-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GN5SgxP9Ocx2WH8DshgcZz3A3Ac/ScKHlLCiA8adcBVQIln8pJYDIaoa/tJdvZ4o KIDSBOmWJHvqcPmiOKru3w== 0000950148-01-500265.txt : 20010330 0000950148-01-500265.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950148-01-500265 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001229 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MINIMED INC CENTRAL INDEX KEY: 0000945801 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 954408171 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26268 FILM NUMBER: 1583768 BUSINESS ADDRESS: STREET 1: 12744 SAN FERNANDO RD CITY: SYLMAR STATE: CA ZIP: 91342 BUSINESS PHONE: 8183625958 MAIL ADDRESS: STREET 1: 12744 SAN FERNANDO RD CITY: SYLMAR STATE: CA ZIP: 91342 10-K405 1 v70622e10-k405.txt 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 29, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-26268 MINIMED INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4408171 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 18000 DEVONSHIRE STREET, NORTHRIDGE, CALIFORNIA 91325-1219 (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. [X ] The aggregate market value of the voting stock held by non-affiliates of the registrant at March 15, 2001 was $1,523,558,326 (based on closing sale price of $31.75 per share as reported on the Nasdaq National Market). The total number of shares outstanding of the registrant's Common Stock as of March 15, 2001 was 64,611,780. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following document are incorporated herein by reference: Part III -- The Registrant's Proxy Statement for its 2001 Annual Meeting (the "2001 Proxy"). Exhibit Index is located at page [60] ================================================================================ 2 PART I Some of the information in this Annual Report on Form 10-K contains forward-looking statements, including statements relating to the anticipated operating results, growth and financial resources of our company, development, manufacture, introduction, and commercial acceptance of new products, the development of new markets, trends relating to certain expenses, obtaining and maintaining regulatory approval, acceptance of new products, obtaining and maintaining reimbursement for our products, expectations regarding competition from other companies and from other methods of treating medical conditions, our ability to manufacture and distribute our products, our success in maintaining our license agreements with Medical Research Group, Inc. and the success of MRG's product development and performance. The forward-looking statements are based on assumptions, including assumptions of future events. Although we believe that our expectations are based on reasonable assumptions, the actual results and our financial position will vary from those projected or implied in the forward-looking statements, and the variances may be material. Such variances result from the risks and uncertainties which affect our business, including changes in economic and market conditions, acceptance of our products by health care and reimbursement communities, health care legislation and regulation, new developments in diabetes therapy, administrative and regulatory approval and related considerations, competitive developments, technical risks associated with product development, effective integration of our acquisitions, maintenance and execution of strategic alliances and other factors discussed under the caption "Risk Factors" contained in our Prospectus dated June 29, 1999 filed with the Securities and Exchange Commission. While to the best of our knowledge, the information presented in the annual report is accurate, we disclaim any obligation to update the information provided herein. ITEM 1. BUSINESS We design, develop, manufacture, market and sell advanced microinfusion systems and continuous glucose monitoring systems for the intensive management of diabetes. Our primary goal is to continue to be an innovator in designing and bringing to market advanced medical devices for the treatment of diabetes. We are also using our drug delivery expertise to develop infusion devices for the treatment of other chronic medical conditions. Our development efforts are focused on creating products which will offer patients a comprehensive and integrated approach to enhanced disease management. We have been selling external insulin infusion pumps and related supplies since 1983, and we believe we have established a reputation for quality and service associated with the MiniMed name. We believe that we are the leading provider of insulin infusion systems in the world, with a present market share in the United States which we estimate to be approximately 80% of new product sales. Our net sales of these external pumps and related disposables have grown at a compounded annual growth rate of approximately 47% from $59.5 million in 1996 to $275.8 million in 2000. In turn, this growth has driven our overall net income from $3.3 million to $43.2 million over the same period. We intend to leverage our existing customer base and current distribution channels to introduce new products to satisfy more of our customers' needs and provide more complete diabetes management solutions. MARKET OVERVIEW Diabetes is a chronic, life-threatening disease, for which there is no known cure. In patients with diabetes, the body does not produce or respond adequately to insulin, a hormone produced by the pancreas that is critical to the metabolism of glucose. In the normal digestive process, carbohydrates in food are broken down into glucose, which is circulated in the bloodstream to the cells of the body, where it is converted into energy. The concentration of glucose in the bloodstream must be controlled within a relatively narrow range to maintain normal health and avoid significant long-term health complications. Insulin, which is secreted by the islet cells in the pancreas, is the primary regulatory mechanism by which the body metabolizes glucose. A normal pancreas produces the correct amount of insulin required to maintain a person's glucose at proper levels. In patients with diabetes, however, insulin-producing cells are destroyed or exist in reduced numbers, or some combination of both and, as a result, the body's cells do not effectively metabolize glucose. Although we believe that our most significant growth opportunity is to expand our diabetes business, we also believe that opportunities involving application of our technology to the delivery of other drugs may become increasingly important in the future. TYPE 1 VERSUS TYPE 2 DIABETES Diabetes is typically classified into two primary types. Type 1 is the more severe form of the disease and is characterized by a complete lack of insulin secretion by the pancreas. In order to maintain body chemistry balance and sustain life, Type 1 patients require life-long, daily insulin therapy. In Type 2 diabetes, the more prevalent form of the disease, the pancreas produces some insulin, but glucose levels are still not adequately controlled. There is a spectrum of the severity in Type 2 diabetes, ranging from those 2 3 patients whose disease is mild and even undiagnosed, to those who can usually manage their disease by diet and exercise, to those who use various oral medications and to the most serious segment that requires use of insulin. HOW MANY PEOPLE HAVE DIABETES? According to the American Diabetes Association, which we call the ADA, diabetes afflicts approximately 16 million people in the Unites States, or approximately 6% of the total population, 800,000 to 1 million of whom are estimated by the ADA to suffer from Type 1 diabetes. The Health Care Financing Administration, which administers the Medicare Program, estimates that there is an incidence of 30,000 new diabetes cases per year. Although patients with Type 1 diabetes represent the primary market for our programmable insulin pumps, there is a small but growing use of programmable insulin pumps for Type 2 diabetes. Based on industry sources, we estimate that there are approximately 4 million Type 2 patients using insulin in the U.S. THE COMPLICATIONS OF DIABETES People with diabetes experience distress at both high levels of glucose -- "hyperglycemia," -- and low levels of glucose -- "hypoglycemia," with significant short and long-term negative impacts on wellness and mortality. Recurring high glucose levels inhibit the immune system and result in fatigue, slow healing and lower resistance to infection. In severe cases, high glucose levels can lead to coma and death. Chronically high glucose levels can result in major, long-term complications such as eye disease, kidney disease, nerve disease, male impotence and cardiovascular complications, including heart attacks and strokes. Low glucose levels can also lead to complications, including fainting, weakness and, in severe cases, unconsciousness, permanent loss of cognitive power and death. According to the ADA, diabetes is a leading cause of: o new blindness in adults 20 to 74 years old with 12,000 to 24,000 new cases annually in the United States; o renal failure with approximately 27,900 new cases in 1997; and o amputations with approximately 56,000 new cases annually. Based upon data from the ADA, diabetes is the sixth leading direct cause of death by disease in the United States, accounting for approximately 193,000 deaths in 1996. COSTS TO THE HEALTH CARE SYSTEM The costs to the health care system associated with the treatment of diabetes and its complications are significant. According to the ADA, the total health care costs in the United States of treating people with all types of diabetes was estimated to be $98.0 billion in 1997. This included approximately $44 billion in direct medical and treatment costs and another $54.1 billion was in indirect costs, including premature mortality and disability. THERAPY FOR DIABETES To avoid the acute effects of diabetes and to reduce the associated complications, patients with Type 1 diabetes, and many Type 2 patients, must use insulin daily to control glucose levels. A person's glucose level will vary depending upon food intake, insulin availability, exercise, stress and illness. To achieve good control a patient needs a continuous supply of insulin to provide his or her background metabolic needs, known as basal insulin, as well as periodic larger amounts for meals, known as bolus insulin. Patients generally follow one of two therapy protocols: o conventional, which involves one or two self-administered, daily injections of long-acting, timed-release, insulin, as well as short acting insulin, along with diet control and exercise; or o intensive, which consists either of (1) pump therapy with fast-acting insulin or (2) at least three injections per day of mixtures of long-acting and fast-acting insulins. Pumps can be programmed to better meet these needs because they usually use only fast-acting insulin delivered in hundreds of microinfusions throughout the day in a profile that provides both a constant flow of insulin, or basal rate, and also bolus infusions when needed. Because of the limited number of injections and the uneven absorption of timed-release insulins, we believe that in many patients neither conventional nor multiple injection therapy controls glucose levels as well as pump therapy. Our products have 3 4 been shown in clinical trials to provide reduced glycemic variability and significantly fewer severe hypoglycemic events than conventional or multiple daily injection therapy. THE DAILY RITUAL: WHAT THE DIABETES PATIENT CURRENTLY MUST DO In order to gauge insulin dosage, a patient should measure his or her glucose level at least several times per day. Currently, this is generally done by: o pricking a finger with a needle; o drawing a drop of blood; o placing it on a disposable strip; o inserting the strip into a small meter about the size of a pager; and o waiting twelve seconds to two minutes for a number to appear on the display. The patient must then assess his or her carbohydrate intake and, using the measurement of glucose concentration, compute the appropriate amount of insulin required. The patient then administers that amount of insulin using a syringe, a pen injector or a programmable infusion pump. We believe that the discomfort, complexity and time associated with this entire process discourages patient compliance. In addition, the current glucose monitoring procedure provides measurements at only a few points in time. With each determination the patient does not know for sure if his or her glucose level is rising, falling or remaining stable. This can lead to erroneous conclusions as to the amount of insulin needed. In spite of these limitations, we estimate the present worldwide market for these glucose meters and strips and related disposables to be approximately $3.5 billion. The continuous glucose monitoring technology we are currently developing is intended to eventually compete with these glucose meters and strips, especially for insulin-using patients, who use over half of the total worldwide supply of glucose meters and strips. We cannot assure you, however, that our continuous glucose monitoring systems will prove to be sufficiently accurate and effective or that we will be able to successfully commercialize these products. NIH LANDMARK STUDY: DCCT In 1984, the National Institutes for Health, which we call the NIH, started a $165.0 million study known as the Diabetes Complications and Control Trial, which is generally referred to as the DCCT, involving 1,441 Type 1 patients who participated over the entire approximately ten-year term of the study. The study was designed to determine whether close control of blood glucose levels, approaching "normal" levels, could prevent the onset and the progression of severe, long-term complications of Type 1 diabetes. Individuals with diabetes with mild or no significant complications were randomly divided into two groups: o the conventionally-managed patients took one or two injections daily of a variety of types of mixed insulins and were required to measure their blood glucose levels once or twice per day; and o the intensively-managed patients were given the choice of three or more injections per day, or use of an insulin pump. These patients were required to take at least four glucose measurements daily. The NIH provided to patients who used insulin pumps our earlier Model 504-S, although a small number of patients who had already been using other pumps were permitted to continue using their existing pumps. Among the intensively-managed patients, 34% overall used external pumps, and at the end of the study 42% of the intensively-managed patients were using pumps. In September 1993, The New England Journal of Medicine published the results of this landmark study, which concluded that: o Serious consequences of diabetes were reduced significantly for the intensively-managed patient group as a whole. o Progression of the three primary conditions that were evaluated was reduced in the intensive group relative to the conventional group: eye disease by 76%, kidney disease by 50% and nerve disease by 60%. 4 5 o The incidence of hypoglycemic events for the intensively-managed group was three times higher than for the conventionally-managed group. o In spite of the finding with respect to hypoglycemic events, the NIH concluded that Type 1 patients should be treated intensively because the reduction in long-term complications greatly outweighed the risk of hypoglycemic events. In fact, the results of the study were so compelling that the study was terminated a year earlier than planned. MORE RECENT CLINICAL STUDIES Although the DCCT was not intended to compare the benefits of pump therapy with multiple daily injections, more recent studies have focused on this comparison and have concluded that pump therapy has significant advantages. In November 1999, Diabetes Care, a respected scientific journal, published the results of a study conducted by Elizabeth Boland, MSN, APRN, PNP, CDE and others, involving 75 adolescents between the ages of 12 and 20 years who were candidates for intensive therapy. Twenty-five of the patients chose the external programmable pump as their mode of diabetes treatment while the other fifty patients chose multiple daily injections. The study found that the rate of severe hypoglycemic events was reduced by almost 50% in the group using the pump. The pump patients also used less insulin than those receiving multiple daily injections. Furthermore, the patients using pumps found coping with diabetes to be less difficult than adolescents using multiple daily injections. In April 1996, Diabetes Care published the results of a study by Bruce Bode, M.D. and others, involving 55 patients who managed their glucose levels intensively, using multiple daily injections for at least 12 months before switching to our external programmable pump for a minimum of 12 months. The study found that the patients achieved reduced glycemic variability and a four-to six-fold reduction in severe hypoglycemic events with the pump. The EVADIAC study group in France presented two studies in 1996 which included a comparison of pump therapy using implantable pumps to multiple daily injections and external programmable pumps. We manufactured a majority of the implantable pumps used in the studies. The studies, involving more than 240 patients, found that implantable pumps had significant advantages over alternative intensive management therapies for Type 1 patients. The studies also showed that patients with implantable pumps had an even greater reduction in severe hypoglycemic events than patients with external pumps. In October 1996, the Journal of the American Medical Association, generally known as JAMA, published the results of a prospective, randomized study performed for the U.S. Department of Veterans Affairs which compared pump therapy using our implantable pump to multiple daily injections in a total of 105 Type 2 patients. The study found that Type 2 patients with implantable pumps achieved reduced glycemic variability and reduced risk of hypoglycemic events without weight gain, as compared to those patients using multiple daily injections. The study also showed that the pump patients had an enhanced quality of life. In 1998, the UK Prospective Diabetes Study published in The Lancet, found, over a ten-year period, that intensively-managed Type 2 patients had a 25% reduction in the risks of microvascular clinical complications, such as eye disease and kidney disease. The only disadvantages according to the study to intensive management for Type 2 patients were weight gain and risk of hypoglycemia. There was also no evidence that intensive treatment had any specific adverse effect on macrovascular disease. THE MINIMED SOLUTION We believe our insulin pumps and continuous glucose monitoring technologies offer patients with diabetes substantial benefits over the current alternative therapies. In addition, we believe our technologies for external programmable pumps can be used in the controlled delivery of other large molecule compounds with advantages over current treatment options. INSULIN PUMP TECHNOLOGIES Our diabetes products, both those already available commercially and others under development, reduce the serious complications of diabetes by enabling patients to more easily, accurately and intensively manage their glucose levels. Our programmable insulin pumps have substantial advantages over conventional or intensive injection therapy because they: o Result in Fewer Severe Hypoglycemic Events. The Diabetes Care, EVADIAC and JAMA studies referred to above all demonstrated this using our pumps. 5 6 o Enable Rapid Insulin Absorption and Availability. Our pumps use fast-acting insulin which is more quickly absorbed into the blood. Regular and timed-release insulins take considerable time before initiating metabolism of glucose, which means that a patient using injection therapy must administer an injection well before the insulin is actually needed. Changing plans can cause problems. For example, a bolus injection -- a single sizable dose -- of regular insulin should be taken 5--15 minutes before a meal. If the carbohydrate intake or the timing changes, glucose control is impaired. In pump therapy, which uses only fast-acting insulin, only a few minutes of lead time are required between the infusion of a bolus and the meal. o Improve Consistency of Insulin Absorption. Fast-acting insulin delivered by a pump in tiny microinfusions also has lower variability in absorption. By contrast, both conventional therapy and multiple daily injections require the use of timed-release insulins, which vary in absorption within the same patient by as much as 52% or more from one day to the next. Insulin delivered by pumps has been shown to have variability levels of less than 2.8% in most patients. In addition, injection therapy requires the patient to administer multiple injections of insulin in different locations in the body. Each location in the body may have different absorption characteristics. Pumps, in contrast, deliver the insulin through an infusion set that is usually connected for three days to a single site, usually in a patient's abdomen, providing more consistent absorption. o Enhance Control Through Programmable Delivery. Because our pumps deliver hundreds of microdoses of insulin and are programmable, they enable the delivery of insulin to be more closely matched to a patient's needs as they vary throughout the day. This capability is important at all times and especially during sleep. Many patients have been shown to suffer from a rise in early morning glucose levels. The patient can program our pumps to address this condition, known as the Dawn Phenomenon, as well as the many other predictable fluctuations in glucose levels. o Provide Continuous Insulin Supply. Our pumps deliver a virtually continuous infusion of insulin to provide for a patient's background metabolic needs. Injection therapy, in contrast, requires the repeated administration of boluses, which form a subcutaneous depot or collection of insulin and can result in tissue scarring at the injection site. In pump therapy, fast-acting insulin is delivered in hundreds of microinfusions throughout the day, thereby reducing the creation of such depots. o Improve Patient Quality of Life. In addition to advantages related to glucose control, we believe our pumps provide patients with a more flexible lifestyle, an important advantage that makes pumps a particularly attractive alternative to injection therapy. Because of the flexibility of infusion pumps to deliver both a continuous background profile of fast-acting insulin and larger episodic boluses when needed before meals, patients are not restricted to the fixed schedule of eating and exercise that is required for both conventional and intensive injection therapy. They are less likely to have glucose level fluctuations as the insulin demands of an active life are met. In addition to these lifestyle benefits, many people using the pump report that they feel much better with pump therapy. GLUCOSE SENSOR TECHNOLOGY In June 1999, the U.S. Food and Drug Administration, which we call the FDA, approved our first generation continuous glucose monitoring system designed to be used by physicians in treating patients with diabetes. Patients can wear this initial model for several days to enable a physician to retrospectively analyze patients' glucose levels. Physicians are able to use the information to modify patients' treatment, which may include the prescription or reprogramming of an insulin pump. Our current continuous glucose monitoring system is not a substitute for the traditional methods of glucose measurement. Subject to receipt of a separate FDA approval, we intend to introduce a consumer model of the glucose monitoring system that would provide the patient with continuous glucose readings. The first generation consumer model of our continuous glucose monitoring system is not a substitute for the traditional methods of glucose measurement. We submitted our application to the FDA for the consumer version of our continuous glucose monitoring system in August 2000. We expect that the FDA will review our consumer model of the glucose monitoring system in calendar year 2001. However, we cannot assure you when the FDA will complete its review of our consumer model of the glucose monitoring system. Furthermore, we cannot assure you that upon review, the FDA will approve our consumer model of the glucose monitoring system. Our continuous glucose monitoring systems utilize a small, thin, pliable sensor inserted into subcutaneous tissue, the tissue immediately under the skin, usually in the abdomen, upper arm or thigh. This sensing element produces an electrical signal proportional to glucose in the interstitial fluid, the fluid in the subcutaneous tissue. We are developing a series of subsequent generations of products utilizing this technology. The current product utilizes a sensor connected by cable to a small recording/display unit, and future versions will transmit the signal by telemetry to a recording/display unit. We are designing future models of our external pumps to receive information from the sensor and react to sensor commands, although these products, if they are successfully 6 7 developed, will not be available for at least two years. We believe that if these products are successfully developed we would be able to compete in the worldwide market for glucose strips and meters, which we estimate to be approximately $3.5 billion. There can be no guarantee that we would be able to successfully develop such products. We believe that our continuous glucose monitoring systems will, if successful, offer significant advantages over current methods of monitoring glucose levels because our systems would: o Improve Patients' Ability to Normalize Glucose Levels. Our continuous glucose monitoring systems have been shown in limited human trials to continuously and accurately measure glucose levels as compared to standard laboratory reference equipment. This information not only presents quantitative measurements but will allow patients to determine whether glucose levels are rising, falling or remaining stable. This will provide the patient a means to better manage his or her glucose levels. o Warn Against Dangerously High or Low Blood Glucose Levels. Studies indicate that during the day and night patients experience wide swings of glucose levels which are not easily detected even by testing with four to six finger pricks per day. In our next generation continuous glucose monitoring system product, when a sensor measurement indicates a glucose level above or below an acceptable range, an alarm will activate. Our sensing systems will also operate during periods of sleep and will sound an alarm to wake the patient if his or her glucose level gets too high or too low. o Improve Patient Compliance. Our subcutaneous glucose sensor is inserted through the skin approximately every three days. Because it is small, thin and pliable, the microsensor causes little, if any, patient discomfort. By avoiding the discomfort, complexity and time associated with repeatedly pricking a finger to draw blood and waiting for a meter reading of the sample, our continuous glucose monitoring system is expected to remove many of the obstacles which are believed to deter patient compliance, particularly in the case of intensive management of diabetes. A patient using our continuous glucose monitoring system would need only two or three sensor insertions per week and is expected to require fewer calibrations per week, as compared to at least 28 finger pricks per week for recommended monitoring with strip meters in an intensive management regimen. o Enable Health Care Professionals to Establish Improved Treatment Protocols. The challenge of establishing a suitable treatment program for patients beginning intensive management is great. In some medical practices, patients are hospitalized for several days so that frequent glucose measurements can be made to generate a suitable treatment protocol. Even this procedure is limited in its effectiveness because the patient's behavior in the hospital differs from his or her normal lifestyle. Continuous sensing and recording outside a hospital will permit better treatment protocols to be generated at lower cost and without the need for hospitalization or close surveillance. USE OF OUR INFUSION PUMP SYSTEMS FOR OTHER MEDICAL CONDITIONS We have gained considerable expertise from our experience with insulin infusion and believe that this expertise can be applied to meet the delivery requirements of many other complex drugs. Many genetically engineered and manufactured proteins and peptides have delivery problems similar to insulin. Delivery for these drugs is difficult because they: o comprise fragile, large molecules; o cannot be ingested orally; o have short half-lives in the body; o require site specific delivery; o have very narrow effective ranges of concentration; or o require a profiled delivery pattern or would otherwise require large boluses of drugs that are either expensive or toxic in the high doses required to achieve therapeutic value. We believe that our external programmable pumps used in the controlled delivery of a variety of large molecule compounds may have advantages as compared to current treatment options. 7 8 BUSINESS STRATEGY Our primary goal is to continue to be an innovator in bringing to market advanced medical devices for the treatment of diabetes, but we also intend to use our drug delivery expertise to develop devices for the treatment of other chronic medical conditions. To achieve these objectives, we are pursuing the following business strategy: o Expand the Market for Insulin Pumps. The NIH and the ADA have established intensive therapy as the standard of care for most Type 1 patients, in part as a result of the DCCT. Clinical results have shown that continuous insulin therapy using programmable insulin pumps is the most effective way to provide intensive management. Since the benefits of intensive therapy have only recently been verified, and since many patients are treated by primary care physicians who do not have the facilities and support personnel to pursue intensive management, the majority of Type 1 patients and most insulin-using Type 2 patients are still being treated with conventional therapy. We estimate that in the United States only approximately 12% of Type 1 patients and a very small number of Type 2 patients are using pump therapy. As a result, we believe that we have a significant opportunity to expand the market for our insulin pumps. o Develop Market for Continuous Glucose Monitoring Systems. We believe that there is a significant market for continuous glucose monitoring systems. We believe that such devices will enable diabetic patients to better control their blood glucose levels and delay the onset of complications. Continuous glucose monitoring systems will also enable health care providers to establish better treatment protocols for their patients. Clinical case studies have demonstrated how our current continuous glucose monitoring system can be effective in guiding management to improve the glycemic control in diabetic patients. Given the benefits of continuous glucose monitoring systems, we believe that we have a significant opportunity to develop the market for our current and future models of continuous glucose monitoring systems. o Offer Comprehensive Array of Products for the Treatment of Diabetes. In 1998, we acquired two distributors of our products and related supplies, Home Medical Supply, Inc. and its affiliated companies, which we call HMS, and Diabetes Support Systems, Inc., which we call DSS. With these acquisitions, we have established a presence in the market for additional diabetes products and supplies, such as strips and meters, complementing our existing distribution network for insulin pumps and supplies. We also believe that these acquisitions may also provide means to efficiently distribute other new diabetes products we intend to bring to market if and when FDA approval is received. Our disposable infusion pump system for Type 2 diabetes, if and when approved by the FDA, is expected to allow us to increase our presence in the much larger Type 2 market. By increasing our ability to satisfy more of our customers' needs and continuing our extensive customer service efforts, we believe that we can maximize our revenues over the long term and create barriers to entry for competitors. o Diversification Into Treatment of Other Medical Conditions. We believe that there are many opportunities to use our infusion pump technology with medications other than insulin. We are, therefore, exploring opportunities for applications of our delivery systems for other drugs with several biopharmaceutical companies and have entered into agreements with two companies. We have entered into an agreement with United Therapeutics Corporation, which we refer to as "UT." The agreement with UT relates to the development of a treatment for pulmonary hypertension. For more information regarding our efforts to diversify into treatment of other medical conditions, please read the section entitled "General Purpose Infusion Pump." o Generate Recurring Revenue Stream. Our insulin infusion products include a variety of disposable products and accessories which are labeled to be replaced every 48 to 72 hours and provide a continuing source of revenue from each patient. In addition, both our continuous-flow infusion system for Type 2 diabetes and our continuous glucose monitoring systems are also disposable products or have disposable components which are anticipated to be replaced every 72 hours. We will seek to continue to expand our recurring revenue stream by adding new proprietary disposables and accessories, as well as by distributing other supplies to our customers, such as pre-filled insulin cartridges, strips and meters. o Seek and Expand Strategic Alliances. We intend to continue our efforts to expand the market for our products through strategic alliances with key partners. In the diabetes care marketplace, we will continue to collaborate and expand its relationships with insulin and glucose meter manufacturers and hospital service providers. In December 2000, we invested in and entered into a strategic development agreement with DMCare, Inc. which we call "DMCare." Under the terms the agreement, DMCare will develop an automated dosing support algorithm that can be accessed and utilized by patients who use our insulin infusion pumps and their prescribing physicians. We have also agreed to participate in a number of other cooperative initiatives with DMCare, which include cross-marketing programs, reimbursement and data initiatives, and patient and physician educational 8 9 activities. This strategic alliance with DMCare is consistent with our strategy to attract a broader range of general practitioners to our products. While these are the strategies we are pursuing in our business, we cannot assure you that: o any of the future products mentioned above can be successfully developed or commercialized; o the various components of any of the systems can be made to work together; o regulatory approval for commercial distribution will be obtained; o reimbursement by third-party payors will be available; or o the products will be accepted in the marketplace by health care professionals, patients and third-party payors. PRODUCTS The following table summarizes some information with respect to principal products we own or distribute and products under development.
PRODUCT DESCRIPTION REGULATORY STATUS TARGET MARKETS INFUSION PUMPS AND SYSTEMS External programmable insulin pump Several models; currently on Commercially available Type 1 patients; eighth generation insulin-using Type 2 patients Type 2 insulin infusion system Disposable, constant-flow FDA approval required Insulin-using Type 2 patients infusion device Implantable insulin pump Implanted under the skin of the CE Mark received in EU; FDA Type 1 patients abdomen; used for insulin therapy approval required; insulin approval required General purpose infusion pump Multipurpose drug infusion pump Commercially available Pulmonary hypertension; HIV for non-insulin applications infection; cancer; and other medical conditions DISPOSABLE AND ACCESSORIES Quick-set(R) infusion set Insulin-compatible tubing set Commercially available Type 1 and 2 patients with soft cannula (instead of a needle) with 90 degree angle insertion and at site disconnect Sof-set(R) infusion set Multiple versions; Commercially available Type 1 and 2 patients insulin-compatible tubing set with soft cannula (instead of a needle) Silhouette(R) infusion set Insulin-compatible tubing set Commercially available Type 1 and 2 patients with angled soft cannula (instead of needle) Polyfin(R) infusion set Two versions; insulin- compatible Commercially available Type 1 and 2 patients tubing set with needle Quick-serter(R) Automatic Quick-set cannula Commercially available Type 1 and 2 patients inserter Sof-serter(R) Automatic Sof-set cannula inserter Commercially available Type 1 and 2 patients Medication reservoir Syringe-like reservoir used with Commercially available Type 1 and 2 patients external insulin pump Prepackaged insulin cartridges Worldwide license to package and FDA approval required Type 1 and 2 patients sell a new formulation of Lilly's insulin lyspro for use with
9 10 programmable infusion pumps Solutions Software Communication cradle to download Commercially available Physicians who treat diabetes patient information from external insulin pumps and popular glucose meters Strips and meters Manufactured by other companies Commercially available Type 1 and 2 patients and used to measure glucose levels GLUCOSE MONITORING SYSTEMS Physician diagnostic device Used by health care professionals Commercially available Physicians who treat Diabetes to monitor patients continuously patients for 2-3 days Patient glucose monitoring system To be used by the patient to Under review by FDA; FDA Type 1 and 2 patients continuously monitor glucose approval required levels, includes hypoglycemia/ hyperglycemia alarms Sen-serter Automatic insertion device for Commercially available Type 1 and 2 patients glucose sensors Long Term Glucose Sensor Marketing rights to Long Term In clinical trials; FDA Type 1 and 2 patients Glucose Sensor under development approval required by MRG
INFUSION PUMPS AND SYSTEMS External Insulin Pump. We introduced our most recent version, the Model 508, in October 1999. This model weighs about 3.5 ounces and is about the size of a pager. The pump can accurately deliver, throughout the day, a controlled, programmable profile of u-100 insulin in several hundred microinfusions of one microliter, i.e., 0.1 unit of insulin, each. The insulin delivery profile can thus be adjusted to meet individual needs. Insulin is delivered from the pump through special insulin-compatible tubing either to a needle or soft cannula, a tiny tube which penetrates the skin, usually into the subcutaneous tissue of the abdomen. The Model 508 is an upgrade to the seventh generation of our external pumps, the first of which was introduced in 1983. We continually seek to improve our existing external pumps with additional features and capabilities. Our pumps have many safety features, including numerous alarms, maximum limitations on the rate and amount of basal and bolus deliveries, and automatic shut-off mechanisms to prevent excessive delivery of insulin. The Model 508 stores a record of the timing and size of the last 450 bolus doses administered plus daily totals for the past 90 days' insulin delivery. It provides the ability to set a temporary basal rate for particular activities such as exercise, and it can be programmed to turn itself off if the user does not enter a command for a specified period of time. It offers an extended bolus delivery over time which can be especially useful with very fast-acting insulin analogs and for high fat content foods. The Model 508 also incorporates a backlight that makes it easier for a patient to program his or her pump in low light conditions. The Model 508 also includes several new features as compared to its predecessor Model 507C which was introduced in June 1998. The Model 508 has a remote programmer which enables a user to program a bolus delivery from a short distance. This feature also allows, boluses to be programmed inconspicuously by a patient. For instance, when a pump is hidden under clothing, a patient may use the remote programmer to change delivery rates without exposing the pump. Furthermore, a parent or a caregiver can program a bolus for a child without the need to touch the pump case or disturb the child. To further enhance privacy, the Model 508 has a vibration option which allows a patient to select either an audible or vibration alert for the purpose of programming and alarms. In addition to the above, the Model 508 also has the following new features: o low reservoir volume alert; o greater bolus programming flexibility; and 10 11 o child block feature. In the second half of our fiscal year 2001, we plan to introduce our next generation insulin infusion pump, the Paradigm. The Paradigm pump is based on a new technology platform as compared to our Model 508. The Paradigm will be smaller than our current Model 508 and will incorporate many new features. Physicians prescribe insulin pumps and associated disposables to achieve better control of glucose levels for their patients. When a pump is prescribed, a nurse usually assists in teaching the patient how to use the pump and the related skills, such as calculating the appropriate amount of insulin for boluses. A patient typically returns to the physician's office for periodic check-ups and often contacts our Clinical Services Department for information. While we believe that our external pumps significantly improve the quality of life of their users and have also become increasingly easy to use, some physicians do not prescribe external pumps for patients using intensive therapy because they feel that some patients may not have the motivation and ability to understand and correctly use them. Also, some patients, particularly in their teenage and early adult years, may object to pumps because they do not like the idea of having a device attached to their bodies. We believe that our educational programs and publicity about our more famous pump users, such as Nicole Johnson, Miss America 1999, are breaking down some of these barriers to pump acceptance. Type 2 Insulin Infusion System. In June 1999, we obtained a license from Elan Corporation the rights to a constant-rate disposable infusion system which we will use for Type 2 diabetes. The infusion system is attached to the body with an adhesive and delivers a pre-set constant rate of drug. We believe this pump has the potential to distinguish itself in the market by its convenience and ease of use, and we intend to market the device primarily to insulin-using Type 2 diabetes patients. The device is designed to be used as a system, with a drug cartridge packaged with the pump. Before we can market and sell the device, some improvements must be completed, and we must obtain regulatory approval for the system. Under a separate agreement, we will be the exclusive worldwide manufacturer of the constant-flow disposable infusion system for all applications. Elan has granted distribution rights to the product to other companies for use as a system with specific pharmaceutical compounds. We are now establishing a manual production capability, and later we will establish an automated, high-volume manufacturing line for the product. Implantable Insulin Pump. The implantable insulin pump, the MIP 2007A, for which we maintain exclusive worldwide marketing rights for diabetes, is similar in function to the external insulin pump but is implanted under the skin of the abdomen in a relatively minor surgical procedure. This pump releases a basal flow of insulin, with larger programmable bolus doses delivered before meals. The amount of insulin released can be programmed by the patient with a hand-held communicator to meet individual needs. The communicator uses radio waves to control the pump. The pump is used with a special, highly concentrated insulin developed by Aventis (formerly known as Hoechst Marion Roussel, or Hoechst). The pump is designed to store several months supply of the special insulin and is refilled during check ups at about three month intervals in the doctor's office from a special syringe by inserting a needle through the skin and into the pump, which then automatically draws the insulin into its negative pressure reservoir. The negative pressure reservoir is a significant safety feature which virtually prevents the possibility of a spill of the stored medication from a reservoir leak or during refilling. On September 1, 1998, we sold assets and transferred technology related to our implantable pump program to Medical Research Group, Inc., which we call MRG, and also entered into a series of related transactions. Pursuant to the September 1, 1998 transactions we were required to purchase minimum quantities of implantable pump units in 1999, 2000 and 2001 from MRG at negotiated prices. We were also required to purchase minimum quantities in future periods in order to preserve our exclusive worldwide marketing rights. In February, 2001, we restructured our contractual relationship and certain elements of our operating arrangements with MRG. As part of the restructuring, we and MRG agreed to the following: o we have invested $30 million in MRG by purchasing MRG common stock; o a reduction in minimum purchase commitments of implantable pumps; o a reduction in the price we pay for each implantable pump for the next two years; o we will continue to pursue the development of special insulins to be used with implantable pumps; o MRG will fund the first $2 million in development efforts for the special insulins to be used with implantable pumps and we will fund the balance; 11 12 o MRG will contribute the first $4 million involved with the clinical trials of the implantable long term glucose sensor, and we and MRG will share the costs thereafter; o MRG will continue developing the implantable long term glucose sensor for use with the implantable pump, and will also develop versions designed to be used on a stand-alone basis and with our external infusion pumps; o MRG will pursue the development of a new platform implantable pump; and o MRG will fund a special marketing study for the implantable pump and implantable sensor products. MRG may reacquire all of our rights in the implantable pump and the implantable long term glucose sensor, if we fail to purchase the minimum number of implantable pumps in 2003 or 2004, or fail to make certain additional license fee payments to MRG of up to $12 million. However, in order to reacquire our rights, MRG would have to pay MiniMed $60 million. In such event, MRG may alternatively reacquire our distribution rights to the next generation implantable pump for $7.5 million. MRG was founded by Alfred E. Mann, our founder, Executive Chairman and largest stockholder. Mr. Mann continues to hold a substantial equity interest in MRG. The implantable pump has been approved for commercial distribution in the EU, but sales will be limited until the special insulin used with the pump is approved. In the United States, we have filed a combined application for approval of the pump and the special insulin. We cannot assure you that any of these approvals will be obtained or as to the timing of obtaining them. Approximately 700 implantable insulin pumps have been used by patients. During the early phase of the trials approximately 10% to 15% of patients experienced blockage or clogging of the catheter that delivers the insulin or the collecting of deposits on a pump valve. These problems were traced to changes in the manufactured insulin. We believe that the problems have been corrected, but we cannot be sure that they will not occur again. On February 2, 2000, a "CE" approval mark was received for the MIP 2007A. The MIP 2007A is the next generation implantable insulin pump to the MIP 2001. The MIP 2007A, which is manufactured for us by MRG, incorporates several technology improvements not available in the MIP 2001. The MIP 2007A has a longer battery life, an improved memory and is slightly lighter in weight. European sales were initiated in June 2000. Sales of the MIP 2007A will be limited until specially formulated implantable pump insulin is approved for commercial use. We cannot assure you that any of these approvals will be obtained or as to the timing of obtaining them. Neither the implantable pump nor the special insulin have been approved for marketing or use in the United States. General Purpose Infusion Pump. We have developed a general purpose programmable infusion system that we expect to use for non-insulin applications. We anticipate that our first application will be for pulmonary hypertension. In September 1997, we entered into an agreement with United Therapeutics Corporation, which we call UT, a biopharmaceutical company, to work together in the design, development and implementation of therapies for the treatment of pulmonary hypertension. Pulmonary hypertension is a disease that constricts the blood vessels serving the lungs, slowing oxygen absorption and ultimately causing heart failure. There is no known cure, and current treatments are limited to heart/lung transplants or the intravenous administration in or near the heart of an unstable compound with a half-life of approximately two minutes in plasma. Current drug therapy is exceedingly expensive and deters compliance. The drug formulation must be mixed daily and be delivered from a bulky, refrigerated unit worn on the patient's back. This arrangement is a cumbersome process and likely to cause complications. By contrast, the UT compound appears to be similarly effective at reducing pulmonary arterial pressure but can be delivered into subcutaneous tissue using a model of our programmable external infusion pump. UT has completed trials to test UT's UT-15 compound at twenty-one sites within the United States and in thirteen countries abroad. Results from early clinical trials have shown a reduction in pulmonary arterial pressure, and we believe that this therapy will improve patients' health and quality of life. We expect approval for this therapy from the FDA during 2001, but there can no assurances or certainty as to if or when such approval will be received. Our agreement provides that we will be the exclusive supplier of pumps and related supplies for the therapy. Under the arrangement, UT will have primary responsibility for distribution of the therapy, while both parties will participate in marketing efforts. In addition to pulmonary hypertension, we have conducted preliminary work with compounds designed to treat other chronic conditions, including HIV/AIDS and certain forms of cancer. 12 13 While we believe that new applications for our infusion pumps represent a significant opportunity for the future, our efforts in the area are at a preliminary stage. We cannot assure you that: o our anticipated cooperative efforts with biopharmaceutical companies will be commercially implemented; o the development of new applications for our pumps will be successful; or o the applications will be approved by the FDA or other regulatory authorities. Also, many of the new applications may involve new drugs which themselves must be approved by the FDA in addition to the approval required for the use of our infusion systems to deliver the drugs. DISPOSABLES AND ACCESSORIES Disposables for Insulin Pumps. Our external pumps are used with disposable elements consisting of a tubing set and a special syringe-type reservoir, which stores the insulin in the pump. The most popular tubing sets with soft cannulas have been marketed under the trade name Sof-set. We have introduced various versions, called: o the Sof-set QR(R) -- for Quick Release; o the Sof-set Ultimate QR -- incorporating several enhancements over the Sof-set QR which are designed to provide greater patient comfort; o the Sof-set Micro -- which has a shorter length cannula and is designed for greater comfort for pediatric patients and patients with low body fat; and o for customers who prefer to utilize an infusion set with a 90 degree needle, we have developed the Polyfin QR. All of these versions incorporate a quick release connector so that patients can more conveniently disconnect the pump for showering, bathing, swimming, exercise or intimacy. To make the insertion of the cannula through the skin easier, we have developed, or otherwise marketed additional products, including: o the Sof-serter, which allows the patient to automatically insert the cannula; and o the Silhouette, an infusion set, with an angled cannula to facilitate insertion into the skin and a disconnect feature. In February, 2001, we introduced the Quick-set(R) infusion set. The Quick-set which utilizes a soft cannula is inserted at a ninety degree angle and offers an at site disconnect feature. The at site disconnect feature allows patients to more discreetly disconnect their pump. As with the Sof-sets, we have also developed an automatic insertion device, which we call the Quick-serter, which allows for an automatic and easy insertion of the Quick-set cannula. These disposables provide us with a continuing source of revenue from pump customers. Most of these products are labeled to be replaced every 48-72 hours. Pre-Packaged Insulin Cartridges. Our license and supply agreement, once we obtain FDA approval, will enable us to manufacture and market a new formulation of Lilly's insulin lyspro for our programmable insulin pumps. We intend to contract with another company to formulate, fill and package cartridges that we propose to offer for use with our external insulin pumps. Solutions Software. We have developed a data collection system which permits health care professionals to download to a personal computer information from our current and future external pumps, as well as certain popular brands of glucose meters, and to process the information using special software and print out the results in summary or graphical form. This information enables the professional to assess the glucose control of the patient over a three-month period and, where indicated, to adjust the patient's insulin requirements. This product is now commercially available. 13 14 CONTINUOUS GLUCOSE MONITORING SYSTEMS We are planning a series of continuous glucose monitoring products: Physician Diagnostic Device. The first product involving our glucose sensor is connected by wire to a recording and display device. This product received FDA approval on June 15, 1999 for use by health care professionals to record but not display actual glucose readings and trends in glucose levels for a two-to-three day period. The data is downloaded by the professional into a personal computer for evaluation. With this system, the patient is typically asked to use various prompts to input times of meals, insulin administration, exercise times, and other events affecting glucose metabolism. Patients can wear this initial model for several days to enable the health care professional to analyze retrospectively the patient's glucose levels and modify the patient's treatment, which may include the prescription or reprogramming of an insulin pump. The system is intended for prescription use only and for occasional use rather than everyday use. When used, this product is only a supplement to, and not a replacement for, standard invasive measurement of glucose levels. This product allows identification of patterns of glucose level excursions above or below the desired range, and is designed to facilitate therapy adjustments, which may minimize these excursions. As discussed below, we intend to develop and seek approval for a consumer model of the continuous glucose monitoring system that would provide the patient with continuous glucose readings and enable us to compete in the worldwide market for glucose strips and meters, which we estimate to be $3.5 billion. Patient Continuous Glucose Monitoring System. In August 2000, we filed with the FDA for approval of a product that will be used by patients to continuously monitor glucose levels. In future products, we expect to make the display unit smaller for this device so that it can be worn like a wristwatch or carried in a pocket. We also expect that these future products will use telemetry to permit wireless communication between the sensor and the recording and display device. We anticipate that our next generation product will include a programmable hypoglycemia and hyperglycemia alarm, designed to alert patients when glucose levels drop below or rise above limits established by the administering physician. Although our development and regulatory efforts are at a relatively advanced stage, we cannot assure you that the development of these products will be successful or that they will be approved for commercial distribution. We have not completed the development and production engineering of the commercial versions of these products and various accessories, including the introducer, the transmitter and the receiver/display devices. We believe that there will be a substantial market for our continuous glucose monitoring systems even if the cost of the sensors exceeds the cost of the glucose strips that they would replace. However, to maximize penetration of the glucose meter and strip market, we believe that it may be necessary for the patient cost of using our sensors over their useful lives to be reasonably comparable to the current cost of using strips in intensive management. We cannot assure you that we will achieve this price, particularly if glucose meter companies try to compete with us by reducing prices. Also, because the potential market is large, many other companies are attempting to develop non-invasive and/or continuous glucose measuring systems. Implantable Long Term Glucose Sensor. As part of our contractual relationship with MRG, we had the option to acquire the worldwide exclusive marketing rights to the implantable long term glucose sensor developed by MRG for $30 million pending the preliminary results of clinical trials. In October 2000, MRG began human clinical trials for the implantable long term glucose sensor. On January 25, 2001, we notified MRG of our exercise of the option, and on February 21, 2001, we delivered $30 million to MRG as payment for the exclusive marketing rights for the implantable long term glucose sensor. MRG's long term glucose sensor is currently designed to be used with an implantable pump. In connection with the recent restructuring of our contractual relationship, MRG has agreed to develop additional versions of this product, one of which is intended to operate on a stand-alone basis and one of which is intended to operate in conjunction with our external programmable insulin pumps. We can give you no assurance that the implantable long term glucose sensor will be successfully developed or that it will be approved for commercial distribution by the FDA. FUTURE PRODUCTS Our long-term goal is to market "closed-loop" systems in what would essentially constitute artificial pancreas systems. The goal is to create a device that would automatically maintain glucose levels within a normal range via feedback from a continuous glucose sensor to a pump and to continuously adjust the rate of insulin infusion without the need for frequent intervention and programming by the patient or physician. In order for such a system to be feasible, the implantable pump or our external pump would have to operate in conjunction with a sensor, as well as with software algorithms that can control the implantable or external pump so that they function as a closed-loop system. No assurance can be given that the development of a closed looped system will be successful or that it will prove to be safe and effective and be approved for commercial distribution. 14 15 RESEARCH AND DEVELOPMENT Our research and development activities are performed primarily by our research and development organization, which consisted of 209 persons as of March 6, 2001. We obtain our product ideas from our staff, patients, health care professionals and our Medical Advisory Board, all of whose opinions on products we actively seek through surveys, field visits, medical symposia, focus groups and personal relationships. We expense all research and development costs as we incur them. Research and development expenses were $16.5 million for 1998, $26.8 million for 1999 and $34.2 million for 2000. From time to time, we attempt to obtain U.S. governmental grants to strengthen our research and development efforts on technically difficult projects. These grants allow us to pursue the development of new and novel products with less financial risk. In 1998, we were awarded a three year, $2.0 million grant under the Advanced Technology Program, which we refer to as ATP, by the National Institute of Standards and Technology. With this money and $1.5 million in matching research and development expenses, we plan to develop and test components for a simple, accurate, minimally invasive system for measuring glucose levels which uses different technology from our existing continuous glucose monitoring system and may be appropriate for Type 2 diabetes patients. The new chemistries, materials, and devices developed under this research award may also serve as a platform for the development of other sensing applications. In 1998, we were also awarded two multi-year NIH grants aggregating approximately $1,050,000 that will help us strengthen the research being conducted under the ATP award. Furthermore, in September, 2000, we were awarded an additional multi-year NIH grant aggregating approximately $1,112,000. The funds under this NIH grant will be used to further our research in developing an external closed loop system. We will own all new technology resulting from these activities. MARKETING AND SALES Patients in the United States usually place orders for our external insulin pumps upon the advice and recommendation of their physicians, who provide the prescriptions. Our marketing focus is on endocrinologists, diabetologists and other health care professionals who treat diabetes patients. We also market to third-party payors. We have also started to focus our efforts on those primary care physicians who treat relatively large numbers of diabetes patients. We believe that more than 90% of our revenues from the sale of our external pumps and related disposables are reimbursed by third-party payors, subject to applicable deductible and copayment amounts. Our marketing efforts include sponsoring educational symposia in intensive diabetes management and insulin pump therapy for physicians, other health care professionals and third-party payors. We have trained over 1400 health care professionals in the use of our insulin pumps for intensive management of patients. In 2000, we conducted over 40 one-day and 10 two-day symposia in the United States and over 30 symposia internationally. We also conduct numerous presentations to case managers for managed care organizations. Agreement With Nicole Johnson, Miss America 1999. We have entered into an agreement with Nicole Johnson, Miss America 1999 to further promote early diagnosis and aggressive treatment of diabetes. Miss Johnson was diagnosed with Type 1 diabetes at the age of 19 and uses our external insulin pump to treat her diabetes. Together with Miss Johnson, we have developed a program to educate physicians, particularly primary care physicians, and the public at large regarding diabetes diagnosis and treatment. As part of this program, we are sponsoring Miss Johnson's personal appearances at several diabetes related events. Also, Miss Johnson is an important part of a print advertisement campaign aimed at advancing Miss Johnson's platform of increasing diabetes awareness, including awareness of pump therapy. Miss Johnson is also involved in similar promotional arrangements with other companies in the diabetes business, such as Eli Lilly, which do not compete directly with us. Customer Service and Support Network. We also seek to develop patient interest in and demand for our diabetes products by providing patients with access to our service and support network, including: o 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; o free, short-term replacement pumps sent within 48 hours or less to promote continuous therapy; o an insurance assistance department consisting of 258 people as of March 6, 2001 to take and process orders, answer questions, simplify and expedite claims processing and assist patients in obtaining third-party reimbursement; o participation in a patient advocacy program which works with the American Association of Clinical Endocrinologists; 15 16 o an extensive Internet web site at www.minimed.com; o advertisements in targeted media; and o free videotapes and other educational material. We believe that our strategic alliance with DMCare may further enhance our customer service and support network. Under the terms of our agreement with DMCare, DMCare will develop an automated dosing support algorithm that can be accessed and utilized by patients who use our insulin infusion pumps. The automatic dosing support algorithm may provide additional support to our existing as well as new customers who may require and/or desire continued support, guidance and advice regarding insulin pump therapy. Furthermore, our alliance with DMCare may result in our customers gaining access to licensed health care professionals 24-hours per day, seven days per week, who will assist our customers in their ongoing efforts to treat their diabetes. We cannot, however, be certain that any of these products will be successfully implemented. Managed Care. We continue to increase our presence in the managed care marketplace. Field insurance managers are responsible for relationships with, and the solicitation and negotiation of contracts with, third-party payors. In 2000, we increased the number of arrangements we have entered into with third-party payors by over 116. The number of contracts with managed care entities and other third-party payors providing for reimbursement for our external pumps and disposables and other diabetes supplies, as of December 29, 2001, was approximately 422. We have also recently expanded our insurance support activities whereby we assist patients in obtaining reimbursement for our products to better address the growing managed care segment of health care payors in the United States. Expanded Sales Force. We market our diabetes products and serve customers through our direct sales organization and distributors. In addition to senior sales and marketing management and an extensive in-house support staff, as of March 6, 2001, our direct sales organization in the United States consisted of 4 Division directors, 8 Regional Managers and 157 field sales personnel, consisting of District Sales Managers, Territory Managers, Diabetes Nurse Specialists, Pump Trainers, and Sensor Application Specialists, a Director of Managed Care and 15 Managed Care Regional Managers Account Managers. These representatives are extensively trained and specialize in diabetes therapy and the use of our products. We compensate our sales representatives in the United States with a base salary, a sales commission and an annual bonus based on meeting performance objectives. In the United States, we also contract with, and employ, nurse educators who are certified pump trainers to assist in educating potential patients about use of our external pumps. Use of Distributors. We believe that our strategy of maintaining our own direct sales force dedicated to diabetes is an important factor in market development and an important competitive advantage. Nevertheless, we also use independent distributors in the United States to strengthen our direct sales force and increase the number of physicians served. Some third-party payors in the United States require that some classes of purchases be made through specified distributors, and some distributors in the United States and internationally maintain a substantial infrastructure to support physician and patient needs. Internationally, independent distributors are used to provide sales coverage in geographic areas not served by the direct sales force employed by our international subsidiaries. In 2000, we increased the relative percentage of sales processed directly through us. As a result of our continued investment in our internal reimbursement capabilities, our acquisition of HMS and DSS and the activities of our field insurance managers, we expect the percentage of our sales made through our direct sales force will be maintained at least at the current rate. International Sales. We have our own international sales organizations consisting of 60 people as of December 29, 2000, including administrative staff, serving France, Germany, the Netherlands, Belgium, Scandinavia, Australia and the Baltic region. We also have a distribution manager in the United Kingdom and use independent distributors in other countries. We believe that the international market provides a large opportunity for growth and are seeking to expand our international business. International sales of diabetes products increased over 24% to $17.0 million in 2000. Also, we expect that some of our new products and new applications will be introduced in foreign countries before being introduced in the United States because the regulatory approval process in other countries has generally been less time consuming and less expensive than in the United States. In January 1998, we acquired all of the assets of Dartec A.B., a distributor of diabetes products located in Sweden, for $2.7 million in cash. Dartec now MiniMed Nordic AB had been a distributor of our products, and the acquisition of its business gives us a direct sales organization covering the Scandinavian countries and the Baltic region. MANUFACTURING We purchase most of our components, some subassemblies and various services used in the manufacture of our products from outside vendors. These outside vendors generally produce their items to our specifications and in most instances to our designs. We then assemble the components into finished products. We purchase some disposable products from OEM suppliers. 16 17 Our Quality Assurance Department provides guidance to vendors and inspects and tests products at various steps in the manufacturing cycle. This ensures that products comply with our stringent specifications. The manufacturing facilities are subject to periodic inspection by regulatory authorities. We have received approvals from the International Standards Organization, which we refer to as ISO, that allow us to introduce some products into the EU more quickly based on annual certification of our quality system. These approvals are the ISO 9002 relating to quality standards, which we received in 1995, and the ISO 9001 relating to design control standards, which we received in 1996. We rely on single sources for some important parts, including hybrid circuits, integrated circuits, special insulin formulations and various disposable products and components. We also have a sole source subcontract arrangement for sterilization services. We have established secondary source suppliers in some circumstances when appropriate, and we create safety stocks to address changes in market demand. Arrangements for additional or replacement suppliers for some of these parts could not be accomplished quickly. The loss of any of the critical sole source vendors could materially harm our business, financial condition and results of operations. In 1998, we established and validated a semi-automated sensor manufacturing department to address initial market requirements. COMPETITION We currently consider our primary competition in the diabetes market to be injection therapy, and we compete against this delivery modality chiefly by educating doctors, nurses, patients, managed care organizations and other third-party payors about the need for intensive management of glucose levels and the advantages of pump therapy over multiple daily injections. Insulin Pumps. In the sale of our external pumps, we compete primarily with Disetronic Medical Systems, Inc., which we call Disetronic. Disetronic introduced a competitive external pump product in the United States approximately nine years ago. Currently Disetronic offers three different pump models for sale. We estimate that Disetronic currently has approximately 20% of the U.S. market for external pumps for new patients, but is still the dominant supplier in certain countries in Europe, especially in Germany. We believe that our success will encourage other companies to enter this market, although we believe that there are substantial barriers to entry, including access to technology and the need for extensive distribution and customer service organizations. In February 2000 a new company, Animas Corporation, which we call Animas, received 510(k) clearance on a new insulin pump. Animas has initiated commercial sales of its pump in the U.S. However, we do not believe that Animas has yet achieved a significant market share. Internationally, in addition to Disetronic, we compete in the insulin pump market against several smaller suppliers which generally offer less sophisticated products in certain countries with relatively small markets. We compete with other pump makers primarily on the basis of product design, quality and utility, physician and patient education, support services and price. We cannot assure you that past, current and potential makers of competitive pumps, some of which may have substantially greater financial, technical, marketing and other resources, will not become more significant competitive factors in the future. We believe that we may be faced with additional competition in the near future. A number of companies and medical researchers are working on new delivery devices, delivery technologies, procedures, drugs and bioengineered therapeutics for the treatment and prevention of diabetes, such as, for example, inhaled insulin, pancreas transplantation and insulin-producing islet and beta cell preparations and devices. If successful, these or other technologies and/or medical procedures could adversely affect our business and results of operations and could possibly make our products obsolete. Diabetes Supplies and Prescription Drugs. We believe that our most significant competition in the areas of diabetes supplies and prescription drugs comes from national mail order pharmacies, World Wide Web based pharmacies, local and national retail and hospital pharmacies, cost containment and managed care companies and other distributors of diabetes supplies. Many of these companies have substantially greater resources than we have. Moreover, companies in the health care industry, and in the provider segment in particular, are consolidating to a significant extent. This trend could produce competitors with larger and substantially greater resources. Competitive pressure could adversely affect our market share, and we could experience significant price erosion. We compete in this segment on the basis of customer service, convenience, product availability, and price. We believe that our installed base of pump patients offers a significant opportunity for these sales. 17 18 In the field of diabetes supplies, Polymedica Industries, Inc., Chronimed Inc., and Transworld Home Healthcare, Inc. are publicly-held companies that compete with us. We have direct competition in our pharmacy operations from other national mail service companies such as Merck/Medco Managed Care, L.L.C., Express Scripts Inc., PCS Health Systems, Inc., Drugstore.com, PlanetRx.com and Diversified Pharmaceutical Services, Inc., as we seek to redirect focus on distribution of prescription drugs by mail order. We will also begin to concentrate on the distribution of pharmaceuticals to which we have proprietary rights. Glucose Measurement. Numerous companies, some of which have substantially greater financial, technical, manufacturing, marketing and other resources than we do, are attempting to develop a variety of products for glucose measurement. Some of these products and their corresponding technologies are directed toward non-invasive measurement systems. They generally use infrared light directed through tissue, analyzing the reflectance from an arm or transmission through a finger inserted into a well, through an ear lobe or through other tissue. These products appear to face substantial technical obstacles, and to date none has been approved by the FDA for commercial distribution. If, however, any of these products are successfully developed, some patients may prefer such products to our continuous glucose monitoring systems. There are also several efforts aimed at reducing the discomfort associated with the finger pricks required with current glucose meter systems. These efforts include reducing the depth of penetration of the needle, using a laser and/or using other methods to breach the outer derma layers to extract interstitial fluid rather than blood. Still other approaches are being pursued for glucose level determination including attempts to draw out interstitial fluid by electrical or chemical means and then measuring the glucose. We know of at least three other efforts that are being directed toward subcutaneous measurement with electrochemical sensors. Cygnus, Inc. is one company pursuing the development of a method of measuring glucose levels. On December 6, 1999, an FDA advisory committee recommended approval of Cygnus' GlucoWatch Monitor. The GlucoWatch Monitor is a device worn like a watch that uses electric currents to extract interstitial fluid and measure glucose levels of diabetic patients. The FDA panel imposed the following three conditions for the approval: (i) education; (ii) labeling; and (iii) a post market study to detect hypoglycemia and hyperglycemia. In May 2000 Cygnus received an approvable letter from the FDA for its GlucoWatch. In March 2001, the FDA formally approved the GlucoWatch. It is possible that some patients might prefer the GlucoWatch or other systems to our continuous glucose monitoring systems for routine monitoring of glucose levels. The successful development and acceptance of non-invasive or minimally invasive glucose measurement systems or systems without pain could materially and adversely affect our continuous glucose monitoring system program. PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS We file patent applications to protect technology, inventions and improvements that we consider important to the development of our business. We prosecute and manage our patent portfolio using our in-house patent counsel and technical advisors as well as outside patent counsel. We currently hold approximately 69 issued U.S. patents and foreign patents. Many U.S. and foreign patent applications that cover various aspects of our technology are also pending. In addition, we have exclusive licenses under a number of patents. Litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. Although we know of no infringement of patents held by others, it is always possible that a third-party may assert infringement. We believe that we own or have the right to use all technology incorporated into our products, but an adverse determination in any litigation or interference proceeding to which we may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, associated costs may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to us on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling some of our products or planned products, which could have a material adverse affect our business, diversification opportunities, financial condition and results of operations. 18 19 We own the registered trademarks MiniMed(R), Sof-set(R), QR(R), Polyfin(R), Silhouette(R), "Making a Difference in Diabetes(R)," and "Advancing Solutions in Diabetes(R)," and other trademarks are being used and/or pursued for registration. We also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our employees and consultants. We cannot assure that any unprotected information will not also be developed by others. GOVERNMENT REGULATION Clinical testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. In the United States, we are required to register as a medical device manufacturer with the FDA and state agencies such as the Food and Drug Branch of the California Department of Health Services. We are subject to inspection on a routine basis by both the FDA and the California Department of Health for compliance with the FDA's Quality System Regulations, which is commonly referred to as QSR. These regulations impose procedural and documentation requirements upon us with respect to manufacturing and quality assurance activities. Unless an exemption applies, each medical device that we wish to market in the United States must receive either "510(k)" clearance or "PMA approval" in advance from the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes from two to twelve months, but it can take longer. The process of obtaining PMA approval is much more costly, lengthy and uncertain. The FDA's PMA approval process generally requires from one to three years or even longer. No assurance can be given that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market. The FDA decides whether a device must undergo either the 510(k) clearance or PMA approval process based upon statutory criteria. These criteria include the level of risk that the agency perceives is associated with the device and a determination of whether the product is within a type of device that is similar to devices that are already legally marketed. Those devices deemed to pose relatively less risk are placed in either class I or II, which require the manufacturer to submit a premarket notification requesting 510(k) clearance unless an exemption applies. The premarket notification must demonstrate that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a legally marketed "predicate device" that is either in class I, class II, or is a "pre-amendments" class III device, for example, one that was in commercial distribution before May 18, 1976, for which the FDA has not yet decided to require PMA approval. In contrast, devices deemed by the FDA to pose the greatest risk, or to be novel devices lacking a legally marketed predicate, are placed in class III and are required to undergo the PMA approval process. This process requires the manufacturer to file a PMA application presenting extensive clinical testing data and other information to prove the safety and effectiveness of the device to the FDA's satisfaction, and the FDA's completion of satisfactory QSR inspection of the manufacturing facilities. In addition, a new PMA or PMA supplement is required in the event of a modification to a PMA device, its labeling or its manufacturing process affecting the safety or effectiveness of the device. External pumps have generally qualified for clearance under the 510(k) process, although some features of advanced pumps may require clinical validation. Our Paradigm Model insulin infusion pump as well as our Models 508, 507C, 407C, 507, 506, 505, 504S and 502 external pumps have all been cleared by the FDA pursuant to the 510(k) process. Our second generation continuous glucose monitoring system is going through the PMA process. We cannot assure you that future models of our external pumps will qualify for 510(k) clearance as opposed to the more extensive PMA process. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, requires a new 510(k) clearance. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer's decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to submit a premarket notification requiring 510(k) clearance. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance is obtained. After receiving 510(k) clearance, we have on occasion made modifications to our cleared devices for which we have concluded 510(k) clearance is not required. We cannot assure you that the FDA would agree with any of our decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k) clearance for any modification, the FDA also may require us to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance. Under the Federal Food, Drug, and Cosmetic Act, a non-biologic drug for human use requires regulatory approval of a New Drug Application, or NDA, before it may be commercialized. This process is lengthy, expensive and uncertain. Among other things, it requires adequate and well-controlled human clinical trials to establish the safety and efficacy of the product and a satisfactory FDA inspection of the drug manufacturing facilities to assess compliance with Current Good Manufacturing Practice or GMP, which 19 20 includes elaborate testing, control, documentation and other quality assurance procedures. We cannot assure you that FDA approval of any NDA that we or Aventis submit will be granted on a timely basis, or at all. After approval is obtained, a supplemental NDA approval is generally required for each proposed new indication, often accompanied by data similar to that submitted with the original NDA. After the FDA grants a manufacturer approval to bring a device or drug to market, a number of post market regulatory requirements apply, including labeling regulations, the QSR, and the Medical Device Reporting regulation which requires that manufacturers report to the FDA certain types of adverse events involving their products. Class II devices can be subject to additional special controls, for example performance standards, post market surveillance, patient registries, and FDA guidelines that do not apply to class I devices. Clearances and approvals restrict devices and drugs to specifically labeled uses, and the FDA actively enforces regulations prohibiting marketing of products for unapproved or "off label" uses. Changes in existing requirements or adoption of new requirements could have a material adverse effect on our business. The FDA also conducts inspections to determine whether we conform with QSR, and subsequent QSR inspections will continue after the FDA clearance or approval. The FDA completed an inspection in May 1997 under the Good Manufacturing Practices regulations for devices, which are the predecessor of QSR. We received only minor citations, all of which were corrected. In 1999 the FDA conducted a directed inspection of our facilities. We did not receive any citations as a result of such inspection. In January 2000, the FDA conducted another directed inspection of our facilities. Following the January 2000 inspection, we received only minor citations, which have all been corrected. In May 2000, the FDA conducted another inspection of our facilities. We did not receive any citations as a result of such inspection. A further inspection may be conducted relative to any PMA application submitted by us for other products or pursuant to the FDA's practice of performing periodic inspections. If we fail to comply with the FDA's requirements, the agency can institute a wide variety of enforcement actions. The FDA sometimes issues a public warning letter, which could have an adverse impact on our business. The FDA also can pursue stronger remedies, such as: o refusing our requests for 510(k) clearance or PMA approval of new products, withdrawing product approvals already granted, requiring us to recall products; o asking a court to require us to pay civil penalties or criminal fines or adhere to operating restrictions; or o closing down our operations. Ultimately, criminal prosecution is available to the FDA as punishment for the most serious offenses. Any FDA enforcement action could have an adverse effect on our business, financial condition and results of operations. The FDA can withdraw an NDA or PMA if new evidence or new information shows the drug or device is no longer safe or effective, or if the FDA discovers that the NDA or PMA contains any untrue statement of material fact. Other reasons justifying withdrawal of an NDA or PMA by the FDA include, but are not limited to, failure to maintain required records or to file records and reports, new questions regarding manufacturing, and whether labeling is false or misleading. Our implantable pump will require PMA approval, and Aventis' insulin for this pump will require NDA approval prior to our ability to commercially offer the implantable pump system in the U.S. Our prepackaged insulin cartridges as well as our Type 2 insulin infusions system will require NDA approval for the insulin to be used in such products. We are in the process of obtaining such approvals. However, we cannot provide any guarantees that we will be able to successfully obtain such approvals. In late 1991, the FDA adopted new procedures for the review of products that involve both devices and drugs, permitting clinical investigation and approval to be coordinated by a lead center of the FDA. At that time, we withdrew our initial PMA application, expecting that we and Aventis would file a single application containing an NDA element for the insulin and a PMA element for the pump. Under this scenario, we expected that the FDA's Center for Drug Evaluation and Research would be the lead center and responsible for reviewing the NDA portion of the application, while the Center for Devices and Radiological Health will be responsible for reviewing the PMA portion; the FDA's approval would consist of an approved NDA for the insulin and an approved PMA for the pump. The FDA has indicated that there would be only one holder of the approved application for the pump and insulin combination product. The holder would be the entity to file supplements. We believe that Aventis will permit us to be the holder of the approved application but no final agreement with Aventis has been entered into. 20 21 We, however, submitted a written request to the FDA asking that the PMA for the pump and the NDA for the insulin be reviewed separately, rather than pursuant to a single application. Under this approach, our hope is that our PMA application and our NDA application for Aventis' insulin would proceed separately through the regulatory process, although both would rely upon the same clinical data. Also, we would own the ultimate PMA approval for the pump as well as the NDA approval for Aventis' insulin, and each product would be labeled for use with the other. We would have the right to seek necessary supplemental approvals for both the PMA, and the NDA. The FDA granted our request. Exports of products subject to 510(k) notification requirements, but not yet cleared to market, are permitted without FDA export approval if statutory requirements are met. Unapproved products subject to PMA requirements must receive prior FDA export approval unless they are approved for use by any member country of the EU and other countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can be exported to any country without prior FDA approval. International sales are subject to foreign government regulation, the requirements of which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. The EU requires that a company must obtain the CE Mark prior to sale within the EU of some medical devices, including implantable products. During this process, the sponsor must demonstrate compliance with designated manufacturing and quality requirements known as the "ISO" requirements. In March 1995, we obtained the CE Mark to market the implantable pump throughout the EU, but commercial distribution of the implantable pump in the EU has been, and will continue to be, limited until the special insulin required for use in the pump is approved and made available. In March 1995, we received certification under quality standards known as the ISO 9002 standards, and in July 1996, we received certification under the ISO 9001 design control standards. Most recently, in February 2000, a CE Mark for the next generation implantable pump, the MIP 2007A, was granted. We currently maintain exclusive worldwide marketing rights for MIP 2007A. As is the case with QSR inspections in the United States, inspections by various foreign bodies continue in the EU on a periodic basis after receipt of the CE Mark. We are also subject to numerous federal, state and local laws relating to such matters as billing third-party payors, avoiding unlawful inducements to purchase or prescribe our products, safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. Additionally, we must comply with various FDA, and in some cases Federal Trade Commission, requirements for design, safety, advertising, labeling, record keeping and reporting of adverse experiences with the use of a product. We cannot assure you that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our ability to do business. Our pharmacy businesses are subject to various federal and state regulatory requirements relating to the distribution of prescription pharmaceuticals. For example, the U.S. Drug Enforcement Administration, which we call the DEA, regulates controlled drug substances, such as narcotics, under the Controlled Substances Act and the Controlled Substances Import and Export Act. Manufacturers, distributors and dispensers of controlled substances must be registered and inspected by the DEA and are subject to reporting and record keeping requirements. We cannot assure you that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our ability to do business. THIRD-PARTY REIMBURSEMENT In the United States, our insulin infusion pumps are generally purchased directly by patients and dealers and in some cases physicians, physician groups, and/or hospitals. In many cases, on behalf of the patients, we bill third-party payors, including private insurance companies, health maintenance organizations, preferred provider organizations, other managed care providers, and, to a limited extent, Medicaid. Under the Medicaid program, states generally reimburse for approved procedures on a reasonable cost basis or a fee schedule. Currently, some states reimburse our products under the Medicaid program. On April 1, 2000, the Medicare program began coverage of insulin infusion pumps and related disposable supplies for Medicare beneficiaries under certain circumstances. The insulin infusion pump has been classified by the Medicare program as a capped rental item. As a capped rental item, MiniMed is paid a certain rental fee for a ten-month period for each insulin infusion pump received by a Medicare beneficiary. In the tenth month, the beneficiary has a choice of purchasing or renting the infusion pump. Depending on the beneficiary's decision, MiniMed is paid monthly rental fees for an additional three or five months. The capped rental reimbursement model used by the Medicare program is different from our traditional reimbursement models. Generally, we are paid a lump sum for our insulin infusion pumps by third party payors other than Medicare. 21 22 As for infusion sets used with our insulin infusion pumps, the Medicare program reimburses us a set fee per week for all infusion set needs of a beneficiary. Again the Medicare reimbursement model for infusion sets is different from our traditional reimbursement models. Traditionally, we receive a certain sum for each box of infusion sets supplied to our customers by third party payors other than Medicare. We do not receive reimbursement from third party payors for our physician diagnostic glucose monitoring device. Rather, physicians purchase our physician diagnostic device and seek reimbursement for its use during the scope of their individual practice. Medicare Carriers, which make benefit and coverage determinations for medicare beneficiaries, in a limited number of states as well as a limited number of insurance companies are providing reimbursement for the use of the physician diagnostic device under miscellaneous CPT codes. We are supporting the American Association of Clinical Endocronoligists in their efforts to obtain CPT codes for our physician diagnostic continuous glucose monitoring device. We believe that if a CPT code is issued for our physician diagnostic continuous glucose monitoring device, more third party payors would be willing to reimburse physicians for the use of such device. We further believe that as the number of third-party payors that reimburse physicians for the use our physician diagnostic continuous glucose monitoring device increases, our sales of such devices may also increase. We maintain an insurance assistance department consisting of 258 people as of March 6, 2001 to take and process orders, to simplify and expedite claims processing and to assist patients in obtaining third-party reimbursement. We believe that more than 90% of the revenues derived from our external pump and related disposable sales are reimbursed by third-party payors, subject to applicable deductible and copayment amounts. We also maintain a managed care sales force of 11 people who market our products directly to third party payors. Last year we increased the number of managed care contracts by approximately 116 to bring the total number of contracts to approximately 416. Third-party payors may decline to reimburse for procedures, supplies or services determined to be not "medically necessary" or "reasonable." Some payors have initially indicated that they would decline to reimburse for some of our products on that basis. We try to deter and reverse such practices through education and have expanded our insurance assistance efforts toward this end. Our efforts are usually successful, but such reimbursement may become less likely in the future as pressure increases for lower health care costs and particularly near-term costs. Medicare and many other third-party payors also do not reimburse for "experimental" or "investigational" procedures. There is usually no precise date when a procedure ceases to be experimental or investigational, but devices in clinical investigation under an investigational device exemption are usually deemed to be experimental or investigational. The failure to cover early use of a procedure deters usage, delaying acceptance even longer. In the United States many third-party payors still consider use of implantable pumps to be an investigational procedure. Reimbursement for the small number of pumps sold in the United States has therefore been limited to date. There is widespread concern that health care market initiatives in the United States may lead third-party payors to decline or further limit reimbursement. The extent to which third-party payors may determine that use of our products will save costs or will at least be cost effective is highly uncertain, and it is possible, especially for diabetes, that they will merely focus on the lower initial costs associated with injection therapy or will otherwise limit reimbursement for insulin pumps or other products we develop. Because of uncertainties regarding the possible health care reform measures that could be proposed in the future and initiatives to reduce costs by private payors, we cannot predict whether reimbursement for our products will be affected or, if affected, the extent of any effect. The unavailability of third-party coverage or the inadequacy of reimbursement for our products would adversely affect our business and operating results. PRODUCT LIABILITY AND WARRANTIES We usually give two to four-year warranties on our external pumps. The special motors contained in our external pumps are warranted for life. We set aside a reserve based on monthly return rates to pay for customer service and repair of products. We set aside additional reserves during early stages of product introduction. We believe such reserves are adequate, but in the event of a major product problem or recall, the reserves may not be sufficient to cover all costs. Such an event could have a material adverse affect our business and operating results. Our business involves the inherent risk of product liability claims. We maintain product liability insurance with coverage limits of $15.0 million per occurrence and an annual aggregate maximum of $15.0 million, with a deductible of $50,000 per occurrence. We cannot assure that this insurance coverage will continue to be available on acceptable terms or that the coverage will be enough to pay all future product liability claims. EMPLOYEES 22 23 As of March 6, 2001, we employed approximately 1,539 full-time persons including 209 in research and development, 300 in manufacturing, production engineering and quality assurance, 751 in administration and support and 279 in sales and marketing. We also used 88 temporary workers as of March 6, 2001. We believe that the success of our business depends, in part, on our ability to attract and retain qualified personnel, particularly scientific, technical and key management personnel. We believe that our relationships with our employees are good. ITEM 2. PROPERTIES Under a "synthetic" lease and sublease, we have constructed on the campus of California State University Northridge, which we call CSUN, approximately 500,000 square feet of building of space on 19 acres of land for our manufacturing, administrative and other activities. During the year 2000, we moved our headquarters from Sylmar, California to this newly constructed building in Northridge, California. Under the terms of our arrangement with CSUN, we expect to obtain access to an additional 9 acres, which we expect to take possession in 2002, on which we intend to construct an additional 146,000 square feet of facilities. We also are in discussions for an option to lease an additional contiguous 12 acres on the CSUN campus. For further discussion of our facilities in Northridge, California, see "Management's Discussion and Analysis of Financial Condition -- Liquidity and Capital Resources." We own a facility in Hollywood, Florida which consists of an aggregate of approximately 32,000 square feet, and lease an additional 21,135 square feet of warehouse space adjacent to this facility. We also lease approximately 50,600 square feet of space in Chatsworth, California. We own an aggregate of about 175,000 square feet in Sylmar, California. Approximately 23,400 square feet of the space is leased to Alfred E. Mann, our Executive Chairman, and approximately 9,711 square feet is leased to MRG. In 2000, we leased an additional 3,620 square feet and 5,930 square feet to AlleCure Corporation and Advanced Bionics Corporation, respectively, on a short-term basis. Mr. Mann has a substantial financial interest in each such organization. All such leases are on terms we believe to be equal to at least fair market terms to us. We plan to move all of our remaining operations from the Sylmar location late in 2001, at which time we will endeavor to sell or lease the entire complex. We believe that our current facilities as described above satisfy our space requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS On February 9, 1999, we were served with a complaint filed in the Civil District Court for the Parish of Orleans, State of Louisiana, by Diabetes Resources, Inc., which is also known as Insulin Infusion Specialties, and which we will refer to as IIS. IIS entered into an Educational Dealer Agreement with us in July, 1997, relating to the distribution of some of our products by IIS. The agreement expired and we declined to renew that agreement, pursuant to its terms as of December 31, 1998. IIS is alleging that we engaged in unfair competition, breached the agreement, violated applicable trade secret laws and defamed IIS. IIS did not specify the amount of damages it is seeking in its complaint. We removed the action to Federal Court, filed an answer denying the material allegations, and filed a counterclaim seeking damages for unfair trade practices. We have filed an amended counterclaim seeking damages based on IIS's failure to pay amounts due and owing. We believe that we have meritorious defenses to the claims asserted by IIS. Trial in the matter has been set for September 2001. Discovery in this litigation is continuing. We are not presently a party to any other pending legal proceedings which we believe are material. From time to time we are subject to various legal proceedings for product liability, employment and other general business related claims. These claims arise out the ordinary course of our business. We do not believe that any of these claims, individually or collectively, will have any material adverse effect on our business or financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 23 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock began trading on the Nasdaq National Market under the symbol "MNMD" on July 25, 1995. The following table summarizes, for the periods indicated, the intra-day high and low sales prices per share of our Common Stock as adjusted for a 2:1 stock split paid on August 18, 2000 to stockholders of record on August 2, 2000:
HIGH LOW --------- -------- 2000 Fourth Quarter Ended December 29, 2000......................... $ 90.25 $ 39.75 Third Quarter Ended September 29, 2000......................... 92.56 55.00 Second Quarter Ended June 30, 2000............................. 72.06 45.88 First Quarter Ended March 31, 2000............................. 67.25 30.78 1999 Fourth Quarter Ended December 31, 1999......................... $ 45.63 $ 25.07 Third Quarter Ended October 1, 1999............................ 54.13 33.75 Second Quarter Ended July 2, 1999.............................. 39.50 22.91 First Quarter Ended April 2, 1999.............................. 29.69 19.25
RECORD HOLDERS The last reported sale price of our Common Stock on the Nasdaq National Market on December 29, 2000 was $42.031. As of December 29, 2000, our company had approximately 1,476 stockholders of record. DIVIDENDS We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain all of our available funds for use in our business. We do not anticipate paying any cash dividends in the foreseeable future. The Board of Directors will make future determinations relating to our dividend policy, considering the following in making any such determination: o our future earnings; o our capital requirements; o our financial condition; o our future prospects; and o other factors which the Board of Directors might deem relevant. SALES OF UNREGISTERED SECURITIES Not Applicable. 24 25 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected consolidated financial data, which should be read in conjunction with the our 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 December 29, 2000, December 31, 1999, January 1, 1999, January 2, 1998, and December 27, 1996 and for each of the five fiscal years in the period ended December 29, 2000 have been derived from the audited financial statements of MiniMed Inc. The audited financial statements as of December 31, 1999 and December 29, 2000 and for the three fiscal years in the period ended December 29, 2000, which are included elsewhere in this Annual Report, have been audited by Deloitte & Touche LLP, our independent auditors.
FISCAL YEAR ---------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 DECEMBER 27, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, 1996 1998 1999 1999 2000 ------------ ------------ ------------ ------------ ------------ (in thousands, except share and per share data) INCOME STATEMENT DATA: Net sales ...................... $ 76,396 $ 99,492 $ 138,577 $ 212,296 $ 294,403 Cost of sales .................. 32,314 38,704 51,518 72,907 93,657 ------------ ------------ ------------ ------------ ------------ Gross profit ................... 44,082 60,788 87,059 139,389 200,746 Operating expenses: Selling, general and administrative ............ 32,101 41,237 57,059 88,451 124,142 Research and development ..... 7,900 9,447 16,531 26,798 34,159 Research and development contract .................. -- -- (6,000) (6,000) -- Merger related expenses ...... -- 1,000 -- -- -- ------------ ------------ ------------ ------------ ------------ Total operating expenses ........... 40,001 51,684 67,590 109,249 158,301 ------------ ------------ ------------ ------------ ------------ Operating income ............... 4,081 9,104 19,469 30,140 42,445 Interest expense ............... (163) (237) (47) (118) (50) Other income, including interest income ....................... 1,062 1,851 1,503 5,143 21,639 ------------ ------------ ------------ ------------ ------------ Income before income taxes ..... 4,980 10,718 20,925 35,165 64,034 Provision for income taxes ..... (1,662) (4,029) (7,882) (13,266) (20,879) ------------ ------------ ------------ ------------ ------------ Net income ..................... $ 3,318 $ 6,689 $ 13,043 $ 21,899 $ 43,155 ============ ============ ============ ============ ============ Basic income per share ......... $ 0.07 $ 0.13 $ 0.24 $ 0.37 $ 0.68 ============ ============ ============ ============ ============ Basic weighted average shares outstanding .................. 47,764,000 51,620,000 53,760,000 59,294,000 63,756,000 ============ ============ ============ ============ ============ Diluted income per share ....... $ 0.07 $ 0.12 $ 0.23 $ 0.35 $ 0.64 ============ ============ ============ ============ ============ Diluted weighted averages shares outstanding .................. 50,268,000 54,224,000 56,664,000 62,942,000 67,200,000 ============ ============ ============ ============ ============
DECEMBER 27, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, 1996 1998 1999 1999 2000 ------------ ----------- ------------ ------------ ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital ....................... $ 36,153 $ 63,409 $ 84,771 $253,891 $306,903 Total assets .......................... 64,424 105,819 157,652 353,798 450,960 Notes payable, net of current portion . 1,528 728 1,059 -- -- Retained earnings ..................... 1,394 8,083 21,126 43,025 86,180 Total stockholders' equity ............ 48,131 83,083 133,833 327,098 425,996
25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of MiniMed Inc. should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere herein. The discussion in this Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. See language relating to forward-looking statements preceding Item 1, "Business." GENERAL Our sales and profits have been generated primarily through the sale of external pumps and related disposable products used to deliver insulin in the intensive management of diabetes. Additionally, through our acquisition of two distribution businesses, we have broadened our product offerings to include other diabetes supplies and pharmacy products generally used in the treatment of this disease. Product development and manufacturing operations have focused on four product lines: external pumps, disposable products used with our external pumps, continuous glucose monitoring systems, and implantable insulin pumps. Future development of the external pump and disposable product lines will focus upon improving the existing technology for its current use in diabetes treatment, with the ultimate objective of linking the insulin delivery systems to a continuous monitoring system. Our objective is to create an "artificial pancreas", capable of controlling glucose levels in patients without significant patient intervention. Our infusion pump technology may also be used for the treatment of other medical conditions. Our continuous glucose monitoring system has been characterized as a first of its kind technology, and full commercialization will be subject to successful implementation of manufacturing, sales, marketing and reimbursement plans. Sales of continuous glucose monitoring systems commenced in 1999, as we launched a physician version of this product line after receiving regulatory approval in June, 1999. Commercialization of the physician version continued during 2000. We filed an application with the FDA for approval of our consumer version of this product in August 2000. Our application is currently under review. On September 1, 1998, we sold assets and transferred technology related to our implantable pump program to Medical Research Group, Inc., which we call MRG. Alfred E. Mann, our founder, Executive Chairman and largest stockholder also founded MRG and he continues to hold a substantial equity interest in MRG. As part of the transaction to transfer this technology, we acquired an option to purchase worldwide exclusive marketing rights to a long-term glucose sensor being developed by MRG for $30.0 million and have retained exclusive marketing rights to the implantable pump product line for diabetes and certain other medical conditions. Under these initial arrangements, we were obligated to make mandatory purchases of implantable pumps from MRG through 2001 and additional purchases of implantable products in subsequent periods to retain our exclusivity. In February 2001, we restructured our agreements with MRG and exercised our option for the worldwide marketing rights to MRG's long-term glucose sensor. Significant terms of the restructured agreements include a $30.0 million equity investment by us in MRG, a waiver by MRG of our prior purchase commitments, reduced minimum purchase commitments and purchase prices, redefinition of funding responsibilities for future joint research and development programs and the transfer of marketing rights for non-diabetes medical conditions to MRG (See further discussion in "Liquidity and Capital Resources"). During 1999, we entered into two strategic relationships that will affect future product development, manufacturing, sales and marketing efforts, as well as financial performance. In February 1999, we entered into an agreement with Eli Lilly & Co., which we call Lilly, giving us a worldwide license to package and sell a formulation of Lilly's insulin lyspro for use with our programmable insulin infusion pumps. We will offer this insulin to our patients in pre-filled cartridges to be used exclusively in our programmable insulin infusion pumps. In June 1999, we entered into agreements with a division of Elan Corporation, plc, which we call Elan, to manufacture and market exclusively under our name for insulin delivery a disposable, constant-flow infusion system. Our current plans are to offer this disposable infusion system to patients with Type 2 diabetes, further broadening our potential markets. We will also manufacture this infusion system for Elan and its other licensees for use with a variety of other pharmaceutical compounds. Our ability to market products related to each of these agreements is subject to regulatory approval (including separate regulatory approval of the insulin to be used in connection with the disposable infusion system), the timing and certainty of which are not predictable. 26 27 RESULTS OF OPERATIONS The following table sets forth for the years indicated the percentage relationship to net sales of certain items in our 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 1998 1999 ------------------------------- VS. VS. 1998 1999 2000 1999 2000 ----- ----- ----- Net sales ........................... 100.0% 100.0% 100.0% 53.2% 38.7% Cost of sales ....................... 37.2% 34.3% 31.8% 41.5% 28.5% ----- ----- ----- Gross profit ........................ 62.8% 65.7% 68.2% 60.1% 44.0% Operating expenses: Selling, general and administrative 41.2% 41.7% 42.2% 55.0% 40.4% Research and development .......... 11.9% 12.6% 11.6% 62.1% 27.5% Research and development contract . (4.3)% (2.8)% 0.0% 0.0% (100.0)% ----- ----- ----- Total operating expenses ............ 48.8% 51.5% 53.8% 61.6% 44.9% ----- ----- ----- Operating income .................... 14.0% 14.2% 14.4% 54.8% 40.8% ===== ===== =====
The following table sets forth net sales and gross profits for our significant business activities for the three years ended December 29, 2000:
FISCAL YEAR PERCENTAGE OF NET SALES ------------------------------------ ----------------------------- 1998 1999 2000 1998 1999 2000 -------- -------- -------- ----- ----- ----- (IN THOUSANDS) NET SALES: External pumps and related disposables: External pumps: Domestic .......................... $ 66,690 $108,744 $147,641 48.1% 51.2% 50.1% International ..................... 5,815 8,290 10,755 4.2% 3.9% 3.7% -------- -------- -------- ----- ----- ----- Subtotal ........................ 72,505 117,034 158,396 52.3% 55.1% 53.8% Disposable products: Domestic .......................... 44,605 73,783 107,661 32.2% 34.8% 36.6% International ..................... 4,646 6,639 9,756 3.4% 3.1% 3.3% -------- -------- -------- ----- ----- ----- Subtotal ........................ 49,251 80,422 117,417 35.6% 37.9% 39.9% -------- -------- -------- ----- ----- ----- Total external pumps and related disposables .......................... 121,756 197,456 275,813 87.9% 93.0% 93.7% Implantable insulin pumps(1) ........... 1,391 1,811 1,329 1.0% 0.9% 0.5% Other diabetes supplies(1) ............. 6,548 8,729 11,329 4.7% 4.1% 3.8% Glucose Monitoring Systems ............. -- 163 3,195 -- 0.1% 1.1% Pharmacy products(1) ................... 8,882 4,137 2,737 6.4% 1.9% 0.9% -------- -------- -------- ----- ----- ----- Total net sales .............. $138,577 $212,296 $294,403 100.0% 100.0% 100.0% ======== ======== ======== ===== ===== ===== GROSS PROFITS: External pumps and related disposables: External pumps: Domestic ....................... $ 53,200 $ 85,061 $ 117,882 38.4% 40.1% 40.0% International .................. 3,621 4,641 6,154 2.6% 2.2% 2.1% --------- --------- --------- ---- ---- ---- Subtotal ..................... 56,821 89,702 124,036 41.0% 42.3% 42.1% Disposable products: Domestic ....................... 25,946 42,693 66,125 18.7% 20.1% 22.5% International .................. 2,505 3,211 5,643 1.8% 1.5% 1.9% --------- --------- --------- ---- ---- ---- Subtotal ..................... 28,451 45,904 71,768 20.5% 21.6% 24.4% --------- --------- --------- ---- ---- ---- Total external pumps and related disposables ....................... 85,272 135,606 195,804 61.5% 63.9% 66.5% Implantable insulin pumps(1) ........ (1,684) (633) (865) -1.2% -0.3% -0.3% Other diabetes supplies(1) .......... 2,316 3,468 4,047 1.7% 1.6% 1.4% Glucose monitoring systems .......... -- 122 1,309 -- 0.1% 0.4% Pharmacy products(1) ................ 1,155 826 451 0.8% 0.4% 0.2% --------- --------- --------- ---- ---- ----
27 28 Total gross profits....... $ 87,059 $ 139,389 $ 200,746 62.8% 65.7% 68.2% ========= ========= ========= ==== ==== ====
(1) Implantable insulin pump sales are international, and other diabetes supplies and pharmacy products sales are primarily domestic. FISCAL 2000 AND FISCAL 1999 Net Sales. Consolidated net sales increased 38.7% in 2000 over 1999 to $294,403,000 from $212,296,000. Our sales growth is primarily the result of an increase of 39.7%, or $78,357,000, in sales of external pumps and related disposable products. Sales of external pumps grew 35.3% in 2000, with external pump domestic sales growing 35.8% and external pump international sales increasing 29.7%. The domestic increase is primarily related to an increase in unit volume of 37.3% moderated by a slight decrease in average selling prices. The increase in external pump international sales is unit volume driven, as realized international average sales prices were also slightly lower than in 1999. Commencing in the second quarter of 2000, we began selling our programmable external insulin pumps to qualified Medicare beneficiaries when the Health Care Financing Administration began covering these products. Shipments of external pumps to patients who have Medicare as their primary source of reimbursement was the major factor in the reduction of external pump average sales prices during 2000. Revenue for the Medicare patients is recognized over a payment period ranging from 13 to 15 months. The patient also has the right to return the pump at any time during the payment period. This is contrasted to our traditional sales model, where revenue is recognized upon shipment and there is no inherent right of return. During 2000 approximately 4.2% of our domestic external pump shipments were billed under the Medicare program. If the Medicare pumps shipped during 2000 had been reimbursed in our more traditional models, revenues would have increased by approximately $3.8 million with a corresponding increase in gross profits and operating results. The financial impact to our operating results of the Medicare reimbursement program is more pronounced as we start up Medicare sales activity. Over time, assuming Medicare sales volumes remain relatively consistent, the impact of the Medicare reimbursement program upon our short-term operations should diminish. Domestic external pump prices remained relatively consistent for units sold to non-Medicare patients and distributors. International average selling prices for pumps and related disposable products were slightly lower in 2000 compared to 1999 due to decreased exchange rates and increased sales in countries where independent dealers are utilized compared to the prices realized in the markets where we have direct sales operations. Sales of related disposable products increased 46.0% in 2000, with domestic sales growth at 45.9% and international sales growth at 46.9%. This increase in sales of disposable products was primarily volume driven in both the domestic and international markets. This volume increase has been a function of our external pump sales growth, as the number of patients utilizing our external pumps has almost doubled over the past two years. Prices have also increased due to two factors: first, we continue to experience a shift in product mix of the infusion sets sold, with customers moving to the more expensive models; and second, domestic average sales prices have increased as a result of processing more disposable sales directly with third-party payors through our direct sales organization, as contrasted to sales to independent dealers. Implantable pump sales decreased by 26.6% in 2000 over 1999. Sales activity of this product line remains limited due to the lack of required regulatory approvals, and to date, sales of implantable pumps have been generated mainly in connection with clinical trials and compassionate use of the pumps for patients who have difficulty in glucose control with other therapies. In February 2001, we submitted to the FDA our application for approval of this device in combination with the special insulin required for its use. The original implantable pump and the current enhanced version of the implantable pump have received the CE Mark permitting commercial sale in Europe, however, separate approval is required from the EU for the special insulin. The insulin is manufactured by an independent pharmaceutical company, which continues to control the European regulatory filings for its insulin. The applications for approval of the insulin in EU have been filed and are currently under review. No assurance can be given as to when any of these approvals will be received, if at all. Sales of other diabetes supplies increased 29.8%, or $2,600,000 in 2000 over 1999. This increase resulted from overall market growth and the continuation of internal efforts to market these products to our external pump patient base which began in 1999. Average sales prices for these products decreased in 2000 over 1999 due to competitive pressures and the addition of more Medicare patients to our patient base. Pharmaceutical products sales decreased 33.8%, or $1,400,000 in 2000 compared to 1999. While pharmacy sales continue to decrease, we maintain this business activity in anticipation of future commercial activities related to our disposable pump and pre-filled insulin cartridge product lines and to support clinical trial activity for the use of other compounds in our current infusion 28 29 systems. Fiscal 2000 was the first full year of sales activity relating to our continuous glucose monitoring system, with sales increasing $3,032,000 from 1999. In addition to establishing a strong base of physicians utilizing this technology, we sold a number of systems to pharmaceutical companies for use in various diabetes drug clinical trial activities. Cost of Sales and Operating Expenses. Cost of sales increased 28.5% in 2000 over 1999 to $93,657,000 from $72,907,000. As a percentage of net sales, cost of sales decreased to 31.8% in 2000 from 34.3% in 1999. Our overall gross margin percentage improvement was achieved primarily through cost improvements in our external pump and related disposables product lines. Implantable pump gross margins decreased in 2000 compared to 1999 and remained negative due to the reduction in sales activity. Future margins on implantable pumps may be adversely impacted by a contractual purchase commitment for these products to MRG (see further discussion in "Liquidity and Capital Resources). Gross margins in the diabetes supply and pharmacy product lines also decreased due to the pricing pressures of these competitive environments that were partially offset by volume-based cost reductions. Gross margins on the limited volume of continuous glucose monitoring system sales were 41.0% for the year. The fully automated manufacturing operation related to this product line is currently under development and will significantly impact future margins, largely depending upon sales and manufacturing volumes. Gross margin percentages on worldwide sales of external pumps and the related disposable products increased to 71.0% of sales in 2000 over 68.7% in 1999. For external pumps, gross margins improved to 78.3% for 2000 compared to 76.6% in 1999. Included in cost of sales for domestic external pumps for 1999 was a nonrecurring charge of $1,500,000 related to costs required to correct the software of the Model 508 insulin pump which was launched in October 1999. Adjusted for this non-recurring charge, margins on external pumps for 1999 would have been 77.9%. While average sales prices on external pumps have decreased domestically and internationally, manufacturing costs of external pumps have also decreased due to improved manufacturing efficiencies and volume-based cost savings. Related disposable product gross margin percentages increased to 61.1% in 2000 from 57.1% in 1999. The improved margins are a function of stronger pricing achieved through our direct sales efforts and the continued worldwide shift of our customers to the higher margin products combined with continued volume-based cost reduction efforts achieved internally and with our contract manufacturers. Selling, general and administrative expenses increased 40.4% in 2000 over 1999 to $124,142,000 from $88,451,000. As a percentage of net sales, these expenses have increased for 2000 compared to 1999. Selling and marketing expenses increased primarily due to increased sales volumes, which led to increased sales commissions and other variable field and in-house sales costs. In 2000, we continued our expansion of the field sales presence through the addition of direct sales representatives, managed care and other payor sales representatives and nurse specialists who will enhance our ability to educate and train patients and health care professionals. We also increased international selling and marketing expenditures, expanding our operations in Germany, establishing a direct sales operation in Australia and a European headquarters in Belgium. General and administrative expenses have increased primarily due to continued investment in our information systems and related expenditures. We commenced a complete information system upgrade during 2000, with the first phase of the project scheduled to be completed by the end of 2001. In addition to information systems, our next largest investment in general and administrative expenses is in reimbursement personnel increases to support our growth and the continued shift of our domestic business activities to direct sales. Research and development expenses increased 27.5% in 2000 over 1999 to $34,159,000 from $26,798,000. As a percentage of sales, research and development expenses decreased to 11.6% during 2000 from 12.6% during 1999. The 2000 increase in research and development costs resulted primarily from increased expenses in the development of future generations of external pumps and their related disposable products. We continue to invest in start-up manufacturing operations for our current and future continuous glucose monitoring systems, the disposable pump product line and insulin development for all of our insulin delivery systems. Research and development expenses will continue to rise during 2001 as several products prepare for launch and enter the later stages of development. These products include our next platform of external pumps and related disposable products, the consumer version of our continuous glucose monitoring system, several insulin programs, and our disposable infusion system for the treatment of Type 2 diabetes and other medical conditions. From time to time we invest in new and developing technologies that may provide improvements to our core technology or that may provide additional applications for our existing technologies and products. These investments may be in the form of equity investments, loans, research and development agreements, and strategic alliances or cooperation agreements. No assurance can be given as to when such investments will provide useful new technologies or applications, if at all. Such investments may result in losses that could adversely affect our future earnings and results of operations. During 2000, we sold a portion of our investment in Trimeris, Inc., a drug-development company, recognizing a gain of approximately $11.0 million. Other. Other income for 2000 consisted of the capital gain described above and interest income generated from our cash, cash equivalents, and short-term investment balances. Our effective tax rate for all years has been computed giving consideration to the 29 30 pretax results applicable to our foreign and domestic tax jurisdictions and a continual decrease in our valuation allowance against net deferred tax assets due to improved operating results. Our income tax obligations have been significantly reduced as a result of research and development and manufacturing tax credits. We have not incurred any material foreign income tax expense to date. Inflation has not significantly impacted our results of operations for the past three years. FISCAL 1999 AND FISCAL 1998 Net Sales. Consolidated net sales increased 53.2% in 1999 over 1998 to $212,296,000 from $138,577,000. Our sales growth is primarily the result of an increase of 62.2%, or $75,700,000, in sales of external pumps and related disposable products. Sales of external pumps grew 61.4% in 1999, with external pump domestic sales growing 63.1% and external pump international sales increasing 42.6%. The domestic increase is primarily related to increased unit volume combined with a small increase in average selling prices. The increase in international external pump sales is unit volume driven, as realized international average sales prices were slightly lower than in 1998. The domestic price increase was a function of the our continued efforts to increase the percentage of pump sales processed directly with third-party payors rather than selling pumps at larger discounts to independent dealers, and market acceptance of price increases on our pumps related to technological enhancements introduced during the last two years. International average selling prices for pumps and related disposable products were slightly lower in 1999 compared to 1998 due to increased sales in emerging foreign markets where independent dealers are utilized, compared to the prices realized in the markets where we have direct operations. Sales of the related disposable products increased 63.3% in 1999, with domestic sales growth at 65.4% and international sales growth at 42.9%. Similar to our external pumps, this increase in sales of disposable products was primarily volume driven in both the domestic and international markets. Two other factors influenced the sales growth of our disposable products. First, we experienced a shift in product mix of the infusion sets sold, with customers moving to the more expensive models of our infusion sets. Second, similar to our external pump product line, domestic average sales prices have increased as a result of processing more sales directly with third-party payors by our direct sales organization, as contrasted to sales to independent dealers. Sales of implantable pumps increased by 30.2% or $420,000 in 1999 over 1998. Sales activity of this product line remains limited due to the lack of required regulatory approvals, and to date, sales of implantable pumps have been generated mainly in connection with clinical trials and compassionate use of the pumps for patients with particularly difficult cases. We originally received certification for the implantable pump under the applicable directives issued by the EU, and received the CE Mark in March 1995, thus permitting commercial sale throughout the EU. An enhanced version of the implantable pump received the CE Mark in February 2000. Separate approval from the EU, however, is required for commercial sale of the insulin for use in the pump. The insulin is manufactured by an independent pharmaceutical company, which also controls the regulatory filings for its insulin. The implantable pump and the special insulin also remain subject to regulatory review and approval in the United States. No assurance can be given as to when any of these approvals will be received, if at all. Sales of other diabetes supplies increased 33.3%, or $2,181,000 in 1999 over 1998. This increase resulted from overall market growth and the commencement of internal efforts to market these products to our external pump patient base. Average sales prices for these products have increased in 1999 over 1998, as a decreasing percentage of our diabetes supplies business was derived from lower paying Medicare patients. Pharmaceutical products sales decreased 53.4%, or $4,745,000 in 1999 compared to 1998. The 1999 sales decrease is a further continuation of our narrowing and restructuring of the pharmacy operations to better support our future business activities. During the fourth quarter of 1999 we recognized our first revenues on sales of the continuous glucose monitoring system. Cost of Sales and Operating Expenses. Cost of sales increased 41.5% in 1999 over 1998 to $72,907,000 from $51,518,000. As a percentage of net sales, cost of sales decreased to 34.3% in 1999 from 37.2% in 1998. Our overall gross margin percentage improvement was achieved primarily through margin improvement in the implantable pump, other diabetes supplies and pharmacy products. Implantable pump margins improved primarily due to cost reductions achieved because of the sale of assets and transfer of technology to MRG. Margin improvements in other diabetes supplies and pharmacy product areas are the result of our repositioning of these businesses. Gross margin percentages on domestic sales of external pumps and the related disposable products remained constant in 1999 compared to 1998. While average sales prices on external pumps increased, manufacturing costs of external pumps also increased, as our latest model external pump incorporates several technological advancements including a remote bolus programming device. Additionally, included in cost of sales for domestic external pumps is a nonrecurring charge of $1,500,000 million recorded in the fourth 30 31 quarter of 1999 for the estimated costs of correcting a software error on certain external pumps sold in October and November of 1999. Domestic disposable product gross margin percentages remained consistent from 1999 to 1998. While the shift in product mix to more expensive infusion sets resulted in increased sales prices, the gross profit margin percentages on these enhanced infusion sets are lower due to higher costs. International gross margin percentages on external pumps and related disposable products decreased in 1999 from 1998 due to our increased expansion into new markets where we are realizing lower prices. Selling, general and administrative expenses increased 55.0% in 1999 over 1998 to $88,451,000 from $57,059,000. As a percentage of net sales, these expenses remained consistent for 1999 compared to 1998. Selling and marketing expenses increased primarily due to increased sales volumes, which led to increased sales commissions and other variable field and in-house sales costs. Additionally, we continued the expansion of our direct sales organization during 1999 through the addition of new sales representatives, continued development of our managed care marketing efforts and an expanding commitment to field education and training. We also increased international selling and marketing expenditures to expand our overall international presence, particularly in Germany and in new international markets. General and administrative expenses increased to support our growth, primarily in the areas of reimbursement and information systems. Research and development expenses increased 62.1% in 1999 over 1998 to $26,798,000 from $16,531,000. As a percentage of sales, research and development expenses increased to 12.6% during 1999 from 11.9% during 1998. The 1999 increase in research and development costs resulted from greater resources directed toward the development of continuous glucose monitoring systems and the related pilot manufacturing operations, development efforts related to future generations of external pumps, expansion of the data communication capabilities of our products, support of efforts for the use of our core technology in the treatment of other medical conditions, and product development efforts related to our pre-filled insulin cartridge program and our disposable infusion systems. Research and development expenses will continue to rise during 2000, as we plan to introduce several new products over the next several years, including the consumer version of our continuous glucose monitoring system, new generations of external insulin pumps and related disposable products (including pre-filled insulin cartridges), expansion of our core technology for the treatment of other medical conditions and our disposable infusion system, both for the treatment of Type 2 diabetes and under our commitment to supply this product to Elan and its licensees. During the 1998 first quarter, we signed a research and development contract with American Medical Instruments, Inc., also known as AMI, a member of The Marmon Group of Companies. Under the terms of the agreement we performed research and development services on the development of electronics and telemetry for future models of infusion pumps. Upon achievement of quarterly performance milestones, we have received $12.0 million in funding, $6.0 million received in each of 1999 and 1998, respectively. Subject to payment of royalties to AMI, we have the right to sell products utilizing the technologies developed pursuant to the agreement on a worldwide basis, with the exception of Japan. We also have the right to purchase the technologies developed at prices ranging from an aggregate of $13.5 million to $19.0 million during certain periods commencing January 2000 and concluding April 30, 2002. During each of 1999 and 1998, we recorded the $6.0 million we received under this research and development contract as a reduction of operating expenses. Costs related to completion of the obligations under this agreement are included in research and development expense. LIQUIDITY AND CAPITAL RESOURCES We generated cash from operations of $40,059,000 in 2000 compared to cash generated from operations of $10,275,000 in 1999. The increase in operating cash flows was the result of increased overall profitability and our tax benefits from the exercise of non-qualified stock options. These increases were partially offset by continued growth in our accounts receivable driven by sales growth and our continuing shift in business to direct sales and billing activities to third party payors. Cash balances were also decreased by an increase in inventories. Our inventories were increased in planning the move to our new corporate headquarters and in an effort to purchase adequate supplies of key components to support our continued sales growth. During 1998, we used $2,921,000 cash from operations. Our use of cash in 1998 included several factors. We used cash in 1998 to retire approximately $6,333,000 in current liabilities related to our acquisitions of HMS and DSS. These liabilities included $1,772,000 in trade payables of the HMS pharmacy operations, $1,893,000 in trade payables and accrued liabilities related to DSS 31 32 operations, $1,910,000 in other accrued liabilities and all of the accrued but unpaid amounts related to the $1.0 million in merger related expenses recorded in fiscal 1997. If we had not retired these liabilities, we would have generated cash flow from operating activities of $3,412,000 rather than the $2,921,000 reported as cash used in operations. Inventory and receivable balances also increased in 1998 to support our increased business activity. Capital expenditures were $38,256,000 for 2000, $20,402,000 for 1999 and $18,570,000 for 1998. The 1998 and 1999 capital expenditures related primarily to building manufacturing capacity for the continuous glucose monitoring systems, as well as other building improvements, manufacturing expansion, research and development engineering equipment and information systems upgrades to support growth. The 2000 capital expenditures related primarily to furniture and equipment for our new facility, continued investment in equipment related to our new product lines, information technology spending to support our growing business activity and tooling, molds and software necessary for our future product releases. We anticipate that future capital expenditures will continue to increase at an even faster rate in support of our new product activities and to build the infrastructure necessary to accommodate continuing growth. We retired $2.8 million in bank debt related to HMS operations and used $2.7 million of cash during the first quarter of 1998 to complete our acquisition of Dartec AB, a Scandinavian distributor. As stated previously, we restructured our agreement with MRG in February, 2001 and exercised our option to purchase the exclusive worldwide marketing rights to MRG's long-term glucose sensor for $30.0 million. The restructured agreement with MRG requires us to make a $30.0 million equity investment in MRG, which was completed in March, 2001. Our ownership position in MRG is approximately 8.0%. Additionally, we are required to make mandatory minimum purchases of implantable pump units from MRG over the next four years in the following amounts: 2001....................................... $ 1,980,000 2002....................................... 3,240,000 2003....................................... 4,860,000 2004....................................... 7,020,000 ----------- Total............................ $17,100,000 =========== We have accrued $3,285,000 as of December 29, 2000 related to implantable pump purchase commitments in excess of expected usage during the four-year period. In addition to these mandatory purchase commitments, to maintain exclusive marketing rights on the fully-implanted systems for periods subsequent to 2002 we are required to pay license fees of $12.5 million to MRG related to achievement of development milestones of future products for the treatment of diabetes which are in the early stages of development. Furthermore, we are required to pay additional fees of up to $12 million in periods subsequent to 2002, which amount may be reduced to the extent we purchase implantable pumps in excess of the minimum purchase requirements. In the event that we fail to satisfy the minimum purchase commitments in 2003 or 2004 or fail to render the required license fee payments, MRG has the right to repurchase all of the distribution rights for $60.0 million or purchase distribution rights to MRG's next generation implantable pump for $7.5 million. MRG has agreed to supplement our funding the development of the special insulin used in the implantable system and to fund a greater portion of the clinical trials of the long-term glucose sensor. In 1999, we entered into a transaction pursuant to which we began construction of corporate headquarters, research and development and manufacturing facilities on the campus of California State University, Northridge, the first phase of which was initially to be financed with a $65.0 million credit transaction. During October 2000, we negotiated with the lessors to increase this arrangement to $80.0 million to further expand this facility. The transaction was structured as a synthetic lease for the facility development and, in a related transaction, we obtained a revolving line of credit to borrow up to $15.0 million. Under the terms of the arrangement, a special purpose trust subleases the land to us and leases the improvements to us. In connection with these transactions, we pledged substantially all of our assets as collateral security and are subject to various affirmative and negative covenants regarding the conduct of our business, including restrictions on the payment of dividends, incurrence of additional debt, capital expenditures, investments, and other operating considerations. These arrangements could adversely affect our ability to acquire additional capital resources or engage in certain strategic transactions. The synthetic lease has an initial term of five years, with two one-year renewal options. Additionally, we have the option of purchasing the leasehold and improvements during this period. If we do not exercise this option, we will be forced to abandon the premises. We anticipate exercising this option prior to its expiration, which will require additional resources. The underlying ground lease has a term of 40 years with renewal options for up to an additional 40 years. Under these arrangements, we are committed to annual payments that are indexed to market interest rates and currently range from $5.5 million to $6.2 million, which we expect to commence on April 1, 2001. Additionally, we are committed to average annual payments in future periods of approximately $450,000 plus periodic cost of living adjustments, per the terms of the ground lease for the Northridge property. When the synthetic lease terminates, we will be able to assume the obligations of the special purpose trust as the lessee under the ground lease if we exercise our option to purchase. In September 2000, the Company entered into an agreement to lease certain computer software and hardware in conjunction with its implementation of a new enterprise resource planning system, which we call ERP. The lessors have agreed to fund up to $16.0 million under this operating lease. Upon full funding of this lease, we will be committed to annual payments not to exceed $4.0 32 33 million, depending upon the amounts drawn under this operating lease. Full funding of this lease is not expected until late 2001. The Company made payments under this lease of $538,000 during 2000. On October 31, 1998, we acquired DSS, a distributor of our products and other diabetes supplies located in South Florida. We acquired substantially all of the net assets of DSS with payment of $4.9 million consisting of $3.1 million in cash and $1.8 million in notes payable, all of which have been retired. In connection with this acquisition, we also assumed certain liabilities and retired approximately $2.0 million in short-term and long-term debt of DSS during the 1998 fourth quarter. On November 5, 1998, we entered into an agreement with a wholly-owned subsidiary of Medtronic, Inc. enabling Medtronic to purchase $30.0 million of our common stock at $15.00 per share, adjusted for two stock splits, the approximate market value of the stock at that time. Medtronic purchased 2,000,000 shares of unregistered common shares during the 1998 fourth quarter. In connection with this sale, we granted Medtronic certain registration rights associated with the shares. Other financing activities during 1998 included an unsecured line of credit which enabled us to borrow up to $10.0 million. This line of credit expired and had never been drawn and was replaced with a new credit facility, described above. We received $6.0 million during each of 1998 and 1999 under terms of our research and development contract with AMI. As indicated above, we have the right to either purchase the technologies developed or acquire a fully paid-up, exclusive worldwide license for these technologies, in either case at prices ranging from an aggregate of $13.5 million to $19.0 million, subject to downward adjustment through April 30, 2002. Alternatively, we may elect to pay royalties on sales of products utilizing the technology developed pursuant to the contract. It is our current intention to purchase these technologies during 2001 at a cost between $16.0 million and $17.0 million. Management believes that our current level of our cash and cash equivalents and short-term investments will be sufficient to meet our needs for working capital and capital expenditures for the next 24 to 36 months. The requirements for additional capital and working capital, however, are subject to change and will depend upon numerous factors, including: o the level of capital expenditures, especially related to the completion of our manufacturing operations for the continuous glucose monitoring system, the disposable pump operations and our various insulin projects; o research and development activities and results; o competitive and technological developments; o health care reimbursement trends; and o the availability for our acquisition of complementary additional distribution channels, products, and technologies. During future periods, we may require significant amounts of cash to pursue opportunities and promote continued growth and expansion. QUARTERLY RESULTS The following table sets forth some of our selected consolidated financial information for our eight most recent quarters. In the opinion of management, this unaudited financial information has been prepared on the same basis as the audited financial information, and includes all adjustments, consisting only of normal, recurring adjustments, necessary to present this information fairly when read in conjunction with our consolidated financial statements and notes thereto contained elsewhere in this annual report on this Form 10-K. 33 34
1999 -------------------------------------------- Q1 Q2 Q3 Q4 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.......................... $ 40,911 $ 49,083 $ 51,400 $ 70,902 Cost of sales...................... 13,838 16,280 16,502 26,287 --------- --------- --------- --------- Gross profits...................... $ 27,073 $ 32,803 $ 34,898 $ 44,615 ========= ========= ========= ========= Net income......................... $ 3,782 $ 4,873 $ 5,816 $ 7,428 ========= ========= ========= ========= Basic earnings per share........... $ 0.07 $ 0.09 $ 0.09 $ 0.12 ========= ========= ========= ========= Diluted earnings per share......... $ 0.06 $ 0.08 $ 0.09 $ 0.12 ========= ========= ========= =========
2000 -------------------------------------------- Q1 Q2 Q3 Q4 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.......................... $ 60,338 $ 69,411 $ 72,138 $ 92,516 Cost of sales...................... 19,592 22,155 22,459 29,451 --------- --------- --------- --------- Gross profits...................... $ 40,746 $ 47,256 $ 49,679 $ 63,065 ========= ========= ========= ========= Net income......................... $ 6,247 $ 8,622 $ 9,525 $ 18,761 ========= ========= ========= ========= Basic earnings per share........... $ 0.10 $ 0.14 $ 0.15 $ 0.29 ========= ========= ========= ========= Diluted earnings per share......... $ 0.09 $ 0.13 $ 0.14 $ 0.28 ========= ========= ========= =========
Our results of operations have historically fluctuated on a quarterly basis. These seasonal trends have resulted in sales and earnings for each of the first three quarters being significantly lower than sales in the fourth quarter. Fluctuations of earnings from quarter to quarter have and will continue to result from numerous factors, including: o response to practices of insurance companies and other third-party payors with respects to reimbursement for our products, which tend to result in increased sales of our external infusion pumps and disposables later in the calendar year, after patients' deductibles are satisfied; o market acceptance of our products; o timing of regulatory approvals; o new product introductions; o competition; o our ability to manufacture our products efficiently; o timing of research and development expenditures; and o the structure of our sales compensation program. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest excess cash in short-term debt securities that are classified as available for sale. Two of the main risks associated with these investments are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of the debt securities. Fluctuations in interest rates should not have a material effect on our financial statements because of the short-term nature of the securities in which we invest. Credit risk refers to the possibility that the issuer of the debt securities will not be able to make principal and interest payments. We have limited our investments to investment grade or comparable securities and have not experienced any losses on our investments to date due to credit risk. 34 35 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.................................................................................................. 36 Consolidated Balance Sheets -- December 31, 1999 and December 29, 2000........................................................ 37 Consolidated Statements of Income -- Years Ended January 1, 1999, December 31, 1999 and December 29, 2000..................... 38 Consolidated Statements of Stockholders' Equity and Comprehensive Income -- Years Ended January 1, 1999, December 31, 1999 and December 29, 2000...................................................................................................... 39 Consolidated Statements of Cash Flows -- Years Ended January 1, 1999, December 31, 1999 and December 29, 2000................. 40 Notes to Consolidated Financial Statements.................................................................................... 42
35 36 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 31, 1999 and December 29, 2000 and the related consolidated statements of income, stockholders' equity and comprehensive income, and of cash flows for each of the three years in the period ended December 29, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 31, 1999 and December 29, 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, 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 Deloitte & Touche LLP Los Angeles, California February 7, 2001 36 37 MINIMED INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND DECEMBER 29, 2000 ASSETS
1999 2000 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents .............................................. $ 92,718,000 $105,612,000 Short-term investments ................................................. 77,716,000 81,976,000 Accounts receivable, net of allowance for doubtful accounts of $13,108,000 and $16,240,000 at December 31, 1999 and December 29, 2000, respectively ...................................... 65,938,000 89,153,000 Inventories: Raw materials ........................................................ 9,380,000 15,025,000 Work-in-process ...................................................... 2,315,000 2,143,000 Finished goods ....................................................... 7,643,000 14,695,000 ------------ ------------ Total inventories ............................................. 19,338,000 31,863,000 Deferred income taxes .................................................. 9,973,000 8,424,000 Income taxes receivable ................................................ 5,761,000 3,568,000 Prepaid expenses and other current assets .............................. 7,602,000 11,271,000 ------------ ------------ Total current assets .......................................... 279,046,000 331,867,000 NOTE RECEIVABLE FROM AFFILIATE ......................................... 3,600,000 3,600,000 LONG-TERM INVESTMENTS .................................................. 8,552,000 6,655,000 DEFERRED INCOME TAXES .................................................. -- 18,672,000 OTHER ASSETS -- Net .................................................... 17,969,000 18,820,000 LAND, BUILDINGS, PROPERTY AND EQUIPMENT -- Net ......................... 44,631,000 71,346,000 ------------ ------------ TOTAL ASSETS .................................................. $353,798,000 $450,960,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable............................................................ $ 1,000,000 $ -- Accounts payable ....................................................... 3,573,000 6,739,000 Accrued salaries and related benefits .................................. 7,749,000 8,016,000 Accrued sales commissions .............................................. 2,964,000 1,863,000 Accrued warranties ..................................................... 3,859,000 3,681,000 Accrued software refurbishment costs ................................... 1,200,000 -- Accrued related party purchase commitment obligations .................. 3,500,000 3,285,000 Other accrued expenses ................................................. 1,310,000 1,380,000 ------------ ------------ Total current liabilities ..................................... 25,155,000 24,964,000 ------------ ------------ DEFERRED INCOME TAXES .................................................. 1,545,000 -- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.01; 100,000,000 shares authorized; 62,300,594 and 64,547,080 shares issued and outstanding as of December 31, 1999 and December 29, 2000, respectively ........... 634,000 656,000 Additional capital ................................................... 280,508,000 337,751,000 Accumulated other comprehensive income ............................... 2,931,000 1,409,000 Retained earnings .................................................... 43,025,000 86,180,000 ------------ ------------ Total stockholders' equity .................................... 327,098,000 425,996,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $353,798,000 $450,960,000 ============ ============
See notes to consolidated financial statements. 37 38 MINIMED INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 1, 1999, DECEMBER 31, 1999 AND DECEMBER 29, 2000
FISCAL YEAR ----------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- NET SALES ................................. $ 138,577,000 $ 212,296,000 $ 294,403,000 COST OF SALES ............................. 51,518,000 72,907,000 93,657,000 ------------- ------------- ------------- GROSS PROFIT .............................. 87,059,000 139,389,000 200,746,000 ------------- ------------- ------------- OPERATING EXPENSES: Selling, general and administrative ..... 57,059,000 88,451,000 124,142,000 Research and development ................ 16,531,000 26,798,000 34,159,000 Research and development contract ....... (6,000,000) (6,000,000) -- ------------- ------------- ------------- Total operating expenses ........ 67,590,000 109,249,000 158,301,000 ------------- ------------- ------------- OPERATING INCOME .......................... 19,469,000 30,140,000 42,445,000 INTEREST EXPENSE .......................... (47,000) (118,000) (50,000) OTHER INCOME, Including interest income ... 1,503,000 5,143,000 21,639,000 ------------- ------------- ------------- INCOME BEFORE INCOME TAXES ................ 20,925,000 35,165,000 64,034,000 PROVISION FOR INCOME TAXES ................ 7,882,000 13,266,000 20,879,000 ------------- ------------- ------------- NET INCOME ................................ $ 13,043,000 $ 21,899,000 $ 43,155,000 ============= ============= ============= Basic earnings per share .................. $ 0.24 $ 0.37 $ 0.68 ============= ============= ============= Basic weighted average shares outstanding . 53,760,000 59,294,000 63,756,000 ============= ============= ============= Diluted earnings per share ................ $ 0.23 $ 0.35 $ 0.64 ============= ============= ============= Diluted weighted average shares outstanding 56,664,000 62,942,000 67,200,000 ============= ============= =============
See notes to consolidated financial statements. 38 39 MINIMED INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED JANUARY 1, 1999, DECEMBER 31, 1999 AND DECEMBER 29, 2000
COMMON STOCK ------------------------------ ADDITIONAL NUMBER OF PAID-IN COMPREHENSIVE SHARES AMOUNT CAPITAL INCOME ------------- ------------- ------------- ------------- BALANCE, JANUARY 2, 1998 ...................... 53,069,638 $540,000 $ 73,401,000 Issuance of common stock in private offering (net of expenses) ........... 2,000,000 20,000 29,970,000 Exercise of stock options ..................... 1,005,588 11,000 1,815,000 Tax benefit associated with stock option exercises ............................. 4,972,000 Issuance of stock under employee stock plan ................................... 115,432 1,000 1,163,000 Stock awards to directors ..................... 6,128 76,000 Comprehensive income: Net income .................................. $ 13,043,000 Other comprehensive income: Unrealized holding loss on security, net of $106,000 in deferred income taxes ............................. (326,000) Foreign currency translation adjustments .............................. 5,000 ------------- Total other comprehensive loss ........ (321,000) ------------- Total comprehensive income............. $ 12,722,000 ------------- ------------- ------------- ============= BALANCE, JANUARY 1, 1999 ...................... 56,196,786 572,000 111,397,000 Issuance of common stock in public offering (net of expenses) ............................ 4,345,000 44,000 140,544,000 Exercise of stock options ..................... 1,652,878 17,000 5,507,000 Tax benefit associated with stock option exercises..................................... 21,034,000 Issuance of stock under employee stock plan ... 103,268 1,000 1,946,000 Stock awards to directors ..................... 2,662 80,000 Comprehensive income: Net income .................................. $ 21,899,000 Other comprehensive income: Unrealized holding gain on security, net of $1,416,000 in deferred income taxes ... 2,310,000 Foreign currency translation adjustments .... (117,000) ------------- Total other comprehensive income ...... 2,193,000 ------------- Total comprehensive income ............ $ 24,092,000 ------------- ------------- ------------- ============= BALANCE, DECEMBER 31, 1999 .................... 62,300,594 634,000 280,508,000 Exercise of stock options ..................... 2,185,243 22,000 14,955,000 Tax benefit associated with stock option exercises .................................... 39,703,000 Issuance of stock under employee stock plan ... 59,669 2,498,000 Stock awards to directors ..................... 1,574 87,000 Comprehensive income: Net income................................... $ 43,155,000 Other comprehensive income: Unrealized holding gain on security, net of $3,433,000 in deferred income taxes...... 7,033,000 Less: reclassification adjustment for gain included in net income, net of $3,588,000 in income taxes .............. (7,415,000) Foreign currency translation adjustments .. (1,140,000) ------------- Total other comprehensive loss ........ (1,522,000) ------------- Total comprehensive income ............ $ 41,633,000 ------------- ------------- ------------- ============= BALANCE, DECEMBER 29, 2000 .................... 64,547,080 $ 656,000 $ 337,751,000 ------------- ============= ============= ACCUMULATED OTHER COMPREHENSIVE RETAINED INCOME EARNINGS TOTAL ------------- ------------- ------------- BALANCE, JANUARY 2, 1998 ...................... $ 1,059,000 $8,083,000 83,083,000 Issuance of common stock in private offering (net of expenses) ........... 29,990,000 Exercise of stock options ..................... 1,826,000 Tax benefit associated with stock option exercises ............................. 4,972,000 Issuance of stock under employee stock plan ................................... 1,164,000 Stock awards to directors ..................... 76,000 Comprehensive income: Net income .................................. 13,043,000 13,043,000 Other comprehensive income: Unrealized holding loss on security, net of $106,000 in deferred income taxes ............................. (326,000) Foreign currency translation adjustments .............................. 5,000 Total other comprehensive loss ........ (321,000) Total comprehensive income ............ ------------- ------------- ------------- BALANCE, JANUARY 1, 1999 ...................... 738,000 21,126,000 133,833,000 Issuance of common stock in public offering (net of expenses) ........................... 140,588,000 Exercise of stock options ..................... 5,524,000 Tax benefit associated with stock option exercises..................................... 21,034,000 Issuance of stock under employee stock plan ... 1,947,000 Stock awards to directors ..................... 80,000 Comprehensive income: Net income .................................. 21,899,000 21,899,000 Other comprehensive income: Unrealized holding gain on security, net of $1,416,000 in deferred income taxes.... 2,310,000 Foreign currency translation adjustments .. (117,000) Total other comprehensive income ...... 2,193,000 Total comprehensive income ............ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1999 .................... 2,931,000 43,025,000 327,098,000 Exercise of stock options...................... 14,977,000 Tax benefit associated with stock option exercises .................................... 39,703,000 Issuance of stock under employee stock plan ... 2,498,000 Stock awards to directors...................... 87,000 Comprehensive income: Net income................................... 43,155,000 43,155,000 Other comprehensive income: Unrealized holding gain on security, net of $3,433,000 in deferred income taxes ..... 7,033,000 Less: reclassification adjustment for gain included in net income, net of $3,588,000 in income taxes.......................... (7,415,000) Foreign currency translation adjustments .. (1,140,000) Total other comprehensive loss ........ (1,522,000) Total comprehensive income ............ ------------- ------------- ------------- BALANCE, DECEMBER 29, 2000 .................... $ 1,409,000 $ 86,180,000 $ 425,996,000 ============= ============= =============
See notes to consolidated financial statements. 39 40 MINIMED INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 1, 1999, DECEMBER 31, 1999 AND DECEMBER 29, 2000
1998 1999 2000 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................... $ 13,043,000 $ 21,899,000 $ 43,155,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ................................................... 4,134,000 7,318,000 12,057,000 Directors' fees paid in common stock ........................... 76,000 80,000 87,000 Deferred income taxes .......................................... (1,629,000) (4,305,000) (18,512,000) Tax benefit from exercise of non-qualified stock options ....... 4,972,000 21,034,000 39,703,000 Changes in operating assets and liabilities: Accounts receivable, net ..................................... (14,439,000) (27,150,000) (23,400,000) Inventories .................................................. (8,908,000) (2,478,000) (12,557,000) Prepaid expenses and other current assets .................... (2,464,000) (3,767,000) (3,673,000) Other assets ................................................. 940,000 44,000 134,000 Accrued sales commissions .................................... 317,000 704,000 (1,101,000) Accrued salaries and related benefits ........................ 1,512,000 2,518,000 304,000 Accounts payable ............................................. (459,000) (1,874,000) 3,179,000 Accrued warranties ........................................... 370,000 1,031,000 (178,000) Income taxes ................................................. 880,000 (6,916,000) 2,193,000 Accrued software refurbishment costs ......................... -- 1,200,000 (1,200,000) Accrued related party purchase commitment obligations ........ 2,000,000 1,500,000 (215,000) Other accrued expenses ....................................... (3,266,000) (563,000) 83,000 ------------- ------------- ------------- Net cash provided by (used in) operating activities .......... (2,921,000) 10,275,000 40,059,000 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Short-term investments ......................................... 5,237,000 (64,240,000) (4,260,000) Sale (Acquisition) of marketable securities .................... -- -- 1,359,000 Acquisition of Dartec A.B ...................................... (2,670,000) -- -- Acquisition of Diabetes Support Systems, Inc. ("DSS") .......... (3,052,000) -- -- Long-term investments .......................................... (1,140,000) -- -- Purchase of technology license ................................. -- (7,000,000) (1,500,000) Purchase of land, buildings, property and equipment ............ (18,570,000) (20,402,000) (38,256,000) ------------- ------------- ------------- Net cash used in investing activities .......................... (20,195,000) (91,642,000) (42,657,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable ..................................... (2,820,000) (1,160,000) (1,000,000) Repayment of notes payable in connection with DSS acquisition .. (2,028,000) -- -- Proceeds from public offering, net of expenses ................. -- 140,588,000 -- Proceeds from private offering, net of expenses ................ 29,990,000 -- -- Proceeds from stock option exercises ........................... 1,826,000 5,524,000 14,977,000 Proceeds from issuance of common stock under employee stock plan 1,164,000 1,947,000 2,498,000 ------------- ------------- ------------- Net cash provided by financing activities ...................... 28,132,000 146,899,000 16,475,000 ------------- ------------- ------------- Effect of cumulative foreign currency translation adjustment on cash and cash equivalents ...................................... 5,000 (117,000) (983,000) ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 5,021,000 65,415,000 12,894,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 22,282,000 27,303,000 92,718,000 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 27,303,000 $ 92,718,000 $ 105,612,000 ============= ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION -- Cash paid during the period for: Interest ..................................................... $ 62,000 $ 108,000 $ 60,000 Income taxes ................................................. $ 3,854,000 $ 1,106,000 $ 201,000
See notes to consolidated financial statements. 40 41 MINIMED INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JANUARY 1, 1999, DECEMBER 31, 1999 AND DECEMBER 29, 2000 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES -- The Company issued 6,128, 2,662 and 1,574 shares of common stock to certain Directors in lieu of fees during 1998, 1999 and 2000, respectively. The Company recorded an unrealized holding loss of $326,000 during 1998, an unrealized holding gain of $2,310,000 during 1999 and an unrealized holding gain of $7,033,000 during 2000, net of deferred income taxes, on marketable securities classified as long-term investments available for sale. During 1998, the Company accepted a $3.6 million note receivable from a related party in conjunction with the sale of $3.0 million of net implantable pump inventory components and $600,000 of net implantable pump fixed assets. On October 31, 1998, the Company acquired substantially all of the assets and certain of the liabilities of Diabetes Support Systems, Inc. ("DSS"). In connection with this acquisition, the Company paid cash as follows: Assets acquired: Property and equipment........................... $ 188,000 Accounts receivable.............................. 1,438,000 Goodwill......................................... 8,500,000 Inventories...................................... 304,000 Other assets..................................... 93,000 Liabilities assumed: Accounts payable and accrued expenses............ (3,643,000) Notes payable.................................... (2,028,000) Long-term debt issued to sellers................... (1,800,000) ------------- Cash paid in acquisition........................... $ 3,052,000 ============= See notes to consolidated financial statements. 41 42 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 1, 1999, DECEMBER 31, 1999 AND DECEMBER 29, 2000 The fiscal years referenced herein are as follows: FISCAL YEAR YEAR ENDED ----------- ---------- 2000................................. December 29, 2000 1999................................. December 31, 1999 1998................................. January 1, 1999 1. GENERAL INFORMATION Operations -- MiniMed Inc. ("MiniMed" or the "Company") designs, develops, manufactures, markets and sells advanced microinfusion systems and glucose monitoring systems for the intensive management of diabetes. The drug delivery systems include external and implantable microinfusion drug pumps and related disposable products which provide long-term delivery of medication for the treatment of diabetes. The Company is also developing these systems to treat other medical conditions. On June 15, 1999, the Company received Federal Drug Administration ("FDA") approval of the first generation of glucose monitoring systems which provide diabetic patients with continuous monitoring of glucose levels and may ultimately be linked to the microinfusion pumps to create an artificial pancreas. Other development efforts focus on developing non-diabetes uses of the Company's technologies. The Company generally markets its products through either a direct sales force or independent distributors in the United States and a combination of direct sales representatives and independent distributors in international markets. The main markets for products are the United States and Western Europe. Through its acquisitions of Home Medical Supply, Inc. and its affiliated companies ("HMS") and Dartec AB (now "MiniMed NordicAB") in fiscal 1997, and DSS in fiscal 1998, the Company also acts as a distributor of additional diabetes supplies and operates a pharmacy. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Stock Split -- On July 19, 2000, the Company announced a 2-for-1 stock split, in the form of a stock dividend, to result in the issuance of one additional share of common stock for every share of common stock outstanding. The stock split was effective August 2, 2000 for holders of record at the close of business on that date and was distributed on August 18, 2000. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," the Company has recorded the effects of this stock split on share and per share amounts and all prior periods have been restated. Principles of Consolidation -- The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries, MiniMed Distribution Corp., MiniMed Development Corp., MiniMed S.A., MiniMed GmbH, MiniMed Nordic AB and MiniMed Pty. Ltd., and its indirect subsidiaries. All intercompany accounts and transactions have been eliminated. The financial statements of MiniMed S.A., MiniMed GmbH, MiniMed Nordic AB and MiniMed Pty. LTD have been translated using the exchange rates at the end of each period for balance sheet items and the weighted average exchange rates during each period for operating results. Adjustments arising from the translation of financial statements located outside the United States are recorded as a component of comprehensive income. Reclassifications -- Certain reclassifications have been made to various balances in the 1998 and 1999 financial statements to conform with current year presentation. Cash and Cash Equivalents -- The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Investments -- The Company classifies all of its marketable investments as available-for-sale, with unrealized holding gains and losses recorded directly to other comprehensive income. Cost approximates fair value for all short-term investments. Long-term investments include an investment in the common stock of Trimeris, Inc. The fair value of this investment was $7,412,000 and $5,515,000 at December 31, 1999 and December 29, 2000, respectively. The Company recorded an unrealized holding loss of 42 43 $326,000 during 1998, an unrealized holding gain of $2,310,000 during 1999 and an unrealized holding gain of $7,033,000 during 2000 on this investment, net of $106,000, $1,416,000 and $3,433,000, respectively in deferred income taxes. During 2000, the Company sold 213,226 shares of its investment in Trimeris common stock and recorded a gain of $11,003,000 in other income. Also, included in long-term investments at December 31, 1999 and December 29, 2000 was a $1,140,000 investment in the common stock of Pharmaceutical Discovery Corporation ("PDC") which is recorded using the cost method. PDC's chairman and majority shareholder is MiniMed's Executive Chairman. The Company owns less than 5% of PDC's common stock. Realized gains and losses and declines in value judged to be other-than-temporary are included in investment income, which is included in other income in the Company's consolidated statements of income. Realized gains and losses on short-term investments for 1998, 1999 and 2000 were not material. The Company's investment policy is to invest idle and excess funds in high grade, short-term, fixed income securities. The primary objective of investment activities is to protect capital value. Inventories -- Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Land, Buildings, Property and Equipment, and Depreciation -- Land, buildings, property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Research and Development -- Research and development costs are expensed as incurred. Research and Development Contract -- On March 31, 1998, the Company signed a research and development contract with American Medical Instruments, Inc. ("AMI"), a member of The Marmon Group of Companies. Under terms of this agreement, the Company received $12.0 million in funding related to two research projects. The Company completed these projects during fiscal 1999 and recorded $6.0 million related to this contract during each of fiscal 1998 and fiscal 1999. These revenues have been recorded as a reduction of operating expenses. Costs related to the completion of the contractual obligations are included in research and development expense. Under terms of this contract, the Company may sell products developed under the agreement on a world-wide basis, except for Japan, subject to the payment of royalties to AMI. The Company may purchase the technology related to these projects from AMI at prices ranging from $13.5 million to $19.0 million through April 30, 2002. The Company has applied the principles of SFAS No. 68, "Accounting for Research and Development Contracts" to account for this transaction. Income Taxes -- Income taxes are provided for taxes currently payable or refundable, and deferred income taxes arising from future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates. An allowance is provided for net deferred tax assets for which realization is not likely. Revenues and Concentration of Credit Risk -- In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," that summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in the financial statements. It requires that an entity recognize revenue only when all of the following criteria are met: o Persuasive evidence of an arrangement exists, o Delivery has occurred or services have been rendered, o The seller's price to the buyer is fixed or determinable, and o Collectibility is reasonably assured. The Company recognizes revenue in accordance with the provisions of SAB No. 101. For most sales transactions, revenues are recognized when products are shipped. In other instances, where customers maintain the right to return the product, revenues are recognized as non-refundable payments are received and the revenue recognition process is complete when the customer no longer has the right to return the products. 43 44 During 1998, 1999 and 2000, the Company derived approximately 92.4%, 93.6% and 94.2%, 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 governmental agencies. Levels of payments from third-party payors and patients vary, depending upon the specific benefits provided under each patient's coverage. On an overall basis, the Company's accounts receivable balances are subject to credit risk similar to other entities dependent upon third-party health care payors and the insureds for reimbursement. Foreign revenues outside of France, Germany, Austria, Belgium, the Netherlands, Sweden and Australia represent sales to independent dealers. Sales to the European dealers may be shipped from the United States or through the Company's European subsidiaries. Certain foreign sales are transacted directly with patients by the Company's European subsidiaries, with reimbursement provided by the appropriate third party. No single customer represents more than 10% of the Company's sales for any period presented. The Company has recorded an allowance for doubtful accounts to account for the difference between recorded revenues and anticipated collections from distributors, patients and third-party payors. The allowance and provision for bad debts are adjusted periodically based upon the Company's evaluation of historical collection experience, industry reimbursement trends and other relevant factors. The Company determines the allowance amount based upon an analysis of the collectibility of specific accounts and the aging of the accounts receivable. Stock Based Compensation -- The Company has granted stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which disclosures are presented in Note 11. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Pervasiveness of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's most significant estimates relate to the allowance for uncollectible accounts, provisions for obsolete inventory, accrued warranty obligations and accrued related party purchase commitment obligations. Recent Accounting Pronouncement -- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Implementation of this standard was delayed by the FASB for a 12-month period. The Company will adopt SFAS No. 133 as required for its first quarterly filing of fiscal year 2001 and the Company believes that the adoption of SFAS No. 133 will not have a material effect on the Company's operations. 3. BUSINESS COMBINATION On January 2, 1998, the Company acquired Dartec, now MiniMed Nordic, a distributor of diabetes products, including the Company's products, located in Sweden. The Company purchased substantially all of the net assets of MiniMed Nordic for $2.7 million. In connection with this purchase, the Company recorded $2.7 million of goodwill to other long-term assets. This goodwill is being amortized over a period of 15 years on a straight-line basis. On October 31, 1998, the Company acquired DSS, a distributor of diabetes products, including the Company's products, located in South Florida. The Company purchased substantially all of the net assets of DSS, and certain liabilities, for $3.1 million in cash and notes payable totaling $1.8 million. The notes payable bear interest at 6.0% and are due and payable $800,000 on October 31, 1999 and $1.0 million on October 31, 2000. Both of these notes payable and related interest have been retired. In connection with the purchase of DSS, the Company recorded $8.5 million of goodwill to other long-term assets. This goodwill is being amortized over a period of 25 years on a straight-line basis. 44 45 4. FAIR VALUE OF FINANCIAL INSTRUMENTS 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 value. For accounts receivable, accounts payable and note payable, the carrying amount on the balance sheet also approximates fair value due to the short term nature of these instruments. 5. RELATED PARTY TRANSACTIONS Facilities Agreements -- During 1998, the Company leased certain warehouse facilities from Advanced Bionics Corporation ("ABC"), a company with a substantial ownership interest held by Alfred E. Mann, MiniMed's largest single stockholder and Executive Chairman. Rental expense related to this lease with ABC was $37,000, $144,000 and $149,000 during 1998, 1999 and 2000, respectively. The Company has leased certain operating facilities to Mr. Mann under a five-year lease commitment. Rents charged under this agreement were $144,000 during each of the years ended January 1, 1999, December 31, 1999 and December 29, 2000, respectively. Rental income related to all of these leases is recorded in other income. During the fourth quarter of 2000 the Company entered into two additional short-term leases, one with ABC and one with Allecure Corporation, another entity with a substantial ownership interest by Mr. Mann. Relationship with Medical Research Group, Inc. ("MRG") - On September 1, 1998, the Company sold assets and transferred technology related to its implantable pump program to MRG and entered into a series of related transactions. Certain terms and conditions of these transactions were revised on February 1, 2001. MRG was founded by MR. Mann who continues to hold a substantial equity interest in MRG. Current terms and conditions of the MRG relationship, along with the financial statement effect of this relationship are summarized as follows. The Company sold assets, consisting primarily of inventories and equipment to MRG in exchange for a note receivable of approximately $3.6 million. No gain or loss has been recognized on the sale of these assets. The note receivable and all accrued interest have been paid in the first quarter of 2001. Interest income recognized on this note receivable was $84,000 in 1998 and $252,000 in both 1999 and 2000. The Company has also leased facilities and improvements to MRG at which MRG carries out its activities. The Company has recorded $63,000, $147,000 and $89,000 as rental income under this lease during 1998, 1999 and 2000, respectively. The obligations of MRG under such lease are guaranteed by Mr. Mann. Certain employees of the Company involved in the manufacturing operations and research and development activities related to the implantable pump product line have become employees of MRG. The Company maintains exclusive distribution rights to the implantable pump product line for diabetes and remains responsible for pursuing regulatory approval of this product and the special insulin required for the treatment of diabetes. MRG will provide MiniMed with up to $2.0 million in future funding to support the development and regulatory approval of insulins to be used in the implantable pump. The Company also obtained an option to purchase exclusive worldwide marketing rights to a long-term glucose sensor, currently under development by MRG, for $30.0 million subject to MRG's achievement of certain development milestones. MRG achieved these milestones during the fourth quarter of 2000 and the Company exercised this option in February 2001. MiniMed and MRG have a joint financial responsibility for pursuing regulatory approval of the long-term glucose sensor. 45 46 Under terms of the restructured agreements, the Company made a $30.0 million equity investment in MRG and is required to make the following future minimum purchases of implantable pump units based upon current prices: 2001.............................. $ 1,980,000 2002.............................. 3,240,000 2003.............................. 4,860,000 2004.............................. 7,020,000 ------------ Total................... $ 17,100,000 ============ The implantable pump and related insulin have not been approved for commercial distribution in the United States. The implantable pump has been approved for commercial distribution in the European Union ("EU"), but sales will be limited until the special insulin used with the pump is approved. The Company has accrued $3,500,000 and $3,285,000 at December 31, 1999 and December 29, 2000, respectively related to implantable pump purchase commitment obligations in excess of expected usage. In addition to these mandatory purchase commitments, the Company is required to pay license fees of $12.5 million to MRG related to achievement of development milestones of future products for the treatment of diabetes which are in the early stages of development. Furthermore, the Company is required to pay additional fees of up to $12 million in periods subsequent to 2002, which amount may be reduced to the extent the Company purchases implantable pumps in excess of the minimum purchase requirements. In the event that the Company fails to satisfy the minimum purchase requirements in 2003 or 2004 or fails to make the license fee payments, MRG has the right to repurchase all of the Company's distribution rights for $60.0 million or purchase distribution rights to MRG's next generation implantable pump for $7.5 million. 6. LONG-TERM INVESTMENTS AND OTHER ASSETS Long-term investments consist of the following: DECEMBER 31, 1999 DECEMBER 29, 2000 ----------------- ----------------- Investment in Trimeris common stock -- at fair value............................. $7,412,000 $5,515,000 Investment in PDC common stock -- at cost ..... 1,140,000 1,140,000 ---------- ---------- $8,552,000 $6,655,000 ========== ==========
Other assets-net consist of the following: Technology license ............................ $ 7,094,000 $ 8,543,000 Goodwill in connection with MiniMed Nordic acquisition ................................. 2,502,000 2,327,000 Goodwill in connection with DSS acquisition ... 8,104,000 7,764,000 Other ......................................... 269,000 186,000 ----------- ----------- $17,969,000 $18,820,000 =========== ===========
The Company has recorded $673,000 and $1,243,000 as accumulated amortization on other assets at December 31, 1999 and December 29, 2000 respectively. The Company has also recorded $51,000 during 1998 and $570,000 during both 1999 and 2000 as amortization expense on other assets. 46 47 7. LAND, BUILDINGS, PROPERTY AND EQUIPMENT -- NET Land, buildings, property and equipment, net consist of the following:
ESTIMATED DECEMBER 31, DECEMBER 29, USE LIVES 1999 2000 (YEARS) ---------------- --------------- --------- Land, buildings and improvements............... $ 15,817,000 $ 18,198,000 20 to 40 Machinery and equipment........................ 25,963,000 44,346,000 3 to 5 Tooling and molds.............................. 3,355,000 7,091,000 3 Computer software.............................. 7,423,000 12,749,000 3 Furniture and fixtures......................... 8,062,000 16,287,000 8 --------------- --------------- 60,620,000 98,671,000 Less accumulated depreciation.................. (15,989,000) (27,325,000) --------------- --------------- Total................................ $ 44,631,000 $ 71,346,000 =============== ===============
8. EARNINGS PER SHARE Earnings per share ("EPS") are calculated in the following table. The reconciliation between the numerator and denominator for basic and diluted EPS is as follows:
INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT -------------- ------------ --------- YEAR ENDED JANUARY 1, 1999: Basic EPS - Net income applicable to common stock...... $ 13,043,000 53,760,000 $ .24 ============== =========== ===== Effect of dilutive securities - Stock options.............................. 2,904,000 -------------- ----------- ----- Diluted EPS - Net income applicable to common stock...... $ 13,043,000 56,664,000 $ .23 ============== =========== ===== YEAR ENDED DECEMBER 31, 1999 Basic EPS - Net income applicable to common stock...... $ 21,899,000 59,294,000 $ .37 ============== =========== ===== Effect of dilutive securities - Stock options.............................. 3,648,000 -------------- ----------- ----- Diluted EPS - Net income applicable to common stock...... $ 21,899,000 62,942,000 $ .35 ============== =========== ===== YEAR ENDED DECEMBER 29, 2000: Basic EPS - Net income applicable to common stock...... $ 43,155,000 63,756,000 $ .68 ============ =========== ===== Effect of dilutive securities - Stock options.............................. 3,444,000 -------------- ----------- ----- Diluted EPS - Net income applicable to common stock...... $ 43,155,000 67,200,000 $ .64 ============ =========== =====
9. COMMITMENTS AND CONTINGENCIES Leases - In May 1999, the Company entered into an agreement to lease up to 28 acres of land located on the campus of California State University, Northridge, where it has constructed the first phase of a corporate headquarters, research and development and manufacturing facility. The ground lease has an initial term of 40 years with renewal options for up to an additional 40 years. Pursuant to the terms of the ground lease, the Company made payments of $400,000 and $300,000 during 1999 and 2000, respectively, and is committed to average annual payments in future periods of approximately $450,000 plus periodic cost of living adjustments. In May 1999, the Company also entered into a transaction pursuant to which it now leases certain buildings constructed on the land described above. The lessors of the buildings originally committed to fund up to a maximum of $65.0 million for the first phase of construction of the buildings and provided the Company with a $15.0 million revolving line of credit that has never been drawn. During October 2000, the Company successfully negotiated an increase of this lease arrangement to $80.0 million in order to expand the development of this facility. Under the terms of the transaction, a special purpose trust subleases the land, buildings and improvements to the Company. The lease has an initial term of five years, with 47 48 two one-year renewal options. Under the revised arrangement, the Company is committed to annual rent payments under this operating lease that are indexed to market interest rates and currently range from $5.5 million to $6.2 million commencing on April 1, 2001. The Company began relocating portions of its operations to the Northridge site late in the third quarter of 2000 and recorded $800,000 as rent expense under this lease during 2000. Construction on the unfinished buildings at Northridge continued during the fourth quarter of 2000 and is scheduled to be completed in the first quarter of 2001. In connection with these transactions, the Company pledged substantially all of its assets as collateral security, and is subject to various affirmative and negative covenants regarding the conduct of its business including restrictions on the payment of dividends and the incurrence of additional debt. These arrangements could adversely affect the Company's ability to acquire additional capital resources or engage in certain strategic transactions. The Company's February 2001 exercise of its $30.0 million option to purchase exclusive worldwide marketing rights of MRG's long-term glucose sensor combined with its $30.0 million equity investment in MRG violated certain covenants of the arrangement. The lessors have provided the Company with a waiver regarding these covenants and have restructured the lease to provide for these transactions in subsequent periods. In September 2000, the Company entered into an agreement to lease certain computer software and hardware in conjunction with its implementation of a new enterprise resource planning ("ERP") system. The lessors have agreed to fund up to $16.0 million for this lease. Upon full funding of this lease, the Company will be committed to annual payments not to exceed $4.0 million, depending upon the amounts drawn under this operating lease. Full funding of this lease is not expected until late 2001. The Company made payments under this lease of $538,000 during 2000. As part of its ERP activities, the Company entered into a contract with Siemens Medical Solutions Health Services Corporation, formerly Shared Medical Systems Corporation ("SMS"), licensing medical billing software and support services. After significant evaluation of the SMS product it has been determined that the SMS product will not integrate effectively with the Company's selected ERP system. When it became clear that the integration issue could not be solved, the Company notified SMS of its intent to cancel the agreement. SMS responded by claiming the Company is in breach of the agreement. The parties are currently in discussions to resolve this situation. Legal Proceedings - On February 9, 1999, the Company was served with a complaint filed in the Civil District Court For the Parish of Orleans, State of Louisiana, by Diabetes Resources, Inc., which is also known as Insulin Infusion Specialties ("IIS"). The Company and IIS entered into an Educational Dealer Agreement in July, 1997, relating to the distribution of certain MiniMed products by IIS. The Company declined to renew that agreement, pursuant to its terms, as of December 31, 1998. IIS is alleging that MiniMed engaged in unfair competition, breached the agreement, violated applicable trade secret laws and defamed IIS. IIS did not specify the amount of damages it is seeking in its complaint. The Company believes that it has meritorious defenses to IIS's claims. The action was removed to Federal Court, and the Company has filed an answer denying the material allegations, and filed a counterclaim seeking damages for unfair trade practices. The Company has filed an amended counterclaim seeking damages based on IIS's failure to pay amounts due and owing. The Company believes that it has meritorious defenses to the claims asserted by IIS. Trial in the matter is scheduled for September 2001. Discovery in this litigation is continuing. During the normal course of business, the Company may be subject to other litigation involving various business matters. Management believes that an adverse outcome of any such known matters would not have a material adverse impact on the Company's financial statements. 10. STOCKHOLDERS' EQUITY Stock Options and Purchase Plan -- The Company has granted stock options under its incentive stock plan ("stock option plan"), which provides that options may have a term of up to 10 years and become exercisable and vest in annual increments of up to six years. Options to purchase an additional 4,911,172 shares are available for grant at December 29, 2000. Stock option plan activity is as follows:
WEIGHTED AVERAGE PRICE SHARES PER SHARE --------- ------------- Outstanding options at January 2, 1998........ 6,996,624 $ 3.90 Options granted............................... 1,632,000 $ 11.43 Options exercised............................. (1,005,588) $ 1.92 Options canceled.............................. (151,800) $ 6.86 --------- Outstanding options at January 1, 1999........ 7,471,236 $ 5.75 Options granted............................... 2,137,000 $ 23.22 Options exercised............................. (1,652,878) $ 3.34 Options canceled.............................. (216,000) $ 13.08 --------- Outstanding options at December 31, 1999...... 7,739,358 $ 10.81 Options granted............................... 1,847,500 $ 47.65 Options exercised............................. (2,185,243) $ 6.91 Options canceled.............................. (147,800) $ 18.19 --------- Outstanding options at December 29, 2000...... 7,253,815 $ 21.39 =========
48 49 The following table summarizes information about stock options outstanding at December 29, 2000:
SHARES NUMBER WEIGHTED WEIGHTED EXERCISABLE WEIGHTED RANGE OF OUTSTANDING AT AVERAGE REMAINING AVERAGE AT DECEMBER 29, AVERAGE EXERCISE PRICES DECEMBER 29, 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE - ------------------- ------------------ ------------------ -------------- --------------- -------------- $ 1.25 - 3.69 1,294,075 2.36 $ 2.43 1,174,075 $ 2.30 $ 3.79 - 9.44 1,041,824 4.51 8.02 488,624 7.40 $ 9.69 - 20.38 1,320,761 5.25 11.16 532,761 10.36 $ 21.31 - 37.08 1,844,250 6.28 23.85 271,584 22.85 $ 37.91 - 64.06 1,752,905 7.25 48.45 32,500 55.04 ---------- ---- -------- ---------- -------- 7,253,815 5.38 $ 21.39 2,499,544 $ 7.93 ========== ==== ======== ========== ========
During 1996, the Company's stockholders approved an employee stock purchase plan ("stock purchase plan"). Substantially all of the Company's employees are eligible to participate in the stock purchase plan through regular payroll deductions. Options under the stock purchase plan are granted for an indeterminable number of shares on semi-annual offering dates and are automatically exercised six months from the offering date, subject to the right of participating employees to withdraw from the stock purchase plan prior to the expiration of the relevant six-month period. 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. Transfer 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 SHARES EXERCISE PRICE ----------- -------------- Shares available at January 2, 1998................ 3,841,088 Exercised.......................................... 115,432 $ 10.09 ----------- ------- Shares available at January 1, 1999................ 3,725,656 Exercised.......................................... 103,268 $ 18.89 ----------- ------- Shares available at December 31, 1999.............. 3,622,388 Exercised.......................................... 59,669 $ 41.92 ----------- ------- Shares available at December 29, 2000.............. 3,562,719 ===========
All stock options are granted at the fair market value of the Company's common stock at the grant date. The aggregate estimated fair value of options granted in 1998, 1999 and 2000 was $14,230,000, $30,834,000 and $56,245,000, respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and stock purchase plan. Accordingly, no compensation cost for the Company's stock option plan and stock purchase plan has been recognized in 1998, 1999 or 2000. Had compensation cost for the Company's stock option plan and stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123, the Company's net income and earnings per share for the years ended January 1, 1999, December 31, 1999 and December 29, 2000 would have been reduced to the pro forma amounts indicated below:
YEAR ENDED ----------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1999 1999 2000 ------------- -------------- -------------- Net income to common stockholders: As reported................................................. $ 13,043,000 $ 21,899,000 $ 43,155,000 Pro forma................................................... $ 10,420,000 $ 15,354,000 $ 29,133,000 Net income per common and common equivalent share: As reported -- basic........................................ $ 0.24 $ 0.37 $ 0.68 Pro forma -- basic.......................................... 0.19 0.26 0.46 As reported -- diluted...................................... 0.23 0.35 0.64 Pro forma -- diluted........................................ 0.18 0.24 0.43
49 50 The fair value of options granted under the stock option plan during 1998, 1999 and 2000 was determined using the Black-Scholes option pricing model utilizing the following weighted-average assumptions:
YEAR ENDED ---------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1999 1999 2000 ---------- ----------- ---------- Dividend yield................... 0% 0% 0% Volatility....................... 51% 57% 64% Risk-free interest rate.......... 5.45% 5.22% 6.49% Expected lives................... 7 years 6 years 6 years
Pro forma compensation cost of options granted under the employee stock purchase plan is measured based upon the discount from market value. Stockholders' Rights Plan -- In May 1995, the Company's Board of Directors approved a plan to protect stockholders' rights in the event of a proposed takeover of the Company, which plan was amended by the Board of Directors in February 1999. Under the plan, the Board of Directors declared a dividend distribution of a Series B Preferred Stock purchase right (a "Right") on each share of the Company's common stock (a "Common Share") outstanding on July 24, 1995, and each Common Share issued thereafter. Upon becoming exercisable, each Right will entitle its holder to purchase 1/1000 of a share of Series B Preferred Stock at an exercise price of $250.00. The Rights are not exercisable or transferable apart from the Common Shares unless certain events occur, including a public announcement that a person has acquired or announced a tender or exchange offer to acquire 15% or more of the outstanding Common Shares. Unless the Rights are redeemed, in the event that an Acquiring Person acquires 15% or more of the outstanding Common Shares (other than pursuant to a tender offer deemed fair by the Company's Board of Directors), each Right not held by the Acquiring Person will entitle the holder to purchase for the exercise price that number of Common Shares (or other shares or assets) having market value equal to two times the exercise price of the Right. In the event that (i) the Company is acquired in a merger or business combination in which the Company is not the surviving corporation or in which the Common Shares are exchanged for stock or assets of another entity, or (ii) 50% or more of the Company's consolidated assets or earning power is sold, each Right not held by an Acquiring Person will entitle the holder to purchase for the exercise price that number of shares of common stock of the acquiring company having a market value equal to two times the exercise price. The Rights are redeemable, in whole but not in part, at the Company's option, at $0.01 per Right at any time prior to becoming exercisable and in certain other circumstances. The Rights expire in 2005 unless they have been earlier redeemed or exchanged. 11. 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 January 1, 1999, December 31, 1999 and December 29, 2000 were $387,000, $625,000 and $878,000, respectively. 12. INCOME TAXES Pretax income (loss) for the three years in the period ended December 29, 2000 was subject to income tax in the following jurisdictions:
YEAR ENDED ------------------------------------------------ JANUARY 1, DECEMBER 31, DECEMBER 29, 1999 1999 2000 --------------- --------------- -------------- Domestic................................. $ 21,270,000 $ 36,370,000 $ 66,893,000 Foreign.................................. (345,000) (1,205,000) (2,859,000) -------------- -------------- ------------- Pretax income............................ $ 20,925,000 $ 35,165,000 $ 64,034,000 ============== ============== =============
50 51 Significant components of the provision for income taxes are as follows:
YEAR ENDED ----------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1999 1999 2000 -------------- --------------- -------------- Current: Federal.................................. $ 4,142,000 $ (2,972,000) $ (145,000) Foreign.................................. 30,000 52,000 255,000 State.................................... 367,000 (543,000) (422,000) ------------- -------------- ------------- 4,539,000 (3,463,000) (312,000) Effect of nonqualified stock option exercises upon income taxes currently payable.................................. 4,972,000 21,034,000 39,703,000 Deferred: Federal.................................. (1,545,000) (2,823,000) (13,356,000) State.................................... (84,000) (1,482,000) (5,156,000) ------------- -------------- ---------- (1,629,000) (4,305,000) (18,512,000) ------------- -------------- -------------- $ 7,882,000 $ 13,266,000 $ 20,879,000 ============= ============== =============
The components of deferred income tax assets (liabilities) at December 31, 1999 and December 29, 2000 are as follows:
DECEMBER 31, 1999 DECEMBER 29, 2000 ---------------------------- ----------------------------- FEDERAL STATE FEDERAL STATE ------------- ------------ ------------- ------------ Current deferred tax assets: Accrued warranties................. $ 1,312,000 $ 112,000 $ 1,288,000 $ 94,000 NOL carryforwards.................. 2,365,000 340,000 -- -- Accrued vacation................... 485,000 58,000 755,000 54,000 Allowance for doubtful accounts........................ 3,664,000 684,000 5,114,000 374,000 Reserve for obsolete inventory..... 536,000 46,000 631,000 46,000 Other.............................. 371,000 -- 68,000 -- ------------- ------------ ------------- ------------ 8,733,000 1,240,000 7,856,000 568,000 Long-term deferred tax (liabilities) assets and tax credits: NOL carryforwards.................. -- -- 9,350,000 6,022,000 Depreciation....................... (1,521,000) (189,000) (715,000) (41,000) Unrealized gain on securities...... (1,840,000) (157,000) (1,706,000) (125,000) Tax credits........................ 1,000,000 1,162,000 3,938,000 715,000 Other.............................. -- -- 1,150,000 84,000 ------------- ------------ ------------- ------------ (2,361,000) 816,000 12,017,000 6,655,000 ------------- ------------ ------------- ------------ Net deferred tax assets.............. $ 6,372,000 $ 2,056,000 $ 19,873,000 $ 7,223,000 ============= ============ ============= ============
A reconciliation of the Company's provision for income taxes for 1998, 1999 and 2000 to the U.S. Federal Statutory rates is as follows:
YEAR ENDED --------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1999 1999 2000 ------------- --------------- ------------- Provision for income taxes at U.S. statutory rates.......................................... $ 7,324,000 $ 12,308,000 $ 22,412,000 State taxes, net of Federal benefit.............. 655,000 1,811,000 2,497,000 Non-deductible expenses.......................... 99,000 273,000 427,000 Foreign loss not usable.......................... 121,000 422,000 1,001,000 Reduction of valuation allowance................. (270,000) (36,000) -- Research and development income tax credits...... -- (1,000,000) (4,554,000) California manufacturer's investment income tax credit..................................... -- (500,000) (700,000) Other............................................ (47,000) (12,000) (204,000) ------------- -------------- -------------- $ 7,882,000 $ 13,266,000 $ 20,879,000 ============= ============== ==============
51 52 13. OPERATING SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA During 1999, the Company reorganized its diabetes products operating segment to illustrate the differences in revenues and gross profit generation from external infusion pumps, related disposable products, implantable pumps and other diabetes supplies. Additionally, during 1999 the Company began conducting business in a new operating segment, glucose monitoring systems. The Company has organized its operating segments around differences in products offered. The Company conducts business in six operating segments; external infusion pumps, related disposable products, implantable pumps, other diabetes supplies, glucose monitoring systems and pharmaceutical products. The external infusion pumps and related disposable products operating segments derive their revenues from the manufacture and distribution of drug delivery systems primarily for the treatment of diabetes. The implantable pumps operating segment derives its revenues from the distribution of internal drug delivery systems primarily for the treatment of diabetes. The other diabetes supplies operating segment generates revenues from the distribution of a broad range of diabetes treatment products, including blood glucose testing strips and meters. The pharmaceutical products operating segment derives its revenues from the distribution of prescription drugs to treat certain medical conditions, including diabetes and, previously, HIV/AIDS and renal failure. The Company manages its operating segments through analysis of segment net sales and gross profit. The external infusion pumps, related disposable products, implantable pumps, glucose monitoring systems and other diabetes supplies operating segments are aggregated into the diabetes products operating segment for purposes of tracking selling, general and administrative expenses, interest expense, other income, capital expenditures, depreciation expense and assets and liabilities as the type of customers, the distribution channels and the nature of the regulatory environment are similar. In the following tables, net sales by operating segment and geographic area include sales to customers, as reported in the Consolidated Statements of Income at sales prices which approximate market.
OPERATING SEGMENTS 1998 1999 2000 ------------------ ---------------- ---------------- --------------- Net sales: Pharmaceutical products................. $ 8,882,000 $ 4,137,000 $ 2,737,000 External infusion pumps................. 72,505,000 117,034,000 158,396,000 Related disposable products............. 49,251,000 80,422,000 117,417,000 Implantable pumps....................... 1,391,000 1,811,000 1,329,000 Glucose monitoring systems.............. -- 163,000 3,195,000 Other diabetes supplies................. 6,548,000 8,729,000 11,329,000 --------------- --------------- -------------- Total net sales................. $ 138,577,000 $ 212,296,000 $ 294,403,000 --------------- --------------- -------------- Gross profit: Pharmaceutical products................. $ 1,155,000 $ 826,000 $ 451,000 External infusion pumps................. 56,821,000 89,702,000 124,036,000 Related disposable products............. 28,451,000 45,904,000 71,768,000 Implantable pumps....................... (1,684,000) (633,000) (865,000) Glucose monitoring systems.............. -- 122,000 1,308,000 Other diabetes supplies................. 2,316,000 3,468,000 4,048,000 --------------- --------------- -------------- Total gross profit.............. $ 87,059,000 $ 139,389,000 $ 200,746,000 --------------- --------------- -------------- Operating profit (loss): Pharmaceutical products................. $ (1,378,000) $ (2,805,000) $ (1,036,000) Diabetes products....................... 20,847,000 32,945,000 43,481,000 --------------- --------------- --------------- Total operating profit.......... $ 19,469,000 $ 30,140,000 $ 42,445,000 --------------- --------------- --------------- Interest expense.......................... (47,000) (118,000) (50,000) Other income.............................. 1,503,000 5,143,000 21,639,000 --------------- --------------- --------------- Income before income taxes................ $ 20,925,000 $ 35,165,000 $ 64,034,000 =============== =============== ============== Identifiable assets: Pharmaceutical products................. $ 4,458,000 $ 6,012,000 $ 3,372,000 Diabetes products....................... 153,194,000 347,786,000 447,588,000 --------------- --------------- -------------- Total........................... $ 157,652,000 $ 353,798,000 $ 450,960,000 =============== =============== ==============
Capital expenditures and depreciation expense related to the Company's pharmaceutical products operations are not material compared to its diabetes products operations for the three years presented. 52 53
GEOGRAPHIC AREAS 1998 1999 2000 ---------------- ---------------- --------------- NET SALES: North America....................................... $ 127,981,000 $ 198,641,000 $ 277,435,000 Europe.............................................. 10,596,000 13,655,000 16,297,000 Australia........................................... -- -- 671,000 ---------------- ---------------- --------------- Consolidated........................................ $ 138,577,000 $ 212,296,000 $ 294,403,000 =============== =============== =============== OPERATING INCOME (LOSS): North America....................................... $ 20,099,000 $ 31,236,000 $ 44,691,000 Europe.............................................. (630,000) (1,096,000) (2,184,000) Australia........................................... -- -- (62,000) ---------------- ---------------- --------------- Consolidated........................................ $ 19,469,000 $ 30,140,000 $ 42,445,000 =============== =============== =============== IDENTIFIABLE ASSETS AT END OF PERIOD: North America....................................... $ 149,768,000 $ 344,446,000 $ 433,867,000 Europe.............................................. 7,884,000 9,352,000 16,296,000 Australia........................................... -- -- 797,000 ---------------- ---------------- --------------- Consolidated........................................ $ 157,652,000 $ 353,798,000 $ 450,960,000 =============== =============== ===============
53 54 MINIMED INC. VALUATION AND QUALIFYING ACCOUNTS -- SCHEDULE II
COLUMN A COLUMN B COLUMN C -- ADDITIONS COLUMN D COLUMN E -------- ------------- --------------------------- -------------- -------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES(1) ACCOUNTS DEDUCTIONS PERIOD ----------- ------------- -------------- ---------- -------------- -------------- Allowance for doubtful accounts: 1998............................. $ 6,250,000 $ 4,505,000 $ (1,911,000) $ 8,844,000 1999............................. $ 8,844,000 $ 7,292,000 $ (3,028,000) $ 13,108,000 2000............................. $ 13,108,000 $ 3,653,000 $ (521,000) $ 16,240,000 Accrued warranties: 1998............................. $ 2,458,000 $ 1,537,000 $ (1,167,000) $ 2,828,000 1999............................. $ 2,828,000 $ 1,597,000 $ (566,000) $ 3,859,000 2000............................. $ 3,859,000 $ 1,352,000 $ (1,530,000) $ 3,681,000 Accrued related party purchase commitment obligations: 1998............................. $ -- $ 2,000,000 $ -- $ 2,000,000 1999............................. $ 2,000,000 $ 1,500,000 $ -- $ 3,500,000 2000............................. $ 3,500,000 $ -- $ (215,000) $ 3,285,000
- ---------- (1) The allowance for doubtful accounts represents charges to bad debt expense for the year. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information regarding our Directors and Executive Officers is incorporated by reference to our definitive Proxy Statement for our annual meeting of stockholders which is to be held on June 7, 2001. The Proxy Statement will be filed with the Securities Exchange Commission no later than 120 days after December 29, 2000. We refer to the Proxy Statement to be filed as the "2001 Proxy." ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item is incorporated by reference to our 2001 Proxy. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item is incorporated by reference to our 2001 Proxy. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Information with respect to this item is incorporated by reference to our 2001 Proxy. 54 55 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 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 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). 2.2 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). 2.3 Asset Purchase Agreement dated as of October 8, 1998, by and among Diabetes Support Systems, Inc., MiniMed Distribution Corp. and MiniMed Inc. (included as Exhibit 2.3 to the Company's Annual Report on the Form 10-K for the fiscal year ended January 1, 1999 which is incorporated herein by reference). 3(i).1 Amended and Restated Certificate of Incorporation (included as Exhibit 3(i).1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 3(ii).1 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(ii).2 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(ii).3 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended October 2, 1998 which is incorporated herein by reference). 3(ii).4 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 3(ii).5 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended October 1, 1999 which is incorporated herein by reference). 3(ii).6 Amendment to Bylaws of MiniMed Inc. adopted October 13, 1999. (included as Exhibit 3(ii).6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 3(ii).7 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 3(ii).8 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).2 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 4.1 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). 4.2 Amendment to Rights Agreement effective as of May 1, 1999 by and between MiniMed Inc. and Harris Trust
55 56 Company of California (previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-3, Registration No. 333-80527 on June 11, 1999, and incorporated herein by reference). 10.1 First Amendment to Stock Pledge Agreement made by MiniMed in favor of ING (U.S.) Capital LLC dated as of June 24, 1999 (included as Exhibit 10.1 to the Company's Quarterly Report for the period ended October 1, 1999 which is incorporated herein by reference). 10.2 Ground Sublease by and between North Campus-University Park Development Corporation and First Security Bank, N.A. as Owner Trustee dated as of May 18, 1999 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.3 Parent Guaranty dated as of May 18, 1999 from MiniMed Inc. to First Security Bank, N.A. as Trustee (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.4 Master Lease between First Security Bank, N.A. as Trustee and MiniMed Development Corp. dated May 18, 1999 (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.5 Participation Agreement among MiniMed Development Corp. as Construction Agent and Lessee, MiniMed Inc. and First Security Bank, N.A. as Trustee, et. Al. dated May 18, 1999 (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.6 First Amendment to Participation Agreement and Related Documents among MiniMed Development Corp. as Construction Agent and Lessee, MiniMed Inc. and First Security Bank, N.A. as Trustee, et. Al. dated October 30, 2000 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 10.7 Revolving Credit Agreement dated as of May 18, 1999, among MiniMed Inc., the Revolving Credit Lenders and ING (U.S.) Capital LLC (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.8 Security Agreement dated as of May 18, 1999, among MiniMed Inc., certain subsidiaries of MiniMed Inc. and ING (U.S.) Capital LLC (included as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.9 Change of Control Agreement dated August 12, 1999 between MiniMed Inc. and Stephen Bowman (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended October 1, 1999 which is incorporated herein by reference). 10.10 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Alfred E. Mann (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.11 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Terrance H. Gregg (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.12 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Eric S. Kentor (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.13 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and David Morley (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.14 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Kevin R. Sayer (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.15 Change of Control Agreement dated August 12, 2000 between MiniMed Inc. and Steven Schultz 10.16 Change of Control Agreement dated October 19, 2000 between MiniMed Inc. and Kevin Wells 10.17 Third Amended and Restated 1994 Stock Incentive Plan (Incorporated by reference from Exhibit 4.1 to Post Effective Amendment No. 2 to the Company's Registration Statement on Form S-8 filed by the Company on September 16, 1999, registration no. 33-95630). 10.18 MiniMed Inc. 1994 Stock Incentive Plan -- Form of Option. (included as Exhibit 10.15 to the Company's Annual
56 57 Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 10.19 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). 10.20 MiniMed Inc. 1992 Stock Incentive Plan -- Amendment to Form of Option (included as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 10.21 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). 10.22 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). 10.23 License Supply and Distribution Agreement between Eli Lilly and Company and MiniMed Inc. dated February 1, 1999 (included as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.24 Amendment to License Supply and Distribution Agreement between Eli Lilly and Company and MiniMed Inc. dated as June 28, 1999 (included as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.25 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). 10.26 Development, License and Supply Agreement between Elan Pharmaceutical Technologies, Elan Pharma International Limited and MiniMed Inc. dated June 11, 1999 (included as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.27 License and Manufacturing Agreement between Elan Pharmaceutical Technologies, Elan Pharma International Limited and MiniMed Inc. dated June 11, 1999 (included as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.28 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). 10.29 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). 10.30 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). 10.31 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). 10.32 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). 10.33 Lease dated as of October 15, 2000 by and between MiniMed Inc. and Advanced Bionics Corporation. 10.34 Lease dated as of October 15, 2000 by and between MiniMed Inc. and AlleCure. 10.35 Agreement Regarding Implantable Pump Business dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.36 Implantable Pump License and Distribution Agreement dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.37 Glucose Sensor Option Agreement dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.38 Guarantee of Alfred E. Mann dated September 1, 1998 (included as Exhibit 10.4 to the Company's Quarterly
57 58 Report on Form 10-Q which is incorporated by reference herein). 10.39 Amended and Restated Implantable Pump License and Distribution Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 10.40 Amendment to Glucose Sensor Option Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 10.41 Stock Purchase Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP.
(b) 1. REPORTS ON FORM 8-K None. 58 59 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 28, 2001 By: /s/ ALFRED E. MANN ------------------------------------------- Alfred E. Mann Executive Chairman Date: March 28, 2001 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, Executive Chairman March 28, 2001 - ----------------------------------------------------- Alfred E. Mann /s/ TERRANCE H. GREGG Director, President, and Chief Operating Officer March 28, 2001 - ----------------------------------------------------- Terrance H. Gregg /s/ KEVIN R. SAYER Senior Vice President, Finance and Chief Financial March 28, 2001 - ----------------------------------------------------- Officer (Principal Financial and Accounting Officer) Kevin R. Sayer /s/ DAVID CHERNOF, M.D. Director March 28, 2001 - ----------------------------------------------------- David Chernof, M.D. /s/ CAROLYNE KAHLE DAVIS Director March 28, 2001 - ----------------------------------------------------- Carolyne Kahle Davis /s/ WILLIAM R. GRANT Director March 28, 2001 - ----------------------------------------------------- William R. Grant /s/ DAVID MACCALLUM Director March 28, 2001 - ----------------------------------------------------- David MacCallum /s/ JAY SKYLER, M.D. Director March 28, 2001 - ----------------------------------------------------- Jay Skyler, M.D. /s/ THOMAS R. TESTMAN Director March 28, 2001 - ----------------------------------------------------- Thomas R. Testman /s/ JOHN C. VILLFORTH Director March 28, 2001 - ----------------------------------------------------- John C. Villforth
59 60 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------- ----------- 2.1 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). 2.2 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). 2.3 Asset Purchase Agreement dated as of October 8, 1998, by and among Diabetes Support Systems, Inc., MiniMed Distribution Corp. and MiniMed Inc. (included as Exhibit 2.3 to the Company's Annual Report on the Form 10-K for the fiscal year ended January 1, 1999 which is incorporated herein by reference). 3(i).1 Amended and Restated Certificate of Incorporation (included as Exhibit 3(i).1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 3(ii).1 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(ii).2 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(ii).3 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended October 2, 1998 which is incorporated herein by reference). 3(ii).4 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 3(ii).5 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended October 1, 1999 which is incorporated herein by reference). 3(ii).6 Amendment to Bylaws of MiniMed Inc. adopted October 13, 1999. (included as Exhibit 3(ii).6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 3(ii).7 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).1 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 3(ii).8 Amendment to Bylaws of MiniMed Inc. (included as Exhibit 3(ii).2 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 4.1 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). 4.2 Amendment to Rights Agreement effective as of May 1, 1999 by and between MiniMed Inc. and Harris Trust Company of California (previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-3, Registration No. 333-80527 on June 11, 1999, and incorporated herein by reference). 10.1 First Amendment to Stock Pledge Agreement made by MiniMed in favor of ING (U.S.) Capital LLC dated as of June 24, 1999 (included as Exhibit 10.1 to the Company's Quarterly Report for the period ended October 1, 1999 which is incorporated herein by reference). 10.2 Ground Sublease by and between North Campus-University Park Development Corporation and First Security Bank, N.A. as Owner Trustee dated as of May 18, 1999 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.3 Parent Guaranty dated as of May 18, 1999 from MiniMed Inc. to First Security Bank, N.A. as Trustee (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.4 Master Lease between First Security Bank, N.A. as Trustee and MiniMed Development Corp. dated May 18, 1999 (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.5 Participation Agreement among MiniMed Development Corp. as Construction Agent and Lessee, MiniMed Inc. and First Security Bank, N.A. as Trustee, et. Al. dated May 18, 1999 (included as Exhibit 10.2 to the Company's
60 61 Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.6 First Amendment to Participation Agreement and Related Documents among MiniMed Development Corp. as Construction Agent and Lessee, MiniMed Inc. and First Security Bank, N.A. as Trustee, et. Al. dated October 30, 2000 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2000 which is incorporated herein by reference). 10.7 Revolving Credit Agreement dated as of May 18, 1999, among MiniMed Inc., the Revolving Credit Lenders and ING (U.S.) Capital LLC (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.8 Security Agreement dated as of May 18, 1999, among MiniMed Inc., certain subsidiaries of MiniMed Inc. and ING (U.S.) Capital LLC (included as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.9 Change of Control Agreement dated August 12, 1999 between MiniMed Inc. and Stephen Bowman (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended October 1, 1999 which is incorporated herein by reference). 10.10 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Alfred E. Mann (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.11 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Terrance H. Gregg (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.12 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Eric S. Kentor (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.13 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and David Morley (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.14 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Kevin R. Sayer (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended April 2, 1999 which is incorporated herein by reference). 10.15 Change of Control Agreement dated August 12, 2000 between MiniMed Inc. and Steven Schultz 10.16 Change of Control Agreement dated October 19, 2000 between MiniMed Inc. and Kevin Wells 10.17 Third Amended and Restated 1994 Stock Incentive Plan (Incorporated by reference from Exhibit 4.1 to Post Effective Amendment No. 2 to the Company's Registration Statement on Form S-8 filed by the Company on September 16, 1999, registration no. 33-95630). 10.18 MiniMed Inc. 1994 Stock Incentive Plan -- Form of Option. (included as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 10.19 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). 10.20 MiniMed Inc. 1992 Stock Incentive Plan -- Amendment to Form of Option (included as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which is incorporated herein by reference). 10.21 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). 10.22 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). 10.23 License Supply and Distribution Agreement between Eli Lilly and Company and MiniMed Inc. dated February 1, 1999 (included as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference).
61 62 Amendment to License Supply and Distribution Agreement between Eli Lilly and Company and MiniMed Inc. dated as 10.24 June 28, 1999 (included as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.25 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). 10.26 Development, License and Supply Agreement between Elan Pharmaceutical Technologies, Elan Pharma International Limited and MiniMed Inc. dated June 11, 1999 (included as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.27 License and Manufacturing Agreement between Elan Pharmaceutical Technologies, Elan Pharma International Limited and MiniMed Inc. dated June 11, 1999 (included as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 1999 which is incorporated herein by reference). 10.28 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). 10.29 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). 10.30 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). 10.31 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). 10.32 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). 10.33 Lease dated as of October 15, 2000 by and between MiniMed Inc. and Advanced Bionics Corporation. 10.34 Lease dated as of October 15, 2000 by and between MiniMed Inc. and AlleCure. 10.35 Agreement Regarding Implantable Pump Business dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.36 Implantable Pump License and Distribution Agreement dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.37 Glucose Sensor Option Agreement dated September 1, 1998, by and between Medical Research Group, LLC, a California limited liability company and MiniMed Inc., a Delaware corporation (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.38 Guarantee of Alfred E. Mann dated September 1, 1998 (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q which is incorporated by reference herein). 10.39 Amended and Restated Implantable Pump License and Distribution Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 10.40 Amendment to Glucose Sensor Option Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 10.41 Stock Purchase Agreement dated February 1, 2001, by and between Medical Research Group, Inc., a Delaware corporation and MiniMed Inc., a Delaware corporation. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP.
62 EX-10.15 2 v70622ex10-15.txt EXHIBIT 10.15 1 Exhibit 10.15 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 12th day of August, 2000 between MiniMed Inc., a Delaware corporation (the "Company") and Steven Schultz (the "Executive"). R E C I T A L S The Company considers it essential and in the best interest of its stockholders to foster the continuous employment of key management personnel. The Company further recognizes that, as in the case of many publicly held corporations, the possibility of a change of control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may create concerns for, and the distraction of, management personnel and may even result in departures which might have otherwise not have taken place, all to the detriment of the Company and its stockholders. The Company now desires to take steps to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company. A G R E E M E N T 1. Payment of Severance Benefits Upon Change of Control. In the event of a Change of Control of the Company (as defined in Section 3) during the two-year period from the date of this Agreement, the Executive shall be entitled to the benefits set forth in Section 2 (the "Severance Benefits"), but only if: (a) the Executive's employment by the Company or the successor owner of its business is terminated by the Company or such successor without Cause (as defined in Section 4) during the two years after the occurrence of the Change of Control; (b) the Executive terminates his or her employment with the Company or its successor (i) for Good Reason (as defined in Section 5) during the two years after the occurrence of the Change of Control or (ii) with or without Good Reason during the thirty day period after the first anniversary of the Change of Control provided that the Executive gives the Company at least sixty (60) days prior written notice of any such termination pursuant to this clause (ii); (c) the Executive's employment by the Company is terminated by the Company within three months prior to the Change of Control and such termination (i) was at the request of a third party who had taken steps to effect the Change of Control at the time of the request or (ii) otherwise arose in connection with or in anticipation of the Change of Control; or (d) the Executive terminates his or her employment with the Company for Good Reason within three months prior to the Change of Control and the event referred to in Section 5 (a), (b) or (c) constituting Good Reason (i) occurs at the request of a third party who had taken steps to effect the Change of Control at the time of the request or (ii) otherwise arose in connection with or in anticipation of the Change of Control. A termination of the Executive's employment coupled with an offer of employment by an Affiliate of the Company will not constitute a termination of employment for purposes of this Agreement unless the terms of employment offered would constitute Good Reason for the Executive to terminate his or her employment if they were imposed by the Company and then only if the Executive does not accept the offer. Any resignation by the Executive at the request of the Board of Directors shall be treated as a termination by the Company pursuant to (a) or (c) above (whichever is applicable) but shall not necessarily mean that the requirements of (c)(i) or (ii) have been satisfied. An "Affiliate" of the Company is an entity controlling, controlled by or under common control with the Company as defined in Rule 405 of the Securities and Exchange Commission under the Securities Act of 1933. The effective date of any termination of employment referred to in (a) or (c) above shall be the date specified by the Company or the successor owner of its business, and the effective date of any termination of employment referred to in (b) or (d) above shall be the date specified in the notice of termination delivered pursuant to Section 5 or, if no date is specified in the notice, the 2 date specified by the Executive orally or, if no such date is specified orally, the date the Executive ceases working for the Company or the successor owner of its business on a full time basis. 2. Definition of Severance Benefits. 2.1 Amount of Benefits. Except as provided in Section 2.2, the Severance Benefits referred to in Section 1 shall include and be limited to the following: (a) a lump sum payment equal to two times (2X) the Executive's annual base salary (at the greater of the rate in effect immediately prior to the Change of Control or the rate in effect immediately prior to the termination of his or her employment); (b) a lump sum payment equal to two times (2X) the Executive's Three-Year Average Bonus (as defined and calculated in accordance with Section 6); (c) a lump sum payment with respect to the Executive's bonus for the year of termination of employment as follows: (i) if the performance and other criteria for earning the Executive's bonus for the year of termination of employment have been established for the quarterly periods of that year and the criteria through the end of the last full quarter prior to the effective date of termination have been been satisfied (excluding any criterion that the Executive continued to be employed through the end of the year), then the pro rata portion of the full bonus that would have been earned for that year if the performance criteria for the full year were satisfied to the same extent as they have been satisfied for such interim period (such pro rata portion to be determined on the basis of the number of days in the year prior to the termination of employment as compared to the full year); (ii) if the performance and other criteria for earning the Executive's bonus for the year of termination of employment have been established as provided in (i) above and the criteria for earning any bonus through the end of the last full quarter prior to the effective date of termination have not been satisfied (and the Executive would be deemed to not be eligible for any portion of any bonus in connection therewith), then no payment pursuant to this Section 2.1 (c); (iii) if the performance and other criteria for earning the Executive's bonus are not established on a quarterly basis as provided in (i) and (ii) above and all performance and other criterial for earning the bonus for the full year have been satisfied as of the date of termination (other than the criterion that Executive continue to be employed through the end of the year), then a pro rata portion of the full bonus for that year determined as provided in (i) above; and (iv) if none of (i) through (iii) apply, then a prorated portion of the Executive's Three-Year Average Bonus (such prorata portion to be determined as provided in (i) above. (d) continuation of the Company's contribution to any health, disability and life insurance benefits being offered at the time of termination of his or her employment for the period from the effective date of termination of employment until the earlier of the date two (2) years thereafter or the date the Executive becomes employed on a full-time basis by another employer and is covered by a medical plan provided by such employer with no applicable exclusions for pre-existing conditions; (e) if the Executive has the right to use of a Company car or is granted a car allowance, continuation of such use or allowance for a period of one year after the effective date of termination of the Executive's employment or until such earlier date as the Executive becomes employed on a full time basis by another employer; and (f) acceleration of the exercise dates of all outstanding options to purchase shares of capital stock of the Company (or any other security or property as to which any such option may have become exercisable pursuant to its terms) held by the Executive and granted under stock option plans adopted by the Company for employees and others so that such options 2 3 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. The payments in (a), (b) and (c) above shall be made within thirty (30) days after the effective date of the termination of the Executive's employment. Notwithstanding (a) through (e) above, in the case of a termination of employment prior to the occurrence of a Change of Control, the Company shall have no obligation to pay or provide any Severance Benefits with respect to the period prior to the occurrence of the Change of Control. In such event, and to the extent Section 1 (c) or (d) applies, the amount of Severance Benefits shall be determined as if the Executive's employment terminated effective upon the occurrence of the Change of Control, except that, if any of the benefits referred to in (a) through (e) above have been paid or provided for all or any portion of the period between the termination of employment and the Change of Control, the amount of the Severance Benefits which would otherwise be paid shall be reduced by the amount of the benefits paid or provided for the period prior to the Change of Control. With respect to acceleration of the exercise dates of stock options pursuant to (f) above for an Executive whose termination of employment occurred prior to the occurrence of the Change of Control, such acceleration shall not occur until the Change of Control and any such stock option which shall have expired without being fully exercised during the period from the termination of employment to the date of the Change of Control shall be deemed to have been reinstated and extended to permit acceleration as contemplated by (f) above and exercise of the option concurrently with the consummation of any transaction constituting a Change of Control or, in the event of such a change referred to in Section 3.1 (a) or (d), within thirty days thereafter. Notwithstanding (b) and (c) above, the benefits set forth in those subparagraphs shall not be payable if the Executive had been advised, prior to the Change of Control, that he or she would not be eligible to earn a bonus for the year in which the termination of employment becomes effective unless (i) such advice was at the request of a third party who had taken steps to effect the Change of Control or (ii) otherwise arose in connection with the Change of Control. 2.2 Reduction of Amount of Severance Benefits In the event the Company determines that payment of any of the Severance Benefits would result in the imposition of any tax imposed by Section 4999 of the Internal Revenue Code of 1986 and the regulations thereunder (or any successor provisions), the Severance Benefits referred to in Section 2.1 (a) through (e) shall be reduced to such extent as the Company determines is necessary to avoid the imposition of any such tax. Such determination shall be made taking into account all other "parachute payments" (as defined in Section 280G of the Internal Revenue Code and the regulations thereunder or any successor provisions), to which the Executive would be entitled, including without limitation the acceleration of the exercise date of stock options. Such reductions shall first be made in the bonus payments referred to in Section 2.1(b) and thereafter, if necessary, to the bonus payments referred to in Section 2.1(c), the salary payments referred to in Section 2.1(a) and the other benefits referred to in Section 2.1(e) and (d), all in that order of priority. In no event shall any reductions in Severance Benefits pursuant to this Section 2.2 affect the Executive's rights under 2.1(f) or under any then existing stock option agreement or plan. If the Company determines that, after the reduction of the other Severance Benefits referred to above, the acceleration of the exercise dates of stock options pursuant to 2.1(f) above or pursuant to the terms of the option agreements or plans themselves would still result in the imposition of a tax imposed by Section 4999 of the Internal Revenue Code, then all of the reductions in Severance Benefits referred to in Section 2.1 (a) through (e) shall be made and there shall be no further reduction in Severance Benefits except to the extent that the Executive elects in writing, prior to the delivery of any notice of termination of his or her employment, to not have any stock options so accelerate. 2.3 Resolution of Disagreements. The Company shall make its determination as to whether any reduction in Severance Benefits is required pursuant to Section 2.2 within 15 days after the termination of the employment of the Executive and again promptly after the Executive exercises any stock options and shall deliver to the Executive written notice of the determination together with the Company's detailed calculations supporting its conclusion. If the Executive does not agree with the Company's determination, he or she shall notify the Company in writing of that disagreement within 30 days after receipt of the Company's notice and detailed calculations. Failure to give such notice of disagreement shall be deemed to constitute acceptance of the determination by the Company, and such determination shall become final and binding on the parties. The notice by the Executive shall set forth in reasonable detail why the Executive disagrees with the determination made by the Company and shall be accompanied by the Executive's detailed calculations supporting his or her conclusion. If the Company and the Executive have not resolved their disagreement within ten days after the Company receives the Executive's notice and detailed calculations, the Company and the Executive will each have the right, acting without the other, to refer the matter to the firm then serving as the independent certified public accountants of the Company, whose determination shall be final 3 4 and binding on both parties. The Company will endeavor to cause the accounting firm to give both the Executive and the Company written notice of its determination accompanied by its detailed calculations. If (i) neither party refers the dispute to the independent accounting firm within thirty days after the Company receives the Executive's notice, (ii) the Company does not then have a firm serving as its independent certified public accountants or (iii) the firm then serving in that capacity refuses to resolve the matter or fails to provide written notice of its determination accompanied by its detailed calculations within 30 days after the matter is referred to it, then either party will have the right to commence an arbitration pursuant to Section 13 to resolve the matter. The fees and expenses of the accounting firm will be paid by the Company. If the Company determines that payment of the full Severance Benefits will result in the imposition of a tax as provided above, the Company will have the right to withhold from the payment of Severance Benefits the amount of any reduction determined by it in accordance with Section 2.2. If the Executive disagrees with the determination by the Company, the Company shall have the right to continue to withhold the payments of such amounts until the matter is finally resolved. If such resolution indicates that the Company's determination was incorrect, the Company shall promptly pay to the Executive any amount of Severance Benefits which should not have been withheld, with interest for the period that the payment was withheld at the reference rate then in effect of the Bank of America National Trust and Savings Association. 4 5 3. Definition of Change of Control. 3.1 Events Constituting Change of Control. For purposes of this Agreement, a "Change of Control" of the Company shall be deemed to have occurred if any one of the following events occurs: (a) except as provided in Section 3.3, the acquisition by any person or group of beneficial ownership (as defined in Section 3.5) of more than 30% of the outstanding shares of Common Stock of the Company or, if there are then outstanding any other voting securities of the Company, such acquisition of 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; (b) the Company sells all or substantially all of its assets (or consummates any transaction having a similar effect) or the Company merges or consolidates with another entity or completes a reorganization except as provided in Section 3.4; (c) the Company is liquidated; or (d) The Board of Directors of the Company (if the Company continues to own its business) or the board of directors or comparable governing body of any successor owner of its business (as a result of a transaction which is not itself a Change of Control) consists of a majority of directors or members who are not Incumbent Directors (as defined in Section 3.2).. Any purchase or redemption of outstanding shares of Common Stock or other voting securities by the Company resulting in an increase in the percentage of outstanding shares or other voting securities beneficially owned by any person or group shall be deemed to constitute a reorganization pursuant to (b) above except as provided in Section 3.4. 3.2 Definition of Incumbent Directors. For purposes of Section 3.1 and subject to the last sentence of this Section 3.2, "Incumbent Directors" includes only those persons who are: (i) serving as directors of the Company on the date of this Agreement or, (ii) elected by a majority of the directors who then constitute Incumbent Directors or selected by a majority of such directors to be nominated for election by the stockholders and are elected. In no event, however, shall any director whose election to office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by on behalf of a person or entity other than the Board of Directors of the Company be an Incumbent Director. 3.3 Exception for Certain Acquisitions of Stock. Section 3.1(a) shall not include the acquisition of beneficial ownership of Common Stock or other voting securities of the Company (a) by the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company. (b) by Alfred E. Mann, (c) by any person or entity as a result of the death of Mr. Mann if the shares acquired were beneficially owned by Mr. Mann immediately before his death; or (d) by any person or entity during Mr. Mann's lifetime if the shares acquired were beneficially owned by Mr. Mann immediately prior to their acquisition and the acquisition is a charitable contribution or a transfer to a trust, partnership, corporation or other entity in which Mr. Mann's family and/or any charity or charities own a majority of the beneficial interests. 5 6 3.4 Exceptions for Certain Reorganizations. Section 3.1(b) shall not apply to any transaction described therein if the holders of the voting securities of the Company outstanding immediately prior to the transaction own immediately after the transaction in approximately the same proportions 70% or more of the combined voting power of the voting securities of the entity purchasing the assets or surviving the merger or consolidation or, in the case of a reorganization, 70% or more of the combined voting power of the voting securities of the Company. No increase in the percentage of outstanding shares or other voting securities beneficially owned by Alfred E. Mann resulting from any redemption of shares or other voting securities by the Company shall result in a Change of Control pursuant to Section 3.1. 3.5 Definition of Person, Acquisition, Group and Beneficial Ownership. For purposes of this Agreement the term "person" shall have the meaning set forth in the Securities Exchange Act of 1934 and the terms "acquisition," "group, " and "beneficial ownership" shall have the meanings set forth in Rules 13d-3 and 13d-5 of the Rules of the Security and Exchange Commission adopted under the Securities Exchange Act of 1934 except that shares which a person or group has the right to acquire shall be deemed beneficially owned whether or not that right is presently exercisable and regardless of when it becomes exercisable. 4. Definition of Termination for Cause. The Executive's employment shall be deemed to have been terminated for "Cause" if such employment terminates as a result of: (a) the death of the Executive; (b) the Executive becoming unable to perform the essential duties of his or her position, even with reasonable accommodation, as a result of any physical or mental condition for a period of more than ninety (90) consecutive days or for ninety (90) nonconsecutive days in any three hundred sixty five (365) day period; (c) the Executive reaching a mandatory retirement age established by the Company before the Change of Control and not in anticipation thereof; or (d) the Executive's gross negligence; willful misconduct; breach of fiduciary duty to the Company involving self-dealing or personal profits or conviction, entry of a plea of guilty or nolo contendre to a charge of a felony or other crime involving moral turpitude. 5. Definition of "Good Reason." For purposes of this Agreement the Executive shall be deemed to have terminated his or her employment for "Good Reason" if such a termination results from: (a) the Company substantially reducing or increasing the duties, responsibilities or volume of work of the Executive compared to those he or she had in the position he or she held immediately prior to the Change of Control except in connection with a promotion accepted by the Executive; (b) the Company requiring the Executive to have as his or her principal location of work any location which is not within 35 miles of either the Executive's principal location of work or the Executive's residence immediately prior to the Change of Control; (c) the Company (i) reducing the base salary of the Executive, (iiiii) reducing the employee benefits available to the Executive (not including bonuses or stock options) to an extent which is material to all such benefits taken as a whole, or (iii) changing any objective criteria for calculating the annual bonus that can be earned by the Executive or, if no such objective criteria exist, changing the amount of the annual bonus such that the Executive cannot reasonably be expected to earn in salary and bonus combined at least 90% of the average amount he or she had earned in salary and bonus combined for the last three full fiscal years preceding the year for which the bonus is changed or such lesser number of full fiscal years during which the Executive has been employed by the Company; (d) the Company reducing the employee benefits available to the Executive (not including bonuses or stock options) to an extent which is material to all such benefits taken as a whole; or (e) the Company failing to require a successor to expressly assume this Agreement as required in Section 9 below unless such assumption occurs and is effective by operation of law. 6 7 Notwithstanding the foregoing, none of the events referred to in (a) through (c) above shall constitute Good Reason unless the Executive gives written notice to the Company of his or her election to terminate his or her employment for such reason within 90 days after he or she becomes aware of the existence of facts or circumstances constituting Good Reason. Such notice shall set forth in reasonable detail the facts and circumstances constituting the Good Reason and, if the Good Reason is a curable condition, shall provide the Company with 30 days to cure such condition. The notice shall also specify the date when the termination of employment is to become effective (if the Good Reason is not curable or is curable but not cured within the 30 days), which date shall be not less than 60 days and not more than 180 days from the date the notice is given. 6. Definition of "Three-Year Average Bonus." For purposes of determining the amount of the Severance Benefit referred to in Section 2.1 (b) and (c) (subject to the last paragraph of Section 2.1), an Executive's "Three-Year Average Bonus" shall be deemed to be the average of the bonuses paid for the three most recent full fiscal years preceding the date of termination of the Executive's employment, or, if the Executive was not an executive officer of the Company during such three year period or could not have earned a bonus during such three year period, then (subject to the last paragraph of Section 2.1) the average annual bonus for such shorter time that he or she was an executive officer of the Company and could have earned a bonus. Notwithstanding the foregoing, if all performance and other criteria for earning the bonus for the year in which termination of the Executive's employment occurs have been satisfied as of the effective date of such termination (other than the criterion that the Executive continued to be employed), then the full bonus for that year and the two most recent full fiscal years shall be averaged to determine the Three-Year Average Bonus. If the two year period referred to in Section 2.1(b) includes any partial fiscal year of the Company, the bonus for such partial fiscal year shall be calculated by prorating the Three Year Average Bonus based on the number of says in the partial fiscal year. 7. Employment At Will. The employment relationship contemplated by this Agreement is an at will relationship under which either the Executive or the Company has the right at any time to terminate the employment relationship with or without Cause or Good Reason and without notice, subject only to the payment of the Severance Benefits set forth in Section 2 to the extent that they become payable under the terms of this Agreement. Nothing in this Agreement is intended to create a term of employment for a period of years or otherwise. 8. Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any Severance Benefit provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, except as provided in Section 2.1(d) and (e). Notwithstanding the foregoing, in the event that the Executive is entitled, by operation of any applicable law, to unemployment compensation benefits or benefits under the Worker Adjustment and Retraining Act of 1988 (known as the "WARN" Act) in connection with the termination of his or her employment in addition to those required to be paid to him or her under this Agreement, then to the extent permitted by applicable law governing severance payments or notice of termination of employment, the Company shall be entitled to offset against the amounts payable hereunder the amounts of any such mandated payments. 9. Assumption of Agreement. The Company will require any successor (whether by purchase of assets, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform all of the obligations of the Company under this Agreement (including the obligation to cause any subsequent successor to also assume the obligations of this Agreement) unless such assumption occurs by operation of law. Nothing in this Section 9 is intended, however, to require that a person or group referred to in Section 3.1(a) as being the beneficial owner of shares of stock of the Company assume the obligations under this Agreement as a result of such stock ownership. 10. Assignment and Successors in Interest. This Agreement is personal to the Executive and is not assignable by him or her. This Agreement shall inure to the benefit of and be enforceable by the Executive and his or her personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees, and is binding upon the successors and assigns of the Company. 11. Withholding Taxes. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 12. Covenants of Executive. During the period that Executive is receiving payments described in Section 1(a) above, he or she will not actively solicit any employees of the Company or its Affiliates to accept employment for any other person or entity and, during that period and thereafter, will not disclose to any person or entity any information concerning the Company or its 7 8 business that the Executive knows to be of a confidential or non-public nature except as necessary to enforce this Agreement or as required by law. "Affiliate" is defined as any entity controlling, controlled by or under common control with, the Company within the meaning of Rule 405 of the Securities and Exchange Commission under the Securities Act of 1933. 13. Notice. All notices, requests, demands and other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered, in the case of the Company to an executive officer other than the Executive, or when mailed by United States mail, postage prepaid, return receipt requested, addressed, in the case of the Company to 12744 San Fernando Road, Sylmar, California 91342 or, in the case of the Executive to the address set forth beneath his or her signature hereto, or such other address as may be provided by either party as to himself, herself or itself in the manner set forth above. 14. Arbitration. Except as provided in Section 2.3, all disputes or controversies arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in Los Angeles County, California in accordance with the rules of the American Arbitration Association then in effect, provided that the arbitrator or arbitrators shall decide the dispute or controversy in accordance with California law as applied to this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California applicable to the agreements between residents of California to be performed entirely within California. 16. Attorneys' Fees. In the event of any litigation or arbitration arising out of or relating to this Agreement, the prevailing party shall be entitled to recover his, her or its reasonable attorneys' fees incurred in connection therewith. 17. Entire Agreement. This Agreement sets forth the entire agreement of the parties with respect to the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, commitments, communications, representations, or warranties, whether oral or written except that nothing in this Agreement shall amend or supersede any employment or stock option agreement in effect on the date hereof. 18. Waiver. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by parties hereto. No waiver by either party hereto at any time of any breach by the other party or of any right or remedy under this Agreement shall constitute a waiver of any other breach, right or remedy, whether or not similar in nature. 19. Counterparts. This Agreement may be executed in two counterparts each of which shall be deemed an original but both of which together shall constitute one and the same instrument. MINIMED INC. By: /s/ ALFRED E. MANN /s/ STEVEN SCHULTZ -------------------------------- ------------------------------- Alfred E. Mann Steven Schultz 8 EX-10.16 3 v70622ex10-16.txt EXHIBIT 10.16 1 Exhibit 10.16 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 19th day of October, 2000 between MiniMed Inc., a Delaware corporation (the "Company") and Kevin Wells (the "Executive"). R E C I T A L S The Company considers it essential and in the best interest of its stockholders to foster the continuous employment of key management personnel. The Company further recognizes that, as in the case of many publicly held corporations, the possibility of a change of control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may create concerns for, and the distraction of, management personnel and may even result in departures which might have otherwise not have taken place, all to the detriment of the Company and its stockholders. The Company now desires to take steps to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company. A G R E E M E N T 1. Payment of Severance Benefits Upon Change of Control. In the event of a Change of Control of the Company (as defined in Section 3) during the two-year period from the date of this Agreement, the Executive shall be entitled to the benefits set forth in Section 2 (the "Severance Benefits"), but only if: (a) the Executive's employment by the Company or the successor owner of its business is terminated by the Company or such successor without Cause (as defined in Section 4) during the two years after the occurrence of the Change of Control; (b) the Executive terminates his or her employment with the Company or its successor (i) for Good Reason (as defined in Section 5) during the two years after the occurrence of the Change of Control or (ii) with or without Good Reason during the thirty day period after the first anniversary of the Change of Control provided that the Executive gives the Company at least sixty (60) days prior written notice of any such termination pursuant to this clause (ii); (c) the Executive's employment by the Company is terminated by the Company within three months prior to the Change of Control and such termination (i) was at the request of a third party who had taken steps to effect the Change of Control at the time of the request or (ii) otherwise arose in connection with or in anticipation of the Change of Control; or (d) the Executive terminates his or her employment with the Company for Good Reason within three months prior to the Change of Control and the event referred to in Section 5 (a), (b) or (c) constituting Good Reason (i) occurs at the request of a third party who had taken steps to effect the Change of Control at the time of the request or (ii) otherwise arose in connection with or in anticipation of the Change of Control. A termination of the Executive's employment coupled with an offer of employment by an Affiliate of the Company will not constitute a termination of employment for purposes of this Agreement unless the terms of employment offered would constitute Good Reason for the Executive to terminate his or her employment if they were imposed by the Company and then only if the Executive does not accept the offer. Any resignation by the Executive at the request of the Board of Directors shall be treated as a termination by the Company pursuant to (a) or (c) above (whichever is applicable) but shall not necessarily mean that the requirements of (c)(i) or (ii) have been satisfied. An "Affiliate" of the Company is an entity controlling, controlled by or under common control with the Company as defined in Rule 405 of the Securities and Exchange Commission under the Securities Act of 1933. The effective date of any termination of employment referred to in (a) or (c) above shall be the date specified by the Company or the successor owner of its business, and the effective date of any termination of employment referred to in (b) or (d) above shall be the date specified in the notice of termination delivered pursuant to Section 5 or, if no date is specified in the notice, the 2 date specified by the Executive orally or, if no such date is specified orally, the date the Executive ceases working for the Company or the successor owner of its business on a full time basis. 2. Definition of Severance Benefits. 2.1 Amount of Benefits. Except as provided in Section 2.2, the Severance Benefits referred to in Section 1 shall include and be limited to the following: (a) a lump sum payment equal to two times (2X) the Executive's annual base salary (at the greater of the rate in effect immediately prior to the Change of Control or the rate in effect immediately prior to the termination of his or her employment); (b) a lump sum payment equal to two times (2X) the Executive's Three-Year Average Bonus (as defined and calculated in accordance with Section 6); (c) a lump sum payment with respect to the Executive's bonus for the year of termination of employment as follows: (i) if the performance and other criteria for earning the Executive's bonus for the year of termination of employment have been established for the quarterly periods of that year and the criteria through the end of the last full quarter prior to the effective date of termination have been been satisfied (excluding any criterion that the Executive continued to be employed through the end of the year), then the pro rata portion of the full bonus that would have been earned for that year if the performance criteria for the full year were satisfied to the same extent as they have been satisfied for such interim period (such pro rata portion to be determined on the basis of the number of days in the year prior to the termination of employment as compared to the full year); (ii) if the performance and other criteria for earning the Executive's bonus for the year of termination of employment have been established as provided in (i) above and the criteria for earning any bonus through the end of the last full quarter prior to the effective date of termination have not been satisfied (and the Executive would be deemed to not be eligible for any portion of any bonus in connection therewith), then no payment pursuant to this Section 2.1 (c); (iii) if the performance and other criteria for earning the Executive's bonus are not established on a quarterly basis as provided in (i) and (ii) above and all performance and other criterial for earning the bonus for the full year have been satisfied as of the date of termination (other than the criterion that Executive continue to be employed through the end of the year), then a pro rata portion of the full bonus for that year determined as provided in (i) above; and (iv) if none of (i) through (iii) apply, then a prorated portion of the Executive's Three-Year Average Bonus (such prorata portion to be determined as provided in (i) above. (d) continuation of the Company's contribution to any health, disability and life insurance benefits being offered at the time of termination of his or her employment for the period from the effective date of termination of employment until the earlier of the date two (2) years thereafter or the date the Executive becomes employed on a full-time basis by another employer and is covered by a medical plan provided by such employer with no applicable exclusions for pre-existing conditions; (e) if the Executive has the right to use of a Company car or is granted a car allowance, continuation of such use or allowance for a period of one year after the effective date of termination of the Executive's employment or until such earlier date as the Executive becomes employed on a full time basis by another employer; and (f) acceleration of the exercise dates of all outstanding options to purchase shares of capital stock of the Company (or any other security or property as to which any such option may have become exercisable pursuant to its terms) held by the Executive and granted under stock option plans adopted by the Company for employees and others so that such options 2 3 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. The payments in (a), (b) and (c) above shall be made within thirty (30) days after the effective date of the termination of the Executive's employment. Notwithstanding (a) through (e) above, in the case of a termination of employment prior to the occurrence of a Change of Control, the Company shall have no obligation to pay or provide any Severance Benefits with respect to the period prior to the occurrence of the Change of Control. In such event, and to the extent Section 1 (c) or (d) applies, the amount of Severance Benefits shall be determined as if the Executive's employment terminated effective upon the occurrence of the Change of Control, except that, if any of the benefits referred to in (a) through (e) above have been paid or provided for all or any portion of the period between the termination of employment and the Change of Control, the amount of the Severance Benefits which would otherwise be paid shall be reduced by the amount of the benefits paid or provided for the period prior to the Change of Control. With respect to acceleration of the exercise dates of stock options pursuant to (f) above for an Executive whose termination of employment occurred prior to the occurrence of the Change of Control, such acceleration shall not occur until the Change of Control and any such stock option which shall have expired without being fully exercised during the period from the termination of employment to the date of the Change of Control shall be deemed to have been reinstated and extended to permit acceleration as contemplated by (f) above and exercise of the option concurrently with the consummation of any transaction constituting a Change of Control or, in the event of such a change referred to in Section 3.1 (a) or (d), within thirty days thereafter. Notwithstanding (b) and (c) above, the benefits set forth in those subparagraphs shall not be payable if the Executive had been advised, prior to the Change of Control, that he or she would not be eligible to earn a bonus for the year in which the termination of employment becomes effective unless (i) such advice was at the request of a third party who had taken steps to effect the Change of Control or (ii) otherwise arose in connection with the Change of Control. 2.2 Reduction of Amount of Severance Benefits In the event the Company determines that payment of any of the Severance Benefits would result in the imposition of any tax imposed by Section 4999 of the Internal Revenue Code of 1986 and the regulations thereunder (or any successor provisions), the Severance Benefits referred to in Section 2.1 (a) through (e) shall be reduced to such extent as the Company determines is necessary to avoid the imposition of any such tax. Such determination shall be made taking into account all other "parachute payments" (as defined in Section 280G of the Internal Revenue Code and the regulations thereunder or any successor provisions), to which the Executive would be entitled, including without limitation the acceleration of the exercise date of stock options. Such reductions shall first be made in the bonus payments referred to in Section 2.1(b) and thereafter, if necessary, to the bonus payments referred to in Section 2.1(c), the salary payments referred to in Section 2.1(a) and the other benefits referred to in Section 2.1(e) and (d), all in that order of priority. In no event shall any reductions in Severance Benefits pursuant to this Section 2.2 affect the Executive's rights under 2.1(f) or under any then existing stock option agreement or plan. If the Company determines that, after the reduction of the other Severance Benefits referred to above, the acceleration of the exercise dates of stock options pursuant to 2.1(f) above or pursuant to the terms of the option agreements or plans themselves would still result in the imposition of a tax imposed by Section 4999 of the Internal Revenue Code, then all of the reductions in Severance Benefits referred to in Section 2.1 (a) through (e) shall be made and there shall be no further reduction in Severance Benefits except to the extent that the Executive elects in writing, prior to the delivery of any notice of termination of his or her employment, to not have any stock options so accelerate. 2.3 Resolution of Disagreements. The Company shall make its determination as to whether any reduction in Severance Benefits is required pursuant to Section 2.2 within 15 days after the termination of the employment of the Executive and again promptly after the Executive exercises any stock options and shall deliver to the Executive written notice of the determination together with the Company's detailed calculations supporting its conclusion. If the Executive does not agree with the Company's determination, he or she shall notify the Company in writing of that disagreement within 30 days after receipt of the Company's notice and detailed calculations. Failure to give such notice of disagreement shall be deemed to constitute acceptance of the determination by the Company, and such determination shall become final and binding on the parties. The notice by the Executive shall set forth in reasonable detail why the Executive disagrees with the determination made by the Company and shall be accompanied by the Executive's detailed calculations supporting his or her conclusion. If the Company and the Executive have not resolved their disagreement within ten days after the Company receives the Executive's notice and detailed calculations, the Company and the Executive will each have the right, acting without the other, to refer the matter to the firm then serving as the independent certified public accountants of the Company, whose determination shall be final 3 4 and binding on both parties. The Company will endeavor to cause the accounting firm to give both the Executive and the Company written notice of its determination accompanied by its detailed calculations. If (i) neither party refers the dispute to the independent accounting firm within thirty days after the Company receives the Executive's notice, (ii) the Company does not then have a firm serving as its independent certified public accountants or (iii) the firm then serving in that capacity refuses to resolve the matter or fails to provide written notice of its determination accompanied by its detailed calculations within 30 days after the matter is referred to it, then either party will have the right to commence an arbitration pursuant to Section 13 to resolve the matter. The fees and expenses of the accounting firm will be paid by the Company. If the Company determines that payment of the full Severance Benefits will result in the imposition of a tax as provided above, the Company will have the right to withhold from the payment of Severance Benefits the amount of any reduction determined by it in accordance with Section 2.2. If the Executive disagrees with the determination by the Company, the Company shall have the right to continue to withhold the payments of such amounts until the matter is finally resolved. If such resolution indicates that the Company's determination was incorrect, the Company shall promptly pay to the Executive any amount of Severance Benefits which should not have been withheld, with interest for the period that the payment was withheld at the reference rate then in effect of the Bank of America National Trust and Savings Association. 4 5 3. Definition of Change of Control. 3.1 Events Constituting Change of Control. For purposes of this Agreement, a "Change of Control" of the Company shall be deemed to have occurred if any one of the following events occurs: (a) except as provided in Section 3.3, the acquisition by any person or group of beneficial ownership (as defined in Section 3.5) of more than 30% of the outstanding shares of Common Stock of the Company or, if there are then outstanding any other voting securities of the Company, such acquisition of 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; (b) the Company sells all or substantially all of its assets (or consummates any transaction having a similar effect) or the Company merges or consolidates with another entity or completes a reorganization except as provided in Section 3.4; (c) the Company is liquidated; or (d) The Board of Directors of the Company (if the Company continues to own its business) or the board of directors or comparable governing body of any successor owner of its business (as a result of a transaction which is not itself a Change of Control) consists of a majority of directors or members who are not Incumbent Directors (as defined in Section 3.2).. Any purchase or redemption of outstanding shares of Common Stock or other voting securities by the Company resulting in an increase in the percentage of outstanding shares or other voting securities beneficially owned by any person or group shall be deemed to constitute a reorganization pursuant to (b) above except as provided in Section 3.4. 3.2 Definition of Incumbent Directors. For purposes of Section 3.1 and subject to the last sentence of this Section 3.2, "Incumbent Directors" includes only those persons who are: (i) serving as directors of the Company on the date of this Agreement or, (ii) elected by a majority of the directors who then constitute Incumbent Directors or selected by a majority of such directors to be nominated for election by the stockholders and are elected. In no event, however, shall any director whose election to office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by on behalf of a person or entity other than the Board of Directors of the Company be an Incumbent Director. 3.3 Exception for Certain Acquisitions of Stock. Section 3.1(a) shall not include the acquisition of beneficial ownership of Common Stock or other voting securities of the Company (a) by the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company. (b) by Alfred E. Mann, (c) by any person or entity as a result of the death of Mr. Mann if the shares acquired were beneficially owned by Mr. Mann immediately before his death; or (d) by any person or entity during Mr. Mann's lifetime if the shares acquired were beneficially owned by Mr. Mann immediately prior to their acquisition and the acquisition is a charitable contribution or a transfer to a trust, partnership, corporation or other entity in which Mr. Mann's family and/or any charity or charities own a majority of the beneficial interests. 5 6 3.4 Exceptions for Certain Reorganizations. Section 3.1(b) shall not apply to any transaction described therein if the holders of the voting securities of the Company outstanding immediately prior to the transaction own immediately after the transaction in approximately the same proportions 70% or more of the combined voting power of the voting securities of the entity purchasing the assets or surviving the merger or consolidation or, in the case of a reorganization, 70% or more of the combined voting power of the voting securities of the Company. No increase in the percentage of outstanding shares or other voting securities beneficially owned by Alfred E. Mann resulting from any redemption of shares or other voting securities by the Company shall result in a Change of Control pursuant to Section 3.1. 3.5 Definition of Person, Acquisition, Group and Beneficial Ownership. For purposes of this Agreement the term "person" shall have the meaning set forth in the Securities Exchange Act of 1934 and the terms "acquisition," "group, " and "beneficial ownership" shall have the meanings set forth in Rules 13d-3 and 13d-5 of the Rules of the Security and Exchange Commission adopted under the Securities Exchange Act of 1934 except that shares which a person or group has the right to acquire shall be deemed beneficially owned whether or not that right is presently exercisable and regardless of when it becomes exercisable. 4. Definition of Termination for Cause. The Executive's employment shall be deemed to have been terminated for "Cause" if such employment terminates as a result of: (a) the death of the Executive; (b) the Executive becoming unable to perform the essential duties of his or her position, even with reasonable accommodation, as a result of any physical or mental condition for a period of more than ninety (90) consecutive days or for ninety (90) nonconsecutive days in any three hundred sixty five (365) day period; (c) the Executive reaching a mandatory retirement age established by the Company before the Change of Control and not in anticipation thereof; or (d) the Executive's gross negligence; willful misconduct; breach of fiduciary duty to the Company involving self-dealing or personal profits or conviction, entry of a plea of guilty or nolo contendre to a charge of a felony or other crime involving moral turpitude. 5. Definition of "Good Reason." For purposes of this Agreement the Executive shall be deemed to have terminated his or her employment for "Good Reason" if such a termination results from: (a) the Company substantially reducing or increasing the duties, responsibilities or volume of work of the Executive compared to those he or she had in the position he or she held immediately prior to the Change of Control except in connection with a promotion accepted by the Executive; (b) the Company requiring the Executive to have as his or her principal location of work any location which is not within 35 miles of either the Executive's principal location of work or the Executive's residence immediately prior to the Change of Control; (c) the Company (i) reducing the base salary of the Executive, (iiiii) reducing the employee benefits available to the Executive (not including bonuses or stock options) to an extent which is material to all such benefits taken as a whole, or (iii) changing any objective criteria for calculating the annual bonus that can be earned by the Executive or, if no such objective criteria exist, changing the amount of the annual bonus such that the Executive cannot reasonably be expected to earn in salary and bonus combined at least 90% of the average amount he or she had earned in salary and bonus combined for the last three full fiscal years preceding the year for which the bonus is changed or such lesser number of full fiscal years during which the Executive has been employed by the Company; (d) the Company reducing the employee benefits available to the Executive (not including bonuses or stock options) to an extent which is material to all such benefits taken as a whole; or (e) the Company failing to require a successor to expressly assume this Agreement as required in Section 9 below unless such assumption occurs and is effective by operation of law. 6 7 Notwithstanding the foregoing, none of the events referred to in (a) through (c) above shall constitute Good Reason unless the Executive gives written notice to the Company of his or her election to terminate his or her employment for such reason within 90 days after he or she becomes aware of the existence of facts or circumstances constituting Good Reason. Such notice shall set forth in reasonable detail the facts and circumstances constituting the Good Reason and, if the Good Reason is a curable condition, shall provide the Company with 30 days to cure such condition. The notice shall also specify the date when the termination of employment is to become effective (if the Good Reason is not curable or is curable but not cured within the 30 days), which date shall be not less than 60 days and not more than 180 days from the date the notice is given. 6. Definition of "Three-Year Average Bonus." For purposes of determining the amount of the Severance Benefit referred to in Section 2.1 (b) and (c) (subject to the last paragraph of Section 2.1), an Executive's "Three-Year Average Bonus" shall be deemed to be the average of the bonuses paid for the three most recent full fiscal years preceding the date of termination of the Executive's employment, or, if the Executive was not an executive officer of the Company during such three year period or could not have earned a bonus during such three year period, then (subject to the last paragraph of Section 2.1) the average annual bonus for such shorter time that he or she was an executive officer of the Company and could have earned a bonus. Notwithstanding the foregoing, if all performance and other criteria for earning the bonus for the year in which termination of the Executive's employment occurs have been satisfied as of the effective date of such termination (other than the criterion that the Executive continued to be employed), then the full bonus for that year and the two most recent full fiscal years shall be averaged to determine the Three-Year Average Bonus. If the two year period referred to in Section 2.1(b) includes any partial fiscal year of the Company, the bonus for such partial fiscal year shall be calculated by prorating the Three Year Average Bonus based on the number of says in the partial fiscal year. 7. Employment At Will. The employment relationship contemplated by this Agreement is an at will relationship under which either the Executive or the Company has the right at any time to terminate the employment relationship with or without Cause or Good Reason and without notice, subject only to the payment of the Severance Benefits set forth in Section 2 to the extent that they become payable under the terms of this Agreement. Nothing in this Agreement is intended to create a term of employment for a period of years or otherwise. 8. Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any Severance Benefit provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, except as provided in Section 2.1(d) and (e). Notwithstanding the foregoing, in the event that the Executive is entitled, by operation of any applicable law, to unemployment compensation benefits or benefits under the Worker Adjustment and Retraining Act of 1988 (known as the "WARN" Act) in connection with the termination of his or her employment in addition to those required to be paid to him or her under this Agreement, then to the extent permitted by applicable law governing severance payments or notice of termination of employment, the Company shall be entitled to offset against the amounts payable hereunder the amounts of any such mandated payments. 9. Assumption of Agreement. The Company will require any successor (whether by purchase of assets, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform all of the obligations of the Company under this Agreement (including the obligation to cause any subsequent successor to also assume the obligations of this Agreement) unless such assumption occurs by operation of law. Nothing in this Section 9 is intended, however, to require that a person or group referred to in Section 3.1(a) as being the beneficial owner of shares of stock of the Company assume the obligations under this Agreement as a result of such stock ownership. 10. Assignment and Successors in Interest. This Agreement is personal to the Executive and is not assignable by him or her. This Agreement shall inure to the benefit of and be enforceable by the Executive and his or her personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees, and is binding upon the successors and assigns of the Company. 11. Withholding Taxes. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 12. Covenants of Executive. During the period that Executive is receiving payments described in Section 1(a) above, he or she will not actively solicit any employees of the Company or its Affiliates to accept employment for any other person or entity and, during that period and thereafter, will not disclose to any person or entity any information concerning the Company or its 7 8 business that the Executive knows to be of a confidential or non-public nature except as necessary to enforce this Agreement or as required by law. "Affiliate" is defined as any entity controlling, controlled by or under common control with, the Company within the meaning of Rule 405 of the Securities and Exchange Commission under the Securities Act of 1933. 13. Notice. All notices, requests, demands and other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered, in the case of the Company to an executive officer other than the Executive, or when mailed by United States mail, postage prepaid, return receipt requested, addressed, in the case of the Company to 12744 San Fernando Road, Sylmar, California 91342 or, in the case of the Executive to the address set forth beneath his or her signature hereto, or such other address as may be provided by either party as to himself, herself or itself in the manner set forth above. 14. Arbitration. Except as provided in Section 2.3, all disputes or controversies arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in Los Angeles County, California in accordance with the rules of the American Arbitration Association then in effect, provided that the arbitrator or arbitrators shall decide the dispute or controversy in accordance with California law as applied to this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California applicable to the agreements between residents of California to be performed entirely within California. 16. Attorneys' Fees. In the event of any litigation or arbitration arising out of or relating to this Agreement, the prevailing party shall be entitled to recover his, her or its reasonable attorneys' fees incurred in connection therewith. 17. Entire Agreement. This Agreement sets forth the entire agreement of the parties with respect to the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, commitments, communications, representations, or warranties, whether oral or written except that nothing in this Agreement shall amend or supersede any employment or stock option agreement in effect on the date hereof. 18. Waiver. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by parties hereto. No waiver by either party hereto at any time of any breach by the other party or of any right or remedy under this Agreement shall constitute a waiver of any other breach, right or remedy, whether or not similar in nature. 19. Counterparts. This Agreement may be executed in two counterparts each of which shall be deemed an original but both of which together shall constitute one and the same instrument. MINIMED INC. By: /s/ ALFRED E. MANN /s/ KEVIN WELLS -------------------------------- ------------------------------- Alfred E. Mann Kevin Wells 8 EX-10.33 4 v70622ex10-33.txt EXHIBIT 10.33 1 Exhibit 10.33 INDUSTRIAL LEASE THIS LEASE is made as of October 15, 2000 by and between MiniMed Inc., a Delaware corporation, hereafter called "Landlord," and Advanced Bionics Corporation, Delaware corporation, hereinafter called "Tenant." ARTICLE I. BASIC LEASE PROVISIONS Each reference in this Lease to the "Basic Lease Provisions" shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease. 1. Premises: The Premises are more particularly described in Section 2.1. Address of Building: 12744 San Fernando Road, Sylmar, CA 91342 2. Use of Premises: General office 3. Estimated Commencement Date: November 1, 2000 4. Lease Term: Eight (8) months commencing on the Commencement Date and ending on June 30, 2001 (Expiration Date). Unless either party shall deliver written notice at least thirty (30) days prior to the Expiration Date, the lease shall continue thereafter on a month-to-month basis subject to the terms and conditions of this Lease. This Lease may be terminated by either party on or after the Expiration Date upon thirty days' prior written notice. 5. Basic Rent: $6,523.00 per month, based on $1.10 per rentable square foot. 6. Floor Area of Premises: Approximately 5,930 rentable square feet. 7. Security Deposit: $6,523.00 8. Broker(s): None 9. Address for Payments and Notices: LANDLORD TENANT 18000 Devonshire Street 12740 San Fernando Road Northridge, CA 91325 Sylmar, CA 91342 10. Tenant's Minimum Liability Insurance Requirement: $2,000,000.00 2 11. Vehicle Parking Spaces: To be determined by Tenant and Landlord, and agreed to in writing by December 15, 2000. The parties anticipate allocating parking on a basis consistent with actual proportionate use of the total facility, relative to other tenants. ARTICLE II. PREMISES SECTION 2.1 LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the premises shown in Exhibit A (the "Premises".) Landlord shall make available for Tenant certain furniture (the "Furniture") identified in Exhibit B hereto, which shall be used by Tenant at no additional cost but in the sole discretion of Landlord. At Landlord's request, Tenant shall return the Furniture to Landlord, or, at the election of Landlord, remove the Furniture at the end of the term hereof and properly dispose of such Furniture. The Premises consist of all the rentable square footage of and are located within the interior of, the building identified in Item 1 of the Basic Lease Provisions (which together with the underlying real property, is called the "Building"). Tenant understands that the floor area set forth in Item 6 of the Basic Lease Provisions may include, at Landlord's option, a factor approximating the total square footage of any common lobby or internal common features of the Building times the ratio of the actual square footage of the Premises to the total square footage of the Building. SECTION 2.2 ACCEPTANCE OF PREMISES. Except as expressly provided in this Lease, Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises or the Building or the suitability or fitness of either for any purpose, including without limitation any representations or warranties regarding zoning or other land use matters, and that neither Landlord nor any representative of Landlord has made any representations or warranties regarding (i) what other tenants or occupants or uses may be permitted or intended in the Building, or (ii) any exclusivity of use by Tenant with respect to its permitted use of the Premises as set forth in Item 2 of the Basic Lease Provisions. Tenant further acknowledges that neither Landlord nor any representative of Landlord has agreed to undertake any alterations or additions or construct any improvements to the Premises. The taking of possession or use of the Premises by Tenant for any purpose shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects. SECTION 2.3 BUILDING NAME AND ADDRESS. Tenant shall not utilize any name selected by Landlord from time to time for the Building as any part of Tenant's corporate or trade name. Landlord shall have the right to change the name, address, number or designation of the Building, in its sole discretion, without liability or Notice to Tenant. SECTION 2.4 LANDLORD'S RESPONSIBILITIES. Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that the Premises shall be in good and clean operating condition and repair as of the Commencement Date, and that the plumbing, electrical and mechanical systems serving the Building, including, without 2 3 limitation, the HVAC systems, shall be in good operating condition as of the Commencement Date. ARTICLE III. TERM SECTION 3.1 GENERAL. The Term shall be for the period shown in Item 4 of the Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the Term shall commence on the date Tenant takes possession (which shall be confirmed in writing by Tenant) ("Commencement Date") and end on June 30, 2001 ("Expiration Date"). Following the Expiration Date, Tenant may continue to occupy and lease the Premises on a month-to-month basis on or after the Expiration Date subject to the terms and conditions of this Lease. Either party may terminate this Lease upon thirty (30) days' written notice to the other party. ARTICLE IV. RENT AND OPERATING EXPENSES SECTION 4.1 BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset, Basic Rent for the Premises in the total amount shown (including subsequent adjustments, if any) in Item 5 of the Basic Lease Provisions. The rent shall be due and payable in advance commencing on the Commencement Date (as prorated for any partial month) and continuing thereafter on the first day of each successive calendar month of the Term. No demand, notice or invoice shall be required for the payment of Basic Rent. An installment of rent in the amount of thirty days' Basic Rent at the initial rate specified in Item 5 of the Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's execution of this Lease and shall be applied against the Basic Rent first due hereunder. SECTION 4.2 OPERATING EXPENSES. (a) Landlord shall be solely responsible for "Operating Expenses", as defined below, incurred by Landlord in the operation of the Building. Tenant shall not be responsible for any portion of the Operating Expenses. (b) The term "Operating Expenses" shall mean and include all expenses of operation and maintenance of the Building together with all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but not limitation: water and sewer charges; permit and inspection fees; heat; light; power; janitorial services; security services; air conditioning; and Property Taxes. The term "Property Taxes" as used herein shall include the following: (i) all real estate taxes or personal property taxes, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and any improvements, fixtures and equipment and other property of Landlord located in the Building. SECTION 4.3 SECURITY DEPOSIT. Concurrently with Tenant's delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 7 of the Basic 3 4 Lease Provisions, to be held by Landlord as security for the full and faithful performance of Tenant's obligations under this Lease (the "Security Deposit"). Upon any Default by Tenant, the Security Deposit shall be deemed to be automatically and immediately applied, without waiver of any rights Landlord may have under this Lease or at law or in equity as a result of the Default, as a setoff for full or partial compensation for that Default. If any portion of the Security Deposit is applied after a Default by Tenant, Tenant shall within five (5) days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. The Security Deposit shall be returned to Tenant within sixty (60) days after the expiration of the Term, provided that Landlord may, in its reasonable discretion, retain all or a portion of the Security Deposit to the extent and until such time as all amounts due from Tenant in accordance with this Lease have been determined and paid in full, with any balance of the Security Deposit being returned to Tenant within sixty (60) days after the expiration of the Term. ARTICLE V. USES SECTION 5.1 USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with applicable laws and restrictions and pursuant to approvals to be obtained by Tenant from all relevant and required governmental agencies and authorities. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant, at its expense, shall procure, maintain and make available for Landlord's inspection throughout the Term, all governmental approvals, licenses and permits, if any, required for the proper and lawful conduct of Tenant's business in the Premises. Tenant shall not do or permit anything to be done in or about the Premises which will in any way interfere with the rights of other occupants of the Building, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any insurance policy(ies) covering the Building, and/or their contents (unless Tenant agrees to pay for such increases), and shall comply with all applicable insurance underwriters rules. Tenant shall comply at its expense with all present and future laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety requirements, whether or not Tenant's compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. SECTION 5.2 SIGNS. Tenant shall have the no right to install any signs on the exterior of the Building. 4 5 SECTION 5.3 HAZARDOUS MATERIALS. (a) For purposes of this Lease, the term "Hazardous Materials" includes (i) any "hazardous materials" as defined in Section 25501(n) of the California Health and Safety Code, (ii) any other substance or matter which results in liability to any person or entity from exposure to such substance or matter under any statutory or common law theory, and (iii) any substance or matter which is in excess of permitted levels set forth in any federal, California or local law or regulation pertaining to any hazardous or toxic substance, material or waste. (b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises standard office products that may contain Hazardous Materials (such as photocopy toner, "White Out", and the like), provided however, that (i) Tenant shall maintain such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant's storage, use and disposal of all such products. Landlord may, in its sole discretion, place such commercially reasonable conditions as Landlord deems appropriate with respect to any such Hazardous Materials, and may further require that Tenant demonstrate that any such Hazardous Materials are necessary or useful to Tenant's business and will be generated, stored, used and disposed of in a manner that complies with all applicable laws and regulations pertaining thereto and with good business practices. Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval in connection with the storage, generation, release, disposal or use of Hazardous Materials by Tenant on or about the Premises, and/or to conduct periodic inspections of the storage, generation, use, release and/or disposal of such Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that any costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder upon demand. (c) Landlord and its agents shall have the right, but not the obligation, to inspect, sample and/or monitor the Premises and/or the soil or groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith Tenant shall provide Landlord with full access to all relevant facilities, records and personnel. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under or about the Premises caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord's other rights and remedies under this Lease, to immediately enter upon the Premises without notice and to discharge Tenant's obligations 5 6 under this Section 5.3 at Tenant's expense, including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant's business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant's expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises. (d) If the presence of any Hazardous Materials on, under, from or about the Premises caused or permitted by Tenant or its agents, employees, contractors, licensees or invitees results in (i) injury to any person, (d) injury to or any contamination of the Premises, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and any other affected real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials and to remedy or repair any such injury or contamination, including without limitation, any cleanup, remediation, removal, disposal, neutralization or other treatment of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord's prior written consent, take any remedial action in response to the presence of any Hazardous Materials on, under or about the Premises or any other affected real or personal property owned by Landlord or enter into any similar agreement, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord's prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under or about the Premises or any other affected real or personal property owned by Landlord (i) imposes an immediate threat to the health, safety or welfare of any individual or (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord's consent before taking such action. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys acceptable to Landlord) Landlord and any successors to all or any portion of Landlord's interest in the Premises and any other real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation attorneys' fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, generation, storage, treatment, release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building and any other real or personal property owned by Landlord caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, specifically including without limitation the cost of any required or necessary repair, restoration, cleanup or detoxification of the Premises, the Building and any other real or personal property owned by Landlord, and the preparation of any closure or other required plans, whether or not such action is required or necessary during the Term or after the expiration of this Lease. If Landlord at any time discovers that Tenant or its agents, employees, contractors, licensees or invitees may have caused or permitted the release of a Hazardous Material on, under, from or about the Premises or any other real or 6 7 personal property owned by Landlord, Tenant shall, at Landlord's request, immediately prepare and submit to Landlord a comprehensive plan, subject to Landlord's approval, specifying the actions to be taken by Tenant to return the Premises, the Building or any other real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at its expense, and without limitation of any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this subsection (d) shall expressly survive the expiration or sooner termination of this Lease. (f) The rights, obligations and duties of the parties contained in this Section 5.3 shall supersede any contrary provisions contained in this Lease. ARTICLE VI. COMMON AREAS; SERVICES SECTION 6.1 UTILITIES AND SERVICES. Landlord shall provide, at its cost and expense, water, gas, electricity, sewer, heat, light, power, refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services reasonably necessary for Tenant to utilize the Premises hereunder. Landlord shall not be responsible for telephone service. Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder. Landlord shall at all reasonable times have free access to all electrical and mechanical installations of Landlord, provided that Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business in the Premises. SECTION 6.2 OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate all Common Areas within the Building . The term "Common Areas" shall mean all areas within the exterior boundaries of the Building which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, hallways and interior stairwells not located within the premises of any tenant, common electrical rooms and roof access entries, common entrances and lobbies, elevators, and restrooms not located within the premises of any tenant. SECTION 6.3 USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with all rules and regulations as are prescribed from time to time by Landlord. Landlord shall operate and maintain the Common Areas in the manner Landlord may determine to be appropriate. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain any use 7 8 or occupancy, except as authorized by Landlord's rules and regulations. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant's operations. Nothing in this Lease shall be deemed to impose liability upon Landlord for any damage to or loss of the property of, or for any injury to, Tenant, its invitees or employees. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of prescriptive rights, or for any other reason deemed reasonably sufficient by Landlord, without liability to Tenant. SECTION 6.4 PARKING. Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 12 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles, vans or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking within the Common Areas shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any area which would prohibit or impede the free flow of traffic within the Common Areas. There shall be no overnight parking of any vehicles of any kind unless otherwise authorized by Landlord, and vehicles which have been abandoned or parked in violation of the terms hereof may be towed away at the owner's expense. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking within the Common Areas. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; to restrict parking by tenants, their officers, agents and employees to employee parking areas; and to do and perform such other acts in and to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Any person using the parking area shall observe all directional signs and arrows and any posted speed limits. In no event shall Tenant interfere with the use and enjoyment of the parking area by other occupants of the Building or their employees or invitees. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for 24-hour periods, is prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant's employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas. 8 9 SECTION 6.5 CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building, or to the attendant fixtures, equipment and Common Areas. Landlord may at any time relocate or remove any of the various buildings, parking areas, and other Common Areas, and may add areas to the Building from time to time. No change shall entitle Tenant to any abatement of rent or other claim against Landlord, provided that the change does not deprive Tenant of reasonable access to or use of the Premises. Notwithstanding anything to the contrary in this Section 6.5, Landlord shall not make any modifications to or use of the Common Areas if such modifications or use would unreasonably interfere with Tenant's business operations on the Premises or materially increase the obligations or materially decrease the rights of Tenant under the Lease. Landlord shall use its reasonable diligence to minimize any disruption to Tenant's business operations in connection with any such modifications to the Common Areas. ARTICLE VII. MAINTAINING THE PREMISES SECTION 7.1 TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense shall make all repairs necessary to keep the Premises and the Furniture in the condition as existed on the Commencement Date excepting ordinary wear and tear, including without limitation all glass, windows, doors, door closures, hardware, fixtures and fire extinguisher equipment. Any damage or deterioration of the Premises or the furniture shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. All repairs shall be at least equal in quality to the original work, shall be made only by a licensed contractor approved in writing in advance by Landlord. Any contractor utilized by Tenant shall be subject to Landlord's reasonable requirements for contractors, as modified from time to time. Landlord may impose reasonable restrictions and requirements with respect to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs. If Tenant fails to properly maintain and/or repair the Premises or the furniture as herein provided following Landlord's notice and the expiration of the applicable cure period, then Landlord may elect to make any repair or maintenance required hereunder on behalf of Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord for all reasonable costs incurred within ten (10) days following submission of an invoice. SECTION 7.2 LANDLORD'S MAINTENANCE AND REPAIR. Landlord shall provide service, maintenance and repair with respect to any air conditioning, ventilating or heating equipment which serve the Premises and shall maintain in good repair the roof, foundations, footings, the exterior surfaces of the exterior walls of the Building, and the structural, electrical, plumbing and mechanical systems, except that Tenant at its expense shall make all repairs which Landlord deems reasonably necessary as a result of the act or negligence of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord's affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section shall limit Landlord's right to reimbursement from Tenant for maintenance, repair 9 10 costs and replacement costs as provided elsewhere in this Lease. Except as expressly provided in Section 7.6 of this Lease, Tenant understands that it shall not make repairs at Landlord's expense or by rental offset. Tenant further understands that Landlord shall not be required to make any repairs to the roof, foundations, footings, structural, electrical or mechanical systems unless and until Tenant has notified Landlord in writing of the need for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. SECTION 7.3 ALTERATIONS. Tenant shall make no alterations, additions or improvements to the Premises or the Furniture without the prior written consent of Landlord. SECTION 7.4 ENTRY AND INSPECTION. Landlord shall at all reasonable times, upon at least twenty-four (24) hours' written or oral notice (except in emergencies, when no notice shall be required) have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to protect the interests of Landlord in the Premises, and to submit the Premises to prospective or actual purchasers, lessors or encumbrance holders, all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall have the right to retain a key which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises. Landlord and its licensees and agents shall have the right to enter the premises at any time in carrying out the terms of this Lease and fulfilling the obligations and exercising the rights of Landlord hereunder. ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises. ARTICLE IX. ASSIGNMENT AND SUBLETTING SECTION 9.1 RIGHTS OF PARTIES. (a) Notwithstanding any provision of this Lease to the contrary, Tenant will not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant's interest in this lease, or permit the Premises to be occupied by anyone other than Tenant, without Landlord's prior written consent, which consent may be withheld in the sole and absolute discretion of Landlord. No assignment (whether voluntary, involuntary or by operation of law) and no subletting shall be valid or effective without Landlord's prior written consent and, at Landlord's election, any such assignment or subletting shall constitute a material Default of this Lease. Landlord shall not be 10 11 deemed to have given its consent to any assignment or subletting by any other course of action. To the extent not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and its creditors, administrators and assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for the estate of the bankrupt meets Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations to be delivered in connection with the assignment shall be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to have assumed all of the obligations arising under this Lease on and after the date of the assignment, and shall upon demand execute and deliver to Landlord an instrument confirming that assumption. ARTICLE X. INSURANCE AND INDEMNITY SECTION 10.1 TENANT'S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit C. Evidence of that insurance must be delivered to Landlord prior to the Commencement Date. SECTION 10.3 JOINT INDEMNITY. (a) Tenant's Indemnity. To the fullest extent permitted by law, Tenant shall defend (with attorneys reasonably acceptable to Landlord), indemnify, protect, save and hold harmless Landlord, its agents, and any and all affiliates of Landlord, including, without limitation, any corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all claims, liabilities, costs or expenses arising from Tenant's use or occupancy of the Premises or the Building, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises or the Building, or from any Default in the performance of any obligation on Tenant's part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, visitors, patrons, guests, invitees or licensees; provided Tenant shall have no obligation to indemnify, save or hold harmless Landlord for any claims, liabilities, costs or expenses to the extent the same is caused by the negligence or willful misconduct on the part of Landlord, or its authorized agents, contractors or employees, or for which Tenant is otherwise indemnified hereunder. In cases of alleged negligence asserted by third parties against Landlord which arise out of, are occasioned by, or in any way attributable to Tenant's, its agents, employees, contractors, licensees or invitees use and occupancy of the Premises or the Building, or from the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees on Tenant's part to be performed under this Lease, or from any act of negligence of Tenant, its agents, employees, licensees or invitees, Tenant shall accept any tender of defense for Landlord and shall, notwithstanding any allegation 11 12 of negligence or willful misconduct on the part of the Landlord, defend Landlord and protect and hold Landlord harmless and pay all costs expenses and attorneys' fees incurred in connection with such litigation, provided that Tenant shall not be liable for any such injury or damage, and Landlord shall reimburse Tenant for the reasonable attorney's fees and costs for the attorney representing both parties, all to the extent and in the proportion that such injury or damage is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Landlord) to be attributable to the negligence or willful misconduct of Landlord. Upon Landlord's request, Tenant shall at Tenant's sole cost and expense, retain a separate attorney selected by Landlord to represent Landlord in any such suit if Landlord determines that the representation of both Tenant and Landlord by the same attorney would cause a conflict of interest; provided, however, that to the extent and in the proportion that the injury or damage which is the subject of the suit is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Landlord) to be attributable to the negligence or willful misconduct of Landlord, Landlord shall reimburse Tenant for the reasonable legal fees and costs of the separate attorney retained by Tenant. The provisions of this SubSection 10.3(a) shall expressly survive the expiration or sooner termination of this Lease. (b) Landlord's Indemnity. To the fullest extent permitted by law, but subject to the express limitations on liability contained in this Lease (including, without limitation, the provisions of Sections 10.4, 10.5 and 14.8 of this Lease), Landlord shall defend (with attorneys reasonably acceptable to Tenant), indemnify, protect, save and hold harmless Tenant, its agents and any and all affiliates of Tenant, including, without limitation, any corporations, or other entities controlling, controlled by or under common control with Tenant, from and against any and all claims, liabilities, costs or expenses arising from the maintenance or repair of the Common Areas, the Project and/or the Building by Landlord or its employees, authorized agents or contractors; provided that Landlord shall have no obligation to indemnify, save or hold harmless Tenant for any claims, liabilities, costs or expenses to the extent the same is caused by the negligence or willful misconduct on the part of Tenant, or its agents, employees, licensees or invitees, or for which Landlord is otherwise indemnified hereunder. In cases of alleged negligence asserted by third parties against Tenant which arise out of, are occasioned by, or in any way attributable to the maintenance or repair of the Common Areas, or the Building by Landlord or its contractors, authorized agents or employees, Landlord shall accept any tender defense for Tenant and shall, notwithstanding any allegation of negligence or willful misconduct on the part of Tenant, defend Tenant and protect and hold Tenant harmless and pay all cost, expense and attorneys' fees incurred in connection with such litigation, provided that Landlord shall not be liable for any such injury or damage, and Tenant shall reimburse Landlord for the reasonable attorney's fees and costs for the attorney representing both parties, all to the extent and in the proportion that such injury or damage is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Tenant) to be attributable to the negligence or willful misconduct of Tenant. Upon Tenant's request, Landlord shall at Landlord's sole cost and expense, retain a separate attorney selected by Tenant to represent Tenant in any such suit if Tenant determines that the representation of both Tenant and Landlord by the same 12 13 attorney would cause conflict of interest; provided, however, that to the extent and the proportion that the injury or damage which is the subject of the suit is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Tenant) to be attributable to the negligence or willful misconduct of Tenant, Tenant shall reimburse Landlord for the reasonable legal fees and costs of the separate attorney retained by Landlord. The provisions of this Subsection 10.3(b) shall expressly survive the expiration or sooner termination of this Lease. SECTION 10.4 LANDLORD'S NONLIABILITY. Except as expressly provided by the indemnity obligations contained in Section 10.3(b) of this Lease, Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord, for loss of or damage to any property, or any injury to any person, or any other loss, cost, damage, injury or liability whatsoever resulting from fire, explosion, failing plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Building or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injury results from conditions arising in the Premises or in other portions of the Building. Notwithstanding any provision of this Lease to the contrary, including, without limitation, the provisions of Section 10.3(b) of this Lease, Landlord shall in no event be liable to Tenant, its employees, agents, and invitees, and Tenant hereby waives all claims against Landlord, for loss or interruption of Tenant's business or income (including, without limitation, any consequential damages and lost profit or opportunity costs), or any other loss, cost, damage, injury or liability resulting from, but not limited to, Acts of God, acts of civil disobedience or insurrection, acts of omissions (criminal or otherwise) of any third parties, including without limitation, any other tenants within the Building or their agents, employees, contractors, guests or invitees. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Except as expressly provided in this Lease, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business (including without limitation consequential damages and lost profit or opportunity costs) arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the premises, nor shall any related activity by Landlord constitute an actual or constructive eviction, provided, however, that in making repairs, alterations or improvements, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business in the Premises. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building and of defects in any improvements or equipment. SECTION 10.5 WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant each hereby waives all rights of recovery against the other and the other's agents on account of loss and damage occasioned to the property of such waiving party to the extent only that such loss or damage is required to be insured against under Article X; provided however, that the foregoing waiver shall not apply to the extent of Tenant's obligations to pay deductibles 13 14 under any such policies and this Lease. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any "all-risk" property insurance policies required by this Article, even though such loss or damage might be occasioned by the negligence of such party, its agents, employees, contractors, guests or invitees. All of the parties' repair and maintenance and indemnity obligations under this Lease shall be subject to the waiver of subrogation contained in this Section 10.5. The parties hereto shall cause each property insurance policy it obtains to include a waiver of subrogation regarding the liabilities released hereby. ARTICLE XI. DAMAGE OR DESTRUCTION SECTION 11.1 RESTORATION. (a) If the Building of which the Premises are a part is damaged, Landlord shall repair that damage as soon as reasonably practicable, at its expense, unless: (i) Landlord reasonably determines that the cost of repair is greater than Fifty Thousand Dollars ($50,000.00) and is not covered by Landlord's coverages, plus such additional amounts Tenant elects, at its option, to contribute, excluding however the deductible (for which Tenant shall be responsible for tenant's share); (ii) Landlord reasonably determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, including without limitation Hazardous Materials, earthquake faults, and other similar dangers) within thirty (30) days after the date of the damage; or (iii) a Default by Tenant has occurred at the time of such damage, should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in writing within fifteen (15) days after the damage occurs and this Lease shall terminate as of the date of that notice. (b) Unless Landlord elects to terminate this Lease in accordance with subsection (a) above, this Lease shall continue in effect for the remainder of the Term; provided that so long as Tenant is not in Default under this Lease, if the damage is so extensive that Landlord reasonably determines that the Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, earthquake faults, and other similar dangers) so as to allow Tenant's substantial use and enjoyment of the Premises, or are not in fact repaired by Landlord, within two fifteen (15) days after the date of damage, then Tenant may elect to terminate this Lease by written notice to Landlord either within the fifteen (15) day period stated in subsection (a), or within fifteen (15) days following Landlord's failure to so repair the Premises within thirty (30) days after the date of damage. (c) Commencing on the date of any damage to the Building, and ending on the sooner of the date the damage is repaired or the date this Lease is terminated, the rental to be paid under this Lease shall be abated in the same proportion that the floor area of the Premises that is rendered unusable by the damage from time to time bears to 14 15 the total floor area of the Premises, provided that Tenant is then carrying the business interruption insurance required in Exhibit C. (d) Tenant shall fully cooperate with Landlord in removing Tenant's personal property and any debris from the Premises to facilitate all inspections of the Premises and the making of any repairs. Notwithstanding anything to the contrary contained in this Lease, if Landlord in good faith believes there is a risk of injury to persons or damage to property from entry into the Building or Premises following any damage or destruction thereto, Landlord may restrict entry into the Building or the Premises by Tenant, its employees, agents and contractors in a non-discriminatory manner, without being deemed to have violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to determine if there are safe methods of entry into the Building or the Premises solely in order to allow Tenant to retrieve files, data in computers, and necessary inventory, subject however to all indemnities and waivers of liability from Tenant to Landlord contained in this Lease and any additional indemnities and waivers of liability which Landlord may reasonably require. SECTION 11.2 LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law. ARTICLE XII. EMINENT DOMAIN SECTION 12.1 TOTAL OR PARTIAL TAKING. If all or a material portion of the Premises is taken, whether such taking is permanent or temporary, by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses or loss of good will recoverable from the taking authority. SECTION 12.2 TAKING OF PARKING AREA . In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord shall have no obligation to locate or provide substitute or additional parking. If the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect. 15 16 ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE SECTION 13.1 SUBORDINATION. At the option of Landlord, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as Tenant is not in Default under this Lease, this Lease shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in- interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall execute any instrument reasonably required by Landlord's successor for that purpose. Tenant shall also, upon written request of Landlord, execute and deliver all instruments as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above), or, if requested by Landlord, to subordinate, in whole or in part, any ground or underlying lease or the lien of any mortgage or deed of trust to this Lease. SECTION 13.2 ESTOPPEL CERTIFICATE. (a) Tenant shall, at any time upon not less than fifteen (15) days' prior written notice from Landlord, execute, acknowledge and deliver to Landlord, in any form that Landlord may reasonably require, a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect) and the dates to which the rental, additional rent and other charges have been paid in advance, if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured defaults on the part of Landlord, or specifying each default if any are claimed, and (iii) setting forth all further information that Landlord may reasonably require. Tenant's statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building. (b) Notwithstanding any other rights and remedies of Landlord, Tenant's failure to deliver any estoppel statement within the provided time shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance, and (iii) not more than one month's rental has been paid in advance. ARTICLE XIV. DEFAULTS AND REMEDIES SECTION 14.1 TENANT'S DEFAULTS. The occurrence of any one or more of the following events, following notice by Landlord and the expiration of the applicable cure period, if any, without cure by Tenant, shall constitute a default by Tenant (a "Default" as used in this Lease): 16 17 (a) The failure by Tenant to make any payment of rent or additional rent required to be made by Tenant, as and when due, where the failure continues for a period of five (5) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. For purposes of these default and remedies provisions, the term "additional rent" shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease. (b) Assignment, sublease, encumbrance or other transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord. (c) The failure of Tenant to timely and fully provide any subordination agreement, or estoppel certificate in accordance with the requirements of Article XIII, where the failure continues for a period of ten (10) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. (e) The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant or such shorter period as is specified in any other provision of this Lease; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. (d) (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, if possession is not restored to Tenant within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where the seizure is not discharged within thirty (30) days. Landlord shall not be deemed to have knowledge of any event described in this subsection unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant's insolvency. In the event that any 17 18 provision of this subsection is contrary to applicable law, the provision shall be of no force or effect. SECTION 14.2 LANDLORD'S REMEDIES. (a) In the event of any Default by Tenant, or in the event of the abandonment of the Premises by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies: (i) Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant: (1) The worth at the time of award of the unpaid rent and additional rent which had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided; (3) The worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided; (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant's Default, including, but not limited to, the cost of recovering possession of the Premises, refurbishment of the Premises, marketing costs, commissions and other expenses of reletting, including necessary repair and, reasonable attorneys' fees, and any other reasonable costs; and (5) At Landlord's election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term "rent" as used in this Lease shall be deemed to mean the Basic Rent and all other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty-four (24) month period immediately prior to Default, except that if it becomes necessary to compute such rental before the twenty-four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in subparagraphs (1) and (2) above, the "worth at the time of award" 18 19 shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in subparagraph (3) above, the "worth at the time of award" shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (ii) Landlord may elect not to terminate Tenant's right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord's interests under this Lease, shall not constitute a termination of the Tenant's right to possession of the Premises. (b) The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time. (c) No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord's knowledge of the preceding breach or default at the time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy available to Landlord by virtue of the breach or default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant's estate shall not waive or cure a default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord's right to recover the balance of the rent or pursue any other remedy available to it. No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of the Lease or a surrender of the Premises. SECTION 14.3 LATE PAYMENTS. Any rent due under this Lease that is not received by Landlord within five (5) days of the date when due shall bear interest at the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any Default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering 19 20 the Premises. Accordingly, if any rent due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge in a sum equal to the greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment. The foregoing late charge shall not be charged, however, in connection with the initial payment of rent not paid by Tenant within five (5) days after the date due. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant's Default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies. SECTION 14.4 RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant's sole cost and expense and without any abatement of rent or right of set-off except as specifically set forth in this Lease. If Tenant fails to pay any sum of money, other than rent, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant's part. Landlord's election to make the payment or perform the act on Tenant's part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid by Landlord and all necessary incidental costs, together with interest at the maximum rate permitted by law from the date of the payment by Landlord. Landlord shall have the same rights and remedies if Tenant fails to pay those amounts as Landlord would have in the event of a Default by Tenant in the payment of rent. SECTION 14.5 DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion. Except as expressly provided in this Lease, no delay or omission of Tenant to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any default by Landlord. SECTION 14.6 EXPENSES AND LEGAL FEES. All sums reasonably incurred by Landlord in connection with any Default by Tenant under this Lease including without limitation all costs, expenses and actual accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable by Tenant to Landlord on demand, and shall bear interest at the rate of ten percent (10%) per annum. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts. 20 21 SECTION 14.7 WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. SECTION 14.8 SATISFACTION OF JUDGMENT. The obligations of Landlord and Tenant under this Lease do not constitute the personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord or Tenant, or their respective constituent partners. Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Building and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Building and no action for any deficiency may be sought or obtained by Tenant. SECTION 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim or demand arising in tort or in contract against Landlord based upon or arising in connection with this Lease (except those arising in connection with Sections 10.3(b) of this Lease) shall be barred unless Tenant commences an action thereon within twelve (12) months after the date that the occurrence of the act, omission, event or default upon which the claim, demand or right arises is discovered by Tenant. Nothing contained in this Section 14.9, however, shall extend the operation of any applicable statute of limitations binding on Tenant. ARTICLE XV. END OF TERM SECTION 15.1 SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear, casualty, Hazardous Materials (except to the extent Tenant is responsible therefor as provided in Section 5.3 of this Lease) and repairs which are Landlord's obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all personal property and debris, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect 21 22 to repair any structural damage at Tenant's expense. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If Tenant fails to remove Tenant's personal property from the Premises upon the expiration of the Term, Landlord may remove, store, dispose of and/or retain such personal property, at Landlord's option, in accordance with then applicable laws, all at the expense of Tenant. Upon the expiration of the Term, if requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises. ARTICLE XVI. PAYMENTS AND NOTICES All sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth in Item 10 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent pursuant to Section 4.1, all payments shall be due and payable within twenty (20) days after demand. All payments requiring proration shall be prorated on the basis of a thirty (30) day month and a three hundred sixty (360) day year. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered in person or by courier or overnight delivery service to the other party, or may be deposited in the United States mail, duly registered or certified, postage prepaid, return receipt requested, and addressed to the other party at the address set forth in Item 10 of the Basic Lease Provisions, or if to Tenant, at that address or, from and after the Commencement Date, at the Premises (whether or not Tenant has departed from, abandoned or vacated the Premises). Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If any notice or other document is sent by mail, it shall be deemed served or delivered three (3) business days after mailing. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them. ARTICLE XVII. RULES AND REGULATIONS Tenant agrees to observe faithfully and comply strictly with the Rules and Regulations, attached as Exhibit D, and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and Common Areas. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease by any other tenant or such tenant's agents, employees, contractors, guests or invitees. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant's failure to keep and observe the Rules and Regulations following notice from Landlord and the expiration of the applicable 22 23 cure period, shall constitute a Default under this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling. Notwithstanding anything to the contrary in this Article XVII, Tenant shall not be required to comply with any rule or regulation unless the same applies non-discriminatorily to all occupants of the Project. ARTICLE XVIII. BROKER'S COMMISSION Tenant warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from any cost, expense or liability (including reasonable attorneys' fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease. ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST In the event of any transfer of Landlord's interest in the Premises, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that the transferee assumes in writing all of such obligations and any funds held by the transferor in which Tenant has an interest shall be turned over, subject to that interest, to the transferee and Tenant is notified of the transfer as required by law. No holder of a mortgage and/or deed of trust to which this Lease is or may be subordinate, and no landlord under a so-called sale-leaseback, shall be responsible in connection with the Security Deposit, unless the mortgagee or holder of the deed of trust or the landlord actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership. ARTICLE XX. INTERPRETATION SECTION 20.1 GENDER AND NUMBER. Whenever the context of this Lease requires, the words "Landlord" and "Tenant" shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others. SECTION 20.2 HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation. SECTION 20.3 JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more 23 24 of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease. SECTION 20.4 SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease. SECTION 20.5 TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease. SECTION 20.6 CONTROLLING LAW. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. SECTION 20.7 SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 20.8 WAIVER AND CUMULATIVE REMEDIES. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party's consent to any subsequent act. No breach by Tenant of this Lease shall be deemed to have been waived by Landlord unless the waiver is in a writing signed by Landlord. The rights and remedies of Landlord under this Lease shall be cumulative and in addition to any and all other rights and remedies which Landlord may have. SECTION 20.9 INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent. SECTION 20.10 ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any 24 25 representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding. SECTION 20.11 QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord. SECTION 20.12 SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns. ARTICLE XXI. EXECUTION AND RECORDING SECTION 21.1 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. SECTION 21.2 CORPORATE AND PARTNERSHIP AUTHORITY. If a corporation or partnership is executing this Lease, each individual executing this Lease on behalf of the corporation or partnership represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation or partnership, and that this Lease is binding upon the corporation or partnership in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of its board of directors' resolution or partnership agreement or certificate authorizing or evidencing the execution of this Lease. SECTION 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant. SECTION 21.4 RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. SECTION 21.5 AMENDMENTS. No amendment or termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal 25 26 arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect. SECTION 21.6 EXECUTED COPY. Any fully executed photocopy or similar reproduction of this Lease shall be deemed an original for all purposes. SECTION 21.7 ATTACHMENTS. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease. ARTICLE XXII. MISCELLANEOUS SECTION 22.1 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any other tenant or apparent prospective tenant of the Building or Project, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease, and as required for any security filings, financings or sales, reorganizations or consolidations of Tenant's business. SECTION 22.3 APPROVALS. Subject to Landlord's rights to consent or approve in its "discretion" or "sole discretion" as provided in this Lease, whenever the Lease requires an approval, consent, designation, determination, discretion or judgment by either Landlord or Tenant, such approval, consent, designation, determination, discretion or judgment (including, without limiting the generality of the foregoing, those required in connection with assignment and subletting) shall not be unreasonable or unreasonably withheld or delayed and in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. MiniMed Inc. Advanced Bionics Corporation By: /s/ ERIC KENTOR By: /s/ MARK CHAMBERLAIN ----------------------- ----------------------- Eric Kentor Mark Chamberlain Its: Senior Vice President & General Counsel 26 EX-10.34 5 v70622ex10-34.txt EXHIBIT 10.34 1 Exhibit 10.34 INDUSTRIAL LEASE THIS LEASE is made as of October 15, 2000 by and between MiniMed Inc., a Delaware corporation, hereafter called "Landlord," and AlleCure, a Deleware corporation, hereinafter called "Tenant." ARTICLE I. BASIC LEASE PROVISIONS Each reference in this Lease to the "Basic Lease Provisions" shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease. 1. Premises: The Premises are more particularly described in Section 2.1. Address of Building: 12744 San Fernando Road, Sylmar, CA 91342 2. Use of Premises: General office; laboratories 3. Estimated Commencement Date: November 1, 2000 4. Lease Term: Eight (8) months commencing on the Commencement Date and ending on June 30, 2001 (Expiration Date). Unless either party shall deliver written notice at least thirty (30) days prior to the Expiration Date, the lease shall continue thereafter on a month-to-month basis subject to the terms and conditions of this Lease. This Lease may be terminated by either party on or after the Expiration Date upon thirty days' prior written notice. 5. Basic Rent: $3,982.00 per month, based on $1.10 per rentable square foot. 6. Floor Area of Premises: Approximately 3,620 rentable square feet. 7. Security Deposit: $3,982.00 9. Broker(s): None 10. Address for Payments and Notices: LANDLORD TENANT 18000 Devonshire Street 9340 DeSoto Avenue Northridge, CA 91325 Chatsworth, CA 91311 11. Tenant's Liability Insurance Requirement: $ 1,000,000.00 2 12. Vehicle Parking Spaces: 10-May be adjusted by Landlord to accommodate other tenants requirements. ARTICLE II. PREMISES SECTION 2.1 LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the premises shown in Exhibit A (the "Premises".) The Premises consist of all the rentable square footage of and are located within the interior of, the building identified in Item 1 of the Basic Lease Provisions (which together with the underlying real property, is called the "Building"). Tenant understands that the floor area set forth in Item 6 of the Basic Lease Provisions may include, at Landlord's option, a factor approximating the total square footage of any common lobby or internal common features of the Building times the ratio of the actual square footage of the Premises to the total square footage of the Building. SECTION 2.2 ACCEPTANCE OF PREMISES. Except as expressly provided in this Lease, Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises or the Building or the suitability or fitness of either for any purpose, including without limitation any representations or warranties regarding zoning or other land use matters, and that neither Landlord nor any representative of Landlord has made any representations or warranties regarding (i) what other tenants or occupants or uses may be permitted or intended in the Building, or (ii) any exclusivity of use by Tenant with respect to its permitted use of the Premises as set forth in Item 2 of the Basic Lease Provisions. Tenant further acknowledges that neither Landlord nor any representative of Landlord has agreed to undertake any alterations or additions or construct any improvements to the Premises. The taking of possession or use of the Premises by Tenant for any purpose shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects. SECTION 2.3 BUILDING NAME AND ADDRESS. Tenant shall not utilize any name selected by Landlord from time to time for the Building as any part of Tenant's corporate or trade name. Landlord shall have the right to change the name, address, number or designation of the Building, in its sole discretion, without liability or Notice to Tenant. SECTION 2.4 LANDLORD'S RESPONSIBILITIES. Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that the Premises shall be in good and clean operating condition and repair as of the Commencement Date, and that the plumbing, electrical and mechanical systems serving the Building, including, without limitation, the HVAC systems, shall be in good operating condition as of the Commencement Date. ARTICLE III. TERM 2 3 SECTION 3.1 GENERAL. The Term shall be for the period shown in Item 4 of the Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the Term shall commence on the date Tenant takes possession (which shall be confirmed in writing by Tenant) ("Commencement Date") and end on June 30, 2001 ("Expiration Date"). Following the Expiration Date, Tenant may continue to occupy and lease the Premises on a month-to-month basis on or after the Expiration Date subject to the terms and conditions of this Lease. Either party may terminate this Lease upon thirty (30) days' written notice to the other party. ARTICLE IV. RENT AND OPERATING EXPENSES SECTION 4.1 BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset, Basic Rent for the Premises in the total amount shown (including subsequent adjustments, if any) in Item 5 of the Basic Lease Provisions. The rent shall be due and payable in advance commencing on the Commencement Date (as prorated for any partial month) and continuing thereafter on the first day of each successive calendar month of the Term. No demand, notice or invoice shall be required for the payment of Basic Rent. An installment of rent in the amount of thirty days' Basic Rent at the initial rate specified in Item 5 of the Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's execution of this Lease and shall be applied against the Basic Rent first due hereunder. SECTION 4.2 OPERATING EXPENSES. (a) Landlord shall be solely responsible for "Operating Expenses", as defined below, incurred by Landlord in the operation of the Building. Tenant shall not be responsible for any portion of the Operating Expenses. (b) The term "Operating Expenses" shall mean and include all expenses of operation and maintenance of the Building together with all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but not limitation: water and sewer charges; permit and inspection fees; heat; light; power; janitorial services; security services; air conditioning; and Property Taxes. The term "Property Taxes" as used herein shall include the following: (i) all real estate taxes or personal property taxes, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and any improvements, fixtures and equipment and other property of Landlord located in the Building. SECTION 4.3 SECURITY DEPOSIT. Concurrently with Tenant's delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 7 of the Basic Lease Provisions, to be held by Landlord as security for the full and faithful performance of Tenant's obligations under this Lease (the "Security Deposit"). Upon any Default by Tenant, the Security Deposit shall be deemed to be automatically and immediately applied, without waiver of any rights Landlord may have under this Lease or at law or in equity as a result of the Default, as a setoff for full or partial compensation for that 3 4 Default. If any portion of the Security Deposit is applied after a Default by Tenant, Tenant shall within five (5) days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. The Security Deposit shall be returned to Tenant within sixty (60) days after the expiration of the Term, provided that Landlord may, in its reasonable discretion, retain all or a portion of the Security Deposit to the extent and until such time as all amounts due from Tenant in accordance with this Lease have been determined and paid in full, with any balance of the Security Deposit being returned to Tenant within sixty (60) days after the expiration of the Term. ARTICLE V. USES SECTION 5.1 USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with applicable laws and restrictions and pursuant to approvals to be obtained by Tenant from all relevant and required governmental agencies and authorities. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant, at its expense, shall procure, maintain and make available for Landlord's inspection throughout the Term, all governmental approvals, licenses and permits, if any, required for the proper and lawful conduct of Tenant's business in the Premises. Tenant shall not do or permit anything to be done in or about the Premises which will in any way interfere with the rights of other occupants of the Building, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any insurance policy(ies) covering the Building, and/or their contents (unless Tenant agrees to pay for such increases), and shall comply with all applicable insurance underwriters rules. Tenant shall comply at its expense with all present and future laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety requirements, whether or not Tenant's compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. SECTION 5.2 SIGNS. Tenant shall have the no right to install any signs on the exterior of the Building. SECTION 5.3 HAZARDOUS MATERIALS. (a) For purposes of this Lease, the term "Hazardous Materials" includes (i) any "hazardous materials" as defined in Section 25501(n) of the California Health and Safety Code, (ii) any other substance or matter which results in liability to any person or entity from exposure to such substance or matter under any statutory or common law theory, 4 5 and (iii) any substance or matter which is in excess of permitted levels set forth in any federal, California or local law or regulation pertaining to any hazardous or toxic substance, material or waste. (b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises standard office products that may contain Hazardous Materials (such as photocopy toner, "White Out", and the like), provided however, that (i) Tenant shall maintain such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant's storage, use and disposal of all such products. Landlord may, in its sole discretion, place such commercially reasonable conditions as Landlord deems appropriate with respect to any such Hazardous Materials, and may further require that Tenant demonstrate that any such Hazardous Materials are necessary or useful to Tenant's business and will be generated, stored, used and disposed of in a manner that complies with all applicable laws and regulations pertaining thereto and with good business practices. Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval in connection with the storage, generation, release, disposal or use of Hazardous Materials by Tenant on or about the Premises, and/or to conduct periodic inspections of the storage, generation, use, release and/or disposal of such Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that any costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder upon demand. (c) Landlord and its agents shall have the right, but not the obligation, to inspect, sample and/or monitor the Premises and/or the soil or groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith Tenant shall provide Landlord with full access to all relevant facilities, records and personnel. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under or about the Premises caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord's other rights and remedies under this Lease, to immediately enter upon the Premises without notice and to discharge Tenant's obligations under this Section 5.3 at Tenant's expense, including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant's business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant's expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release 5 6 and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises. (d) If the presence of any Hazardous Materials on, under, from or about the Premises caused or permitted by Tenant or its agents, employees, contractors, licensees or invitees results in (i) injury to any person, (d) injury to or any contamination of the Premises, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and any other affected real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials and to remedy or repair any such injury or contamination, including without limitation, any cleanup, remediation, removal, disposal, neutralization or other treatment of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord's prior written consent, take any remedial action in response to the presence of any Hazardous Materials on, under or about the Premises or any other affected real or personal property owned by Landlord or enter into any similar agreement, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord's prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under or about the Premises or any other affected real or personal property owned by Landlord (i) imposes an immediate threat to the health, safety or welfare of any individual or (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord's consent before taking such action. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys acceptable to Landlord) Landlord and any successors to all or any portion of Landlord's interest in the Premises and any other real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation attorneys' fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, generation, storage, treatment, release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building and any other real or personal property owned by Landlord caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, specifically including without limitation the cost of any required or necessary repair, restoration, cleanup or detoxification of the Premises, the Building and any other real or personal property owned by Landlord, and the preparation of any closure or other required plans, whether or not such action is required or necessary during the Term or after the expiration of this Lease. If Landlord at any time discovers that Tenant or its agents, employees, contractors, licensees or invitees may have caused or permitted the release of a Hazardous Material on, under, from or about the Premises or any other real or personal property owned by Landlord, Tenant shall, at Landlord's request, immediately prepare and submit to Landlord a comprehensive plan, subject to Landlord's approval, specifying the actions to be taken by Tenant to return the Premises, the Building or any other real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at its expense, and without limitation of any rights and remedies of 6 7 Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this subsection (d) shall expressly survive the expiration or sooner termination of this Lease. (f) The rights, obligations and duties of the parties contained in this Section 5.3 shall supersede any contrary provisions contained in this Lease. ARTICLE VI. COMMON AREAS; SERVICES SECTION 6.1 UTILITIES AND SERVICES. Landlord shall provide, at its cost and expense, water, gas, electricity, sewer, heat, light, power, refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services reasonably necessary for Tenant to utilize the Premises hereunder. Landlord shall not be responsible for telephone service. Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder. Landlord shall at all reasonable times have free access to all electrical and mechanical installations of Landlord, provided that Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business in the Premises. SECTION 6.2 OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate all Common Areas within the Building . The term "Common Areas" shall mean all areas within the exterior boundaries of the Building which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, hallways and interior stairwells not located within the premises of any tenant, common electrical rooms and roof access entries, common entrances and lobbies, elevators, and restrooms not located within the premises of any tenant. SECTION 6.3 USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with all rules and regulations as are prescribed from time to time by Landlord. Landlord shall operate and maintain the Common Areas in the manner Landlord may determine to be appropriate. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain any use or occupancy, except as authorized by Landlord's rules and regulations. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant's operations. Nothing in this Lease shall be deemed to impose liability upon Landlord for any damage to or loss of the property of, or for any injury to, Tenant, its invitees or employees. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of 7 8 prescriptive rights, or for any other reason deemed reasonably sufficient by Landlord, without liability to Tenant. SECTION 6.4 PARKING. Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 12 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles, vans or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking within the Common Areas shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any area which would prohibit or impede the free flow of traffic within the Common Areas. There shall be no overnight parking of any vehicles of any kind unless otherwise authorized by Landlord, and vehicles which have been abandoned or parked in violation of the terms hereof may be towed away at the owner's expense. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking within the Common Areas. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; to restrict parking by tenants, their officers, agents and employees to employee parking areas; and to do and perform such other acts in and to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Any person using the parking area shall observe all directional signs and arrows and any posted speed limits. In no event shall Tenant interfere with the use and enjoyment of the parking area by other occupants of the Building or their employees or invitees. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for 24-hour periods, is prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant's employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas. SECTION 6.5 CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building, or to the attendant fixtures, equipment and Common Areas. Landlord may at any time relocate or remove any of the various buildings, parking areas, and other Common Areas, and may add areas to the Building from time to time. No change shall entitle Tenant to any abatement of rent or other claim against Landlord, provided that the change does not deprive Tenant of 8 9 reasonable access to or use of the Premises. Notwithstanding anything to the contrary in this Section 6.5, Landlord shall not make any modifications to or use of the Common Areas if such modifications or use would unreasonably interfere with Tenant's business operations on the Premises or materially increase the obligations or materially decrease the rights of Tenant under the Lease. Landlord shall use its reasonable diligence to minimize any disruption to Tenant's business operations in connection with any such modifications to the Common Areas. ARTICLE VII. MAINTAINING THE PREMISES SECTION 7.1 TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense shall make all repairs necessary to keep the Premises in the condition as existed on the Commencement Date excepting ordinary wear and tear, including without limitation all glass, windows, doors, door closures, hardware, fixtures and fire extinguisher equipment. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. All repairs shall be at least equal in quality to the original work, shall be made only by a licensed contractor approved in writing in advance by Landlord. Any contractor utilized by Tenant shall be subject to Landlord's reasonable requirements for contractors, as modified from time to time. Landlord may impose reasonable restrictions and requirements with respect to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs. If Tenant fails to properly maintain and/or repair the Premises as herein provided following Landlord's notice and the expiration of the applicable cure period, then Landlord may elect to make any repair or maintenance required hereunder on behalf of Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord for all reasonable costs incurred within ten (10) days following submission of an invoice. SECTION 7.2 LANDLORD'S MAINTENANCE AND REPAIR. Landlord shall provide service, maintenance and repair with respect to any air conditioning, ventilating or heating equipment which serve the Premises and shall maintain in good repair the roof, foundations, footings, the exterior surfaces of the exterior walls of the Building, and the structural, electrical, plumbing and mechanical systems, except that Tenant at its expense shall make all repairs which Landlord deems reasonably necessary as a result of the act or negligence of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord's affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section shall limit Landlord's right to reimbursement from Tenant for maintenance, repair costs and replacement costs as provided elsewhere in this Lease. Except as expressly provided in Section 7.6 of this Lease, Tenant understands that it shall not make repairs at Landlord's expense or by rental offset. Tenant further understands that Landlord shall not be required to make any repairs to the roof, foundations, footings, structural, electrical or mechanical systems unless and until Tenant has notified Landlord in writing of the need 9 10 for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. SECTION 7.3 ALTERATIONS. Tenant shall make no alterations, additions or improvements to the Premises without the prior written consent of Landlord. SECTION 7.4 ENTRY AND INSPECTION. Landlord shall at all reasonable times, upon at least twenty-four (24) hours' written or oral notice (except in emergencies, when no notice shall be required) have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to protect the interests of Landlord in the Premises, and to submit the Premises to prospective or actual purchasers, lessors or encumbrance holders, all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall have the right to retain a key which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises. Landlord and its licensees and agents shall have the right to enter the premises at any time in carrying out the terms of this Lease and fulfilling the obligations and exercising the rights of Landlord hereunder. ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises. ARTICLE IX. ASSIGNMENT AND SUBLETTING SECTION 9.1 RIGHTS OF PARTIES. (a) Notwithstanding any provision of this Lease to the contrary, Tenant will not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant's interest in this lease, or permit the Premises to be occupied by anyone other than Tenant, without Landlord's prior written consent, which consent may be withheld in the sole and absolute discretion of Landlord. No assignment (whether voluntary, involuntary or by operation of law) and no subletting shall be valid or effective without Landlord's prior written consent and, at Landlord's election, any such assignment or subletting shall constitute a material Default of this Lease. Landlord shall not be deemed to have given its consent to any assignment or subletting by any other course of action. To the extent not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and its creditors, administrators and assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for the estate of the bankrupt meets Landlord's standard for consent as set forth in Section 10 11 9.1(b) of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations to be delivered in connection with the assignment shall be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to have assumed all of the obligations arising under this Lease on and after the date of the assignment, and shall upon demand execute and deliver to Landlord an instrument confirming that assumption. ARTICLE X. INSURANCE AND INDEMNITY SECTION 10.1 TENANT'S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit B. Evidence of that insurance must be delivered to Landlord prior to the Commencement Date. SECTION 10.2 JOINT INDEMNITY. (a) Tenant's Indemnity. To the fullest extent permitted by law, Tenant shall defend (with attorneys reasonably acceptable to Landlord), indemnify, protect, save and hold harmless Landlord, its agents, and any and all affiliates of Landlord, including, without limitation, any corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all claims, liabilities, costs or expenses arising from Tenant's use or occupancy of the Premises or the Building, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises or the Building, or from any Default in the performance of any obligation on Tenant's part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, visitors, patrons, guests, invitees or licensees; provided Tenant shall have no obligation to indemnify, save or hold harmless Landlord for any claims, liabilities, costs or expenses to the extent the same is caused by the negligence or willful misconduct on the part of Landlord, or its authorized agents, contractors or employees, or for which Tenant is otherwise indemnified hereunder. In cases of alleged negligence asserted by third parties against Landlord which arise out of, are occasioned by, or in any way attributable to Tenant's, its agents, employees, contractors, licensees or invitees use and occupancy of the Premises or the Building, or from the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees on Tenant's part to be performed under this Lease, or from any act of negligence of Tenant, its agents, employees, licensees or invitees, Tenant shall accept any tender of defense for Landlord and shall, notwithstanding any allegation of negligence or willful misconduct on the part of the Landlord, defend Landlord and protect and hold Landlord harmless and pay all costs expenses and attorneys' fees incurred in connection with such litigation, provided that Tenant shall not be liable for any such injury or damage, and Landlord shall reimburse Tenant for the reasonable attorney's fees and costs for the attorney representing both parties, all to the extent and in the proportion that such injury or damage is ultimately determined by a court of 11 12 competent jurisdiction (or in connection with any negotiated settlement agreed to by Landlord) to be attributable to the negligence or willful misconduct of Landlord. Upon Landlord's request, Tenant shall at Tenant's sole cost and expense, retain a separate attorney selected by Landlord to represent Landlord in any such suit if Landlord determines that the representation of both Tenant and Landlord by the same attorney would cause a conflict of interest; provided, however, that to the extent and in the proportion that the injury or damage which is the subject of the suit is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Landlord) to be attributable to the negligence or willful misconduct of Landlord, Landlord shall reimburse Tenant for the reasonable legal fees and costs of the separate attorney retained by Tenant. The provisions of this SubSection 10.3(a) shall expressly survive the expiration or sooner termination of this Lease. (b) Landlord's Indemnity. To the fullest extent permitted by law, but subject to the express limitations on liability contained in this Lease (including, without limitation, the provisions of Sections 10.4, 10.5 and 14.8 of this Lease), Landlord shall defend (with attorneys reasonably acceptable to Tenant), indemnify, protect, save and hold harmless Tenant, its agents and any and all affiliates of Tenant, including, without limitation, any corporations, or other entities controlling, controlled by or under common control with Tenant, from and against any and all claims, liabilities, costs or expenses arising from the maintenance or repair of the Common Areas, the Project and/or the Building by Landlord or its employees, authorized agents or contractors; provided that Landlord shall have no obligation to indemnify, save or hold harmless Tenant for any claims, liabilities, costs or expenses to the extent the same is caused by the negligence or willful misconduct on the part of Tenant, or its agents, employees, licensees or invitees, or for which Landlord is otherwise indemnified hereunder. In cases of alleged negligence asserted by third parties against Tenant which arise out of, are occasioned by, or in any way attributable to the maintenance or repair of the Common Areas, or the Building by Landlord or its contractors, authorized agents or employees, Landlord shall accept any tender defense for Tenant and shall, notwithstanding any allegation of negligence or willful misconduct on the part of Tenant, defend Tenant and protect and hold Tenant harmless and pay all cost, expense and attorneys' fees incurred in connection with such litigation, provided that Landlord shall not be liable for any such injury or damage, and Tenant shall reimburse Landlord for the reasonable attorney's fees and costs for the attorney representing both parties, all to the extent and in the proportion that such injury or damage is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Tenant) to be attributable to the negligence or willful misconduct of Tenant. Upon Tenant's request, Landlord shall at Landlord's sole cost and expense, retain a separate attorney selected by Tenant to represent Tenant in any such suit if Tenant determines that the representation of both Tenant and Landlord by the same attorney would cause conflict of interest; provided, however, that to the extent and the proportion that the injury or damage which is the subject of the suit is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Tenant) to be attributable to the negligence or willful misconduct of Tenant, Tenant shall reimburse Landlord for the reasonable legal fees and costs of the 12 13 separate attorney retained by Landlord. The provisions of this Subsection 10.3(b) shall expressly survive the expiration or sooner termination of this Lease. SECTION 10.4 LANDLORD'S NONLIABILITY. Except as expressly provided by the indemnity obligations contained in Section 10.3(b) of this Lease, Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord, for loss of or damage to any property, or any injury to any person, or any other loss, cost, damage, injury or liability whatsoever resulting from fire, explosion, failing plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Building or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injury results from conditions arising in the Premises or in other portions of the Building. Notwithstanding any provision of this Lease to the contrary, including, without limitation, the provisions of Section 10.3(b) of this Lease, Landlord shall in no event be liable to Tenant, its employees, agents, and invitees, and Tenant hereby waives all claims against Landlord, for loss or interruption of Tenant's business or income (including, without limitation, any consequential damages and lost profit or opportunity costs), or any other loss, cost, damage, injury or liability resulting from, but not limited to, Acts of God, acts of civil disobedience or insurrection, acts of omissions (criminal or otherwise) of any third parties, including without limitation, any other tenants within the Building or their agents, employees, contractors, guests or invitees. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Except as expressly provided in this Lease, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business (including without limitation consequential damages and lost profit or opportunity costs) arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the premises, nor shall any related activity by Landlord constitute an actual or constructive eviction, provided, however, that in making repairs, alterations or improvements, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business in the Premises. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building and of defects in any improvements or equipment. SECTION 10.5 WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant each hereby waives all rights of recovery against the other and the other's agents on account of loss and damage occasioned to the property of such waiving party to the extent only that such loss or damage is required to be insured against under Article X; provided however, that the foregoing waiver shall not apply to the extent of Tenant's obligations to pay deductibles under any such policies and this Lease. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any "all-risk" property insurance policies required by this Article, even though such loss or damage might be occasioned by the negligence of such party, its agents, 13 14 employees, contractors, guests or invitees. All of the parties' repair and maintenance and indemnity obligations under this Lease shall be subject to the waiver of subrogation contained in this Section 10.5. The parties hereto shall cause each property insurance policy it obtains to include a waiver of subrogation regarding the liabilities released hereby. ARTICLE XI. DAMAGE OR DESTRUCTION SECTION 11.1 RESTORATION. (a) If the Building of which the Premises are a part is damaged, Landlord shall repair that damage as soon as reasonably practicable, at its expense, unless: (i) Landlord reasonably determines that the cost of repair is greater than Fifty Thousand Dollars ($50,000.00) and is not covered by Landlord's coverages, plus such additional amounts Tenant elects, at its option, to contribute, excluding however the deductible (for which Tenant shall be responsible for tenant's share); (ii) Landlord reasonably determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, including without limitation Hazardous Materials, earthquake faults, and other similar dangers) within thirty (30) days after the date of the damage; or (iii) a Default by Tenant has occurred at the time of such damage, should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in writing within fifteen (15) days after the damage occurs and this Lease shall terminate as of the date of that notice. (b) Unless Landlord elects to terminate this Lease in accordance with subsection (a) above, this Lease shall continue in effect for the remainder of the Term; provided that so long as Tenant is not in Default under this Lease, if the damage is so extensive that Landlord reasonably determines that the Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, earthquake faults, and other similar dangers) so as to allow Tenant's substantial use and enjoyment of the Premises, or are not in fact repaired by Landlord, within two fifteen (15) days after the date of damage, then Tenant may elect to terminate this Lease by written notice to Landlord either within the fifteen (15) day period stated in subsection (a), or within fifteen (15) days following Landlord's failure to so repair the Premises within thirty (30) days after the date of damage. (c) Commencing on the date of any damage to the Building, and ending on the sooner of the date the damage is repaired or the date this Lease is terminated, the rental to be paid under this Lease shall be abated in the same proportion that the floor area of the Premises that is rendered unusable by the damage from time to time bears to the total floor area of the Premises, provided that Tenant is then carrying the business interruption insurance required in Exhibit B. (d) Tenant shall fully cooperate with Landlord in removing Tenant's personal property and any debris from the Premises to facilitate all inspections of the Premises and 14 15 the making of any repairs. Notwithstanding anything to the contrary contained in this Lease, if Landlord in good faith believes there is a risk of injury to persons or damage to property from entry into the Building or Premises following any damage or destruction thereto, Landlord may restrict entry into the Building or the Premises by Tenant, its employees, agents and contractors in a non-discriminatory manner, without being deemed to have violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to determine if there are safe methods of entry into the Building or the Premises solely in order to allow Tenant to retrieve files, data in computers, and necessary inventory, subject however to all indemnities and waivers of liability from Tenant to Landlord contained in this Lease and any additional indemnities and waivers of liability which Landlord may reasonably require. SECTION 11.2 LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law. ARTICLE XII. EMINENT DOMAIN SECTION 12.1 TOTAL OR PARTIAL TAKING. If all or a material portion of the Premises is taken, whether such taking is permanent or temporary, by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses or loss of good will recoverable from the taking authority. SECTION 12.2 TAKING OF PARKING AREA . In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord shall have no obligation to locate or provide substitute or additional parking. If the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect. ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE SECTION 13.1 SUBORDINATION. At the option of Landlord, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as Tenant is not in Default under this Lease, this Lease shall not be terminated or Tenant's quiet 15 16 enjoyment of the Premises disturbed in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in- interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall execute any instrument reasonably required by Landlord's successor for that purpose. Tenant shall also, upon written request of Landlord, execute and deliver all instruments as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above), or, if requested by Landlord, to subordinate, in whole or in part, any ground or underlying lease or the lien of any mortgage or deed of trust to this Lease. SECTION 13.2 ESTOPPEL CERTIFICATE. (a) Tenant shall, at any time upon not less than fifteen (15) days' prior written notice from Landlord, execute, acknowledge and deliver to Landlord, in any form that Landlord may reasonably require, a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect) and the dates to which the rental, additional rent and other charges have been paid in advance, if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured defaults on the part of Landlord, or specifying each default if any are claimed, and (iii) setting forth all further information that Landlord may reasonably require. Tenant's statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building. (b) Notwithstanding any other rights and remedies of Landlord, Tenant's failure to deliver any estoppel statement within the provided time shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance, and (iii) not more than one month's rental has been paid in advance. ARTICLE XIV. DEFAULTS AND REMEDIES SECTION 14.1 TENANT'S DEFAULTS. The occurrence of any one or more of the following events, following notice by Landlord and the expiration of the applicable cure period, if any, without cure by Tenant, shall constitute a default by Tenant (a "Default" as used in this Lease): (a) The failure by Tenant to make any payment of rent or additional rent required to be made by Tenant, as and when due, where the failure continues for a period of five (5) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. For purposes 16 17 of these default and remedies provisions, the term "additional rent" shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease. (b) Assignment, sublease, encumbrance or other transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord. (c) The failure of Tenant to timely and fully provide any subordination agreement, or estoppel certificate in accordance with the requirements of Article XIII, where the failure continues for a period of ten (10) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. (e) The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant or such shorter period as is specified in any other provision of this Lease; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is served in the manner required under Code of Civil Procedure Section 1162. (d) (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, if possession is not restored to Tenant within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where the seizure is not discharged within thirty (30) days. Landlord shall not be deemed to have knowledge of any event described in this subsection unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant's insolvency. In the event that any provision of this subsection is contrary to applicable law, the provision shall be of no force or effect. SECTION 14.2 LANDLORD'S REMEDIES. (a) In the event of any Default by Tenant, or in the event of the abandonment of the Premises by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies: 17 18 (i) Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant: (1) The worth at the time of award of the unpaid rent and additional rent which had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided; (3) The worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided; (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant's Default, including, but not limited to, the cost of recovering possession of the Premises, refurbishment of the Premises, marketing costs, commissions and other expenses of reletting, including necessary repair and, reasonable attorneys' fees, and any other reasonable costs; and (5) At Landlord's election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term "rent" as used in this Lease shall be deemed to mean the Basic Rent and all other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty-four (24) month period immediately prior to Default, except that if it becomes necessary to compute such rental before the twenty-four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in subparagraphs (1) and (2) above, the "worth at the time of award" shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in subparagraph (3) above, the "worth at the time of award" shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (ii) Landlord may elect not to terminate Tenant's right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to 18 19 protect the Landlord's interests under this Lease, shall not constitute a termination of the Tenant's right to possession of the Premises. (b) The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time. (c) No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord's knowledge of the preceding breach or default at the time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy available to Landlord by virtue of the breach or default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant's estate shall not waive or cure a default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord's right to recover the balance of the rent or pursue any other remedy available to it. No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of the Lease or a surrender of the Premises. SECTION 14.3 LATE PAYMENTS. Any rent due under this Lease that is not received by Landlord within five (5) days of the date when due shall bear interest at the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any Default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any rent due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge in a sum equal to the greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment. The foregoing late charge shall not be charged, however, in connection with the initial payment of rent not paid by Tenant within five (5) days after the date due. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant's Default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies. 19 20 SECTION 14.4 RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant's sole cost and expense and without any abatement of rent or right of set-off except as specifically set forth in this Lease. If Tenant fails to pay any sum of money, other than rent, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant's part. Landlord's election to make the payment or perform the act on Tenant's part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid by Landlord and all necessary incidental costs, together with interest at the maximum rate permitted by law from the date of the payment by Landlord. Landlord shall have the same rights and remedies if Tenant fails to pay those amounts as Landlord would have in the event of a Default by Tenant in the payment of rent. SECTION 14.5 DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion. Except as expressly provided in this Lease, no delay or omission of Tenant to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any default by Landlord. SECTION 14.6 EXPENSES AND LEGAL FEES. All sums reasonably incurred by Landlord in connection with any Default by Tenant under this Lease including without limitation all costs, expenses and actual accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable by Tenant to Landlord on demand, and shall bear interest at the rate of ten percent (10%) per annum. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts. SECTION 14.7 WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY 20 21 MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. SECTION 14.8 SATISFACTION OF JUDGMENT. The obligations of Landlord and Tenant under this Lease do not constitute the personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord or Tenant, or their respective constituent partners. Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Building and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Building and no action for any deficiency may be sought or obtained by Tenant. SECTION 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim or demand arising in tort or in contract against Landlord based upon or arising in connection with this Lease (except those arising in connection with Sections 10.3(b) of this Lease) shall be barred unless Tenant commences an action thereon within twelve (12) months after the date that the occurrence of the act, omission, event or default upon which the claim, demand or right arises is discovered by Tenant. Nothing contained in this Section 14.9, however, shall extend the operation of any applicable statute of limitations binding on Tenant. ARTICLE XV. END OF TERM SECTION 15.1 SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear, casualty, Hazardous Materials (except to the extent Tenant is responsible therefor as provided in Section 5.3 of this Lease) and repairs which are Landlord's obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all personal property and debris, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect to repair any structural damage at Tenant's expense. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If Tenant fails to remove Tenant's personal property from the Premises upon the expiration of the Term, Landlord may remove, store, dispose of and/or retain such personal property, at Landlord's option, in accordance with then applicable laws, all at the expense of Tenant. Upon the expiration of the Term, if requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises. 21 22 ARTICLE XVI. PAYMENTS AND NOTICES All sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth in Item 10 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent pursuant to Section 4.1, all payments shall be due and payable within twenty (20) days after demand. All payments requiring proration shall be prorated on the basis of a thirty (30) day month and a three hundred sixty (360) day year. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered in person or by courier or overnight delivery service to the other party, or may be deposited in the United States mail, duly registered or certified, postage prepaid, return receipt requested, and addressed to the other party at the address set forth in Item 10 of the Basic Lease Provisions, or if to Tenant, at that address or, from and after the Commencement Date, at the Premises (whether or not Tenant has departed from, abandoned or vacated the Premises). Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If any notice or other document is sent by mail, it shall be deemed served or delivered three (3) business days after mailing. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them. ARTICLE XVII. RULES AND REGULATIONS Tenant agrees to observe faithfully and comply strictly with the Rules and Regulations, attached as Exhibit D, and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and Common Areas. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease by any other tenant or such tenant's agents, employees, contractors, guests or invitees. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant's failure to keep and observe the Rules and Regulations following notice from Landlord and the expiration of the applicable cure period, shall constitute a Default under this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling. Notwithstanding anything to the contrary in this Article XVII, Tenant shall not be required to comply with any rule or regulation unless the same applies non-discriminatorily to all occupants of the Project. ARTICLE XVIII. BROKER'S COMMISSION Tenant warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and Tenant agrees to indemnify and hold 22 23 Landlord harmless from any cost, expense or liability (including reasonable attorneys' fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease. ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST In the event of any transfer of Landlord's interest in the Premises, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that the transferee assumes in writing all of such obligations and any funds held by the transferor in which Tenant has an interest shall be turned over, subject to that interest, to the transferee and Tenant is notified of the transfer as required by law. No holder of a mortgage and/or deed of trust to which this Lease is or may be subordinate, and no landlord under a so-called sale-leaseback, shall be responsible in connection with the Security Deposit, unless the mortgagee or holder of the deed of trust or the landlord actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership. ARTICLE XX. INTERPRETATION SECTION 20.1 GENDER AND NUMBER. Whenever the context of this Lease requires, the words "Landlord" and "Tenant" shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others. SECTION 20.2 HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation. SECTION 20.3 JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease. SECTION 20.4 SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease. 23 24 SECTION 20.5 TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease. SECTION 20.6 CONTROLLING LAW. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. SECTION 20.7 SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 20.8 WAIVER AND CUMULATIVE REMEDIES. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party's consent to any subsequent act. No breach by Tenant of this Lease shall be deemed to have been waived by Landlord unless the waiver is in a writing signed by Landlord. The rights and remedies of Landlord under this Lease shall be cumulative and in addition to any and all other rights and remedies which Landlord may have. SECTION 20.9 INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent. SECTION 20.10 ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding. SECTION 20.11 QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord. 24 25 SECTION 20.12 SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns. ARTICLE XXI. EXECUTION AND RECORDING SECTION 21.1 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. SECTION 21.2 CORPORATE AND PARTNERSHIP AUTHORITY. If a corporation or partnership is executing this Lease, each individual executing this Lease on behalf of the corporation or partnership represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation or partnership, and that this Lease is binding upon the corporation or partnership in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of its board of directors' resolution or partnership agreement or certificate authorizing or evidencing the execution of this Lease. SECTION 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant. SECTION 21.4 RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. SECTION 21.5 AMENDMENTS. No amendment or termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect. SECTION 21.6 EXECUTED COPY. Any fully executed photocopy or similar reproduction of this Lease shall be deemed an original for all purposes. SECTION 21.7 ATTACHMENTS. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease. ARTICLE XXII. MISCELLANEOUS 25 26 SECTION 22.1 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any other tenant or apparent prospective tenant of the Building or Project, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease, and as required for any security filings, financings or sales, reorganizations or consolidations of Tenant's business. SECTION 22.3 APPROVALS. Subject to Landlord's rights to consent or approve in its "discretion" or "sole discretion" as provided in this Lease, whenever the Lease requires an approval, consent, designation, determination, discretion or judgment by either Landlord or Tenant, such approval, consent, designation, determination, discretion or judgment (including, without limiting the generality of the foregoing, those required in connection with assignment and subletting) shall not be unreasonable or unreasonably withheld or delayed and in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. MiniMed Inc. Allecure By: /s/ KEVIN SAYER By: /s/ STEPHEN MCCORMACK ---------------------- ------------------------ Kevin Sayer Stephen McCormack Its: Senior V.P. Finance, CFO Its: President & CEO EX-10.39 6 v70622ex10-39.txt EXHIBIT 10.39 1 Exhibit 10.39 AMENDED AND RESTATED IMPLANTABLE PUMP LICENSE AND DISTRIBUTION AGREEMENT This AMENDED AND RESTATED IMPLANTABLE PUMP LICENSE AND DISTRIBUTION AGREEMENT ("Agreement") is made as of the 1st day of February, 2001 by and between MINIMED INC. ("MiniMed"), a Delaware corporation, and MEDICAL RESEARCH GROUP, INC. ("MRG"), a Delaware corporation, with respect to the following facts: RECITALS MiniMed and MRG are parties to an Implantable Pump License and Distribution Agreement dated as of September 1, 1998, as amended June 8, 1999 (the "Prior Agreement"). The parties now desire to amend and restate the Prior Agreement in full on the terms set forth in this Agreement. Concurrently with the execution and delivery of this Agreement, the parties are also entering into an Amendment to Glucose Sensor Agreement and a Stock Purchase Agreement, both dated as of the same date as this Agreement. 1. DEFINITIONS 1.1 AFFILIATE. A Person, including Subsidiaries, that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, the designated Party, but only for as long as such control relationship exists. For purposes of this definition, "control" shall include (a) in the case of a corporation, ownership of more than fifty percent (50%) of the shares of stock entitled to vote for the election of directors, and (b) in the case of any other business entity, ownership of more than fifty percent (50%) of the beneficial interest in capital or profits. 1.2 CONFIDENTIAL INFORMATION. All information of MRG or MiniMed that (a) is generally not available from public sources, although information shall not cease to be Confidential Information if it becomes publicly available as a result of a breach of this Agreement, and (b) is either designated as Confidential Information or, is of such nature or is disclosed in such manner that the fact that it is not publicly available would be obvious to a reasonable person under the circumstances. 1.3 COVERED APPLICATIONS. Applications of Licensed Products for which MRG appoints MiniMed as a distributor. These applications may specify the use of a particular drug, the treatment of a particular condition and/or the use of drugs manufactured by a particular company. As provided in this Agreement Covered Applications may be modified from time to time and may be exclusive or non-exclusive. 1.4 EFFECTIVE DATE. The Effective Date is September 1, 1998. 1.5 ENHANCED PUMP. An apparatus or system which utilizes Pump Technology for diabetes or non-diabetes applications or both in conjunction with Enhancement Technology. 1.6 ENHANCEMENT TECHNOLOGY. Electronic enhancements for Pump Technology that MRG has developed as set forth in Section 4 and any subsequent Improvements thereto. 1.7 EXCLUDED APPLICATIONS. Applications of Licensed Products expressly excluded from the Covered Applications pursuant to Section 5.1 and applications which become Excluded Applications in accordance with the terms of this Agreement. These applications may specify the use of a particular drug, the treatment of a particular condition and/or the use of drugs manufactured by a particular company. 1.8 FDA. The United States Food and Drug Administration or any successor agency having substantially the same authority. 1.9 GLUCOSE CONTROLLER. An apparatus or system which utilizes Glucose Sensing Technology to control an insulin infusion device in a human or in an animal. 2 1.10 GLUCOSE MONITOR. Any monitor product utilizing Glucose Sensing Technology to provide indications of glucose concentration or changes in glucose concentration in a human or in an animal. 1.11 GLUCOSE SENSING TECHNOLOGY. Technology relating to implantable glucose sensors intended to be used in vivo in humans or in animals for a period of at least forty-five days before replacement, including Improvements thereto. 1.12 GLUCOSE SENSOR OPTION AGREEMENT. The Glucose Sensor Option Agreement dated as of September 1, 1998, by and between MiniMed and MRG, as amended by an Amendment thereto dated as of the same date as this Agreement. 1.13 IDE. Approval from the FDA to conduct a clinical trial of a medical device in humans under the Investigational Device Exemption regulations adopted by the FDA. 1.14 IMPROVEMENT. Any change, addition or deletion in the design, configuration, formulation, ingredients, components, or software of an apparatus or system, or in the formulas, processes, procedures, methods or techniques used in its manufacture, production or assembly that enhances the performance of an apparatus or system or that makes it quicker, easier or less expensive to manufacture, assemble, distribute, store, use or dispose of. 1.15 JOHNS HOPKINS RIGHTS. All rights which MiniMed now has to Technical Information as a result of or relating to any contract or agreement with The Johns Hopkins University, including but not limited to a License Agreement which The Johns Hopkins University and Pacesetter Systems, Inc. entered into on February 13, 1980, the Addenda thereto executed December 1, 1981 and December 8, 1982, the Agreement Constituting Consent to Assignment dated February 28, 1995, the Amendment to the 1980 License Agreement dated March 8, 1990 and the Novation Agreement made April 29, 1992, by and between The Applied Physics Laboratories of The Johns Hopkins University and Pacesetter Systems, Inc. and its successors, Pacesetter Infusion, Ltd. and MiniMed Technologies, Ltd. 1.16 LICENSED PRODUCTS. Implantable microinfusion pump systems intended for in vivo use in humans or in animals, including all accessories, utilizing in whole or in part MiniMed's Pump Technology and/or Improvements thereof and any Enhancement Technology and/or other technology developed by MRG and/or Improvements of either of the foregoing that is incorporated into such Products. Glucose Controllers, Glucose Monitors, Long-Term Glucose Sensors and the abdominal lead that connects the implantable pump to a Long-Term Glucose Sensor are not Licensed Products. 1.17 LICENSED PUMP RIGHTS. MiniMed's rights to any patent or Technology included within MiniMed's Pump Technology. 1.18 LICENSED PUMP SALES. The U.S. dollar amount of gross revenues from sales of the Licensed Products to Third Parties who are not Affiliates of MiniMed by MRG or any of its Affiliates, excluding any amount paid to MRG or its Affiliates by the Third Party for transportation; shipping and mailing costs; sales, use or excise taxes; custom duties; tariffs or insurance and reduced by all amounts refunded, allowed, credited or discounted with respect to such sales, whether or not the sale occurred in the same accounting period. 1.19 LIST PRICE The price generally published from time to time for a product offered for sale in a particular market and in particular quantities to Third Parties unrelated to either Party who are not sales agents, sales representatives, dealers or distributors, but instead utilize the product for themselves or in providing medical care to unrelated persons. 1.20 LONG-TERM GLUCOSE SENSOR. Any sensor, the principal purpose of which is to detect the presence of, or to measure the quantity of, or any change in the quantity of, glucose in the body of a human or animal subject that is intended to be used in vivo with a Licensed Product for at least 45 days before replacement, including Improvements thereto. 1.21 MANN FOUNDATION RIGHTS. All rights which MRG now has to Technical Information as a result of or relating to any contract or agreement involving the Mann Foundation, including but not limited to all rights under a License Agreement dated February 6, 1996 between MRG and the Mann Foundation, as amended April 17, 1998 and August 30, 2000. 1.22 MRG'S GLUCOSE SENSING TECHNOLOGY. All rights which MRG now has and hereafter develops or acquires to Glucose Sensing Technology, including but not limited to, Mann Foundation Rights and UC Rights as such rights relate to Glucose 2 3 Sensing Technology. MRG's Glucose Sensing Technology shall not include any glucose sensing technology under development, developed or licensed by MiniMed. 1.23 MINIMED'S PUMP TECHNOLOGY. All rights which MiniMed has to Pump Technology, including but not limited to, the Johns Hopkins Rights, as such rights relate to Pump Technology. 1.24 OPTION. The option granted by MRG to MiniMed to purchase marketing rights to the Long-Term Glucose Sensor granted pursuant to Section 5.1 of the Glucose Sensor Option Agreement. 1.25 OTHER APPLICATIONS. Applications of Licensed Products which are not Covered Applications or Excluded Applications. As provided in this Agreement Other Applications may be modified from time to time. 1.26 PARTY. Either entity that is a signatory to this Agreement. 1.27 PMA. Approval from the FDA to commercially distribute a medical device under the Pre Market Approval regulations. 1.28 PERSON. Any individual, partnership, association, joint stock company, joint venture, limited liability company, corporation, trust, unincorporated organization, other entity or government, or agency or political subdivision, economic unit or entity thereof, including without limitation, each of the Parties to this Agreement and their respective Affiliates. 1.29 PUMP TECHNOLOGY. Technology relating to implantable infusion pumps developed or sold by MiniMed, as of September 1, 1998, including (i) MiniMed's MIP 2001 pump and successor products, and any subsequent Improvements thereto (including the MIP 2007 and the NewMIP model), including accessories thereto, and (ii) a constant flow pump under development by MiniMed. 1.30 REGULATORY APPROVAL. Approval by appropriate authorities to allow commercial sale of any Licensed Products in a certain country or countries, for example the FDA PMA or 510(k) approval in the United States. 1.31 [This Section Intentionally Omitted.] 1.32 SUBSIDIARIES. Means entities of which a designated Party owns the equity interests specified in 1.1(a) or (b), either directly or indirectly through other entities so owned. 1.33 TECHNICAL INFORMATION. Any information reasonably relevant to the Licensed Products or otherwise pertaining to the design, manufacture, assembly, production, operation, performance or use of the Licensed Products or any component of Licensed Products, including but not limited to invention disclosures, patent applications, issued patents, feasibility study information, testing and reliability information, specifications, documentation, drawings, computer programs, software, prototypes, and the like. 1.34 TECHNOLOGY. Any invention, development or Improvement, and any trade secret, "know-how", manufacturing formula, process, procedure, method or technique, whether or not patentable, copyrightable or otherwise protectable by law. 1.35 NEWMIP. The model of MRG's implantable pumps to be developed pursuant to Section 16.1. 1.36 THIRD PARTY. Any Person other than the legal entities that are Parties to this Agreement. 1.37 TRANSFER PRICE. The price charged for any product by MRG to MiniMed. 1.38 UC RIGHTS. All rights which MRG now has to Technical Information as a result of or relating to any contract or agreement involving the Regents of the University of California, including the Exclusive License Agreement for Glucose Sensors and Systems, effective February 28, 1990, U.C. Agreement Control No. 90-04-0104. 3 4 1.39 WILSON-GREATBATCH RIGHTS. All rights which MiniMed has or had to Technical Information as a result of or relating to any contract or agreement involving Wilson-Greatbatch Ltd., including but not limited to a License Agreement and Supply Agreement, each made as of the 1st day of October, 1993 and any amendments thereto. 2. CONFIDENTIAL INFORMATION 2.1 TREATMENT OF CONFIDENTIAL INFORMATION. MiniMed and MRG shall maintain all Confidential Information disclosed by the other Party pursuant to or during the performance of this Agreement in strict secrecy and confidence, and not disclose such Confidential Information to any Third Party, nor make any use of such Information for its own benefit or gain except as is mutually agreed between the Parties or is otherwise provided for and permitted under this Agreement and the Glucose Sensor Option Agreement. No Confidential Information or materials pertaining to Licensed Products or MiniMed's Pump Technology will be disclosed to any other Person other than those approved in writing by MiniMed with respect to Confidential Information disclosed by it to MRG and by MRG with respect to Confidential Information disclosed by it to MiniMed, except disclosure to sublicensees, potential distributors and contractors with a need to know and bound by confidentiality agreements and to the FDA and similar regulatory agencies of information relative to obtaining regulatory approval. Nothing in this Section 2.1 shall apply, however, to any disclosure of Confidential Information that may be required by applicable law, including without limitation disclosures (to the extent they may be legally required) in documents filed with the Securities and Exchange Commission and private placement memoranda used in connection with the sale of securities. MRG acknowledges its understanding and agreement that as a public company MiniMed has responsibilities to disclose certain information about its affairs and will be required to publicly disclose the existence of this Agreement and its material terms as well as future developments in the portion of its business to which this Agreement relates. MiniMed likewise acknowledges its understanding and agreement that MRG may be required to make similar disclosure in connection with its capital raising efforts. 2.2 REQUESTED DISCLOSURE OF CONFIDENTIAL INFORMATION. In the event either Party is requested pursuant to, or required by, applicable law or regulation or by legal process to make any disclosure otherwise prohibited hereunder, the Party that is required to make disclosure (the "Disclosing Party") shall, to the extent reasonably practicable, provide the other Party with prompt notice of such requests or requirements prior to disclosure so that (a) the other Party may seek an appropriate protective order or other remedy and/or (b) the Disclosing Party and the other Party can seek in good faith to consult with the Disclosing Party on the appropriate scope and approach to disclosure. In the event that such protective order or other remedy is not obtained, the Disclosing Party shall furnish only that portion of the Confidential Information which the Disclosing Party reasonably believes may be legally required and, to the extent reasonably practicable, use reasonable efforts to obtain confidential treatment for the Confidential Information disclosed. 2.3 LIMITED RELEASE. MiniMed and MRG shall be released from the obligations of Sections 2.1 and 2.2 to the extent that any of the disclosed information: (a) was already part of the public domain at the time of the disclosure by the other Party or (b) becomes publicly available through no fault of the receiving Party (but only after and only to the extent that it becomes publicly available. 2.4 TERM OF CONFIDENTIALITY. The obligation of MiniMed and MRG to receive and hold information disclosed by the other Party in confidence, as required by Section 2.1, shall terminate three (3) years after termination of this Agreement or ten years after the Effective Date, whichever is later, except that such obligations shall not terminate as to Technical Information which constitutes a trade secret until such time as that information has become publicly available. 3. LICENSE OF PATENT RIGHTS AND MINIMED'S PUMP TECHNOLOGY 3.1 GRANT OF LICENSE. Subject to Section 3.2, MiniMed hereby grants to MRG and MRG hereby accepts from MiniMed, the worldwide right to manufacture, cause to be manufactured, promote, sell, market, distribute and use the Pump Technology, whether or not in conjunction with the Long-Term Glucose Sensor. The rights granted MRG shall be exclusive except (a) to the extent MiniMed's rights to the Pump Technology depend upon licenses which do not give MiniMed exclusive rights, (b) nothing herein shall limit the rights of MiniMed with respect to any Technology or to license others with respect to Technology insofar as such rights relate to external infusion pumps or any other application not constituting an implantable infusion pump and (c) nothing herein is intended to limit the rights of MiniMed under Section 5 or 8. 3.2 MINIMED'S DISTRIBUTION AND MANUFACTURING RIGHTS. Notwithstanding anything to the contrary set forth in Section 3.1, MRG agrees not to engage in any commercial distribution or commercial exploitation of the Pump Technology or to manufacture any Licensed Product that would violate this Agreement or MiniMed's rights under Section 5 of this Agreement. 4 5 3.3 PROVIDING OF INFORMATION. MiniMed shall provide to MRG access to all documentation relating to the design, manufacture, testing and regulatory approval of its implantable pumps. 3.4 ROYALTIES. The license granted pursuant to Section 3.1 shall be a fully paid-up license with no obligation on the part of MRG to pay royalties to MiniMed except as follows: 3.4.1 ROYALTIES FOR INSULIN APPLICATIONS. If MRG converts MiniMed's rights under Section 5.1 to Covered Applications to a non-exclusive basis pursuant to Section 7, then thereafter MRG will pay to MiniMed a royalty of ten percent (10%) of Licensed Pump Sales from the sale, lease, sublicensing or other commercial exploitation of Licensed Products that are for the delivery of insulin during the term of this Agreement (excluding the NewMIP referred to in Section 16.1) until aggregate royalties in the amount of $5 million have been paid and thereafter a royalty equal to three percent (3%) of such Licensed Pump Sales. For purposes of this Section 3.4.1 Licensed Products do not include the abdominal lead connecting MRG's Long-Term Glucose Sensor to an implantable pump. Notwithstanding the foregoing, in the event the Licensed Products include the Enhancement Technology, the applicable royalty rates pursuant to the preceding sentence will be reduced to five percent (5%) of Licensed Pump Sales instead of ten percent (10%) and two percent (2%) of Licensed Pump Sales instead of three percent (3%). Whether or not MRG establishes separate prices for the Licensed Products and the Long-Term Glucose Sensor, for purposes of this Section 3.4.1 the portion of total revenues from Licensed Products distributed together with MRG's Long-Term Glucose Sensor shall be equal to: (a) if MiniMed then has List Prices for the Licensed Product, then MiniMed's applicable List Price; (b) if (a) does not apply and MRG is then regularly publishing List Prices for the Licensed Product, then MRG's applicable List Price but not less than manufacturing cost plus 30% thereof; (c) whether or not (a) or (b) applies, if MRG sells any Licensed Product directly to those who utilize the Licensed Products themselves or in providing medical care to an unrelated person, then the actual sale prices of such Licensed Products but in no event less than the manufacturing cost plus 50% thereof. In no event, however, shall more than 70% of the aggregate revenues received for the Licensed Product and the Long-Term Glucose Sensor be allocated to the Licensed Product for purposes of this Section 3.4.1. 3.4.2. ROYALTIES ON EXCLUDED APPLICATIONS. If MRG pursues commercial development of Licensed Products for any application that is not a Covered Application, then MRG will pay to MiniMed a royalty of three percent (3%) of Licensed Pump Sales during the term of this Agreement from such applications if the Licensed Products are programmable implantable pump systems that do not use the Enhancement Technology, two percent (2%) if the Licensed Products are programmable implantable pump systems that use the Enhancement Technology and one and one-half percent (1.5%) of such Licensed Pump Sales from Licensed Products that are constant flow implantable pump systems. 3.4.3 ROYALTIES TO JOHNS HOPKINS AND WILSON GREATBATCH. In addition to the royalties provided for in Section 3.4.1 MRG shall pay to MiniMed all royalties relating to all applications payable by MiniMed pursuant to the agreements relating to the Johns Hopkins Rights. Payment under the invoice shall not be due before MiniMed is obligated to pay such payments to the licensor under the agreements evidencing the Johns Hopkins Rights. In addition, MRG will perform on behalf of MiniMed all of MiniMed's obligations under the agreements, addenda and amendment evidencing the Johns Hopkins Rights and, if any such obligations remain unperformed, the Wilson Greatbatch Rights, in each case arising after the Effective Date except as otherwise agreed to in writing and will not take any action or omit to take any action which would constitute a default under any such agreement, addendum or amendment. 3.5 EXCLUSIONS. In the event any tax is imposed on MRG with respect to the payment of any royalty set forth in Section 3.4, MRG shall, at its sole expense, have the right to withhold from such royalty the amount of such tax actually paid by it; provided, however, that MRG shall execute and deliver such documents and take such other actions as MiniMed reasonably may request in connection with disputing such tax or obtaining a credit or refund thereof. 5 6 3.6 PAYMENT 3.6.1 DATES OF PAYMENT. The royalties payable by MRG to MiniMed pursuant to Section 3.4 shall be paid on or before the forty-fifth (45th) day following the end of each calendar quarter and shall be computed with respect to all Licensed Pump Sales during such quarterly period. 3.6.2 DOCUMENTATION. MRG shall deliver to MiniMed, together with each payment of royalties payable by MRG to MiniMed under Section 3.4, a written statement, verified as to correctness by the Manager or the Chief Financial Officer of MRG, setting forth for each Licensed Product a detailed calculation of the amount of royalties then due to MiniMed and such information as MiniMed reasonably shall require to verify the accuracy of such computation. 3.6.3 CURRENCY OF PAYMENT. All amounts payable by MRG under Section 3.4 shall be paid in United States dollars; provided, however, that any such amounts payable with respect to Licensed Products invoiced by MRG in a currency other than United States dollars shall be converted into United States dollars at the selling price for such foreign currency published by Citibank N.A. as the Selling Price for Bank Transfers in the United States for Payment Abroad at the close of business on the last business day of the calendar quarter with respect to which such royalty relates. 3.7 LATE FEE. In the event any payment payable by MRG to MiniMed pursuant to Section 3.4 shall not be paid promptly when due, the unpaid balance thereof shall bear interest at the lesser of (a) the prime rate of Citibank N.A. from time to time in effect plus 1% or (b) the maximum rate permitted by applicable law. 3.8 BOOKS AND RECORDS. MRG shall establish and maintain at its principal places of business in the United States, or at such other place as to which MiniMed may consent in writing, true and complete books of account, records and other data, containing all particulars necessary for an exact determination of the royalties payable by MRG to MiniMed pursuant to Section 3.4. During the term of this Agreement, and for three (3) years thereafter, MRG and its employees and agents, including but not limited to, accountants and attorneys, shall have the right, during normal business hours, on forty-eight (48) hours prior written notice, to inspect, copy and make extracts from all such books of account, records and other data to verify the accuracy of any royalties paid pursuant to Section 3.4, or any statements furnished in accordance with Section 3.6.2. In the event any examination by MiniMed of MRG's books and records discloses underpayments to MiniMed of the royalties theretofore actually paid by MRG with respect to such quarter, MRG shall pay to MiniMed such deficiency plus interest pursuant to Section 3.7, and, if the deficiency exceeds five percent (5%) for the relevant calendar quarter, MRG shall further reimburse MiniMed on demand for all of MiniMed's reasonable and documented out-of-pocket costs and expenses, including, but not limited to, all professional fees, incurred in connection with any such examination. 3.9 ADDITIONAL LICENSE RIGHTS. Effective if and when MiniMed's distribution rights under Section 5.1 become nonexclusive or MRG repurchases rights pursuant to Section 7.6.1(a), MiniMed hereby grants to MRG: (a) a fully paid-up, royalty-free license limited to the field of use of implantable infusion pumps on all Technology that is developed by MiniMed through the date such distribution rights become non-exclusive or the date MRG repurchases such rights, but only if and to the extent such Technology is then utilized in a Licensed Product; and (b) a license to any software that has been developed by MiniMed through January 31, 2003 which is then being utilized in a Licensed Product which provides insulin dosage based upon a glucose sensor and is patented, constitutes a trade secret or is the subject of a pending patent application, but only if and to the extent such Technology is then utilized in a Licensed Product. MRG shall pay MiniMed a royalty equal to 3.5% of Net Sales from the software. "Net Sales" is defined as the U.S. dollar amount of gross revenues from sales of the software to Third Parties who are not Affiliates of MiniMed by MRG or any of its Affiliates, excluding any amount paid to MRG or its Affiliates by the Third Party for transportation, shipping and mailing costs; sales, use or excise taxes; custom duties; tariffs or insurance, and reduced by amounts refunded, allowed, credited or discounted with respect to such sales, whether or not the sale occurred in the same accounting. If the software is incorporated into another product or is sold with other products, the royalty will be based upon a reasonable allocation of the total price payable for the software and the other product or products so that the royalty is based upon the portion of the total price that is reasonably allocable to the software, whether or not a separate price is specified for the software. 6 7 4. DEVELOPMENT OF ENHANCEMENT TECHNOLOGY 4.1 Scope of Development 4.1.1 MRG has developed the Enhancement Technology contemplated by Section 4 of the Prior Agreement. 4.2 [This Section Intentionally Omitted.] 4.3 REGULATORY APPROVAL. MRG shall make commercially reasonable efforts to deliver to MiniMed any additional information necessary to comply with FDA regulatory requirements, and the regulatory requirements of any foreign jurisdiction designated by MiniMed. MiniMed shall use commercially reasonable efforts to obtain Regulatory Approval of an implantable pump for insulin delivery incorporating the Enhancement Technology. MRG shall reasonably cooperate with MiniMed in obtaining such approvals, including cooperation in connection with clinical trials. 4.4 [THIS SECTION INTENTIONALLY OMITTED.] 4.5 Ownership of Developed Technology. 4.5.1 IMPROVEMENTS BY MRG. The Enhancement Technology and any other Improvements to the Technology, Technical Information or Confidential Information developed by MRG relating to the Licensed Products during the term of this Agreement are, as between MRG and MiniMed, owned by MRG. MiniMed may make use and sell these Improvements without additional royalty to the extent that they are incorporated into a Licensed Product MiniMed has the right to make, use or sell under this Agreement. 4.5.2 IMPROVEMENTS BY MINIMED. Any Improvements developed by MiniMed to the Enhancement Technology or any other Improvements to the Technology, Technical Information or Confidential Information relating to the Licensed Products shall be owned by MiniMed; however, MRG will have the right to make, use and sell the Improvements, and sublicense others to do so, subject to payment by MRG to MiniMed of a reasonable royalty to be agreed upon by the parties or, if the Parties cannot agree within a reasonable time, by arbitration pursuant to Section 29. No such royalty shall be payable, however, with respect to any Licensed Products including such Improvements sold by MRG to MiniMed. 4.5.3 JOINT IMPROVEMENTS. Any patented Improvement jointly owned by the Parties shall not be licensed to any Third Party without the written consent of both Parties. 4.5.4 TERM OF LICENSES. Any licenses granted under Sections 4.5.1 through 4.5.3 will survive until the last of the patents on the Improvements, if any, which are the subject of the license, which may be a date after the termination of this Agreement. If there are not such patents or when the last of such patents expires, any such license will continue for as long as is legally permissible. MiniMed agrees to assist MRG in filing any patent applications and obtaining any patents (including execution of assignments and other documents and instruments necessary or proper) to carry out the provisions of these Sections. 4.5.5 UNITED STATES PATENT PROTECTION. Should any Enhancement Technology or the Improvements referred to in Section 4.5.1 through 4.5.3 of this Agreement be reasonably deemed to be suitable for protection under the patent laws of the United States, then the Party developing the Improvements shall prepare and file patent application(s) on the invention(s) in the United States, and shall bear all of the costs and expenses associated with obtaining and maintaining such patents. The Party developing the Improvement shall be identified as the owner in any such patent applications. In the event the developing Party elects not to seek patent protection on any invention, the other Party shall have the right to prepare and file patent application(s) for which all the costs and expenses associated with obtaining and maintaining such patents shall be borne by such Party and such patents shall be jointly owned by both Parties. 4.5.6 FOREIGN COUNTRY PATENT PROTECTION. Neither Party developing Improvements shall be obligated to file for or to obtain patent protection for any Enhancement Technology or any Improvements referred to in Section 4.5.1 through 4.5.3 in any foreign country, but if the developing party does file for or obtain any such patent protection, the developing Party shall bear all of the costs and expenses associated with obtaining and maintaining such patent protection. If the developing Party elects not to file for or to obtain patent protection for any Enhancement Technology or any such Improvements in any foreign country, then the 7 8 other Party may elect to file for or to obtain patent protection for such Enhancement Technology or Improvement, at its sole expense, and any such patent application or patent obtained therefrom shall be jointly owned by both parties. 4.5.7 USE OF ENHANCEMENT TECHNOLOGY. Subject to Section 7 and notwithstanding any other provision of this Section 4, MRG has not and will not license any Enhancement Technology for use in implantable pumps to any Third Party during the term of this Agreement for Covered Applications, unless MiniMed's rights to Covered Applications cease to be exclusive as provided herein. 5. APPOINTMENT OF MINIMED AS DISTRIBUTOR. 5.1 APPLICATIONS. As of the date of this Amended and Restated Agreement, Covered Applications will include the use of Licensed Products for delivery of insulin or any other compound for the treatment of diabetes. As of the Effective Date, Excluded Applications will include the use of Licensed Products for the treatment of pain, spasticity, cardiovascular or otological conditions. Nothing in this Agreement shall limit the right of MiniMed to distribute the Licensed Products with Long-Term Glucose Sensors or any other products offered by parties other than MRG for the treatment of diabetes or any other Covered Application. 5.2 APPOINTMENT. MRG hereby appoints MiniMed as its exclusive distributor throughout the world of all Licensed Products now or hereafter owned, acquired or developed by MRG to be used for a Covered Application. Nothing in this Agreement shall give MiniMed the right to distribute implantable pump systems for any other application. 5.3 EXCLUSIVITY. During the term set forth in Section 5.5 MRG will not (a) appoint any other distributor for the Licensed Products to be used for the Covered Applications, (b) sell, lease or otherwise transfer for consideration the Licensed Products to any Third Party for distribution for Covered Applications or (c) itself sell, lease or otherwise commercially exploit the Licensed Products for Covered Applications (other than pursuant to this Agreement). During the term of this Agreement MRG will forward to MiniMed all inquiries received from potential purchasers of the Licensed Products for the Covered Applications. MRG shall expressly restrict by contract all of its sales agents, distributors and other third parties from participating in the commercial distribution of the Licensed Products for the Covered Applications. If MRG terminates the exclusivity of MiniMed's rights to Covered Applications pursuant to Section 7, this paragraph will no longer apply. 5.4 SUBDISTRIBUTORS. MiniMed may appoint subdistributors, dealers or agents for itself with respect to the sale of the Licensed Products for the Covered Applications. Such subdistributors, dealers or agents of MiniMed shall have no rights against MRG under this Agreement, and MiniMed shall continue to be in all respects responsible for compliance with the terms and conditions of this Agreement with respect to all activities and sales made by any subdistributors and dealers. 5.5 TERM. The term of MiniMed's rights as distributor of the Licensed Products (the "Term of the Distribution Rights") will be deemed to have commenced on September 1, 1998 and will continue until December 31, 2003 and shall be deemed to be extended automatically thereafter on a year-to-year basis unless MiniMed terminates the Term of the Distribution Rights effective at the end of the initial term or any time thereafter by giving not less than six (6) months' prior written notice to MRG. This Agreement is also subject to premature termination as provided in Section 11. 6. PRICE AND TERMS OF SALE TO MINIMED. 6.1 PRICES UNTIL DECEMBER 31, 2002. From time to time during the Term of the Distribution Rights, MiniMed will purchase Licensed Products from MRG by placing written orders therefor using a customary purchase order. For the period from the date of this Amended and Restated Agreement through December 31, 2002, the Transfer Price payable by MiniMed for the Licensed Products ordered will be $9,000 for a complete implantable pump system (including a program communicator unit and catheter). The price for accessory items (including without limitation refill kits, needles and software products) will be 70% of MiniMed's List Price, whether purchased before or after December 31, 2002. 6.2. PRICES AFTER DECEMBER 31, 2002. For Licensed Products ordered after December 31, 2002, the Transfer Price will be equal to the average of MRG's manufacturing cost (determined in accordance with generally accepted accounting principles consistently applied) and MiniMed's List Price (as established by MiniMed) at the time the Licensed Products are ordered. In no event, however, will the Transfer Price exceed MiniMed's List Price less 15% thereof or be less than MRG's manufacturing cost plus 30%. If no Transfer Price satisfies the foregoing requirements, the price shall be determined by arbitration in accordance with Section 6.3. Each of the Parties will afford the other the right to examine its books and records and cause an audit thereof (at the cost of the examining party) in order to verify List Price and cost figures. Although no assurance can be given that its efforts will be 8 9 successful, MRG will use commercially reasonable efforts to reduce manufacturing costs as sales volume increases and the economies of scale are realized and engineering changes become cost effective to implement. 6.3 ADJUSTMENT IN PRICES. If at anytime after December 31, 2002 either Party believes that the Transfer Price arrangement is materially unfair to it, the Parties will meet and seek in good faith to agree on revised prices that are agreeable to both Parties and approximate pricing structures that are customary for other comparable distribution arrangements involving high technology products. If the Parties are unable to agree on price, the matter shall be resolved by arbitration in accordance with Section 29. 6.4 DELIVERY AND PAYMENT. The prices payable by MiniMed shall be F.O.B. MRG's place of manufacture with export packing to be furnished at MRG's expense. Payment will be made by MiniMed in United States dollars within thirty (30) days after shipment. If any invoice is not paid by MiniMed in accordance with its terms and within thirty (30) days of notice of late payment, MRG may cancel or delay further shipments until such payment is made. In the event any payment payable by MiniMed to MRG shall not be paid promptly when due, the unpaid balance thereof shall bear interest at the lesser of (a) the prime rate of Citibank N.A. from time to time in effect plus 1% or (b) the maximum rate permitted by applicable law. All sales will be final, and no returns will be allowed except as set forth below in Section 12 for products not complying with MRG's warranty or the inspection specifications. MiniMed shall be responsible for clearing all Licensed Products through customs and shall pay any and all taxes or duties imposed by any governmental authority on importation or sale of the Licensed Products. 6.5 TIME FOR DELIVERY. MiniMed and MRG will cooperate to ensure that MiniMed receives the quantities of pumps that it requires throughout the term referred to in Section 11.1. MiniMed will continue to provide supplemental purchase orders periodically, but at least every two months, specifying the quantity of pumps MiniMed will require over the next six month period. MRG will have the right to refuse any purchase order that would exceed MRG's manufacturing capacity; however MRG may not refuse a purchase order for a monthly requirement of 10% or less of MiniMed's minimum annual purchases required to maintain exclusivity as provided in section 7. If MiniMed's requirements for pumps increase or decrease such that MiniMed would like to amend these purchase orders MRG will attempt to accommodate those changes, but MRG may request additional payment from MiniMed beyond the agreed Transfer Prices if changes to purchase orders increase MRG's costs. Such additional payment will equal MRG's reasonably estimated additional cost and will be requested, if at all, within thirty (30) days of MRG's receipt of any such change. In the event of any disagreement as to whether the additional charges reflect MRG's costs, the matter shall be settled by arbitration pursuant to Section 29. Nothing in this Section 6.5 affects the Mandatory Purchase Commitment in Section 7.1 or the Minimum Sales Quotas in Section 7.2. 6.6 ADDITIONAL OBLIGATIONS OF MRG. Throughout the term of this Agreement, MRG will do each of the following: (a) provide such technical training for MiniMed's personnel as MiniMed may reasonably request together with copies of all manuals, product specifications and performance data and other materials as MiniMed may reasonably request, at MRG's cost and expense (except for travel cost); (b) provide all current packaging material for the Licensed Products; (c) provide necessary documentation to assist MiniMed in meeting requirements to register Licensed Products in various jurisdictions where they are to be sold and to comply with all laws and regulations applicable to the Licensed Products; and (d) provide MiniMed with copies of all correspondence with the FDA and other regulatory authorities after the Effective Date pertaining to the Licensed Products. 6.7 ADDITIONAL OBLIGATIONS OF MINIMED. MiniMed will do each of the following: (a) throughout the term of this Agreement provide MRG with copies of all correspondence with the FDA and other regulatory authorities after the Effective Date pertaining to the Licensed Products, and (b) produce, at MiniMed's expense, the English language version of all required labeling of implantable pumps using the Enhancement Technology, including patient and clinician instruction manuals. 9 10 7. MINIMUM PURCHASE REQUIREMENTS. 7.1 REQUIRED MINIMUM PURCHASES. MiniMed agrees to purchase the following minimum quantities of programmable implantable pump systems (the "Mandatory Purchase Commitment") in each of the respective periods: (a) from the date of this Amended and Restated Agreement through December 31, 2001, 20 pump systems per month; (b) from January 1, 2002 to December 31, 2002, 30 pump systems per month; (c) from January 1, 2003 through December 31, 2003, 45 pump systems per calendar month; and (d) from January 1, 2004 through December 31, 2004, 65 pump systems per calendar month. 7.2 MINIMUM PURCHASES NECESSARY TO KEEP EXCLUSIVE RIGHTS. In furtherance of the sales and distribution, the Parties agree that if MiniMed purchases the following minimum quantities of programmable implantable insulin pump systems in each of the respective calendar years (the "Minimum Sales Quotas"), its exclusive distribution rights will not be subject to termination as provided below:
Year Minimum Sales Quotas ---- -------------------- 2005 10% of external insulin pumps actually sold by MiniMed during 2004 2006 15% of external insulin pumps actually sold by MiniMed during 2005 2007 and following years 20% of external insulin pumps actually sold by MiniMed during the preceding year
7.3 DATES WHEN PUMP SYSTEMS DEEMED PURCHASED. For purposes of this Section 7, programmable implantable pump systems will be deemed to have been purchased when they are delivered by MRG to MiniMed or its designee, except that Licensed Products delivered by MRG at a date later than the delivery date specified in MiniMed's order will be deemed, solely for purposes of this Section 7, to have been purchased when they should have been delivered. If MiniMed does not accept any Licensed Products delivered to it in accordance with its right to do so under this Agreement, such products shall be deemed to have been purchased for purposes of this Section 7 but MiniMed shall be obligated to accept delivery of substitute Licensed Products if the Licensed Products not accepted were necessary to meet the minimum purchase requirements set forth above, provided that MiniMed's obligation to accept such substitute Licensed Products is subject to the condition that MRG deliver such Licensed Products meeting the requirements of this Agreement within 90 days after the date MiniMed has declined acceptance of the Licensed Products previously delivered. 7.4 TERMINATION OF EXCLUSIVE DISTRIBUTION RIGHTS. If MiniMed fails to purchase the applicable Minimum Sales Quota during the period after December 31, 2004, MRG's sole and exclusive remedy shall be to terminate the exclusivity feature of MiniMed's distribution rights under Section 5.1 of this Agreement (subject to MiniMed's right to pursue arbitration set forth below) by delivering written notice of its election to do so to MiniMed within one hundred eighty (180) days after the end of any calendar year in which MiniMed has failed to purchase the required number of pump systems. 7.4.1 Notwithstanding the preceding paragraph, MiniMed's exclusive distribution rights shall not be terminated for any calendar year or longer period referred to below prior to the date (the "One-Year Expiration Date") of expiration of one year after the first Regulatory Approval in the U.S. or the EU (by obtaining the CE Mark) of a system in which an MRG fully implanted Long-Term Glucose Sensor provides a significant portion of the control of insulin delivery by the Licensed Products if: (i) MiniMed has purchased one-half of the applicable Minimum Sales Quota during the year in question or longer period referred to below, and 10 11 (ii) MiniMed has used commercially reasonable efforts during the year in question to promote and sell the Licensed Products. 7.4.2 For the calendar year in which the One-Year Expiration Date occurs, the Minimum Sales Quota shall be divided by 365 (rounded to the nearest one-thousandth) to establish a daily average, and the Minimum Sales Quota for the fractional calendar year prior to the One-Year Expiration Date ( the daily average multiplied by the number of days in the year prior to the One Year Expiration Date) shall be added to the Minimum Sales Quota for the prior calendar year. MRG shall have the right to terminate MiniMed's exclusive distribution rights for the failure to purchase the Minimum Sales Quota for such fractional year only if MiniMed has failed to purchase one-half of the combined Minimum Sales Quota for the combined period as contemplated by 7.4.1(i) above and it has not used commercially reasonable efforts during the combined period to promote and sell the Licensed Products as contemplated by 7.4.1(ii) above. 7.4.3 The determination of whether or not MiniMed used such efforts as required by 7.4.1(ii) above shall be made by arbitration commenced by MiniMed in accordance with Section 29 except that discovery shall be limited to 60 days. MiniMed may only commence such an arbitration if it does so, within thirty (30) days after receipt of MRG's written notice of termination of exclusivity. In the arbitration the arbitrators will determine whether or not the requirement of 7.4.1(ii) has been met. Pending a final determination, MiniMed's distribution rights shall continue to be exclusive. 7.4.4 If MiniMed does not commence such an arbitration or if the arbitrators determine that the requirement of 7.4.1(ii) above has not been met, (A) MRG will have the right to distribute pumps through its own sales organization or to designate other parties as distributors of the Licensed Products for the Covered Applications on a non-exclusive basis, (B) MiniMed will have the right to continue to purchase Licensed Products for any Covered Applications on the terms set forth above and to distribute them throughout the world on a non-exclusive basis during the balance of the Term of the Distribution Rights, including any extension thereof, with no minimum purchase obligations and (C) MiniMed will have right to manufacture the Licensed Products for the Covered Applications or contract with others to do so provided that it gives MRG written notice of its intention to do so at least two years before it commences manufacturing Licensed Products for commercial distribution. If MiniMed commences manufacturing Licensed Products as provided above, it will be obligated to pay the royalties as provided in Section 8.1.2 and it will have the right to use the Technology relating to the Licensed Products as provided in Section 8.1.2. 7.5 ADJUSTMENTS IN MINIMUM SALES QUOTAS. 7.5.1 [This Section Intentionally Omitted.] 7.5.2 From the date of this Agreement until December 31, 2002, if MRG fails in any calendar quarter to deliver at least 80% of the Licensed Products ordered by MiniMed, in accordance with MiniMed's quality specifications, meeting the inspection requirements and warranty set forth in Section 12 and in quantities so ordered, or if MRG fails to deliver, or MiniMed is unable to manufacture or distribute Licensed Products as a result of an injunction obtained by a Third Party asserting any right to the Technology associated with the Licensed Products, then the obligation to meet the Mandatory Purchase Commitment and the Minimum Sales Quotas shall be suspended until such time as either MRG or MiniMed or a Third Party with whom either of them contracts begins manufacturing or, in the case of the assertion of Third Party rights to the Technology, the inability of MRG to deliver or MiniMed to manufacture or distribute Licensed Products is eliminated (as a result of legal proceedings or otherwise) and such delivery, manufacturing or distribution, as the case may be, begins. Commencing January 1, 2003, if MRG fails in any calendar month to deliver at least 80% of the Licensed Products ordered by MiniMed, in accordance with MiniMed's quality specifications meeting the inspection requirements and warranty set forth in Section 12 and in quantities so ordered, or if MRG fails to deliver, or MiniMed is unable to manufacture or distribute Licensed Products as a result of an injunction obtained by a Third Party asserting any right to the Technology associated with the Licensed Products, then the obligation to meet the Mandatory Purchase Commitment and the Minimum Sales Quotas shall be suspended until such time as either MRG or MiniMed or a Third Party with whom either of them contracts begins manufacturing or, in the case of the assertion of Third Party rights to the Technology, the inability of MRG to deliver or MiniMed to manufacture or distribute Licensed Products is eliminated (as a result of legal proceedings or otherwise) and such delivery, manufacturing or distribution, as the case may be, begins. The Mandatory Purchase Commitment or Minimum Sales Quota for the first period commencing thereafter shall be the same as the Mandatory Purchase Commitment or Minimum Sales Quota for the period in Section 7.1 or 7.2 in which the suspension occurred. The Mandatory Purchase Commitment and Minimum Sales Quota for each subsequent period shall be equal to those Quotas for the periods in Section 7.1 or 7.2 subsequent to the periods in which the suspension occurred. 11 12 7.5.3 If during any calendar year (a) MRG fails to deliver to MiniMed within the times required by this Agreement, all of the Licensed Products (determined without regard to the doctrine of substantial performance and without regard to the 10% requirement set forth in Section 6.5) ordered by MiniMed for delivery during that year in accordance with the terms of this Agreement, or not ordered in accordance with the terms of this Agreement but as to which MRG accepts the order (the "Number of Units Ordered") or (b) any such Licensed Products delivered during the calendar year fail to meet all of the requirements of this Agreement (including without limitation those set forth in Sections 12.1, 12.2 and 14.2), then the Mandatory Purchase Commitment or the Minimum Sales Quota for that calendar year will be reduced by the number of Licensed Products which are not so delivered plus those that do not meet such requirements (the "Shortfall"). In addition, the Mandatory Purchase Commitment or the Minimum Sales Quota for each subsequent calendar year will be reduced by the percentage that the Shortfall represents of the Number of Units Ordered. Such reduction shall be made whether or not the Number of Units Ordered exceeds the 10% limitation set forth in Section 6.5. 7.5.4 In no event shall MiniMed's marketing rights be converted to non-exclusive rights pursuant to Section 7.4, if the failure of MiniMed to meet the Minimum Sales Quota for any calendar year is caused by (a) the failure of MRG to deliver, in accordance with the terms of this Agreement (and without regard to the doctrine of substantial performance and to the 10% limitations set forth in Section 6.5), the Number of Units Ordered or (b) the failure of MRG to establish or maintain the capability to manufacture Licensed Products or continuously maintain that capability or (c) MiniMed's inability to manufacture or distribute as a result of an injunction obtained by a Third Party asserting rights in the Technology associated with the Licensed Products. The parties acknowledge that in the case of (b) or (c) MiniMed will not be obligated to place orders for Licensed Products and therefore (b) and (c) will apply even if (a) does not. 7.6 MRG'S REPURCHASE RIGHTS 7.6.1 In the event that MiniMed fails to satisfy the Mandatory Purchase Commitment in 2003 or 2004 for any period as set forth in Section 7.1 or fails to pay the Additional Fees referred to in Section 16.3 which have become due, then the sole and exclusive remedy shall be, at MRG's option, to either: (a) repurchase from MiniMed all rights to distribute the Licensed Products pursuant to Section 5 of this Agreement and all rights to distribute the Long Term Glucose Sensor and related products pursuant to the Glucose Sensor Option Agreement for a payment in cash of $60 million; or (b) repurchase from MiniMed its rights to distribute the NewMIP pursuant to Section 16.1 of this Agreement (as a stand-alone product or for use in combination with the Long Term Glucose Sensor) for the payment of $7.5 million, in which case MRG shall have nonexclusive rights to distribute the Long Term Glucose Sensor solely with the NewMIP. If MRG exercises its rights pursuant to (a) above, no royalties shall be payable pursuant to Section 3.4.1 or 3.4.2. 7.6.2 Such rights shall be exercisable by MRG by only after delivery of written notice to MiniMed of its failure to satisfy the Mandatory Purchase Commitment or the failure to pay the Additional Fees (or both). MiniMed will have 30 days thereafter to cure any such default. After the expiration of the cure period, MRG will have 60 days to exercise its rights by delivery of written notice to MiniMed (the "Exercise Notice") stating which of the two options MRG has elected to exercise. The closing of the transaction shall occur at the principal executive office of MiniMed at 9:00 a.m. local time 30 days after delivery of the Exercise Notice or on such other day, at such other time or at such other place as the parties may mutually agree to in writing. At the closing MiniMed will deliver to MRG appropriate documents of transfer of the rights being acquired by MRG against delivery by MRG, by cashier's or certified check or by wire transfer to an account designated in advance by MiniMed, the amount of the payment so required. MRG will have the right, however, to elect to pay $10 million of the $60 million payable pursuant to Section 7.6.1(a) at the closing and to pay the balance six months after the closing. Likewise, MRG will have the right to pay $1.875 million of the $7.5 million payable pursuant to Section 7.6.1(b) and to pay the balance 60 days after the closing. Any such deferred payment of any such amount due under Section 7.6.1(a) or (b) shall bear interest from the day of the closing until the amount is paid in full at the rate which is 2% in excess of the prime rate of Citibank N.A. on the date of the closing. Any such deferred portion of the purchase price shall be evidenced by a promissory note in customary form setting forth the foregoing terms, providing for the payment of costs of collection, including reasonable attorney's fees, and the acceleration of all amounts due thereunder in the event of any default in payment. 7.6.3 If MRG elects to exercise its rights in Section 7.6.1(b) with respect to the NewMIP, MiniMed shall retain the right under this Agreement to distribute generations of implantable pumps prior to NewMIP (being the MIP 2007 12 13 model) and the distribution rights to the Long-Term Glucose Sensor and related products pursuant to the Glucose Sensor Option Agreement as follows: (i) exclusive rights to distribute the Long-Term Glucose Sensor and related products as stand-alone products, (ii) exclusive rights to distribute the Long-Term Glucose Sensor and related products as part of a system combined with an external infusion pump and (iii) non-exclusive rights to distribute the Long-Term Glucose Sensor and related products as part of a closed-loop system in combination with the MIP 2007 model. In any event, however, MiniMed will have no right to the NewMIP either alone or in combination with the Long Term Glucose Sensor and related products. In order to preserve MiniMed's exclusive rights in (i) and (ii), MiniMed will use commercially reasonable efforts in marketing such products. MRG's sole remedy for MiniMed's failure to use such commercially reasonable efforts shall be to convert the rights to non-exclusive rights. 7.7 MRG'S REGULATORY ACCESS AND INSULIN RIGHTS. In the event MRG has the right to sell implantable pump systems for insulin, MiniMed shall make commercially reasonable efforts to allow MRG to make, sell and use Licensed Products under any PMA or similar authority that MiniMed may have, including access to appropriate clinical data, and shall provide MRG with reference rights to any PMA or similar approval. MiniMed will also use commercially reasonable efforts to allow MRG the ability to purchase insulin from MiniMed for implantable pump use for resale to the extent MiniMed itself has such rights, either directly from Third Parties or from MiniMed. If MiniMed sells insulin to MRG the price will be set to be the average of MiniMed's manufacturing or acquisition cost plus 35%. If MiniMed is unable to provide insulin to MRG, or elects to no longer be involved in selling insulin for implantable pumps, MiniMed will make such efforts as MRG reasonably requests to assist MRG in securing its own source for insulin for implantable pump systems. MRG will reimburse MiniMed for all direct out-of-pocket costs and expenses incurred pursuant to this Section 7.7. If MiniMed is unable to provide insulin to MRG or elects to no longer be involved in selling insulin for implantable pumps and MRG has not been able to secure its own source of insulin, MiniMed will make available to MRG all of its Technical Information with respect to insulin for implantable pumps and a non-exclusive license to use any Technology reflected therein. The foregoing rights shall be used by MRG solely in connection with its business, will constitute MiniMed's Confidential Information and will not be transferable (including granting any security interest therein) except in connection with a sale by MRG of its business substantially as a whole. 8. MANUFACTURING AND RIGHTS TO OTHER APPLICATIONS. 8.1 Manufacture of Licensed Products. 8.1.1 From the date of execution of this Agreement, MRG shall have the capability to manufacture Licensed Products in accordance with MiniMed's quality specifications meeting the inspection, requirements and warranty set forth in Section 12, in the quantities and within the delivery times contemplated by Section 6.5. If MRG fails to establish the capability to manufacture Licensed Products in accordance with the requirements of the preceding sentence or thereafter loses that capability or fails to manufacture the Licensed Products to be sold to MiniMed as contemplated by this Agreement, MiniMed will have the right, in addition to all other rights and remedies MiniMed may have under applicable law, to itself undertake the manufacture of the Licensed Products for the Covered Applications or contract with others to do so. Such right may only be exercised by giving written notice to MRG of MiniMed's intention to do so, and thereafter MRG will have 360 days in which to cure its failure to perform. Such cure shall be deemed effective only if MRG manufactures and delivers to MiniMed 80% of the number of units of Licensed Products which MiniMed had ordered and MRG had failed to deliver and at least that number of units meets the inspection requirements and warranty referred to in Section 12. If, however, MRG fails to deliver in any three-year period (based on the number of days elapsed, not calendar years) 80% or more of the number of units ordered by MiniMed which meet the inspection requirements and warranty referred to in Section 12, then there shall be no right to cure and MiniMed may exercise its right to undertake manufacturing the Licensed Products or contract with others to do so as provided above. 8.1.2 If MiniMed undertakes to manufacture the Licensed Products as provided in Section 8.1.1 or Section 7 as a result of its distribution rights becoming nonexclusive, it will have the right to do so thereafter throughout the balance of the Term of the Distribution Rights. MiniMed will, however, pay a royalty to MRG equal to 6% of MiniMed Licensed Pump Sales from the sale, lease or other commercial exploitation of the Licensed Products manufactured by it. If MiniMed incorporates any 13 14 Technology developed by MRG which is not commercially available when MiniMed begins manufacturing, MiniMed will pay MRG a reasonable royalty but in no event to exceed 6% of MiniMed Licensed Pump Sales for all such Technology in the aggregate. "MiniMed Licensed Pump Sales" for this purpose shall have the same meaning as Licensed Pump Sales except that it will apply to sales by MiniMed and its Affiliates. If MiniMed elects to exercise the right to manufacture the Licensed Products pursuant to this Agreement, MiniMed will have the right to use all Technology owned by or licensed to MRG relating to the Licensed Products for the purpose of manufacturing, distributing and selling Licensed Products (provided that MiniMed complies with any requisite obligations owed by MRG under any license to a Third Party), and MRG will cooperate with MiniMed in providing such technical information and assistance as MiniMed may reasonably require. 8.1.3 Nothing in this Section 8.1 shall limit or otherwise affect the rights of MiniMed to recover damages or seek any other right or remedy MiniMed has against MRG for its failure to manufacture and sell Licensed Products to MiniMed as provided in this Agreement. In no event shall any failure or delay in the development or FDA approval of a solution to the existing compliant catheter problem be considered to be a failure of MRG to establish manufacturing capability for purposes of this Agreement. 8.2 [This Section Intentionally Omitted.] 8.2.1 OTHER RIGHTS OF MINIMED TO OTHER APPLICATIONS. MiniMed may, at any time, request that MRG enter into an exclusive or non-exclusive agreement to distribute pumps for any Other Application that MiniMed does not have rights to, and the Parties shall agrees to negotiate in good faith to establish an equitable agreement in regard to such Other Application under which MRG would be an OEM manufacturer for MiniMed. 8.2.2 OTHER RIGHTS OF MINIMED TO EXCLUDED APPLICATIONS. MiniMed may, at any time, request that MRG enter into an exclusive or non-exclusive agreement to distribute pumps for any Excluded Application, and MRG may, at its sole discretion, negotiate to establish an equitable agreement in regard to such Excluded Application under which MRG would be an OEM manufacturer for MiniMed. 9. TRADEMARKS, TRADENAMES AND COPYRIGHTS. 9.1 LIMITED RIGHT TO USE TRADEMARKS AND TRADENAMES. All trademarks and tradenames developed during the term of this Agreement shall remain the sole property of the developing Party. MiniMed will have the right to use its own trademarks and tradenames in connection with the advertising, promotion, distribution and sale of the Licensed Products and MRG will incorporate such trademarks and tradenames into the Licensed Products and the packaging therefor as reasonably requested by MiniMed. During the term of this Agreement, MiniMed may, in its sole and absolute discretion, use the trademarks and tradenames of MRG applicable to the Licensed Products, but only in connection with the advertising, promotion, distribution and sale of the Licensed Products for the Covered Applications that it purchases from MRG and provided that it properly uses such trademarks and tradenames. Such use of MRG's trademarks and tradenames will not give rise to any rights of MiniMed therein. The design and printing of the packaging will be determined by MiniMed, and MiniMed will have the responsibility to be sure that all legal requirements with respect thereto are satisfied. The right to use the MiniMed trademarks and tradenames by MRG will be only with the written consent of MiniMed and for Licensed Products for Covered Applications. Upon termination of the exclusivity of MiniMed's distribution rights, the limited right of MRG to use MiniMed trademarks and tradenames shall be limited to use in connection with Licensed Products sold to MiniMed. 9.2 COPYRIGHTS. Any technical manuals relating to the Licensed Products translated into a language other than English and printed by MiniMed shall be copyrighted in the name and ownership of MiniMed, with the cost of such translation and printing to be paid by MiniMed. 10. REPORTS AND RECORDS. 10.1 MONTHLY REPORTS. On or before the 15th day of each calendar month during the term of this Agreement, commencing with the first full calendar month after the month in which this Agreement is executed and delivered, MiniMed will deliver to MRG a written report setting forth the following: (a) net sales of Licensed Products in units and MiniMed's Licensed Pump Sales for the preceding calendar month, and the fiscal year through end of such preceding months; 14 15 (b) the amount of remaining inventory of the Licensed Products, if any; (c) any material changes in government regulations known to MiniMed affecting the importation, sale or use of the Licensed Products in any jurisdiction where MiniMed is selling the Licensed Products which has not previously been reported to MRG or is not known to MRG; and (d) a brief description of any litigation against MiniMed relating to the Licensed Products and not previously disclosed to MRG as well as any material developments in litigation previously disclosed. For purposes of this Section 10.1, all references to "fiscal year" refer to the then fiscal year of MiniMed. Net sales and units shall be those sales invoiced by MiniMed net of returns credited by MiniMed during the period. 10.2 RECORDS. MiniMed will retain a copy of each invoice substantiating a sale as well as complete and accurate books of account and records relating to purchases and sales of the Licensed Products. MiniMed will provide MRG with such summaries and reports of such information as MRG may reasonably request that MiniMed prepares for its own purposes. MiniMed shall retain all invoices, books of account and records relating to purchases, sales and inventories of the Licensed Products for a period of at least three years or such longer periods as may be required by law. If MRG so requests, MiniMed shall offer the records to MRG at no cost prior to disposing of them, except that MRG will pay the actual costs necessary to retrieve and transport such records. 11. TERM AND TERMINATION 11.1 TERM. Unless otherwise terminated in accordance with Section 11.2, the term of the rights granted by MiniMed to MRG under Section 3.1 shall continue until the expiration of the last of the patents on the MiniMed Pump Technology. Thereafter MRG will have a fully paid-up, perpetual license and the right to sublicense the MiniMed Pump Technology in the expired patents to the extent MiniMed owns or has the right to license such Technology. In addition MRG will have the right to continue to have the right to use the MiniMed Pump Technology and make, use and sell Licensed Products to the extent such Technology is patented under other unexpired patents or constitutes a trade secret, know how or other proprietary Technology and to the extent MiniMed owns or has the right to license such Technology, provided that MRG pays to MiniMed a reasonable royalty agreed to by the Parties (which shall not exceed the royalty rate applicable pursuant to Section 3.4), or, failing such an agreement within a reasonable time, by arbitration pursuant to Section 29. In determining the amount of the reasonable royalty the parties acknowledge that the following facts should be considered: (a) most of the value of the MiniMed Pump Technology consists of Technology that is not patented, (b) MiniMed and its predecessors have made very substantial investments in the development of the Technology over many years and (c) significant value arises from the research and clinical data relating to the MiniMed Pump Technology which either cannot be re-produced at all or cannot be re-produced without significant expense and the passage of a number of years. Nothing in this Section 11.1 shall limit or otherwise affect the rights of MRG under Section 4.5.2 or 4.5.3. 11.2 TERMINATION FOR CAUSE. Either Party will have the right to terminate this Agreement upon the occurrence of any of the events specified in Sections 11.2.1 or 11.2.2. Any such termination may only be made by delivering notice of intention to terminate to the other party specifying the effective date of the termination, which shall be not less than thirty (30) days after the delivery of the notice. Said thirty (30) day period shall be in addition to any of the cure periods specified in Section 11.2.1. 11.2.1 MATERIAL DEFAULT. The other Party (the "defaulting party") has failed to perform any material term, condition or obligation to be performed by it under any of Sections 3 through 17 of this Agreement and such failure remains uncured after written notice of default, specifying the nature thereof in reasonable detail, has been given to the defaulting party unless, in the case of default that does not involve the payment of money, prior to the expiration of the applicable cure period, the defaulting party has commenced and thereafter pursues and completes with due diligence those actions necessary to cure such default within the applicable cure period. The applicable period for the failure to make any payment due under this Agreement shall be thirty (30) days, and the applicable cure period for any other default shall be sixty (60) days but said 60 day cure period shall be subject to extension for a reasonable period of time if the default is of such nature that it cannot reasonably be cured with due diligence within sixty (60) days. A default in the payment of money shall not be deemed material unless the amount thereof exceeds $100,000 and the non-performing Party believes in good faith that it is not legally obligated to make the payment. 11.2.2 BANKRUPTCY OR INSOLVENCY. The other Party (an "insolvent party") becomes bankrupt or insolvent or a receiver is appointed for the business and/or assets of such other Party or an assignment is made by such other Party for 15 16 the benefit of its creditors, in each case whether by the voluntary act or otherwise and, in the case of any such proceeding that is involuntary, if such proceeding is not terminated within sixty (60) days thereafter. 11.3 RIGHTS AND DUTIES UPON TERMINATION. The termination of this Agreement for any reason shall be without prejudice to the right of either Party to receive any payments accrued under any provision of this Agreement prior to the effective date of termination. 11.3.1 SALE OF INVENTORY. In the event of termination of this Agreement, MRG shall nonetheless have the right for one year after the effective date of termination to sell the inventory of Licensed Products in its possession at the time of termination, except, however, that MiniMed shall have the right but not the obligation to repurchase the Licensed Products in MRG's inventory, if any, at the Transfer Price then in effect pursuant to Section 6. 11.3.2 EFFECT OF TERMINATION. The termination of this Agreement for cause shall be without prejudice to (a) the rights of either Party under Sections 2, 12.2, 14.5 through 14.9, 17, 22, 27, 28 and 33, all of which shall survive such termination, or (b) any rights or remedies with respect to defaults arising before such termination. 11.4 RIGHT TO RECOVER DAMAGES. Nothing in this Section 11 is intended to limit the right of a Party to recover damages for any default of the other Party, whether or not the nature of the default permits termination of this Agreement pursuant to this Section 11. 11.5 SEPARATE AGREEMENTS. The Glucose Sensor Option Agreement, the Agreement Re Implantable Pump Business between the Parties dated as of September 1, 1998, the Secured Promissory Note and Security Agreement referred to in Section 2.4, the Line of Credit Note referred to in Section 4.2, the Lease referred to in Section 5 of the Agreement Re Implantable Pump Business and the Stock Purchase Agreement dated as of the same date as this Agreement shall be considered completely separate from this Agreement and not a part hereof. Except as provided in the Stock Purchase Agreement, a default under such other documents shall not affect the rights and obligations of the Parties under this Agreement, and no default under this Agreement shall affect the rights and obligations of the Parties under those other documents. 12. INSPECTION, WARRANTY, REMEDIES 12.1 INSPECTION OF LICENSED PRODUCT. MiniMed shall have the right but not the obligation to conduct inspection tests of Licensed Products to be shipped to MiniMed at MRG's facility. Licensed Products reasonably rejected by MiniMed as a result of such inspection shall not be shipped. In the event of any shortage, damage or discrepancy in or to a shipment of Licensed Products or in the event any Licensed Product fails to comply with the then current specification for the Licensed Product, MiniMed will make a written claim within two months from the date of delivery of the Licensed Products for problems that are patent (i.e. readily discoverable from a customary physical inspection of the shipment or MRG's manufacturing records maintained in accordance with applicable regulatory requirements) and as promptly as practicable after discovery for latent defects. MiniMed's claim will detail such shortage, damage or discrepancy or failure and furnish such written evidence or other documentation as MRG reasonably may deem appropriate. If such shortage, damage or discrepancy or non-conformity with specifications existed at the time of delivery of Licensed Product at the F.O.B. point, MiniMed may return the Licensed Product to MRG at MRG's expense except that in no event shall MiniMed be entitled to return any Licensed Product beyond the expiration date for its use if MRG could have corrected the problem had it been discovered within two months after delivery. Upon such return of a Licensed Product and, except as otherwise provided in Section 7, MRG shall at MiniMed's option, either (a) promptly deliver a substitute Licensed Product of the same or another acceptable design to MiniMed in accordance with the delivery procedures set forth herein or (b) refund to MiniMed MiniMed's cost of the Licensed Product including all costs of shipping, handling, insurance, import and export taxes and other similar expenses incurred by MiniMed. In no event shall the provisions of this Section 12.1 limit or otherwise affect MRG's liability for any breach of the warranty set forth in Section 12.2 or for indemnification pursuant to Section 14.7 with respect to any Licensed Product sold or otherwise distributed by MiniMed without knowledge of any defect, failure to meet specifications, damage or other similar problem. MRG shall have no liability for incidental or consequential damages, but in no event shall bodily injury, death or property damage caused by a Licensed Product be deemed to be incidental or consequential damages. 12.2 LIMITED WARRANTY. MRG warrants to MiniMed that Licensed Products sold by MRG to MiniMed under this Agreement shall be in conformance with applicable specifications and shall be free from defects at the time of delivery of said Licensed Products at the F.O.B. point except that no such warranty is made with respect to any defect in design of MiniMed's current model of its implantable pump systems. 16 17 13. DEFENSE OF TECHNOLOGY 13.1 NOTICE. In the event either Party hereto discovers or becomes aware of any infringement or possible infringement of, or attack or threatened attack on, any of the Licensed Pump Rights or rights to the MRG Enhancement Technology, such Party immediately shall notify the other Party in reasonable detail of such infringement, possible infringement, attack or threatened attack. Promptly after such notification, the Parties will consult with each other as to the course of action to be taken. 13.2 DEFENSE. MiniMed, in its sole discretion and at its sole cost and expense and with counsel reasonably satisfactory to MRG, shall take any and all appropriate legal action to defend the Licensed Pump Rights against any suspected infringement or from any attack or threatened attack; provided, however, that MRG at all times shall have the right to participate fully in any such action at its own expense. In the event MiniMed fails within a reasonable time to initiate appropriate action in connection with any such suspected infringement, attack or threatened attack which in the reasonable judgment of MRG adversely affects or might adversely affect MRG's rights in, to or under the Licensed Pump Rights, or fails to pursue such action vigorously once commenced, MRG upon notice to MiniMed shall have the right, but not the obligation, to initiate or pursue any such appropriate action in MiniMed's name but at MRG's risk and expense, and MiniMed shall cooperate fully in any such action. Any judgment, damages, settlement or award which results from any such action shall be allocated (a) first, to MiniMed and MRG in proportion and to the extent of the actual costs incurred by each in connection therewith and (b) thereafter to MiniMed and MRG in proportion to their actual damages. 13.3 LICENSES OF CONFLICTING TECHNOLOGY. In the event of the occurrence of any claim that any of the rights granted pursuant to Section 3.1 by MiniMed to MRG conflict with any patent, copyright or other proprietary right of any Third Party, the Parties hereto shall consult with each other regarding such claim and the avoidance of the same. In the event the Parties mutually determine that it is necessary or appropriate that MRG obtain a license from such Third Party in order for MRG to exercise the rights granted to it hereunder, the Parties shall use commercially reasonable efforts to obtain such license on the most favorable terms practicable to MRG. In the event MRG is required by the terms of such license to pay royalties to such Third Party, MRG shall have the right to a refund of a portion of the royalties paid hereunder by MRG in an amount equal to half the royalties paid to such Third Party not exceeding half the royalties paid to MiniMed under Section 3. 13.4 MRG ENHANCED TECHNOLOGY. MiniMed and MRG shall have rights with respect to each other that are reciprocal to those specified in Sections 13.2 and 13.3 in the event of any attack or threatened attack of the kind referred to in those sections against any MRG Enhancement Technology incorporated into a Licensed Product. 14. MISCELLANEOUS 14.1 QUALITY CONTROL. MiniMed shall follow reasonable quality control standards with respect to the storage, preservation and use of Licensed Products purchased under this Agreement. 14.2 GOOD MANUFACTURING PROCEDURES. Licensed Products shall be manufactured and tested by MRG in accordance with (a) all applicable U.S. laws and FDA regulations, including but not limited to the FDA's Good Manufacturing Practice and Quality System regulations in effect at the time of such manufacture or testing and (b) MiniMed's quality standards and systems from time to time in effect and applied by MiniMed to all of MiniMed's products which are of a comparable nature. MiniMed shall have the right, at its expense, to conduct quality audits of MRG and of the Licensed Products and MRG shall fully cooperate in all such audits. Each Party shall notify the other Party of any FDA inspection of its production facilities used to manufacture any Licensed Products and shall furnish the other Party with copies of any FDA Form 483 or similar report to the extent that they apply to any Licensed Products or Long-Term Glucose Sensors. 14.3 RECORDS AND TRACEABILITY. Each of the Parties hereby covenants and agrees that during the Term of the Distribution Rights, including any extensions thereof, and for a minimum period of seven (7) years thereafter, it shall maintain complete and accurate traceability records for all Licensed Products that are manufactured and sold under this Agreement, including pertinent data, research reports, test results, and know-how data, as required under all applicable FDA regulations and other U.S. or other applicable laws or regulations then in effect. Each of the Parties hereby covenants, during the term of this Agreement and for a minimum period of three (3) years thereafter or such longer period as any regulatory authority may require, to maintain adequate business and sales records regarding the distribution of all Licensed Products that are manufactured and sold under this Agreement, including pertinent data, research reports, test results, and know-how data to meet or exceed all applicable FDA and other U.S. or other applicable laws or regulations then in effect. MRG and MiniMed shall give each other access to these records in the event of an 17 18 FDA recall or other remedial actions with respect to any product subject to this Agreement, or for other purposes of the Parties in complying with applicable regulatory requirements. 14.4 COMPLIANCE WITH LAW. MiniMed and MRG shall each comply with all federal, state and local laws (and the laws of any foreign jurisdictions in which the Licensed Products are manufactured or sold) applicable to the manufacture, sale and/or distribution of the Licensed Products. 14.5 PATENT IDENTIFICATION. MRG will, and will cause its Affiliates, its sublicensees and their Affiliates to, apply to all Licensed Products proper patent notice in accordance with U.S. and any foreign statutes relating to the marking of patented articles. 14.6 MRG'S LIABILITY INSURANCE. Beginning on the earlier of the date on which the first sale of a Licensed Product manufactured by MRG or an Affiliate or distributor of MRG is made by MiniMed or an Affiliate or distributor of MiniMed or the date that any clinical trial sponsored by MiniMed and using a Licensed Product begins and continuing until the expiration of ten (10) years from the date on which the last sale by MiniMed of a Licensed Product occurs, MiniMed shall maintain product liability insurance for the benefit of MiniMed and MRG as named insureds (containing a Products Contractual Liability Endorsement covering MRG's obligations under Sections 14.7) on such Licensed Product in amounts that are consistent with the amount of products liability insurance that are maintained by MiniMed on similar products sold by MiniMed for similar or related purposes, but in no event less than Fifteen Million Dollars ($15,000,000). In the event the cost of the products liability insurance (including the Products Contractual Liability Endorsement) exceeds a reasonable amount as a result of claims made for bodily injury, death, or property damage actually or allegedly caused by a Licensed Product, MRG will pay the incremental cost of the insurance in excess of said reasonable amount (notwithstanding the first sentence of this Section 14.6). If MiniMed ceases to be the exclusive distributor of Licensed Products for the Covered Applications for any reason, the amount of insurance required to be maintained by MiniMed shall be appropriately reduced to reflect the risk for Licensed Products sold and to be sold by MiniMed. In the event MiniMed cannot obtain the insurance required by this Section 14.6 because MiniMed is not the manufacturer of the Licensed Products or for any other reason, MRG shall obtain and maintain such insurance for the benefit of MRG and MiniMed at the cost of MRG. 14.7 INDEMNITY. MRG shall indemnify, defend and hold harmless MiniMed and its directors, officers, and employees from, and shall pay any and all damages, costs, attorneys' fees or fines in excess of the amounts MiniMed actually recovers under the insurance policy referred to in Section 14.6 or any other policy maintained by MiniMed or MRG resulting from all claims or liability for bodily injury, death and/or property damage arising out of any actually or allegedly defective products sold to MiniMed pursuant to this Agreement or any actual or alleged negligence or willful misconduct of MRG in carrying out the terms of this Agreement and shall bear all costs and expenses of defending such claims (including attorney's fees incurred by MiniMed or the allocable cost of MiniMed's in-house counsel) in excess of such insurance proceeds. As used in this Section 14.7 a "defective product" means a product that, at the time of delivery to MiniMed at the F.O.B. point, does not conform to applicable specifications or is damaged or has a defect in materials or workmanship or has a defect in design that does not exist on the Effective Date. This indemnity does not extend to any claim or loss which results from a Licensed Product causing any other component, device or thing to fail (other than a Glucose Controller or Glucose Monitor incorporated into an implantable pump and other than the abdominal lead or the Long-Term Glucose Sensor) or a Licensed Product failing as a result of use with any such other component, device, thing, or technology; nor does this indemnity extend to failure of any such other component, device, thing, or technology to work caused by a Licensed Product which is properly manufactured. 14.8 INDEMNITY. MiniMed shall indemnify, defend and hold harmless MRG and its directors, officers and employees from, and shall pay any and all damages, costs and attorneys fees or fines in excess of the amounts MRG actually receives under the liability insurance referred to in Section 14.6 or any policy maintained by MiniMed or MRG resulting from any claims or liability for bodily injury, death and/or property damage arising out of the activities, services or other involvement of MiniMed with respect to any sale or delivery of products sold or otherwise provided by MiniMed and resulting from or caused by the actual or alleged negligent or willful misconduct of MiniMed and shall bear all costs of defending such claims (including attorneys' fees incurred by MRG) as contemplated by Section 14.9. 14.9 THIRD PARTY CLAIMS. The Party indemnified hereunder (the "Indemnitee") shall promptly notify the indemnifying Party (the "Indemnitor") of the existence of any claim, demand or other matter involving liabilities to a Third Party to which the Indemnitor's indemnification obligations would apply and shall give the Indemnitor a reasonable opportunity to defend the same at its own expense and with counsel of its own selection (who shall be approved by the Indemnitee, which approval shall not be unreasonably withheld); provided, however, that the Indemnitee at all times shall have the right to fully participate in the defense at its own expense. If the Indemnitor shall fail to defend within a reasonable time after such notice, the Indemnitee shall have the right, but 18 19 not the obligation, to undertake the defense of, and to compromise or settle (exercising reasonable business judgment), the claim or other matter on behalf, for the account and at the risk and expense of the Indemnitor. Except as provided in the preceding sentence, the Indemnitee shall not compromise or settle the claim or other matter without the prior written consent of the Indemnitor in each instance. If the claim is one that cannot by its nature be defended solely by the Indemnitor, the Indemnitee shall make available all information and assistance that the Indemnitor reasonably may request; provided, however, that any associated expenses shall be paid by the Indemnitor. 14.10 DEVELOPMENT OF INSULIN. MiniMed will use commercially reasonable efforts to develop the U-1000 insulin on a schedule consistent with the NewMIP development schedule provided to it by MRG pursuant to Section 16.1. MiniMed will prepare a development plan (including milestones) with respect to development of the U-1000, and MRG will be entitled to participate in the preparation of that plan. In addition MiniMed will continue with commercially reasonable efforts to develop and obtain approval from the FDA for U-400 Aventis and Lispro Insulins. All of these insulin development programs will be funded by MRG up to an aggregate amount of $2 million of which up to $500,000 may be in-kind contributions pursuant to the development plan. All reasonable expenditures required for these programs in excess of $2 million will be paid by MiniMed. MRG will make the payments of the funding costs to MiniMed from time to time within thirty days after receipt from MiniMed of a request for payment setting forth in reasonable detail, and/or accompanied by appropriate documentation with respect to, the costs incurred by MiniMed in connection with the programs. Such statements shall not be submitted by MiniMed to MRG more frequently than monthly and not less frequently than quarterly. The expenses incurred by MiniMed which are payable by MRG pursuant to this Section 14.10 shall include and be limited to all direct out-of-pocket costs and expenses incurred in connection with the insulin development programs together with all direct employee expenses incurred by MiniMed for the time spent by MiniMed employees on these programs, which amounts shall be reasonably documented. Such expenses for MiniMed employees' time shall include a pro rata portion of indirect employee expenses such as employee benefits and payroll taxes. In no event shall MRG be obligated to pay any portion of MiniMed's general overhead, facilities allocation or administrative expense. 14.11 MARKETING STUDY. Within 90 days after the date of this Amended and Restated Agreement MiniMed will initiate a marketing study of implantable pump products and the Long Term Glucose Sensor (including the Stand-Alone Long-Term Glucose Sensor) referred to in the Glucose Sensor Option Agreement. MRG will fund the cost of the study up to the amount of $250,000 unless the parties agree to a higher amount. The parameters and the end-points of the study and the firm selected to perform the study shall be reasonably satisfactory to both MRG and MiniMed. 14.12 OVERSIGHT OF IMPLANTABLE PROGRAMS. MiniMed and MRG will each designate a senior representative to monitor the progress of the various programs contemplated by this Agreement and the Glucose Sensor Option Agreement and will make a report at least quarterly upon request to MiniMed's management. 15. FDA APPROVAL AND CLINICAL TRIALS 15.1 PMA/NDA FOR DIABETES. MiniMed has caused or is about to cause a combined PMA and New Drug Approval application ("PMA/NDA") to be filed with the FDA with respect to the Licensed Products and any related special insulin and to obtain approval of both the Licensed Products and the related insulin for commercial distribution in the United States. MiniMed will prepare a development plan with respect to these efforts, including clinical trials, as soon as practicable after the date of this Amended and Restated Agreement. MRG will be entitled to participate in the preparation of the plan, and the plan will include milestones. In that connection, MiniMed will also use commercially reasonable efforts to conduct any additional clinical trials reasonably required by the FDA for such approval. Except as provided in Section 14.10, MiniMed will pay all reasonable costs and expenses of obtaining approval of the PMA/NDA from the FDA, including the cost of the clinical trials, except that MRG will provide at its expense Licensed Product support activities. If MiniMed obtains reimbursement for any such implantable pump systems provided by MRG, the amount of such reimbursement shall be allocated equally between MiniMed and MRG. If MiniMed believes that the scope of any required clinical trials or any other requirements imposed by the FDA are not commercially reasonable to pursue, MiniMed will have the right to notify MRG of such determination, and thereafter the parties will consult in good faith as to the extent to which MRG is willing to bear a portion of the costs. If such consultation with MRG does not result in an amendment to this Agreement satisfactory to MiniMed, either Party will have the right to have the matter resolved by arbitration pursuant to Section 29. The arbitrator(s) shall determine whether the requirements of the FDA are commercially unreasonable to pursue and the portion of the cost that is unreasonable. Upon such determination, MRG shall pay the portion of the cost determined to be unreasonable as each item of cost is incurred and upon the presentation of reasonable documentation from MiniMed. 15.2 OTHER APPLICATIONS. If MRG and MiniMed do not enter into an agreement with respect to the distribution by MiniMed of Other Applications (including neurological and otological applications), then MiniMed will cooperate with MRG in 19 20 connection with obtaining FDA approval and comparable approval from the European Union for such Other Applications, including clinical trials, and will provide such information as is available to MiniMed as MRG reasonably requests. MRG will reimburse MiniMed for its direct out-of-pocket expenses incurred in providing such cooperation and/or information. If MRG and MiniMed do enter into an agreement with respect to Other Applications, their respective obligations with respect to obtaining FDA and other regulatory approvals will be as set forth in that agreement. 15.3 ACCESS TO INFORMATION REGARDING CLINICAL TRIALS. MiniMed will provide regularly to MRG information on the protocols and results obtained in MiniMed's trials conducted with respect to Licensed Products and any special insulin used with Licensed Products. Such information will constitute MiniMed's confidential information pursuant to this Agreement. 15.4 TERMINATION OF OBLIGATIONS. MiniMed's obligations under this Section 15 shall terminate at such time as MiniMed's distribution rights with respect to Licensed Products are converted to non-exclusive rights. 16. DEVELOPMENT OF THE NEWMIP 16.1 OBLIGATION TO DEVELOP. MRG will use commercially reasonable efforts to develop the "NewMIP" model of its implantable pump system in accordance with specifications set forth in Exhibit 16.1 attached hereto. The NewMIP will be developed by MRG in accordance with MRG's Product Development Protocol, a copy of which has been delivered to and approved by MiniMed prior to the execution to this Agreement. MRG will prepare a development plan, including milestones, with respect to the NewMIP program and provide a copy thereof to MiniMed. 16.2 DISTRIBUTION RIGHTS. Upon completion of the development and qualification of the NewMIP in accordance with MRG's Product Development Protocol and delivery by MRG to MiniMed of written notice that those events have occurred, MiniMed shall become unconditionally obligated to pay to MRG $12.5 million in cash, within 30 days after receipt of the notice, for the exclusive world-wide right to distribute the NewMIP and all improvements and modifications thereof for Covered Applications. If MiniMed purchases the additional $16 million "Second Tranche" of MRG's common stock contemplated by Section 2.2 of the Stock Purchase Agreement, the foregoing amount payable by MiniMed shall be reduced to $7.5 million. The term of MiniMed's rights as distributor of the NewMIP will commence upon payment of the fee therefor, will continue for a period of five years thereafter and thereafter will be deemed to be extended automatically on a year to year basis unless MiniMed voluntarily terminates its distribution rights with respect to the NewMIP upon not less than six months prior written notice to MRG. MiniMed's rights are also subject to premature termination as provided in Section 11. 16.3 ADDITIONAL FEES. MiniMed will also be obligated to pay additional license fees (the "Additional Fees") as follows: (a) $6 million on or before the later of December 31, 2003 or six months after completion of the qualification of the NewMIP under MRG's Product Development Protocol; and (b) $6 million on or before the later of December 31, 2004 or twelve months following completion of the qualification of the NewMIP under MRG's Product Development Protocol. MiniMed's obligations to pay the Additional Fees shall be reduced by fifty cents ($.50) for each dollar to the extent that MiniMed orders and agrees to accept implantable pump systems beyond the Mandatory Purchase Commitments referred to in Section 7.1 for 2003 and/or 2004. In the event MiniMed defaults in the payment of any of the Additional Fees and fails to pay the same after the giving of notice by MRG, MRG may exercise the repurchase rights in Section 7.6 and MiniMed's distribution rights with respect to the NewMIP shall terminate. 17. REPRESENTATIONS AND WARRANTIES 17.1 REPRESENTATIONS AND WARRANTIES OF MRG. MRG hereby represents and warrants to MiniMed that the statements set forth in Sections 17.1 through 17.1.4 hereof are true and correct. 17.1.1 ORGANIZATION AND STANDING. MRG is duly organized, validly existing and in good standing under the laws of the state of its organization, with full power and authority to own its property and carry on its business as now conducted. 20 21 17.1.2 AUTHORITY AND ENFORCEABILITY. MRG has the right, power and authority required for the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; all authorizations and approvals have been secured by MRG which are necessary to authorize the execution, delivery and performance of this Agreement; and this Agreement upon being duly executed constitutes a legal, valid and binding agreement of MRG and is enforceable against it in accordance with its terms, excepting only to the extent that such enforceability may be limited by bankruptcy law or other laws of general application relating to creditor's rights and subject to the availability of equitable remedies. 17.1.3 COMPLIANCE WITH THE LAW AND OTHER INSTRUMENTS. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, will not result in the breach of any term or provision of, or constitute a default under, the Certificate of Incorporation or Bylaws of MRG, as amended to the date hereof, or any statute, order, judgment, writ, injunction, decree, license, permit, rule or regulation of any governmental or regulatory body or court, or any indenture, mortgage, deed of trust or other agreement or instrument to which MRG is a party or by which it is bound. 17.1.4 INTELLECTUAL PROPERTY RIGHTS. The Enhancement Technology and any other Technology of MRG incorporated into Licensed Products is not and will not be subject to any encumbrance, lien or claim of ownership by any Third Party, except for rights that MRG has licensed or intends to license from Third Parties, for which MRG has (or will have at the time of sale of Licensed Products to MiniMed) rights to utilize such technology as required hereunder. To the extent that MRG has licensed or intends to license intellectual property from Third Parties MRG will be responsible for all costs and obligations related to such licenses. To the best of MRG's knowledge but without having conducted a patent infringement search, the manufacture, use or sale of products incorporating the Enhancement Technology will not infringe any intellectual property rights of any Third Party, except for certain patents and copyrights that MRG has licensed or will license from third parties and which MRG has or will have the right to use. 17.2 REPRESENTATIONS AND WARRANTIES OF MINIMED. MiniMed hereby represents and warrants to MRG that the statements set forth in Section 17.2.1 through 17.2.5 hereof are true and correct. 17.2.1 ORGANIZATION AND STANDING. MiniMed is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, with full corporate power and authority to own its property and carry on its business as now conducted. 17.2.2 AUTHORITY AND ENFORCEABILITY. MiniMed has the right, power and authority required for the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; all authorizations and approvals have been secured by MiniMed which are necessary to authorize the execution, delivery and performance of this Agreement; and upon being duly executed this Agreement constitutes a legal, valid and binding agreement of MiniMed and is enforceable against it in accordance with its terms, excepting only to the extent that such enforceability may be limited by bankruptcy law or other laws of general application relating to creditor's rights and subject to the availability of equitable remedies. 17.2.3 COMPLIANCE WITH THE LAW AND OTHER INSTRUMENTS. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, will not result in the breach of any term or provision of, or constitute a default under, the Certificate of Incorporation or Bylaws of MiniMed, as amended to the date hereof, or any statute, order, judgment, writ, injunction, decree, license, permit, rule or regulation of any governmental or regulatory body or court, or any indenture, mortgage, deed of trust or other agreement or instrument to which MiniMed is a party or by which it is bound. 17.2.4 INTELLECTUAL PROPERTY RIGHTS. MiniMed's Pump Technology is not and will not be subject to any encumbrance, lien or claim of ownership of any Third Party except for the rights of the licensor of the Johns Hopkins Rights. To the best of MiniMed's knowledge but without having conducted a patent infringement search, the manufacture, use or sale of MiniMed's Pump Technology will not infringe any intellectual property rights of any Third Party. MiniMed has not licensed MiniMed's Pump Technology to any Third Party. 17.2.5 JOHNS HOPKINS AND WILSON GREATBATCH CONTRACTS. MiniMed's existing agreements with The Johns Hopkins University and the Applied Physics Laboratories of The Johns Hopkins University with respect to the Johns Hopkins Rights were binding obligations of the parties and continued to be in effect except as otherwise disclosed by MiniMed to MRG in writing prior to that date; MiniMed has no actual knowledge of any default by either party to any such agreements in the performance of its obligations thereunder; to MiniMed's actual knowledge, the royalty rate payable with respect to the Johns Hopkins Rights is 3.5%. MRG acknowledges that it has received copies of all such agreements and has had an opportunity to make such review and perform such inquiry as it considers to be necessary or desirable with respect to such agreements. 21 22 18. LIMITATIONS ON WARRANTIES AND REMEDIES 18.1 LIMITATIONS ON WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN SECTIONS 12.2 AND 17.1.4, MRG MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE LICENSED PRODUCTS OR MINIMED'S PUMP TECHNOLOGY, INCLUDING BUT NOT LIMITED TO (a) THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR (b) ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE VALIDITY OR SCOPE OF ANY RIGHTS TO TECHNOLOGY, OR (c) ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE OWNERSHIP OF ANY TECHNOLOGY, THE LICENSED PRODUCTS OR MINIMED'S PUMP TECHNOLOGY OR THE INFRINGEMENT BY THE SAME OF ANY PATENT, COPYRIGHT OR OTHER PROPRIETARY RIGHT OF ANY THIRD PARTY, OR (d) ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE ABSENCE OF ANY DEFECT IN THE LICENSED PRODUCTS. 18.2 LIMITATIONS ON REMEDIES. EXCEPT AS SET FORTH IN SECTION 14.7 AND 17.1.4 IN NO EVENT SHALL MRG BE LIABLE TO MINIMED FOR ANY DAMAGES FOR LOST PROFITS, LOST SAVINGS OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH MRG'S MANUFACTURE OF THE LICENSED PRODUCTS EVEN IF MRG HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. DAMAGES FOR PHYSICAL INJURY, DEATH OR PERSONAL INJURY SHALL NOT CONSTITUTE CONSEQUENTIAL DAMAGES. THE PROVISIONS OF THIS 18.2 SHALL NOT APPLY TO DAMAGES FOR THE INACCURACY OF ANY REPRESENTATION OR WARRANTY SET FORTH IN SECTIONS 17.1.1 THROUGH 17.1.4. 18.3 REMEDY FOR BREACHES COVERED BY SECTION 18.2. Notwithstanding Section 18.2, if (a) MRG breaches any obligation under this Agreement for which lost profits, lost savings or consequential damages would have been available but for Section 18.2, (b) such breach is material, (c) MRG did not use commercially reasonable efforts to perform that obligation and (d) MRG failed to actually and fully perform the obligation in default within 30 days after MiniMed delivers written notice of the breach to MRG, then MiniMed will have the right to undertake to manufacture the Licensed Products for the Covered Applications or contract with others to do so after asserting such right in a written notice delivered to MRG. Either Party shall have the right to commence an arbitration in accordance with Section 29 to determine whether MiniMed has that right under this Section 18.3. The decision of the arbitrator or arbitrators will be final and binding on the parties. Pending the arbitration, MiniMed will not be entitled to undertake manufacturing or contract with others to do so and MRG will continue to have all of its obligations under this Agreement. If neither party commences an arbitration within 30 days after MiniMed's written notice referred to above is delivered, MiniMed will be deemed to have the right to undertake to manufacture the Licensed Products or contract with others to do so. If MiniMed undertakes to manufacture Licensed Products or contract with others to do so pursuant to this Section 18.3, MiniMed shall have no further obligation to purchase Licensed Products from MRG and the provisions of Section 8.1.2 shall apply. 19. INDEPENDENT CONTRACTORS 19.1 The relationship between MiniMed and MRG under this Agreement is solely that of independent contractors. 19.2 Neither Party shall have the right to bind the other or to incur obligations on the other's behalf without the other's prior written consent in each instance. 20. CONDITION PRECEDENT The effectiveness of the amendments to the Prior Agreement set forth in this Agreement is conditioned upon, on or prior to the date of execution of this Agreement, the execution by MiniMed and MRG of the Amendment to Glucose Sensor Option Agreement and the Stock Purchase Agreement each dated as of the same date as this Agreement. 21. FORCE MAJEURE Any Party's delay or failure in performing its obligation under this Agreement shall be excused to the extent caused by forces beyond that Party's reasonable control, including, without limitation, the following: war, floods, earthquakes, other acts of God, industrial disputes, civil disobedience, strikes, fire, mobilization, changes in governmental regulation or interpretation, requisition, embargo, restriction and shortage of transport facilities, fuel, energy or supplies. The unavailability of funds to any Party to perform any obligation under this Agreement shall not excuse performance under this Agreement regardless of the reason therefor. 22 23 Each Party claiming the benefit of such an excuse agrees to notify the other promptly in writing of any such delay or failure in performance, and to resume performance as soon as is reasonably practicable. 22. NOTICES Any notice, request, demand or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given (a) if personally delivered, when so delivered, (b) if mailed, seventy-two (72) hours after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the Party to whom it is directed at the address set forth below or (c) if given by telex or telecopier, when such notice or other communication Is transmitted to the telex or telecopier number specified below and the appropriate answer back or telephonic, confirmation is received: If to MiniMed: MiniMed Inc. 18000 Devonshire Street Northridge, California 91325-5350 Attention: General Counsel Telephone No.: (818) 576-5444 Telecopier No: (818) 576-6228 With a copy to: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Roy J. Schmidt Telephone No.: (213) 229-7000 Telecopier No.: (213) 229-7520 If to Medical Research Group, Inc.: Medical Research Group, Inc. 12744 San Fernando Road Sylmar, California 91342-5058 Telephone No.: (818) 362-8084 Telecopier No: (818) 367-5149 With a copy to: Resch Polster Alpert & Berger LLP 10390 Santa Monica Blvd., 4th Floor Los Angeles, California 90025-5058 Attention: Aaron A. Grunfeld Telephone No.: (310) 277-8300 Telecopier No: (310) 552-3209 23. ASSIGNMENT Neither Party shall be entitled to assign its rights or to delegate its duties under this Agreement, whether by law or otherwise, without the express written consent of the other Party except that either Party may assign this Agreement to (a) a wholly-owned subsidiary of such Party, or (b) a Third Party who acquires either Party by merger or consolidation or acquisition of 80% or more of the outstanding equity interests of said Party (although no change in the ownership of equity interests of a Party shall be deemed to constitute an assignment of this Agreement), or (c) a Third Party who acquires all or substantially all of the assets of either Party relating to the Licensed Products, so long as the assignee agrees to assume all of the obligations of said Party under this Agreement. In the event of such an assignment, the party making the assignment shall remain fully liable for the performance of its obligations hereunder. 23 24 24. SEVERABILITY The provisions of this Agreement are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable. 25. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS All representations, warranties and agreements made by MiniMed or MRG in this Agreement shall survive the date hereof and any investigations, inspections, examinations or audits made by or on behalf of any Party hereto. 26. ENTIRETY This Amended and Restated Agreement, the Mutual Nondisclosure Agreement between the Parties with an effective date of January 2, 1996, the Glucose Sensor Option Agreement, the Agreement Re Implantable Pump Business dated as of September 1, 1998, the other agreements and instruments entered into pursuant to said Agreement Re Implantable Pump Business and the Stock Purchase Agreement together constitute the entire agreement between the Parties hereto pertaining to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter hereof or thereof. 27. AMENDMENT; WAIVER This Agreement may be amended, modified, superseded or canceled, and any of the terms and conditions hereof may be modified, only by a written instrument executed by the Parties or, in the case of a waiver, by the Party waiving compliance. No supplement, modification, waiver or termination of this Agreement shall be valid unless it has been reduced to writing and executed by the Party to be bound thereby. The failure of a Party at any time or from time to time to require performance of any provision hereof shall in no manner affect the right of such Party at a later time to enforce the same, and no waiver of any nature, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or considered as a further or continuing waiver of any other provision of this Agreement. Subject to the restrictions on modification in this Section 27, to the extent that any provision of this Agreement purports to grant rights or create obligations that are inconsistent with either: (1) MRG's Mann Foundation Rights or UC Rights, or (2) MiniMed's Johns Hopkins' Rights (collectively, the "Rights"), the Parties shall meet and confer to bring such provision in conformity with such Rights. 28. USE OF NAME Except as provided in Section 9 with respect to trademarks and tradenames, neither MiniMed nor MRG shall use the name of the other Party or of any staff member or employee of the other Party or any adaptation thereof in any advertising, promotion or sales literature in a manner which would constitute an express or implied endorsement by the other Party or of any staff member or employee thereof for any commercial product without the prior written consent of the other Party in each instance. 29. SETTLEMENT OF DISPUTES 29.1 DISPUTES AND ARBITRATION. Unless the relief sought requires the granting of equitable relief as contemplated by Section 29.1.1, below, any dispute or controversy (whether or not based upon the law of contracts) arising between the Parties in connection with this Agreement, including (a) disputes relating to the formation of this Agreement or the performance, interpretation, enforcement, application or validity of its provisions, and (b) issues that may be based upon or arise out of disputes that MRG or MiniMed has with Third Parties, shall upon the demand of either Party be resolved by arbitration held at Los Angeles, California, in accordance with the arbitration procedures established by the Rules of Commercial Arbitration of the American Arbitration Association, except as otherwise provided herein. 29.1.1 If in connection with any such dispute or controversy either Party seeks the issuance of a temporary restraining order or the granting of preliminary injunctive relief, the court shall have the right and power to grant the 24 25 requested relief on a temporary basis pending the resolution of factual issues by arbitration in accordance with Section 29.1.2, and to thereafter enforce any award made in such arbitration proceedings. 29.1.2 The following principles and conditions will apply in all arbitration proceedings conducted pursuant to this Agreement: A. During the thirty (30) days following the date that the written notice is given by either Party demanding the submission of the dispute to arbitration, MRG and MiniMed will endeavor to select three independent arbitrators having no substantial economic or other material relationship with either MRG or MiniMed. If the issue in dispute involves matters of patents, licensing or technology, the arbitration panel shall include at least two persons who are knowledgeable in such matters. If the Parties cannot mutually agree on the three arbitrators within such thirty (30) day period, then each Party will, within seven (7) days after the expiration of such thirty (30) day period, select one independent arbitrator and those two arbitrators shall select the third independent arbitrator within seven (7) days after the selections of the later of the two to be selected. In the event either party fails to select an arbitrator within the time period specified above or the two arbitrators fail to select a third arbitrator within the time period specified above, either party may request that the American Arbitration Association appoint any such arbitrator, and any arbitrator so appointed shall be one of the arbitrators pursuant to this Section 29. B. Discovery of evidence shall be conducted expeditiously by the Parties and in accordance with the general principles embodied in the California Civil Discovery Act. To the extent that it is necessary, either Party may apply to a court of competent jurisdiction for assistance in obtaining discovery of evidence for presentation to the arbitrators. C. Except as provided in Section 29.1.3, the arbitrators shall issue findings of fact and conclusions of law. D. Except as provided in Section 29.1.3, the arbitration will be conducted as a case would be represented to a trial court without a jury. The arbitrators in their discretion may hear any type of evidence, including hearsay evidence. The arbitrators shall decide the dispute in accordance with applicable law and shall render a written decision, setting forth their findings of fact and the conclusions of law upon which they relied in making their award. The decision of the arbitrators shall be final and binding on the Parties. 29.1.3 In the case of an arbitration to determine the adjustment in prices referred to in Section 6.3, the arbitrators shall permit each of the Parties to submit written and oral information and argument, shall decide the matter in accordance with the standard set forth in Section 6.3 and shall issue a written opinion explaining in reasonable detail the basis for their decision on the adjustment in prices. The decision of the arbitrators will be final and binding on the Parties. 29.2 COSTS OF ENFORCEMENT. Should any action or proceeding be necessary to construe or enforce this Agreement, including an arbitration pursuant to Section 29.1, or any arbitration award made pursuant to Section 29.1, above, then the Party prevailing in any such action or proceeding shall be entitled to recover all court costs and reasonable attorneys' fees, to be fixed by the court and taxed as part of any judgment entered therein, and the costs and fees incurred in enforcing or collecting any such judgment. 30. GOVERNING LAW The validity, construction and interpretation of this Agreement shall be governed in all respects by the laws of the State of California applicable to contracts made by residents of that state and to be performed wholly within that state. 31. HEADINGS Section and subsection headings are not to be considered part of this Agreement and are included solely for convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof. 32. THIRD PARTIES Nothing in this Agreement, expressed or implied, is intended to confer upon any Person other than MiniMed or MRG any rights or remedies under or by reason of this Agreement. 25 26 33. COUNTERPARTS This Agreement may be executed in two or more counterparts, each one of which shall be deemed an original, but all of which shall constitute one and the same instrument. 34. JURISDICTION 34.1 Each Party hereto irrevocably submits to the exclusive jurisdiction of any court of the State of California or the United States of America sitting in the City of Los Angeles over any suit, action or proceeding arising out of or relating to this Agreement. Any arbitration proceedings according to Section 29.1 shall be conducted in the County of Los Angeles. To the fullest extent it may effectively do so under applicable law, each party irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any objection that it may now or hereafter have to the establishment of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 34.2 Each Party hereto agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to hereinabove brought in any such court shall be conclusive and binding upon such Person and its successors and assigns and may be enforced in the courts of the United States of America or the State of California (or any other courts to the jurisdiction of which such Person is or may be subject) by a suit upon such judgment. 26 27 34.3 Nothing in this Section 34 shall be construed to limit the force or effect of Section 29. IN WITNESS WHEREOF, the: Parties hereto have caused this Agreement to be executed as of the date and year first set forth. above. MINIMED INC., a Delaware corporation MEDICAL RESEARCH GROUP, a Delaware corporation By: /s/ ERIC KENTOR By: /s/ RONALD LEBEL ----------------------------- ------------------------------ Eric S. Kentor Ronald Lebel, Senior Vice President and President General Counsel By: /s/ KEVIN R. SAYER ----------------------------- Kevin R. Sayer Senior Vice President and Chief Financial Officer 27 EX-10.40 7 v70622ex10-40.txt EXHIBIT 10.40 1 Exhibit 10.40 AMENDMENT TO GLUCOSE SENSOR OPTION AGREEMENT THIS AMENDMENT TO GLUCOSE SENSOR OPTION AGREEMENT (this "Amendment") is made as of the 1st day of February, 2001 by and between MINIMED INC. ("MiniMed"), a Delaware corporation, and MEDICAL RESEARCH GROUP, INC. ("MRG"), a Delaware corporation with respect to the following facts: RECITALS MiniMed and MRG are parties to the Glucose Sensor Option Agreement dated as of September 1, 1998 (the "Agreement") pursuant to which MRG granted an option to MiniMed to purchase the worldwide distribution rights with respect to certain long-term glucose sensor technology being developed by MRG. On January 25, 2001 MiniMed delivered notice of its exercise of the option. The parties now desire to amend and supplement the Agreement on the terms set forth herein. Concurrently with the execution and delivery of this Agreement, the parties are also entering into an Amended and Restated Implantable Pump License and Distribution Agreement and a Stock Purchase Agreement, both dated as of the same date as this Agreement. 1. DEFINITIONS: All capitalized terms not otherwise defined in this Amendment have the meanings set forth in the Agreement. 2. DEVELOPMENT OF STAND-ALONE SENSOR SYSTEM 2.1 OBLIGATION TO DEVELOP. MRG will use commercially reasonable efforts to develop a Stand-Alone Long-Term Glucose Sensor System which will include an implantable glucose sensor suitable for use in vivo in humans or animals for a period of at least 45 days, a transmitter and a receiver/monitor, but not including an implantable pump (the "Stand-Alone Sensor System"). MRG will prepare a development plan (which will include scheduled milestones) with respect to its development efforts, and MiniMed will be entitled to participate in the preparation of the plan. MRG's initial development plan will be completed as soon as practicable after the date of this Agreement. 2.2 PAYMENT. Upon completion of the development and qualification of the Stand-Alone Sensor System in accordance with MRG's Product Development Protocol attached hereto as Exhibit 2.2, and delivery by MRG to MiniMed of written notice that those events have occurred, MiniMed shall become unconditionally obligated to pay to MRG $13 million in cash, within 30 days after receipt of the notice, for the exclusive world-wide distribution rights for Covered Applications with respect to the Stand-Alone Sensor System and all improvements and modifications thereof. If MiniMed purchases the additional $16 million "Second Tranche" of MRG's common stock contemplated by Section 2.2 of the Stock Purchase Agreement, the foregoing amount payable by MiniMed shall be reduced to $5 million. In order to preserve MiniMed's exclusive rights to the Stand-Alone Sensor System, MiniMed will use commercially reasonable efforts in marketing the Stand-Alone Sensor System. MRG's sole remedy for MiniMed's failure to use such commercially reasonable efforts shall be to convert MiniMed's exclusive distribution rights to non-exclusive rights. 2.3 TRANSFER PRICES. After development of the Stand-Alone Sensor System and its qualification pursuant to Section 2.2, the Transfer Price of the sensor component of the Stand-Alone Sensor System will be determined in accordance with Section 6.4.1 of the Agreement, and the transmitter and the receiver/monitor will be subject to Transfer Prices equal to the average of MRG's manufacturing cost (determined in accordance with generally accepted accounting principles consistently applied) and MiniMed's List Price. In no event, however, will the transfer price exceed MiniMed's List Price less 15% thereof or be less than MRG's manufacturing cost plus 30% thereof. If no transfer price satisfies the foregoing requirements, the price shall be determined by arbitration in accordance with Section 2.4. If the Stand-Alone Sensor System is sold with an implantable or external pump and/or other products, the Transfer Price for the Stand-Alone Sensor System will be based upon a reasonable allocation of the total List Price for the Stand-Alone Sensor System and the other products (which may include a pump) so that the List Price of the Stand-Alone Sensor System is equal to the portion of the total List Price that is reasonably allocable to the Stand-Alone Sensor System, whether or not a separate List Price is specified for the Stand-Alone Sensor System. The lead connecting the Long-Term Glucose Sensor to an implantable pump will have a Transfer Price determined as provided above for the transmitter and the receiver/monitor. 2.4 ADJUSTMENT IN PRICES. If, at any time after MiniMed becomes the exclusive distributor of the Stand-Alone Sensor System, either Party believes that the Transfer Price referred to in Section 2.3 is materially unfair to either, the Parties will meet and 2 seek in good faith to agree on revised prices that are agreeable to both Parties and approximate pricing structures that are customary for other comparable distribution agreements involving high technology products. If the Parties are unable to agree on price, the matter shall be resolved by arbitration in accordance with Section 18 of the Agreement. 2.5 STATUS OF STAND-ALONE SENSOR SYSTEM. After its development by MRG, the Stand-Alone Sensor System will be deemed to be a "Long-Term Glucose Sensor and other Licensed Products," and the technology relating thereto shall be deemed to be "MRG Glucose Sensing Technology" for all purposes of this Amendment except as expressly set forth herein and for all purposes of the Agreement except for purposes of Sections 5.1, 5.3, 5.4, 6.4.1 (except as referred to in Section 2.3 of this Amendment), 6.6, and 6.6.1 through 6.6.7 thereof. 2.6 MANUFACTURING RIGHTS WITH RESPECT TO STAND-ALONE SENSOR SYSTEM. The rights of MiniMed to itself undertake the manufacture of the Long-Term Glucose Sensor and the other Licensed Products set forth in Section 6.4.2 and 6.4.3 of the Agreement shall apply separately with respect to the Stand-Alone Sensor System, which MiniMed will have the right to undertake to manufacture, or contract with others to manufacture, without at the same time undertaking to manufacture, or contract with others to manufacture, any other Long-Term Glucose Sensor or Licensed Products. 2.7 ROYALTIES PAYABLE TO THIRD PARTIES. For purposes of the last sentence of Section 6.9.3 of the Agreement, if MiniMed is required to pay royalties to a Third Party as provided therein and MiniMed has made the payment provided for in Section 2.2 of this Amendment (whether the payment is made before or after the obligation to pay royalties arises), the amount of the refund to which MiniMed shall be entitled shall be equal to one-half of the royalties paid to such Third Party up to a maximum of $17,500,000. 2.8 TERMINATION OF EXCLUSIVITY. The rights of MiniMed to terminate the Exclusive Marketing Agreement or Section 6.3 of the Agreement as provided in Section 6.23 of the Agreement shall be exercisable by MiniMed, at its option, separately with respect to the Long-Term Glucose Sensor and Licensed Products without exercising such rights with respect to the Stand-Alone Sensor System, and MiniMed's election to do so shall terminate all of its obligations under the Agreement with respect to such other products which terminate upon the exercise of the rights under Section 6.23 of the Agreement. 3. CLINICAL TRIALS Notwithstanding the provisions of Section 6.11.1 of the Agreement, the cost of all clinical trials with respect to the Long-Term Glucose Sensor and other Licensed Products (including the Stand-Alone Sensor System) shall be paid by MRG through December 31, 2002, up to a maximum aggregate amount of $4 million. MRG shall be entitled to credit against its $4 million funding obligation expenses it reasonably incurs in connection with the clinical trials. MiniMed and MRG each will contribute one-half of the costs of the clinical trials in excess of said $4 million, but neither party will be required by the provisions of this Section 3 to make any expenditure which is not commercially reasonable. MRG will make the payments of its share the funding costs to MiniMed from time to time within 30 days after receipt from MiniMed of a request for payment setting forth in reasonable detail, and/or accompanied by appropriate documentation with respect to, the costs incurred by MiniMed in connection with the clinical trials. Such statements shall not be submitted by MiniMed to MRG more frequently than monthly and no less frequently than quarterly. MRG shall submit to MiniMed statements setting forth in reasonable detail and/or accompanied by appropriate documentation with respect to the costs incurred by MRG with respect to the clinical trials. Expenses incurred by MiniMed and MRG which are payable by MRG pursuant to this Section 3 and expenses incurred by MRG which are to be credited to its obligations under this Section 3 shall include and be limited to all direct out-of-pocket costs and expenses incurred in connection with the clinical trials together with all direct employee expenses for the time spent by employees on these programs, which amounts shall be reasonably documented. Such expenses for employees' time shall include a pro rata portion of indirect employee expenses, such as employee benefits and payroll taxes. In no event shall either party charge any portion of its general overhead, facilities allocation or administrative expense as an expense of the clinical trials pursuant to this Section 3. 4. LOSS OF EXCLUSIVE RIGHTS The Parties acknowledge that pursuant to Section 7.6.1 of the Implantable Pump License and Distribution Agreement MRG has the right to repurchase from MiniMed MiniMed's rights to distribute the NewMIP (as defined in the Implantable Pump License Agreement and Distribution Agreement) and that, pursuant to Section 7.6.3 of the Implantable Pump License Agreement, if that right is exercised, MiniMed's rights with respect to the Long-Term Glucose Sensor and other Licensed Products shall include: (a) exclusive rights to distribute the Stand-Alone Sensor System, 2 3 (b) exclusive rights to distribute the Stand-Alone Sensor System as part of a system combined with an external infusion pump and (c) non-exclusive rights to distribute the Long-Term Glucose Sensor (not the Stand-Alone Sensor System) as part of a Closed Loop System in combination with MRG's MIP 2007 model of implantable pumping systems or Improvements thereto. 5. LICENSE ON MINIMED TECHNOLOGY Effective if and when MiniMed's distribution rights under Section 6 of the Agreement become nonexclusive or MRG repurchases rights pursuant to Section 7.6.1(a) of the Amended and Restated License and Distribution Agreement, MiniMed hereby grants MRG a fully paid-up, royalty-free license on all Technology that is developed by MiniMed through said effective date but limited to the field of use of fully implanted, oxygen-based sensors configured to the then current Long-Term Glucose Sensor or subsequent Improvements or modifications. 6. LEADS The last sentence of Section 1.15 of the Agreement is hereby amended to read in full as follows: "The lead connecting the Long-Term Glucose Sensor to an implantable pump is a Licensed Product. 7. SETTLEMENT OF DISPUTES Section 18.1.2(A) of the Agreement is hereby amended by adding a new sentence at the end thereof reading as follows: "In the event either party fails to select an arbitrator within the time period specified where the two arbitrators fail to select a third arbitrator within the time period specified above, either party may request that the American Arbitration Association appoint any such arbitrator, and any arbitrator so appointed shall be one of the arbitrators pursuant to this Section 18." 8. SEPARATE AGREEMENTS Section 8.3 of the Agreement is hereby amended to read in full as follows: "The Amended and Restated Implantable Pump License and Distribution Agreement, the Agreement Re Implantable Pump Business between the Parties dated as of September 1, 1998, the Secured Promissory Note and Security Agreement referred to in Section 2.4, the Line of Credit Note referred to in Section 4.2, the Lease referred to in Section 5 of the Agreement Re Implantable Pump Business and the Stock Purchase Agreement dated as of the same date as this Amendment shall be considered completely separate from the Agreement as amended by this Amendment and not a part thereof. Except as provided in the Stock Purchase Agreement, a default under such other documents shall not affect the rights and obligations of the Parties under the Agreement as amended by this Amendment, and no default under the Agreement as so amended shall affect the rights and obligations of the Parties under those other documents." 9. NOTICES Section 10 of the Agreement is amended to read in full as follows: "Any notice, request, demand or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given (a) if personally delivered, when so delivered, (b) if mailed, seventy-two (72) hours after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the Party to whom it is directed at the address set forth below or (c) if given by telex or telecopier, when such notice or other communication Is transmitted to the telex or telecopier number specified below and the appropriate answer back or telephonic, confirmation is received: 3 4 If to MiniMed: MiniMed Inc. 18000 Devonshire Street Northridge, California 91325-5350 Attention: General Counsel Telephone No.: (818) 576-5444 Telecopier No: (818) 576-6228 With a copy to: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Roy J. Schmidt Telephone No.: (213) 229-7000 Telecopier No.: (213) 229-7520 If to Medical Research Group, Inc: Medical Research Group, Inc. 12744 San Fernando Road Sylmar, California 91342-5058 Telephone No.: (818) 362-8084 Telecopier No: (818) 367-5149 With a copy to: Resch Polster Alpert & Berger LLP 10390 Santa Monica Blvd., 4th Floor Los Angeles, California 90025-5058 Attention: Aaron A. Grunfeld Telephone No.: (310) 277-8300 Telecopier No: (310) 552-3209" 10. ENTIRE AGREEMENT This Amendment, the Agreement, the Mutual Nondisclosure Agreement between the Parties with an effective date of January 2, 1996, the Amended and Restated Implantable Pump License and Distribution Agreement, the Agreement Re Implantable Pump Business dated as of September 1, 1998, the other agreements and instruments entered into pursuant to said Agreement Re Implantable Pump Business and the Stock Purchase Agreement together constitute the entire agreement between the Parties hereto pertaining to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter hereof or thereof. 11. CONTINUED EFFECT OF AGREEMENT Except as amended and supplemented by this Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date and year first set forth. above. MINIMED INC., a Delaware corporation MEDICAL RESEARCH GROUP, a Delaware corporation 4 5 By: /s/ ERIC S. KENTOR By: /s/ RONALD LEBEL ---------------------------------- -------------------------------- Eric S. Kentor Ronald Lebel, Senior Vice President and President General Counsel By: /s/ KEVIN R. SAYER ---------------------------------- Kevin R. Sayer Senior Vice President, Finance and Chief Financial Officer 5 EX-10.41 8 v70622ex10-41.txt EXHIBIT 10.41 1 Exhibit 10.41 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is entered into as of February 1, 2001 (the "Effective Date") by and between MEDICAL RESEARCH GROUP, INC., a Delaware corporation (the "Company"), and MINIMED INC., a Delaware corporation ("MiniMed"). In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto agree as follows: 1. DEFINITIONS. 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following respective meanings: "Common Stock" shall mean the Company's common stock, $0.001 par value. "Proprietary Assets" shall mean all patents, patent applications, trademarks, service marks, trade names, copyrights, moral rights, maskworks, trade secrets, confidential and proprietary information, compositions of matter, formulas, designs, proprietary rights, know-how and processes of the Company. 1.2 Index of Other Defined Terms. In addition to the terms defined above, the following terms shall have the respective meanings given thereto in the sections indicated below: Defined Term Section ------------ ------- "Act" 4.5(b) "Action" 4.9 "Agreement" Preamble "Balance Sheet Date" 4.13 "Bylaws" 4.11 "Closings" 3.1 "Company" Preamble "Company Contracts" 4.11 "Effective Date" Preamble "Financial Statements" 4.13 "First Tranche" 2.2 "Glucose Sensor Agreement" 9.4 "Initial Closing" 3.1 "Lender Consents" 2.2 "MiniMed" Preamble "MiniMed Transactions" 4.14 "Pump Agreement" 9.13 "Shares" 2.1 "Second Closing" 3.1 "Second Tranche" 2.2 2. AGREEMENT TO PURCHASE AND SELL STOCK. 2.1. Agreement to Purchase and Sell. Subject to the terms and conditions hereof (including Section 2.2, below), on the date of the Initial Closing, the Company will issue and sell to MiniMed, and MiniMed agrees to purchase from the Company, One Million Nine Hundred Twenty Thousand Six Hundred Fourteen (1,920,614) shares of Common Stock (the "Shares") at a price of Fifteen Dollars Sixty Two Cents ($15.62) per share for an aggregate purchase price of Twenty-Nine Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety Dollars ($29,999,990). The purchase price for the Shares shall be paid by wire transfer of funds 2 to a designated account of the Company, provided that wire transfer instructions are delivered to MiniMed at least one (1) business day prior to the Closing. 2.2. Tranches. If MiniMed is not able to obtain, on or before the Initial Closing, any consents ("Lender Consents") that may be required from its third-party lenders in order to purchase the full amount of the Shares, then MiniMed may elect to split the Shares into two tranches, the first of which shall consist of Eight Hundred Ninety-Six Thousand, Two Hundred Eighty-Seven (896,287) shares of Common Stock for an aggregate purchase price of Fourteen Million Dollars ($14,000,000) (the "First Tranche") and the second of which shall consist of the remaining One Million Twenty-Four Thousand Three Hundred Twenty-Seven (1,024,327) shares of Common Stock for an aggregate purchase price of Fifteen Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety Dollars ($15,999,990) (the "Second Tranche"). In such case, the purchase and sale of the First Tranche shall be consummated on the Initial Closing and the consummation of the purchase and sale of the Second Tranche shall be deferred until such time as MiniMed shall have obtained such Lender Consents (or, in MiniMed's sole discretion, waived such condition), provided, however, that if MiniMed does not obtain such Lender Consents (or waive such condition) by the date set for the Second Closing, MiniMed's obligation to purchase, and the Company's obligation to sell, the Second Tranche shall terminate and be of no further force or effect (without giving rise to any claims for any breach hereunder). 3. CLOSINGS; DELIVERY. 3.1. The Closings. The purchase and sale of the Shares (or, in any event, the First Tranche) hereunder shall be held at the offices of Gibson, Dunn & Crutcher LLP, on March 7, 2001, or at such other time and place as Company and MiniMed may mutually agree upon (the "Initial Closing"). If necessary pursuant to Section 2.2, a further closing (the "Second Closing") will be held on April 6, 2001 or at such other time as the Company and MiniMed may agree. The Initial Closing and the Second Closing may be referred to together herein as the "Closings." 3.2. Delivery. At each of the Closings, the Company will deliver to MiniMed a certificate representing the shares to be purchased by MiniMed hereunder at the Initial Closing or Second Closing, as applicable, against payment of the full purchase price therefor by wire transfer. 3.3. Reasonable Efforts. The parties will use all commercially reasonable efforts to cause all conditions to the Closings to be satisfied and the Closings to occur. 4. COMPANY REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to MiniMed that the statements in this Section 4 are all true and correct and will be true and correct as of the Initial Closing: 4.1. Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under, and by virtue of, the laws of the State of Delaware and has all requisite corporate power and authority to own its properties and assets and to carry on its business as now conducted and as presently proposed to be conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction where failure to be so qualified would have a material adverse effect on its properties, assets, liabilities, financial condition, results, business, affairs, prospects or operations (a "Material Adverse Effect"). 4.2. Capitalization. Immediately prior to the Initial Closing, the authorized capital stock of the Company will consist of the following: (a) Common Stock. A total of fifty million (50,000,000) authorized shares of Common Stock ($0.001 par value) of which twenty-one million four hundred fifty-three thousand nine hundred eighty (21,453,980) shares are issued and outstanding. (b) Preferred Stock. A total of five million (5,000,000) authorized shares of Preferred Stock ($0.001 par value), none of which are issued and outstanding. (c) Options, Warrants, Reserved Shares. Except for the up to 3,500,000 shares of Common Stock reserved for issuance under the Company's 1999 Stock Incentive Plan (and the stock option plan of the Company's predecessor) under which options to purchase an aggregate of 2,210,500 shares (with a weighted average exercise price of $3.17 per share) are outstanding (and any additional options that may be granted under such plan in the ordinary course of business, consistent with past 2 3 practice, between the date hereof and the Initial Closing), there are no options, warrants, conversion privileges or other rights, or agreements with respect to the issuance thereof, presently outstanding to purchase any of the capital stock of the Company. 4.3. Subsidiaries. Except as disclosed to MiniMed in writing, the Company does not presently own or control, directly or indirectly, any equity interest in any other corporation, partnership, trust, joint venture, association, or other entity. 4.4. Due Authorization; Consents. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance of all obligations of the Company under, this Agreement, and the authorization, issuance and delivery of all of the Shares being sold under this Agreement has been taken or will be taken prior to the Initial Closing. This Agreement is a valid and binding obligation of the Company enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium, reorganization and similar laws affecting creditors' rights generally and to general equitable principles. The Shares are not subject to any preemptive rights or rights of first refusal. All consents, approvals and authorizations of, and registrations, qualifications and filings with, any federal or state governmental agency, authority or body, or any third party, required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been obtained or will be obtained prior to the Initial Closing. 4.5. Valid Issuance of Stock. (a) The Shares, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non assessable. (b) The outstanding shares of the capital stock of the Company are duly and validly issued, fully paid and non assessable, and such shares of such capital stock, and all outstanding stock, options and other securities of the Company have been issued in full compliance with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Act"), and the registration and qualification requirements of all applicable state securities laws, or in compliance with applicable exemptions therefrom, and all other provisions of applicable federal and state securities laws, including, without limitation, anti-fraud provisions. 4.6. Liabilities. Except as shown on the Financial Statements, the Company has no material indebtedness for borrowed money that the Company has directly or indirectly created, incurred, assumed, or guaranteed, or with respect to which the Company has otherwise become directly or indirectly liable. 4.7. Title to Properties and Assets. The Company has good and marketable title to, or rights to use, its properties and assets held in each case subject to no mortgage, pledge, lien, encumbrance, security interest or charge of any kind, except for liens in favor of MiniMed or disclosed in the Financial Statements. 4.8. Status of Proprietary Assets. (a) Ownership. To the knowledge of the Company, the Company has full title and ownership of, or has license to, all Proprietary Assets necessary to enable it to carry on its business as now conducted and as presently proposed to be conducted without any conflict with or infringement of the rights of others. To the knowledge of the Company, no third party has any ownership right, title, interest, claim in or lien on any of the Company's Proprietary Assets and the Company has taken, and in the future the Company will use its commercially reasonable efforts to take, all steps reasonably necessary to preserve its legal rights in, and the secrecy of, all its Proprietary Assets, except those for which disclosure is required for legitimate business or legal reasons. (b) No Infringement. To the Company's knowledge, the Company has not violated or infringed, and is not currently violating or infringing any Proprietary Asset of any other person or entity. The Company has not received any communications alleging that the Company (or any of its employees or consultants) has violated or infringed or, by conducting its business as proposed, would violate or infringe, any Proprietary Asset of any other person or entity. 4.9. Litigation. There is no action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the Company's knowledge, currently threatened) against the Company, its activities, properties or assets or, to the Company's knowledge, against any officer, director or employee of the Company in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of the Company. To the Company's knowledge, there is no factual or legal basis for any 3 4 such Action that might result, individually or in the aggregate, in any Material Adverse Effect. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality and there is no Action by the Company currently pending or which the Company intends to initiate. 4.10. Governmental Consents. All consents, approvals, orders, authorizations or registrations, qualifications, designations, declarations or filings with any federal, state or local governmental authority on the part of the Company required in connection with the consummation of the transactions contemplated herein shall have been obtained prior to and be effective as of the Closing. Based in part on the representations of MiniMed set forth in Section 5 below, the offer, sale and issuance of the Shares in conformity with the terms of this Agreement are exempt from the registration and prospectus delivery requirements of the Act. 4.11. Compliance with Other Instruments. The Company is not in, nor shall the conduct of its business as proposed to be conducted result in, any violation, breach or default of any term of the Company's Certificate of Incorporation or the Company's bylaws (the "Bylaws") or in any material respect of any term or provision of any mortgage, indenture, contract, agreement or instrument to which the Company is a party or by which it may be bound, (the "Company Contracts") or of any provision of any foreign or domestic state or federal judgment, decree, order, statute, rule or regulation applicable to or binding upon the Company. The execution, delivery and performance of and compliance with this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation, breach or default, or be in conflict with or constitute, with or without the passage of time or the giving of notice or both, either a default under the Company's Certificate of Incorporation, Bylaws or the Company Contracts or, to the Company's knowledge, a violation of any statutes, laws, regulations or orders, or an event which results in the creation of any lien, charge or encumbrance upon any asset of the Company. 4.12. Disclosure. No representation or warranty by the Company in this Agreement or in any statement or certificate signed by any officer of the Company furnished or to be furnished to MiniMed pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. 4.13. Financial Statements. The Company has provided MiniMed with true and correct copies of an audited balance sheet of the Company dated December 31, 1999, and an audited income statement and statement of changes in cash flows of the Company for its fiscal year ended December 31, 1999; and an unaudited balance sheet of the Company dated September 29, 2000 (the "Balance Sheet Date"), an unaudited income statement of the Company for the period ended September 29, 2000 (all such financial statements being collectively referred to herein as the "Financial Statements"). Except as otherwise disclosed in writing to MiniMed, such Financial Statements (a) are in accordance with the books and records of the Company, (b) are true, correct and complete and present fairly the financial condition of the Company at the date or dates therein indicated and the results of operations for the period or periods therein specified, and (c) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except as to the unaudited financial statements, for the omission of notes thereto and normal year-end audit adjustments. Specifically, but not by way of limitation, the respective balance sheets of the Financial Statements disclose all of the Company's material debts, liabilities and obligations of any nature, whether due or to become due, as of their respective dates (including, without limitation, absolute liabilities, accrued liabilities, and known contingent liabilities) to the extent such debts, liabilities and obligations are required to be disclosed in accordance with generally accepted accounting principles. The Company has good and marketable title to all assets set forth on the balance sheets of the Financial Statements, except for such assets as have been spent, sold or transferred in the ordinary course of business since their respective dates. 4.14. Certain Actions. Since the Balance Sheet Date, the Company has not: (a) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock; (b) incurred any indebtedness for money borrowed individually in excess of five hundred thousand dollars ($500,000) or in excess of one million dollars ($1,000,000) in the aggregate; (c) made any loans or advances to any person, other than ordinary advances for travel expenses; or (d) sold, exchanged or otherwise disposed of any material assets or rights other than in the ordinary course of its business, other than in "MiniMed Transactions" as defined below. "MiniMed Transactions" shall mean any transactions between the Company and MiniMed, including the return by MiniMed, in January and February 2001, of approximately $1.6 million of products to the Company for examination and rework or replacement (which is expected to be completed in March or April 2001). 4.15. Activities Since Balance Sheet Date. Since the Balance Sheet Date (and excluding any MiniMed Transactions), there has not been: (a) any damage, destruction or loss, whether or not covered by insurance, which has had, or may be expected to have, a Material Adverse Effect; 4 5 (b) any waiver by the Company of a valuable right or of a material debt owed to it; or (c) to the Company's knowledge, any other event or condition of any character which has had, or is likely to have, a Material Adverse Effect. 4.16 Exempt Offering. Based in part upon MiniMed's representations in Section 5, the offer and sale of the Shares pursuant to this Agreement are exempt from the registration requirements of Section 5 of the Act by virtue of, among other things, Section 4(2) thereof and Rule 506 thereunder, from the qualification requirements of the California Corporate Securities Law of 1968, as amended, by virtue of, among other things, Section 25102(f) thereof, and from the registration or qualification requirements of any other applicable state securities laws. 5. REPRESENTATIONS AND WARRANTIES OF MINIMED. MiniMed represents and warrants to the Company as follows: 5.1. Due Authorization; Consents. All corporate action on the part of MiniMed, its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance of all obligations of MiniMed under, this Agreement has been taken or will be taken prior to the Initial Closing. This Agreement is a valid and binding obligation of MiniMed enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium, reorganization and similar laws affecting creditors' rights generally and to general equitable principles. All consents, approvals and authorizations of, and registrations, qualifications and filings with, any federal or state governmental agency, authority or body, or any third party (with the possible exception of the Lender Consents), required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been obtained or will be obtained prior to the Initial Closing. 5.2. Investigation; Economic Risk. MiniMed acknowledges that it has a pre-existing business relationship with the Company, and has had an opportunity to discuss the business, affairs and current prospects of the Company with its officers. MiniMed further acknowledges having had access to information about the Company that it has requested. MiniMed acknowledges that it is able to fend for itself in the transactions contemplated by this Agreement and has the ability to bear the economic risks of its investment pursuant to this Agreement. 5.3. Purchase for Own Account. The Shares will be acquired for its own account, not as a nominee or agent, and not with a view to or in connection with the sale or distribution of any part thereof in violation of the Act. 5.4. Exempt from Registration; Restricted Securities. MiniMed understands that the Shares will not be registered under the Act, on the ground that the sale provided for in this Agreement is exempt from registration under the Act, and that the reliance of the Company on such exemption is predicated in part on MiniMed's representations set forth in this Agreement. MiniMed understands that the Shares being purchased hereunder are restricted securities within the meaning of Rule 144 under the Act; that the Shares are not registered and must be held indefinitely unless they are subsequently registered or an exemption from such registration is available. 5.5. Restrictive Legends. It is understood that each certificate representing (a) the Shares, and (b) any other securities issued in respect of the foregoing upon any stock split, stock dividend, recapitalization, merger or similar event shall be stamped or otherwise imprinted with a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. 5 6 5.6 Removal of Restrictive Legend. The legend set forth above shall be removed by the Company from any certificate evidencing Shares upon delivery to the Company of an opinion by counsel, reasonably satisfactory to the Company, that a registration statement under the Act is at that time in effect with respect to the legended security or that such security can be freely transferred in a public sale without such a registration statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Shares. 6. COVENANTS OF THE COMPANY. The Company covenants to MiniMed as follows: 6.1 Use of Proceeds. The Company will use the proceeds from the sale of the Shares for working capital and other general corporate purposes. 6.2 Inspection Rights. MiniMed shall have the right to review all books and records, reports, accounts and other financial documents of the Company as it may reasonably request and to copy the same and to make excerpts therefrom, all at such reasonable times and as MiniMed may reasonably request, upon prior written notice to the Company, so long as such review and copying does not unreasonably interfere with the business of the Company and MiniMed agrees to keep confidential, and not disclose, except as may be required by law or court order, all information obtained during such review of a confidential or proprietary nature (and not otherwise known to MiniMed through other sources or publicly known). 6.3. Information Rights. The Company shall deliver to MiniMed (a) annual financial statements as soon as available (and, in any event, within 150 days after the end of each fiscal year), which financial statements may be unaudited unless the Company otherwise has caused its financial statements to be audited, and (b) unaudited quarterly financial statements within 45 days of the end of each fiscal quarter. 7. CONDITIONS TO MINIMED'S OBLIGATIONS AT THE CLOSINGS. The obligation of MiniMed to purchase the Shares at the Closings is subject to the fulfillment (or waiver by MiniMed) on or prior to the Closings, of the following conditions: 7.1. Representations and Warranties Correct. The representations and warranties made by the Company in Section 4 hereof shall be true and correct when made, and shall be true and correct as of the date of the Initial Closing with the same force and effect as if they had been made on and as of such date, subject to any changes contemplated by this Agreement. 7.2. Performance of Obligations. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Initial Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein. 7.3. Compliance Certificate. At the Initial Closing, the Company shall deliver to MiniMed a certificate, dated the date of the Initial Closing, signed by the Company's President certifying that the conditions specified in Sections 7.1 and 7.2 have been fulfilled. 7.4. Securities Laws. The offer and sale of the Shares to MiniMed pursuant to this Agreement shall be exempt from the registration requirements of the Act and the registration and/or qualification requirements of all applicable state securities laws. 7.5. Opinion of Company's Counsel. MiniMed shall have received from counsel to the Company an opinion addressed to MiniMed, dated the date of the Initial Closing, in form and substance reasonably acceptable to MiniMed. 7.6 Lender Consents. With respect to the Second Closing only, MiniMed shall have received the Lender Consents. 8. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The obligations of the Company under this Agreement are subject to the fulfillment (or waiver by the Company) on or prior to the Closings of the following conditions: 8.1. Representations and Warranties Correct. The representations and warranties made by MiniMed in Section 5 hereof shall be true and correct when made, and shall be true and correct as of the date of the Initial Closing with the same force and effect as if they had been made on and as of such date, subject to any changes contemplated by this Agreement. 6 7 8.2. Payment of Purchase Price. MiniMed shall have delivered to the Company the purchase price for the shares being purchased in accordance with the provisions of Section 3. 8.3. Securities Exemptions. The offer and sale of the Shares to MiniMed pursuant to this Agreement shall be exempt from the registration requirements of the Act, and the registration and/or qualification requirements of all applicable state securities laws. 9. MISCELLANEOUS. 9.1. Governing Law. This Agreement shall be governed in all respects by the laws of the state of California without regard to provisions regarding choice of laws. 9.2. Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any party hereto and the closing of the transactions contemplated hereby. 9.3. Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. This Agreement and the rights and obligations therein may not be assigned by MiniMed without the written consent of the Company except to a parent corporation, a subsidiary or affiliate or in connection with a consolidation or merger or sale of all or substantially all of the assets of MiniMed. This Agreement and the rights and obligations therein may not be assigned by the Company without the written consent of MiniMed. 9.4. Entire Agreement. This Agreement, the Pump Agreement (as defined below), the Mutual Nondisclosure Agreement between the parties with an effective date of January 2, 1996, the Glucose Sensor Option Agreement dated as of September 1, 1998, as amended by the Amendment thereto dated as of the same date as this Agreement (the "Glucose Sensor Agreement"), the Agreement Re Implantable Pump Business dated as of September 1, 1998, and the other agreements and instruments entered into pursuant to said Agreement Re Implantable Pump Business together constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter hereof or thereof. 9.5. Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when received when sent by facsimile at the address and number set forth below; (c) three business days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party as set forth below; or (d) the next business day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. To MiniMed: To the Company: MiniMed Inc. Medical Research Group, Inc. 18000 Devonshire Street 12744 San Fernando Road Northridge, CA 91325 Sylmar, CA 91342 Attn: General Counsel Attn: President Fax Number: (818) 576-6228 Fax Number: (818) 367-5149 With copies to: With copies to: Gibson, Dunn & Crutcher LLP Resch Polster Alpert & Berger LLP 333 S. Grand Avenue 10390 Santa Monica Blvd., 4th Floor Los Angeles, CA 90071 Los Angeles, CA 90025-5058 Attn: Roy J. Schmidt Attn: Aaron A. Grunfeld Fax Number: (213) 229-7520 Fax Number: (310) 552-3209 7 8 Each person making a communication hereunder by facsimile shall promptly confirm by telephone to the person to whom such communication was addressed each communication made by it by facsimile pursuant hereto but the absence of such confirmation shall not affect the validity of any such communication. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 9.5 by giving the other party written notice of the new address in the manner set forth above. 9.6. Other Agreements. Any default under Sections 2.1 or 2.2 of this Agreement shall constitute a default under the Pump Agreement (as defined below) and the Glucose Sensor Option Agreement. 9.7. Amendments and Waivers. Any term of this Agreement may be amended only with the written consent of the Company and MiniMed. 9.8. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to the Company or to MiniMed, upon any breach or default of any party hereto under this Agreement, shall impair any such right, power or remedy of the Company, or MiniMed nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach of default thereafter occurring; nor shall any waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of the Company or MiniMed of any breach of default under this Agreement or any waiver on the part of the Company or MiniMed of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to the Company or MiniMed shall be cumulative and not alternative. 9.9. Finder's Fees. Each party (a) represents and warrants to the other party hereto that it has retained no finder or broker in connection with the transactions contemplated by this Agreement (except that U.S. Bancorp Piper Jaffrey has provided financial advisory services to MiniMed and its Board of Directors), and (b) hereby agrees to indemnify and to hold harmless the other party hereto from and against any liability for any commission or compensation in the nature of a finder's fee of any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which the indemnifying party or any of its employees or representatives are responsible. 9.10. Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 9.11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 9.12. Severability. Should any provision of this Agreement be determined to be illegal or unenforceable, such determination shall not affect the remaining provisions of this Agreement. 9.13. Disputes and Arbitration. The dispute resolution provisions in Section 29 of that certain Amended and Restated Implantable Pump License and Distribution Agreement entered into by the Company and MiniMed, dated of even date herewith (the "Pump Agreement"), are hereby expressly incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year herein above first written. MINIMED INC. MEDICAL RESEARCH GROUP, INC. /s/ ERIC KENTOR /s/ RONALD LEBEL - ------------------------------------- --------------------------------------- Eric Kentor Ronald lebel Senior Vice President President 8 EX-21.1 9 v70622ex21-1.txt EXHIBIT 21.1 1 Exhibit 21.1 SUBSIDIARIES OF THE COMPANY MiniMed Distribution Corp., a Delaware corporation MiniMed International, Inc., a Barbados corporation MiniMed Development Corp. a Delaware corporation MiniMed SA, a French corporation MiniMed GMBH, a German corporation MiniMed Pty Ltd, an Australian corporation MiniMed Nordic AB, a Swedish corporation MiniMed Europe SA, A Belgium corporation MiniMed 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 MiniMed Pharmacies, Inc., a Florida corporation South Broward Medical Arts Pharmacy, Inc., a Florida corporation Clark Pharmacy, Inc., a Georgia corporation MiniMed Wholesale Co., a Florida corporation Medical Management & Marketing of South Florida, a Florida corporation MiniMed Pharmaceutical Manufacturing, Inc., a Florida corporation EX-23.1 10 v70622ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-95630, No. 333-04912, and No. 333-14190 of MiniMed Inc. on Form S-8 of our report dated February 7, 2001, appearing in this Annual Report on Form 10-K of MiniMed Inc. for the year ended December 29, 2000. /s/ DELOITTE & TOUCHE LLP - --------------------------- Deloitte & Touche LLP Los Angeles, California March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----