schedule basis. Currently, some states reimburse our products under the Medicaid
program. Although we do not currently derive revenues from the Medicare program
for any of our products, we are in the process of seeking coverage for our
external pump. The Budget Reconciliation Act of 1997 passed by Congress and
signed into law by President Clinton provides $2.1 billion in federal funding
over the next five years for diabetes education and training, as well as funds
for diabetes products. We cannot assure you that the Budget Reconciliation Act
of 1997, or any other legislation expanding coverage for diabetes, will benefit
our products.
We maintain an insurance assistance department consisting of 57 people as
of May 31, 1999 to simplify and expedite claims processing and to assist
patients in obtaining third-party reimbursement. We believe that more than 90%
of the revenues from our external pump and related disposable sales are
reimbursed by third-party payors, subject to applicable deductible and copayment
amounts.
Third-party payors may decline to reimburse for procedures, supplies or
services determined to be not "medically necessary" or "reasonable." Some payors
have initially indicated that they would decline to reimburse for some of our
products on that basis. We try to deter and reverse such practices through
education and have expanded our insurance assistance efforts toward this end.
Our efforts are usually successful, but such reimbursement may become less
likely in the future as pressure increases for lower health care costs and
particularly near-term costs.
Medicare and many other third-party payors also do not reimburse for
"experimental" or "investigational" procedures. There is usually no precise date
when a procedure ceases to be experimental or investigational, but devices in
clinical investigation under an investigational device exemption are usually
deemed to be experimental or investigational. The failure to cover early use of
a procedure deters usage, delaying acceptance even longer. In the United States
many third-party payors still consider use of implantable pumps to be an
investigational procedure. Reimbursement for the small number of pumps sold in
the United States has therefore been limited to date.
There is widespread concern that health care market initiatives in the
United States may lead third-party payors to decline or further limit
reimbursement. The extent to which third-party payors may determine that use of
our products will save costs or will at least be cost effective is highly
uncertain, and it is possible, especially for diabetes, that they will merely
focus on the lower initial costs associated with injection therapy or will
otherwise limit reimbursement for insulin pumps or other products we develop.
Because of uncertainties regarding the possible health care reform measures that
could be proposed in the future and initiatives to reduce costs by private
payors, we cannot predict whether reimbursement for our products will be
affected or, if affected, the extent of any effect. The unavailability of
third-party coverage or the inadequacy of reimbursement for our products would
adversely affect our business and operating results.
PRODUCT LIABILITY AND WARRANTIES
We usually give two to four-year warranties on our external pumps. The
special motors contained in our external pumps are warranted for life. We set
aside a reserve based on monthly return rates to pay for customer service and
repair of products. We set aside additional reserves during early stages of
product introduction. We believe such
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reserves are enough, but in the event of a major product problem or recall, the
reserves may not be enough to cover all costs. Such an event could adversely
affect our business and operating results.
Our business involves the inherent risk of product liability claims. We
maintain product liability insurance with coverage limits of $15.0 million per
occurrence and an annual aggregate maximum of $15.0 million, with a deductible
of $50,000 per occurrence. We cannot assure that this insurance coverage will
continue to be available on acceptable terms or that the coverage will be enough
to pay all future product liability claims.
EMPLOYEES
As of May 31, 1999, we employed 967 full-time persons including 97 in
research and development, 278 in manufacturing, production engineering and
quality assurance, 341 in administration and 251 in sales and marketing. We also
used 78 temporary workers as of May 31, 1999. We believe that the success of our
business depends, in part, on our ability to attract and retain qualified
personnel, particularly qualified scientific, technical and key management
personnel. We believe that our relationships with our employees are good.
PROPERTIES
We own our current primary facilities which consist of an aggregate of
about 175,000 square feet in Sylmar, California. Approximately 23,400 square
feet of the space is leased to Alfred E. Mann, our Chairman and Chief Executive
Officer and approximately 9,711 square feet is leased to MRG. In conjunction
with our acquisition of HMS, we acquired ownership of a facility in Hollywood,
Florida which consists of an aggregate of approximately 32,000 square feet. We
also lease approximately 44,000 square feet of administrative office space in
two locations in Northridge and Chatsworth, California. Under a lease and
sublease, we expect to construct on the campus of California State University
Northridge up to 710,000 square feet of building space in two phases over a
three to five-year period to address our future space requirements for our
manufacturing, administrative and other activities. See "Management's Discussion
and Analysis of Financial Condition -- Liquidity and Capital Resources."
LEGAL PROCEEDINGS
On September 11, 1996, we filed an action against Fimed, Inc. in Los
Angeles County Superior Court seeking declaratory relief and rescission of a
distributorship agreement giving Fimed an exclusive right to distribute our
external pumps using third-party consumer financing. We alleged that Fimed
fraudulently induced us to enter into the agreement and failed to disclose
material facts. Fimed answered our complaint generally denying the allegations,
but also asserted counterclaims against us alleging breach of contract,
promissory fraud, unfair competition, intentional interference with prospective
economic advantage, defamation, libel and slander, and abuse of process and
seeking compensatory damages of $400.0 million, plus punitive damages. No
significant amount of our products has ever been sold using third-party consumer
financing, and Fimed never made any sales under the agreement. We notified Fimed
that we were seeking rescission of the agreement less than six months after it
was signed and before Fimed began marketing our products.
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We believe we have meritorious defenses to the counterclaim asserted by
Fimed. We intend to prosecute our claim against Fimed and defend against the
counterclaim vigorously. Fact discovery in the litigation has been completed. In
February 1999, a hearing was held before a retired Judge who was appointed by
the court to act as an independent expert pursuant to California law to evaluate
the amount of damages, if any, sustained by Fimed. The Judge issued his opinion
on May 16, 1999. In that opinion he determined that, even if Fimed is able to
prove that we are liable for the actions it alleges, any recovery by Fimed
should be limited to its out-of-pocket expenses and the gross profit we earned
for our consumer finance sales for the period of April 17, 1996 through June 30,
1997. We have not definitively calculated those amounts, but believe the amounts
will be immaterial. The Judge specifically stated that he did not believe Fimed
had shown the existence of lost profits damages from its proposed business with
the requisite certainty required under California law. Trial in this matter is
set for September 7, 1999. Although the findings of the independent expert are
not binding on the court they will be admissible as evidence in the trial.
On February 9, 1999, we were served with a complaint filed in the Civil
District Court For the Parish of Orleans, State of Louisiana, by Diabetes
Resources, Inc., which is also known as Insulin Infusion Specialties, and which
we will refer to as IIS. IIS entered into an Educational Dealer Agreement with
us in July, 1997, relating to the distribution of some of our products by IIS.
We declined to renew that agreement, pursuant to its terms as of December 31,
1998. IIS is alleging that we are engaged in unfair competition, breached the
agreement, violated applicable trade secret laws and defamed IIS. IIS did not
specify the amount of damages it is seeking in its complaint. We believe that we
have meritorious defenses to IIS's claims. We removed the action to Federal
Court, and filed an answer denying the material allegations, and filed a
counterclaim seeking damages for unfair trade practices. We will shortly be
filing an amended counterclaim seeking damages based on IIS's failure to pay
amounts due and owing. Trial in the matter has been set for January 24, 2000.
Discovery in this litigation is in its preliminary stages.
In October 1998, we filed a complaint against Robert Kusher and Craig Lowy,
the former owners of HMS, in the United States District Court for the Southern
District of Florida, Ft. Lauderdale Division. The complaint alleges that Mr.
Kusher and Mr. Lowy engaged in fraudulent misrepresentation, negligent
misrepresentation and breach of contract relating to the sale of HMS to us and
specific billing practices carried on prior to the sale. We are seeking several
remedies including declaratory relief as to our rights under the acquisition
and/or indemnification for any liability arising out of these billing practices.
The allegations regarding billing practices could give rise to claims against us
by the State of Florida. See "Risk Factors."
MEDICAL ADVISORY BOARD
We have organized a Medical Advisory Board, consisting of five individuals
with recognized expertise in fields relating to diabetes care and treatment. The
Medical Advisory Board advises us concerning long-term product planning,
research, development and marketing of our diabetes treatment products. Members
of the Medical Advisory Board consult and meet with us formally and informally.
Some members of the Medical Advisory Board are employed by academic institutions
and may have commitments to other entities that limit their availability to us.
Members of the Medical Advisory Board may also serve as consultants to other
medical product companies. The members of the Medical Advisory Board have
agreed, however, to maintain the confidentiality of all
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proprietary information disclosed to them by us. In addition, we own any ideas,
inventions, developments, improvements and works of authorship developed by the
members of the Medical Advisory Board relating to insulin pumps or glucose
sensors. Currently, the following persons comprise our Medical Advisory Board:
Jay S. Skyler, M.D., Chairman, is a Professor of Medicine, Pediatrics and
Psychology at the University of Miami in Miami, Florida, past President of the
American Diabetes Association, and current Vice-President of the International
Diabetes Federation. Dr. Skyler is the Chairman for the NIH-sponsored
Multi-center Diabetes Prevention Trial. Dr. Skyler is the author of numerous
research and review articles, many of which focus on the complications of
diabetes and the risk reduction of such with intensive diabetes management.
Irl B. Hirsch, M.D., is Associate Professor of Medicine at the University
of Washington School of Medicine in Seattle, Washington and the Medical Director
of the Diabetes Care Center at the University of Washington in Seattle,
Washington. Dr. Hirsch has been an Associate Editor for Clinical Diabetes, a
medical journal specializing in diabetes, since 1992 and is a reviewer for
several scientific and medical journals. From 1993, he has been a consultant to
the Diabetes Control Project in the state of Washington. He is the author of
numerous articles covering topics such as use of insulin pump therapy to treat
hypoglycemia, insulin treatment during surgery and an update on insulin therapy
for family practitioners. Dr. Hirsch recently published a book with the ADA for
individuals with diabetes entitled, How To Get Great Diabetes Care: What You and
Your Doctor Can Do to Improve Your Medical Care--And Your Life. Dr. Hirsch has
diabetes and uses our Model 507 insulin pump.
Francine Ratner Kaufman, M.D. is an Associate Professor of Pediatrics at
the University of Southern California School of Medicine. Dr. Kaufman was past
President of the Board of Directors of the Los Angeles Chapter of the ADA from
1988 to 1990 and 1993 to 1994 and is President of the Board of Directors of the
California affiliate of the ADA. She is a member of the national ADA Board of
Directors, where she is on the Professional Practice Committee and a member of
the Clinical Initiatives Committee of the Endocrine Society. For the past five
years she has been an associate editor for Clinical Diabetes.
Christopher D. Saudek, M.D., is Professor of Medicine at the Johns Hopkins
University School of Medicine and a leader in the field of implantable pump
therapy. Dr. Saudek began working on implantable insulin pump therapy with a one
of our predecessors in the early 1980's, implanted the first MiniMed pump in
1987 and was the principal investigator in our clinical trials of our
implantable pump. Dr. Saudek received the Clinician of the Year Award from the
ADA in 1991.
Robert J. Tanenberg, M.D., FACP, is Clinical Associate Professor of
Medicine at Georgetown University School of Medicine, Washington, D.C. and
senior attending physician at Washington Hospital Center in Washington, D.C. Dr.
Tanenberg is on the Medical Advisory Board for the Washington, DC Chapter of the
Juvenile Diabetes Foundation. He is an investigator in our implantable pump
trials. Dr. Tannenberg was formerly the Chairman of the ADA's Council on Health
Care Delivery and Public Health.
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MANAGEMENT
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alfred E. Mann...................... 73 Chairman of the Board and Chief
Executive Officer
Terrance H. Gregg................... 50 President, Chief Operating Officer,
and Director
Eric S. Kentor...................... 40 Senior Vice President, General
Counsel and Secretary
Kevin R. Sayer...................... 41 Senior Vice President, Finance and
Chief Financial Officer
Stephen A. Bowman................... 54 Senior Vice President, Sales and
Marketing
David Morley........................ 52 Senior Vice President, Operations
David Chernof, M.D.................. 63 Director
Carolyne Kahle Davis................ 67 Director
William R. Grant.................... 74 Director
David H. MacCallum.................. 61 Director
Thomas R. Testman................... 62 Director
John C. Villforth................... 70 Director
</TABLE>
Messrs. Chernof, Grant and Villforth are members of the Organization and
Compensation Committee of the Board of Directors. Ms. Davis and Messrs.
MacCallum and Testman are members of the Audit Committee of the Board.
Alfred E. Mann has served as our Chairman of the Board and Chief Executive
Officer since our incorporation and was President until 1994 and from October
1995 until October 1996. Until March 1994, Mr. Mann served as the Chairman of
the Board of the general partner of the predecessor of our company, which was
also engaged in the design, manufacture and marketing of hospital intravenous
pumps and electrostimulation devices primarily for restoration of hearing for
the deaf. Mr. Mann has also served as Chairman of Advanced Bionics Corporation
since 1994 and as CEO from 1994 to February 1996. Advanced Bionics Corporation
is the successor to the electrostimulation business segment of the predecessor
to our company. From 1985 to September 1992, Mr. Mann was also President and CEO
of Siemens-Pacesetter, Inc., a manufacturer and distributor of cardiac
pacemakers. Mr. Mann founded and from 1972 until 1985 was Chairman of the Board
and CEO of Pacesetter Systems, Inc., predecessor of Siemens-Pacesetter, Inc.
Prior to 1972, he was President of Spectrolab, an electro-optical and aerospace
systems company, and Heliotek, a semiconductor electro-optical components
manufacturer. Mr. Mann founded these companies in 1956 and 1960 and were sold to
Textron Inc. in 1960. Mr. Mann is currently Chairman of the Board of Trustees of
the Alfred E. Mann Foundation, a medical research foundation. Mr. Mann is also
founder, Chairman and President of MRG, the company that purchased our
implantable pump assets and is developing a long-term glucose sensor. Mr. Mann
is also director of Pharmaceutical Discovery Corporation, CTL Immunotherapies
Inc. and the manager of Second Sight, LLC and Quallon, LLC, all of which are
privately-held, early stage health care technology companies. Since March 1998,
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Mr. Mann has served as a Trustee for the University of Southern California, and
he currently serves as Chairman of the Southern California Bio-Medical Council,
a non-profit association dedicated to the fostering of the bio-medical industry
in the Los Angeles Metropolitan area. He holds a B.A. and an M.S. degree in
physics from the University of California, Los Angeles.
Terrance H. Gregg was promoted to Executive Vice President, Operations in
February 1996 and to President and Chief Operating Officer in October 1996. Mr.
Gregg joined us as Vice President of Regulatory Affairs and Clinical Research in
September 1994. Prior to employment with us, Mr. Gregg spent the preceding nine
years as Vice President of Governmental Affairs for Ioptex Research, the
ophthalmic surgical products subsidiary of Smith & Nephew. Prior to joining
Ioptex Research, Mr. Gregg was responsible for Regulatory Affairs, Clinical
Research and Quality Assurance for divisions of Allergan, Inc. Mr. Gregg earned
a B.S. degree in zoology from Colorado State University in 1971.
Eric S. Kentor was promoted to Senior Vice President in February 1996. Mr.
Kentor joined us in May 1995 as Vice President, General Counsel and Secretary.
Prior to joining us, Mr. Kentor was Vice President, Legal Services., of Health
Net, California's second largest health maintenance organization, where he held
various positions beginning in March 1994. From March 1994 until May 1995, Mr.
Kentor also served as Executive Counsel of Health Net's parent corporation,
Health Systems International. Inc. Previously, from 1987 until 1994. Mr. Kentor
practiced with the law firm of McDermott, Will & Emery, where he was elected
partner in 1992. Mr. Kentor received a J.D. degree from the UCLA School of Law
in 1986.
Kevin R. Sayer was promoted to Senior Vice President, Finance, in February
1996. Mr. Sayer joined us in May 1994 as Vice President, Finance and Chief
Financial Officer. Prior to joining us, Mr. Sayer spent the previous 11 years
with Ernst & Young, where he specialized in providing auditing, accounting and
consulting services to high growth companies, primarily in the health care and
high technology industry segments. Mr. Sayer received a B.S. in accounting from
Brigham Young University in 1981 and received a Masters degree in
accounting/information systems from Brigham Young University in 1983.
Stephen A. Bowman joined us as Senior Vice President, Sales and Marketing
in March 1999. Prior to joining us, Mr. Bowman served as Vice President,
International Sales and Marketing of Sulzer Intermedics, Inc., a manufacturer
and distributor of implantable and disposable medical products, where he served
as Vice President -- International Sales and Marketing from October 1992 until
March 1999 and as Vice President -- Worldwide Marketing from May 1992 to October
1992. Mr. Bowman served as Director -- Western Region at Sulzer Intermedics from
May 1991 to May 1992. Previously, from November 1989 to April 1991, Mr. Bowman
was General Manager of Biotronik, a manufacturer and distributor of implantable
medical products. Prior to joining Biotronik, Mr. Bowman held various positions
with Medtronic, Inc., Johnson & Johnson and Del Monte Sales. Mr. Bowman earned a
B.A. degree in Marketing from San Diego State University in 1968.
David Morley joined us as Senior Vice President, Operations in January of
1998. Prior to joining us, Mr. Morley served as Executive Vice President of
Operations at the Cardiac Rhythm Management division of St. Jude Medical, Inc.,
formerly Pacesetter Systems, Inc., a manufacturer of medical devices including
cardiac pacemakers and related products. At St. Jude Medical, Mr. Morley was
responsible for all manufacturing and quality activities at facilities in
California, Arizona, South Carolina and Sweden. Mr. Morley
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received a B.A. from Duquesne University in 1968, an M.A. from the University of
Pittsburgh in 1970 and an M.B.A. from California State University, Northridge.
David Chernof, M.D. has been a Director of MiniMed since July 1994. Since
January 1999, Dr. Chernof has been President of DCHC -- Health Care Consultants,
a health care consulting firm. Previously, he served as Chief Medical Officer of
LA Care Healthplan, a health maintenance organization, from October 1996 through
December 1998. Previously, Dr. Chernof was an independent medical and health
care consultant. From 1991 to July 1995, Dr. Chernof served as the Senior Vice
President and Corporate Medical Director of Blue Cross of California, where he
was responsible for medical policies, physician relations, utilization and
quality monitoring programs and technology assessment. Dr. Chernof was a member
of the Blue Cross of California Board of Directors from 1987 to 1991 and was in
private practice from 1968 to 1991.
Carolyne Kahle Davis has been a Director of MiniMed since May 1997. Ms.
Davis currently serves as an independent business advisor to numerous companies.
Ms. Davis served as National and International Health Care Advisor to Ernst &
Young, an international auditing, accounting and consulting firm from October
1985 until her retirement in April 1997. From March 1981 until August 1985, Ms.
Davis served as Administrator of the Health Care Financing Administration, a
sub-cabinet position reporting to the Secretary of Health and Human Services.
The Health Care Financing Administration is the agency responsible for the
Medicare and Medicaid programs. Previously, Ms. Davis served as Associate Vice
President for Academic Affairs at the University of Michigan and Dean of the
University of Michigan School of Nursing. Ms. Davis currently serves on the
boards of Beckman Instruments, Merck & Co., Inc., Pharmaceutical Marketing
Services, Inc., and The Prudential Insurance Company of America.
William R. Grant has been a Director of MiniMed since June 1994 and is the
Chairman of the Organization and Compensation Committee of the board. He has
served as managing General Partner and Chairman of Galen Associates, a
privately-held investment company, since 1989. Previously, Mr. Grant served as
President and Vice Chairman of Smith Barney Inc., as President and Chairman of
Mac-Kay Shields Financial Corporation and as Vice Chairman of SmithKline
Beecham. Mr. Grant currently serves on the boards of directors of Witco
Corporation, Allergan, Inc., Ocular Sciences, Inc., Vasogen, Inc., and
Westergaard.com, Inc. He is also a member of the General Electric Equity
Advisory Board.
David H. MacCallum has been a Director of MiniMed since July 1994. In June
1999, Mr. MacCallum joined Salomon Smith Barney as Global Head of Health Care,
Investment Banking. Previously, Mr. MacCallum served at ING Baring Furman Selz
LLC, an investment banking firm and a subsidiary of ING Group, a Dutch financial
institution, as an Executive Vice President and head of the health care
investment banking group from April 1998 to June 1999. Mr. MacCallum served as
Managing Director, Investment Banking for UBS Securities LLC from May 1994 to
April 1998. Mr. MacCallum served as Co-Head of Investment Banking of Hambrecht &
Quist from 1991 to 1994. Prior to 1991, Mr. MacCallum was a Managing Director of
Hambrecht & Quist. He is also a Director of Bionx Implants, Inc., a medical
device company.
Thomas R. Testman has been a Director of MiniMed since July 1994 and is the
Chairman of the Audit Committee of the board. He retired from his position as
Managing Partner with Ernst & Young, an international auditing, accounting arid
consulting services firm, in October 1992 after 30 years of continuous service.
During his tenure, he held the
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position of National Director of Management Consulting Services, served on the
operating committee of the firm, was Western Regional Director of Healthcare
Services and engaged in management consulting during various periods. Mr.
Testman currently serves as a director of Techniclone Corp., a cancer treatment
developer and in 1998 also served as its interim Chief Executive. He is also a
director of Chromavison Medical Systems, Inc., an advanced cellular imaging
company. He also formerly served as a director of Nichols Institute, a
publicly-held laboratory company that was sold to Corning, Inc. in 1994. He
currently also serves as a director of six privately held health care companies.
John C. Villforth has been a Director of MiniMed since May 1996. He has
served since September 1990 as President and Executive Director of the Food and
Drug Law Institute, a non-profit organization whose mission is to increase
knowledge about the laws and regulations pertaining to food, drugs, cosmetics,
medical devices and biological products. Prior to 1990 and for 29 years, Mr.
Villforth was a Commissioned Officer in the U.S. Public Health Service in the
Department of Health and Human Services, the last 19 years of which he was
assigned to the FDA. Mr. Villforth retired from the Public Health Service in
August 1990 with the rank of Assistant Surgeon General (Rear Admiral). During
his tenure, he held the positions of Director, Center for Devices and
Radiological Health of the FDA from 1982 to 1990; Director, Bureau of
Radiological Health of the FDA from 1969 to 1982; and Chief Engineer, U.S.
Public Health Service from 1985 to 1990, among other positions. Mr. Villforth
served on the board of Target Therapeutics, Inc. which was subsequently acquired
by Boston Scientific Corporation, a medical device company from 1992 to April
1997, and the board of BRI International, subsequently acquired by Quinitiles
Transnational Corp., a contract research organization for the biotechnology,
pharmaceutical and medical devices industries, from 1992 to 1997.
CHANGE OF CONTROL AGREEMENTS
In February 1999, we entered into agreements with Messrs. Mann, Gregg,
Kentor, Morley and Sayer providing for severance benefits to these officers if
their employment were to terminate in connection with a change in control of our
company. The severance benefits are payable if we terminate the employment of
the officer without cause or the officer voluntarily terminates his employment
for good reason, generally consisting of adverse changes in responsibilities,
compensation, benefits or location of work place, within two years after a
change of control or three months prior to and in connection with, or in
anticipation of, a change. The benefits are also payable if the officer
voluntarily terminates his employment for any reason within 30 days after the
expiration of one year after a change of control.
"Change of control" means:
- the acquisition of beneficial ownership of 30% or more of the outstanding
shares of voting stock of our company by any person, entity or group,
subject to some exceptions including acquisitions by Mr. Mann and
acquisitions of shares beneficially owned by him as a result of his death
and transfers during his lifetime to charities or members of his family
or entities in which charities or members of his family have a majority
of the beneficial interest;
- any change in the directors of our company after which a majority of the
directors consists of persons who are not either presently serving as
directors or selected for election by stockholders, or elected to fill
vacancies on the board, by directors who are presently serving or were
themselves so selected or nominated;
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- a sale of all or substantially all of our assets or a merger,
consolidation or reorganization of our company unless the holders of our
outstanding voting shares immediately before any transaction own at least
70% of the outstanding voting shares of our company or a successor
company immediately after the transaction; or
- a liquidation of our company.
The severance benefits generally consist of a lump sum payment equal to two
times the officer's annual base salary and two times his average annual bonus
determined over the three prior years, subject to some exceptions. The officer
would also receive a prorated portion of his or her bonus for the year of
termination and continuation of life, health and disability insurance for two
years or until any earlier date when other full time employment is obtained
providing health plan benefits without an exclusion for pre-existing conditions.
The severance benefits would also include continuation of the use of a company
car or car allowance for one year or until any earlier date when other full time
employment is obtained and acceleration of the date when outstanding stock
options become exercisable. The benefits, other than acceleration of the
exercise dates of stock options, are subject to reduction to avoid the taxes and
loss of deductions associated with excess severance benefits or "excess
parachute payments" under the Internal Revenue Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
AGREEMENT WITH MRG. In September 1998, we sold assets and transferred
technology related to an implantable pump program to MRG. MRG was founded by
Alfred E. Mann, founder, Chairman, CEO and the largest stockholder of our
company. Mr. Mann continues to hold a substantial equity interest in MRG. Since
the transaction with MiniMed, MRG has been incorporated.
The assets sold consisted primarily of inventories and equipment. The
purchase price was $3.6 million payable in a single lump-sum amount on December
31, 2003. The note bears interest at 7% per annum payable annually. The note is
secured by the assets sold to MRG and guaranteed by Mr. Mann. We have also
leased facilities and improvements to MRG at which MRG will carry out its
activities. The obligations of MRG under the lease are guaranteed by Mr. Mann.
Certain of our employees involved in the manufacturing and research and
development activities of the implantable pump product line have become
employees of MRG. We retained exclusive marketing rights to the implantable pump
product line for diabetes and other specific applications.
Our agreement with MRG also provides:
- We are obligated to purchase minimum quantities over a three-year period
and must purchase minimum quantities in each calendar year from 2001
through 2003 in order to preserve the exclusivity of our marketing
rights. These purchases may be deferred if MRG does not provide us
implantable pumps with specified enhanced technology by January 1, 2001.
- Future minimum purchase commitments for implantable pump units based upon
current prices total approximately $20.5 million over three years but our
obligation to make the full amount of required purchases depends upon
MRG's completion of development of improvements to the electronic design
of the pump.
- We are responsible for pursuing regulatory approval of the implantable
pump for the treatment of diabetes and have the right to participate in
the pursuit of regulatory approval for certain other applications.
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- We have provided MRG with a working capital line of credit of $3.0
million, which will bear interest at 7% annually. Any amounts MRG
borrows, and the interest payable thereon, under the line of credit are
due in a single lump-sum payment on or before December 31, 2001.
Repayment is guaranteed by Mr. Mann and the guarantee is secured by a
pledge of our common stock owned by Mr. Mann. To date, MRG has not
borrowed any funds under this line of credit.
- MRG has granted us an option to acquire exclusive world-wide distribution
rights to its long-term glucose sensor, currently under development, for
$30.0 million. We have the right to exercise this option within 90 days
after MRG's first successful human implant in a clinical trial performed
in accordance with applicable regulatory authority. MRG is attempting to
integrate its long-term glucose sensor technology with the implantable
pump. The exclusivity of the license depends upon purchasing the minimum
quantity of implantable pumps referred to above and specified minimum
quantities of glucose sensors.
- MRG has agreed to pursue the development of certain improvements to the
electronic design of the implantable pump.
Because of Mr. Mann's interest in MRG, our board of directors appointed a
special committee of the board, consisting of all of the directors except Mr.
Mann to consider approval of the transaction. Mr. Testman served as Chairman of
the Committee. The committee retained the services of legal counsel, a financial
advisory firm and a scientific advisor. The committee engaged in extensive
negotiations with MRG over a period of many months. The committee, exercising
the full powers of the board which had been delegated to it with respect to this
matter, unanimously approved the transaction, and the financial advisory firm
retained by the committee, Pacific Growth Equities, Inc., rendered a written
opinion to the effect that the transaction is fair to our stockholders other
than Mr. Mann from a financial point of view. Mr. Mann did not participate in
any of the deliberations of the committee with respect to the transaction except
to the extent that he was requested to do so.
SYLMAR LEASE. We lease a portion of our principal facility in Sylmar,
California to Mr. Mann. The amount of space being leased is 23,400 square feet
with a monthly rent of $8,424 per month for the lease term, which expires in
2001. Pursuant to the terms of the lease, Mr. Mann is also responsible for
paying for tenant improvements made to the facilities in the amount of $4,050
per month over the balance of the term which includes an interest factor of
7.5%. Either party may terminate the lease upon 90 days notice prior to the end
of any calendar year. If Mr. Mann terminates the lease, he will be obligated to
continue to repay us for the tenant improvements until the time as we occupy and
use the space. We believe that the terms of the lease reflect the fair rental
value of the space. Mr. Mann has subleased a portion of that space to MRG, and a
portion has been made available at no charge to the Alfred E. Mann Foundation
for Scientific Research, a medical research foundation founded by Mr. Mann.
During 1998, we also leased certain warehouse facilities from Advanced
Bionics Corporation, a company founded by Mr. Mann and of which he is the
Chairman and principal stockholder. Rental under the lease was $37,000 during
1998, which we believe reflects the fair market value of the space.
AGREEMENTS WITH PDC. In 1997 and 1998, we loaned an aggregate of $1,105,000
to Pharmaceutical Discovery Corporation, which we call PDC. This was in
anticipation of a potential business combination and to fund some research and
development activities. PDC is involved in the research and development of novel
chemical technologies, particularly encapsulation technologies for the delivery
of pharmaceutical products. PDC owns several
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U.S. patents relating to these technologies. The loan bears interest at the
prime rate plus 1%. In December 1998, we exchanged the outstanding principal
amount of the loans, plus the interest accrued, to purchase 2,672,703 shares of
common stock of PDC at a purchase price of $.45 per share. The shares of PDC
common stock we acquired represent approximately 6.2% of the total outstanding
shares.
In September 1997, we entered into two research and development agreements
with PDC under which PDC conducted preliminary research activities relating to
the encapsulation of some pharmaceuticals. We paid PDC $70,000 for these
activities. In March 1998, we licensed from PDC, on a worldwide, exclusive
basis, its encapsulation technology for use with specified pharmaceutical
compounds. We will pay PDC a royalty based upon either the cost of the compound
to be encapsulated or upon the total net revenues derived by us from the therapy
utilizing the compounds. PDC also retains some manufacturing rights relating to
the encapsulation technology.
After we made the loans to PDC, our board of directors decided not to
pursue an acquisition of PDC. With the approval of our Board, Mr. Mann entered
into an investment agreement with PDC in January 1999. Under that agreement, Mr.
Mann purchased 25,901,642 shares of PDC common stock at a purchase price of $.45
per share for a total purchase price of approximately $11.7 million. The shares
purchased by Mr. Mann represent approximately 60% of the outstanding common
stock of PDC.
Concurrently with entering into the investment agreement, PDC entered into
a rescission agreement with Encap Technologies LLC, of which Mr. Mann is the
principal beneficial owner. Under the rescission agreement, the parties agreed
to rescind agreements entered into in September 1998 giving ENCAP an option to
purchase all of the assets of PDC in exchange for loans to PDC and giving ENCAP
a license on PDC technology and other specified rights. The investment agreement
allows PDC, for a period of one year from the date of the investment agreement,
to reacquire all rights under the license granted to ENCAP for an amount equal
to all expenditures paid or incurred by ENCAP with respect to the license
agreement plus accumulated interest at the annual rate of 4.48% per annum
calculated from the date of each expenditure.
AGREEMENTS WITH CTL. In 1998, we entered into a letter agreement with CTL
Immunotherapies Corp. regarding a potential strategic alliance described under
"Business --Products -- General Purpose Infusion Pumps."
We were also presented with an opportunity to invest in CTL, but our board
of directors declined that opportunity. With the consent of the other directors,
Mr. Mann elected to pursue the investment personally. He and MRG have each
agreed to lend up to $1,250,000 to CTL, and a third party agreed to lend up to
an additional $500,000. The loans are to be made upon the achievement by CTL of
specific milestones, they bear interest at 5% per annum and they are payable in
October 2002 or any earlier time that CTL completes an initial public offering
of its Class A common voting shares meeting specified requirements. The loans
are convertible at the option of each lender into Preferred Stock of CTL, which
in turn is convertible into Class A common voting shares. Also, the loans are
convertible into Class A common voting shares at the option of CTL in the event
of an initial public offering described above. As of May 31, 1999, Mr. Mann and
MRG had each loaned CTL $500,000 pursuant to the arrangement.
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FINANCING OF NEW PRINCIPAL FACILITY. In May 1999, we finalized the
financing arrangements relating to our new worldwide headquarters described in
more detail in "Recent Developments." ING Baring Furman Selz LLC and some of its
affiliates arranged the financing, received underwriting fees of $1,239,500 and
will receive $20,000 per year to serve as agent for the lenders under the credit
agreement until the loans under that agreement are paid in full, and $5,000 per
year as agent to the lenders under the revolving credit agreement until
outstanding loans made under that agreement have been paid in full and the
commitments to make additional loans have terminated. ING Baring Furman Selz LLC
is a participant in a lender syndicate. David MacCallum, a member of the board
of directors, was, at the time of the transaction, an Executive Vice President
of ING Baring Furman Selz LLC.
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PRINCIPAL AND SELLING STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth information with respect to the beneficial
ownership of our common stock as of May 31, 1999, by each person known by us to
own beneficially more than 5% of the common stock, each of our directors, each
of the five most highly compensated executive officers and all directors and
executive officers as a group. Except as otherwise noted, each named beneficial
owner has sole voting and investment power with respect to the shares owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING(1) NUMBER OF OWNED AFTER OFFERING
--------------------------- SHARES BEING -------------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
---- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Alfred E. Mann(3)........... 9,304,802(4) 32.4% 250,000 9,054,802(4) 29.4%
Putnam Investments, Inc..... 1,480,302(5) 5.2% -- 1,480,302(5) 4.9%
David Chernof, M.D.......... 41,750 * -- 33,000 --
Carolyne Kahle Davis........ 14,895(7) * -- 11,003(7) --
William R. Grant............ 617,103(6)(7) 2.17% -- 820,288(6)(7) 2.0%
Terrance H. Gregg........... 163,540 * -- 163,452 --
Eric S. Kentor.............. 96,460 * -- 96,350 --
David H. MacCallum.......... 48,252(7) * -- 39,449(7) --
David Morley................ 6,535 * -- 6,314 --
Kevin R. Sayer.............. 79,196 * -- 115,196 --
Thomas R. Testman........... 51,530(7) * -- 42,727(7) --
John C. Villforth........... 24,662(7) * -- 18,359(7) --
All directors and executive
officers as a group
(12 persons).............. 10,460,725 35.7% -- 10,210,725 32.6%
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes the following numbers of shares which the executive officer or
director has the right to purchase under outstanding stock options which are
exercisable or become exercisable within 60 days: Mr. Mann -- 378,000, Dr.
Chernof -- 8,750, Ms. Davis -- 14,098, Mr. Grant -- 41,750, Mr.
MacCallum -- 42,750, Mr. Testman -- 41,750, Mr. Gregg -- 162,000, Mr.
Kentor -- 93,000, Mr. Sayer -- 78,000, Mr. Morley -- 6,000, Mr.
Villforth -- 21,750; all directors and executive officers as a group (12
persons) -- 899,848.
(2) Percentage calculations assume no exercise of the Underwriters'
over-allotment option and are based on 28,382,846 as a number of common
shares outstanding as of May 31, 1999.
(3) Mr. Mann has been Chairman of the Board, CEO and our director since our
incorporation and was President from the date of incorporation until 1994
and from October 1995 until October 1996.
(4) Includes the shares the Alfred E. Mann Foundation beneficially owns for
Scientific Research, of which Mr. Mann is a trustee. As a trustee, Mr. Mann
shares voting and investment power with respect to the shares beneficially
owned by the Foundation. Mr. Mann disclaims any beneficial interest in the
shares owned by the Foundation.
(5) As reported by Putnam Investments, Inc. ("PI"), Putnam Investment
Management, Inc. ("PIM") and, The Putnam Advisory Company Inc. ("PAC"), in
their Amended Schedule 13G filed on February 9, 1999 with the Securities and
Exchange Commission. According to that filing, PI shares voting power as to
192,502 shares and
74
<PAGE> 78
shares dispositive power as 1,480,302 shares, PIM shares dispositive power
as to 1,251,400 shares, and PAC shares voting power as to 192,502 shares and
shares dispositive power as to 228,902 shares.
(6) Includes 457,222 shares of common stock held by funds managed by Galen
Associates, of which Mr. Grant is the Managing General Partner and Chairman
and may be deemed to beneficially own the shares. Mr. Grant disclaims
beneficial ownership of the shares except for his pecuniary interest
therein.
(7) Includes the following number of shares which the director has the right to
acquire pursuant to the director's participation in our Non-Employee
Deferred Stock Units Plan: Ms. Davis -- 797.08, Mr. Grant -- 3,773.24, Mr.
MacCallum -- 2,006.19, Mr. Testman -- 5,779.68 and Mr.
Villforth -- 2,911.54; (total -- 15,268).
75
<PAGE> 79
UNDERWRITING
- --------------------------------------------------------------------------------
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and the selling stockholder and we have agreed to sell to each
underwriter, the number of shares of common stock set forth opposite the name of
the underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Warburg Dillon Read LLC.....................................
Hambrecht & Quist LLC.......................................
ING Baring Furman Selz LLC..................................
Volpe Brown Whelan & Company, LLC...........................
---------
Total..................................................... 2,250,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of specific legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the shares, other than those covered
by the over-allotment option described below, if they purchase any of the
shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
in excess of $ per share. The underwriters may allow, and dealers may allow,
a concession not in excess of $ per share on sales to other dealers. After
the initial offering of the shares to the public, the public offering price and
concessions may be changed by the underwriters.
MiniMed and its Chairman, Alfred Mann, have granted to the underwriters an
option, exercisable no later than 30 days after the date of this prospectus, to
purchase up to an aggregate of 337,500 additional shares of our common stock at
the public offering price less the underwriting discount. The underwriters may
exercise this option solely for the purpose of covering over-allotments, if any,
in connection with this offering. To the extent that the underwriters exercise
the over-allotment option, the underwriters would purchase up to 300,000 shares
from us and up to 37,500 shares from Mr. Mann. To the extent the underwriters
exercise the over-allotment option, each underwriter will be obligated, subject
to specific conditions, to purchase a number of additional shares approximately
proportionate to such underwriters' initial purchase commitment. MiniMed and Mr.
Mann will each be obligated, pursuant to the option granted by them, to sell the
shares to the underwriters if they exercise the over-allotment option. See
"Principal and Selling Stockholders."
Each of MiniMed, the selling stockholder and MiniMed's executive officers
and directors have agreed, for a period of 90 days from the date of this
prospectus, without the prior written consent of Warburg Dillon Read LLC, not to
offer, sell, contract to sell, or otherwise dispose of, any shares of their
common stock or any securities convertible into,
76
<PAGE> 80
or exercisable or exchangeable for, common stock. In addition, subject to
specific conditions, Medtronic has agreed to the same restrictions for a period
of 60 days from the date of this prospectus. Warburg Dillon Read LLC in its sole
discretion may release any of the securities subject to these lock-up agreements
at any time without notice.
Our common stock is quoted on the Nasdaq National Market under the symbol
"MNMD."
In connection with the offering, Warburg Dillon Read LLC, on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of specific bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Warburg Dillon Read LLC is covering syndicate short
positions or making stabilizing purchases and repurchases shares originally sold
by that syndicate member. These activities may cause the price of the common
stock to be higher than the price that otherwise would exist in the open market
in the absence of these transaction. These transactions may be effected on the
Nasdaq National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
The Underwriters may engage in passive market making on the Nasdaq National
Market in accordance with Rule 103 of Regulation M under the Exchange Act during
the one-day period before the commencement of offers or sales of common stock.
The passive market making transactions must comply with applicable volume and
price limits and be identified. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid for such
security; if all independent bids are lowered before the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Passive market making may stabilize the market price of the common
stock above independent market levels and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of our common stock will be passed upon for us by Gibson, Dunn
and Crutcher LLP, Los Angeles, California and for the underwriters by Dewey
Ballantine LLP, New York, New York.
EXPERTS
- --------------------------------------------------------------------------------
Our financial statements as of January 2, 1998 and January 1, 1999 and for
each of the three years in the period ended January 1, 1999 included in this
prospectus and the financial statements and financial statement schedule
incorporated in this prospectus by reference from our annual report on Form 10-K
for the year ended January 1, 1999 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports
77
<PAGE> 81
appearing herein and incorporated herein by reference, and have been so included
and incorporated by reference in reliance upon the reports of such firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
- --------------------------------------------------------------------------------
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the Registration Statement on Form S-3 of which this prospectus is a part
(File No. 333-80527), as well as reports, proxy statements and other information
filed by us, at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Securities and Exchange
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You can obtain copies of this material from the Public Reference Room of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You can call the Securities and Exchange Commission
at 1-800-732-0330 for information regarding the operations of its Public
Reference Room. The Securities and Exchange Commission also maintains a World
Wide Web site at http:\\www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants like our company that
file electronically.
The Securities and Exchange Commission allows this Prospectus to
"incorporate by reference" other information that we file with the Commission,
which means that we can disclose important information to you by referring to
those documents. The information incorporated by reference is an important part
of this prospectus, and information that we file later with the Securities and
Exchange Commission will automatically update and replace this information. We
incorporate by reference the documents listed below and any future filings made
by us with the Securities and Exchange Commission under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 until we have sold all of the
securities that we have registered:
1. Our Annual Report on Form 10-K for the year ended January 1, 1999
(including information specifically incorporated by reference into our Form
10-K from our definitive Proxy Statement for our 1999 Annual Meeting);
2. Our Quarterly Report on Form 10-Q for the quarter ended April 2,
1999;
3. Our Current Report on Form 8-K filed May 7, 1999; and
4. The descriptions of our capital stock contained in a Registration
Statement on Form 8-A dated June 14, 1995 filed with the Securities and
Exchange Commission, including any amendments or reports filed for the
purpose of updating the descriptions.
If you make a request for this information in writing or by telephone, we
will provide you without charge, a copy of any or all of the information
incorporated by reference in the registration statement of which this prospectus
is a part. Requests for this information should be submitted in writing to the
Senior Vice President, General Counsel and Secretary, at our principal executive
offices at MiniMed Inc., 12744 San Fernando Road, Sylmar, California 91342 or by
telephone at (818) 362-5958.
78
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- January 2, 1998, January 1,
1999 and (Unaudited) April 2, 1999........................ F-3
Consolidated Statements of Income -- Years Ended December
27, 1996, January 2, 1998 and January 1, 1999 and
(Unaudited) the Three Months Ended April 3, 1998 and April
2, 1999................................................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income -- Years ended December 27, 1996,
January 2, 1998 and January 1, 1999 and (Unaudited) the
Three Months Ended April 2, 1999.......................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 27, 1996, January 2, 1998 and January 1, 1999 and
(Unaudited) the Three Months Ended April 3, 1998 and April
2, 1999................................................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of MiniMed Inc.:
We have audited the accompanying consolidated balance sheets of MiniMed
Inc. and its subsidiaries (the "Company") as of January 2, 1998 and January 1,
1999, and the related consolidated statements of income, of stockholders' equity
and comprehensive income, and of consolidated cash flows for each of the three
years in the period ended January 1, 1999. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 2,
1998 and January 1, 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 1, 1999 in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
Deloitte & Touche LLP
Los Angeles, California
March 5, 1999 (except for Note 15 as to which the date is April 1, 1999)
F-2
<PAGE> 84
MINIMED INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, APRIL 2,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 22,282,000 $ 27,303,000 $ 21,418,000
Short-term investments..................................... 18,713,000 13,476,000 13,482,000
Accounts receivable, net of allowance for doubtful accounts
of $6,250,000, $8,844,000 and $8,481,000 at January 2,
1998, January 1, 1999 and April 2, 1999, respectively.... 24,661,000 38,788,000 40,245,000
Inventories:
Raw materials............................................ 5,152,000 7,064,000 7,672,000
Work-in-process.......................................... 1,819,000 3,040,000 2,328,000
Finished goods........................................... 3,701,000 6,756,000 7,681,000
------------ ------------ ------------
Total inventories...................................... 10,672,000 16,860,000 17,681,000
Deferred income taxes...................................... 5,803,000 6,404,000 6,485,000
Prepaid expenses and other current assets.................. 1,279,000 3,835,000 7,082,000
------------ ------------ ------------
Total current assets................................... 83,410,000 106,666,000 106,393,000
NOTE RECEIVABLE FROM AFFILIATE............................. -- 3,600,000 3,600,000
LONG-TERM INVESTMENTS...................................... 4,118,000 4,826,000 5,140,000
OTHER ASSETS............................................... 1,348,000 11,522,000 11,367,000
LAND, BUILDINGS, PROPERTY AND
EQUIPMENT -- Net......................................... 16,943,000 31,038,000 34,400,000
------------ ------------ ------------
TOTAL ASSETS........................................... $105,819,000 $157,652,000 $160,900,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable and line of credit........ 2,453,000 1,101,000 882,000
Accounts payable........................................... 4,371,000 5,447,000 5,747,000
Accrued salaries and related benefits...................... 3,719,000 5,231,000 3,838,000
Accrued sales commissions.................................. 1,943,000 2,260,000 573,000
Accrued warranties......................................... 2,458,000 2,828,000 2,885,000
Income taxes payable....................................... 276,000 1,155,000 2,014,000
Other accrued expenses..................................... 4,781,000 3,873,000 2,955,000
------------ ------------ ------------
Total current liabilities.............................. 20,001,000 21,895,000 18,894,000
------------ ------------ ------------
Deferred tax liabilities................................... 2,007,000 865,000 984,000
Notes payable.............................................. 728,000 1,059,000 1,000,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 40,000,000 shares authorized;
26,520,480, 28,095,274 and 28,207,356 shares issued and
outstanding as of January 2, 1998, January 1, 1999 and
April 2, 1999, respectively.............................. 270,000 286,000 294,000
Additional capital......................................... 73,671,000 111,683,000 113,941,000
Accumulated other comprehensive income..................... 1,059,000 738,000 879,000
Retained Earnings.......................................... 8,083,000 21,126,000 24,908,000
------------ ------------ ------------
Total stockholders' equity............................. 83,083,000 133,833,000 140,022,000
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $105,819,000 $157,652,000 $160,900,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 85
MINIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 27, 1996 (1996), JANUARY 2, 1998
(1997) AND JANUARY 1, 1999 (1998) AND (UNAUDITED)
THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS ENDED
---------------------------------------- -----------------------------
1996 1997 1998 APRIL 3, 1998 APRIL 2, 1999
----------- ----------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES...................... $76,396,000 $99,492,000 $138,577,000 $26,366,000 $40,911,000
COST OF SALES.................. 32,314,000 38,704,000 51,518,000 9,784,000 13,838,000
----------- ----------- ------------ ----------- -----------
GROSS PROFIT................... 44,082,000 60,788,000 87,059,000 16,582,000 27,073,000
----------- ----------- ------------ ----------- -----------
OPERATING EXPENSES:
Selling, general and
administrative............ 32,101,000 41,237,000 57,059,000 11,391,000 17,499,000
Research and development..... 7,900,000 9,447,000 16,531,000 3,317,000 5,296,000
Research and development
contract.................. -- -- (6,000,000) (1,500,000) (1,500,000)
Merger related expenses...... -- 1,000,000 -- -- --
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 40,001,000 51,684,000 67,590,000 13,208,000 21,295,000
----------- ----------- ------------ ----------- -----------
OPERATING INCOME............... 4,081,000 9,104,000 19,469,000 3,374,000 5,778,000
INTEREST EXPENSE............... (163,000) (237,000) (47,000) -- (46,000)
OTHER INCOME, Including
interest income.............. 1,062,000 1,851,000 1,503,000 291,000 340,000
----------- ----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES..... 4,980,000 10,718,000 20,925,000 3,665,000 6,072,000
PROVISION FOR INCOME TAXES..... 1,662,000 4,029,000 7,882,000 1,361,000 2,290,000
----------- ----------- ------------ ----------- -----------
NET INCOME.............. $ 3,318,000 $ 6,689,000 $ 13,043,000 $ 2,304,000 $ 3,782,000
=========== =========== ============ =========== ===========
Basic earnings per share....... $ 0.14 $ 0.26 $ 0.49 $ 0.09 $ 0.13
=========== =========== ============ =========== ===========
Basic weighted average shares
outstanding.................. 23,882,000 25,810,000 26,880,000 26,562,000 28,148,000
=========== =========== ============ =========== ===========
Diluted earnings per share..... $ 0.13 $ 0.25 $ 0.46 $ 0.08 $ 0.13
=========== =========== ============ =========== ===========
Diluted weighted average shares
outstanding.................. 25,134,000 27,112,000 28,332,000 27,854,000 30,024,000
=========== =========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 86
MINIMED INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 2, 1999
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED RETAINED
--------------------- ADDITIONAL OTHER EARNINGS
NUMBER OF PAID-IN COMPREHENSIVE COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT CAPITAL INCOME INCOME DEFICIT) TOTAL
---------- -------- ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 30, 1995... 23,561,634 $240,000 $ 43,804,000 $(1,924,000) $ 42,120,000
Exercise of stock options.... 406,040 4,000 984,000 988,000
Tax benefit associated with
stock option
exercises.................. 994,000 994,000
Issuance of stock under
employee stock plan........ 29,644 272,000 272,000
Issuance of stock for
technology license......... 20,000 285,000 285,000
Stock awards to directors.... 4,800 2,000 152,000 154,000
Net income................... 3,318,000 3,318,000 3,318,000
---------- -------- ------------ =========== ---------- ----------- ------------
BALANCE, DECEMBER 27, 1996... 24,022,118 246,000 46,491,000 1,394,000 48,131,000
Issuance of common stock in
public offering
(net of expenses).......... 1,850,000 18,000 22,146,000 22,164,000
Issuance of common stock for
exercise of warrants....... 400,000 4,000 2,596,000 2,600,000
Exercise of stock options.... 192,034 2,000 515,000 517,000
Tax benefit associated with
stock option
exercises.................. 1,276,000 1,276,000
Issuance of stock under
employee stock plan........ 49,812 547,000 547,000
Stock awards to directors.... 6,516 100,000 100,000
Comprehensive income
Net income................. $ 6,689,000 6,689,000 6,689,000
Other comprehensive income:
Unrealized holding gain
on security, net of
$747,000 in deferred
income taxes........... 1,371,000 1,371,000
Foreign currency
translation
adjustments............ (312,000) (312,000)
-----------
Other comprehensive
income................... 1,059,000 $1,059,000
-----------
Comprehensive income......... $ 7,748,000
---------- -------- ------------ =========== ---------- ----------- ------------
BALANCE, JANUARY 2, 1998..... 26,520,480 270,000 73,671,000 1,059,000 8,083,000 83,083,000
Issuance of common stock in
private offering
(net of expenses).......... 1,000,000 10,000 29,980,000 29,990,000
Exercise of stock options.... 514,014 6,000 1,820,000 1,826,000
Tax benefit associated with
stock option
exercises.................. 4,972,000 4,972,000
Issuance of stock under
employee stock plan........ 57,716 1,164,000 1,164,000
Stock awards to directors.... 3,064 76,000 76,000
Comprehensive income
Net income................. $13,043,000 13,043,000 13,043,000
Other comprehensive income:
Unrealized holding loss
on security, net of
$106,000 in deferred
income taxes........... (326,000) (326,000)
Foreign currency
translation
adjustments............ 5,000 5,000
-----------
Other comprehensive
income................... (321,000) (321,000)
-----------
Comprehensive income......... $12,722,000
---------- -------- ------------ =========== ---------- ----------- ------------
BALANCE, JANUARY 1, 1999..... 28,095,274 286,000 111,683,000 738,000 21,126,000 133,833,000
Exercise of stock options
(unaudited)................ 111,382 8,000 596,000 604,000
Tax benefit associated with
stock option
exercises (unaudited)...... 1,630,000 1,630,000
Stock awards to directors
(unaudited)................ 700 32,000 32,000
Comprehensive income
Net income (unaudited)..... $ 3,782,000 3,782,000 3,782,000
Other comprehensive income:
Unrealized holding gain
on security, net of
$119,000 in deferred
income taxes
(unaudited)............ 195,000 195,000
Foreign currency
translation adjustments
(unaudited)............ (54,000) (54,000)
-----------
Other comprehensive income
(unaudited).............. 141,000 141,000
-----------
Comprehensive income
(unaudited)................ $ 3,923,000
---------- -------- ------------ =========== ---------- ----------- ------------
BALANCE, APRIL 2, 1999
(unaudited)................ 28,207,356 $294,000 $113,941,000 $ 879,000 $24,908,000 $140,022,000
========== ======== ============ ========== =========== ============
Comprehensive income
(unaudited) three months
ended April 3, 1998........ $ 1,454,000
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 87
MINIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 27, 1996 (1996), JANUARY 2, 1998 (1997)
AND JANUARY 1, 1999 (1998) AND (UNAUDITED)
THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS ENDED
----------------------------------------- -----------------------------
1996 1997 1998 APRIL 3, 1998 APRIL 2, 1999
----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 3,318,000 $ 6,689,000 $ 13,043,000 $ 2,304,000 $ 3,782,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ 2,025,000 2,971,000 4,134,000 1,053,000 1,481,000
Directors' fees paid in common stock................ 53,000 100,000 76,000 -- 32,000
Deferred income taxes............................... (1,316,000) (2,354,000) (1,629,000) (558,000) (81,000)
Tax benefit from exercise of non-qualified stock
options........................................... 994,000 1,276,000 4,972,000 -- 1,630,000
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (6,329,000) (6,966,000) (14,439,000) 1,477,000 (1,457,000)
Inventories....................................... (1,868,000) (2,989,000) (8,908,000) (1,602,000) (821,000)
Prepaid expenses and other current assets......... 408,000 73,000 (2,464,000) 384,000 (3,247,000)
Other assets...................................... (367,000) (771,000) 940,000 (47,000) 35,000
Accrued sales commissions......................... 954,000 375,000 317,000 (1,631,000) (1,687,000)
Accrued salaries and related benefits............. 755,000 1,484,000 1,512,000 (1,035,000) (1,393,000)
Accounts payable.................................. 370,000 833,000 (459,000) (2,495,000) 300,000
Accrued warranties................................ (370,000) (415,000) 370,000 138,000 57,000
Income taxes payable.............................. (192,000) (377,000) 880,000 1,438,000 859,000
Other accrued expenses............................ 181,000 2,382,000 (1,266,000) (2,625,000) (918,000)
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities...................................... (1,384,000) 2,311,000 (2,921,000) (3,199,000) (1,428,000)
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES --
Short-term investments.............................. (793,000) (9,196,000) 5,237,000 14,081,000 (6,000)
Acquisition of marketable securities................ -- (2,000,000) -- -- --
Acquisition of Dartec A.B........................... -- -- (2,670,000) (2,544,000) --
Acquisition of Diabetes Support Systems, Inc........ -- -- (3,052,000) -- --
Long-term investments............................... -- -- (1,140,000) -- --
Purchase of land, buildings, property and
equipment......................................... (4,171,000) (6,072,000) (18,570,000) (3,393,000) (4,724,000)
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) investing
activities........................................ (4,964,000) (17,268,000) (20,195,000) 8,144,000 (4,730,000)
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES --
Issuance of notes payable........................... 727,000 1,068,000 -- -- --
Repayment of notes payable.......................... (600,000) -- (2,820,000) (2,811,000) (278,000)
Repayment of notes payable in connection with DSS
acquisition....................................... -- -- (2,028,000) -- --
Capital contributions............................... 101,000 -- -- -- --
Proceeds from public offering, net of expenses...... -- 22,164,000 -- -- --
Proceeds from private offering, net of expenses..... -- -- 29,990,000 -- --
Proceeds from exercises of warrants................. -- 2,600,000 -- -- --
Proceeds from stock option exercises................ 988,000 517,000 1,826,000 -- 604,000
Proceeds from issuance of common stock under
employee stock plan............................... 272,000 547,000 1,164,000 -- --
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities........................................ 1,488,000 26,896,000 28,132,000 (2,811,000) 326,000
----------- ------------ ------------ ----------- -----------
Effect of cumulative foreign currency translation
adjustment on cash and equivalents.................. -- (62,000) 5,000 147,000 (53,000)
----------- ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (4,860,000) 11,877,000 5,021,000 2,281,000 (5,885,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 15,265,000 10,405,000 22,282,000 22,282,000 27,303,000
----------- ------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $10,405,000 $ 22,282,000 $ 27,303,000 $24,563,000 $21,418,000
=========== ============ ============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION --
Cash paid during the period for:
Interest.......................................... $ 163,000 $ 237,000 $ 62,000 $ 35,000 $ 2,000
Income taxes...................................... $ 2,120,000 $ 6,110,000 $ 3,854,000 $ 461,000 $ 265,000
</TABLE>
F-6
<PAGE> 88
MINIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999 AND
(UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITY -- During 1996 the Company issued 20,000 shares of common stock to a
supplier in exchange for a technology license. The Company also issued 4,800,
6,516 and 3,064 shares of common stock to certain Directors in lieu of fees
during 1996, 1997 and 1998, respectively. The Company recorded an unrealized
holding gain of $1,371,000 during 1997, an unrealized holding loss of $326,000
during 1998, an unrealized holding loss of $997,000 during the three months
ended April 3, 1998 and an unrealized holding gain of $195,000 during the three
months ended April 2, 1999, net of estimated income taxes on marketable
securities classified as long-term investments available for sale. During 1997,
the Company issued 749,768 shares of common stock to effect an acquisition of a
distributor accounted for as a pooling of interests. During 1998, the Company
accepted a $3.6 million note receivable from a related party in conjunction with
the sale of $3.0 million of net implantable pump inventory components and
$600,000 of net implantable pump fixed assets.
On October 31, 1998, the Company acquired substantially all of the assets
and certain of the liabilities of DSS. In connection with this acquisition, the
Company paid cash as follows:
<TABLE>
<S> <C>
Assets acquired:
Property and equipment...................................... $ 188,000
Accounts receivable......................................... 1,438,000
Goodwill.................................................... 8,500,000
Inventories................................................. 304,000
Other assets................................................ 93,000
Liabilities assumed:
Accounts payable and accrued expenses....................... (3,643,000)
Notes payable............................................... (2,028,000)
Long-term debt issued to seller............................. (1,800,000)
-----------
Cash paid in acquisition.................................... $ 3,052,000
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 89
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
The fiscal years referenced herein are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR YEAR ENDED
----------- -----------------
<S> <C>
1999........................................ December 31, 1999
1998........................................ January 1, 1999
1997........................................ January 2, 1998
1996........................................ December 27, 1996
</TABLE>
1. GENERAL INFORMATION
Operations -- MiniMed Inc. ("MiniMed" or the "Company") develops,
manufactures and markets medical devices for drug delivery and monitoring
patients with diabetes and other medical conditions. The drug delivery systems
include external and implantable microinfusion drug pumps and related disposable
products which provide long-term delivery of medication for treatment of chronic
disorders. The Company is developing glucose sensor systems which will, if
successful, provide diabetic patients with continuous monitoring of glucose
levels and may ultimately be linked to the microinfusion pumps to create an
artificial pancreas. Other development efforts focus on developing non-diabetes
uses of the Company's technologies. The Company generally markets its products
through either a direct sales force or independent distributors in the United
States and a combination of direct sales representatives and independent
distributors in international markets. The main markets for products are the
United States and Western Europe. Through its acquisitions of Home Medical
Supply, Inc. and its affiliated companies ("HMS") and Dartec AB ("Dartec") in
fiscal 1997 and Diabetes Support Systems, Inc. ("DSS") in fiscal 1998, the
Company also acts as a distributor of additional diabetes supplies and operates
a pharmacy.
Unaudited Consolidated Quarterly Financial Statements -- The consolidated
financial data as of and for the three months ended April 3, 1998 and April 2,
1999 have been derived from our unaudited financial statements. In the opinion
of management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the financial position and the results of operations as of such dates and for
such periods. The results for the three month period ended April 2, 1999 are not
necessarily indicative of the results to be expected for the entire year or the
quarters following in 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Split -- On March 15, 1999, the Company announced a 2-for-1 stock
split, in the form of a stock dividend, to result in the issuance of one
additional share of common stock for every share of common stock outstanding.
The stock split was effective April 1, 1999 for holders of record at the close
of business on that date and will be distributed on April 16, 1999. In
accordance with Statement of Financial Accounting Standard
F-8
<PAGE> 90
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
("SFAS") No. 128, "Earnings per Share," the Company has recorded the effects of
this stock split on share and per share amounts for all periods presented.
Principles of Consolidation -- The accompanying financial statements
include the accounts of the Company and its wholly owned subsidiaries, MiniMed
Distribution Corp., MiniMed S.A., MiniMed GMBH, and Dartec AB, and its indirect
subsidiaries. All intercompany accounts and transactions have been eliminated.
The financial statements of MiniMed S.A., MiniMed GMBH and Dartec AB have been
translated using the exchange rate at the end of each period for balance sheet
items and the weighted average exchange rate during each period for operating
results. Adjustments arising from the translation of assets located outside the
United States are recorded as a component of comprehensive income.
Reclassifications -- Certain reclassifications have been made to various
balances in the 1996 and 1997 financial statements to conform with current year
presentation.
Cash and Cash Equivalents -- The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
Investments -- The Company classifies all of its marketable investments as
available-for-sale, with unrealized holding gains and losses recorded directly
to comprehensive income. Cost approximates fair value for all short-term
investments. Long-term investments represent a $2,000,000 investment in the
common stock of Trimeris, Inc. The fair value of this investment was $4,118,000
and $3,686,000 at January 2, 1998 and January 1, 1999, respectively. The Company
recorded an unrealized holding gain of $1,371,000 during 1997 and an unrealized
holding loss of $326,000 during 1998 on this investment, net of $747,000 and
$106,000, respectively in estimated income taxes which were recorded as a
deferred income tax liability. Included in long-term investments at January 1,
1999 was a $1,140,000 investment in 7.0% of the common stock of Pharmaceutical
Discovery Corporation ("PDC") which is recorded using the cost method. Realized
gains and losses and declines in value judged to be other-than-temporary are
included in investment income, which is included in other income in the
Company's statement of income. Realized gains and losses on short-term
investments for 1997 and 1998 were not material. The Company's investment policy
is to invest idle and excess funds in high grade, short-term, fixed income
securities. The primary objective of investment activities is to protect capital
value.
Inventories -- Inventories are stated at the lower of cost or net
realizable value. Cost is determined using the first-in, first-out method.
Land, Buildings, Property and Equipment and Depreciation -- Land,
buildings, property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets.
F-9
<PAGE> 91
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
Research and Development -- Research and development costs are expensed as
incurred.
Research and Development Contract -- On March 31, 1998, the Company signed
a research and development contract with American Medical Instruments, Inc.
("AMI"), a member of The Marmon Group of Companies. Under terms of this
agreement, the Company can receive up to $12.0 million in funding related to two
research projects. The Company anticipates completion of these projects during
fiscal 1999 and has recorded $6.0 million related to this contract during fiscal
1998. These revenues have been recorded as a reduction of operating expenses.
Costs related to the completion of the contractual obligations are included in
research and development expense.
Under terms of this contract, the Company may sell products developed under
the agreement on a worldwide basis, except for Japan, subject to the payment of
royalties to AMI. The Company may purchase the technology related to these
projects from AMI at prices ranging from $13.5 million to $19.0 million through
April 30, 2002. The Company has applied the principles of FASB Statement No. 68
"Accounting for Research and Development Contracts" to account for this
transaction.
Income Taxes -- Income taxes are provided for taxes currently payable or
refundable, and deferred income taxes arising from future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The effects of income taxes are measured based on enacted tax laws and
rates. An allowance is provided for net deferred tax assets for which
realization is not likely.
Revenues and Concentration of Credit Risk -- The Company recognizes revenue
from product sales when the goods are shipped to its customers. During 1996,
1997 and 1998, the Company derived approximately 92.8%, 93.4% and 92.4%,
respectively, of its revenues from domestic sales. A significant portion of
domestic revenues represent products sold by the Company directly to patients.
The Company bills these patients directly or processes billing to their health
care payors, which include indemnity insurers, HMOs, PPOs and various
governmental agencies. Levels of payments from third-party payors and patients
vary, depending upon the specific benefits provided under each patient's
coverage. On an overall basis, the Company's accounts receivable balances are
subject to credit risk similar to other entities dependent upon third-party
health care payors for reimbursement.
Foreign revenues outside of France, Germany, Austria, Belgium, the
Netherlands and Sweden represent sales to independent dealers. Sales to the
European dealers may be shipped from the United States or through the Company's
European subsidiaries. Certain foreign sales are transacted directly with
patients by the Company's European subsidiaries, with reimbursement provided by
the appropriate third party. No single customer represents more than 10% of the
Company's sales for any period presented.
The Company has recorded an allowance for doubtful accounts to account for
the difference between recorded revenues and anticipated collections from
distributors, patients
F-10
<PAGE> 92
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
and third-party payors. The allowance and provision for bad debts are adjusted
periodically based upon the Company's evaluation of historical collection
experience, industry reimbursement trends and other relevant factors. The
Company determines the allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.
Stock Based Compensation -- The Company has granted stock options for a
fixed number of shares to employees with an exercise price equal to the fair
market value of the shares at the date of grant. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," which disclosures are presented in Note 11. The Company accounts
for stock option grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants.
Pervasiveness 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 certain
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. The Company's most significant estimates relate to the allowance for
uncollectible accounts, provisions for obsolete inventory and accrued warranty
obligations.
3. BUSINESS COMBINATION
On January 2, 1998, the Company acquired Dartec, a distributor of diabetes
products, including the Company's products, located in Sweden. The Company
purchased substantially all of the net assets of Dartec for $2.7 million. In
connection with this purchase, the Company recorded $2.7 million of goodwill to
other long-term assets. This goodwill will be amortized over a period of 15
years on a straight-line basis.
On October 31, 1998, the Company acquired DSS, a distributor of diabetes
products, including the Company's products, located in South Florida. The
Company purchased substantially all of the net assets of DSS, and certain
liabilities, for $3.1 million in cash and notes payable totaling $1.8 million.
The notes payable bear interest at 6.0% and are due and payable $800,000 on
October 31, 1999 and $1.0 million on October 31, 2000. In connection with the
purchase of DSS, the Company recorded $8.5 million of goodwill to other
long-term assets. This goodwill will be amortized over a period of 25 years on a
straight-line basis.
F-11
<PAGE> 93
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
Dartec and DSS are included in the accompanying financial statements
subsequent to acquisition. Had the acquisitions occurred at the beginning of
fiscal 1997, pro forma combined (unaudited) operating results would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 2, 1998 JANUARY 1, 1999
--------------- ---------------
<S> <C> <C>
Net Sales................................ $108,422,000 $148,579,000
Net Income............................... $ 5,815,000 $ 12,420,000
Basic Earnings Per Share................. $ 0.23 $ 0.46
Basic weighted average shares
outstanding............................ 25,810,000 26,880,000
Diluted Earnings Per Share............... $ 0.21 $ 0.44
Diluted weighted average shares
outstanding............................ 27,112,000 28,332,000
</TABLE>
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosure of Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments for which it is
practical to estimate that value. For cash and cash equivalents the carrying
amount reported in the balance sheet represents fair market value. For accounts
payable and all notes payable, the carrying amount on the balance sheet also
approximates fair value. The fair value of the $3.6 million note receivable from
an affiliate cannot be determined due to the related party nature of the note.
5. NOTES PAYABLE AND LINE OF CREDIT
Notes payable and line of credit consisted of the following at January 2,
1998, January 1, 1999 and April 2, 1999:
<TABLE>
<CAPTION>
AVERAGE JANUARY 2, JANUARY 1, APRIL 2,
INTEREST RATE 1998 1999 1999
------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT
Bank borrowings................... 9.75 % $2,125,000 $ 278,000 $ --
Current portion of long-term
debt............................ 9.125% 328,000 23,000 82,000
Note payable...................... 6.0 % -- 800,000 800,000
---------- ---------- ----------
Total Short-Term Debt............. $2,453,000 $1,101,000 $ 882,000
---------- ---------- ----------
LONG-TERM
Various notes -- due in 2000...... 7.563% $ 728,000 $1,059,000 $1,000,000
</TABLE>
Short-term borrowings consisted primarily of borrowings from U.S. banks.
F-12
<PAGE> 94
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
6. RELATED PARTY TRANSACTIONS
Facilities Agreements -- During 1998, the Company leased certain warehouse
facilities from Advanced Bionics Corporation ("ABC"), a Company owned primarily
by the individual who is currently MiniMed's largest single stockholder,
Chairman and Chief Executive Officer. Rental expense related to this lease with
ABC was $37,000 during 1998. The Company has leased certain operating facilities
to its Chairman and Chief Executive Officer under a five-year lease commitment.
Rents charged under this agreement were $75,000, $144,000, and $144,000 for the
years ended December 27, 1996, January 2, 1998, and January 1, 1999,
respectively. Rental income related to this lease is recorded in other income.
Sale of Implantable Insulin Pump Assets -- On September 1, 1998, the
Company sold assets and transferred technology related to its implantable pump
program to Medical Research Group, LLC ("MRG") and entered into a series of
related transactions. MRG was founded by Alfred E. Mann, founder, Chairman, CEO
and largest stockholder of MiniMed. Mr. Mann continues to hold a substantial
equity interest in MRG.
MiniMed sold assets, consisting primarily of inventories and equipment to
MRG in exchange for a note receivable of approximately $3.6 million. No gain or
loss has been recognized on the sale of these assets. The note receivable is due
and payable in full on December 31, 2003, and accrued interest is payable on
December 31 of each year prior to maturity. The note bears interest at a rate of
7.0% annually. The note is secured by the assets sold to MRG and guaranteed by
Mr. Mann. The Company has also leased facilities and improvements to MRG at
which MRG will carry out its activities. The obligations of MRG under such lease
are guaranteed by Mr. Mann. Certain employees of the Company involved in the
manufacturing operations and research and development activities related to the
implantable pump product line have become employees of MRG. The Company retained
exclusive distribution rights to the implantable pump product line for specific
medical conditions, including diabetes. MiniMed is required to purchase
implantable pump units from MRG at negotiated prices, and is obligated to
purchase minimum quantities in 1999, 2000 and 2001 and must purchase minimum
quantities in future periods in order to preserve its exclusivity.
F-13
<PAGE> 95
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
The Company is responsible for pursuing regulatory approval of the
implantable pump for the treatment of diabetes and has provided MRG with a
working capital line of credit of $3.0 million, which will bear interest at 7.0%
annually. Any amounts borrowed under the line of credit are due on or before
December 31, 2001 and will be secured by a pledge of MiniMed common stock owned
by Mr. Mann. To date, MRG has not borrowed any funds under this line of credit.
Future minimum purchase commitments for implantable pump units based upon
current prices are:
<TABLE>
<S> <C>
1999.............................................. $ 4,575,000
2000.............................................. 7,604,000
2001.............................................. 8,935,000
-----------
Total............................................. $21,114,000
===========
</TABLE>
MRG has also granted MiniMed an option to acquire exclusive worldwide
distribution rights to MRG's long-term glucose sensor, currently under
development, for $30.0 million. The option is exercisable upon MRG's achievement
of certain development milestones. MRG is attempting to integrate its long-term
glucose sensor technology with the implantable pump. MRG also agreed to pursue
the development of certain improvements to the electronic design of the
implantable pump.
7. LONG-TERM INVESTMENTS AND OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, APRIL 2,
1998 1999 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Technology license..................... $ 197,000 $ 145,000 $ 133,000
Inventory components, non-current...... 999,000 -- --
Goodwill in connection with Dartec
acquisition.......................... -- 2,670,000 2,636,000
Goodwill in connection with DSS
acquisition.......................... -- 8,444,000 8,358,000
Other.................................. 152,000 263,000 240,000
---------- ----------- -----------
$1,348,000 $11,522,000 $11,367,000
========== =========== ===========
</TABLE>
F-14
<PAGE> 96
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
Long-term investments consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, APRIL 2,
1998 1999 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Investment in Trimeris common stock -- at
fair value............................. $4,118,000 $3,686,000 $4,000,000
Investment in PDC common stock -- at
cost................................... -- 1,140,000 1,140,000
---------- ---------- ----------
$4,118,000 $4,826,000 $5,140,000
========== ========== ==========
</TABLE>
8. LAND, BUILDINGS, PROPERTY AND EQUIPMENT -- NET
Land, buildings, property and equipment, net consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
JANUARY 2, JANUARY 1, APRIL 2, USE LIVES
1998 1999 1999 (YEARS)
----------- ----------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land, buildings and
improvements............ $10,625,000 $13,244,000 $ 14,500,000 20 to 40
Machinery and equipment... 7,589,000 17,332,000 18,845,000 3 to 5
Tooling and molds......... 2,493,000 2,352,000 2,359,000 3 to 5
Computer software......... 944,000 1,989,000 2,682,000 3
Furniture and fixtures.... 1,948,000 5,301,000 6,569,000 7
----------- ----------- ------------
23,599,000 40,218,000 44,955,000
Less accumulated
depreciation............ (6,656,000) (9,180,000) (10,555,000)
----------- ----------- ------------
Total................... $16,943,000 $31,038,000 $ 34,400,000
=========== =========== ============
</TABLE>
9. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated in the following table. The
reconciliation between the numerator and denominator for basic and diluted EPS
is as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
DECEMBER 27, 1996
Basic EPS
Net Income Applicable to Common Stock... $ 3,318,000 23,882,000 $.14
=========== ========== ====
Effect of Dilutive Securities
</TABLE>
F-15
<PAGE> 97
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Warrants................................ 112,000
Stock Options........................... 1,140,000
----------- ---------- ----
Diluted EPS
Net Income Applicable to Common Stock... $ 3,318,000 25,134,000 $.13
----------- ---------- ----
JANUARY 2, 1998:
Basic EPS
Net Income Applicable to Common Stock... $ 6,689,000 25,810,000 $.26
=========== ========== ====
Effect of Dilutive Securities
Warrants................................ 60,000
Stock Options........................... 1,242,000
----------- ---------- ----
Diluted EPS
Net Income Applicable to Common Stock... $ 6,689,000 27,112,000 $.25
=========== ========== ====
JANUARY 1, 1999:
Basic EPS
Net Income Applicable to Common Stock... $13,043,000 26,880,000 $.49
=========== ========== ====
Effect of Dilutive Securities
Stock Options........................... 1,452,000
----------- ---------- ----
Diluted EPS
Net Income Applicable to Common Stock... $13,043,000 28,332,000 $.46
----------- ---------- ----
APRIL 3, 1998 (UNAUDITED):
Basic EPS
Net Income Applicable to Common Stock
(unaudited)........................... $ 2,304,000 26,562,000 $.09
=========== ========== ====
Effect of Dilutive Securities
Stock Options (unaudited)............... 1,292,000
----------- ---------- ----
Diluted EPS
Net Income Applicable to Common Stock
(unaudited)........................... $ 2,304,000 27,854,000 $.08
=========== ========== ====
APRIL 2, 1999 (UNAUDITED):
Basic EPS
Net Income Applicable to Common Stock
(unaudited)........................... $ 3,782,000 28,148,000 $.13
=========== ========== ====
Effect of Dilutive Securities
Stock Options (unaudited)............... 1,876,000
----------- ---------- ----
</TABLE>
F-16
<PAGE> 98
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Diluted EPS
Net Income Applicable to Common Stock
(unaudited)........................... $ 3,782,000 30,024,000 $.13
=========== ========== ====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
On September 11, 1996, the Company filed an action against Fimed, Inc.
("Fimed") seeking rescission of a product distribution contract. Subsequent to
the filing of this action, Fimed filed a counterclaim seeking compensatory
damages of approximately $400 million plus punitive damages. The Company
believes that it has meritorious defenses to the counterclaims asserted by
Fimed. The Court appointed a retired Judge to act as an Independent Expert
pursuant to California law to evaluate, assuming liability, the amount of
damages, if any, sustained by Fimed. The hearing on this matter was held in
February 1999. Fact discovery pertaining to the litigation has been largely
completed. Trial in this matter was set to commence May 1999; however, on March
30, 1999, the Court indicated that the trial will be continued until July 1999
at the earliest. The Company has been pursuing its claims and is defending
against Fimed's claims vigorously.
During 1998, the Company integrated the operations of Home Medical Supply,
Inc. and its affiliated companies ("HMS"), which the Company acquired in fiscal
1997. In connection with these activities, the Company discovered certain
business practices relating to charges billed to the State of Florida for health
care services provided through an affiliated pharmacy. These practices were
implemented by HMS' prior owners and may potentially result in liability to the
Company. The Company has received no notice of any action which is pending or
threatened against it in connection therewith. The Company has corrected such
practices, notified the State of Florida authorities of its findings, initiated
legal action against the prior owners to seek indemnification for any such
liability and is pursuing other legal remedies. The amount of liability to the
Company, if any, cannot be determined at this time, although the Company
believes that indemnification for such liability would be available from HMS'
prior owners.
During the normal course of business, the Company may be subject to
litigation involving various business matters. Management believes that an
adverse outcome of any such known matters would not have a material adverse
impact on the Company.
F-17
<PAGE> 99
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
11. STOCKHOLDERS' EQUITY
Stock Options and Purchase Plan -- The Company has granted stock options
under its incentive stock plan ("stock option plan"), which provides that
options may have a term of up to 10 years and become exercisable and vest in
annual increments of up to six years. Options to purchase an additional
1,873,200 shares are available for grant at January 1, 1999. Stock option plan
activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding options at December 30, 1995........... 2,853,936 $ 3.12
Options granted.................................... 607,694 $ 8.35
Options exercised.................................. (406,040) $ 2.46
Options canceled................................... (143,298) $ 4.48
---------
Outstanding options at December 27, 1996........... 2,912,292 $ 3.19
Options granted.................................... 621,000 $16.61
Options exercised.................................. (192,034) $ 2.69
Options canceled................................... (191,598) $ 3.51
---------
Outstanding options at January 2, 1998............. 3,149,660 $ 6.51
Options granted.................................... 872,000 $20.18
Options exercised.................................. (514,014) $ 3.84
Options canceled................................... (147,028) $13.71
---------
Outstanding options at January 1, 1999............. 3,360,618 $ 9.99
=========
</TABLE>
The following table summarizes information about stock options outstanding
at January 1, 1999:
<TABLE>
<CAPTION>
SHARES
RANGE OF NUMBER WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
EXERCISE OUTSTANDING AT AVERAGE REMAINING AVERAGE AT JANUARY 1, AVERAGE
PRICES JANUARY 1, 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
-------- --------------- ----------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.25 - 3.63 705,754 2.24 $ 2.56 669,894 $ 2.52
$ 3.83 - 3.83 787,800 4.11 3.83 469,200 3.83
$ 4.38 - 14.32 548,864 5.23 7.68 240,432 7.39
$14.63 - 18.88 674,000 6.64 16.49 118,200 15.22
$19.38 - 29.38 644,200 7.11 20.85 99,600 20.38
--------- ---- ------ --------- ------
3,360,618 4.98 $ 9.99 1,597,326 $ 5.69
========= ==== ====== ========= ======
</TABLE>
During 1996, the Company's stockholders approved an employee stock purchase
plan ("stock purchase plan"). Substantially all of the Company's employees are
eligible to participate in the stock purchase plan through regular payroll
deductions. Options under the stock purchase plan are granted for an
indeterminable number of shares on semi-annual offering dates and are
automatically exercised six months from the offering date,
F-18
<PAGE> 100
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
subject to employee withdrawal from the stock purchase plan. Options are
exercised at the lesser of: (1) 85% of the fair market value of the common stock
on the offering date; or (2) 85% of the fair market value of the common stock on
the exercise date. Sale of shares issued under the stock purchase plan is
prohibited for one year from the exercise date. Transactions related to the
employee stock purchase plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Shares available........................... 1,000,000
Exercised.................................. 29,644 $ 9.19
--------- ------
Shares available at December 27, 1996...... 970,356
Exercised.................................. 49,812 $10.99
--------- ------
Shares available at January 2, 1998........ 920,544
Exercised.................................. 57,716 $20.17
--------- ------
Shares available at January 1, 1999........ 862,828
--------- ------
</TABLE>
All stock options are granted at the fair market value of the Company's
common stock at the grant date. The weighted average estimated fair value of
options granted in 1996, 1997 and 1998 was $2,089,754, $6,268,628 and
$9,417,535, respectively. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plan and stock purchase plan.
Accordingly, no compensation cost for the Company's stock option plan and stock
purchase plan has been recognized in 1996, 1997 or 1998. Had compensation cost
for the Company's stock option plan and stock purchase plan been determined
based on the fair value at the grant dates for awards under those plans
consistent with SFAS 123, "Accounting for Stock Based Compensation," the
Company's net income and earnings per share for the years ended December 27,
1996, January 2, 1998 and January 1, 1999 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
DECEMBER 27, JANUARY 2, JANUARY 1,
1996 1998 1999
------------ ---------- -----------
<S> <C> <C> <C>
Net income to common stockholders:
As reported........................ $3,318,000 $6,689,000 $13,043,000
Pro forma.......................... $2,458,000 $5,142,000 $ 8,835,000
Net income per common and common
equivalent share:
As reported -- basic............... $ 0.14 $ 0.26 $ 0.49
Pro forma.......................... 0.11 0.20 0.33
As reported -- diluted............. 0.13 0.25 0.46
Pro forma.......................... 0.10 0.19 0.31
</TABLE>
F-19
<PAGE> 101
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
The fair value of options granted under the stock option plan during 1996,
1997 and 1998 was determined using the Black Scholes option pricing model
utilizing the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 27, JANUARY 2, JANUARY 1,
1996 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Dividend yield..................... 0% 0% 0%
Volatility......................... 66% 48% 51%
Risk-free interest rate............ 6.09% 5.68% 5.45%
Expected lives..................... 5 years 7 years 7 years
</TABLE>
Pro forma compensation cost of options granted under the employee stock
purchase plan is measured based upon the discount from market value.
Stockholders' Rights Plan -- In May 1995, the Company's Board of Directors
approved a plan to protect stockholders' rights in the event of a proposed
takeover of the Company. Under the plan, the Board of Directors declared a
dividend distribution of a Series B Preferred Stock purchase right (a "Right")
on each share of the Company's common stock (a "Common Share") outstanding on
July 24, 1995, and each Common Share issued thereafter. Upon becoming
exercisable, each Right will entitle its holder to purchase 1/1000(th) of a
share of Series B Preferred Stock at an exercise price of $65.00. The Rights are
not exercisable or transferable apart from the Common Shares unless certain
events occur, including a public announcement that a person has acquired or
announced a tender or exchange offer to acquire 15% or more of the outstanding
Common Shares. Unless the Rights are redeemed, in the event that an Acquiring
Person acquires 15% or more of the outstanding Common Shares (other than
pursuant to a tender offer deemed fair by the Company's Board of Directors),
each Right not held by the Acquiring Person will entitle the holder to purchase
for the exercise price that number of Common Shares (or other shares or assets)
having market value equal to two times the exercise price of the Right. In the
event that (i) the Company is acquired in a merger or business combination in
which the Company is not the surviving corporation or in which the Common Shares
are exchanged for stock or assets of another entity, or (ii) 50% or more of the
Company's consolidated assets or earning power is sold, each Right not held by
an Acquiring Person will entitle the holder to purchase for the exercise price
that number of shares of common stock of the acquiring company having a market
value equal to two times the exercise price. The Rights are redeemable, in whole
but not in part, at the Company's option, at $0.01 per Right at any time prior
to becoming exercisable and in certain other circumstances. The Rights expire in
2005 unless they have been earlier redeemed or exchanged.
F-20
<PAGE> 102
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan which is available to
substantially all full-time employees of the Company. During 1995 and future
periods, the Company is obligated to contribute a certain percentage of all
employee contributions with limits specified by the Plan. Contributions to the
Plan in the years ended December 27, 1996, January 2, 1998 and January 1, 1999
were $99,000, $307,000 and $387,000, respectively.
13. INCOME TAXES
Pretax income from continuing operations for the three years in the period
ended January 1, 1999 was subject to income tax in the following jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 27, JANUARY 2, JANUARY 1,
1996 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Domestic...................... $5,402,000 $11,474,000 $21,270,000
Foreign....................... (422,000) (756,000) (345,000)
---------- ----------- -----------
Pretax income (loss).......... $4,980,000 $10,718,000 $20,925,000
========== =========== ===========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 27, JANUARY 2, JANUARY 1,
1996 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $ 1,521,000 $ 4,577,000 $ 4,142,000
Foreign............................... 10,000 20,000 30,000
State................................. 453,000 510,000 367,000
----------- ----------- -----------
1,984,000 5,107,000 4,539,000
Effect of nonqualified stock option
exercises upon income taxes
currently payable................... 994,000 1,276,000 4,972,000
Deferred:
Federal............................... (1,008,000) (1,970,000) (1,545,000)
Foreign............................... -- -- --
State................................. (308,000) (384,000) (84,000)
----------- ----------- -----------
(1,316,000) (2,354,000) (1,629,000)
----------- ----------- -----------
$ 1,662,000 $ 4,029,000 $ 7,882,000
=========== =========== ===========
</TABLE>
F-21
<PAGE> 103
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
The components of deferred tax assets (liabilities) at January 2, 1998 and
January 1, 1999 are as follows:
<TABLE>
<CAPTION>
JANUARY 2, 1998 JANUARY 1, 1999
---------------------- ----------------------
FEDERAL STATE FEDERAL STATE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued warranties............. $ 836,000 $138,000 $ 990,000 $159,000
NOL carryforwards.............. 385,000 63,000 502,000 21,000
Accrued vacation............... 230,000 38,000 350,000 57,000
Allowance for doubtful
accounts..................... 2,125,000 351,000 3,095,000 498,000
Other accrued liabilities...... 641,000 104,000 -- --
Reserve for obsolete
inventory.................... 625,000 103,000 524,000 86,000
Other.......................... 113,000 51,000 409,000 --
Current deferred state income
taxes........................ -- -- (287,000) --
---------- -------- ---------- --------
4,955,000 848,000 5,583,000 821,000
Deferred Tax Liabilities:
Depreciation................... (659,000) (109,000) (232,000) (39,000)
Unrealized gain on
securities................... (687,000) (68,000) (546,000) (95,000)
Deferred state income taxes.... (214,000) -- 47,000 --
---------- -------- ---------- --------
Net deferred tax assets........ 3,395,000 671,000 4,852,000 687,000
Valuation allowance............ (229,000) (41,000) -- --
---------- -------- ---------- --------
Total........................ $3,166,000 $630,000 $4,852,000 $687,000
========== ======== ========== ========
</TABLE>
A reconciliation of the Company's provision for income taxes for 1996, 1997
and 1998 to the U.S. Federal Statutory rates is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 27, JANUARY 2, JANUARY 1,
1996 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Provision for income taxes at U.S.
statutory rates....................... $2,217,000 $3,751,000 $7,324,000
State taxes, net of Federal benefit..... 94,000 209,000 655,000
Non-deductible expenses................. 112,000 136,000 99,000
Foreign loss not usable................. 148,000 257,000 121,000
Reduction of valuation allowance........ (653,000) (645,000) (270,000)
Other................................... (256,000) 321,000 (47,000)
---------- ---------- ----------
$1,662,000 $4,029,000 $7,882,000
========== ========== ==========
</TABLE>
F-22
<PAGE> 104
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
14. OPERATING SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA
In June, 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires public companies to report
certain information about operating segments in complete sets of financial
statements and in condensed financial statements of interim periods issued to
stockholders. SFAS 131 was adopted by the Company for the year ended on January
1, 1999.
The Company has organized its operating segments around differences in
products offered. The Company conducts business in two operating segments;
diabetes products and pharmaceutical products. The diabetes products operating
segment generates revenues from the following three separate product lines;
external pumps and related disposable products, implantable pumps, and other
diabetes supplies. These product lines are aggregated into the diabetes products
operating segment as the nature of the products and production processes, the
type of customers, the distribution channels and the nature of the regulatory
environment are similar. The pharmaceutical products operating segment derives
its revenues from the distribution of prescription drugs to treat a number of
medical conditions, including diabetes, HIV/AIDS and renal failure.
In the following tables, net sales by operating segment and geographic area
include both sales to customers, as reported in the Consolidated Statements of
Income at sales prices which approximate market.
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS THREE MONTHS
----------------------------------------- ENDED ENDED
OPERATING SEGMENTS 1996 1997 1998 APRIL 3, 1998 APRIL 2, 1999
------------------ ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales
Pharmaceutical
products............... $ 9,338,000 $ 11,810,000 $ 8,882,000 $ 3,033,000 $ 1,171,000
Diabetes products........ 67,058,000 87,682,000 129,695,000 23,333,000 39,740,000
----------- ------------ ------------ ----------- ------------
Total.................... 76,396,000 99,492,000 138,577,000 26,366,000 40,911,000
Operating profit (loss)
Pharmaceutical
products............... (1,846,000) (2,145,000) (1,378,000) 76,000 (125,000)
Diabetes products........ 5,927,000 11,249,000 20,847,000 3,298,000 5,903,000
----------- ------------ ------------ ----------- ------------
Total operating profit... 4,081,000 9,104,000 19,469,000 3,374,000 5,778,000
----------- ------------ ------------ ----------- ------------
Interest expense........... (163,000) (237,000) (47,000) -- (46,000)
Other income............... 1,062,000 1,851,000 1,503,000 291,000 340,000
----------- ------------ ------------ ----------- ------------
Income before income
taxes.................... $ 4,980,000 $ 10,718,000 $ 20,925,000 $ 3,665,000 $ 6,072,000
=========== ============ ============ =========== ============
Identifiable assets
Pharmaceutical
products............... $ 2,596,000 $ 3,890,000 $ 4,458,000 $ 4,366,000 $ 4,924,000
Diabetes products........ 61,828,000 101,929,000 153,194,000 92,908,000 155,976,000
----------- ------------ ------------ ----------- ------------
Total.................... $64,424,000 $105,819,000 $157,652,000 $97,274,000 $160,900,000
=========== ============ ============ =========== ============
</TABLE>
F-23
<PAGE> 105
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
Capital expenditures and depreciation expense related to the Company's
pharmaceutical products operations are not material compared to its diabetes
products operations for the three years presented.
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS THREE MONTHS
----------------------------------------- ENDED ENDED
GEOGRAPHIC AREAS 1996 1997 1998 APRIL 3, 1998 APRIL 2, 1999
---------------- ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES
North America............ $70,885,000 $ 92,946,000 $127,981,000 $24,261,000 $ 37,999,000
Europe................... 5,511,000 6,546,000 10,596,000 2,105,000 2,912,000
----------- ------------ ------------ ----------- ------------
Consolidated............. $76,396,000 $ 99,492,000 $138,577,000 $26,366,000 $ 40,911,000
=========== ============ ============ =========== ============
OPERATING INCOME (LOSS)
North America............ $ 4,335,000 $ 9,773,000 $ 20,099,000 $ 3,525,000 $ 6,185,000
Europe................... (254,000) (669,000) (630,000) (151,000) (407,000)
----------- ------------ ------------ ----------- ------------
Consolidated............. $ 4,081,000 $ 9,104,000 $ 19,469,000 $ 3,374,000 $ 5,778,000
=========== ============ ============ =========== ============
IDENTIFIABLE ASSETS AT END
OF PERIOD
North America............ $60,947,000 $100,981,000 $149,768,000 $92,093,000 $152,953,000
Europe................... 3,477,000 4,838,000 7,884,000 5,181,000 7,947,000
----------- ------------ ------------ ----------- ------------
Consolidated............. $64,424,000 $105,819,000 $157,652,000 $97,274,000 $160,900,000
=========== ============ ============ =========== ============
</TABLE>
15. SUBSEQUENT EVENTS
On March 15, 1999, the Company announced a 2-for-1 stock split, in the form
of a stock dividend, to result in the issuance of one additional share of common
stock for every share of common stock outstanding. The stock split was effective
April 1, 1999 for holders of record at the close of business on that date and
will be distributed on April 16, 1999. In accordance with SFAS 128, "Earnings
per Share," the Company has recorded the effects of this stock split on share
and per share amounts for all periods presented.
The Company is currently negotiating final details with respect to a
financing transaction pursuant to which it expects to enter into several
agreements in conjunction with its plans to construct a $65.0 million corporate
headquarters, research and development and manufacturing facility on the campus
of California State University, Northridge. The Company expects the transaction
to be structured as a synthetic lease financing for this facility and, in a
related transaction, to obtain a revolving line of credit to borrow up to $15
million. In connection with these financing transactions, the Company expects to
pledge substantially all of its assets as collateral security, and to be subject
to various affirmative and negative covenants regarding the conduct of its
business. These arrangements could adversely affect the Company's ability to
obtain additional capital or acquire additional capital resources. The synthetic
lease will have a term of five years, with two one-year renewal options. The
underlying ground lease has a term of 40 years with
F-24
<PAGE> 106
MINIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996, JANUARY 2, 1998 AND JANUARY 1, 1999
AND (UNAUDITED) THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 2, 1999
renewal options for up to an additional 40 years. Under these arrangements, the
Company will be committed to annual payments ranging from $4.5 million to $5.0
million commencing sometime during the second half of 2000. Additionally, the
Company is committed to payments of $550,000 during 1999 and to annual payments
in future periods of approximately $450,000, plus periodic cost of living
adjustments, per the terms of the ground lease for the Northridge property.
These lease payments will be recorded as rent expense in future periods.
F-25
<PAGE> 107
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY
SHARES OF MINIMED INC. 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
PROSPECTUS OR OF ANY SALE OF THE MINIMED COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Recent Developments.................. 15
Use Of Proceeds...................... 18
Price Range of Common Stock.......... 19
Dividend Policy...................... 19
Capitalization....................... 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 37
Management........................... 66
Principal Stockholders............... 74
Underwriting......................... 76
Legal Matters........................ 77
Experts.............................. 77
Where You Can Find More Information.. 78
Index To Financial Statements........ F-1
Independent Auditor's Report......... F-2
</TABLE>
PRELIMINARY PROSPECTUS June 24, 1999
2,250,000 Shares
[MINIMED LOGO]
Common Stock
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
ING BARING FURMAN SELZ LLC
VOLPE BROWN WHELAN &
COMPANY
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated fees and expenses payable by
MiniMed Inc. in connection with the issuance and distribution of the securities
registered:
<TABLE>
<S> <C>
Registration fee............................................ $ 49,274
NASD filing fee............................................. 18,225
The Nasdaq National Market fees............................. 17,500
Printing, duplicating and engraving expenses................ 150,000
Legal fees and expenses, other than Blue Sky................ 150,000
Transfer Agent and Registrar fees........................... 2,500
Accounting fees and expenses................................ 100,000
Blue sky fees and expenses.................................. 5,000
Miscellaneous............................................... 132,501
--------
Total..................................................... $625,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") makes
provision for the indemnification of officers and directors in terms
sufficiently broad to indemnify our officers and directors under some
circumstances from liabilities, including reimbursement for expenses incurred,
arising under the Securities Act of 1933. Our charter and bylaws and the
indemnification agreements between us and our officers and directors provide, in
effect, that, to the fullest extent and under the circumstances permitted by
Section 145 of the DGCL, we will indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is our director or officer or is or was
serving at our request as a director or officer of another corporation or
enterprise. We may, in our discretion, similarly indemnify our employees and
agents. The charter relieves our directors from monetary damages to our
stockholders or us for breach of such director's fiduciary duty as directors to
the fullest extent permitted by the DGCL. Under Section 102(b)(7) of the DGCL, a
corporation may relieve its directors from personal liability to such
corporation or its stockholders for monetary damages for any breach of their
fiduciary duty as directors except (i) for a breach of the duty of loyalty, (ii)
for failure to act in good faith, (iii) for intentional misconduct or knowing
violation of law, (iv) for willful or negligent violation of specific provisions
in the DGCL imposing some requirements with respect to stock repurchases,
redemption and dividends, or (v) for any transactions from which the director
derived an improper personal benefit. Depending upon the character of the
proceedings, under Delaware law, we may indemnify against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding if the
person indemnified acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to our best interest, and, with respect to any
criminal action or proceeding, had no cause to believe his or her conduct was
unlawful. To the extent that directors or officers have been successful in the
defense of any action, suit or proceeding referred to above, we will be
obligated to indemnify him or her against expenses, including attorneys' fees,
actually and reasonably
II-1
<PAGE> 109
incurred in connection therewith. We will continue to maintain our director and
officer liability insurance policy in the amount of at least $ million.
ITEM 16. EXHIBITS.
See the Exhibit Index attached to this Registration Statement and
incorporated by reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement 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.
The undersigned registrant hereby undertakes that
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant 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.
(2) For the purposes 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 tide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sylmar, State of California, on June 24, 1999.
MINIMED INC.
By: /s/ ERIC S. KENTOR
-----------------------------------
Eric S. Kentor
Senior Vice President,
General Counsel and Secretary
Dated: June 24, 1999
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Dated: June 24, 1999 *
---------------------------------------------------
Alfred E. Mann
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Dated: June 24, 1999 *
---------------------------------------------------
Terrance H. Gregg
President and Chief Operating Officer
Dated: June 24, 1999 *
---------------------------------------------------
Kevin R. Sayer
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: June 24, 1999 *
---------------------------------------------------
David Chernof, M.D.
Director
</TABLE>
II-3
<PAGE> 111
<TABLE>
<S> <C>
Dated: June 24, 1999 *
---------------------------------------------------
William R. Grant
Director
Dated: June 24, 1999 *
---------------------------------------------------
David H. MacCallum
Director
Dated: June 24, 1999 *
---------------------------------------------------
Thomas R. Testman
Director
Dated: June 24, 1999 *
---------------------------------------------------
John C. Villforth
Director
Dated: June 24, 1999 *
---------------------------------------------------
Carolyne Davis
Director
</TABLE>
*By: /s/ ERIC S. KENTOR
----------------------------------
Eric S. Kentor
Attorney-in-Fact
II-4
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement............................
4.1 Specimen Certificate of Common Stock (previously filed as
Exhibit 4.1 to the Company's Registration Statement on
Form S-I, Registration No. 33-927 10, on July 21, 1995,
and incorporated herein by reference).....................
4.2 Registration Rights Agreement dated as of November 5, 1998
by and among Medtronic Asset Management Inc. and MiniMed
Inc.*.....................................................
4.3 Amendment to Rights Agreement effective as of May 1, 1999
by and between MiniMed Inc. and Harris Trust Company of
California.*..............................................
5.1 Opinion of Gibson, Dunn & Crutcher LLP*...................
23.1 Consent of Deloitte & Touche LLP..........................
23.2 Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 5.1)*.............................................
24.1 Power of Attorney (included as part of signature page)*...
27.1 Financial Data Schedule*..................................
</TABLE>
- ----------------
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
2,250,000 Shares
MINIMED INC.
Common Stock
UNDERWRITING AGREEMENT
June __, 1999
WARBURG DILLON READ LLC
HAMBRECHT AND QUIST LLC
ING BARING FURMAN SELZ LLC
VOLPE, BROWN WHELAN & COMPANY, LLC
C/O WARBURG DILLON READ LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
MiniMed Inc., a Delaware corporation (the "Company"), proposes
to issue and sell 2,000,000 shares of its authorized but unissued common stock,
$.01 par value per share (the "Common Stock"), and Alfred E. Mann (the "Selling
Securityholder") proposes to sell 250,000 shares of Common Stock (collectively,
such 2,250,000 shares of Common Stock are hereinafter referred to as the "Firm
Shares") to the several underwriters listed on Schedule A to this Agreement
(collectively, the "Underwriters"). In addition, the Company and the Selling
Stockholder also propose to grant to the Underwriters an option to purchase up
to an aggregate of 337,500 additional shares (the "Option Shares") of Common
Stock on the terms and for the purposes set forth in Section 3(c). The Firm
Shares and the Option Shares are hereinafter collectively referred to as the
"Shares."
The Company and the Selling Securityholder severally wish to
confirm as follows their agreements with you in connection with the several
purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-3
(File No. 333- 80527) including a prospectus relating to the Shares and each
amendment thereto has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. There have been delivered to you three signed copies of such
registration statement and amendments, together with three copies of each
exhibit filed therewith. Copies of such registration statement and amendments
(but without exhibits) and of the related preliminary
<PAGE> 2
prospectus have been delivered to you in such reasonable quantities as you have
requested for each of the Underwriters. If such registration statement has not
become effective, a further amendment to such registration statement, including
a form of final prospectus, necessary to permit such registration statement to
become effective will be filed promptly by the Company with the Commission. If
such registration statement has become effective, a final prospectus containing
all Rule 430A Information (as hereinafter defined) will be filed by the Company
with the Commission in accordance with Rule 424(b) of the Rules and Regulations
on or before the second business day after the date hereof (or such earlier time
as may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement
shall mean such registration statement (including all exhibits and financial
statements and all documents incorporated by reference therein) at the time such
registration statement becomes or became effective and, in the event any
post-effective amendment thereto becomes effective prior to the Closing Date (as
hereinafter defined), shall also mean such registration statement as so amended;
provided, however, that such term shall include all Rule 430A Information deemed
to be included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and shall also mean any registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations with respect to the Shares. The term
"Preliminary Prospectus" shall mean any preliminary prospectus referred to in
the preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no
filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall
mean the form of final prospectus included in the Registration Statement at the
time such registration statement becomes effective. The term "Rule 430A
Information" means information with respect to the Shares and the offering
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDER.
(a) The Company hereby represents and warrants as
follows:
(i) The Company has not received, and has no
notice of, any order of the Commission preventing or suspending the use of any
Preliminary Prospectus, or instituted proceedings for that purpose, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the Rules and Regulations. When the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date") and at all times subsequent thereto up to and at the Closing
Date (as hereinafter defined), any later date on which Option Shares are to be
purchased (the "Option Closing Date") and when any post-effective amendment to
the Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The foregoing representations and warranties
in this Section 2(a) do not apply to any
2
<PAGE> 3
statements or omissions made in reliance on and in conformity with the
information contained in the third paragraph of the section of the Prospectus
entitled "Underwriting" or in the last paragraph on the front cover page of the
Prospectus. The Company has not distributed any offering material in connection
with the offering or sale of the Shares other than the Registration Statement,
the Preliminary Prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
(ii) The Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
State of Delaware, with full corporate power and authority to own, lease and
operate its properties and conduct its business as described in the Registration
Statement. The Company is duly qualified to do business as a foreign corporation
in good standing in each jurisdiction where the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to so qualify would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its Subsidiaries (as hereinafter defined) taken as a whole (a
"Material Adverse Effect"). The Company has no subsidiaries (as defined in the
Rules and Regulations) other than those set forth on Schedule B hereto
(collectively, the "Subsidiaries"). Other than the Subsidiaries and an
investment in the capital stock of Pharmaceutical Discover Corporation and
Trimeris, Inc., the Company does not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association or
other entity other than investments held in the ordinary course of business.
Complete and correct copies of the certificates of incorporation and of the
bylaws of the Company and the Subsidiaries and all amendments thereto have been
delivered to the Underwriters, and except as set forth in the exhibits to the
Registration Statement no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date. Each
Subsidiary has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement. Each
Subsidiary is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction where the ownership or leasing of the properties
or the conduct of its business requires such qualification. All of the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable under Alabama,
California, Delaware, Florida, Georgia, Michigan, Tennessee, French, Swedish,
German and Barbados law, as applicable, and (except as otherwise described in
this Section 2(a)) are owned by the Company or other Subsidiaries subject to no
security interest, other encumbrance or adverse claims. No options, warrants or
other rights to purchase, agreements or other obligation to issue or other
rights to convert any obligation into shares of capital stock or ownership
interests in the Subsidiaries are outstanding.
(iii) The Company has full power and authority
(corporate and otherwise) to enter into this Agreement
and to perform the transactions contemplated hereby. This Agreement has been
duly authorized, executed and delivered by the Company and is a valid and
binding agreement on the part of the Company, enforceable against the Company in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by applicable laws or equitable principles and except
as enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. The performance of this Agreement
by the Company and the consummation by the Company of the transactions herein
contemplated will not conflict with or result in a breach or violation of any of
the terms and
3
<PAGE> 4
provisions of, or constitute a default under, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or the Subsidiaries pursuant to the terms of (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any lease, contract or other agreement or
instrument to which the Company or any Subsidiary is a party or by which its
properties are bound, or (ii) the certificate of incorporation or bylaws or
other organizational documents of the Company or any Subsidiary or (iii) any
law, order, rule, regulation, writ, injunction or decree of any court or
governmental agency or body to which the Company or any Subsidiary is subject.
The Company is not required to obtain or make (as the case may be) any consent,
approval, authorization, order, designation or filing by or with any court or
regulatory, administrative or other governmental agency or body as a requirement
for the consummation by the Company of the transactions herein contemplated,
except such as may be required under the Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act") or under state securities or blue sky
("Blue Sky") laws or under the rules and regulations of the National Association
of Securities Dealers, Inc. ("NASD").
(iv) There is not pending or, to the Company's
knowledge, threatened, any action, suit, claim,
proceeding or investigation against the Company or its Subsidiaries or any of
their respective officers or any of their respective properties, assets or
rights before any court or governmental agency or body or otherwise that are
required to be described in the Prospectus, or required to be filed as exhibits
to the Registration Statement by the Act or the Rules and Regulations but are
not described as required. There are no statutes, rules, regulations,
agreements, contracts, leases or documents that are required to be described in
the Prospectus, or to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations that have not been accurately described in
all material respects in the Prospectus or filed as exhibits to the Registration
Statement and all such statutes, rules, regulations, agreements, contracts,
leases or documents are in full force and effect and, where applicable, are
binding on the parties thereto.
(v) All outstanding shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of any preemptive right, resale
right, right of first refusal or similar right. The authorized and outstanding
capital stock of the Company conforms in all material respects to the
description thereof contained in the Registration Statement (and such
description correctly states the substance of the provisions of the instruments
defining the capital stock of the Company).
(vi) The Shares to be sold by the Company have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable. The Shares to be sold by the Selling
Securityholder are duly authorized and are duly and validly issued, fully paid
and nonassessable. The Shares conform to the description thereof in the
Registration Statement. Except as set forth in the Prospectus, no preemptive
right, co-sale right, right of first refusal or other similar rights of
securityholders exists with respect to any of the Shares or the issue and sale
thereof other than those that have been expressly waived prior to the date
hereof. Except as set forth in the Prospectus, no holder of securities of the
Company has the right to cause the Company to register such holder's securities
under the Act because of the filing of the registration statement or
consummation of the transactions contemplated by this Agreement and, except as
disclosed in the Prospectus, no person has the right to require registration
under the Act of any
4
<PAGE> 5
shares of Common Stock or other securities of the Company. No further approval
or authorization of any security holder, the Board of Directors or any duly
appointed committee thereof or others is required for the issuance and sale or
transfer of the Shares, either by the Company or the Selling Securityholder,
except as may be required under the Act, the Exchange Act or under state
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, the Company does not have outstanding any
options or warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option and other plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the Registration
Statement accurately and fairly presents, in all material respects, the
information required to be shown with respect to such plans, arrangements,
options and rights. No person has the right, contractual or otherwise, to cause
the Company to permit such person to underwrite the sale of any of the Shares.
(vii) The Shares to be sold by the Selling
Securityholder are listed and duly admitted to trading on the
Nasdaq National Market and prior to the Closing Date, the Shares to be issued
and sold by the Company will be authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(viii) Deloitte & Touche LLP (the "Accountants")
who have examined the financial statements, together with the related schedules
and notes, of the Company filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
public accountants within the meaning of the Act and the Rules and Regulations.
The financial statements of the Company, together with the related schedules and
notes, forming part of the Registration Statement and the Prospectus, comply
with the requirements of the Act and the Rules and Regulations and fairly
present the financial position and the results of operations of the Company at
the respective dates and for the respective periods to which they apply. All
financial statements, together with the related schedules and notes, filed with
the Commission as part of the Registration Statement have been prepared in
accordance with generally accepted accounting principles as in effect in the
United States consistently applied throughout the periods involved except as may
be otherwise stated in the Registration Statement. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the financial statements presented therein. No other financial
statements or schedules are required by the Act or the Rules and Regulations to
be included in the Registration Statement.
(ix) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been (i) any material adverse change, or any development which, in
the Company's reasonable judgment, may be expected to involve a material adverse
change, in the business, properties or assets described or referred to in the
Registration Statement, or the results of operations, condition (financial or
otherwise), business or operations of the Company and its Subsidiaries taken as
a whole, (ii) any transaction which is material to the Company or its
Subsidiaries, except transactions in the ordinary course of business, (iii) any
obligation, direct or contingent, which is material to the Company and its
Subsidiaries taken as a whole, incurred by the Company or its Subsidiaries,
except obligations incurred in the ordinary course of business, (iv) any change
in the capital stock or outstanding indebtedness of the Company or its
Subsidiaries or (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company. Neither the Company nor its
5
<PAGE> 6
Subsidiaries has any material contingent obligation which is not disclosed in
the Registration Statement.
(x) Except as set forth in the Prospectus (i)
the Company and each Subsidiary have good and marketable title to all material
properties (real and personal) and assets described in the Prospectus as owned
by them, free and clear of any pledge, lien, security interest, charge,
encumbrance, claim, equitable interest, or restriction, (ii) the agreements to
which the Company or any Subsidiary is a party described in the Prospectus are
valid agreements, enforceable against the Company or such Subsidiary in
accordance with their terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles, and, to the Company's knowledge, the other contracting party or
parties thereto are not in material breach or default under any of such
agreements and (iii) the Company and each Subsidiary have valid and enforceable
leases for the properties described in the Prospectus as leased by it, and such
leases conform in all material respects to the description thereof, if any, set
forth in the Registration Statement.
(xi) The Company and each Subsidiary now hold and
at the Closing Date and any later Option Closing Date, as the case may be, will
hold, all licenses, certificates, approvals and permits from all state, United
States, foreign and other regulatory authorities, including but not limited to
the United States Food and Drug Administration (the "FDA") and any foreign
regulatory authorities performing functions similar to those performed by the
FDA, that are material to the conduct of the business of the Company (as such
business is currently conducted), or are necessary to own their respective
properties, except for such licenses, certificates, approvals and permits the
failure of which to hold would not have a Material Adverse Effect, all of which
are valid and in full force and effect, and there is no proceeding pending or,
to the knowledge of the Company, threatened which may cause any such license,
certificate, approval or permit to be withdrawn, cancelled, suspended or not
renewed or may result in any other material impairment of the rights of the
holder of any such licenses, certificates, approvals and permits, subject to
such qualifications as may be set forth in the Prospectus. Except as described
in the Prospectus, none of such licenses, certificates, approvals and permits
contains any restriction that is materially burdensome to the Company or the
Subsidiaries. Neither the Company nor any Subsidiary is in violation of its
certificate of incorporation or bylaws or other organization documents, or in
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any material contract, indenture,
mortgage, loan agreement, joint venture or other material agreement or
instrument to which it is a party or by which it or any of its properties are
bound, and no event has occurred, and no condition or state of fact exists of
which any of the Company or the Subsidiaries is aware, which, with the passage
of time or the giving of notice, or both, would constitute such a default, or in
violation of any law, order, rule, regulation, writ, injunction or decree of any
court or governmental agency or body having jurisdiction over it, including, but
not limited to, the FDA. All of the descriptions in the Registration Statement
and Prospectus of the legal and governmental proceedings by or before the FDA or
any foreign, state or local government body exercising comparable authority are
true, complete and accurate in all material respects.
(xii) The Company and each Subsidiary have filed
on a timely basis all necessary federal, state and foreign income, franchise and
other tax returns and has paid all taxes shown thereon as due, or has obtained
extensions therefor, and the Company has no knowledge of any tax deficiency
which has been or might be asserted against the Company or any
6
<PAGE> 7
Subsidiary. All material tax liabilities are adequately provided for within the
financial statements of the Company.
(xiii) The Company and its Subsidiaries maintain
the insurance described in the Prospectus and other insurance of the types and
in the amounts adequate for their business and consistent with insurance
coverage maintained by similar companies in similar businesses.
(xiv) Neither the Company nor its Subsidiaries are
involved in any labor dispute or disturbance nor, to the knowledge of the
Company, is any such dispute or disturbance threatened.
(xv) Except as described in the Prospectus, the
Company and each Subsidiary own or possess adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets, know-how, franchises, and other material
intangible property and assets (collectively, "Intellectual Property") described
in the Prospectus as being owned by them or, to the best of their knowledge,
necessary to the conduct of their businesses as conducted and as proposed to be
conducted as described in the Prospectus. The Company has no knowledge of any
facts which would preclude it from having rights to its patent applications
referenced in the Prospectus. The Company has no knowledge that it or any
Subsidiary lacks or will be unable to obtain any rights or licenses to use any
of the Intellectual Property necessary to conduct the business now conducted or
proposed to be conducted by it as described in the Prospectus, except as
described in the Prospectus. The Company has not received any notice of
infringement or of conflict with rights or claims of others with respect to any
Intellectual Property. The Company is not aware of any patents of others which
are infringed upon by potential products or processes referred to in the
Prospectus in such a manner as to materially and adversely affect the Company
and its Subsidiaries taken as a whole, except as described in the Prospectus.
(xvi) The statements in the Registration Statement
and the Prospectus under the captions "Risk Factors -- Any breakdown in the
protection of our proprietary technology, or any determination that our
proprietary technology infringes the right of others, could materially affect
our business" and "Business -- Patents, Proprietary Rights and Trademarks" and
other references therein (including but not limited to the Exhibits listed or
incorporated by reference therein), to patent, trademark and licensing matters
("Intellectual Property Rights"), and insofar as such statements pertain to
Intellectual Property Rights, accurately and fairly present the information
referred to therein;
(xvii) Except as disclosed in the Registration
Statement and Prospectus (inclusive of the Exhibits listed or incorporated by
reference therein), the Company has no knowledge of any (A) rights of third
parties to any of the Intellectual Property Rights described in the Prospectus
as being owned or licensed by the Company, except as described in the applicable
licensing agreement(s) in the case of licensed technology; (B) pending or
threatened actions, suits, proceedings or claims by others challenging the
Company's rights in or to any such Intellectual Property Rights; and (C) pending
or threatened actions, suits, proceedings or claims by others that the Company
is infringing or otherwise violating any Intellectual Property Rights of others;
(xviii) There are no facts or circumstances known to
the Company, which, if asserted in a lawsuit, likely will render any patents of
the Intellectual Property Rights
7
<PAGE> 8
invalid or unenforceable or result in the cancellation of any registered
trademark of the Intellectual Property Rights.
(xix) Neither the Company nor the Subsidiaries
are, nor will the Company or the Subsidiaries become, upon sale of the Shares to
be issued and sold in accordance herewith and upon application of the net
proceeds to the Company from such sale as described in the Prospectus under the
caption "Use of Proceeds," an "investment company" or a person "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(xx) Neither the Company nor any of its
Subsidiaries has incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in connection
with the transactions contemplated by this Agreement other than the underwriting
discounts and commissions contemplated hereby.
(xxi) The Company and each of its Subsidiaries is
(i) in compliance with any and all applicable United States, state and local
environmental laws, rules, regulations, treaties, statutes and codes promulgated
by any and all governmental authorities relating to the protection of human
health and safety, the environment or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business as currently conducted, and (iii) is in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's or its Subsidiaries' activities involving Hazardous
Materials. "Hazardous Materials" means any material or substance (i) that is
prohibited or regulated by any environmental law, rule, regulation, order,
treaty, statute or code promulgated by any governmental authority, or any
amendment or modification thereto, or (ii) that has been designated or regulated
by any governmental authority as radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment.
(xxii) Neither the Company nor any of its
Subsidiaries has at any time during the last five years (i) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to any foreign,
United States or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States.
(xxiii) The Common Stock is registered pursuant
to Section 12(g) of the Exchange Act. The Company has taken no action designed
to, or likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act or delisting the Common Stock from the Nasdaq
National Market, nor has the Company received any notification that the
Commission or the Nasdaq National Market is contemplating terminating such
registration or listing.
(xxiv) Neither the Company nor the Selling
Securityholder nor, to either of their knowledge, any of the Company's officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor the Selling Securityholder nor, to
either of their knowledge, any of the Company's officers, directors or
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<PAGE> 9
affiliates will have taken, directly or indirectly, any action which has
constituted, or might reasonably be expected to constitute, the stabilization or
manipulation of the price of sale or resale of the Shares.
(xxv) The Company has timely and properly filed
with the Commission all reports and other documents required to have been filed
by it with the Commission pursuant to the Act and the Rules and Regulations.
True and complete copies of all such reports and other documents have been
delivered to you.
(xxvi) The Company has not distributed and, prior
to the later to occur of (i) the Closing Date and (ii) completion of the
distribution of the Shares, will not distribute any offering material in
connection with the offering and sale of the Shares other than the Registration
Statement, the Prospectus or other materials, if any, permitted by the Act.
(xxvii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxviii) Neither the Company nor any of the
Subsidiaries nor, to the Company's knowledge, any employee or agent of the
Company or the Subsidiaries has made any payment of funds of the Company or the
Subsidiaries or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(xxix) The Company has complied and will continue
to comply with all provisions of Florida Statutes ss.517.075 and the regulations
thereunder relating to issuers doing business with Cuba.
(xxx) Each "employee benefit plan," within the
meaning of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained or contributed to by the Company (the "Plans") is in
material compliance with the applicable provisions of ERISA and the Internal
Revenue Code of 1986, as amended (the "Code"). With respect to the Plans, and
any other employee benefit plan as to which the Company is considered a "party
in interest" under ERISA or the Code, the Company does not have any liability
under ERISA or the Code, nor does the Company expect that any such liability
will be incurred, that could, singly or in the aggregate, have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations, of the Company and its
Subsidiaries taken as a whole.
(b) The Selling Securityholder hereby represents and
warrants as follows:
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<PAGE> 10
(i) The Selling Securityholder now has or has
the right to acquire, and on the Closing Date or any Option Closing Date will
have, good and marketable title to all of the Shares to be sold by the Selling
Securityholder hereunder, free and clear of all liens, encumbrances, security
interests and claims whatsoever, with full right and authority, and any approval
required by law, to deliver the same hereunder, subject, to the rights of
MiniMed Inc., as Custodian (herein called the Custodian), pursuant to the
Custody Agreement dated June __, 1999, between the Custodian and the Selling
Securityholder (the "Custody Agreement"), and that upon the delivery of and
payment for such Shares hereunder, the several Underwriters will receive good
and marketable title thereto, free and clear of all liens, encumbrances,
security interests and claims whatsoever.
(ii) Certificates in negotiable form for the
Shares to be sold by the Selling Securityholder have been placed in custody
under the Custody Agreement for delivery under this Agreement with the
Custodian; the Selling Securityholder specifically agrees that the Shares
represented by the certificates so held in custody for the Selling
Securityholder are subject to the interests of the several Underwriters
described in such Custody Agreement, that the arrangements made by the Selling
Securityholder for such custody, including the Power of Attorney provided for in
such Custody Agreement, are, to the extent described in such Custody Agreement
irrevocable, and that the obligations of the Selling Securityholder shall not be
terminated by any act of the Selling Securityholder or by operation of law,
whether by the death or incapacity of the Selling Securityholder or the
occurrence of any other event; if any such death, incapacity, dissolution,
liquidation or other such event should occur before the delivery of such Shares
hereunder, certificates for such Shares shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred, regardless
of whether the Custodian shall have received notice of such death, incapacity,
dissolution, liquidation or other event.
(iii) The Selling Securityholder has reviewed the
Registration Statement and Prospectus and (i) insofar as they relate to the
Selling Securityholder, neither the Registration Statement nor the Prospectus
contains, nor will contain, an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, and (ii) the Selling Securityholder does not have any actual
knowledge that would lead the Selling Securityholder to believe that (A) on the
Effective Date, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading or
(B) on the Effective Date the Prospectus contained and, on the Closing Date and
the Option Closing Date, contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(iv) The Selling Securityholder has the requisite
power and authority to enter into this Agreement and the Custody Agreement. This
Agreement and the Custody Agreement have each been duly and validly authorized,
executed and delivered by or on behalf of the Selling Securityholder and are
valid and binding agreements of the Selling Securityholder, enforceable against
the Selling Securityholder in accordance with their respective terms, except as
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy and subject to the
qualification that the Selling Securityholder's obligations hereunder may be
limited by bankruptcy, fraudulent conveyance, insolvency,
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<PAGE> 11
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles.
(v) Neither the execution and delivery of this
Agreement or the Custody Agreement by or on behalf of the Selling Securityholder
nor the consummation of the transactions herein or therein contemplated by or on
behalf of the Selling Securityholder requires any consent, approval,
authorization or order of, or filing or registration with, any court, regulatory
body, administrative agency or other governmental body, agency or official
(except such as may be required under the Act or such as may be required under
state securities or Blue Sky laws governing the purchase and distribution of the
Shares) or conflicts or will conflict with or constitutes or will constitute a
breach of, or default under, or violates or will violate, any agreement,
indenture or other instrument to which the Selling Securityholder is a party or
by which the Selling Securityholder is or may be bound or to which any of the
Selling Securityholder's property or assets is subject, or any statute, law,
rule, regulation, ruling, judgment, injunction, order or decree applicable to
the Selling Securityholder or to any property or assets of the Selling
Securityholder.
(vi) The representations and warranties of the
Selling Securityholder in the Custody Agreement are, and on the Closing Date and
any Option Closing Date will be, true and correct.
(vii) The Selling Securityholder has not taken,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares, except for the
lock-up arrangements described in the Prospectus.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell 2,000,000 shares of the Firm Shares to the several Underwriters,
the Selling Securityholder agrees to sell 250,000 shares of the Firm Shares to
the several Underwriters, and each of the Underwriters agrees to purchase from
the Company and the Selling Securityholder the respective aggregate number of
Firm Shares set forth opposite its name on Schedule A, plus such additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to Section 3(b) hereof. The price at which such Firm Shares shall be
sold by the Company and purchased by the several Underwriters shall be $______
per share. The obligation of each Underwriter to the Company and the Selling
Securityholder shall be to purchase from the Company and the Selling
Securityholder that number of the Firm Shares which represents the same
proportion of the total number of the Firm Shares to be sold by each of the
Company and the Selling Securityholder pursuant to this Agreement as the number
of the Firm Shares set forth opposite the name of such Underwriter in Schedule A
hereto represents of the total number of the Firm Shares to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of Firm Shares specified on Schedule A.
(b) If for any reason one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the
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provisions of Section 11 hereof) to purchase and pay for the number of Shares
agreed to be purchased by such Underwriter or Underwriters, the Company or the
Selling Securityholder shall immediately give notice thereof to you and the
non-defaulting Underwriters shall have the right within twenty-four (24) hours
after such default to purchase, or procure one or more other Underwriters to
purchase, in such proportions as may be agreed upon between you and upon the
terms herein set forth, all or any part of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such Shares,
the number of Shares which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on a
pro rata basis (as adjusted by you in such manner as you deem advisable to avoid
fractional shares) to absorb the remaining Shares which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the Shares which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholder shall have the right, within twenty-four
(24) hours next succeeding the 24-hour period referred to above, to make
arrangements with other underwriters or purchasers reasonably satisfactory to
you for purchase of such Shares on the terms herein set forth. In any such case,
either you or the Company and the Selling Securityholder shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If the aggregate number of Shares which the defaulting Underwriter
or Underwriters agreed to purchase exceeds 10% of the total number of Shares
which all Underwriters agreed to purchase hereunder, and if neither the
non-defaulting Underwriters nor the Company and the Selling Securityholder shall
make arrangements within the 24-hour periods stated above for the purchase of
all the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Securityholder to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling
Securityholder. Nothing in this paragraph (b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company and the Selling Securityholder grant an option to the several
Underwriters to purchase all or any portion of the Option Shares at the same
price per share as the Underwriters shall pay for the Firm Shares. The maximum
number of the Option Shares which each of the Company and Selling Securityholder
agree to sell upon the exercise of such option is set forth opposite their
respective names in Schedule C hereto. Said option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of the Option
Shares as to which the several Underwriters are exercising the option. If the
Underwriters elect to purchase less than all of the Option Shares, the
Underwriters shall purchase Option Shares from the Company and the Selling
Securityholder pro rata based on the number of Firm Shares being sold by each.
Delivery of certificates for the Option Shares, and payment therefor, shall be
made
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as provided in Section 5 hereof. Each Underwriter will purchase such percentage
of the Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing, the exact number of shares to be adjusted by you in
such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the
Shares by the Underwriters shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) You represent and warrant that (i) the information
set forth in the last paragraph on the front cover page and the third paragraph
under the caption "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Shares (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and that the
statements made therein are correct and do not omit to state any material fact
required to be stated therein or necessary to make the statements made therein
in light of the circumstances under which they were made not misleading, and
(ii) the Underwriters have not distributed and will not distribute prior to the
Closing Date or on any Option Closing Date, as the case may be, any of offering
material in connection with the offering and sale of the shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement and other
materials permitted by the Act.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the
Option Shares (if the option granted pursuant to Section 3(c) hereof shall have
been exercised not later than 1:00 p.m., New York City time, on the date at
least two business days preceding the Closing Date), and payment therefor, shall
be made at the office of Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, NY 10019 at 9:00 a.m., New York City time, on the third business day after
the date of this Agreement, or at such time on such other day, not later than
seven full business days after such third business day, as shall be agreed upon
in writing by the Company, the Selling Securityholder and you (the "Closing
Date").
(b) If the option granted pursuant to Section 3(c) hereof
shall be exercised after 1:00 p.m., New York City time, on or before the 30th
day after the date of this Agreement, delivery of certificates for the Option
Shares, and payment therefor, shall be made at the office of Dewey Ballantine
LLP, 1301 Avenue of the Americas, New York, NY 10019 at 9:00 a.m., New York City
time, on the third business day after the exercise of such option.
(c) Payment for the Shares purchased from the Company
shall be made to the Company or its order and payment for the Shares purchased
from the Selling Securityholder shall be made to the Custodian, for the account
of the Selling Securityholder, in each case in immediately available funds. Such
payment shall be made upon delivery of certificates for the Shares to you for
the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the Shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least three business days before the Closing Date, in the case of
Firm Shares, and at least two business days prior to the
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Option Closing Date, in the case of the Option Shares. Such certificates will be
made available to the Underwriters for inspection, checking and packaging at a
location in New York, New York, designated by the Underwriters not less than one
full business day prior to the Closing Date or, in the case of the Option
Shares, by 3:00 p.m., New York time, on the business day preceding the Option
Closing Date.
It is understood that each of you may (but shall not be
obligated to) make payment to the Company and the Selling Securityholder for
shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later Option Closing Date. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING
SECURITYHOLDER.
(a) The Company covenants and agrees as follows:
(i) The Company will use its best efforts to
cause the Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; it will notify you,
promptly after it shall receive notice thereof, of the time when the
Registration Statement or any subsequent amendment to the Registration Statement
has become effective or any supplement to the Prospectus has been filed. If the
Company omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a), the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission. If for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed. The
Company will notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or for
additional information. Promptly upon your request, it will prepare and file
with the Commission any amendments or supplements to the Registration Statement
or Prospectus which, in the reasonable opinion of counsel to the several
Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters. The Company
will promptly prepare and file with the Commission, and promptly notify you of
the filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
an untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. In case any Underwriter is required to
deliver a prospectus within the nine-month period referred to in Section
10(a)(3) of the Act in connection with the sale of the Shares, the Company will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act. The Company will file no amendment or supplement to
the Registration Statement or Prospectus that shall not previously have been
submitted to you a reasonable time prior to the proposed filing
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thereof or to which you shall reasonably object in writing or which is not in
compliance with the Act and Rules and Regulations or the provisions of this
Agreement.
(ii) The Company will advise you, promptly after
it shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the initiation or threat of any
proceeding for that purpose; and the Company and the Selling Securityholder will
promptly use their best efforts to prevent the issuance of any such stop order
or to obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(iii) The Company will cooperate with you in
endeavoring to qualify the Shares for offering and sale under the securities
laws of such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares, except that the Company shall not be required in
connection therewith or as a condition thereof to qualify as a foreign
corporation, or to execute a general consent to service of process in any
jurisdiction, or to make any undertaking with respect to the conduct of its
business. In each jurisdiction in which the Shares shall have been qualified,
the Company will make and file such statements, reports and other documents in
each year as are or may be reasonably required by the laws of such jurisdictions
so as to continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Shares, or as otherwise may be
required by law.
(iv) The Company will furnish to you, as soon as
available, copies of the Registration Statement (three of which will be signed
and which will include all financial statements and exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
The Company consents to the use, in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, prior to the date of the Prospectus, of each Preliminary Prospectus
so furnished by the Company.
(v) The Company will make generally available to
its stockholders as soon as practicable an earnings statement (which will be in
reasonable detail but need not be audited) complying with the provisions of
Section 11(a) of the Act and Rule 158 of the Rules and Regulations and covering
a 12-month period beginning after the effective date of the Registration
Statement and ending not later than 15 months thereafter, and will advise you in
writing when such statement has been made available.
(vi) During a period of five years after the date
hereof, the Company, as soon as practicable after the end of each respective
period, will furnish to its stockholders annual reports (including financial
statements audited by independent certified public accountants) and will, upon
request, furnish to you and the other several Underwriters hereunder (A)
concurrently with making such reports available to its stockholders, statements
of operations of the Company for each of the first three quarters in the form
made available to the Company's stockholders; (B) concurrently with the
furnishing thereof to its stockholders, a balance sheet of the Company as of the
end of such fiscal year, together with statements of operations, of
stockholders' equity and of cash flow of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of nationally
recognized independent certified public accountants; (C) concurrently with the
furnishing of such reports to its stockholders, copies of all
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<PAGE> 16
reports (financial or other) mailed to stockholders; (D) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission (except for documents for which confidential treatment is
requested); and (E) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared for general release by the Company. During such
five-year period, if the Company shall have any active Subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company are consolidated with any Subsidiaries, and
shall be accompanied by similar financial statements for any significant
Subsidiary that is not so consolidated.
(vii) Prior to or simultaneously with the
execution and delivery of this Agreement, the Company will obtain agreement from
each beneficial owner of the Company's Common Stock listed on Schedule D to this
Agreement, from each of its current executive officers and directors, and from
certain other stockholders, providing that such person will not, for a period of
90 days (60 days in the case of Medtronic Asset Management, Inc.) after the date
of the Prospectus, without the prior written consent of Warburg Dillon Read LLC,
directly or indirectly, offer to sell, sell, contract to sell, grant any option
to purchase, or otherwise dispose of, any shares of Common Stock beneficially
owned as of the date such lockup agreement is executed (including, without
limitation, shares of Common Stock which may be deemed to be beneficially owned
in accordance with the Rules and Regulations and shares of Common Stock which
may be issued upon exercise of a stock option or warrant) or any securities
convertible into or exercisable or exchangeable for such Common Stock except,
(A) by operation of law or (B) pursuant to a bona fide gift to any person or
other entity which agrees in writing to be bound by this restriction. Each such
person or entity shall also agree and consent to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of shares of
Common Stock held by such person or entity, except in compliance with the
foregoing restriction.
(viii) The Company shall not, during the 90 days
following the effective date of the Registration Statement, except with your
prior written consent and except as requested by Medtronic Asset Management,
Inc., file a registration statement covering any of its shares of capital stock,
except that one or more registration statements on Form S-8 may be filed at any
time following the effective date of the Registration Statement.
(ix) The Company shall not, during the 90 days
following the effective date of the Registration Statement, except with your
prior written consent, issue, sell, offer or agree to sell, grant, distribute or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
options, rights or warrants with respect to shares of Common Stock, or any
securities convertible into or exchangeable for Common Stock, other than (i) the
sale of Shares hereunder, (ii) the grant of options or the issuance of shares of
Common Stock under the Company's stock option plans or stock purchase plan, as
the case may be, existing on the date hereof, and (iii) the issuance of shares
of Common Stock upon exercise of the currently outstanding options or warrants
described in the Registration Statement.
(x) The Company will apply the net proceeds from
the sale of the Shares being sold by it in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(xi) The Company will maintain a Transfer Agent
and, if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock.
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(xii) For so long as the Company remains subject
to the reporting requirements of the Exchange Act, the Company will use its best
efforts to maintain listing of its shares of Common Stock on the Nasdaq National
Market or other national securities exchange.
(xiii) The Company is familiar with the Investment
Company Act of 1940, as amended, and the rules and regulations thereunder, and
has in the past conducted its affairs, and will, for so long as the Company
remains subject to the reporting requirements of the Exchange Act, conduct its
affairs, in such a manner so as to ensure that the Company was not and will not
be an "investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
(xiv) If at any time during the 90-day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which in
your reasonable opinion the market price of the Common Stock has been or is
likely to be materially affected (regardless of whether such rumor, publication
or event necessitates a supplement to or amendment of the Prospectus), the
Company will, after written notice from you advising the Company to the effect
set forth above consult with you in good faith regarding the necessity of
disseminating a press release or other public statement responding to or
commenting on such rumor, publication or event and, if the Company in its
reasonable judgment determines that such a press release or other public
statement is appropriate, the substance of any press release or other public
statement.
(xv) The Company consents to the use, in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by all dealers to whom Shares may be sold, prior to the date of
the Prospectus, of each Preliminary Prospectus so furnished by the Company.
(xvi) As soon after the execution and delivery of
this Agreement as possible and thereafter from time to time for such period as
in the opinion of counsel for the Underwriters a prospectus is required by the
Act to be delivered in connection with sales by any Underwriter or dealer, the
Company will expeditiously deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or supplement
thereto) as you may request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or dealer.
(xvii) Except as stated in this Agreement and in
the Preliminary Prospectus and Prospectus, the Company has not taken, nor will
it take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(xviii) The Company will use its best efforts to
have the Shares listed for quotation on the Nasdaq National Market concurrently
with the effectiveness of the registration statement.
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(b) The Selling Securityholder agrees with the several
Underwriters as follows:
(i) The Selling Securityholder will cooperate to
the extent necessary to cause the registration statement or any post-effective
amendment thereto to become effective at the earliest possible time and will do
or perform all things required to be done or performed by the Selling
Securityholder prior to the Closing Date or any Option Closing Date, as the case
may be, to satisfy all conditions precedent to the delivery of the Shares being
sold by the Selling Securityholder pursuant to this Agreement.
(ii) The Selling Securityholder will pay all
federal and other taxes, if any, on the transfer or sale of the Shares being
sold by the Selling Securityholder to the Underwriters.
(iii) The Selling Securityholder will not sell,
offer to sell, contract to sell or otherwise transfer or dispose of any Common
Stock (or any securities convertible into or exercisable or exchangeable for
Common Stock), or grant any options or warrants to purchase Common Stock, except
for the sale of Shares to the Underwriters pursuant to this Agreement, for a
period of 90 days after the date of the Prospectus, without the prior written
consent of Warburg Dillon Read LLC.
(iv) Except as stated in this Agreement and in
the Preliminary Prospectus and Prospectus, the Selling Securityholder has not
taken, nor will it take, directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Shares.
7. EXPENSES.
The Company agrees with each Underwriter that:
(a) The Company will pay and bear all costs, fees and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing or reproduction of this Agreement, the Preliminary Blue
Sky Memoranda and any Supplemental Blue Sky Memoranda and any instruments
related to any of the foregoing; the issuance and delivery of the Shares
hereunder to the several Underwriters, including transfer taxes, if any; the
cost of all stock certificates representing the Shares and Transfer Agents' and
Registrars' fees; the fees and disbursements of corporate, patent and regulatory
counsel (including local and special counsel) for the Company; all fees and
other charges of the Company's independent public accountants; the cost of
printing (or reproduction) and furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing (including postage, air freight charges and charges for counting and
packaging) as may be reasonably requested in connection with the offering; and
of the Shares; NASD filing fees and expenses incident to securing any required
review and the cost of qualifying the Shares under the laws of such
jurisdictions within the United States as you may designate (including filing
fees and reasonable fees and disbursements of Underwriters' Counsel in
connection with such NASD filings, Blue Sky qualifications and
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<PAGE> 19
delivery of any preliminary or supplemental Blue Sky memoranda); listing
application fees of the Nasdaq National Market; the registration of the Common
Stock under the Exchange Act, as amended; the transportation and other expenses
incurred by or on behalf of representatives of the Company in connection with
presentations to prospective purchasers of the Shares; and all other expenses
directly incurred by the Company or the Selling Securityholder in connection
with the performance of their obligations hereunder. The Selling Securityholder
will pay any transfer taxes incident to the transfer to the Underwriters of the
Shares being sold by the Selling Securityholder.
(b) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, the Company
will, in addition to paying the expenses described in clause (a) above,
reimburse the several Underwriters for all out-of-pocket expenses (including
reasonable fees and disbursements of Underwriters' Counsel) incurred by the
Underwriters in reviewing the Registration Statement and the Prospectus and in
otherwise investigating, preparing to market or marketing the Shares. The
Company will not in any event be liable to any of the several Underwriters for
any loss of anticipated profits from the sale by them of the Shares.
(c) The provisions of paragraphs (a) and (b) of this
Section are intended to relieve the Underwriters from the payment of the
expenses and costs which the Company hereby agrees to pay and shall not affect
any agreement which the Company and the Selling Securityholder make, or may have
made, for the sharing of any such expenses and costs.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and
pay for the Shares, as provided herein, shall be subject to the accuracy, as of
the date hereof and the Closing Date and any later Option Closing Date, as the
case may be, of the representations and warranties of the Company and the
Selling Securityholder herein, to the performance by the Company and the Selling
Securityholder of their obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become
effective not later than 9:00 a.m., New York City time, on the date following
the date of this Agreement, or such later time or date as shall be consented to
in writing by you. If the filing of the Prospectus, or any supplement thereto,
is required pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations,
the Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company, the Selling Securityholder or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this subsection.
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(c) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, an opinion of Gibson, Dunn &
Crutcher LLP, counsel for the Company, dated such date and addressed to you, as
the Underwriters, to the effect that:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered and
qualified to conduct its business and is in good standing in each state of the
United States where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure to so
register or qualify does not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company and the Subsidiary taken as a whole;
(ii) The authorized and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in the
Prospectus; and the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof incorporated by
reference into the Registration Statement;
(iii) All the shares of capital stock of the
Company outstanding prior to the issuance of the Shares to be issued and sold by
the Company hereunder have been duly authorized and validly issued, are fully
paid and nonassessable;
(iv) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and free
of any (A) preemptive rights or (B) to the best knowledge of such counsel after
reasonable inquiry, similar rights that entitle or will entitle any person to
acquire any Shares of capital stock of the Company upon the issuance thereof by
the Company;
(v) The form of certificates for the Shares
conforms to the requirements of the Delaware General Corporation Law;
(vi) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act and, to
the best knowledge of such counsel after reasonable inquiry, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule 424(b)
has been made in accordance with Rule 424(b);
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver the Shares
to the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company;
(viii) To the best knowledge of such counsel, the
Company is not in violation of its certificate of incorporation or by-laws, or
other organizational documents and is not in default in the performance of any
material obligation, agreement or condition contained in any bond, debenture,
note or other evidence of indebtedness, except as may be disclosed in the
Prospectus;
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(ix) Neither the offer, sale or delivery of the
Shares, nor the execution, delivery or performance of this Agreement, nor
compliance by the Company with the provisions hereof, nor consummation by the
Company of the transactions contemplated hereby conflicts or will conflict with
or constitutes or will constitute a breach of, or a default under, the
certificate of incorporation or by-laws of the Company or any agreement,
indenture, lease or other instrument to which the Company is a party or by which
it or any of its properties is bound that is made an exhibit to the Registration
Statement or is known to such counsel after reasonable inquiry, or will result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, nor will any such action result in any
violation of any existing law, regulation, ruling (assuming compliance with all
applicable state securities and Blue Sky laws), judgment, injunction, order or
decree known to such counsel after reasonable inquiry, and applicable to the
Company or any of its properties;
(x) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official is
required on the part of the Company (except as have been obtained under the Act
or such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) for the valid issuance and sale of the
Shares to the Underwriters as contemplated by this Agreement;
(xi) The Registration Statement and the
Prospectus and any supplements or amendments thereto (except for the financial
statements and notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements of the
Act;
(xii) To the best knowledge of such counsel after
reasonable inquiry, (A) other than as described or contemplated in the
Prospectus (or any supplement thereto), there are no legal or governmental
proceedings pending or threatened against the Company, or to which the Company,
or any of its properties, is subject, which are required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) that are not so described and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) or to be filed as an exhibit to the Registration Statement that are not
described or filed as required, as the case may be;
(xiii) The statements in the Prospectus in the
eighth and ninth paragraphs under the caption "Our Business," the last three
sentences under the caption of "Risk Factors -- Our ability to maintain our
competitive position depends upon our ability to attract and retain highly
qualified managerial, technical, manufacturing, regulatory, and sales and
marketing personnel," "Risk Factors -- We have adopted a number of anti-takeover
measures which could inhibit any change in control of our company and prevent a
stockholder from receiving a favorable price for his or her shares," the first
three paragraphs under the caption "Business -- Legal Proceedings," under the
captions "Recent Developments," "Business -- Products -- Cancer," "Business
- --Marketing and Sales -- Agreement with Miss Americam Nicole Johnson," "Business
- -- Product Liability and Warranties," "Business --Properties," "Management --
Change of Control Agreements" and under the caption "Management - Corporation
Committee Interlocks and Insider Participations," insofar as they are
descriptions or specifically referred to contracts,
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agreements or other legal documents, or insofar as they specifically refer to
statutes, regulations and legal or governmental proceedings, are accurate in all
material respects;
(xiv) Except as described in the Prospectus, such
counsel does not know of any outstanding option, warrant or other right calling
for the issuance of, and such counsel does not know of any commitment, plan or
arrangement to issue, any shares of capital stock of the Company or any
securities convertible into or exchangeable or exercisable for capital stock of
the Company; and except as described in the Prospectus, such counsel does not
know of any holder of any security of the Company or any other person who has
the right, contractual or otherwise, to cause the Company to sell or otherwise
issue to them, or permit them to underwrite the sale of, any of the Shares or
the right to have any Common Stock or other securities of the Company included
in the Registration Statement or the right, as a result of the filing of the
Registration Statement or otherwise, to require registration under the Act of
any shares of Common Stock or other securities of the Company;
(xv) The Company is not, nor will the Company
become upon and as a result of the sale of the Shares and the application of the
proceeds therefrom as described in the Prospectus under the caption "Use of
Proceeds," an "investment company" or a person "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended;
and
(xvi) Upon delivery of the Shares pursuant to this
Agreement and payment therefor as contemplated herein, the Underwriters will
acquire good title to the Shares to be issued and sold by the Company free and
clear of any lien, claim, security interest, or other encumbrance, restriction
on transfer or other defect in title (other than any claim on or to the Shares
the Underwriters may have under this Agreement or that may attach to the Shares
at the time of delivery and payment as a result of any contract, agreement,
note, bond, judgment or other restrictions, instrument or obligation to which
the several Underwriters may be a party or by which any of them or any of their
properties or assets may be bound).
In addition, such counsel shall state that in connection with
the preparation of the Registration Statement and the Prospectus, such counsel
has participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company,
the Selling Securityholder and the Underwriters' representatives at which the
contents of the Registration Statement and the Prospectus and related matters
were discussed and, although such counsel have not undertaken to investigate or
verify independently, and do not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, on the basis of the foregoing, no facts have come
to the attention of such counsel leading such counsel to believe that either the
Registration Statement at the time it became effective contained an untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus at the date thereof or as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no view with respect to the financial statements and schedules, the
notes thereto or the other financial, statistical and accounting data included
therein).
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In rendering their opinion as aforesaid, such counsel may rely
upon an opinion or opinions, each dated the Closing Date, of other counsel
retained by them or the Company as to laws of any jurisdiction other than the
United States or the State of California or the corporation law of the State of
Delaware, provided that (1) each such local counsel is acceptable to the
Underwriters, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Underwriters and
is in form and substance satisfactory to them and their counsel, and (3) counsel
shall state in their opinion that they believe that they and the Underwriters
are justified in relying thereon.
(d) You shall have received on the Closing Date and on
any later Option Close Date, as the case may be, an opinion of Hogan & Hartson
L.L.P., special FDA regulatory counsel for the Company, dated such date and
addressed to you, to the effect that the statements in the Prospectus under the
captions "Risk Factors -- The extent of regulation of our business by the FDA
and corresponding state and foreign agencies results in significant delay and
expense in introducing new products and presents a continuing risk to our
ability to produce existing products " and "Business -- Government Regulation,"
insofar as such statements purport to summarize applicable provisions of the
Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated
thereunder, have been reviewed by such counsel and are accurate summaries in all
material respects of the provisions purported to be summarized under such
captions in the Prospectus.
(e) You shall have received on the Closing Date and on
any later Option Close Date, as the case may be, an opinion of McDermott, Will &
Emery, special counsel for the Company, dated such date and addressed to you, to
the effect that the statements in the Prospectus under the caption "Risk Factors
- -- The billing practices of the prior owners of one of the businesses we
acquired could subject us to significant losses and penalties," and the
statements in the last paragraph under the caption "Business -- Legal
Proceedings," insofar as they are descriptions or specifically referred to in
contracts, agreements or other legal documents, or insofar as they specifically
refer to statutes, regulations and legal or governmental proceedings, are
accurate in all material respects, have been reviewed by such counsel and are
accurate summaries in all material respects of the provisions purported to be
summarized under such captions in the Prospectus.
(f) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, the opinion of Gibson, Dunn,
& Crutcher LLP, counsel for the Selling Securityholder, dated such date and
addressed to you, to the effect that:
(i) The Selling Securityholder has the requisite
power and authority, and to such counsel's knowledge no approval is required by
law (except as may be required under the Act, the Exchange Act and all
applicable state securities and Blue Sky laws), to enter into this Agreement and
the Custody Agreement and to sell and deliver the Shares to be sold by the
Selling Securityholder as provided herein, and this Agreement and the Custody
Agreement have been duly and validly authorized by the Selling Securityholder;
(ii) This Agreement and the Custody Agreement
have each been duly executed and delivered by or on behalf of the Selling
Securityholder;
(iii) The execution and delivery of this Agreement
and the Custody Agreement by or on behalf of the Selling Securityholder and the
consummation of the transactions contemplated hereby and thereby will not
conflict with, violate, result in a breach of
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or constitute a default under any agreement, indenture, lease or other
instrument to which the Selling Securityholder is a party or by which the
Selling Securityholder is or may be bound that is made an exhibit to the
Registration Statement or is known to such counsel after reasonable inquiry; and
(iv) Upon delivery of the Shares sold by the
Selling Securityholder pursuant to this Agreement and payment therefor as
contemplated herein the Underwriters (assuming that the Underwriters are
purchasing the Shares for value in good faith and without notice of any adverse
claim within the meaning of the California Uniform Commercial Code) will acquire
valid and legal title to the Shares free and clear of any liens, adverse claims,
security interests, or other encumbrances, restrictions on transfer or other
defects in title (other than any claim on or to the Shares the Underwriters may
have under this Agreement or that may attach to the Shares at the time of
delivery and payment as a result of any contract, agreement, note, bond,
judgment or other restrictions, instrument or obligation to which the several
Underwriters may be a party or by which any of them or any of their properties
or assets may be bound).
In rendering such opinion, such counsel may rely as to factual
matters upon (i) certificates of the Selling Securityholder and (ii) the
representations of the Selling Securityholder contained herein and in the
Custody Agreement.
(g) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, an opinion of Dewey
Ballantine, Underwriters' Counsel, dated such date and addressed to you, as the
Underwriters, with respect to the sufficiency of all corporate proceedings
undertaken by the Company and other legal matters relating to this Agreement and
the transactions contemplated hereby as you may reasonably require, and the
Company shall have furnished to such counsel such documents as it may have
reasonably requested for the purpose of enabling it to pass upon such matters.
(h) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, a letter from the Accountants
addressed to the Company and the Underwriters, dated such date confirming that
it is an independent certified public accountant with respect to the Company
within the meaning of the Act and the Rules and Regulations thereunder and based
upon the procedures described in its letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than three days prior to the Closing Date or any
such later Option Closing Date, as the case may be, (i) confirming that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later Option Closing Date, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter that are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall disclose any change, or any development involving
a prospective change, in or affecting the business or properties of the Company
which, in your reasonable judgment, makes it impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. In addition, you shall have received from the Accountants a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it deemed necessary in establishing the scope
of its latest examination of the Company's financial statements, did not
disclose any weaknesses in internal controls that it considered to be material
weaknesses. All such letters shall be in a form reasonably satisfactory to the
Underwriters and their counsel.
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(i) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, a certificate of the Chief
Executive Officer and the Chief Financial Officer of the Company, dated such
date, to the effect that as of such date (and you shall be satisfied that as of
such date):
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made on and as of the
Closing Date or any later Option Closing Date, as the case may be; and the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later Option Closing Date, as the case may be;
(ii) The Registration Statement has become
effective under the Act and no stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of the Prospectus has
been issued, and no proceedings for that purpose have been instituted or are
pending or, to the best of their knowledge, threatened under the Act;
(iii) They have carefully reviewed the
Registration Statement and the Prospectus; and, when the Registration Statement
became effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein or necessary to make the statements therein not misleading; and
when the Registration Statement became effective, and at all times subsequent
thereto up to the delivery of such certificate, none of the Registration
Statement, the Prospectus or any amendment or supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been (A) any material adverse change in the properties or assets
described or referred to in the Registration Statement and the Prospectus or in
the condition (financial or otherwise), operations, business or prospects of the
Company and its Subsidiaries, (B) any transaction which is material to the
Company and its Subsidiaries, except transactions entered into in the ordinary
course of business and transactions described in the Prospectus, (C) any
obligation, direct or contingent, incurred by the Company or its Subsidiaries,
which is material to the Company and its Subsidiaries taken as a whole, (D) any
change in the capital stock or outstanding indebtedness of the Company or its
Subsidiaries which is material to the Company and its Subsidiaries taken as a
whole or (E) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company.
(j) The Company and the Selling Securityholder shall have
furnished to you such further certificates and documents as you shall reasonably
request as to the accuracy of the representations and warranties of the Company
and the Selling Securityholder herein, as to the performance by the Company and
the Selling Securityholder of their obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder and such other certificates and documents as you may reasonably
request.
(k) The Firm Shares and the Option Shares, if any, shall
have been approved for listing on the Nasdaq National Market.
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(l) Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, prospects, properties, net worth, or results of operations of the
Company not contemplated by the Prospectus, which in your opinion, as
Underwriters, would materially, adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Company or any
officer or director of the Company or the Selling Securityholder which makes any
material statement made in the Prospectus untrue or which, in the opinion of the
Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in your
opinion, as the Underwriters, materially adversely affect the market for the
Shares.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company or the Selling
Securityholder, as the case may be, will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
In case any of the conditions specified in this Section 8
shall not be fulfilled, this Agreement may be terminated by you by giving notice
to the Company and to the Selling Securityholder. Any such termination shall be
without liability of the Company or the Selling Securityholder to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholder; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholder agree to indemnify and
hold harmless the Underwriters from all costs or expenses incurred by the
Company and the Selling Securityholder incident to the performance of their
respective obligations under this Agreement, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholder to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
9. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDER.
The obligation of the Company and the Selling Securityholder
to deliver the Shares shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 9
shall not be fulfilled, this Agreement may be terminated by the Company and the
Selling Securityholder by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholder to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholder; provided, however, that in the event of any such
termination the Company and the Selling Securityholder jointly and severally
agree to indemnify and hold
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harmless the Underwriters from all costs or expenses incurred by the Company and
the Selling Securityholder incident to the performance of their respective
obligations under this Agreement.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (g) below, the
Company and the Selling Securityholder jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Act from and against any and all losses, claims, damages or liabilities,
joint or several, to which such indemnified parties or any of them may become
subject under the Act, the Exchange Act, or the common law or otherwise, and the
Company and the Selling Securityholder jointly and severally agree to reimburse
each such Underwriter and controlling person for any legal or other
out-of-pocket expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof) or any
post-effective amendment thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that (1) the indemnity agreements of
the Company and the Selling Securityholder contained in this paragraph (a) shall
not apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission is contained in the third paragraph of the section of the
Prospectus entitled "Underwriting" or in the last paragraph of text on the cover
page of the Prospectus, (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Shares which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (a) of Section 6 hereof, and (3) the Selling
Securityholder shall only be liable under this paragraph with respect to (A)
information pertaining to the Selling Securityholder furnished by or on behalf
of the Selling Securityholder expressly for use in any Preliminary Prospectus or
the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of the Selling Securityholder set forth in Section
2(b) hereof. The information furnished pursuant to Clause (A) of the preceding
sentence to the date of this Agreement consists solely of that information set
forth with respect to the Selling Securityholder in the Registration Statement
under the heading "Principal and Selling Stockholders." The indemnity agreements
of the Company and the Selling Securityholder contained in this paragraph (a)
and the representations and warranties of the Company and the Selling
Securityholder contained in Section 2 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall
27
<PAGE> 28
survive the delivery of any payment for the Shares and any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Company, its directors or officers, the Selling
Securityholder or any person controlling the Company or the Selling
Securityholder, shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 10.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its executive officers, each of its
directors, each other Underwriter and each person (including each partner or
officer thereof) who controls the Company or any such other Underwriter within
the meaning of Section 15 of the Act, and the Selling Securityholder from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof any or any
post-effective amendment thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that in the cases of clauses (i) and
(ii) above, such statement or omission is contained in the third paragraph of
the Section of the Prospectus entitled "Underwriting" or in the last paragraph
on the cover page of the Prospectus. The indemnity agreement of each Underwriter
contained in this paragraph (b) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provisions of
paragraphs (a) and (b) of this Section 10 agrees that, upon the service of a
summons or other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement of
any investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume
28
<PAGE> 29
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnified party or parties and if
such party or parties include Warburg Dillon Read LLC, then Warburg Dillon Read
LLC shall choose such counsel; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled, at its or their own expense to have counsel chosen by such indemnified
party or parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and chooses counsel, the indemnifying party or parties will
not be liable under paragraphs (a) through (c) of this Section 10 for any legal
or other expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
legal and other expenses incurred in connection with the conduct of the defense
as referred to in clause (i) of the proviso to the fourth sentence of this
paragraph (c) and (B) the indemnifying party or parties shall bear such other
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no Notice
of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding. It is understood that the indemnifying parties shall not,
in respect of the legal defenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all of the Underwriters and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act, and (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act. The indemnifying party or parties shall not be liable for any
settlement of any proceeding effected without its or their written consent.
(d) If the indemnification provided for in this Section
10 is unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 10, then each indemnifying party shall, in
lieu of indemnifying such indemnified party and subject to clause (3) in the
proviso to paragraph (a) of Section 10, contribute to the amount paid or payable
by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 10 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. Subject to Clause (3) in the proviso to
paragraph (a) of Section 10, the relative benefits received by the Company and
the Selling Securityholder, on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Shares received by the Company and
29
<PAGE> 30
the Selling Securityholder and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares provided that, in the
event that the Underwriters shall have purchased any Option Shares hereunder,
any determination of the relative benefits received by the Company, the Selling
Securityholder or the Underwriters from the offering of the Shares shall include
the net proceeds (before deducting expenses) received by the Company and the
Selling Securityholder, and the underwriting discounts and commissions received
by the Underwriters, from the sale of such Option Shares, in each case computed
on the basis of the respective amounts set forth in the notes to the table on
the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in paragraph (c) of this Section 10).
(e) Neither Company nor the Selling Securityholder will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including, without limitation, the
provisions of this Section 10 and are fully
30
<PAGE> 31
informed regarding said provisions. They further acknowledge that the provisions
of this Section 10 fairly allocate the risks in light of the ability of the
parties to investigate the Company and its business in order to assure that
adequate disclosure is made in the Registration Statement and Prospectus as
required by the Act and the Exchange Act.
(g) The liability of the Selling Securityholder under the
Selling Securityholder's representations and warranties contained in Section 2
hereof and under the indemnity and reimbursement agreements contained in the
provisions of this Section 10 and Section 12 hereof shall be limited to an
amount equal to the initial public offering price of the stock sold by the
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholder may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
11. TERMINATION. This Agreement may be terminated by you at any
time on or prior to the Closing Date or on or prior to any later Option Closing
Date, as the case may be, by giving written notice to the Company and the
Selling Securityholder (i) if the Company or the Selling Securityholder shall
have failed, refused or been unable, at or prior to the Closing Date, or on or
prior to any later Option Closing Date, as the case may be, to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company or
the Selling Securityholder is not fulfilled, or (ii) if trading on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market, by such trading exchanges or by order of the Commission or any other
governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, accident or other calamity
of such character as to have a Material Adverse Effect regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the judgment of the Representatives
makes it inadvisable or impracticable to proceed with the offering, sale and
delivery of the Shares, or (v) if there shall have occurred an outbreak or
escalation of hostilities between the United States and any foreign power or of
any other insurrection or armed conflict involving the United States or other
national or international calamity, hostilities or crisis or the declaration by
the United States of a national emergency which, in the judgment, adversely
affects the marketability of the Shares. If this Agreement shall be terminated
in accordance with this Section 11, there shall be no liability of the Company
or the Selling Securityholder to the Underwriters and no liability of the
Underwriters to the Company or the Selling Securityholder, except as provided in
the last paragraph of Section 8.
If you elect to terminate this Agreement as provided in this Section
11, the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
12. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section
10 of this Agreement (and subject, in the case of Selling Securityholder, to the
provisions of paragraph (g) of Section 10), the Company and the Selling
Securityholder hereby jointly and severally agree to reimburse on a quarterly
basis the Underwriters for all reasonable legal and other expenses
31
<PAGE> 32
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 10 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 12 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due and (iii) the Company and the Selling Securityholder shall be obligated
to pay such reimbursement only if they are indemnifying parties under paragraph
(a) of Section 10 with respect to the statement or omission or alleged statement
or omission being investigated or defended.
(b) In addition to their other obligations under Section
10 of this Agreement, the Underwriters hereby agree to reimburse on a quarterly
basis the Company and the Selling Securityholder for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (b) of Section 10 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 12 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the Company and the Selling Securityholder shall
promptly refund it and (ii) the Company and the Selling Securityholder shall
provide to the Underwriter, upon request, reasonable assurances of its ability
to effect any refund, when and if due.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholder and the several
Underwriters and, with respect to the provisions of Section 10 hereof, the
several parties (in addition to the Company, the Selling Securityholder and the
several Underwriters) indemnified under the provisions of said Section 10, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Shares from any of the several Underwriters.
14. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Warburg Dillon Read
LLC, 299 Park Avenue, New York, NY 10171, Attention: Mr. Nicholas Ganz, with a
copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019,
Attention: Frederick W. Kanner; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, at 12744 San Fernando Road,
Sylmar, California 91342, Attention: Alfred E. Mann, Chairman of the Board and
Chief Executive Officer with a copy to Gibson, Dunn & Crutcher, LLP, 333 South
Grand Avenue, Los Angeles, CA 90071-3197, Attention: Roy J. Schmidt, Jr.; and if
to the Selling Securityholder, shall be mailed, telegraphed or delivered to Mr.
Alfred E. Mann, care of the Company, at 12744 San Fernando Road, Sylmar,
California 91342, with a copy to Gibson, Dunn & Crutcher LLP, 333 South Grand
Avenue, Los Angeles, California 90071-3197, Attention: Roy J. Schmidt, Jr. All
notices given by telegraph shall be promptly confirmed by letter.
32
<PAGE> 33
15. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (i) any investigation made by or on behalf of any Underwriter or
controlling person thereof, or by or on behalf of the Company or the Selling
Securityholder or the Company's respective directors or officers, and (ii)
delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Any action under or in respect of this Agreement taken by
Warburg Dillon Read LLC will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
[INTENTIONALLY LEFT BLANK]
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<PAGE> 34
Please sign and return to the Company and to the Selling Securityholder
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholder and the several Underwriters in accordance with its terms.
Very truly yours,
MINIMED INC.
By: ___________________________
[NAME]
[TITLE]
SELLING SECURITYHOLDER
Alfred E. Mann
By: ______________________________
[ATTORNEY-IN-FACT]
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
WARBURG DILLON READ LLC
HAMBRECHT AND QUIST LLC
ING BARING FURMAN SELZ LLC
VOLPE, BROWN WHELAN & COMPANY, LLC
By: WARBURG DILLON READ LLC
By: ______________________________
Title:
34
<PAGE> 35
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares to be
Underwiters Purchased
- ------------------------- -------------------
<S> <C>
Warburg Dillon Read LLC..................................
Hambrecht & Quist LLC....................................
ING Baring Furman Selz LLC...............................
Volpe, Brown Whelan & Company LLC........................
-------------------
Total 2,250,000
===================
</TABLE>
A-1
<PAGE> 36
SCHEDULE B
LIST OF SUBSIDIARIES
MiniMed Distribution Corp., a Delaware corporation
MiniMed International, Inc., a Barbados corporation
MiniMed Development Corp. a Delaware corporation
MiniMed SA, a French corporation
MiniMed GMBH, a German corporation
Dartec AB, a Swedish corporation
Home Medical Supply, Inc., a Florida corporation
Home Medical Supply, Inc., a Georgia corporation
Home Medical Supply, Inc., a Tennessee corporation
Home Medical Supply, Inc., a California corporation
Home Medical Supply of Michigan, Inc., a Michigan corporation
HMS, Inc., an Alabama corporation
Pharmax, Inc., a Florida corporation d/b/a Home Medical Supply, Inc.
South Broward Medical Arts Pharmacy, Inc., a Florida corporation
Clark Pharmacy, Inc., a Georgia corporation
Clark Wholesale Co., a Florida corporation
Clark Financial Services, Inc., a Florida corporation
Diabetix Depot, Inc., a Florida corporation
Dialysis Management Services, Inc., a Florida corporation
Medical Management & Marketing of South Florida, a Florida corporation
B-1
<PAGE> 37
SCHEDULE C
Over-allotment Option
<TABLE>
<CAPTION>
Maximum Number of
Optionee Optional Shares to be Sold
- -------- --------------------------
<S> <C>
MiniMed Inc...................................... 300,000
Alfred E. Mann................................... 37,500
Total 337,500
===========================
</TABLE>
C-1
<PAGE> 38
NY--327460.3
SCHEDULE D
Lock-Up Agreements
Alfred Mann
Alfred Mann Foundation
Carolyne Kahle Davis
William R. Grant
Terrence Gregg
Eric Kentor
Stephen A. Bowman
David MacCallum
David Morley
Kevin Sayer
Thomas Testman
John Villforth
Medtronic Asset Management, Inc.
D-1
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-80527 of MiniMed,
Inc. on Form S-3 of our report dated March 5, 1999 (except for Note 15 as to
which the date is April 1, 1999) appearing in the Prospectus, which is part of
this Registration Statement and to the reference to us under the headings
"Selected Financial Data" and "Experts" in such Prospectus.
We also consent to the incorporation by reference in this Registration Statement
of MiniMed, Inc. on Form S-3 of our report dated March 5, 1999 (except for Note
15 as to which the date is April 1, 1999), appearing in the Annual Report on
Form 10-K of MiniMed, Inc. for the year ended January 1, 1999.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
June 24, 1999
