-----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, V8yTAa01Z4ipaFiEbeaQKYa56IzqEjLgFL4FG9Ov1jvxfaMDmIsQ0jgavOHqBCZa CF/lfisWxcsscGVJJjtKgQ== 0000950148-99-001199.txt : 19990518 0000950148-99-001199.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950148-99-001199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 000-26268 FILM NUMBER: 99627382 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-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-26268 MINIMED INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4408171 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATED OR ORGANIZATION) IDENTIFICATION NO.)
12744 SAN FERNANDO ROAD, SYLMAR, CA 91342 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 362-5958 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT MAY 12, 1999 ------------------ --------------------------- COMMON STOCK, $.01 PAR VALUE 28,351,696
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PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements and Notes................. 3 Consolidated Balance Sheets -- January 1, 1999 and April 2, 1999 (Unaudited)............................................ 3 Consolidated Statements of Income (Unaudited) -- Three months ended April 3, 1998 and April 2, 1999................ 4 Consolidated Statements of Cash Flows (Unaudited) -- Three months ended April 3, 1998 and April 2, 1999................ 5 Notes to Consolidated Financial Statements (Unaudited)...... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 16 Item 2. Changes in Securities and Use of Proceeds................... 16 Item 3. Defaults Upon Senior Securities............................. 17 Item 4. Submission of Matters to a Vote of Security Holders......... 17 Item 5. Other Information........................................... 17 Item 6. Exhibits and Reports on Form 8-K............................ 17 SIGNATURE............................................................ 18 INDEX TO EXHIBITS.................................................... 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES MINIMED INC. CONSOLIDATED BALANCE SHEETS JANUARY 1, 1999 AND APRIL 2, 1999 ASSETS
1998 1999 ------------ ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................. $ 27,303,000 $ 21,418,000 Short-term investments.................................... 13,476,000 13,482,000 Accounts receivable, net of allowance for doubtful accounts of $8,844,000 and $8,481,000 at January 1, 1999 and April 2, 1999, respectively................... 38,788,000 40,245,000 Inventories............................................... 16,860,000 17,681,000 Deferred income taxes..................................... 6,404,000 6,485,000 Prepaid expenses and other current assets................. 3,835,000 7,082,000 ------------ ------------ Total current assets.............................. 106,666,000 106,393,000 NOTE RECEIVABLE FROM AFFILIATE.............................. 3,600,000 3,600,000 LONG-TERM INVESTMENTS....................................... 4,826,000 5,140,000 OTHER ASSETS................................................ 11,522,000 11,367,000 LAND, BUILDINGS, PROPERTY AND EQUIPMENT -- Net.............. 31,038,000 34,400,000 ------------ ------------ TOTAL ASSETS................................................ $157,652,000 $160,900,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable and line of credit....... 1,101,000 882,000 Accounts payable.......................................... 5,447,000 5,747,000 Accrued salaries and related benefits..................... 5,231,000 3,838,000 Accrued sales commissions................................. 2,260,000 573,000 Accrued warranties........................................ 2,828,000 2,885,000 Income taxes payable...................................... 1,155,000 2,014,000 Other accrued expenses.................................... 3,873,000 2,955,000 ------------ ------------ Total current liabilities......................... 21,895,000 18,894,000 ------------ ------------ Deferred Tax Liabilities.................................. 865,000 984,000 Notes payable............................................. 1,059,000 1,000,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.005; 40,000,000 shares authorized; 28,095,274 and 28,207,356 shares issued and outstanding as of January 1, 1999 and April 2, 1999, respectively........................................... 143,000 147,000 Additional capital........................................ 111,826,000 114,088,000 Accumulated other comprehensive income.................... 738,000 879,000 Retained earnings......................................... 21,126,000 24,908,000 ------------ ------------ Total stockholders' equity........................ 133,833,000 140,022,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $157,652,000 $160,900,000 ============ ============
See notes to consolidated financial statements. 3 4 MINIMED INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED APRIL 3, 1998 AND THREE MONTHS ENDED APRIL 2, 1999
1998 1999 ----------- ----------- (UNAUDITED) NET SALES................................................... $26,366,000 $40,911,000 COST OF SALES............................................... 9,784,000 13,838,000 ----------- ----------- GROSS PROFIT................................................ 16,582,000 27,073,000 =========== =========== OPERATING EXPENSES: Selling, general and administrative......................... 11,391,000 17,499,000 Research and development.................................... 3,317,000 5,296,000 Research and development contract income.................... (1,500,000) (1,500,000) ----------- ----------- Total operating expenses.......................... 13,208,000 21,295,000 =========== =========== OPERATING INCOME............................................ 3,374,000 5,778,000 OTHER INCOME, Including interest income..................... 291,000 294,000 ----------- ----------- INCOME BEFORE INCOME TAXES.................................. 3,665,000 6,072,000 PROVISION FOR INCOME TAXES.................................. 1,361,000 2,290,000 ----------- ----------- NET INCOME.................................................. $ 2,304,000 $ 3,782,000 =========== =========== BASIC EARNINGS PER SHARE.................................... $ 0.09 $ 0.13 =========== =========== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING................... 26,562,000 28,148,000 =========== =========== DILUTED EARNINGS PER SHARE.................................. $ 0.08 $ 0.13 =========== =========== DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING................. 27,854,000 30,024,000 =========== ===========
See notes to consolidated financial statement. 4 5 MINIMED INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED APRIL 3, 1998 AND THREE MONTHS ENDED APRIL 2, 1999
1998 1999 ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES -- Net income.................................................. $ 2,304,000 $ 3,782,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 1,053,000 1,560,000 Directors fees paid in common stock....................... -- 32,000 Deferred income taxes..................................... (558,000) (81,000) Tax benefit from exercise of non-qualified stock options................................................ -- 1,630,000 Changes in operating assets and liabilities: Accounts receivable, net............................... 1,477,000 (1,457,000) Inventories............................................ (1,602,000) (821,000) Prepaid expenses and other current assets.............. 384,000 (3,247,000) Other assets........................................... (47,000) 35,000 Accounts payable....................................... (2,495,000) 300,000 Income taxes payable................................... 1,438,000 859,000 Accrued expenses....................................... (5,153,000) (3,941,000) ----------- ----------- Net cash used in operating activities.................. (3,199,000) (1,349,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES -- Short-term investments.................................... 14,081,000 (6,000) Acquisition of Dartec A.B................................. (2,544,000) -- Purchase of land, buildings, property and equipment....... (3,393,000) (4,724,000) ----------- ----------- Net cash provided by (used in) investing activities....... 8,144,000 (4,730,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES -- Repayment of notes payable................................ (2,811,000) (278,000) Proceeds from stock option exercises...................... -- 525,000 ----------- ----------- Net cash provided by (used in) financing activities....... (2,811,000) 247,000 ----------- ----------- Effect of foreign exchange rates on cash.................. 147,000 (53,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................... 2,281,000 (5,885,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................................... 22,282,000 27,303,000 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $24,563,000 $21,418,000 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION -- Cash paid during the period for: Interest.................................................. $ 35,000 $ 2,000 Income taxes.............................................. $ 461,000 $ 265,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY -- The Company recorded an unrealized holding gain of $195,000 during the three months ended April 2, 1999 and an unrealized holding loss of $997,000 during the three months ended April 3, 1998, net of estimated income taxes on marketable securities classified as long-term investments available for sale. See notes to consolidated financial statements. 5 6 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED APRIL 3, 1998 AND THREE MONTHS ENDED APRIL 2, 1999 The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED ----------- ----------------- 1999............................................. December 31, 1999 1998............................................. January 1, 1999
NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of MiniMed Inc. (the "Company" or "MiniMed") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited financial statements included in the Annual Report of MiniMed filed on Form 10-K with the Securities and Exchange Commission for the year ended January 1, 1999. The results of operations for the three months ended April 2, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. On March 15, 1999, the Company announced a 2-for-1 stock split, in the form of a stock dividend, to holders of record of MiniMed's common stock at the close of business on April 1, 1999. In accordance with SFAS 128, "Earnings per Share," the Company has recorded the effects of this stock split on share and per share amounts at April 2, 1999 and all prior periods have been restated. NOTE 2. INCOME TAXES Net income and earnings per share for the three months ended April 3, 1998 and April 2, 1999 reflect income taxes which have been recorded at the Company's estimated effective tax rate for the year. This estimated income tax rate has been determined by giving consideration to the pretax earnings and losses applicable to foreign and domestic tax jurisdictions. NOTE 3. WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), basic earnings per share for the three months ended April 3, 1998 and April 2, 1999, were computed by dividing net income by weighted average common shares outstanding during the periods presented. Diluted earnings per share for the periods presented were computed by dividing net income by weighted average common and common equivalent shares outstanding, computed in accordance with the treasury stock method. The computation of basic and diluted EPS is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED APRIL 3, 1998 APRIL 2, 1999 ------------------ ------------------ BASIC EPS COMPUTATION Numerator: Net income applicable to common stock........... $ 2,304,000 $ 3,782,000 Denominator: Weighted average common shares outstanding...... 26,562,000 28,148,000 ----------- ----------- Basic earnings per share........................ $ 0.09 $ 0.13 =========== ===========
6 7 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE MONTHS ENDED APRIL 3, 1998 AND THREE MONTHS ENDED APRIL 2, 1999
THREE MONTHS ENDED THREE MONTHS ENDED APRIL 3, 1998 APRIL 2, 1999 ------------------ ------------------ DILUTED EPS COMPUTATION Numerator: Net income applicable to common stock........... $ 2,304,000 $ 3,782,000 ----------- ----------- Denominator: Weighted average common shares outstanding...... 26,562,000 28,148,000 Effect of dilutive securities: Stock options................................. 1,292,000 1,876,000 ----------- ----------- Diluted weighted average shares outstanding..... 27,854,000 30,024,000 ----------- ----------- Diluted earnings per share...................... $ 0.08 $ 0.13 =========== ===========
NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS Certain balance sheet components are as follows:
JANUARY 1, APRIL 2, 1999 1999 ----------- ------------ (UNAUDITED) Inventories: Raw materials.................................. $ 7,064,000 $ 7,672,000 Work-in-progress............................... 3,040,000 2,328,000 Finished Goods................................. 6,756,000 7,681,000 ----------- ------------ $16,860,000 $ 17,681,000 =========== ============ Property, plant and equipment: Land, buildings and improvements............... $13,244,000 $ 14,500,000 Machinery and equipment........................ 17,332,000 18,845,000 Tooling and molds.............................. 2,352,000 2,359,000 Computer software.............................. 1,989,000 2,682,000 Furniture and fixtures......................... 5,301,000 6,569,000 ----------- ------------ 40,218,000 44,955,000 Less accumulated depreciation.................... (9,180,000) (10,555,000) ----------- ------------ Total............................................ $31,038,000 $ 34,400,000 =========== ============ Other assets: Technology license............................. $ 145,000 $ 133,000 Goodwill....................................... 11,114,000 10,994,000 Other.......................................... 263,000 240,000 ----------- ------------ Total............................................ $11,522,000 $ 11,367,000 =========== ============ Long-term investments: Investment in Trimeris common stock -- at fair value....................................... $ 3,686,000 $ 4,000,000 Investment in PDC common stock -- at cost...... 1,140,000 1,140,000 ----------- ------------ Total............................................ $ 4,826,000 $ 5,140,000 =========== ============
7 8 MINIMED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE MONTHS ENDED APRIL 3, 1998 AND THREE MONTHS ENDED APRIL 2, 1999 NOTE 5. COMPREHENSIVE INCOME The Company's total comprehensive income was as follows:
THREE MONTHS ENDED ------------------------------ APRIL 3, 1998 APRIL 2, 1999 ------------- ------------- Net income.................................................. $2,304,000 $3,782,000 Other comprehensive income (loss): Foreign currency translation adjustments.................. 147,000 (54,000) Unrealized gain (loss) on securities...................... (1,608,000) 314,000 ---------- ---------- Other comprehensive income (loss), before income taxes.... (1,461,000) 260,000 Income tax expense (benefit) related to items of other comprehensive income (loss)............................ (611,000) 119,000 ---------- ---------- Other comprehensive income (loss)......................... (850,000) 141,000 ---------- ---------- Total comprehensive income.................................. $1,454,000 $3,923,000 ========== ==========
NOTE 6. COMMITMENTS AND CONTINGENCIES On September 11, 1996, the Company filed an action against Fimed, Inc. ("Fimed") seeking rescission of a product distribution contract. Subsequent to the filing of this action, Fimed filed a counterclaim seeking compensatory damages of approximately $400 million plus punitive damages. The Company believes that it has meritorious defenses to the counterclaims asserted by Fimed. The Court appointed a retired Judge to act as an Independent Expert pursuant to California law to evaluate, assuming liability, the amount of damages, if any, sustained by Fimed. The hearing on this matter was held in February 1999. Fact discovery pertaining to the litigation has been largely completed. Trial in this matter is currently set to commence September 1999. The Company has been pursuing its claims and is defending against Fimed's claims vigorously. During 1998, the Company integrated the operations of Home Medical Supply, Inc. and its affiliated companies ("HMS"), which the Company acquired in fiscal 1997. In connection with these activities, the Company discovered certain business practices relating to charges billed to the State of Florida for health care services provided through an affiliated pharmacy. These practices were implemented by HMS' prior owners and may potentially result in liability to the Company. The Company has received no notice of any action which is pending or threatened against it in connection therewith. The Company has corrected such practices, notified the State of Florida authorities of its findings, initiated legal action against the prior owners to seek indemnification for any such liability and is pursuing other legal remedies. The amount of liability to the Company, if any, cannot be determined at this time, although the Company believes that indemnification for such liability would be available from HMS' prior owners. On February 9, 1999, the Company was served with a complaint, filed in Louisiana, by Diabetes Resources, Inc. (d/b/a Insulin Infusion Specialties) ("IIS"), a former authorized distributor for MiniMed products, alleging various causes of action against the Company. IIS entered into an Educational Dealer Agreement (the "Agreement") with MiniMed in July 1997. MiniMed elected to not renew the Agreement and the Agreement expired 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. On April 6, 1999, the Company filed a counterclaim alleging IIS breached the Agreement and carried on various unfair trade practices. The Company believes that its counterclaims and its defenses to the claims asserted by IIS are meritorious. Discovery in this litigation is in its preliminary stages. During the normal course of business, the Company may be subject to litigation involving various business matters. Management believes that an adverse outcome of any such known matters would not have a material adverse impact on the Company. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of MiniMed Inc. ("MiniMed" or the "Company") should be read in conjunction with the consolidated financial statements and the related notes thereto incorporated by reference herein. Any statements contained herein regarding MiniMed that are forward looking, including statements relating to anticipated operating results, growth, financial resources, capital requirements, adequacy of the Company's capital resources, trends in spending on research and development, the development of new markets, the development, regulatory approval, manufacture, distribution, and commercial acceptance of new products and new applications for MiniMed's existing product lines are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may affect the Company's business and prospects, including changes in economic and market conditions, acceptance of MiniMed's products by the health care and reimbursement communities, health care legislation and regulation, new developments in diabetes therapy, administrative and regulatory approval and related considerations, competitive developments, maintenance of strategic alliances and other factors discussed in the Company's filings with the Securities and Exchange Commission. GENERAL The Company's 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 its acquisitions of HMS and Dartec in fiscal 1997 and Diabetes Support Systems, Inc. ("DSS") in fiscal 1998, the Company has broadened its product offerings to its customers to include other diabetes supplies and pharmacy products generally used in the treatment of this disease. The Company distributes these products nationally. Product development and manufacturing operations have focused on three product lines: external insulin pumps and related disposables, implantable insulin pumps and continuous glucose monitoring systems. Future development of the external pump and disposable product line will focus upon improving the existing technology for its current use in diabetes treatment and the utilization of this technology for the treatment of other medical conditions. There have been no sales of glucose monitoring systems to date; however, on February 26, 1999, the Company received a unanimous recommendation for approval of the first generation of that product from an Advisory Panel to the Food and Drug Administration ("FDA") subject to certain conditions. The Company intends to initiate sales activity for this product line after final FDA approval is received. The Company's continuous glucose monitoring system's technology has been characterized as a first of its kind, and commercialization will be subject to successful implementation of manufacturing, sales, marketing and reimbursement plans. Management anticipates that this will occur by mid-1999. On September 1, 1998, the Company sold assets and transferred technology related to its implantable pump program to Medical Research Group, LLC ("MRG"). The Company has retained exclusive distribution rights to the implantable pump product line for specific medical conditions, including diabetes. Sales of the implantable pump have been and will continue to be irregular until full regulatory approval is obtained. 9 10 RESULTS OF OPERATIONS The following table sets forth, for the three months ended April 2, 1999 and the three months ended April 3, 1998, the percentage relationship to net sales of certain items in the Company's consolidated statements of operations and the percentage changes in the dollar amounts of such items on a comparative basis.
PERCENTAGE OF NET SALES ------------------------------ THREE MONTHS THREE MONTHS PERCENTAGE ENDED ENDED INCREASE APRIL 2, 1999 APRIL 3, 1998 (DECREASE) ------------- ------------- ---------- Net sales.............................................. 100.0% 100.0% 55.2% Cost of sales.......................................... 33.8 37.1 41.4 ----- ----- ---- Gross profit........................................... 66.2 62.9 63.3 Operating expenses Selling, general and administrative.................. 42.8 43.2 53.6 Research and development............................. 12.9 12.6 59.7 Research and development contract revenue............ (3.7) (5.7) 0 ----- ----- ---- Total operating expenses..................... 52.0 50.1 61.2 ----- ----- ---- Operating income....................................... 14.2% 12.8% 71.3% ===== ===== ====
The following table sets forth domestic and international net sales and gross profits related to the Company's primary product lines for the three months ended April 2, 1999 and for the three months ended April 3, 1998.
DOLLARS IN THOUSANDS % OF NET SALES ------------------------------ ------------------------------ THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED APRIL 2, 1999 APRIL 3, 1998 APRIL 2, 1999 APRIL 3, 1998 ------------- ------------- ------------- ------------- DIABETES PRODUCTS: External pumps and related disposables Domestic......................... $34,275 $19,336 83.8% 73.3% International.................... 3,436 2,756 8.4 10.5 ------- ------- ----- ----- Subtotal.................... 37,711 22,092 92.2 83.8 Implantable insulin pumps........... 147 221 0.4 0.8 Other diabetes supplies............. 1,882 1,020 4.6 3.9 ------- ------- ----- ----- Total diabetes products..... 39,740 23,333 97.2 88.5 Pharmacy products................... 1,171 3,033 2.8 11.5 ------- ------- ----- ----- Total net Sales............. $40,911 $26,366 100.0% 100.0% ======= ======= ===== ===== GROSS PROFITS Diabetes products: External pumps and related disposables...................... $26,378 $15,966 64.5% 60.6% Implantable pumps................... (199) (596) (0.5) (2.3) Other diabetes supplies............. 502 491 1.2 1.9 ------- ------- ----- ----- Total diabetes products..... 26,681 15,861 65.2 60.2 Pharmacy products................... 392 721 1.0 2.7 ------- ------- ----- ----- Total gross profits......... $27,073 $16,582 66.2% 62.9% ======= ======= ===== =====
10 11 THREE MONTHS ENDED APRIL 2, 1999 AND APRIL 3, 1998 NET SALES Net sales increased 55.2% during the three months ended April 2, 1999 over the three months ended April 3, 1998 to $40,911,000 from $26,366,000. This increase is primarily the result of an increase of 70.7%, or $15,619,000 in the sales volume of external pumps and related disposables. Domestic sales of these products grew 77.3% or $14,939,000 in the first quarter of 1999 as compared to the first quarter of 1998, while international sales increased 24.7% or $680,000 during the same period. The domestic net sales growth was derived primarily from increased volume of external pumps and related disposables combined with an increase in average prices realized on external pump sales. The higher domestic external pump price resulted from an increase in the list price for the latest generation external pump during the second quarter of 1998, combined with the continued shift of sales by the Company through its direct sales organization rather than through its independent dealers, which receive discounts on these products. International sales of external pumps and related disposable products grew primarily due to greater sales volumes of external pumps, while pricing of external pumps in the international market remained consistent with the comparable quarter of 1998. Domestic and international pricing for disposable products did not change materially from the first quarter of 1998 to the first quarter of 1999. Sales of implantable pumps decreased 33.5% or $74,000 from the first quarter of 1998 to the first quarter of 1999, as regulatory approval for the implantable pump and special insulin utilized in the implantable system is still pending. Although the Company received certification under the applicable directives issued by the European Union (the "EU") and received the CE Mark in March 1995 for the implantable pump (permitting commercial sale throughout the EU), separate approval from the EU is required for commercial sale of the insulin. No assurance can be given as to when such approval will be received, if at all. Sales of implantable pumps to date have been generated mainly in connection with clinical trials and compassionate use of the pumps. The implantable pump and the special insulin remain subject to regulatory review and approval in the United States. No assurance can be given as to when such approvals will be received, if at all. Sales of other diabetes supplies increased by 84.5% or $862,000 during the 1999 first quarter compared to the 1998 first quarter. This increase resulted from overall market growth combined with the addition of sales of these products by DSS, which was acquired by the Company during the fourth quarter of 1998. Average sales prices have decreased for these products due to reimbursement trends. Pharmaceutical product sales decreased 61.4% or $1,862,000 during the 1999 first quarter compared to the 1998 first quarter. The pharmacy operation historically distributed products to treat a number of medical conditions, including diabetes, HIV/ AIDS and renal failure. The 1999 sales decrease resulted primarily from the Company's continued narrowing and restructuring of the pharmacy operations to better support MiniMed's current activities and to better position the Company for future opportunities. OPERATING RESULTS Cost of Sales and Gross Profits -- Cost of sales increased 41.4% during the three months ended April 2, 1999 over the three months ended April 3, 1998 to $13,838,000 from $9,784,000. As a percentage of net sales, cost of sales in the 1999 first quarter decreased to 33.8% from 37.1% in the comparable period of 1998. Gross margins on external pumps and disposables decreased to 69.9% of such sales during the 1999 first quarter, compared to 72.3% for this product line during the 1998 first quarter. The decline in gross margins on these products is primarily the result of increased spending to identify alternate supply channels of raw material components used in the Company's external pumps and to certify vendors for MiniMed's quality criteria. The effects of this increased spending on vendor identification and certification on external pump gross margins was partially offset by an increase in average selling prices for external pumps. Disposable gross margins were consistent between the first quarter of 1998 and the first quarter of 1999. The Company has continued to purchase certain disposable products from a contract manufacturer rather than manufacturing these products through its internal manufacturing operations. The Company's gross profits continue to be adversely impacted by the implantable pump product line due to continued limited sales prior to full commercial release. However, implantable pump gross margins 11 12 improved during the 1999 first quarter compared to the comparable period in 1998 due to the transfer of implantable pump manufacturing operations to Medical Research Group, Inc. ("MRG") on September 1, 1998. The Company expects this improvement in margins to continue in the short-term as a result of the MRG transaction; however, long-term margins may be reduced due to the transfer of the manufacturing operation to MRG, as MiniMed's role has been converted to an exclusive distributor of this product. MiniMed is required to purchase implantable pump units from MRG at negotiated prices, is obligated to purchase minimum quantities in 1999, 2000 and 2001 and must purchase minimum quantities in future periods in order to preserve its exclusivity. Future minimum purchase commitments for implantable pump units based upon current prices are: 1999............................................ $ 3,980,000 2000............................................ 7,604,000 2001............................................ 8,935,000 ----------- Total........................................... $20,519,000 ===========
Gross margins for other diabetes supplies decreased to 26.7% of such sales during the first quarter of 1999 compared to 48.1% of such sales during the comparable period in 1998. This decrease was due to the continued effects of lower average sales prices due to reimbursement trends. Gross profits on pharmaceutical products decreased 45.6% to $392,000 during the first quarter of 1999, compared to $721,000 during the first quarter of 1998. This decrease was primarily due to the continued restructuring of the pharmacy operations as described above. Gross margins on pharmaceutical products, however, as a percentage of such sales, increased to 33.5% during the first quarter of 1999 compared to 23.8% during the first quarter of 1998. Operating Expenses -- Selling, general and administrative expenses increased 53.6% during the three months ended April 2, 1999 over the three months ended April 3, 1998 to $17,499,000 from $11,391,000. As a percentage of net sales, these expenses decreased to 42.8% during the 1999 first quarter from 43.2% during the 1998 first quarter. Selling and marketing expenses increased primarily due to increased sales volumes, which led to increased sales commissions and other variable field sales costs. Also, the Company continued to increase expenditures to expand its overall international presence, particularly in Germany. General and administrative expenses also rose during the three months ended April 2, 1999 over the three months ended April 3, 1998 due to costs associated with staff increases necessary to support the Company's increased business activities. Research and development expenses grew 59.7% during the three months ended April 2, 1999 over the three months ended April 3, 1998 to $5,296,000 from $3,317,000. As a percentage of sales, research and development expenses increased to 12.9% during the three months ended April 2, 1999 from 12.6% during the comparable period in 1998. The 1999 first quarter increase in research and development costs resulted from greater resources directed to the development of continuous glucose monitoring systems, start-up manufacturing operations of the continuous glucose monitoring systems, development of future generation external insulin pumps and related disposable products and data communication capabilities for external pumps and continuous glucose monitoring systems. The Company anticipates that research and development expenditures for future periods will continue to increase as more of its new technological innovations approach commercialization. During the 1998 first quarter, 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 the agreement, and subject to the achievement of quarterly performance milestones, the Company can receive up to $12.0 million in funding, payable in quarterly installments of $1.5 million, for two research and development projects. Subject to payment of royalties to AMI, the Company will have the right to sell products utilizing the technology developed pursuant to the agreement on a world-wide basis, with the exception of Japan. The Company also has the right to purchase the technologies developed at prices ranging from an aggregate of $13.5 million to $19.0 million during certain periods through April 30, 2002. During each of the first quarter 1998 and 1999, the Company recorded $1.5 million from this research and development contract as a reduction of operating expenses, as costs related to completion of the contractual obligations will be included in research and development expense. 12 13 Other -- During the three months ended April 2, 1999 and the three months ended April 3, 1998, other income consisted primarily of interest income generated from the Company's cash, cash equivalents, and short-term investment balances. The Company's effective tax rate during the three months ended April 2, 1999 and April 3, 1998 has been computed giving consideration to the pretax earnings and losses applicable to the Company's foreign and domestic tax jurisdictions. Inflation has not significantly impacted the Company's results of operations for the past two years. LIQUIDITY AND CAPITAL RESOURCES The Company used cash in operations of $1,349,000 and $3,199,000 during the three months ended April 2, 1999 and the three months ended April 3, 1998, respectively. Cash flow from operations improved during the first quarter of 1999 compared to the first quarter of 1998 primarily due to a reduction in cash expenditures on various accounts payable and accrued expenses. During the first quarter of 1998, the Company used cash to retire approximately $3,356,000 in current liabilities related to the HMS acquisition. The improvement in operating cash flow in the first quarter of 1999 was partially offset by increases in inventory and accounts receivable balances during such period. The Company has begun to increase finished goods inventory levels to support the historically higher sales volumes experienced in the third and fourth quarters. Additionally, the Company experienced a significant increase in accounts receivable caused primarily by the Company's continuing shift to selling direct to patients through its in-house sales organization rather than through independent dealers. This sales shift has led to a significant increase in accounts receivable balances due from third party payors, which are generally realized over a longer payment cycle. The increase in capital expenditures in the first quarter of 1999 to $4,724,000 compared to $3,393,000 spent during the comparable period in 1998, resulted primarily from building glucose sensor manufacturing capacity, as well as other building improvements to service growth, manufacturing expansion, research and development engineering equipment, information systems requirements and some initial outlays for the new corporate headquarters. The Company anticipates that future capital expenditures will continue to increase to support the Company's new product activities and to build the infrastructure necessary to accommodate the Company's anticipated growth. During the first quarter of 1998, the Company used approximately $2.5 million of cash to complete its acquisition of Dartec A.B., a Scandinavian distributor. The Company also used cash of approximately $2.8 million and $278,000 to retire some existing debt related to the HMS operations during the first quarter of 1998 and the first quarter of 1999, respectively. The Company is finalizing a financing transaction pursuant to which it will construct a corporate headquarters, research and development and manufacturing facility on the campus of California State University, Northridge, the first phase of which will be financed with a $65.0 million credit transaction. The Company expects the transaction to be structured as a synthetic lease financing for this facility and, in a related transaction, is obtaining a revolving line of credit to borrow up to $15 million. In connection with these financing transactions, the Company will pledge substantially all of its assets as collateral security, and to be subject to various affirmative and negative covenants regarding the conduct of its business. These arrangements could adversely affect the Company's ability to obtain additional capital or acquire additional capital resources. The synthetic lease will have a term of five years, with two one-year renewal options. The underlying ground lease has a term of 40 years with renewal options for up to an additional 40 years. Under these arrangements, the Company will be committed to annual payments ranging from $4.5 million to $5.0 million commencing sometime during the second half of 2000. Additionally, the Company is committed to payments of $400,000 during 1999 and to average annual payments in future periods of approximately $450,000, plus periodic cost of living adjustments, per the terms of the ground lease for the Northridge property. These lease payments will be recorded as rent expense in future periods. Management expects that the current level of cash and cash equivalents will be sufficient to meet its needs for working capital and capital expenditures for at least one year. However, the requirements for additional capital and working capital are subject to change and will depend upon numerous factors, including the level of capital expenditures, research and development activities and results, competitive and technologi- 13 14 cal developments, health care reimbursement trends, and the availability for acquisition by the Company of complementary additional distribution channels, products, and technologies, and the development of the next phase of the Company's facilities. YEAR 2000 COMPLIANCE The Year 2000 problem ("Y2K") refers to the potential of all electronic devices containing microprocessors to improperly calculate dates in and beyond the year 2000. In the second quarter of 1998, the Company formed a Year 2000 Oversight Committee (the "Committee") to evaluate the Company's position regarding Y2K. The Committee consists of members representing all of the major operating and administrative departments within the Company including information technology, facilities, manufacturing, research and development, regulatory, quality assurance, materials, finance and accounting and legal. The Committee established an Action Plan Program (the "Plan") to facilitate the Company's Y2K compliance and minimize the potential effects of Y2K on the Company's operations. The components of the plan include the following steps: (1) assess Y2K compliance of the Company's products; (2) inventory Company equipment and software (including non-information systems equipment and software) and prioritize according to critical business functions; (3) implement Y2K compliance testing and remediation according to priorities developed; (4) assess vendor and health care payor compliance; (5) develop and implement policies to maintain Y2K compliance going forward; and (6) establish contingency plans. A timetable for the completion of each of these action steps contained in the Plan has been developed by the Committee. The Committee meets regularly to assess the Company's efforts to comply with the Plan and to address any outstanding Y2K issues. The Committee is also responsible for coordinating all communications and responding to all inquiries relating to Y2K. The Company has completed its evaluation of all of its current product offerings. Such evaluation has shown that Y2K will not pose operating problems for such products. In the first quarter of 1999 the Company completed the process of creating a master inventory of all equipment and software vulnerable to Y2K and is identifying the equipment and software attendant to critical business processes. Once this process is complete, the Company will be in a position to implement remediation programs to address potential problems that are identified. The Company has also begun to remediate certain non-compliant systems including certain manufacturing systems, information technology systems, communication systems, security systems and personal computers. The Company currently believes that it will be able to modify, replace, or mitigate its affected systems in time to avoid any material impact on its operations. The Company has initiated formal communication with its vendors to assess their compliance with Y2K. Questionnaires have been developed and distributed to vendors. Such questionnaires, when returned by a vendor, have been evaluated to assess the Y2K risk presented by such vendor. On site evaluations at the most critical vendors' sites of operations are currently being conducted. The Company suspects that its greatest Y2K risk will be vendor compliance. The Company relies on its vendors to supply it with critical components necessary for the manufacture of its products. A program to assess the Y2K compliance of insurance companies, management service organizations, and other third party payors is also being implemented. Once both the internal and external reviews described above are completed, the Company will be able to design a contingency plan to address its areas of greatest exposure. The Company's most reasonably likely worst case scenario in the event of a failure to correct a material Y2K problem could be an interruption in, or failure of certain normal business activities. Such failures or interruptions could materially impact the Company's results of operations, liquidity and financial position. Due to the general uncertainty inherent in the Y2K problem, resulting primarily from the uncertainty of the Y2K readiness of the Company's vendors, suppliers and third party payors, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material adverse impact on the Company. The Plan, implemented by the Committee, is expected to significantly reduce both the Company's level of uncertainty about the Y2K problem and the possibility of significant interruptions to normal operations. Management currently believes that the cost of Y2K assessment and remediation will not be material. The Company estimates that the implementation of the Plan and remediation activities related to the 14 15 Company's internal systems and equipment will cost approximately $1,000,000. Management currently believes that the Company has adequate working capital to fund these activities. Readers are cautioned that forward looking statements contained in this Year 2000 Compliance section should be read in conjunction with the Company's cautionary language relating to forward-looking statements at the beginning of Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this quarterly report on Form 10-Q. 15 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company has a Stockholder Rights Plan (the "Rights Plan") which is intended to have the effect of discouraging attempts to obtain control of the Company. Under the Rights Plan, the Company's stockholders have the right to purchase a substantial number of additional shares of Common Stock at a price equal to one-half of the then market price after a person or entity acquires beneficial ownership of 15% or more of the voting stock of the Company (subject to certain exceptions) and the acquisition has been publicly announced. The person or entity acquiring 15% or more of the voting of the stock of the Company is not entitled to exercise any such rights. As a result, the exercise of the Rights (as defined in the Rights Plan) would have a substantial dilutive effect on the voting power and equity investment of that person or entity. If, after a person or entity acquires 15% or more of the voting stock of the Company, the acquisition has been publicly announced and thereafter: (a) the Company merges or consolidates with another entity and the Company is not the surviving corporation or (b) the Company merges or consolidates with another entity and is the surviving corporation but the Common Stock of the Company is converted into or exchanged for stock or assets of another person or entity or (c) 50% or more of the Company's assets or earning power is sold or transferred, then the Rights become exercisable to purchase shares of the common stock of the surviving corporation or acquirer at half of its then market price. Until they become exercisable the Rights are not evidenced by any separate security and trade with the Common Stock. Until the rights become exercisable to purchase Common Stock, the Rights are redeemable at the option of the Board of Directors for nominal consideration and the Board has the right to amend, supplement or terminate the Rights Plan. On May 1, 1999, the Company amended its Rights Plan to (a) eliminate those provisions that require that certain actions may only be taken by 'Independent Directors' (as defined in the Rights Plan) and (b) to change the exercise price of a Right (as defined in the Rights Plan) from $65.00 to $250.00. Under the Rights Plan prior to this amendment, a majority (but not less than three) 'Independent Directors' had the power to take certain actions after the Rights have become exercisable, including the power to redeem the Rights and to amend and supplement the Rights Plan in certain respects. 'Independent Directors' were directors who became directors prior to the time a person or entity acquired beneficial ownership of 15% or more of the outstanding shares of voting stock of the Company (subject to certain exceptions) or were recommended to become a director by such directors and who were not such a 15% stockholder or affiliated with such a 15% stockholder. In 1998 the Delaware Court of Chancery decided a case holding that such provisions, which can have the effect of excluding some or all duly elected directors from voting on the action to be taken, are invalid. The amendment to the Rights Plan is intended to bring the Rights Plan into conformance with the court decision. The effect of the amendment is to make it possible for directors who are elected after a person or entity acquires beneficial ownership of 15% or more of the outstanding shares of Common Stock (and who are not recommended by the directors in office before that acquisition of shares) to redeem the Rights and to amend or supplement the Rights Plan. This makes it easier for such a 15% stockholder to reduce or eliminate the protection that the Rights Plan was intended to provide. 16 17 At the 1999 Annual Meeting of Stockholders to be held on May 20, 1999 the stockholders of the Company will consider amendments to the Company's Certificate of Incorporation and ByLaws to establish three classes of directors with each class being elected every three years (after a phase-in period) to staggered three year terms. With such a classified board, replacement of a majority of the directors would normally take at least two annual meetings. This provides some measure of protection against the possibility that the Rights Plan could be circumvented by newly elected directors redeeming the Rights or amending or supplementing the Rights Plan that was lost by the elimination of the Independent Director concept. The amendment of the Rights Plan to increase the exercise price of the Rights is intended to take into account changes in the prices at which the Company's Common Stock have been trading since the Rights Plan was adopted in 1995. Under the Rights Plan each stockholder receives one Right for each share of Common Stock held by him or her. The number of shares that can be purchased upon exercise of each Right when it becomes exercisable to purchase Common Stock is equal to the exercise price divided by one-half of the then current market price of the Common Stock. Thus the relationship between the exercise price and the market price of the Common Stock determines the number of shares which can be purchased upon exercise of the Rights. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER EXHIBIT ------- ------- 10.1 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Alfred E. Mann. 10.2 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Terrance H. Gregg. 10.3 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Eric S. Kentor. 10.4 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and David Morley. 10.5 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Kevin R. Sayer. 27.1 Financial data schedule
(b) REPORTS ON FORM 8-K None. 17 18 SIGNATURE Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MiniMed Inc. Date: May 17, 1999 /s/ KEVIN R. SAYER -------------------------------------- Kevin R. Sayer Senior Vice President, Finance & Chief Financial Officer 18 19 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Alfred E. Mann. 10.2 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Terrance H. Gregg. 10.3 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Eric S. Kentor. 10.4 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and David Morley. 10.5 Change of Control Agreement dated March 1, 1999 between MiniMed Inc. and Kevin R. Sayer. 27.1 Financial data schedule
19 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 1st day of March, 1999 between MiniMed Inc., a Delaware corporation (the "Company") and Alfred E. Mann (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 2 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 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 2 3 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 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. 3 4 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 4 5 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 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. 5 6 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. 6 7 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. 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; 7 8 (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, (ii) 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. 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, 8 9 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 9 10 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 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. 10 11 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/ Terrance H. Gregg Alfred E. Mann --------------------- ------------------------------ [Print Name] 12744 San Fernando Road ------------------------------ Sylmar, CA 91342 ------------------------------ (Address) 11 EX-10.2 3 EXHIBIT 10.2 1 Exhibit 10.2 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 1st day of March, 1999 between MiniMed Inc., a Delaware corporation (the "Company") and Terrance H. Gregg (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 2 (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 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 2 3 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 3 4 that such options 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. 4 5 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 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 5 6 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. 6 7 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. 7 8 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. 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; 8 9 (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, (ii) 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. 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, 9 10 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 10 11 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 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. 11 12 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 Terrance H. Gregg ------------------ ------------------------------ [Print Name] 12744 San Fernando Road ------------------------------ Sylmar, CA 91342 ------------------------------ (Address) 12 EX-10.3 4 EXHIBIT 10.3 1 Exhibit 10.3 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 1st day of March, 1999 between MiniMed Inc., a Delaware corporation (the "Company") and Eric S. Kentor (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 2 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 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 2 3 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 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. 3 4 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 4 5 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 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. 5 6 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. 6 7 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. 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; 7 8 (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, (ii) 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. 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, 8 9 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 9 10 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 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. 10 11 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 Eric S. Kentor ------------------ ------------------------------ [Print Name] 12744 San Fernando Road ------------------------------ Sylmar, CA 91342 ------------------------------ (Address) 11 EX-10.4 5 EXHIBIT 10.4 1 EXHIBIT 10.4 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 1st day of March, 1999 between MiniMed Inc., a Delaware corporation (the "Company") and David Morley (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 2 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 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 2 3 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 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. 3 4 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 4 5 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 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. 5 6 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. 6 7 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. 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; 7 8 (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, (ii) 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. 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, 8 9 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 9 10 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 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. 10 11 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 David Morley ------------------ ------------------------------ [Print Name] 12744 San Fernando Road ------------------------------ Sylmar, CA 91342 ------------------------------ (Address) 11 EX-10.5 6 EXHIBIT 10.5 1 EXHIBIT 10.5 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement is entered into this 1st day of March, 1999 between MiniMed Inc., a Delaware corporation (the "Company") and Kevin R. Sayer (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 2 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 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 2 3 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 become fully exercisable on the date of the termination of the Executive's employment to the extent they were not otherwise exercisable. 3 4 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 4 5 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 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. 5 6 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. 6 7 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. 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; 7 8 (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, (ii) 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. 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, 8 9 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 9 10 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 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. 10 11 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 Kevin R. Sayer ------------------ ------------------------------ [Print Name] 12744 San Fernando Road ------------------------------ Sylmar, CA 91342 ------------------------------ (Address) 11 EX-27.1 7 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1999 JAN-02-1999 APR-02-1999 21,418 13,482 48,726 8,481 17,681 106,393 44,955 10,555 160,900 18,894 1,000 0 0 147 139,875 160,900 40,911 41,195 13,838 35,003 120 (363) 46 6,072 2,290 3,782 0 0 0 3,782 0.13 0.13
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