10-K

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                   FOR THE FISCAL YEAR ENDED: JANUARY 2, 1998
 
                        COMMISSION FILE NUMBER: 0-26268
 
                                  MINIMED INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                            
                    DELAWARE                      95-4408171
            (STATE OR OTHER JURISDICTION OF    (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)    IDENTIFICATION NO.)
               
                  
         12744 SAN FERNANDO ROAD, SYLMAR, CALIFORNIA         91342
           (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)       (ZIP CODE)

            
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 362-5958
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                              TITLE OF EACH CLASS
 
                          COMMON STOCK, $.01 PAR VALUE
                        PREFERRED STOCK PURCHASE RIGHTS
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-K or any amendment to
this Form 10-K.      [ ]
 
     The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 13, 1998 was $303,177,589. The number of shares
outstanding of the registrant's Common Stock as of March 13, 1998 was
13,275,132.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
    Portions of the following document are incorporated herein by reference:
 Part III -- The Registrant's Proxy Statement for its 1998 Annual Meeting (the
                                 "1998 Proxy").
 
                      Exhibit Index is located at page 52
 
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                                     PART I
 
     This Annual Report on Form 10-K contains statements that are
forward-looking, including statements relating to anticipated operating results,
growth, financial resources, the development of new markets, the development,
regulatory approval, manufacture, distribution, and commercial acceptance of new
products and new applications for MiniMed's existing product line. Investors are
cautioned that, although MiniMed believes that its expectations are based on
reasonable assumptions, forward-looking statements involve risks and
uncertainties which may affect MiniMed's business and prospects, including
changes in economic and market conditions, acceptance of MiniMed's products by
the health care and reimbursement communities, health care legislation and
regulation, new developments in diabetes therapy, administration and regulatory
approval and related considerations, competitive developments, the effective
integration of the Company's recent acquisitions, maintenance of strategic
alliances and other factors discussed under the caption "Risk Factors" in the
Company's Registration Statement No. 333-23013 filed with the Securities and
Exchange Commission and declared effective on March 27, 1997.
 
ITEM 1. BUSINESS
 
     MiniMed Inc. (the "Company" or "MiniMed") designs, develops, manufactures
and markets advanced microinfusion systems for delivery of a variety of drugs,
with a primary focus on the intensive management of diabetes. Substantially all
of the Company's revenues have been derived from the sale of external insulin
pumps and related disposables, which are designed to deliver small quantities of
insulin in a controlled, programmable profile. The Company believes that it is
the leading provider of these systems in the world with a present market share
in the U.S. of approximately 75% for new pump sales. The Diabetes Control and
Complications Trial (the "DCCT Study"), a landmark, 10-year study conducted
under the auspices of the National Institutes of Health (the "NIH"), established
that close control of glucose levels can prevent or delay the onset of the
long-term consequences of diabetes. Other clinical studies have demonstrated
that the use of insulin pumps offers many advantages over injection therapy,
such as enabling patients to achieve lower glucose variability, reducing the
serious consequences of diabetes and improving the patients' quality of life.
The Company has also developed an implantable insulin pump and is developing
continuous subcutaneous glucose monitoring systems intended to enable further
improvement in glycemic control and avoidance of hypoglycemic (low glucose
level) and hyperglycemic (high glucose level) events. The Company's net sales of
external pumps and related disposables have grown at a compounded annual rate of
approximately 32% from $11.8 million in 1990 to $80.3 million in 1997. The
Company believes its primary market is Type 1 (insulin-dependent,
juvenile-onset) diabetes patients. The American Diabetes Association (the "ADA")
has estimated that there are 800,000 Type 1 patients in the U.S., and the
Company believes that approximately 6% of such patients use insulin pumps.
 
     Beyond intensive management of diabetes, the Company is seeking to take
advantage of its drug delivery expertise by exploring applications of its pumps
with drugs other than insulin. The Company believes that its pump technology is
well suited for the delivery of a number of drugs that are difficult to
administer, including drugs that: (i) are made up of fragile, large molecules,
(ii) cannot be ingested orally, (iii) have short half-lives in vivo, (iv)
require site-specific delivery, (v) have very narrow effective ranges of
concentration, (vi) require a profiled delivery pattern or (vii) would otherwise
require large amounts of drugs that are either expensive or toxic in the high
doses required to achieve therapeutic value. Many genetically engineered and
manufactured proteins and peptides have these characteristics. In 1997, the
Company entered into a Cooperation and Strategic Alliance Agreement with
Trimeris, Inc. ("Trimeris") with respect to its new drug for the treatment of
HIV infection and with United Therapeutics Corporation (formerly LRX
Pharmaceuticals, Inc.), to collaborate in the design, development and
implementation of therapies for the treatment of pulmonary hypertension. The
Company continues to have discussions with a number of other biopharmaceutical
companies regarding additional collaboration on developing the Company's
infusion systems for use with drugs other than insulin.
 
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DIABETES THERAPY
 
     The Company's primary business currently is directed to the intensive
management of diabetes. Toward this end, the Company currently manufactures and
markets programmable pumps, and related supplies, for delivery of insulin in
patient controlled profiles. The Company's programmable external insulin pumps
are thin and lightweight (about the size of a pager) and are designed to be worn
under the patient's clothing, on a belt, in a pocket or elsewhere in order not
to interfere with normal daily activities. The pumps are designed to utilize the
Company's proprietary disposables, consisting of an infusion set and a
medication reservoir, which provide the Company with a continuing source of
revenue following pump sales. The Company's external infusion pumps deliver
insulin subcutaneously in hundreds of microinfusions throughout the day, more
closely simulating delivery by a normal pancreas as compared to the two to four
large (bolus) doses per day with injection therapy. A prospective, cross-over
study published in April 1996 in Diabetes Care has shown that intensive
management of diabetes by insulin pump therapy using the Company's external pump
reduces the risk of severe hypoglycemic events four-to six-fold as compared to
intensive management of diabetes by multiple daily injections.
 
     In addition to its external pumps, the Company has developed an implantable
pump which to date has been utilized only for insulin delivery. The Company's
programmable implantable pump is similar in function to its external pump, but
is implanted under the skin of the abdomen, releasing insulin directly into the
peritoneal cavity. Peritoneal delivery even more closely simulates normal
pancreatic function than subcutaneous delivery via an external pump. Two studies
presented in France in 1994 found that intensive insulin therapy with an
implantable pump (a majority of which were made by the Company) has significant
advantages over alternative intensive management therapies for Type 1 patients,
including providing reduced glycemic variability and a significant reduction in
hypoglycemic events. A separate study published in the Journal of the American
Medical Association ("JAMA") in October 1996 found that in Type 2 (adult onset)
patients, intensive insulin therapy utilizing the Company's implantable pump, as
compared to those patients using multiple daily injections, also provided
reduced glycemic variability, reduced risk of hypoglycemic events without weight
gain and enhanced quality of life. The Company's implantable pump has been
approved for commercial sale in the European Union ("EU"), and the special
insulin used in the implantable pump is subject to a separate regulatory
approval process in the EU. The manufacturer of this insulin, Hoechst Marion
Roussel, an international company ("Hoechst"), has applied for such approval. In
the U.S., the Company and Hoechst will file a single application to the Food and
Drug Administration (the "FDA"). Such application will contain both a New Drug
Approval ("NDA") element for the special insulin and a Pre-Market Approval
("PMA") element for the pump. The Company has substantially completed
preparation of the PMA portion of the application for the implantable pump and
is working with Hoechst in the preparation of the NDA element of the application
for the special insulin.
 
     The Company is also developing a series of continuous glucose monitoring
systems, all of which utilize a sensor that can be inserted into subcutaneous
tissue for continuous monitoring of glucose levels. Each sensor is expected to
last approximately 3 1/2 days, after which the patient would replace it with
another sensor in a different location. These systems are being developed to
provide minimally invasive, continuous measurements and alarms that warn the
patient when glucose levels become too low. The Company believes these systems
would provide substantial benefits over widely used glucose meters and strips
that provide only intermittent measurements and can cause considerable
discomfort and inconvenience as a result of the need to prick a finger to draw
blood and then use a strip and a meter to determine glucose levels. Because of
the expected advantages of the Company's minimally-invasive continuous glucose
monitoring systems over glucose strips and meters, the Company believes that its
systems, if successfully developed, would enable better disease management and
significantly improve patient compliance. In December 1997, the Company filed an
application to the FDA for 510(k) clearance of its first sensor products: a
physician diagnostic device and a hypoglycemic alert monitor.
 
     On January 2, 1998, the Company completed its acquisition of Home Medical
Supply, Inc. and its affiliated companies ("HMS"), a privately held group of
companies that is headquartered in Florida. HMS
 
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operates a medical products and supplies distribution business in approximately
30 states, which includes pharmacy operations in selected states. The
acquisition of HMS was effected to allow the Company to more efficiently
distribute its external insulin pumps and disposables as well as facilitate the
Company's ability to distribute other diabetes supplies including its continuous
glucose monitoring systems. The Company plans to utilize HMS' pharmacy
businesses to distribute prescription drugs for the treatment of diabetes and
other difficult-to-deliver drugs that are well suited for use with its pump
technology. The acquisition of HMS was accounted for utilizing the
pooling-of-interests method of accounting. Accordingly, operating results for
the Company have been restated to include the operations of HMS for prior
periods.
 
OTHER MEDICAL CONDITIONS
 
     The Company has gained considerable expertise from its experience with
infusion of insulin, which it believes can be applied to meet the complex
delivery requirements of many other drugs. Many genetically engineered and
manufactured proteins and peptides have delivery problems comparable to insulin.
Delivery problems for these drugs arise because they contain fragile, large
molecules, cannot be ingested orally, have short half lives in vivo, require
site specific delivery, have very narrow effective ranges of concentration,
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. The Company is exploring opportunities for applications of
delivery systems for other drugs with several biopharmaceutical companies, and
entered into two Cooperation and Strategic Alliance Agreements in 1997.
 
     In April of 1997, the Company announced its alliance with Trimeris relating
to a new antiviral compound for the treatment of HIV/AIDS. Approximately
1,000,000 people in the United States are infected with HIV, according to an
article published in JAMA in 1996. Trimeris' proprietary compound, called T-20
or "pentafuside", 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. Extensive laboratory
studies have demonstrated T-20's antiviral effectiveness and a pilot study in
humans has shown the drug to be safe, effective and well tolerated. In
cooperation with Trimeris, MiniMed expects to participate in clinical trials for
the continuos subcutaneous infusion of T-20 beginning in 1998.
 
     In September of 1997, MiniMed entered into an agreement with another
biopharmaceutical company, United Therapeutics Corporation ("UTC"), to
collaborate 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 central intravenous administration
of an unstable compound with a plasma half-life of approximately two minutes.
Current drug therapy is exceedingly expensive, deters compliance and requires
placement of a central I.V. catheter near or in the heart. In addition, the drug
formulation must be mixed daily and be delivered from a bulky, refrigerated unit
worn on the patient's back, a process which is cumbersome and prone to cause
complications.
 
     By contrast, the UTC compound appears to be similarly effective at reducing
pulmonary arterial pressure, but can be delivered using a MiniMed subcutaneous
infusion pump. By combining the Company's microinfusion technology with the
patented compound of UTC, MiniMed intends to pursue the development of a therapy
system for the treatment of pulmonary hypertension.
 
     The Company is developing a series of pumps to address delivery
requirements for its alternative applications. While the Company believes that
such new applications for its pumps represent a significant opportunity for the
future, its efforts in the area are at a very preliminary stage, and no
assurance can be given that the anticipated collaborative efforts with
biopharmaceutical companies will be commercially implemented, that the
development of such new applications for the Company's pumps will be successful
or that such applications will be approved by the FDA or other regulatory
authorities. In addition, 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 the Company's infusion systems to deliver the drugs.
 
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BUSINESS STRATEGY
 
     The Company's primary goal is to design, develop, manufacture and market
advanced medical devices for the treatment of diabetes and other chronic medical
conditions. The Company's focus has been, and for the foreseeable future will
continue to be, on diabetes. The Company plans, however, to diversify its drug
delivery programs to treat other medical conditions, which the Company believes
also offer significant future market opportunities. For example, the Company has
specifically targeted therapies for the treatment of HIV/AIDS. To achieve these
objectives, the Company is 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 Study. The Company believes that, once continuous glucose
monitoring shows the relatively poor glucose level achieved with either
conventional therapy or multiple daily injections, there will be an increasing
use of insulin pumps. Clinical results have shown that continuous insulin
therapy utilizing insulin pumps is the most effective way to provide intensive
management, and as a result the Company believes that it has a significant
opportunity to expand the market for its insulin pumps. Since verification of
the benefits of intensive therapy is a relatively recent development 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. The Company estimates that in the U.S. only
approximately 6% of Type 1 patients are using pump therapy. The Company is
therefore focusing its marketing efforts on educating physicians, patients and
third-party payors as to the need for intensive therapy and the benefits of
external pumps over injection therapy (either conventional or multiple daily
injections). The Company also intends to expand the market for its external
pumps by enhancing its selling efforts internationally and entering additional
geographic areas. The Company has adopted as a strategy the initial introduction
of certain of its new products and applications in selected foreign countries
because of potentially less extensive and less time-consuming governmental
regulatory procedures.
 
     Diversification into Distribution of Additional Products for the Treatment
of Diabetes. With its acquisition of HMS, the Company has established a presence
in the market for additional diabetes products and supplies such as strips and
meters. The Company believes that the distribution of additional diabetes
products and supplies will compliment its existing distribution network for
insulin pumps and supplies. The Company also believes that it will provide a
means to efficiently distribute MiniMed's continuous glucose monitoring systems,
once regulatory approval is received.
 
     Diversification Into Treatment of Other Medical Conditions. The Company
believes that there are substantial opportunities to use its infusion pump
technology with medications other than insulin. While the Company's previous
strategy has focused on diabetes, it believes that its organization has matured
sufficiently and that it can now consider pursuing other delivery applications.
In this connection, Cooperation and Strategic Alliance Agreements were entered
into with Trimeris and UTC in 1997 and discussions are ongoing with a number of
other biopharmaceutical companies.
 
     Diversification into Disease Management. The Company plans to diversify
into comprehensive disease management products for the treatment of chronic,
life threatening conditions such as diabetes and HIV/AIDS. The acquisition of
the distribution and pharmacy capabilities of HMS, combined with the Company's
existing and proprietary expertise in therapy delivery systems, provides MiniMed
with a platform infrastructure to develop the facilities, pharmaceutical
expertise and delivery systems to dispense medications, equipment and supplies
to patients nationwide. Such a specialized health care delivery system could
position the Company to offer added value to managed care organizations by
offering payors an infrastructure that can efficiently and effectively serve
large volumes of patients.
 
     Continue Product Innovation. The Company is currently developing
enhancements to its most advanced external insulin pump and related disposables,
continuing to improve and enhance its implantable insulin pump and developing
other external and implantable pumps for alternative applications. The Company
is also involved in the development of continuous glucose monitoring systems,
including a hypoglycemia alert product and a physician monitor to be used by
health care professionals to collect data over two to three days to evaluate
glucose control of a patient. In December 1997, the Company filed an application
for FDA clearance
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for these products. The Company intends to develop a patient monitor that will
enable the patient to have a continual readout of his or her glucose levels. A
long-term goal of the Company is to market a "closed loop" system, or artificial
pancreas, which utilizes a sensor to control a pump for the automatic infusion
of insulin. No assurance can be given, however, that any of these products can
be developed or that the various components of any of such systems can be made
to work together or obtain regulatory approval for commercial distribution or be
accepted in the marketplace.
 
     Seek and Expand Strategic Alliances. The Company intends to continue
efforts to expand the market for its products through strategic alliances with
key partners. In the diabetes care marketplace, the Company will continue to
collaborate and expand its relationships with insulin and glucose meter
manufacturers and hospital service providers. The Company has a collaborative
relationship with Hoechst to work together to develop and test the special
insulin for use in the Company's implantable pump. Additionally, in 1996 the
Company entered into a co-promotion agreement with Roche Diagnostics/Boehringer
Mannheim Corporation ("Roche/BMC"), one of the two largest suppliers of glucose
strip meters in the world, under which each company markets its products to the
customers of the other, and in March 1997 the two companies entered into a
co-development and co-promotion agreement under which they are collaborating on
the development of a glucose management system for use primarily in hospitals.
 
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PRODUCTS
 
     The following table summarizes certain information with respect to the
Company's principal products in commercial distribution or under development.
 


                                                                                                         DATE
       PRODUCT                      DESCRIPTION                              STATUS                   INTRODUCED
       -------                      -----------                              ------                   ----------
                                                                                             
EXTERNAL PUMPS
507 insulin pump         Fourth generation model               Commercially available(1)              1996
506 insulin pump         Third generation model                Commercially available(1)              1992
505 insulin pump         Reduced feature version of the        Commercially available in certain      1996
                         earlier 506                           foreign countries, principally the
                                                               EU
507C insulin pump        Similar to 507, but able to store     Under Development(1)
                         three months of patient data
Data collection          Communications cradle to download     Under development
  system                 patient information from the 507,
                         507C and other products under
                         development
Glucose management       Hospital based system to control      Under development(3)
  system                 glucose levels
DISPOSABLES AND
  ACCESSORIES
Sillouhette infusion     Insulin-compatible soft-angled        Commercially available(1)(4)           1997
  set                    tubing set with disconnect feature
Sof-set QR infusion      Insulin-compatible tubing set with    Commercially available(1)(4)           1995
  set                    soft cannula (instead of a needle)
                         and quick release feature
Sof-set infusion set     Similar to Sof-set QR, without        Commercially available(1)(4)           1987
                         quick release feature
Polyfin QR infusion      Insulin-compatible tubing set with    Commercially available(1)(4)           1997
  set                    needle and quick release feature
Polyfin infusion set     Similar to Polyfin QR, without        Commercially available(1)(4)           1985
                         quick release feature
Medication reservoir     Syringe-like reservoir used with      Commercially available(1)              1983
                         external insulin pump
Sof-serter               Automatic Sof-set cannula inserter    Commercially available(1)              1997
IMPLANTABLE PUMPS
MIP 2001                 Implanted under the skin of the       CE Mark received in EU; application
                         abdomen; used for insulin therapy     in preparation in U.S.(5)(6)
Constant Flow Pump       Single rate pump for certain drugs    Under development(7)
                         other than insulin
GLUCOSE MONITORING
  SYSTEMS
Hypoglycemia alert       Used by patient to warn of low        Regulatory submission pending(3)(8)
  monitor                glucose levels
Physician diagnostic     Used by health care professionals     Regulatory submission pending(3)(8)
  device                 to monitor patients continuously
                         for 2-3 days
Patient glucose          Used by the patient to                Under development(3)
  monitoring system      continuously monitor blood glucose
                         levels

 
- ---------------
(1) Cleared for commercial distribution in the U.S. under Section 510(k)
    approval and in several foreign countries, principally the EU.
 
(2) Requires 510(k) clearance process.
 
(3) Requires 510(k) clearance process with supporting clinical data.
 
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(4) Labeled to be replaced every two or three days.
 
(5) Approved for commercial distribution in the EU (March 1995); approval for
    special insulin pending in EU.
 
(6) Requires combined PMA/NDA product application with respect to the
    implantable pump and the special insulin manufactured by Hoechst
 
(7) Requires PMA approval.
 
(8) 510(k) submission pending with the FDA.
 
  Current Products
 
     External Insulin Pumps. The Company's external pumps are designed to
provide the patient with an easy, comfortable and flexible means of insulin
infusion in order to maintain glucose levels. They are generally worn by the
patient attached to a belt, placed in a pocket, strapped to a leg or worn on a
cord around the neck. The Company's most recent version of its external pumps,
the Model 507, was introduced in June 1996. The Model 507 weighs approximately
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. The 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 507 represents the fourth generation of the Company's external
pumps, the first of which was introduced in 1983. The Company's pumps have many
safety features, including numerous alarms (36 in the Model 507), maximum
limitations on the rate and amount of basal and bolus deliveries, and automatic
shut-off mechanisms to prevent excessive delivery of insulin. It stores a record
of the timing and size of the last 12 bolus doses administered plus daily totals
for the past seven 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
("square wave bolus"), which is especially useful with very fast-acting insulin
analogs and is especially important for high fat content foods. The Model 507
also incorporates a backlight that makes it easier for a patient to program his
or her pump in low light conditions, and an audible bolus indicator for the
vision impaired.
 
     In September 1996, the Company introduced its Model 505 external insulin
pump. This pump is a reduced feature version of the earlier Model 506. It has
full bolus programming capability but only a single basal rate. It is intended
primarily for those markets where more sophisticated technology has not yet been
introduced.
 
     Insulin pumps and associated disposables are prescribed by physicians 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 the Company's Clinical Services Department for information. While
the Company believes that its external pumps significantly improve the quality
of life of their users and have also become increasingly easy to use, physicians
do not prescribe external pumps for certain patients using intensive therapy
because the pumps are a relatively sophisticated means of delivering insulin and
some patients do 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.
 
     Disposables. The Company's 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. The Company has 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
 
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Polyfin QR, all of which incorporate a quick release connector so that patients
can more conveniently and discreetly disconnect the pump for showering, bathing,
swimming, exercise or intimacy. To facilitate the insertion of the cannula
through the skin, the Company has developed a device known as the Sof-serter,
which allows the patient to automatically insert the cannula. In 1997, the
Company signed cooperation agreements with Maersk Medical to distribute new
models of infusion sets, one of which is currently marketed under the name
Silhouette. The Silhouette is a soft-angled infusion set that also incorporates
a disconnect feature.
These disposables provide the Company with a continuing source of revenue from
pump customers. Most of these products are labeled to be replaced every 48-72
hours.
 
     Implantable Insulin Pump. The Company's implantable insulin pump, the MIP
2001, is similar in function to the external insulin pump but is implanted under
the skin of the abdomen in a relatively minor surgical procedure. Like the
external pump, the implantable 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, similar to the way
radio waves are used to control cardiac pacemakers. The pump stores
approximately a three-month supply of a special insulin manufactured by Hoechst
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 draws the insulin into its
negative pressure reservoir. The negative pressure reservoir is a significant
safety feature which virtually precludes the possibility of a spill of the
stored medication from a reservoir leak or during refilling.
 
     Clinical trials of the Company's MIP 2001 implantable pump began in the
U.S. and France in 1990. Approximately 260 patients participated in the formal
trial, and approximately 350 additional patients received implantable pumps
outside of the trial. Additionally, many pumps have been implanted in Europe
(mostly in France) outside of the clinical trial, bringing the total number of
units implanted (including replacements) through December 31, 1997 to
approximately 1,200.
 
     During the early phase of the trials there was a tendency in approximately
10-15% of patients for blockage or clogging of the intra-peritoneal catheter or
for deposits to collect on a pump valve, resulting in a decreased rate of
infusion. These problems began to escalate in late 1993, resulting in the
Company's decision in June 1994 to discontinue implants in new patients except
for compassionate use. The escalation of the problem was traced to changes in
the insulin when the supplier transferred manufacturing from a pilot facility to
a production facility. The Company was able to develop a special rinsing
procedure to restore full function in most patients and a "side-port catheter"
to simplify this rinsing procedure. As a result, a limited number of implants
were resumed in France, pending final regulatory approval of the insulin.
Regulatory approval in the U.S. and the EU has been delayed by these problems
with the insulin and by the amount of time required to test both pilot and full
production lots of improved insulin.
 
     The Company has verified in laboratory tests that improved formulations of
the insulin supplied by the manufacturer are comparable or superior to the
earlier formulations that had performed acceptably in the Company's pumps. The
Company has developed a new test system and predictive algorithm that enables
quantitative projection of the performance of a given insulin formulation in the
implantable pump. A second test system was installed by the Company at Hoechst.
These systems will be used as a quality control diagnostic tool in the testing
of insulin lots.
 
     The Company received certification under applicable ISO quality standards
and received the CE Mark in March 1995 for the MIP 2001 implantable pump,
permitting commercial sale throughout the EU. However, separate approval from
the EU is required for the insulin, and Hoechst has applied for this approval.
No assurance can be given that such approval will be received. Full commercial
distribution of the Company's implantable pump in the EU will be limited until
the special insulin required for use in the pump is approved.
 
     The Company decided not to resume new patient implants in the U.S. until
FDA approval is received because of the high costs of the clinical trial
monitoring and certain other design and manufacturing problems with the MIP 2001
implantable pump have arisen. The Company is continuing to address these
problems and to pursue approval for commercial sale of the implantable pump in
the U.S. and is working with Hoechst under a procedure established by the FDA
for approval of a combined application for the Company's pump and the Hoechst
insulin. The Company has completed preparation of the PMA element of the
application for
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the implantable pump and is working with Hoechst in the preparation of the NDA
element of the application for the special insulin. No assurance can be given
that problems with the MIP 2001 implantable pump and/or the insulin will be
successfully resolved or these applications will be approved by the FDA. If
approved, the labeling would limit this insulin for use only in combination with
the Company's implantable pump. If Hoechst were to cease its efforts to obtain
FDA approval or cease to manufacture the insulin, the Company's implantable pump
program would be materially and adversely affected.
 
  Products Under Development
 
     The Company believes that its success in the future will depend on
continuing to enhance its existing products and developing new products for the
treatment of diabetes and other medical conditions.
 
     External Pumps. The Company is developing a variation of its Model 507
insulin pump, known as the Model 507C, which will have the capability of storing
in its electronic memory up to three months of information tracking the insulin
use of the patient. A second product being developed, the data collection
system, will permit health care professionals to download to a personal computer
this information from the 507 or 507C, 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 the three month period and, where indicated, to adjust the insulin
delivery protocol for the patient. The Company has operating prototypes of these
products and is in the process of testing them and enhancing their design. The
Company obtained clearance by the FDA through the 510(k) process for the 507C in
1997. The Company is also working on next generation pumps which it feels will
contain significant improvements over the 507 and 507C.
 
     The Company is developing a glucose management system in collaboration with
Roche/BMC for use primarily in hospitals. The system is designed to enable
health care professionals to better control the glucose levels of their
patients. The device is expected to be submitted for FDA approval through the
510(k) process.
 
     Disposables and Accessories. The Company is continuously working to improve
its disposables and accessories. The Company is currently working on a new
generation of disposables in an effort to improve current disposable product
offerings.
 
     Glucose Monitoring Systems. The Company is developing glucose monitoring
systems which are designed to provide continuous measurement of glucose levels
without the need to draw blood. Although the Company's development efforts are
at an advanced stage, no assurance can be given that the development of these
products will be successful or that they will be approved for commercial
distribution. All of these products will utilize a small, thin, pliable
microsensor, the "subcutaneous sensor," which is to be inserted into
subcutaneous tissue, generally in the abdomen or upper arm, to detect glucose
levels. Each sensor is expected to last approximately 3 1/2 days, after which
the patient would replace it with another sensor in a different location. The
sensor monitors glucose levels every 10 seconds and records averages over five
minute intervals, providing patients and physicians with an accurate continuous
glucose profile.
 
     A series of products using this technology is planned. The first two
products involve the Company's glucose sensor connected by wire to a
recording/display device and others are currently planned with telemetry,
permitting wireless communication. One of the first two products will provide
programmable alarms for low glucose levels to warn the patient when glucose
levels become too low. This early device will record but will not display actual
glucose readings. The second product will involve the same hardware but is to be
used by health care professionals to evaluate glycemic control, much like a
cardiologist uses a Holter monitor to monitor cardiac electrical function. This
product will record glucose levels and trends for two to three days after which
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. After obtaining additional clinical
experience with these initial products, the Company anticipates filing for FDA
clearance for a product that will be used by patients to continuously monitor
glucose levels. The Company expects to miniaturize the display unit for this
device so that it can be worn like a wristwatch or carried in a pocket.
 
                                        9
   11
 
     During 1997, the Company conducted a series of clinical trials which
evaluated the accuracy and stability of the sensor. Significant data was
collected, compiled and evaluated during these clinical trials, which included
more than 7,000 comparison blood glucose meter measurements recorded over 1,100
patient days. On December 17, 1997, the Company filed an application to the FDA
for 510(k) clearance of the first two products, consisting of the physician
diagnostic product and a hypoglycemia alert monitor.
 
     The development and production engineering of these products and various
accessories including the introducer, the transmitter and the receiver/display
devices are not yet complete. If clearance from the FDA is received, the Company
also plans to conduct a field trial before general release. The Company believes
that there will be a substantial market for its glucose monitoring sensors 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, the Company believes that it may be necessary for the price of the
Company's sensors over their useful life to be reasonably comparable to the cost
of presently available strips. No assurance can be given that this objective
will be achieved, particularly if glucose meter companies try to compete with
the Company by drastically reducing prices. Also, because of the size of its
potential market, many other companies are attempting to develop non-invasive
glucose measuring systems.
 
  Future Products
 
     A long-term goal of the Company is to market a system in which a version of
an implantable pump would be coupled with a long-term glucose sensor in a
"closed-loop" system in what would essentially constitute an artificial
pancreas. The goal is to create a device that would automatically maintain
glucose levels within a normal range via feedback from the sensor to the pump to
continuously adjust the rate of insulin infusion without constant intervention
and programming by the patient or physician.
 
     In order for such a system to be feasible, the Company would need to
develop or acquire the technology for a long-term sensor, as well as develop or
acquire appropriate technology for the sensor to control an implantable pump so
that they function as a closed-loop system. To that end, the Company is
considering entering into certain agreements with Medical Research Group LLC
("MRG"), an entity in which the Company's Chairman and CEO owns a significant
interest, to, among other things, acquire an option to the marketing rights to
long-term sensor technology under development by MRG.
 
     A complete closed-loop system, as described above, would require an IDE (as
defined below) and a PMA, the timing of which are as yet undetermined. No
assurance can be given that further development of the combined system of
implantable pump and long-term sensor will be successful or that it will prove
to be safe and effective and be approved for commercial distribution.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and development activities are performed primarily
by its research and development organization, which consisted of 82 persons as
of February 28, 1998. The Company obtains its product ideas from its staff and
Medical Advisory Board, as well as patients and health care professionals, whose
opinions on products are actively solicited through surveys, field visits,
medical symposia, focus groups and personal relationships. All research and
development costs are expensed as incurred, and for 1995, 1996, and 1997,
research and development expenses were $7,095,000, $7,900,000 and $9,447,000
respectively.
 
MARKETING AND SALES
 
     Orders for the Company's external insulin pumps in the U.S. are typically
placed by the patient upon the advice and recommendation of his or her
physician, who provides a prescription. The Company's primary marketing efforts
are focused on endocrinologists, diabetologists and other health care
professionals who treat diabetes, and on third-party payors. The Company
believes that more than 90% of the Company's revenues from the sale of its
external pumps and related disposables are reimbursed by third-party payors
(subject to applicable deductible and copayment amounts). The Company has begun
to broaden its marketing efforts to include those primary care physicians who
treat relatively large numbers of diabetics in managed care organizations. The
Company sponsors educational symposia in intensive diabetes management for
physicians,
                                       10
   12
 
other health care professionals and third-party payors, teaching the benefits
of, and providing training in, pump therapy. The Company has trained over 5,000
health care professionals in the use of its insulin pumps for intensive
management of patients and intends during 1998 to conduct 40 one-day and nine
two-day symposia in the U.S. and 12 one-day symposia in Europe. Roche/BMC and
Eli Lilly & Co. contribute to the funding of these educational programs.
 
     The Company also seeks to develop patient interest in and demand for
diabetes products by providing patients with access to its existing substantial
service and support network, including: (i) the 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; (ii) free short-term,
replacement pumps sent within 48 hours or less to promote continuous therapy;
(iii) an insurance assistance department consisting of 22 people at February 28,
1998 (exclusive of an additional 35 people involved in reimbursement related
activities acquired in the HMS transaction) to answer questions, simplify and
expedite claims processing and assist patients in obtaining third-party
reimbursement; (iv) participation in a patient advocacy program in collaboration
with the American Association of Clinical Endocrinologists; (v) an extensive
Internet web site (www.minimed.com); (vi) advertisements in targeted media; and
(vii) free videotapes and other educational material. Under their co-promotion
agreement, the Company and Roche/BMC each send targeted advertising to patients
describing the other's products, including in the case of materials sent by
Roche/BMC, descriptions of the Company's patient service and support network.
The Company has recently expanded its insurance support activities to better
address the growing managed care segment of health care payors in the U.S. The
Company has arrangements with over 100 third-party payors providing for
reimbursement for the Company's external pumps, including contracts with
Aetna/U.S. Healthcare, Inc., United Healthcare, PacifiCare, Prudential and
various Blue Cross/Blue Shield affiliates.
 
     The Company markets its diabetes products and serves customers through a
combination of a direct sales organization and distributors. With the purchase
of HMS, the Company significantly increased the size of its sales force. In
addition to senior sales and marketing management and an extensive in-house
support staff, as of February 28, 1998, the direct sales organization in the
U.S. consisted of four regional directors and 80 field staff personnel,
including eight field insurance coordinators. These representatives are
extensively trained and specialize in diabetes therapy and the use of the
Company's products. The Company compensates its sales representatives in the
U.S. with a base salary, a sales commission and an annual bonus based on meeting
performance objectives. In the U.S., the Company also contracts with nurse
educators (many of whom are registered nurses) who assist in educating potential
patients about use of the Company's external pumps.
 
     The Company believes that its strategy of maintaining its own direct sales
force dedicated to diabetes is an important factor in market development and an
important competitive advantage. Nevertheless, the Company also utilizes
independent distributors in the U.S. to augment its direct sales force and
increase the number of physicians served. As a result of its continued
investment in its internal reimbursement capabilities and its recent acquisition
of HMS, the Company anticipates that the percentage of its sales made through
its direct sales force will increase. Internationally, independent distributors
are used to provide sales coverage in geographic areas not served by the
Company's direct sales force. Also, some third-party payors in the U.S. require
that certain classes of purchases be made through specified distributors, and
certain distributors in the U.S. and internationally maintain substantial
infrastructure to support physician and patient needs.
 
     Internationally, the Company has its own sales organizations for France,
Germany, the Netherlands, Belgium and Luxembourg, consisting of 25 people at
February 28, 1998, including administrative staff. The Company also completed
the acquisition of Dartec AB, which will give the Company a third European
subsidiary to better serve Scandinavia and the Baltic region. The Company also
has a distribution manager in the United Kingdom and utilizes independent
distributors in other countries. The Company believes that the international
market provides a significant opportunity for growth and is seeking to expand
its international sales. International sales increased from 7.4% of total
revenues in 1992 to 13.8% in 1997. Also, the Company expects that some of its
new products and new applications will be introduced in foreign countries prior
to their introduction in the U.S. because the regulatory approval process in
other countries has generally been less time consuming and less expensive than
in the U.S.
                                       11
   13
 
     With its acquisition of HMS, the Company has established a presence in the
market for additional diabetes products and supplies such as strips and meters.
The Company believes that the distribution of additional diabetes products and
supplies will compliment its existing distribution network for insulin pumps and
supplies. It will also provide the Company with a means to efficiently
distribute its continuous glucose monitoring systems.
 
MANUFACTURING
 
     The Company purchases from outside vendors most of the components, certain
subassemblies and various services used in the manufacture of its products. The
purchased items are generally produced to the Company's specifications and in
many instances to the Company's designs. The Company then assembles the
components into finished products. Certain disposable products have been
purchased from OEM suppliers.
 
     The Company's Quality Assurance Department provides guidance to vendors and
performs inspections and product tests at various steps in the manufacturing
cycle to ensure compliance with the Company's stringent specifications. The
manufacturing facilities are subject to periodic inspection by regulatory
authorities. In 1995 the Company was approved under International Standards
Organization ("ISO") 9002 relating to quality standards, and in 1996 it was
approved under ISO 9001 relating to design control standards. Such approvals
enable the Company to quickly introduce certain products into the EU based on
annual certification of the Company's quality system.
 
     In 1996 the Company instituted Demand Flow Technology manufacturing
procedures. This version of "Just in Time" manufacturing is intended to
significantly reduce total manufacturing cycle times, thereby reducing
inventories. Also, the manufacturing line can then be more responsive to
customers orders, quality is improved and manufacturing costs and paperwork are
reduced.
 
     The Company relies on single sources for certain critical components,
including hybrid circuits, integrated circuits, pumping elements, special
batteries, special insulin formulations, and various disposable products and
components as well as a sole source subcontract arrangement for sterilization
services. Arrangements for additional or replacement suppliers for certain of
these components could not be accomplished quickly. The loss of any of these
vendors as a supplier could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
COMPETITION
 
     At present the Company considers its primary competition in the diabetes
market for its infusion systems to be injection therapy. The Company competes
against injection therapy primarily by educating doctors, nurses, patients and
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.
 
     In the sale of its external pumps, the Company competes with Disetronic
Medical Systems, Inc. ("Disetronic"), which introduced a competitive external
pump product in the U.S. approximately six years ago. The Company estimates that
Disetronic currently has approximately 25% of the U.S. market for external pumps
for new patients. Internationally, in addition to Disetronic, the Company
competes in the insulin pump market against several smaller suppliers which
generally offer less sophisticated products. The Company competes with other
pump makers primarily on the basis of product design, quality and utility,
physician and patient education and support services and price. There can be no
assurance that past, current and potential makers of competitive pumps, some of
which may have substantially greater financial, technical, marketing and other
resources than the Company, will not become more significant factors in the
future. The Company believes that it may be faced with additional competition in
the near future.
 
     Numerous companies, some of which have substantially greater financial,
technical, manufacturing, marketing and other resources than the Company, are
attempting to develop a variety of products for glucose measurement. Some of
these products are directed toward non-invasive measurement systems, generally
using near-infrared spectroscopic light directed through tissue, such as by
analysis of light reflectance from an arm or transmission through a finger
inserted into a well, through an ear lobe or through other tissue. The technical
 
                                       12
   14
 
obstacles to such technologies are substantial and to date no such instrument
has been approved for commercial distribution by the FDA. However, if such
efforts are successful and provided universal calibration is possible (so far
all reports indicate that even with extensive, individual calibration, results
are not adequate), then applications that can be adequately served by
intermittent measurements, such as measurements in doctors' offices, might be
served with such instruments. There are also several efforts directed to
reducing the discomfort associated with the finger pricks required with current
glucose meter systems by reducing the depth of penetration of the needle, using
a laser and/or using other methods to breach the outer derma layers so as 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. There are also at least three other efforts being directed toward
subcutaneous measurement with electrochemical sensors. It is possible that some
patients might prefer such systems to the Company's 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 therefore have a material adverse effect on the Company's
glucose sensor program.
 
     The distribution of diabetes supplies and prescription drugs are highly
competitive businesses. The Company believes that its principal competition in
these areas will come 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 the Company. Moreover, the health care
industry generally and the provider segment in particular, has experienced and
is expected to continue to experience consolidation. This trend could produce
additional competitors having larger and substantially greater resources than
the Company. Competitive pressure could cause the Company to lose or fail to
gain market share or experience significant price erosion. The Company competes
on the basis of customer service, convenience, product availability and price.
In the field of diabetes supplies, Universal Self Care, Inc., Transworld Home
Healthcare, Inc., Chronimed Inc. and Polymedica Industries, Inc. are
publicly-held companies that will compete with the Company. The Company expects
that it will have no significant direct competitor in its pharmacy operations
recently acquired in the HMS transaction as the Company plans to concentrate on
the distribution of pharmaceuticals that are proprietary to MiniMed.
 
     A number of companies and medical researchers are pursuing 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 have
a material adverse effect on the Company's business, financial condition and
results of operations and could possibly render the Company's products obsolete.
 
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
 
     The Company files patent applications to protect technology, inventions and
improvements that it considers important to the development of its business. The
Company currently holds numerous issued U.S. patents and foreign patents and has
pending many U.S. and foreign patent applications that cover various aspects of
its technology. In addition, the Company has exclusive licenses under a number
of patents and holds fully paid, non-exclusive, worldwide licenses to several
other patents relating to implantable pumps.
 
     Litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. Although
the Company knows of no infringement of patents held by others, it is always
possible that a third-party may assert infringement. The Company believes that
it owns or has the right to use all technology incorporated into its products,
but an adverse determination in any litigation or interference proceeding to
which the Company may become a party could subject the Company to significant
liabilities to third parties or require the Company 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
 
                                       13
   15
 
royalties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products or its planned products, which would have a
material adverse effect on the Company's business, diversification
opportunities, financial condition and results of operations.
 
     The Company owns the trademarks MiniMed, Sof-set, Sof-set QR, Sof-set
Ultimate QR, Polyfin, Silhouette and certain other trademarks. The Company also
relies on certain trade secrets and proprietary know-how that it seeks to
protect, in part, through confidentiality agreements with its employees and
consultants. There can be no assurances that any unprotected information will
not also be developed by others.
 
GOVERNMENT REGULATION
 
     Clinical testing, manufacture and sale of the Company's products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign agencies. In the U.S., the Company is
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 ("DHS"). The Company is subject to inspection on a routine basis by
both the FDA and the DHS for compliance with the FDA's Quality Systems
Regulation ("QSR"). These regulations impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. Hoechst, the manufacturer of the special insulin
to be used in the Company's implantable pump, is also subject to regulation and
inspection by the FDA, as well as European regulatory agencies.
 
     Under the Federal Food, Drug and Cosmetic Act (the "Act"), as amended,
medical devices are classified into one of three classes (i.e., Class I, II, or
III) on the basis of the controls necessary to reasonably ensure their safety
and effectiveness. Safety and effectiveness can reasonably be assured for Class
I devices through general controls (e.g., labeling, premarket notification and
adherence to QSRs) and for Class II devices through the use of general and
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive PMA by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed Class I
or Class II devices).
 
     Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a PMA. A 510(k) clearance will be granted if the submitted data
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device, or to a pre-amendment Class III
medical device for which the FDA has not called for PMAs. Generally an
application for 510(k) clearance only requires submission of a file, including
design, manufacturing, test and marketing information, including labeling.
However, in some cases the FDA requires clinical trials under an IDE (as defined
below), even for products to be cleared under the 510(k) process, There can be
no assurance that the Company will obtain 510(k) premarket clearance for any of
the devices for which it may file a 510(k) notice. The FDA may determine that
the proposed device is not substantially equivalent, or that additional data are
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional data, could
delay the market introduction of new products that fall into this category and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     External pumps have generally qualified for clearance under Section 510(k),
although certain features of advanced pumps may require clinical validation. The
Company's Models 507C, 507, 506, and 505 external pumps have all been cleared by
the FDA pursuant to the Section 510(k) premarket notification process.
Modifications or enhancements to the Company's products that are cleared through
the 510(k) process that could significantly affect safety or effectiveness will
require new submissions. The Company has made certain changes to its cleared
devices which the Company believes do not require the submission of new 510(k)
notifications. However, there can be no assurance that the FDA will agree with
the Company's determinations and not require the Company to submit new 510(k)
notifications for any of these modifications. The Company
 
                                       14
   16
 
believes its short term subcutaneous glucose monitor may be cleared through the
510(k) process after a limited clinical trial and, in December 1997, the Company
filed for 510(k) clearance for its first two glucose sensor products, but there
is no assurance that the FDA will not later require the more stringent PMA
application process for such devices.
 
     A PMA must be filed if the proposed device is not substantially equivalent
to a legally marketed device or if it is a pre-amendment Class III device for
which the FDA has called for PMAs. In addition, a "new drug" may not be marketed
without an approved NDA establishing the safety and effectiveness of the drug
for its intended uses. The NDA process is typically costly, lengthy and
uncertain.
 
     In order to obtain a PMA, a device that poses a significant risk to
patients must undergo clinical evaluation under an Investigational Device
Exemption ("IDE") that is granted by the FDA to permit testing of the device in
a limited number of humans in clinical trials conducted at a restricted group of
clinical sites. Similarly, a new drug, such as the insulin used for the
implantable pump, must be evaluated in an Investigational New Drug ("IND")
trial. In addition to obtaining from the FDA an IDE approval or IND
authorization to conduct a clinical trial, the sponsor of the investigational
research must also obtain approval for the clinical research from an
institutional review board or committee established for this purpose by each
medical center where the trials will be conducted. Clinical trials leading to a
PMA or an NDA are intensive and costly activities that usually extend over two
or more years. As the clinical trial progresses under an IDE or IND, the FDA may
at certain milestones allow expansion of the scope of the trial to allow
additional patients or additional clinical sites or both.
 
     In late 1991, the FDA adopted new procedures for the review of products
that involve both devices and drugs, which permit clinical investigation and
approval to be coordinated by a lead center of the FDA. The Company's
implantable pump and the associated insulin comprise a combined device/drug
system that will be regulated under these procedures. Following the adoption of
these procedures, the Company, which had already submitted a PMA application for
the Company's MIP 2001 implantable insulin pump, withdrew its initial
application for a PMA and the Company and Hoechst intend to submit a single
application to obtain FDA approval of the combination product. This is the first
time that Hoechst has sought FDA approval to market insulin in the U.S. Although
the Company and Hoechst will file a single application, it will contain both an
NDA element for the insulin and a PMA element for the pump. The FDA's Center for
Drug Evaluation and Research will be the lead center and will review the NDA
portion of the application, while the Center for Devices and Radiological Health
will be responsible for reviewing the PMA portion. The Company anticipates that,
if the FDA grants approval, such approval would include issuance of an approved
NDA for the insulin and an approved PMA for the pump. There can be no assurance,
however, that the application will ever be approved. Under the Act, even after
approval, each batch of insulin produced by Hoechst for the combination product
would require FDA's certification that the batch meets requisite strength,
quality and purity standards.
 
     Clinical trial results are presented to the FDA in a PMA or NDA
application. In addition to the results of clinical investigations, the
applicant must submit other information relevant to the safety and efficacy of
the device and/or the drug, including the results of non-clinical tests, a full
description of the device and/or drug and their components, a full description
of the methods, facilities and controls used for manufacturing, and proposed
labeling. Such submissions are extremely detailed and complex, often involving
tens of thousands of pages. The FDA staff then reviews the submitted application
and determines whether or not to accept the application for filing. There is no
assurance that either the safety or efficacy data in these submissions will be
deemed sufficiently complete and adequate by the FDA, and if they are not, a
final determination by the FDA could be delayed while additional trials are
performed or the project could be abandoned. Such trials would add significant
new costs to such a program, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     If accepted for filing, the applications are further reviewed first by the
FDA staff and, if appropriate, subsequently by an FDA scientific advisory panel
comprised of physicians and others with expertise in the relevant field. A
public meeting is held before the advisory panel in which the PMA or NDA
application is reviewed and discussed. The scientific advisory panel then issues
a recommendation of approval or denial to
 
                                       15
   17
 
the FDA or recommends approval with conditions. Although the FDA is not bound by
the opinion of the advisory panel, the FDA tends to give considerable weight to
panel recommendations. If the FDA's evaluations of the application are
favorable, the FDA will subsequently publish an order approving the PMA
application or NDA application. Interested parties can file comments on the
order and seek further FDA review.
 
     Although by statute the FDA is granted 180 days in which to review a PMA or
NDA and either approve or disapprove it, in practice the FDA has often taken
much longer. Generally, during the review, the FDA will request additional data
and the applicant will agree to extend the review time. The FDA will make an
initial assessment as to whether the PMA or NDA is sufficiently complete for
review and may require the development and submission of additional data or
analyses. The PMA and NDA processing in the past has typically lasted more than
a year from the time of filing, and in some cases several years, but the FDA is
being pressured to meet its statutory timelines. Many such reviews are now being
completed within six months, but others are not, and there is no assurance when
or if an application will be approved.
 
     New PMA applications or PMA supplements are required for certain
modifications to a device that is approved through the PMA process. Supplements
to a PMA application often require submission of the same type of information as
for a PMA application except that the supplement is limited to information
needed to support any changes from the product covered by the original PMA
application and may not require the submission of clinical data or the convening
of an advisory committee and corresponding review. In addition, certain changes,
including changes to the labeling, manufacturing, dosage, or route of
administration of an approved new drug require the approval of a supplement to
the NDA application prior to initiating such changes. Submission of significant
NDA supplements often require data similar to that submitted with the original
NDA application. Likewise, with respect to the implantable pump and insulin
combination product, certain changes to the product (e.g., design, labeling,
manufacturing, dosage, route of administration) would require FDA's approval of
a supplement to the original application. At the present time, FDA has indicated
that there will be only one holder of the approved application for the pump and
insulin combination product. The holder will be the entity entitled to file such
supplements. The Company is seeking an arrangement with the FDA and Hoechst
whereby the Company would be the approved application holder, but there can be
no assurance that such an arrangement will be achieved. If the Company does not
hold the approved application, then its ability to obtain FDA approval of
modifications to the device would require appropriate contractual arrangements
with Hoechst, or possibly would require obtaining a new PMA, which could have a
material adverse effect on the Company.
 
     The PMA and NDA processes can each be expensive, uncertain and lengthy, and
a number of devices and drugs for which PMA or NDA approval has been sought have
never been approved for marketing. There can be no assurance that the Company
will be able to obtain necessary regulatory approvals or clearances on a timely
basis or at all for any of its products under development, and delays in receipt
of or failure to receive such approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     Approvals restrict devices and drugs to specifically labeled uses, and the
combination pump/insulin product would be similarly restricted. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
 
     The FDA also conducts inspections to determine whether the Company conforms
with QSR, and subsequent QSR inspections will continue after the FDA approval. A
QSR inspection (such inspection was carried out under the FDA's Good
Manufacturing Practices guidelines that were subsequently replaced by QSR) was
last completed in May of 1997, with only minor citations, which have all been
corrected. A further such inspection may be conducted relative to any PMA
application submitted by the Company for other products or pursuant to the FDA's
practice of performing periodic inspections.
 
     Failure to comply with applicable regulatory requirements can result in,
among other things, fines, injunctions, civil penalties, failure of the
government to grant premarket clearance or premarket approval of devices or
drugs, delays or suspensions or withdrawals of approvals, seizures or recalls of
products, operating
                                       16
   18
 
restrictions and criminal prosecutions. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
Company's 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.
 
     There can be no assurance that the necessary approvals for the use of new
generations of the Company's external pumps and disposables, the Company's
implantable insulin pump or its glucose monitoring systems will be granted by
the FDA or other authorities on a timely basis or at all, and delays in receipt
of or failure to receive such approvals, or the loss of previously received
approvals, could result in significant delays, substantial costs or even the
cessation of operations relating to a product or group of products, and any of
these could have a material adverse effect on the business, financial condition
and results of operations of the Company.
 
     Exports of products subject to 510(k) notification requirements, but not
yet cleared to market, are permitted without FDA export approval, provided that
certain 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 certain 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. Within the next several years, a
company must obtain the CE Mark prior to sale within the EU of certain medical
devices, including implantable products. During this process, the sponsor must
demonstrate compliance with ISO manufacturing and quality requirements. The
Company received approval for use of its implantable insulin pump in France in
June 1993. In March 1995, the Company obtained the CE Mark to market its
implantable pump throughout the EU, but full commercial distribution of the
Company's 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, the
Company received certification under applicable ISO 9002 quality standards and
in July, 1996 received certification under ISO 9001 design control standards. As
is the case with QSR inspections in the U.S., inspections by various foreign
bodies will continue in the EU on a periodic basis after receipt of the CE Mark.
 
     The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Additionally, the Company 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. There can be no assurance that the
Company 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 the Company's ability to do business.
 
     With its acquisition of the pharmacy businesses of HMS, the Company is now
subject to various federal and state regulatory requirements relating the
distribution of prescription pharmaceuticals. For example, the US Drug
Enforcement Administration ("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. There can be no assurance that the
Company 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 the Company's ability to do business.
 
                                       17
   19
 
THIRD-PARTY REIMBURSEMENT
 
     In the U.S., the Company's products are generally purchased directly by
patients, physicians, physician groups, hospitals, and/or dealers. In many cases
the Company, on behalf of the patients, bills third-party payors, including
private insurance companies, health maintenance organizations, preferred
provider organizations, other managed care 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, certain states
reimburse for the Company's products under the Medicaid program. Although the
Company does not currently derive revenues from the Medicare program for any of
its products, it is in the process of seeking coverage for its external pump.
The Company believes that the primary value of Medicare coverage for its insulin
pumps and related disposables today is that it may facilitate reimbursement by
other third party payors because they often follow Medicare guidelines. The
Budget Reconciliation Act of 1997, however, 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. There is no certainty that the Budget Reconciliation Act of 1997, or
any other legislation expanding coverage for diabetes which is currently, or
will in the future, be considered, will benefit the Company's products.
 
     The Company maintains an insurance assistance department consisting of 22
people at February 28, 1998 (exclusive of an additional 35 people involved in
reimbursement related activities acquired in the HMS transaction) to simplify
and expedite claims processing and to assist patients in obtaining third-party
reimbursement. The Company believes that more than 90% of the revenues from
Company's external pump and related disposable sales are reimbursed by
third-party payors (subject to applicable deductible and copayment amounts).
 
     Third-party payors may also decline to reimburse for procedures, supplies
or services determined to be not "medically necessary" or "reasonable." Certain
payors have initially indicated that they would decline to reimburse for certain
of the Company's products on that basis. The Company attempts to deter and
reverse such practices through education and has expanded its insurance
assistance efforts toward this end. These efforts are usually successful, but
such reimbursement may become less likely in the future as pressure continues to
mount for lower health care costs and particularly near term costs.
 
     Medicare and many other third-party payors also do not reimburse for
procedures deemed "experimental" or "investigational." There is usually no
precise date when a procedure ceases to be experimental or investigational, but
devices in clinical investigation under an IDE are usually deemed to be
experimental or investigational. The failure to cover early use of a procedure
deters usage, delaying acceptance even longer. Use of implantable pumps is still
considered to be an investigational procedure by many third-party payors in the
U.S. and reimbursement for the small number of pumps sold in the U.S. has
therefore been limited to date.
 
     There is widespread concern that health care market initiatives in the U.S.
may lead third-party payors to decline or further limit reimbursement. The
extent to which third-party payors may determine that use of the Company's
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 developed by the Company.
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, the Company cannot predict whether reimbursement for the Company's
products will be affected or, if affected, the extent of any effect. The
unavailability of third-party coverage or the inadequacy of reimbursement for
the Company's products would materially and adversely affect the Company's
business, financial condition and results of operations.
 
PRODUCT LIABILITY AND WARRANTIES
 
     The Company's external pumps are generally warranted for various periods
ranging from two to four years. The special motors contained in the Company's
external pumps are warranted for life. The Company sets aside a reserve based on
monthly return rates to pay for customer service and repair of products.
Additional reserves are set aside during early stages of product introduction.
The Company believes such
                                       18
   20
 
reserves to be adequate, but in the event of a major product problem or recall,
the reserves may be inadequate to cover all costs, and such event could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     The Company's business involves the inherent risk of product liability
claims. The Company maintains product liability insurance with coverage limits
of $15 million per occurrence and an annual aggregate maximum of $15 million,
with a deductible of $50,000 per occurrence. There can be no assurance that this
insurance coverage will continue to be available on terms acceptable to the
Company or that such coverage will be adequate for liabilities actually
incurred.
 
EMPLOYEES
 
     As of February 28, 1998, the Company employed 485 full-time persons
(exclusive of HMS), plus 33 temporary employees, including 82 in research and
development, 149 in manufacturing, production engineering and quality assurance,
126 in administration and 138 in sales and marketing. As of February 28, 1998,
the Company also employed 133 employees as part of HMS. The Company believes
that the success of its business depends, in part, on its ability to attract and
retain qualified personnel, particularly qualified scientific, technical and key
management personnel. The Company believes its relationships with its employees
are good.
 
ITEM 2. PROPERTIES
 
     The Company owns its current primary facilities with an aggregate of
approximately 175,000 square feet in Sylmar, California. Approximately 23,400
square feet of the space is leased to Alfred E. Mann, the Company's Chairman and
Chief Executive Officer. In conjunction with its acquisition of HMS, the Company
acquired ownership of a facility in Hollywood, Florida that houses most of the
operations of HMS and contains an aggregate of approximately 32,000 square feet.
 
     The Company is currently participating in ongoing negotiations with the
California State University Northridge ("CSUN"), and its affiliated development
corporation, relating to the possible lease of up to 36 acres of land on the
CSUN campus in Northridge, California. The Company contemplates constructing up
to 655,000 square feet of building space in three phases over a three to five
year period to address its future space requirements for its manufacturing,
administrative and other activities. The Company believes that, if successfully
consummated, its expansion on the CSUN campus will address the Company's space
requirements for the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On September 11, 1996, the Company filed an action against Fimed, Inc.
("Fimed") in Los Angeles County Superior Court seeking declaratory relief and
rescission of a distributorship agreement giving Fimed an exclusive right to
distribute the Company's external pumps using third-party consumer financing.
The Company alleged that Fimed fraudulently induced the Company to enter into
the agreement and failed to disclose material facts. Fimed answered the
Company's complaint generally denying the allegations but also asserted
counterclaims against the Company 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 million, plus punitive damages. No significant
amount of the Company's products has ever been sold using third-party consumer
financing, and Fimed never made any sales under the agreement. The Company
notified Fimed that the Company was seeking rescission of the agreement less
than six months after it was signed and before Fimed began marketing the
Company's products. The Company believes that it has meritorious defenses to the
counterclaim asserted by Fimed. The Company intends to prosecute its claim
against Fimed and defend against the counterclaim vigorously. Discovery in the
litigation has been substantially completed and a trial date has been set for
October 13, 1998.
 
     The Company is not presently a party to any other material pending legal
proceedings. The Company may be subject from time to time to various other legal
proceedings, including product liability and employment claims, which arise in
the ordinary course of its business. The Company believes that none of
                                       19
   21
 
such proceedings, individually or in the aggregate, are likely to have a
material adverse effect on its business or financial condition.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
                                       20
   22
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's 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:
 


                                                              HIGH      LOW
                                                             ------    ------
                                                                 
1997
  Fourth Quarter Ended January 2, 1998...................    $44.50    $33.25
  Third Quarter Ended September 26, 1997.................     39.13     26.25
  Second Quarter Ended June 27, 1997.....................     27.25     22.50
  First Quarter Ended March 28, 1997.....................     34.75     24.63
1996
  Fourth Quarter Ended December 27, 1996.................    $32.75    $23.50
  Third Quarter Ended September 27, 1996.................     29.75     18.25
  Second Quarter Ended June 28, 1996.....................     33.75     16.25
  First Quarter Ended March 29, 1996.....................     18.25     12.25

 
RECORD HOLDERS
 
     The last reported sale price of the Common Stock on the Nasdaq National
Market on March 13, 1998 was $39.50. As of March 13, 1998, there were
approximately 391 stockholders of record of the Company's Common Stock.
 
DIVIDENDS
 
     The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain all available funds for use in
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Any future determination relating to dividend policy will be
made in the discretion of the Board of Directors of the Company and will depend
on a number of factors, including the future earnings, capital requirements,
financial condition and future prospects of the Company and such other factors
as the Board of Directors may deem relevant.
 
SALES OF UNREGISTERED SECURITIES
 
     Effective January 2, 1998, the Company acquired all of the outstanding
shares of capital stock of HMS pursuant to the terms of the Reorganization
Agreement, as amended (the "Reorganization Agreement") among Robert A. Kusher,
Craig Lowy, the Company and MiniMed Distribution Corp., a wholly owned
subsidiary of the Company ("MDC") and dated as of October 19, 1997. Pursuant to
the Reorganization Agreement, MDC received all of the outstanding shares of
capital stock of HMS in exchange for 374,884 shares of common stock of the
Company with a value of approximately $14.2 million.
 
     The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, in the acquisition of HMS and the related sale of unregistered
securities contemplated by the Reorganization Agreement.
 
                                       21
   23
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following table summarizes certain selected consolidated financial
data, which should be read in conjunction with the financial statements and
notes thereto included elsewhere herein and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data as of January 2, 1998, December 27, 1996, December
29, 1995 and December 31, 1994 and 1993, and for each of the five fiscal years
in the period ended January 2, 1998 have been derived from the audited financial
statements of MiniMed Inc., which have been audited by Deloitte & Touche LLP,
the independent auditors.
 


                                         YEAR ENDED          YEAR ENDED     YEAR ENDED    YEAR ENDED
                                        DECEMBER 31,        DECEMBER 29,   DECEMBER 27,   JANUARY 2,
                                    ---------------------   ------------   ------------   ----------
                                      1993        1994          1995           1996          1998
                                    ---------   ---------   ------------   ------------   ----------
                                                  IN THOUSANDS, EXCEPT PER SHARE DATA
                                                                           
STATEMENT OF OPERATIONS DATA:
Net sales........................   $  35,769   $  43,105    $   56,906     $   76,396    $   99,492
Cost of sales....................      17,506      20,847        22,780         32,314        38,704
                                    ---------   ---------    ----------     ----------    ----------
Gross profit.....................      18,263      22,258        34,126         44,082        60,788
Operating expenses:
  Selling, general and
     administrative..............      15,236      17,991        24,379         32,101        41,237
  Research and development.......       3,998       5,372         7,095          7,900         9,447
  Merger related expenses........           0           0             0              0         1,000
                                    ---------   ---------    ----------     ----------    ----------
     Total operating expenses....      19,234      23,363        31,474         40,001        51,684
                                    =========   =========    ==========     ==========    ==========
Operating income (loss)..........        (971)     (1,105)        2,652          4,081         9,104
Interest expense.................        (410)       (564)         (418)          (163)         (237)
Other income, including interest
  income.........................         154         228           965          1,062         1,851
                                    ---------   ---------    ----------     ----------    ----------
Income (loss) before taxes.......      (1,227)     (1,441)        3,199          4,980        10,718
Provision for income taxes.......        (113)          0          (854)        (1,662)       (4,029)
                                    =========   =========    ==========     ==========    ==========
Net income (loss)................   $  (1,340)  $  (1,441)   $    2,345     $    3,318    $    6,689
                                    =========   =========    ==========     ==========    ==========
Basic income (loss) per share....   $   (0.16)  $   (0.18)   $     0.24     $     0.28    $     0.52
                                    =========   =========    ==========     ==========    ==========
Weighted average number of common
  shares used in computing basic
  net income (loss) per share....   8,180,000   8,143,000     9,668,000     11,941,999    12,905,000
                                    =========   =========    ==========     ==========    ==========
Diluted income (loss) per
  share..........................   $   (0.16)  $   (0.18)   $     0.22     $     0.26    $     0.49
                                    =========   =========    ==========     ==========    ==========
Weighted average number of common
  shares used in computing
  diluted net income (loss) per
  share..........................   8,180,000   8,143,000    10,718,000     12,567,000    13,556,000
                                    =========   =========    ==========     ==========    ==========

 
                                       22
   24
 


                                        DECEMBER 31,       DECEMBER 29,    DECEMBER 27,    JANUARY 2,
                                     ------------------    ------------    ------------    ----------
                                      1993       1994          1995            1996           1998
                                     -------    -------    ------------    ------------    ----------
                                                               IN THOUSANDS
                                                                            
BALANCE SHEET DATA:
Working capital..................    $ 8,606    $13,428      $32,133         $36,153        $63,409
Total assets.....................     20,018     25,422       56,561          64,424        105,819
Notes payable, net of current
  portion........................      7,286      7,000          885           1,528            728
Redeemable, convertible preferred
  stock..........................          0      8,513            0               0              0
Retained earnings (accumulated
  deficit).......................     (1,813)    (3,758)      (1,924)          1,394          8,083
Total stockholders' equity.......      3,765      4,907       42,120          48,131         83,083

 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of MiniMed should be read in conjunction with the consolidated
financial statements and the related notes thereto incorporated by reference
herein. The discussion in this Annual Report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in the forward-looking statements. See language
relating to forward-looking statements at the top of page 2 of this Annual
Report on Form 10-K.
 
GENERAL
 
     The Company's sales and profits have been generated primarily through the
sale of external pumps and disposable products used to deliver insulin in the
intensive management of diabetes. With its acquisition of HMS effective January
2, 1998, the Company's consolidated operating results also include sales related
to the distribution of other diabetes supplies and pharmacy products. All
operating results have been restated to include the operations of HMS after $1.0
million in acquisition expenses, as this acquisition has been accounted for as a
poolingof-interests.
 
     Product development and manufacturing operations have focused on three
product lines: external pumps and related disposables, implantable insulin pumps
and continuous glucose monitoring systems. Future developments of the external
pumps and disposable product lines will focus upon improving the existing
technology for its current use in diabetes treatment and the utilization of this
technology for the treatment of other medical conditions. There have been no
sales of glucose monitoring systems to date. Sales activity of the implantable
insulin pump continues to be irregular until full regulatory approval is
obtained.
 
                                       23
   25
 
RESULTS OF OPERATIONS
 
     The following table sets forth for the years indicated the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations and the percentage changes in the dollar amounts of
such items on a comparative basis for the last three fiscal years:
 


                                                                           ANNUAL
                                                                    INCREASE (DECREASE)
                                                                    --------------------
                                       PERCENTAGE OF NET SALES        1995        1996
                                      --------------------------      VS.         VS.
                                       1995      1996      1997       1996        1997
                                      ------    ------    ------    --------    --------
                                                                 
Net sales.........................    100.0%    100.0%    100.0%      34.2%       30.2%
Cost of sales.....................     40.0%     42.3%     38.9%      41.9%       19.8%
                                      ------    ------    ------     ------      ------
Gross profit......................     60.0%     57.7%     61.1%      29.2%       37.9%
Operating expenses:
  Selling, general and
     administrative...............     42.8%     42.0%     41.4%      31.7%       28.5%
  Research and development........     12.5%     10.3%      9.5%      11.3%       19.6%
  Merger related expenses.........      0.0%      0.0%      1.0%       0.0%      100.0%
                                      ------    ------    ------     ------      ------
Total operating expenses..........     55.3%     52.3%     51.9%      27.1%       29.2%
                                      ------    ------    ------     ------      ------
Operating income                        4.7%      5.4%      9.2%      53.9%      123.1%
                                      ======    ======    ======     ======      ======

 
     The following table sets forth sales and gross profits for the Company's
significant business activities for the three years in the period ended January
2, 1998.
 


                                                         NET SALES (IN THOUSANDS)
                                            ---------------------------------------------------
                                                                        
External pumps and related disposables:
  Domestic...............................   $38,247   $53,146   $73,697    67.2%   69.6%   74.1%
  International..........................     5,493     6,396     6,572     9.7     8.4     6.6
                                            -------   -------   -------   -----   -----   -----
          Subtotal.......................   $43,740   $59,542   $80,269    76.9    78.0    80.7
Other diabetes supplies..................     5,046     5,520     5,835     8.8     7.2     5.8
Pharmaceutical products..................     5,805     9,338    11,810    10.2    12.2    11.9
Implantable insulin pumps................     2,315     1,996     1,578     4.1     2.6     1.6
                                            -------   -------   -------   -----   -----   -----
          Total net sales................   $56,906   $76,396   $99,492   100.0%  100.0%  100.0%
                                            =======   =======   =======   =====   =====   =====
Gross profits
External pumps and related disposables...   $29,260   $41,129   $58,496    51.4%   53.8%   58.8%
Other diabetes supplies..................     1,969     2,225     2,416     3.5     2.9     2.4
Pharmaceutical products..................     2,338     1,132     1,365     4.1     1.5     1.4
Implantable insulin pumps................       559      (404)   (1,489)    1.0    (0.5)   (1.5)
                                            -------   -------   -------   -----   -----   -----
          Total gross profits               $34,126   $44,082   $60,788    60.0%   57.7%   61.1%
                                            =======   =======   =======   =====   =====   =====

 
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, which increase occurred predominately in the domestic
market. 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 larger domestic external
pump price
 
                                       24
   26
 
resulted from a higher share of sales by the Company through its direct
organization rather than through its 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 1997 to 1996.
 
     Sales of other diabetes supplies increased 5.7%, or $315,000 in 1997 over
1996. This increase is a reflection of overall market growth and the greater
emphasis on diabetes in the current health care environment. Pharmacy product
sales increased 26.5%, or $2,472,000 in 1997 over 1996. The pharmacy operation
distributes products to treat diabetes, HIV/AIDS and dialysis patients. The
pharmacy sales increase reflects higher sales volume, as the Company's
reimbursement rates on pharmaceutical products began to decrease during 1996,
with the decrease continuing through 1997. The decrease relates primarily to
dialysis pharmacy products. The Company plans to focus future pharmacy
operations on diabetes and HIV/AIDS products, which have historically generated
higher margins than the dialysis products distributed by the Company's pharmacy
operation.
 
     Sales of implantable pumps decreased by $418,000 in 1997 compared to 1996.
The Company anticipates that sales of this product will continue to be irregular
until regulatory approval is obtained on both the implantable pump and the
special insulin utilized in the pump. The Company received certification under
the applicable directives issued by the European Union ("EU") and received the
CE Mark in March 1995 for the implantable pump. In the United States, the
implantable pump and the special insulin currently require approval in
combination. Hoechst Marion Roussel ("Hoechst"), the manufacturer of that
insulin, has applied for such approval in the EU and is working with the Company
on filing for approval for the pump/insulin system in the United States.
European approval for the insulin has not yet been received and no assurance can
be given that such approval will be received. MiniMed and Hoechst have not yet
filed for U.S. regulatory approval for the system, and such approval may not be
received.
 
COST OF SALES AND OPERATING EXPENSES
 
     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. The Company's overall gross profits continue to be
adversely impacted by the implantable pump product line due to continued
unpredictable sales, which have inhibited the Company's ability to realize
manufacturing efficiencies. The Company expects this trend to continue.
 
     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
lead to higher sales commissions and other variable field sales costs. The
Company also expended significant amounts in enhancing administrative support
for the field sales organization and in its educational and marketing programs
for patients, physicians and third party payors. The Company also increased
international selling and marketing expenditures, primarily in the continued
development of its German subsidiary and in expanding its overall international
presence. General and administrative expenses increased as the Company has
continued to build its 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 higher expenses are
primarily the result of greater resources directed to the Company's subcutaneous
continuous glucose monitoring systems, with the Company completing and filing a
510(k) application for pre-market approval for the first of these products in
December 1997.
 
                                       25
   27
 
     The Company anticipates that product development expenditures for its
subcutaneous continuous glucose monitoring systems will grow significantly in
fiscal 1998 to prepare several products for commercialization. The Company also
increased its research and development expenditures on the development of its
external pump and related disposable product technologies for use in the
delivery of compounds to treat other medical conditions. The Company anticipates
that expenditures in this area will also increase in future periods as a key
component of an overall diversification strategy. 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 the Company's 1997 operating expenses is $1.0 million in costs
related directly to the acquisition of HMS. These expenses include due
diligence, 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 the Company's accounts payable
and accrued expense balances.
 
OTHER
 
     Other income for 1997 and 1996 consists primarily of interest income
generated from the Company's 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. The Company retired
approximately $2.9 million of this debt in 1998. Interest expense in 1995 also
includes interest on a MiniMed obligation which was retired with proceeds from
the initial public offering.
 
     The Company's effective tax rate for 1997 and 1996 has been computed giving
consideration to the pretax results applicable to the Company's foreign and
domestic tax jurisdictions and a continual decrease in the Company's valuation
allowance against net deferred tax assets due to improved operating results.
During 1995, the Company utilized net operating loss carryforwards to offset its
taxable income. The Company has not incurred any material foreign income tax
expense to date. Inflation has not significantly impacted the Company's results
of operations for the past three years.
 
FISCAL YEAR 1996 AND FISCAL YEAR 1995
 
NET SALES
 
     Net sales increased 34.2% in 1996 over 1995 to $76,396,000 from
$56,906,000. This increase is principally the result of an increase of 36.1%, or
$15,802,000, in the sales volume of external pumps and related disposables.
Domestic sales of these products grew 39.0%, or $14,899,000, from 1995 to 1996,
while international sales increased 16.4%, or $903,000. The domestic sales
growth was primarily the result of higher sales volume of external pumps and
related disposables, with external pump sales growing at a rate in excess of
disposable product sales. Additionally, net sales increased due to a customer
shift to more expensive disposable products offered by the Company since June
1995, with enhanced features and higher sales prices. With the introduction of
the Company's Model 507 insulin pump in June 1996, the domestic average sales
prices on external pumps increased, while the related disposable products
experienced relative price stability.
 
     International sales of external pumps and related disposables for 1996 and
1995 include the sale of external pumps to Novo Nordisk A/S, which previously
manufactured an external insulin pump and related disposables that were sold in
Europe. Under an agreement with the Company entered into in late 1993, the
external insulin pumps that Novo Nordisk previously manufactured and sold were
replaced with the Company's external insulin pumps. Sales of external pumps to
Novo Nordisk represented 15.5% of international sales of external pumps and
related disposables in 1996, while such sales represented 23.1% of international
sales of these products in 1995. The decline in sales to Novo Nordisk in 1996
reflects the completion of the contractually determined delivery schedule with
Novo Nordisk during the quarter ended June 28, 1996.
 
     Sales of other diabetes supplies increased 9.4% in 1996 over 1995 to
$5,520,000 from $5,046,000. This increase is a direct result of the growing
number of insulin pump patients who elected to purchase their other diabetes
supplies from the Company ,combined with continued diabetes education and
awareness in the health care community. Sales of pharmacy products increased
60.9% in 1996 over 1995 to $9,338,000 from
 
                                       26
   28
 
$5,805,000. This increase relates primarily to greater product distribution to
dialysis patients, combined with less significant increases in HIV/AIDS and
diabetes pharmaceutical products. Sales of implantable pumps decreased by
$319,000, or 13.8%, in 1996 compared to 1995 as the clinical trial was
completed.
 
COST OF SALES AND OPERATING EXPENSES
 
     Cost of sales increased 41.9% in 1996 over 1995 to $32,314,000 from
$22,780,000. As a percentage of net sales, cost of sales grew to 42.3% in 1996
from 40.0% in 1995. The increase is primarily a result of a reduction in
reimbursement obtained on pharmacy products sold to dialysis patients through
the Company's recently acquired pharmacy operations. Gross margins on overall
pharmacy sales decreased to 12.1% on $9,338,000 in sales in 1996, compared to
1995 gross margins of 40.3% on sales of $5,805,000. These reduced margins were
offset by improved gross margins on the Company's external pump and disposable
product lines. Greater sales volume enabled the Company to spread its fixed
manufacturing costs over a larger sales base and thereby achieve certain
economies of scale. The Company has continued to implement manufacturing
efficiency programs that reduced per unit labor, overhead and materials costs.
Additionally, the Company achieved lower product costs for certain disposable
products by bringing the manufacturing processes in-house during 1996. Cost of
sales in 1996 included manufacturing start-up expenses related to the Company's
June 1996 release of its next generation external insulin pump, the Model 507.
Gross profits on the external pumps and related disposables increased to 53.8%
total net of sales in 1996, compared to 51.4% in 1995. The Company's gross
profits have been adversely impacted by the implantable pump product line during
1996 due to continued unpredictable sales, which have inhibited the Company's
ability to realize manufacturing efficiencies on this product line.
 
     Selling, general and administrative expenses increased 31.7% in 1996 over
1995 to $32,101,000 from $24,379,000. As a percentage of net sales, these
expenses decreased to 42.0% in 1996 from 42.8% in 1995. Selling, general and
administrative expenses grew primarily due to higher sales volumes in its
external pump and related disposable products and its pharmacy operations. Other
factors relating to the increase were the introduction of the Model 507 external
insulin pump, field sales staff expansion, greater efforts to educate patients,
professionals and payors in the intensive management of diabetes, and higher
spending on international sales and marketing operations. Increased
international expenses related primarily to bringing in-house to the Company's
French subsidiary certain administrative functions that had been previously
performed by a third party and the organizational and continuing start-up costs
of the Company's German subsidiary, which was formed in December 1995.
 
     Research and development expenses increased 11.3% in 1996 over 1995 to
$7,900,000 from $7,095,000. As a percentage of sales, research and development
expenses decreased to 10.3% in 1996 from 12.5% in 1995. The higher expenses are
primarily the result of greater resources directed to the design and
introduction of the Company's Model 507 external insulin pump and increased
development of the continuous glucose monitoring systems.
 
OTHER
 
     Other income for 1996 and 1995 consists primarily of interest income
generated from the Company's cash, cash equivalents, and short-term investment
balances.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     For 1997 the Company generated cash from operations of $2,311,000 compared
to cash used in operations in 1996 and 1995 of $1,384,000 and $438,000,
respectively. The positive operating cash flow is the result of increased
profitability and greater accounts receivable collections. Inventories also grew
in 1996 and 1997 as a result of the Company's purchases of significant
quantities of component parts for the implantable insulin pump under a supply
agreement entered into in 1996. The Company has no further obligation under this
supply agreement.
 
                                       27
   29
 
     Capital expenditures were $6,072,000, $4,171,000 and $9,822,000 for 1997,
1996, and 1995 respectively. The Company's 1995 capital expenditures consisted
primarily of the purchase and improvement of its operating facilities. The
Company's 1996 and 1997 capital expenditures included continued building
improvements, manufacturing expansion, the acquisition of additional research
and development engineering equipment and information systems requirements. The
Company anticipates the capital expenditures for 1998 will be very significant,
relating primarily to commercialization of the continuous subcutaneous glucose
sensor product line. First, the Company is establishing its initial sensor
manufacturing capability at its current facilities and will require between $4.0
and $6.0 million in capital expenditures for the buildout and equipment related
to this project. Additionally, since the Company believes that demand for future
sensor products will greatly exceed the manufacturing capacity at its current
facility, the construction of a sensor manufacturing building is planned to
commence during fiscal 1998. This factory will ultimately be part of a much
larger corporate headquarters to be completed in future years. The estimated
construction costs of the initial buildings range from $20.0 million to $25.0
million to be expended in 1998 and 1999. The Company may seek to finance this
building through debt or other financing alternatives rather than utilize its
existing capital resources to fund all of the construction of the new project.
 
     In addition to the anticipated 1998 capital expenditures described above,
the Company plans to continue to invest heavily in information technology. These
efforts will focus upon integrating all of the information systems associated
with the various HMS and MiniMed entities.
 
     The Company completed its initial public offering of Common Stock in 1995
which generated net proceeds of $29.5 million. There were no significant equity
transactions during 1996. On January 21, 1997, the Company entered into an
unsecured line of credit agreement which enables the Company to borrow up to
$10.0 million through January 31, 1999. The line of credit, if used, bears
interest at an adjustable rate based upon certain commercial paper rates. The
rate on such line of credit was 7.67% as of March 10, 1998. The Company is
required to maintain certain cash, net worth and debt conditions under the
provisions of the credit agreement. The Company is currently in compliance with
all of these conditions. During April 1997, the Company completed a second
public offering which generated net proceeds of $22.2 million. All outstanding
warrants were also exercised in 1997 to provide the Company with an additional
$2.6 million.
 
     Management expects that the current level of cash and cash equivalents will
be sufficient to meet its cash needs for working capital and capital
expenditures for at least one year. However the requirements for additional
capital and working capital are subject to change and will depend upon numerous
factors, including the level of capital expenditures, research and development
activities and results, competitive and technological developments, health care
reimbursement trends, and the availability for acquisition by the Company of
complementary additional distribution channels, products, and technologies.
 
QUARTERLY RESULTS
 
     The following table sets forth certain selected consolidated financial
information of the Company for its 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 the Company's Consolidated
Financial Statements and Notes thereto contained elsewhere in this report.
 
                                       28
   30
 


                                                                1996
                                              ----------------------------------------
                                               MARCH      JUNE       SEPT.      DEC.
                                              -------    -------    -------    -------
                                                           (IN THOUSANDS)
                                                                   
THREE MONTHS ENDED
  Net Sales...............................    $15,474    $18,028    $19,819    $23,075
  Cost of sales...........................      6,450      7,632      8,548      9,633
                                              -------    -------    -------    -------
  Gross profits...........................    $ 9,024    $10,396    $11,271    $13,442
                                              -------    -------    -------    -------
  Net income..............................    $   557    $   699    $   923    $ 1,139
                                              -------    -------    -------    -------
  Basic earnings per share................    $  0.05    $  0.06    $  0.08    $  0.10
                                              -------    -------    -------    -------
  Diluted earnings per share..............    $  0.04    $  0.06    $  0.07    $  0.09

 


                                                                1997
                                              ----------------------------------------
                                               MARCH      JUNE       SEPT.      DEC.
                                              -------    -------    -------    -------
                                                           (IN THOUSANDS)
                                                                   
THREE MONTHS ENDED
  Net Sales...............................    $19,161    $22,922    $25,038    $32,371
  Cost of sales...........................      7,656      9,425      9,547     12,076
                                              -------    -------    -------    -------
  Gross profits...........................    $11,505    $13,497    $15,491    $20,295
                                              -------    -------    -------    -------
  Net income..............................    $ 1,031    $ 1,527    $ 1,879    $ 2,252
                                              -------    -------    -------    -------
  Basic earnings per share................    $  0.09    $  0.12    $  0.14    $  0.17
                                              -------    -------    -------    -------
  Diluted earnings per share..............    $  0.08    $  0.11    $  0.14    $  0.16

 
     The Company's results of operations have historically fluctuated on a
quarterly basis. As a result of these seasonal trends, sales and earnings for
each of the first three quarters have been significantly lower than sales in the
fourth quarter. These fluctuations are expected to are expected to continue
because of numerous factors, including (i) practices of insurance companies and
other third-party payors with respect to reimbursement for the Company's
products, which tend to result in increased sales of the Company's external
infusion pumps later in the calendar year, after patients' deductibles are
satisfied, (ii) market acceptance of the Company's products, (iii) timing of
regulatory approvals, (iv) new product introductions, (v) competition, (vi) the
Company's ability to manufacture its products efficiently and (vii) timing of
research and development expenditures.
 
YEAR 2000 ISSUE
 
     The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. There is general concern
whether this could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
 
     During 1997, the Company initiated a review of its existing computer
software to determine the extent to which the Company's systems and processes
are vulnerable to the year 2000 issue. Management has determined that the year
2000 issue will not pose operational problems for its computer systems. Costs
for reviewing the compliance of the current systems are being expensed as
incurred and are not expected to have a material effect on the results of
operations.
 
     In anticipation of continued growth and expansion of the Company's sales
activities, continuing interaction with third party payors and the need to
consolidate the various systems employed by MiniMed and HMS, the Company has
commenced a system development effort to improve and consolidate insurance,
reimbursement and collection software, and to assess the internal and external
risks related to the year 2000 issue with respect to these systems. External
resources are being used for this project, while the Company
 
                                       29
   31
 
continues to develop its internal resources in this area. The expenditures for
this project will be capitalized, with estimated total costs ranging from
$500,000 to $750,000. The project should be completed in 1999.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not Applicable
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                         INDEX TO FINANCIAL STATEMENTS
 
     The following independent auditors' report and the consolidated financial
statements of MiniMed Inc. and its subsidiaries are included in Item 8:
 


                                                              PAGE
                                                              ----
                                                           
Independent Auditors' Report................................    31
Consolidated Balance Sheets -- December 27, 1996 and January
  2, 1998...................................................    32
Consolidated Statements of Operations -- Years ended
  December 29, 1995, December 27, 1996 and January 2,
  1998......................................................    33
Consolidated Statements of Convertible Preferred Stock and
  Stockholders' Equity -- Years ended December 29, 1995,
  December 27, 1996 and January 2, 1998.....................    34
Consolidated Statements of Cash Flows -- Years ended
  December 29, 1995, December 27, 1996 and January 2,
  1998......................................................    35
Notes to Consolidated Financial Statements..................    36

 
                                       30
   32
 
                          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 December 27, 1996 and January 2,
1998, and the related consolidated statements of operations, convertible
preferred stock and stockholders' equity, and of consolidated cash flows for
each of the three years in the period ended January 2, 1998. 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 December 27,
1996 and January 2, 1998, and the results of its operations and its cash flows
for each of the three years in the period ended January 2, 1998 in conformity
with generally accepted accounting principles.
 
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
 
Woodland Hills, California
January 23, 1998
 
                                       31
   33
 
                                  MINIMED INC.
 
                          CONSOLIDATED BALANCE SHEETS
                     DECEMBER 27, 1996 AND JANUARY 2, 1998
 
                                     ASSETS
 


                                                                  1996            1997
                                                               -----------    ------------
                                                                        
CURRENT ASSETS:
  Cash and cash equivalents.................................   $10,405,000    $ 22,282,000
  Short-term investments....................................     9,517,000      18,713,000
  Accounts receivable, net of allowance for doubtful
     accounts of $5,393,000 and $6,250,000 at December 27,
     1996 and January 2, 1998, respectively.................    17,938,000      24,661,000
  Inventories:
     Raw materials..........................................     3,465,000       5,152,000
     Work-in-process........................................     1,117,000       1,819,000
     Finished goods.........................................     3,101,000       3,701,000
                                                               -----------    ------------
          Total inventories.................................     7,683,000      10,672,000
  Deferred income taxes.....................................     3,110,000       5,803,000
  Prepaid expenses and other current assets.................     1,352,000       1,279,000
                                                               -----------    ------------
          Total current assets..............................    50,005,000      83,410,000
LONG-TERM INVESTMENTS
OTHER ASSETS................................................       577,000       5,466,000
LAND, BUILDINGS, PROPERTY AND EQUIPMENT -- Net..............    13,842,000      16,943,000
                                                               -----------    ------------
TOTAL.......................................................    64,424,000    $105,819,000
                                                               ===========    ============
                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable and line of credit.........       585,000       2,453,000
Accounts payable............................................     3,538,000       4,371,000
Accrued salaries and related benefits.......................     2,235,000       3,719,000
Accrued sales commissions...................................     1,568,000       1,943,000
Accrued warranties..........................................     2,873,000       3,498,000
Income taxes payable........................................       654,000         276,000
Other accrued expenses......................................     2,399,000       3,741,000
                                                               -----------    ------------
          Total current liabilities.........................    13,852,000      20,001,000
                                                               -----------    ------------
Deferred Tax Liabilities....................................       913,000       2,007,000
Notes payable...............................................     1,528,000         728,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Common stock, par value $.01; 40,000,000 shares
     authorized; 12,011,059 and 13,260,240 shares issued and
     outstanding as of December 27, 1996 and January 2,
     1998, respectively.....................................       123,000         135,000
  Additional capital........................................    46,614,000      73,806,000
  Cumulative foreign currency translation...................                      (312,000)
  Unrealized holding gain on long-term investments
  Unrealized gain on marketable securities..................                     1,371,000
  Retained Earnings.........................................     1,394,000       8,083,000
                                                               -----------    ------------
          Total stockholders' equity........................    48,131,000      83,083,000
                                                               -----------    ------------
TOTAL.......................................................   $64,424,000    $105,819,000
                                                               ===========    ============

 
                 See notes to consolidated financial statements
                                       32
   34
 
                                  MINIMED INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 


                                                                     YEAR ENDED,
                                                      -----------------------------------------
                                                         1995           1996           1997
                                                      -----------    -----------    -----------
                                                                           
NET SALES.........................................    $56,906,000    $76,396,000    $99,492,000
COST OF SALES.....................................     22,780,000     32,314,000     38,704,000
                                                      -----------    -----------    -----------
GROSS PROFIT......................................     34,126,000     44,082,000     60,788,000
                                                      -----------    -----------    -----------
OPERATING EXPENSES:
  Selling, general and administrative.............     24,379,000     32,101,000     41,237,000
  Research and development........................      7,095,000      7,900,000      9,447,000
  Merger related expenses.........................                                    1,000,000
                                                      -----------    -----------    -----------
          Total operating expenses................     31,474,000     40,001,000     51,684,000
                                                      -----------    -----------    -----------
OPERATING INCOME..................................      2,652,000      4,081,000      9,104,000
INTEREST EXPENSE..................................       (418,000)      (163,000)      (237,000)
OTHER INCOME, Including interest income...........        965,000      1,062,000      1,851,000
                                                      -----------    -----------    -----------
INCOME BEFORE INCOME TAXES........................      3,199,000      4,980,000     10,718,000
PROVISION FOR INCOME TAXES........................        854,000      1,662,000      4,029,000
                                                      -----------    -----------    -----------
NET INCOME........................................    $ 2,345,000    $ 3,318,000    $ 6,689,000
                                                      ===========    ===========    ===========
Basic earnings per share..........................          $0.24          $0.28          $0.52
                                                      ===========    ===========    ===========
Basic weighted average shares outstanding.........      9,668,000     11,941,000     12,905,000
                                                      ===========    ===========    ===========
Diluted earnings per share........................          $0.22          $0.26          $0.49
                                                      ===========    ===========    ===========
Diluted weighted average shares outstanding.......     10,718,000     12,567,000     13,556,000
                                                      ===========    ===========    ===========

 
                See notes to consolidated financial statements.
                                       33
   35
 
                                  MINIMED INC.
 
             CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
                            AND STOCKHOLDERS' EQUITY
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998


                                                REDEEMABLE,
                                                CONVERTIBLE
                                              PREFERRED STOCK            COMMON STOCK
                                          ------------------------   ---------------------                 CUMULATIVE    UNREALIZED
                                            NUMBER                     NUMBER                ADDITIONAL      FOREIGN      GAIN ON
                                              OF                         OF                    PAID-IN      CURRENCY     MARKETABLE
                                            SHARES       AMOUNT        SHARES      AMOUNT      CAPITAL     TRANSLATION   SECURITIES
                                          ----------   -----------   ----------   --------   -----------   -----------   ----------
                                                                                                    
BALANCE, JANUARY 1, 1995 AS ORIGINALLY
 REPORTED..............................    1,111,111   $ 8,513,000    7,729,775   $ 77,000   $ 4,907,000
Issuance of shares for outstanding
 stock of Home Medical Supply, Inc. and
 related entities......................                                 374,884      6,000        12,000
                                          ----------   -----------   ----------   --------   -----------    ---------    ----------
RESTATED BALANCE,
 JANUARY 1, 1995.......................    1,111,111     8,513,000    8,104,659     83,000     4,919,000
Accretion of preferred stock to
 redemption value......................                    219,000
Accrual of preferred stock dividends...                    292,000
Issuance of common stock in initial
 public offering, net of expenses......                               2,500,000     25,000    29,513,000
Conversion of redeemable convertible
 preferred.............................   (1,111,111)   (9,024,000)   1,111,111     11,000     9,013,000
Exercise of stock options..............                                  65,047      1,000       300,000
Tax benefit associated with stock
 option exercises......................                                                          179,000
Net income.............................
                                          ----------   -----------   ----------   --------   -----------    ---------    ----------
BALANCE, DECEMBER 29, 1995.............           --            --   11,780,817    120,000    43,924,000
Exercise of stock options..............                                 203,020      2,000       986,000
Tax benefit associated with stock
 option exercises......................                                                          994,000
Issuance of stock under employee
 stock.................................                                  14,822                  272,000
Issuance of stock for technology
 license (Note 6)......................                                  10,000                  285,000
Stock awards to directors..............                                   2,400                   53,000
Capital contribution by HMS officers...                                              1,000       100,000
Net income.............................
                                          ----------   -----------   ----------   --------   -----------    ---------    ----------
BALANCE, DECEMBER 27, 1996.............           --            --   12,011,059    123,000    46,614,000
Issuance of common stock in public
 offering (net of expenses)............                                 925,000      9,000    22,155,000
Issuance of common stock for exercise
 of warrants...........................                                 200,000      2,000     2,598,000
Exercise of stock options..............                                  96,017      1,000       516,000
Tax benefit associated with stock
 option exercises......................                                                        1,276,000
   Issuance of stock under employee
     stock plan........................                                  24,906                  547,000
Stock awards to directors..............                                   3,258                  100,000
Unrealized gain on marketable
 securities............................                                                                                  1,371,000
Foreign currency translation loss......                                                                      (312,000)
Net income.............................
                                          ----------   -----------   ----------   --------   -----------    ---------    ----------
BALANCE, JANUARY 2, 1998...............                              13,260,240   $135,000   $73,806,000    $(312,000)   $1,371,00
 

 
                                           RETAINED
                                           EARNINGS
                                         (ACCUMULATED
                                           DEFICIT)        TOTAL
                                         ------------   -----------
                                                  
BALANCE, JANUARY 1, 1995 AS ORIGINALLY
 REPORTED..............................  $(2,962,000)   $ 2,022,000
Issuance of shares for outstanding
 stock of Home Medical Supply, Inc. and
 related entities......................     (796,000)      (778,000)
                                         -----------    -----------
RESTATED BALANCE,
 JANUARY 1, 1995.......................   (3,758,000)     1,244,000
Accretion of preferred stock to
 redemption value......................     (219,000)      (219,000)
Accrual of preferred stock dividends...     (292,000)      (292,000)
Issuance of common stock in initial
 public offering, net of expenses......                  29,538,000
Conversion of redeemable convertible
 preferred.............................                   9,024,000
Exercise of stock options..............                     301,000
Tax benefit associated with stock
 option exercises......................                     179,000
Net income.............................    2,345,000      2,345,000
                                         -----------    -----------
BALANCE, DECEMBER 29, 1995.............   (1,924,000)    42,120,000
Exercise of stock options..............                     988,000
Tax benefit associated with stock
 option exercises......................                     994,000
Issuance of stock under employee
 stock.................................                     272,000
Issuance of stock for technology
 license (Note 6)......................                     285,000
Stock awards to directors..............                      53,000
Capital contribution by HMS officers...                     101,000
Net income.............................    3,318,000      3,318,000
                                         -----------    -----------
BALANCE, DECEMBER 27, 1996.............    1,394,000     48,131,000
Issuance of common stock in public
 offering (net of expenses)............                  22,164,000
Issuance of common stock for exercise
 of warrants...........................                   2,600,000
Exercise of stock options..............                     517,000
Tax benefit associated with stock
 option exercises......................                   1,276,000
   Issuance of stock under employee
     stock plan........................                     547,000
Stock awards to directors..............                     100,000
Unrealized gain on marketable
 securities............................
Foreign currency translation loss......                    (312,000)
Net income.............................    6,689,000      6,689,000
                                         -----------    -----------
BALANCE, JANUARY 2, 1998...............  $ 8,083,000    $83,083,000

 
                See notes to consolidated financial statements.
 
                                       34
   36
 
                                  MINIMED INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 


                                                                  1995          1996           1997
                                                              ------------   -----------   ------------
                                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $  2,345,000   $ 3,318,000   $  6,689,000
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
  Depreciation..............................................     1,412,000     2,025,000      2,971,000
  Directors' fees paid in common stock......................         2,000        53,000        100,000
  Deferred income taxes.....................................      (789,000)   (1,316,000)    (2,354,000)
  Changes in operating assets and liabilities:
    Accounts receivable, net................................    (3,417,000)   (6,329,000)    (6,966,000)
    Inventories.............................................    (3,384,000)   (1,868,000)    (2,989,000)
    Prepaid expenses and other current assets...............      (618,000)      408,000         73,000
    Other assets............................................       (21,000)     (367,000)      (771,000)
    Accrued sales commissions...............................        59,000       954,000        375,000
    Accrued salaries and related benefits...................       436,000       755,000      1,484,000
    Accounts payable........................................     1,432,000       370,000        833,000
    Accrued warranties......................................       360,000      (370,000)       625,000
    Income taxes payable....................................     1,024,000       802,000        899,000
    Accrued expenses........................................       721,000       181,000      1,342,000
                                                              ------------   -----------   ------------
    Net cash provided by (used in) operating activities.....  $   (438,000)  $(1,384,000)  $  2,311,000
                                                              ------------   -----------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES --
    Short-term investments..................................    (8,724,000)     (793,000)    (9,196,000)
    Acquisition of marketable securities....................            --            --     (2,000,000)
    Purchase of land, buildings, property and equipment.....    (9,822,000)   (4,171,000)    (6,072,000)
                                                              ------------   -----------   ------------
    Net cash used in investing activities...................  $(18,546,000)  $(4,964,000)  $(17,268,000)
                                                              ------------   -----------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES --
    Issuance of notes payable...............................     1,035,000       727,000      1,068,000
    Repayment of note payable...............................    (7,000,000)     (600,000)            --
    Proceeds from initial public offering, net of
      expenses..............................................    29,538,000            --             --
    Capital contributions...................................                     101,000
    Proceeds from public offering, net of expenses..........            --            --     22,164,000
    Proceeds from exercises of warrants.....................            --            --      2,600,000
    Proceeds from stock option exercises....................       301,000       988,000        517,000
    Proceeds from issuance of common stock under employee
      stock plan............................................            --       272,000        547,000
                                                              ------------   -----------   ------------
    Net cash provided by financing activities...............  $ 23,874,000   $ 1,488,000   $ 26,896,000
                                                              ------------   -----------   ------------
Effect of cumulative foreign currency translation adjustment
  on cash and equivalents...................................            --            --        (62,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................     4,890,000    (4,860,000)    11,877,000
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD......................................................    10,375,000    15,265,000     10,405,000
                                                              ------------   -----------   ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................  $ 15,265,000   $10,405,000   $ 22,282,000
                                                              ============   ===========   ============
SUPPLEMENTAL CASH FLOW INFORMATION --
  Cash paid during the period for:
  Interest..................................................  $    361,000   $   163,000   $    237,000
  Income taxes..............................................  $    504,000   $ 2,120,000   $  6,110,000

 
     Supplemental Disclosure of Noncash Financing Activity: During 1995 the
Company recorded $219,000 and $292,000 in accretion of preferred stock to
redemption value and accrued preferred stock dividends, respectively, directly
to accumulated deficit. The Company has recognized a reduction in income taxes
payable of $179,000, $994,000, and $1,276,000 during 1995, 1996 and 1997,
respectively related to the exercise of nonqualified stock options. During 1996
the Company issued 10,000 shares of common stock to a supplier in exchange for a
technology license. The Company also issued 2,400 and 3,258 shares of common
stock to certain Directors in lieu of fees during 1996 and 1997, respectively.
The Company recorded an unrealized holding gain, net of estimated taxes on
marketable securities classified as long-term investments available for sale of
$1,371,000 during 1997. During 1997, the Company issued 374,884 shares of common
stock to effect an acquisition of a distributor accounted for as a pooling of
interests.
 
                See notes to consolidated financial statements.
                                       35
   37
 
                                  MINIMED INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     The fiscal years referenced herein are as follows:
 


FISCAL YEAR                                YEAR ENDED
- -----------                                ----------
                                        
1997.....................................  January 2, 1998
1996.....................................  December 27, 1996
1995.....................................  December 29, 1995

 
 1. GENERAL INFORMATION
 
     OPERATIONS -- MiniMed 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 though 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 acquisition of Home Medical Supply, Inc. and its affiliated
companies ("HMS") in fiscal 1997, the Company also acts as a distributor of
additional diabetes supplies and operates a pharmacy (See Notes 3 and 14).
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     PRINCIPLES OF CONSOLIDATION -- The accompanying financial statements
include the accounts of the Company and its wholly owned subsidiaries, MiniMed
Distribution Corp., HMS, MiniMed S.A., and MiniMed GmbH. All intercompany
accounts and transactions have been eliminated. The financial statements of
MiniMed S.A. and MiniMed GmbH 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 most net assets located outside the United States are recorded as
a component of shareholders' equity.
 
     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 investments as
available-for-sale, with unrealized holding gains and losses recorded directly
to stockholders' equity. Cost approximates fair market value for all short-term
investments. Long-term investments, included in other assets, represent a
$2,000,000 investment in the common stock of Trimeris, Inc. The fair market
value of this investment is $4,118,000 at January 2, 1998, and the Company has
recorded an unrealized holding gain of $1,371,000, net of $747,000 in estimated
income taxes which were recorded as a deferred income tax liability. Realized
gains and losses and declines in value judged to be other-than-temporary are
included in other income in the Company's statement of operations. Realized
gains and losses on short-term investments for 1997 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, BUILDING, PROPERTY AND EQUIPMENT AND DEPRECIATION -- Land, building,
property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
                                       36
   38
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred.
 
     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 yet probable.
 
     REVENUES AND CONCENTRATION OF CREDIT RISK -- The Company recognizes revenue
from product sales when the goods are shipped to its customers. During 1995,
1996 and 1997, the Company derived approximately 87%, 89% and 92%, respectively,
of its revenues from domestic sales. A significant portion of domestic revenues
represents 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 state and federal 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 and Germany 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 by the Company's European subsidiaries with
patients, 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 cover the
difference between recorded revenues and collections from distributors, patients
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 Statement of Financial Accounting Standard (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 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
warranties.
 
     NEW ACCOUNTING PRONOUNCEMENTS -- In June, 1997, the FASB issued Statement
No. 130, Reporting Comprehensive Income, which requires the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company will adopt Statement No. 130
for the fiscal year ending on January 1, 1999.
 
     In June, 1997, the FASB issued Statement No. 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
 
                                       37
   39
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
shareholders. The Company will adopt Statement No. 131 for the fiscal year
ending on January 1, 1999 and subsequent interim periods. The Company does not
expect the impact of this statement to be material.
 
 3. BUSINESS COMBINATION
 
     On January 2, 1998, MiniMed acquired HMS by exchanging 374,884 shares of
its common stock for all the common stock of HMS. The acquisition has been
accounted for as a pooling-of-interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of HMS as though it had always been a part of
MiniMed.
 
     The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow.
 


                                               YEAR ENDED       YEAR ENDED       YEAR ENDED
                                              DEC. 27, 1995    DEC. 29, 1996    JAN. 2, 1998
                                              -------------    -------------    -------------
                                                                       
Net Sales
  MiniMed.................................     $45,107,000      $59,080,000      $77,521,000
  HMS.....................................      14,386,000       20,910,000       30,161,000
  Eliminations............................      (2,587,000)      (3,594,000)      (8,190,000)
                                               -----------      -----------      -----------
  Combined................................      56,906,000       76,396,000       99,492,000
                                               ===========      ===========      ===========
Net Income
  MiniMed.................................     $ 1,809,000      $ 4,672,000      $ 6,724,000
  HMS.....................................         672,000         (999,000)         138,000
  Eliminations............................        (136,000)        (355,000)        (173,000)
                                               -----------      -----------      -----------
  Combined................................       2,345,000        3,318,000        6,689,000
                                               ===========      ===========      ===========

 
     In connection with the acquisition, MiniMed recorded $1,000,000 of direct
acquisition expenses. The expenses include only due diligence, professional and
consulting expenses related directly to the transaction.
 
 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standard (SFAS) No. 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 of on the balance sheet also approximates fair
value.
 
 5. NOTES PAYABLE
 
     Notes payable consisted of the following at December 27, 1996 and January
2, 1998:
 


                                                   AVERAGE       DECEMBER 27,    JANUARY 2,
                  CURRENT                       INTEREST RATE        1996           1998
                  -------                       -------------    ------------    ----------
                                                                        
Bank borrowings.............................        9.75%          $525,000      $2,125,000
Current portion of long-term debt...........       9.125%            60,000         328,000
                                                                   --------      ----------
Total Short-Term Debt.......................                       $585,000      $2,453,000
                                                                   --------      ----------

 
                                       38
   40
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 


                                                   AVERAGE       DECEMBER 27,    JANUARY 2,
                 LONG-TERM                      INTEREST RATE        1996           1998
                 ---------                      -------------    ------------    ----------
                                                                        
Various notes...............................       9.125%         1,528,000      $  728,000

 
     Short-term borrowings consisted primarily of borrowings from non-U.S.
banks. The Company has existing committed lines of credit of $12 million with
various banks, of which $10.0 million was unused at January 2, 1998. All
outstanding long-term debt and $1,825,000 of the outstanding line of credit
borrowings have been subsequently retired.
 
     Future line of credit borrowings bear interest at a rate equal to the
30-day commercial paper rate plus 2.15%, 7.67% as of March 10, 1998. The Company
is also required to maintain certain cash, net worth and debt conditions under
the provisions of this agreement. The Company is currently in compliance with
all of these conditions.
 
 6. RELATED PARTY TRANSACTIONS
 
     SERVICES AND FACILITIES AGREEMENTS -- During 1995, the Company provided
certain support services to and shared certain facilities and equipment with
Advanced Bionics Corporation ("ABC"), a Company owned primarily by the
individual who is currently MiniMed's largest single stockholder, Chairman and
Chief Executive Officer. Costs charged to ABC were $180,000 for the year ended
December 29, 1995. ABC owed the Company $15,000 at December 29, 1995, $90,000 at
December 27, 1996, and $90,000 at January 2, 1998. The amounts are included in
prepaid expenses and other current assets. The Company has leased certain
operating facilities to its current Chairman and Chief Executive Officer under a
five-year lease commitment. Rents charged under this agreement were $16,000,
$75,000, and $144,000 for the years ended December 29, 1995, December 27, 1996,
and January 2, 1998, respectively. Rental income related to this lease is
recorded in other income. The Chairman owed the Company $79,000 and $166,000 at
December 27, 1996 and January 2, 1998, respectively. All amounts owed by the
chairman have been retired subsequent to year-end.
 
     OTHER -- During 1997, the Company commenced negotiation of an agreement to
acquire certain product marketing rights from Medical Research Group, LLC
("MRG"), an entity controlled by MiniMed's Chief Executive Officer and Chairman.
The contemplated agreement also provides for possible cooperation with MRG in
the development of new technologies and the enhancement and manufacture of
certain products. Under the contemplated terms, if MiniMed were to enter into
the agreement and exercise its option to acquire the marketing rights of the
product included in the agreement, MiniMed would be required to pay MRG
approximately $30.0 million. The exercise of this option would be contingent
upon MRG achieving pre-determined regulatory milestones in the development of
the product. While no agreement has been executed, the Company continues
discussions with MRG regarding a possible transaction. No assurance can be given
that any agreement with MRG will be entered into or, if entered into, that the
terms will be as described.
 
                                       39
   41
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
 7. LAND, BUILDING, PROPERTY AND EQUIPMENT -- NET
 
     Land, building, property and equipment, net consists of the following:
 


                                                                        ESTIMATED
                                         DECEMBER 27,    JANUARY 2,     USE LIVES
                                             1996           1998         (YEARS)
                                         ------------    -----------    ---------
                                                               
Land, buildings and improvements.....    $ 8,476,000     $10,625,000    20 to 40
Machinery and equipment..............      6,682,000       8,533,000      3 to 5
Tooling and molds....................      2,979,000       2,493,000           3
Furniture and fixtures...............      1,733,000       1,948,000           7
                                         -----------     -----------
                                          19,870,000      23,599,000
Less accumulated depreciation........     (6,028,000)     (6,656,000)
                                         -----------     -----------
Total................................    $13,842,000     $16,943,000
                                         ===========     ===========

 
 8. OTHER ASSETS
 
     Other assets consist of the following:
 


                                                     DECEMBER 27,    JANUARY 2,
                                                         1996           1998
                                                     ------------    ----------
                                                               
Technology license...............................      $277,000      $  197,000
Inventory components, non-current................       300,000         999,000
Investment in Trimeris common stock..............                     4,118,000
                                                       --------      ----------
Other............................................                       152,000
                                                       --------      ----------
                                                       $577,000      $5,466,000
                                                       ========      ==========

 
 9. EARNINGS PER SHARE
 
     Prior to 1997, the Company reported earnings per share (EPS) in accordance
with Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB 15).
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) was issued.
 
     SFAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS based upon the weighted average number of common shares for the
period. It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures and
requires reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 was adopted by the Company at the end of 1997 and EPS for all prior
periods was restated.
 
                                       40
   42
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     The reconciliation between the numerator and denominator for basic and
diluted EPS is as follows:
 


                                           INCOME          SHARES        PER-SHARE
                                         (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                         -----------    -------------    ---------
                                                                
DECEMBER 29, 1995
Basic EPS
Net Income Applicable to Common
  Stock..............................    $2,345,000       9,668,000        $.24
Effect of Dilutive Securities
  Preferred stock....................                       648,000
  Stock Options......................                       402,000
                                         ----------      ----------        ----
Diluted EPS
Net Income Applicable to Common
  Stock..............................    $2,345,000      10,718,000        $.22
                                         ----------      ----------        ----
DECEMBER 27, 1996
Basic EPS
Net Income Applicable to Common
  Stock..............................    $3,318,000      11,941,000        $.28
                                         ----------      ----------        ----
Effect of Dilutive Securities
  Warrants...........................                        56,000
  Stock Options......................                       570,000
                                         ----------      ----------        ----
Diluted EPS
Net Income Applicable to Common
  Stock..............................    $3,318,000      12,567,000        $.26
JANUARY 2, 1998:
Basic EPS
Net Income Applicable to Common
  Stock..............................    $6,689,000      12,905,000        $.52
                                         ----------      ----------        ----
Effect of Dilutive Securities
  Warrants...........................                        30,000
  Stock Options......................                       621,000
                                         ----------      ----------        ----
Diluted EPS
Net Income Applicable to Common
  Stock..............................    $6,689,000      13,556,000        $.49
                                         ----------      ----------        ----

 
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 counterclaim asserted by Fimed.
Fact discovery on the litigation has been largely completed, and trial has been
set to commence October 13, 1998. The Company has been pursuing its claims and
defending Fimed's claims vigorously.
 
     On November 1, 1996, the Company entered into a component supply and
technology license agreement with a supplier. The Company also issued 10,000
shares of common stock valued at $28.50 per share, the market value of the stock
on the date of the agreement, to this supplier in exchange for the technology
license. MiniMed has fulfilled its component obligations under this agreement.
Management believes that certain of these components will not be sold within the
next 12 months and has classified $999,000 as long-term other assets (Note 8).
 
                                       41
   43
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     During the normal course of business, the Company is subject to litigation
involving various business matters. Management believes that an adverse outcome
of any such known matters would not have a material impact to the Company.
 
11. STOCKHOLDERS' EQUITY
 
     WARRANTS -- In connection with the issuance of Series A Preferred Stock,
which was converted to common stock in 1995, the Company issued warrants to
purchase 200,000 shares of the Company's common stock at an exercise price of
$13.00 per share to the holders of the Series A Preferred Stock. All outstanding
warrants were exercised in 1997.
 
     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. An additional 277,307 options are
available for grant at January 2, 1998. Stock option plan activity is as
follows:
 


                                                                WEIGHTED AVERAGE
                                                    SHARES      PRICE PER SHARE
                                                   ---------    ----------------
                                                          
Outstanding options at January 1, 1995.........      986,550         $ 5.11
Options granted................................      543,500         $ 8.05
Options exercised..............................      (65,047)        $ 4.63
Options canceled...............................      (38,035)        $ 5.57
Outstanding options at December 29, 1995.......    1,426,968         $ 6.23
Options granted................................      303,847         $16.70
Options exercised..............................     (203,020)        $ 4.92
Options canceled...............................      (71,649)        $ 8.95
Outstanding options at December 27, 1996.......    1,456,146         $ 6.38
Options granted................................      310,500         $33.21
Options exercised..............................      (96,017)        $ 5.38
Options canceled...............................      (95,799)        $ 7.01
Outstanding options at January 2, 1998.........    1,574,830         $13.02

 
     The following table summarizes information about stock options outstanding
at January 2, 1998:
 


   RANGE OF          NUMBER            WEIGHTED
   EXERCISE      OUTSTANDING AT    AVERAGE REMAINING   WEIGHTED AVERAGE   SHARES EXERCISABLE   WEIGHTED AVERAGE
    PRICES       JANUARY 2, 1998   CONTRACTUAL LIFE     EXERCISE PRICE    AT JANUARY 2, 1998    EXERCISE PRICE
- ---------------  ---------------   -----------------   ----------------   ------------------   ----------------
                                                                                
     $4.50            324,460            2.82               $4.50              318,353               4.50
 $5.00 - $7.25        208,320            3.78                5.83              147,880               5.79
 $7.65 - $7.65        447,800             5.1                7.65              193,000               7.65
$8.75 - $27.00        282,750            6.08               14.15               77,400              12.96
$29.25 - $42.25       311,500            7.45               33.40               10,000              29.50
                    ---------            ----               -----              -------              -----
                    1,574,830            5.09               13.02              746,633               6.78
                    =========            ====               =====              =======              =====

 
     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
 
                                       42
   44
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
date, 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:
 


                                                                      WEIGHTED
                                                                      AVERAGE
                                                                      EXERCISE
                                                          SHARES       PRICE
                                                         ---------    --------
                                                                
Shares available.....................................    1,000,000
Exercised............................................       14,822     $18.38
                                                         ---------     ------
Shares available at December 27, 1996................      985,178
Exercised............................................       24,906     $21.97
                                                         ---------     ------
Shares available at January 2, 1998..................      960,272
                                                         ---------     ------

 
     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 1995, 1996, and 1997 was $3,854,544, $2,089,754, and
$6,268,628, respectively. The Company applies Accounting Principles Board
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 1995,
1996 or 1997. 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 FASB Statement No. 123, Accounting
for Stock Based Compensation, the Company's net income and earnings per share
for the years ended December 29, 1995, December 27, 1996 and January 2, 1998
would have been reduced to the pro forma amounts indicated below:
 


                                                        YEARS ENDED
                                         ------------------------------------------
                                         DECEMBER 29,    DECEMBER 27,    JANUARY 2,
                                             1995            1996           1998
                                         ------------    ------------    ----------
                                                                
Net income to common stockholders:
  As reported........................     $2,345,000      $3,318,000     $6,689,000
  Pro forma..........................     $1,693,000      $2,458,000     $5,142,000
Net income per common and common
  equivalent share:
  As reported -- basic...............     $     0.24      $     0.28     $     0.52
  Pro forma..........................           0.18            0.21           0.40
  As reported -- diluted.............           0.22            0.26           0.49
Pro forma............................           0.16            0.20           0.38

 
                                       43
   45
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     The fair value of options granted under the stock option plan during 1995,
1996, and 1997 was determined using the Black Scholes option pricing model
utilizing the following weighted-average assumptions:
 


                                                        YEARS ENDED
                                         ------------------------------------------
                                         DECEMBER 29,    DECEMBER 27,    JANUARY 2,
                                             1995            1996           1998
                                         ------------    ------------    ----------
                                                                
Dividend yield.......................       0%              0%               0%
Anticipated volatility...............      325%             66%             48%
Risk-free interest rate..............      7.40%           6.09%           5.68%
Expected lives.......................     5 years         5 years         7 years

 
     Pro forma compensation cost of options granted under the employee stock
purchase plan is measured based upon the discount from market value.
 
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 29, 1995, December 27, 1996 and January 2,
1998, were $74,000, $99,211 and $307,055, respectively.
 
13. INCOME TAXES
 
     Pretax income from continuing operations for the three years in the period
ended January 2, 1998 was subject to income tax in the following jurisdictions:
 


                                                       YEAR ENDED
                                       -------------------------------------------
                                       DECEMBER 29,    DECEMBER 27,    JANUARY 2,
                                           1995            1996           1998
                                       ------------    ------------    -----------
                                                              
Domestic...........................     $3,222,000      $5,402,000     $11,474,000
Foreign............................        (23,000)       (422,000)       (756,000)
                                        ----------      ----------     -----------
Pretax income (loss)...............     $3,199,000      $4,980,000     $10,718,000
                                        ==========      ==========     ===========

 
                                       44
   46
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     Significant components of the provision for income taxes are as follows:
 


                                                       YEAR ENDED
                                       -------------------------------------------
                                       DECEMBER 29,    DECEMBER 27,    JANUARY 2,
                                           1995            1996           1998
                                       ------------    ------------    -----------
                                                              
Current:
  Federal..........................     $1,183,000      $1,521,000     $ 4,577,000
  Foreign..........................             --          10,000          20,000
  State............................        281,000         453,000         510,000
                                        ----------      ----------     -----------
                                       1$,464,000..     $1,984,000     $ 5,107,000
Effect of nonqualified stock option
  exercises upon income taxes
  currently payable................        179,000         994,000       1,276,000
Deferred:
  Federal..........................       (789,000)     (1,008,000)     (1,970,000)
  Foreign..........................             --              --
  State............................             --        (308,000)       (384,000)
                                        ----------      ----------     -----------
                                          (789,000)     (1,316,000)     (2,354,000)
                                        ----------      ----------     -----------
                                        $  854,000      $1,662,000     $ 4,029,000
                                        ==========      ==========     ===========

 
     The components of deferred tax assets (liabilities) at December 27, 1996
and January 2, 1998 are as follows:
 


                                         DECEMBER 27, 1996          JANUARY 2, 1998
                                       ----------------------    ----------------------
                                        FEDERAL       STATE       FEDERAL       STATE
                                       ----------    --------    ----------    --------
                                                                   
Deferred tax assets:
  Accrued warranties...............    $1,215,000    $332,000    $1,291,000    $213,000
NOL carry forwards.................       258,000      42,000       385,000      63,000
  Accrued vacation.................       174,000      48,000       230,000      38,000
  Allowance for doubtful
     accounts......................       834,000     228,000     1,205,000     199,000
  Other accrued liabilities........                                 641,000     104,000
  Reserve for obsolete inventory...       623,000     166,000       625,000     103,000
  Other............................        84,000      21,000       578,000     128,000
                                       ----------    --------    ----------    --------
                                        3,188,000     837,000     4,955,000     848,000
Deferred Tax Liabilities:
  Depreciation.....................      (633,000)   (173,000)     (659,000)   (109,000)
  Unrealized gain on securities....                                (687,000)    (68,000)
  Deferred state income taxes......      (107,000)                 (214,000)
                                       ----------    --------    ----------    --------
Net deferred tax assets............     2,448,000     664,000     3,395,000     671,000
Valuation allowance................      (565,000)   (350,000)     (229,000)    (41,000)
                                       ----------    --------    ----------    --------
Total..............................    $1,883,000    $314,000    $3,166,000    $630,000
                                       ==========    ========    ==========    ========

 
                                       45
   47
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     A reconciliation of the Company's provision for income taxes for 1996 and
1997 to the U.S. Federal Statutory rates is as follows:
 


                                                       YEAR ENDED
                                       -------------------------------------------
                                       DECEMBER 29,    DECEMBER 27,     JANUARY 2,
                                           1995            1996            1998
                                       ------------    ------------     ----------
                                                               
Provision for income taxes at US
  statutory rates...................    $1,088,000      $2,217,000      $3,751,000
State taxes, net of Federal
  benefit...........................       194,000          94,000         209,000
Non-deductible expenses.............       107,000         112,000         136,000
Utilization of Federal and State
  operating loss carryforwards......      (201,000)
Foreign loss not usable.............                       148,000         257,000
Reduction of valuation allowance....      (361,000)       (653,000)       (645,000)
Other...............................        27,000         256,000         321,000
                                        ----------      ----------      ----------
                                           854,000      $1,662,000      $4,029,000
                                        ==========      ==========      ==========

 
14. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA
 
     In the following tables, net sales by industry segment and geographic area
include both sales to customers, as reported in the Consolidated Statement of
Operations, and inter-area sales (for geographic areas) at sales prices which
approximate market.
 


INDUSTRY SEGMENTS                          1995           1996           1997
- -----------------                      ------------   ------------   ------------
                                                            
Net Sales
  Pharmaceutical.....................  $ 5,809,000    $ 9,408,000    $ 11,842,000
  Diabetes Products..................  $51,097,000    $66,988,000    $ 87,650,000
                                       -----------    -----------    ------------
          Total......................  $56,906,000    $76,396,000    $ 99,492,000
Operating Profit (Loss)
  Pharmaceutical.....................      173,000     (1,846,000)     (2,145,000)
  Diabetes products..................    2,479,000      5,927,000      11,249,000
                                       -----------    -----------    ------------
          Total operating profit.....    2,652,000      4,081,000       9,104,000
                                       -----------    -----------    ------------
Interest expense.....................     (418,000)      (163,000)       (237,000)
Other Income.........................      965,000      1,062,000       1,851,000
Income before income taxes...........    3,199,000      4,980,000      10,718,000
                                       -----------    -----------    ------------
Identifiable Assets
  Pharmacy...........................  $ 1,809,000    $ 2,596,000    $  3,890,000
  Other..............................  $54,752,000    $61,828,000    $101,929,000
                                       -----------    -----------    ------------
          Total......................  $56,561,000    $64,424,000    $105,819,000
                                       ===========    ===========    ============

 
                                       46
   48
                                  MINIMED INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND JANUARY 2, 1998
 
     Capital expenditures and depreciation expense related to the Company's
pharmacy operations are not material compared to its diabetes operations for the
three years presented.
 


                                        YEAR ENDED     YEAR ENDED     YEAR ENDED
                                       ------------   ------------   ------------
                                       DECEMBER 29,   DECEMBER 27,    JANUARY 2,
GEOGRAPHICAL AREAS                         1995           1996           1998
- ------------------                     ------------   ------------   ------------
                                                            
NET SALES
  North America......................  $52,474,000    $70,885,000    $ 92,946,000
  Europe.............................    4,432,000      5,511,000       6,546,000
                                       -----------    -----------    ------------
  Consolidated.......................  $56,906,000    $76,396,000    $ 99,492,000
                                       ===========    ===========    ============
OPERATING INCOME (LOSS)
  North America......................  $ 2,756,000    $ 4,335,000    $  9,773,000
  Europe.............................     (104,000)      (254,000)       (669,000)
                                       -----------    -----------    ------------
  Consolidated.......................  $ 2,652,000    $ 4,081,000    $  9,104,000
                                       ===========    ===========    ============
IDENTIFIABLE ASSETS AT END OF PERIOD
  North America......................  $54,475,000    $60,947,000    $100,981,000
  Europe.............................    2,086,000      3,477,000       4,838,000
                                       -----------    -----------    ------------
  Consolidated.......................  $56,561,000    $64,424,000    $105,819,000
                                       ===========    ===========    ============

 
                                       47
   49
 
                                  SCHEDULE II
 
                                  MINIMED INC.
               VALUATION AND QUALIFYING ACCOUNTS -- SCHEDULE VII
 


            COLUMN A                 COLUMN B        COLUMN C -- ADDITIONS        COLUMN D     COLUMN E
- ---------------------------------   ----------   -----------------------------   ----------   ----------
                                    BALANCE AT    (1) CHARGED TO    CHARGED TO                BALANCE AT
                                    BEGINNING       COSTS AND         OTHER                     END OF
           DESCRIPTION              OF PERIOD        EXPENSES        ACCOUNTS    DEDUCTIONS     PERIOD
           -----------              ----------   ----------------   ----------   ----------   ----------
                                                                               
Allowance for doubtful accounts:
  1995...........................   2,419,000       1,152,000                     (420,000)   3,151,000
  1996...........................   3,151,000       2,744,000                     (502,000)   5,393,000
  1997...........................   5,393,000       1,218,000                     (361,000)   6,250,000
Accrued warranties:
  1995...........................   2,883,000         360,000                                 3,243,000
  1996...........................   3,243,000                                     (370,000)   2,873,000
  1997...........................   2,873,000       1,573,000                     (948,000)   3,498,000

 
- ---------------
(1) The allowance for doubtful accounts represents charges to bad debt expense
    for the year.
   50
 
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE
 
     Not Applicable
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information with respect to Directors and Executive Officers of the Company
is incorporated by reference to the Company's definitive Proxy Statement for its
annual meeting of stockholders to be filed not later than 120 days after January
2, 1998 with the Securities and Exchange Commission (the "1998 Proxy").
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Information with respect to this item is incorporated by reference to the
Company's 1998 Proxy.
 
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information with respect to this item is incorporated by reference to the
Company's 1998 Proxy.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
     Information with respect to this item is incorporated by reference to the
Company's 1998 Proxy.
 
                                    PART IV
 
ITEM 14.EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) 1. FINANCIAL STATEMENTS
 
     See index to financial statements under Item 8, on page 30 for a list of
all financial statements filed as part of this report.
 
2. FINANCIAL STATEMENT SCHEDULES
 
     The following financial statement schedules are filed as a part of this
Annual Report on Form 10-K:
 
        Schedule II -- Valuation and Qualifying Accounts
 
     All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
 
3. EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K
 
     The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated herein by reference:
 
2.1    Assignment and Assumption Agreement dated as of May 22, 1992 by and among
       Alfred E. Mann, Siemens-MiniMed Inc., Siemens Corporations, AEM MiniMed
       Corp., MiniMed Technologies Limited and Pacesetter Infusion, Inc.
       (included as Exhibit 2.1 to the Company's Registration Statement on Form
       S-1 (file no. 33-92710) which is incorporated herein by reference).
 
2.2    Asset Acquisition Agreement dated March 18, 1993 by and between MiniMed
       Technologies Limited and MiniMed Inc. (included as Exhibit 2.2 to the
       Company's Registration Statement on Form S-1 (file no. 33-92710) which is
       incorporated herein by reference).
 
2.3    Reorganization Agreement among Robert A. Kusher, Craig Lowy, MiniMed Inc.
       and MiniMed Distribution Corp. dated as of October 19, 1997 (included as
       Exhibit 2.1 to the Company's Current Report on Form 8-K filed October 20,
       1997, which is incorporated herein by reference).
 
                                       48
   51
 
2.4    Amendment to Reorganization Agreement among Robert A. Kusher, Craig Lowy,
       MiniMed Inc. and MiniMed Distribution Corp. dated as of January 2, 1998
       (included as Exhibit 2.1 to the Company's Current Report on Form 8-K
       filed January 16, 1998, which is incorporated herein by reference).
 
3.1    Form of Restated Certificate of Incorporation of MiniMed Inc. (included
       as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (file
       no. 33-92710) which is incorporated herein by reference).
 
3.2    Bylaws of MiniMed Inc. (included as Exhibit 3.2 to the Company's
       Registration Statement on Form S-1 (file no. 33-92710) which is
       incorporated herein by reference).
 
3.3    Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3.3 to the
       Company's 1996 Annual Report on Form 10-K which is incorporated herein by
       reference).
 
3.4    Form of Stockholder Rights Agreement (included as Exhibit 3.4 to the
       Company's Registration Statement on Form S-1 (file no. 33-92710) which is
       incorporated herein by reference).
 
10.4   MiniMed Technologies Limited Amended and Restated 1992 Option Plan
       (included as Exhibit 10.17 to the Company's Registration Statement on
       Form S-1 (file no. 33-92710) which is incorporated herein by reference).
 
10.5   MiniMed Inc. 1992 Stock Incentive Plan -- Form of Option (included as
       Exhibit 4.4 to the Company's Registration Statement on Form S-1 (file no.
       33-92710) which is incorporated herein by reference).
 
10.6   MiniMed Inc. Option Agreement -- Assumption of MiniMed Technologies
       Limited Options (included as Exhibit 10.18 to the Company's Registration
       Statement on Form S-1 (file no. 33-92710) which is incorporated herein by
       reference).
 
10.7   MiniMed Inc. Seconded Amended and Restated 1994 Stock Incentive Plan
       (included as Exhibit 10.16 to the Company's 1995 Annual Report on Form
       10-K which is incorporated herein by reference).
 
10.8   MiniMed Inc. 1994 Stock Incentive Plan -- Form of Option (included as
       Exhibit 10.20 to the Company's Registration Statement on Form S-1 (file
       no. 33-92710) which is incorporated herein by reference).
 
10.9   License Agreement dated February 13, 1980, as amended December 10, 1990,
       by and between Applied Physics Laboratory of the Johns Hopkins
       University, Pacesetter Infusion, Ltd. And MiniMed Technologies Limited
       (included as Exhibit 10.24 to the Company's Registration Statement on
       Form S-1 (file no. 33-92710) which is incorporated herein by reference).
       (Certain redacted information in this Agreement has received confidential
       treatment).
 
10.10 License Agreement dated as of October 1, 1993 by and between MiniMed Inc.
      and Wilson Greatbatch Ltd. (included as Exhibit 10.25 to the Company's
      Registration Statement on Form S-1 (file no. 33-92710) which is
      incorporated herein by reference).
 
10.11 Supply Agreement dated as of October 1, 1993 by and between MiniMed Inc.
      and Wilson Greatbatch Ltd. (included as Exhibit 10.26 to the Company's
      Registration Statement on Form S-1 (file no. 33-92710) which is
      incorporated herein by reference).
 
10.12 Amendment to Supply Agreement and License Agreement dated as of November
      1, 1996 by and between MiniMed Inc. and Wilson Greatbatch Ltd. (included
      as Exhibit 10.12 to the Company's 1996 Annual Report on Form 10-K which is
      incorporated herein by reference).
 
10.13 Form of Indemnity Agreement between MiniMed Inc. and each of its officers
      and directors (included as Exhibit 10.27 to the Company's Registration
      Statement on Form S-1 (file no. 33-92710) which is incorporated herein by
      reference).
 
10.14 MiniMed Inc. Non-Employee Director Deferred Stock Units Plan (included as
      Exhibit 10.14 to the Company's 1995 Annual Report on Form 10-K which is
      incorporated herein by reference).
 
                                       49
   52
 
10.15 MiniMed Inc. Employee Stock Purchase Plan (included as Exhibit 10.15 to
      the Company's 1995 Annual Report on Form 10-K which is incorporated herein
      by reference).
 
10.16 WCMA Note and Loan Agreement dated as of January 21, 1997 by and between
      MiniMed Inc. and Merrill Lynch Business Financial Services Inc. (included
      as Exhibit 10.16 to the Company's 1996 Annual Report on Form 10-K which is
      incorporated herein by reference)
 
10.17 Lease dated as of August 1, 1995, as amended by Amendment thereto dated as
      of July 1, 1996, by and between MiniMed Inc. and Alfred E. Mann (included
      as Exhibit 10.17 to the Company's 1996 Annual Report on Form 10-K which is
      incorporated herein by reference).
 
21.1   Subsidiaries of the Company.
 
23.1   Consent of Deloitte & Touche LLP
 
27.1   Financial Data Schedule
 
(b) 1. REPORTS ON FORM 8-K
 
     Current Report on Form 8-K filed October 20, 1997, announcing the execution
of a Reorganization Agreement whereby the Company would acquire all of the
outstanding capital stock of HMS.
 
                                       50
   53
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Action of 1934, as amended, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                  MINIMED INC.
 
                                                      
Date: March 25, 1998                                     By: /s/ ALFRED E. MANN
                                                             -------------------------------------------------
                                                             Alfred E. Mann
                                                             Chairman of the Board and Chief Executive
                                                             Officer (Principal Executive Officer)
 
Date: March 25, 1998                                     By: /s/ KEVIN R. SAYER
                                                             -------------------------------------------------
                                                             Kevin R. Sayer
                                                             Senior Vice President, Finance
                                                             and Chief Financial Officer
                                                             (Principal Financial and Accounting Officer)


 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
 


                  SIGNATURE                                    TITLE                        DATE
                  ---------                                    -----                        ----
                                                                                 
/s/ ALFRED E. MANN                             Director, Chairman of the Board and     March 25, 1998
- ---------------------------------------------  Chief Executive Officer (Principal
Alfred E. Mann                                 Executive Officer)
 
/s/ KEVIN R. SAYER                             Senior Vice President, Finance and      March 25, 1998
- ---------------------------------------------  Chief Financial Officer (Principal
Kevin R. Sayer                                 Financial and Accounting Officer)
 
/s/ DAVID CHERNOF, M.D.                        Director                                March 25, 1998
- ---------------------------------------------
David Chernof, M.D.
 
/s/ CAROLYNE KAHLE DAVIS                       Director                                March 25, 1998
- ---------------------------------------------
Carolyne Kahle Davis
 
/s/ WILLIAM R. GRANT                           Director                                March 25, 1998
- ---------------------------------------------
William R. Grant
 
/s/ DAVID MACCALLUM                            Director                                March 25, 1998
- ---------------------------------------------
David MacCallum
 
/s/ THOMAS R. TESTMAN                          Director                                March 25, 1998
- ---------------------------------------------
Thomas R. Testman
 
/s/ JOHN C. VILLFORTH                          Director                                March 25, 1998
- ---------------------------------------------
John C. Villforth

 
                                       51
   54
 
                                 EXHIBIT INDEX
 


EXHIBIT                       DESCRIPTION OF EXHIBIT
- -------                       ----------------------
        
2.1        Assignment and Assumption Agreement dated as of May 22, 1992
           by and among Alfred E. Mann, Siemens-MiniMed Inc., Siemens
           Corporations, AEM MiniMed Corp., MiniMed Technologies
           Limited and Pacesetter Infusion, Inc. (included as Exhibit
           2.1 to the Company's Registration Statement on Form S-1
           (file no. 33-92710) which is incorporated herein by
           reference).
2.2        Asset Acquisition Agreement dated March 18, 1993 by and
           between MiniMed Technologies Limited and MiniMed Inc.
           (included as Exhibit 2.2 to the Company's Registration
           Statement on Form S-1 (file no. 33-92710) which is
           incorporated herein by reference).
2.3        Reorganization Agreement among Robert A. Kusher, Craig Lowy,
           MiniMed Inc. and MiniMed Distribution Corp. dated as of
           October 19, 1997 (included as Exhibit 2.1 to the Company's
           Current Report on Form 8-K filed October 20, 1997, which is
           incorporated herein by reference).
2.4        Amendment to Reorganization Agreement among Robert A.
           Kusher, Craig Lowy, MiniMed Inc. and MiniMed Distribution
           Corp. dated as of January 2, 1998 (included as Exhibit 2.1
           to the Company's Current Report on Form 8-K filed January
           16, 1998, which is incorporated herein by reference).
3.1        Form of Restated Certificate of Incorporation of MiniMed
           Inc. (included as Exhibit 3.1 to the Company's Registration
           Statement on Form S-1 (file no. 33-92710) which is
           incorporated herein by reference).
3.2        Bylaws of MiniMed Inc. (included as Exhibit 3.2 to the
           Company's Registration Statement on Form S-1 (file no.
           33-92710) which is incorporated herein by reference).
3.3        Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3.3
           to the Company's 1996 Annual Report on Form 10-K which is
           incorporated herein by reference).
3.4        Form of Stockholder Rights Agreement (included as Exhibit
           3.4 to the Company's Registration Statement on Form S-1
           (file no. 33-92710) which is incorporated herein by
           reference).
10.4       MiniMed Technologies Limited Amended and Restated 1992
           Option Plan (included as Exhibit 10.17 to the Company's
           Registration Statement on Form S-1 (file no. 33-92710) which
           is incorporated herein by reference).
10.5       MiniMed Inc. 1992 Stock Incentive Plan -- Form of Option
           (included as Exhibit 4.4 to the Company's Registration
           Statement on Form S-1 (file no. 33-92710) which is
           incorporated herein by reference).
10.6       MiniMed Inc. Option Agreement -- Assumption of MiniMed
           Technologies Limited Options (included as Exhibit 10.18 to
           the Company's Registration Statement on Form S-1 (file no.
           33-92710) which is incorporated herein by reference).
10.7       MiniMed Inc. Seconded Amended and Restated 1994 Stock
           Incentive Plan (included as Exhibit 10.16 to the Company's
           1995 Annual Report on Form 10-K which is incorporated herein
           by reference).
10.8       MiniMed Inc. 1994 Stock Incentive Plan -- Form of Option
           (included as Exhibit 10.20 to the Company's Registration
           Statement on Form S-1 (file no. 33-92710) which is
           incorporated herein by reference).
10.9       License Agreement dated February 13, 1980, as amended
           December 10, 1990, by and between Applied Physics Laboratory
           of the Johns Hopkins University, Pacesetter Infusion, Ltd.
           And MiniMed Technologies Limited (included as Exhibit 10.24
           to the Company's Registration Statement on Form S-1 (file
           no. 33-92710) which is incorporated herein by reference).
           (Certain redacted information in this Agreement has received
           confidential treatment).

 
                                       52
   55
 


EXHIBIT                       DESCRIPTION OF EXHIBIT
- -------                       ----------------------
        
10.10      License Agreement dated as of October 1, 1993 by and between
           MiniMed Inc. and Wilson Greatbatch Ltd. (included as Exhibit
           10.25 to the Company's Registration Statement on Form S-1
           (file no. 33-92710) which is incorporated herein by
           reference).
10.11      Supply Agreement dated as of October 1, 1993 by and between
           MiniMed Inc. and Wilson Greatbatch Ltd. (included as Exhibit
           10.25 to the Company's Registration Statement on Form S-1
           (file no. 33-92710) which is incorporated herein by
           reference).
10.12      Amendment to Supply Agreement and License Agreement dated as
           of November 1, 1996 by and between MiniMed Inc. and Wilson
           Greatbatch Ltd. (included as Exhibit 10.12 to the Company's
           1996 Annual Report on Form 10-K which is incorporated herein
           by reference).
10.13      Form of Indemnity Agreement between MiniMed Inc. and each of
           its officers and directors (included as Exhibit 10.27 to the
           Company's Registration Statement on Form S-1 (file no. 33-
           92710) which is incorporated herein by reference).
10.14      MiniMed Inc. Non-Employee Director Deferred Stock Units Plan
           (included as Exhibit 10.14 to the Company's 1995 Annual
           Report on Form 10-K which is incorporated herein by
           reference).
10.15      MiniMed Inc. Employee Stock Purchase Plan (included as
           Exhibit 10.15 to the Company's 1995 Annual Report on Form
           10-K which is incorporated herein by reference).
10.16      WCMA Note and Loan Agreement dated as of January 21, 1997 by
           and between MiniMed Inc. and Merrill Lynch Business
           Financial Services Inc. (included as Exhibit 10.16 to the
           Company's 1996 Annual Report on Form 10-K which is
           incorporated herein by reference)
10.17      Lease dated as of August 1, 1995, as amended by Amendment
           thereto dated as of July 1, 1996, by and between MiniMed
           Inc. and Alfred E. Mann (included as Exhibit 10.17 to the
           Company's 1996 Annual Report on Form 10-K which is
           incorporated herein by reference).
21.1       Subsidiaries of the Company
23.1       Consent of Deloitte & Touche LLP
27.1       Financial Data Schedule

 
                                       53

EX-21.1

   1
 
                                                                    EXHIBIT 21.1
 
SUBSIDIARIES OF THE COMPANY
 
     MiniMed Distribution Corp., a Delaware corporation
 
     MiniMed International, Inc., a Barbados 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
 
     Diabetix Depot, Inc., a Florida corporation
 
     Dialysis Management Services, Inc., a Florida corporation
 
     Medical Management & Marketing of South Florida, a Florida corporation

EX-23.1

   1
 
                                                                    EXHIBIT 23.1
 
              INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
 
We consent to the incorporation by reference in Registration Statements No.
33-95630, No. 333-04192, and No. 333-04190 of MiniMed Inc. on Form S-8 of our
report dated January 17, 1998, appearing in this Annual Report on Form 10-K of
MiniMed Inc. for the year ended January 2, 1998.
 
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of MiniMed Inc., listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------
 
Los Angeles, California
March 26, 1998

EX-27.1

 

<ARTICLE> 5
<CIK> 0000945801
<NAME> MINIMED,INC.
<MULTIPLIER> 1,000
       
                             
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