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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NO. 1-7707
MEDTRONIC [LOGO]
MEDTRONIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MINNESOTA 41-0793183
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
7000 CENTRAL AVENUE N.E.
MINNEAPOLIS, MINNESOTA 55432
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (612) 514-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE, INC.
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES __X__ NO ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. ( )
AGGREGATE MARKET VALUE OF VOTING STOCK OF MEDTRONIC, INC. HELD BY NONAFFILIATES
OF THE REGISTRANT AS OF JULY 2, 1998, BASED ON THE CLOSING PRICE OF $66.875 AS
REPORTED ON THE NEW YORK STOCK EXCHANGE: $30.94 BILLION.
SHARES OF COMMON STOCK OUTSTANDING ON JULY 2, 1998: 469,350,541
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S 1998 ANNUAL REPORT ARE INCORPORATED BY REFERENCE INTO
PARTS I, II AND IV; PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR ITS 1998 ANNUAL
MEETING ARE INCORPORATED BY REFERENCE INTO PART III.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS. Medtronic, Inc. (together with its
subsidiaries, "Medtronic" or the "company") was incorporated as a Minnesota
corporation in 1957. Medtronic is the world's leading medical technology company
specializing in implantable and interventional therapies. Primary products
include those for bradycardia pacing, tachyarrhythmia management, atrial
fibrillation management, heart failure management, coronary and peripheral
vascular disease, heart valve replacement, extracorporeal cardiac support,
minimally invasive cardiac surgery, malignant and non-malignant pain, movement
disorders, neurosurgery and neurodegenerative disorders.
Medtronic operates in a single industry segment, that of providing medical
products and services. Its revenues, operating profits and assets for the past
three fiscal years (1996-1998) have been attributable to this single industry
segment. The company does business in more than 120 countries and reports on
three primary product line platforms -- Cardiac Rhythm Management, Other
Cardiovascular and Neurological and Other -- and three geographic areas -- the
Americas, Europe/Middle East/Africa (Europe), and Asia/Pacific.
On June 29, 1998, Medtronic, Inc. and Physio-Control International
Corporation announced the signing of a definitive merger agreement. The
agreement calls for each Physio-Control shareholder to receive $27.50 in the
form of Medtronic common stock for each share of Physio-Control they now hold.
Physio-Control designs, manufactures, markets and services an integrated line of
noninvasive emergency cardiac defibrillator and vital sign assessment devices,
disposable electrodes and data management software. Further information on the
merger is provided in Note 15 to the consolidated financial statements, which is
incorporated herein by reference to Medtronic's 1998 Annual Report -- Financial
Review on page 17.
On July 13, 1998, Medtronic, Inc. and AVECOR Cardiovascular Inc. announced
the signing of an agreement under which Medtronic will acquire AVECOR in a
transaction valued at approximately $91 million. The transaction calls for
AVECOR shareholders to receive $11.125 in Medtronic common stock for each share
of AVECOR they now hold. AVECOR develops, manufactures and markets specialty
medical devices for heart/lung bypass surgery and long-term respiratory support.
The company's current products include membrane oxygenators, blood reservoirs,
blood filters, blood pumps, cardioplegia systems and custom tubing packs.
BUSINESS DESCRIPTION. Cardiac Rhythm Management products consist primarily
of Bradycardia Pacing, which produces products for treating patients with slow
or irregular heartbeats and Tachyarrhythmia Management, which develops products
to treat abnormally fast heart rhythms. The bradycardia pacing systems include
pacemakers, leads and accessories. The pacemakers can be noninvasively
programmed by the physician to adjust sensing, electrical pulse intensity, rate,
duration and other characteristics, and can produce impulses to cause
contractions in either the upper or lower heart chamber, or both, in appropriate
relation to heart activity. The company's Model 9790 programmer can be used
interchangeably with all of the company's bradycardia pacemakers as well as with
its Jewel(R), Micro Jewel(R) and Gem(TM) lines of tachyarrhythmia management
devices. Advances in bradycardia pacing in fiscal 1998 include the commercial
release of the new Medtronic.Kappa(TM) 700 series of pacemakers in Europe and
Canada, which features a highly automated adaptive pacing system that provides
customized therapy while streamlining clinical care, and the Medtronic.Kappa(TM)
400 series in the U.S., which offers dual sensor automated rate responsive
pacing and data collection for enhanced diagnostic capabilities. In general, the
Kappa(R) pacemakers are designed to adjust heart rate to match patient activity
without requiring a hospital or clinic visit. Medtronic also markets the
CapSure(R) Z and CapSureFix(R) steroid-eluting leads, which deliver more
concentrated levels of electrical energy that extend device life. Nearly half of
Medtronic's revenues are generated from the sale of implantable cardiac
pacemaker systems for treatment of bradycardia.
Tachyarrhythmia Management produces implantable devices and transvenous
lead systems for treating ventricular tachyarrhythmias, which are abnormally
fast, and sometimes fatal, heart rhythms. The systems offer a tiered therapy of
pacing, cardioversion and defibrillation, and may be implanted
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pectorally, which reduces patient trauma and hospitalization time and costs. In
June 1998, the Gem(TM) DR defibrillator system was commercially released in
Europe and certain markets outside the U.S. The Gem(TM) DR is the company's
first commercially available device from its new generation of Gem(TM) products
intended to meet the needs of patients with multiple heart rhythm problems. The
Gem(TM) DR features an advanced dual chamber rate responsive pacing capability
as well as advanced diagnostic tools. The Gem(TM) DR is currently in clinical
trials in the U.S. The Gem(TM) single chamber defibrillator, currently in
clinical trials in the U.S. and Europe, is designed to provide rate responsive
pacing in the lower chamber of the heart. The company also markets the Jewel(R)
line of devices, including the Micro Jewel(R) II implantable defibrillator,
which offers expanded diagnostic capabilities in a small size device. The
Jewel(R) AF for treatment of atrial arrhythmias is currently in clinical trials
in the U.S. and Europe. The company also markets a full line of active and
passive steroid-eluting defibrillator leads. The entire line of tachyarrhythmia
devices, like the bradycardia pacemakers, are programmed with the Model 9790
programmer.
The company's Cardiac Rhythm Management products accounted for 64.2% of
Medtronic's net sales during the fiscal year ended April 30, 1998 ("fiscal
1998"), 65.6% of net sales in fiscal 1997 and 67.9% of net sales in fiscal 1996.
Other Cardiovascular products consist of heart valves, perfusion and blood
management systems, cannulae, surgical accessories, balloon and guiding
catheters and stents. Heart Valves produces tissue and mechanical valves and
repair products for damaged or diseased heart valves. In November 1997, the
Freestyle(R) stentless aortic tissue heart valve was commercially released in
the U.S., featuring advanced tissue technology for improved blood flow and
increased durability. Through a series of strategic acquisitions over the past
decade, Medtronic now markets through Cardiopulmonary, Blood Management and DLP
Cannulae a complete line of blood-handling products that form the extracorporeal
life-support circuit by maintaining and monitoring blood circulation and
coagulation status, oxygen supply and body temperature while the patient is
undergoing emergency treatment or open-heart surgery. The company is also
pursuing enabling technologies in minimally invasive cardiac surgery, such as
the commercially available Octopus(R) tissue stabilizing system, which is used
to stabilize sites on the beating heart to enable the surgeon to complete bypass
grafts.
The Vascular product line supports the treatment of disease and damage to
coronary and peripheral blood vessels. Medtronic's primary involvement in the
vascular area has been in coronary angioplasty. The company offers coronary
angioplasty balloon and guide catheters worldwide. In late April 1998, the
company commercially released in Europe and certain markets outside the U.S. the
Presario(TM) single-operator exchange catheter, the first in a new series of
angioplasty catheters which are also intended for use as stent delivery systems.
The company's family of Wiktor(R) stents is designed for coronary applications
and includes the Wiktor(R) Prime(TM) coronary stent system, commercially
released in the U.S. in fiscal 1998, and the Wiktor(R) Rival(TM) coronary stent
system, commercially released in the U.S. in June 1998. The AneuRx stent graft
for minimally invasive abdominal aortic aneurysm repair therapy is commercially
available in Europe and certain markets outside the U.S. and is in clinical
trials in the U.S. The company is also developing a line of self-expanding and
balloon expandable peripheral vascular stents, currently in clinical trials, to
be used in several of the body's fluid passageways. The market for balloon
catheters and stents has become increasingly competitive, and disappointing
sales of these products necessitated management initiatives during the third
quarter of fiscal 1998 to restructure the vascular organization to reduce costs
and focus on new products. See Note 3 to the consolidated financial statements
on page 11 of the company's 1998 Annual Report -- Financial Review, which is
incorporated herein by reference.
The company's Other Cardiovascular products accounted for 21.0% of net
sales in fiscal 1998, 22.0% of net sales in fiscal 1997 and 23.6% of net sales
in fiscal 1996.
Neurological and Other products consists primarily of implantable
neurostimulation devices, drug administration systems, neurosurgery products and
diagnostic systems. The company produces implantable systems for spinal cord and
brain stimulation to treat pain and tremor. Neurostimulation products include
the Itrel(R) 3 spinal cord stimulation system, which features a patient-operated
control unit, and the Mattrix(R) stimulator, which offers a dual stimulation
mode for more effective pain management. The
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new Activa(TM) therapy for essential tremor and tremor associated with
Parkinson's disease was commercially released in the U.S. in fiscal 1998.
Activa(TM) Parkinson's Control Therapy for other major symptoms of Parkinson's
disease was commercially released in Europe in fiscal 1998 and is in clinical
trials in the U.S. The Activa(TM) system allows stimulation levels to be
adjusted according to the needs of each patient.
The Drug Delivery product line consists of implantable programmable drug
delivery systems that are used in treating chronic intractable pain, tremor and
spasticity, including the SynchroMed(R) drug delivery system. The company is
collaborating with several biotechnology companies to develop therapies for
neurodegenerative disorders such as Alzheimer's disease, Parkinson's disease,
Huntington's disease and amyotrophic lateral sclerosis or Lou Gehrig's disease.
Compounds for treating these diseases, called neurotrophic factors, are still in
development by these companies. Once they are proven to be safe and effective,
Medtronic believes its drug delivery technology could be effective in
administering these agents directly to their site of action in precise doses.
The company also manufactures and distributes cerebrospinal fluid shunts and
neurosurgical implants, and is a world leader in computer-supported systems to
diagnose urological and digestive disorders and sleep apnea.
The Neurological and Other products accounted for 14.8% of net sales for
fiscal 1998, 12.4% of net sales for fiscal 1997 and 8.5% of net sales for fiscal
1996.
GOVERNMENT REGULATION AND OTHER MATTERS. Government and private sector
initiatives to limit the growth of health care costs, including price regulation
and competitive pricing, are continuing in many countries where the company does
business, including the United States. These changes are causing the marketplace
to put increased emphasis on the delivery of more cost-effective medical
therapies. Although the company believes it is well positioned to respond to
changes resulting from this worldwide trend toward cost containment, the
uncertainty as to the outcome of any proposed legislation or changes in the
marketplace precludes the company from predicting the impact these changes may
have on future operating results.
In keeping with the increased emphasis on cost effectiveness in health care
delivery, the current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing groups to enhance
purchasing power. The medical device industry has also been consolidating
rapidly, partly in order to offer a broader range of products to large
purchasers. As a result, transactions with customers are more significant, more
complex and tend to involve more long-term contracts than in the past. This
enhanced purchasing power may also increase the pressure on product pricing,
although management is unable to estimate the potential impact at this time.
In the United States, the Food and Drug Administration (the "FDA"), among
other governmental agencies, is responsible for regulating the introduction of
new medical devices, including laboratory and manufacturing practices, labeling
and recordkeeping for medical devices, and review of manufacturers' required
reports of adverse experience to identify potential problems with marketed
medical devices. The FDA can ban certain medical devices, detain or seize
adulterated or misbranded medical devices, order repair, replacement, or refund
of such devices, and require notification of health professionals and others
with regard to medical devices that present unreasonable risks of substantial
harm to the public health. The FDA may also enjoin and restrain certain
violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act
pertaining to medical devices, or initiate action for criminal prosecution of
such violations. Moreover, the FDA administers certain controls over the export
of such devices from the United States. Many of the devices that Medtronic
develops and markets are in a category for which the FDA has implemented
stringent clinical investigation and pre-market clearance requirements. Any
delay or acceleration experienced by the company in obtaining regulatory
approvals to conduct clinical trials or in obtaining required market clearances
(especially with respect to significant products in the regulatory process that
have been discussed in the company's announcements) may affect the company's
operations or the market's expectations for the timing of such events and,
consequently, the market price for the company's common stock.
Medical device laws are also in effect in many of the countries in which
Medtronic does business outside the United States. These range from
comprehensive device approval requirements for some or all of Medtronic's
medical device products to requests for product data or certifications. The
number and scope of these requirements are increasing.
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In the early 1990's the review time by the FDA to clear medical devices for
commercial release lengthened and the number of clearances, both of 510(k)
submissions and pre-market approval applications ("PMA's"), decreased. In
response to public and congressional concern, the FDA Modernization Act of 1997
was adopted with the intent of bringing better definition to the clearance
process. Although it is expected that the 1997 Act will result in improved cycle
times for product clearance, there can be no assurance that the FDA review
process will not involve delays or that clearances will be granted on a timely
basis.
Medtronic is also subject to various environmental laws and regulations
both within and outside the United States. The operations of the company, like
those of other medical device companies, involve the use of substances regulated
under environmental laws, primarily in manufacturing and sterilization
processes. While it is difficult to quantify the potential impact of compliance
with environmental protection laws, management believes that such compliance
will not have a material impact on the company's financial position, results of
operations or liquidity.
The company operates in an industry susceptible to significant product
liability claims. In recent years, there has been an increased public interest
in product liability claims for implanted medical devices, including pacemakers
and leads. These claims may be brought by individuals seeking relief for
themselves or, increasingly, by groups seeking to represent a class, and the
company has experienced an increase in such claims. During the past year, United
States District Courts in California, Florida, Kentucky and Ohio have refused to
certify class actions in cases brought against the company. This is consistent
with the trend in class action law as it applies to the medical device industry
generally. In addition, product liability claims may be asserted against the
company in the future relative to events not known to management at the present
time. Management believes that the company's risk management practices,
including insurance coverage, are reasonably adequate to protect against
potential product liability losses.
In 1994, governmental authorities in Germany began an investigation into
certain business and accounting practices by heart valve manufacturers. As part
of this investigation, documents were seized from the company and certain other
manufacturers. Subsequently, the United States Securities and Exchange
Commission (the "SEC") also began an inquiry into this matter. In August 1996,
the SEC issued a formal non-public order of investigation to the company, as it
had to at least one other manufacturer. Based upon currently available
information, the company does not expect these investigations to have a
materially adverse impact on the company's financial position, results of
operations or liquidity.
The company has completed a review of its computer systems with regard to
year 2000 compliance and will either replace or correct through programming
modifications those computer systems that have been found to have date-related
deficiencies. In addition, the company is assessing the readiness of third
parties (e.g., vendors and customers) that interact with the company's systems.
Also being assessed are facility and telecommunication systems, as well as
systems used to support manufacturing processes, to ensure that these will be
year 2000 ready. The company's products have been assessed and found to be year
2000 compliant with the exception of a few requiring minor corrective actions.
External and internal costs specifically associated with modifying internal
use software for year 2000 compliance are expensed as incurred. To date, those
costs have not been material. Based upon currently available information, the
company does not expect the costs of addressing potential year 2000 problems to
have a material adverse impact on the company's financial position, results of
operations or liquidity in future periods. The company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
SALES, MARKETS AND DISTRIBUTION METHODS. The primary markets for
Medtronic's products are hospitals, other medical institutions and physicians in
the United States and other countries around the world.
Medtronic sells most of its products and services directly through its
staff of trained, full-time sales representatives. Sales by these
representatives accounted for approximately 93% of Medtronic's U.S. sales and
approximately 63% of its sales from other countries in fiscal 1998. The
remaining sales were made through independent distributors.
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RAW MATERIALS AND PRODUCTION. Medtronic generally has vertically integrated
manufacturing operations, and makes its own microprocessors, lithium batteries,
feedthroughs, integrated and hybrid circuits, and certain other components.
Medtronic purchases many of the parts and materials used in manufacturing its
components and products from external suppliers. Medtronic's single-and
sole-sourced materials include materials such as adhesives, polymers, elastomers
and resins; certain integrated circuits and other
electrical/electronic/mechanical components; power sources, battery anodes,
pyrolytic carbon discs, pharmaceutical preparations such as Lioresal(R)
(baclofen, USP) Intrathecal (registered trademark of Novartis Pharmaceutical
Corporation), and computer and other peripheral equipment.
Certain of the raw materials and components used in Medtronic products are
available only from a sole supplier. Materials are purchased from single sources
for reasons of quality assurance, sole source availability or cost
effectiveness. Medtronic works closely with its suppliers to assure continuity
of supply while maintaining high quality and reliability. However, in an effort
to reduce potential product liability exposure, certain suppliers have
terminated or are planning to terminate sales of certain materials and parts to
companies that manufacture implantable medical devices.
PATENTS AND LICENSES. Medtronic owns patents on certain of its inventions,
and obtains licenses from others as it deems necessary to its business.
Medtronic's policy is to obtain patents on its inventions whenever practical.
Technological advancement characteristically has been rapid in the medical
device industry, and Medtronic does not consider its business to be materially
dependent upon any individual patent.
COMPETITION AND INDUSTRY. Medtronic sells therapeutic and diagnostic
medical devices in the United States and around the world. In the product lines
in which Medtronic competes, the company faces a mixture of competitors ranging
from large multi-national industrial manufacturers to national or regional
manufacturers that offer a limited selection of products. In addition, the
company faces competition from providers of alternative medical therapies such
as pharmaceutical companies. Important factors to Medtronic's customers include
product reliability and performance, product technology that provides for
improved patient benefits, product price, and breadth of product lines and
related product services provided by the manufacturer. Major shifts in industry
market share have occurred in connection with product problems, physician
advisories and safety alerts, reflecting the importance and risks of product
quality in the medical device industry.
Medtronic is the leading manufacturer and supplier of cardiac rhythm
management devices in both the U.S. and non-U.S. markets. Worldwide,
approximately nine manufacturers compete in the pacemaker industry. In the U.S.,
Medtronic and three other manufacturers account for a significant portion of
pacemaker sales. Medtronic and five other manufacturers account for most of the
non-U.S. pacemaker sales. Medtronic and two other manufacturers based in the
U.S. account for most sales of implantable defibrillators within and outside the
U.S. At least four other companies have devices in various stages of development
and clinical evaluation.
In the vascular market, which includes balloon and guiding catheters,
guidewires, implantable stents and grafts, and integrated stent delivery
systems, there are numerous competitors worldwide. Medtronic and four other
manufacturers account for most coronary balloon and guiding catheter sales. In
coronary stents, Medtronic and several competitors account for most sales
worldwide, with several new competitors emerging.
Medtronic is the third largest manufacturer and supplier of both tissue and
mechanical heart valves within and outside the U.S. A large manufacturer and
distributor of hospital products and services is the major competitor in tissue
heart valves and two other companies are major competitors in mechanical heart
valves. These two companies and Medtronic are the primary manufacturers and
suppliers of heart valves within the U.S. These three companies plus a few other
competitors account for most of the worldwide heart valve sales.
In the extracorporeal circulation market, there are approximately seven
companies that account for a significant portion of the U.S. and non-U.S.
markets. Medtronic is the market leader in cannulae products. Medtronic and
three competitors account for a significant portion of cannulae sales in the
U.S. Medtronic and three competitors account for a significant portion of
autotransfusion sales in both U.S. and non-U.S. markets.
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In neurological devices, Medtronic is the leading manufacturer and supplier
of implantable neurostimulation and drug delivery systems, and of shunts for the
treatment of hydrocephalus. Medtronic and two competitors account for most sales
worldwide. Medtronic and several other manufacturers account for a significant
portion of the diagnostic testing market for urology, gastroenterology and
neuromuscular disorders.
Market complexity continues to intensify in the medical device industry.
Factors such as buyer groups, government reimbursement systems for health care
costs, relative patent portfolios, government regulation (including the
regulatory approval process for medical devices), a more rigorous enforcement
climate at the FDA, health care reform, product liability litigation and the
rapid rate of technological change are increasingly important considerations for
existing medical device manufacturers and any potential entrants to the
industry.
RESEARCH AND DEVELOPMENT. Medtronic spent $297.2 million on research and
development (11.4% of sales) in fiscal 1998, $280.2 million (11.5% of sales) in
fiscal 1997 and $243.8 million (11.2% of net sales) in fiscal 1996. These
amounts have been applied toward improving existing products, expanding their
applications, and developing new products. Medtronic's research and development
projects span such areas as sensing and treatment of cardiovascular disorders
(including bradycardia and tachyarrhythmia, fibrillation and sinus node
abnormalities); improved heart valves, membrane oxygenators and centrifugal
blood pump systems; implantable drug delivery systems for pain, spasticity and
other neurological applications; muscle and neurological stimulators;
therapeutic angioplasty catheters; coronary and peripheral stents and stented
grafts, and treatments for restenosis; implantable physiologic sensors;
treatments for heart failure; and materials and coatings to enhance the
blood/device interface.
Medtronic has not engaged in significant customer or government sponsored
research.
EMPLOYEES. On April 30, 1998, Medtronic and its subsidiaries employed
12,466 people on a regular, full-time basis and, including temporary and
part-time employees, a total of 13,954 employees on a full-time equivalent
basis.
U.S. AND NON-U.S. OPERATIONS AND EXPORT SALES. Medtronic sells products in
more than 120 countries in three geographic areas: the Americas, Europe/Middle
East/Africa (Europe), and Asia/Pacific. For financial reporting purposes,
revenues, profitability and identifiable assets attributable to significant
geographic areas are presented in Note 14 to the consolidated financial
statements, incorporated herein by reference to Medtronic's 1998 Annual Report
- -- Financial Review on page 17. U.S. export sales to unaffiliated customers
comprised less than two percent of Medtronic's consolidated sales in each of
fiscal 1998, 1997 and 1996.
Operation in countries outside the U.S. is accompanied by certain financial
and other risks. Relationships with customers and effective terms of sale
frequently vary by country, often with longer-term receivables than are typical
in the U.S. Inventory management is an important business concern due to the
potential for rapidly changing business conditions and currency exposure.
Currency exchange rate fluctuations can affect income from, and profitability
of, non-U.S. operations. Medtronic attempts to hedge these exposures to reduce
the effects of foreign currency fluctuations on net earnings. See the "Market
Risk" section of Management's Discussion and Analysis, incorporated herein by
reference to Medtronic's 1998 Annual Report -- Financial Review on page 3.
Certain countries also limit or regulate the repatriation of earnings to the
United States. Non-U.S. operations in general present complex tax and money
management issues requiring sophisticated analysis to meet the company's
financial objectives.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS. Certain statements
contained in this Annual Report on Form 10-K and other written and oral
statements made from time to time by the company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. The company's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider forward-
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looking statements and understand that such statements involve a variety of
risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions. Consequently, no forward-looking statement can be guaranteed and
actual results may vary materially. It is not possible to foresee or identify
all factors affecting the company's forward-looking statements and investors
therefore should not consider any list of such factors to be an exhaustive
statement of all risks, uncertainties or potentially inaccurate assumptions. The
company undertakes no obligation to update any forward-looking statement.
Although it is not possible to create a comprehensive list of all factors
that may cause actual results to differ from the company's forward-looking
statements, such factors include, among others, (i) trends toward managed care,
healthcare cost containment and other changes in government and private sector
initiatives, in the U.S. and other countries in which the company does business,
that are placing increased emphasis on the delivery of more cost-effective
medical therapies; (ii) the trend of consolidation in the medical device
industry as well as among customers of medical device manufacturers, resulting
in more significant, complex and long-term contracts than in the past and
potentially greater pricing pressures; (iii) the difficulties and uncertainties
associated with the lengthy and costly new product development and foreign and
domestic regulatory approval processes, such as delays, difficulties or failures
in achieving acceptable clinical results or obtaining foreign or FDA marketing
clearances, which may result in lost market opportunities or postpone or
preclude product commercialization; (iv) efficacy or safety concerns with
respect to marketed products, whether scientifically justified or not, that may
lead to product recalls, withdrawals or declining sales; (v) changes in
governmental laws, regulations and accounting standards and the enforcement
thereof that may be adverse to the company; (vi) increased public interest in
recent years in product liability claims for implanted medical devices,
including pacemakers and leads; (vii) other legal factors including
environmental concerns and patent disputes with competitors; (viii) agency or
government actions or investigations affecting the industry in general or the
company in particular; (ix) the development of new products or technologies by
competitors, technological obsolescence and other changes in competitive
factors; (x) risks associated with maintaining and expanding international
operations; (xi) business acquisitions, dispositions, discontinuations or
restructurings by the company; (xii) the integration of businesses acquired by
the company; and (xiii) economic factors over which the company has no control,
including changes in inflation, foreign currency rates and interest rates. More
detailed discussions of many of these factors are including in the preceding
sections. The company notes these factors as permitted by the Private Securities
Litigation Reform Act of 1995.
EXECUTIVE OFFICERS OF MEDTRONIC
Set forth below are the names and ages of current executive officers of
Medtronic, Inc., as well as information regarding their positions with
Medtronic, Inc., their periods of service in these capacities, and their
business experience for the past five or more years. Executive officers
generally serve terms of office of approximately one year. There are no family
relationships among any of the officers named, nor is there any arrangement or
understanding pursuant to which any person was selected as an officer.
WILLIAM W. GEORGE, age 55, has been Chairman and Chief Executive Officer
since August 1996, was President and Chief Executive Officer from May 1991 to
August 1996, and was President and Chief Operating Officer from March 1989 to
April 1991. He has been a director since March 1989. Prior to joining the
company, Mr. George was President, Space and Aviation Systems Business, at
Honeywell Inc. from December 1987 to March 1989. During his 11 years with
Honeywell, Mr. George served in several other executive positions including
President, Industrial Automation and Control, from May 1987 to December 1987,
and Executive Vice President of that business from January 1983 to May 1987.
GLEN D. NELSON, M.D., age 61, has been Vice Chairman since July 1988, and
has been a director since 1980. From August 1986 to July 1988, he was Executive
Vice President of the company. Dr. Nelson was Chairman and Chief Executive
Officer of American MedCenters, Inc., an HMO management corporation, from July
1984 to August 1986.
ARTHUR D. COLLINS, JR., age 50, has been President and Chief Operating
Officer since August 1996, was Chief Operating Officer from January 1994 to
August 1996 and from June 1992 to January 1994 was Executive Vice President and
President of Medtronic International. He has been a director since August
7
<PAGE>
1994. Prior to joining the company, Mr. Collins was Corporate Vice President,
Diagnostic Products, at Abbott Laboratories from October 1989 to May 1992 and
Divisional Vice President, Diagnostic Products, from May 1984 to October 1989.
During his 14 years with Abbott, Mr. Collins served in various general
management positions both in the United States and Europe.
BOBBY I. GRIFFIN, age 61, has been Executive Vice President since July
1988, and was President, Cardiac Rhythm Management (formerly Pacing), from
March 1991 to December 1997. From September 1985 to July 1988, Mr. Griffin was
Vice President, Cardiac Rhythm Management. Mr. Griffin will retire in August
1998.
BILL K. ERICKSON, age 54, has been Senior Vice President and President,
Americas, since January 1994. From May 1992 to January 1994, Mr. Erickson was
Senior Vice President and President, U.S. Cardiovascular Sales and Marketing
Division. Mr. Erickson was Senior Vice President, U.S. Cardiovascular Division,
from January 1990 to May 1992 and was Vice President, U.S. Cardiovascular
Distribution, from January 1982 to December 1989.
JANET S. FIOLA, age 56, has been Senior Vice President, Human Resources
since March 1994. She was Vice President, Human Resources, from February 1993 to
March 1994, and was Vice President, Corporate Human Resources, from February
1988 to February 1993.
B. KRISTINE JOHNSON, age 46, has been Senior Vice President and Chief
Administrative Officer since October 1997. She was Senior Vice President and
President, Vascular from May 1996 to September 1997. Prior to that she was Vice
President and President, Tachyarrhythmia Management from May 1995 to April 1996,
and Vice President and General Manager, Tachyarrhythmia Management from January
1990 to April 1995. She served in various general management positions at the
company from April 1982 to December 1989. Prior to joining the company, Ms.
Johnson served in several management positions at Cargill, Inc. from 1973 to
1982.
PHILIP M. LAUGHLIN, age 51, joined the company as Senior Vice President and
President, Cardiac Surgery, in July 1995. Prior to that he served with Clintec
Nutrition company (worldwide joint venture of Baxter International and Nestle
S.A. in the field of clinical nutrition) as President, North America, from 1994
through July 1995 and as President, United States, from 1989 to 1993. From 1976
to 1989, he held numerous general management positions at Baxter International
in Europe and the Far East, and was most recently Vice President, Operations,
Global Business Group.
RONALD E. LUND, age 63, has been Senior Vice President and General Counsel
since November 1990, and Secretary since July 1992, and was Vice President and
General Counsel from February 1989 to November 1990. Prior to joining the
company, Mr. Lund served as Vice President and Associate General Counsel of The
Pillsbury Company from 1984 to February 1989.
STEPHEN H. MAHLE, age 52, has been Senior Vice President and President of
Cardiac Rhythm Management (formerly Pacing) since January 1998. Prior to that,
he was President, Brady Pacing, from May 1995 to December 1997 and Vice
President and General Manager, Brady Pacing, from January 1990 to May 1995. Mr.
Mahle has been with the company for 26 years and served in various general
management positions prior to 1990.
JOHN A. MESLOW, age 59, has been Senior Vice President and President,
Neurological Business, since March 1994. He was Vice President and President,
Neurological Business, from March 1991 to March 1994, and was Vice President,
Neurological Division, from March 1985 to March 1991.
ROBERT L. RYAN, age 55, has been Senior Vice President and Chief Financial
Officer since April 1993. Prior to joining the company, Mr. Ryan was Vice
President, Finance, and Chief Financial Officer of Union Texas Petroleum Corp.
from May 1984 to April 1993, Controller from May 1983 to May 1984, and Treasurer
from March 1982 to May 1983.
BARRY W. WILSON, age 54, has been Senior Vice President since September
1997 and President, Europe, Middle East and Africa since joining the company in
April 1995. Prior to that, Mr. Wilson was President of the Lederle Division of
American Cyanamid/American Home Products from 1991 to March 1995 and President,
Europe of Bristol-Myers Squibb from 1991 to 1993, where he also served
internationally in various general management positions from 1980 to 1991.
8
<PAGE>
ITEM 2. PROPERTIES
Medtronic's principal offices are owned by the company and located in the
Minneapolis, Minnesota metropolitan area. Manufacturing or research facilities
are located in Arizona, California, Colorado, Massachusetts, Michigan,
Minnesota, Utah, Puerto Rico, Canada, China, France, Denmark, Germany, India,
Israel, Italy, the Netherlands, Sweden, Switzerland and Japan. The company's
total manufacturing and research space is approximately 1.9 million square feet,
of which approximately 76% is owned by the company and the balance is leased.
Medtronic also maintains sales and administrative offices in the United
States at 92 locations in 28 states or jurisdictions and outside the United
States at 98 locations in 30 countries. Most of these locations are leased.
Medtronic is utilizing substantially all of its currently available productive
space to develop, manufacture and market its products. The company's facilities
are in good operating condition, suitable for their respective uses and adequate
for current needs.
ITEM 3. LEGAL PROCEEDINGS
Note 12 to the consolidated financial statements appearing on page 16 of
Medtronic's 1998 Annual Report -- Financial Review is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR MEDTRONIC'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information in the sections entitled "Price Range of Medtronic Stock"
and "Investor Information" on page 23 of Medtronic's 1998 Annual Report --
Company Overview is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information for the fiscal years 1988 through 1998 on page 18 of
Medtronic's 1998 Annual Report -- Financial Review is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information on pages 1 through 4 of Medtronic's 1998 Annual Report --
Financial Review is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information on page 3 of Medtronic's 1998 Annual Report -- Financial
Review is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
independent accountants dated May 26, 1998 appearing on pages 5 through 17 of
Medtronic's 1998 Annual Report -- Financial Review, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
9
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MEDTRONIC
The information on pages 1 through 7 of Medtronic's Proxy Statement for its
1998 Annual Shareholders' Meeting and on page 9 of such Proxy Statement entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference. See also "Executive Officers of Medtronic" on pages 7 and 8
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Election of Directors -- Director Compensation" and
"Executive Compensation" on pages 7 and 8, and 14 through 19, respectively, of
Medtronic's Proxy Statement for its 1998 Annual Shareholders' Meeting are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Shareholdings of Certain Owners and Management" on page 9 of Medtronic's
Proxy Statement for its 1998 Annual Shareholders' Meeting is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 8 of Medtronic's Proxy Statement for its 1998
Annual Shareholders' Meeting concerning services provided to the company by
directors and executive officers in fiscal 1998 is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Report of Independent Accountants (incorporated herein by reference to page
5 of Medtronic's 1998 Annual Report -- Financial Review)
Statement of Consolidated Earnings -- years ended April 30, 1998, 1997, and
1996 (incorporated herein by reference to page 6 of Medtronic's 1998 Annual
Report -- Financial Review)
Consolidated Balance Sheet -- April 30, 1998 and 1997 (incorporated herein
by reference to page 7 of Medtronic's 1998 Annual Report -- Financial
Review)
Statement of Consolidated Shareholders' Equity -- years ended April 30,
1998, 1997, and 1996 (incorporated herein by reference to page 8 of
Medtronic's 1998 Annual Report -- Financial Review)
Statement of Consolidated Cash Flows -- years ended April 30, 1998, 1997,
and 1996 (incorporated herein by reference to page 9 of Medtronic's 1998
Annual Report -- Financial Review)
Notes to Consolidated Financial Statements (incorporated herein by
reference to pages 10 through 17 of Medtronic's 1998 Annual Report --
Financial Review)
2. FINANCIAL STATEMENT SCHEDULES
Schedule II. Valuation and Qualifying Accounts -- years ended April 30,
1998, 1997, and 1996
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
10
<PAGE>
3. EXHIBITS
3.1 Medtronic Restated Articles of Incorporation, as amended to date
(Exhibit 3.1).(a)
3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(b)
4 Form of Rights Agreement dated as of June 27, 1991 between
Medtronic and Norwest Bank Minnesota, National Association,
including as Exhibit A thereto the form of Preferred Stock Purchase
Right Certificate. (Exhibit 4).(c)
*10.1 1994 Stock Award Plan, as amended.
*10.2 Management Incentive Plan (Appendix B).(d)
*10.3 1979 Restricted Stock and Performance Share Award Plan, as amended
to date.
*10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(b)
*10.5 Form of Employment Agreement for Medtronic executive officers
(Exhibit 10.5).(e)
*10.6 1991 Restricted Stock Plan for Non-Employee Directors (Exhibit
10.6).(b)
*10.7 Capital Accumulation Plan Deferral Program (Exhibit 10.7).(b)
*10.8 Postretirement Survivor Benefit Plan.
*10.9 Amendment effective October 1, 1993 to the Directors' Retirement
Plan (Exhibit 10.9).(f)
*10.10 Executive Nonqualified Supplemental Benefit Plan (Restated May 1,
1997). (Exhibit 10.10).(c)
*10.11 Stock Option Replacement Program.
*10.12 1998 Outside Director Stock Compensation Plan.
*10.13 Agreement with Officer (Exhibit 10).(g)
*10.14 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock
Option Plan.
13 Those portions of Medtronic's 1998 Annual Shareholders Report
expressly incorporated by reference herein, which shall be deemed
filed with the Commission.
21 List of Subsidiaries.
23 Consent and Report of PricewaterhouseCoopers LLP (set forth on page
13 of this report).
24 Powers of Attorney.
27 Financial Data Schedule.
99.1 Agreement and Plan of Merger dated June 27, 1998 by and among
Medtronic, Inc., PC Merger Corp. and Physio-Control Corporation,
incorporated by reference to Exhibit C to Schedule 13D filed by the
Registrant relating to ownership of shares of Physio-Control
Corporation (SEC File No. 0-27242).
99.2 Agreement and Plan of Merger dated July 12, 1998 by and among
Medtronic, Inc., AC Merger Corp. and AVECOR Cardiovascular, Inc.,
incorporated by reference to Exhibit D to Schedule 13D filed by the
Registrant relating to ownership of shares of AVECOR
Cardiovascular, Inc. (SEC File No. 0-21330).
- ------------------
(a) Incorporated herein by reference to the cited exhibit in Medtronic's
Quarterly Report on Form 10-Q for the quarter ended July 28, 1995, filed
with the Commission on September 8, 1995.
(b) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1996, filed with the
Commission on July 24, 1996.
(c) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1997, filed with the
Commission on July 23, 1997.
(d) Incorporated herein by reference to the cited appendix in Medtronic's Proxy
Statement for its 1994 Annual Meeting of Shareholders, filed with the
Commission on July 27, 1994.
(e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1995, filed with the
Commission on July 25, 1995.
(f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1994, filed with the
Commission on July 27, 1994.
(g) Incorporated herein by reference to the cited exhibit in Medtronic's
Quarterly Report on Form 10-Q for the quarter ended January 30, 1998, filed
with the Commission on March 13, 1998.
*Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Medtronic during the quarter ended
April 30, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
MEDTRONIC, INC.
Dated: July 21, 1998
BY: /S/ William W. George
----------------------------------------
WILLIAM W. GEORGE
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: July 21, 1998 BY: /S/ William W. George
----------------------------------------
WILLIAM W. GEORGE
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Dated: July 21, 1998 BY: /s/ Robert L. Ryan
----------------------------------------
ROBERT L. RYAN
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
WILLIAM R. BRODY, M.D., PH.D.
PAUL W. CHELLGREN
ARTHUR D. COLLINS, JR.
WILLIAM W. GEORGE
ANTONIO M. GOTTO, JR., M.D.
BERNADINE P. HEALY, M.D.
THOMAS E. HOLLORAN DIRECTORS
GLEN D. NELSON, M.D.
RICHARD L. SCHALL
JACK W. SCHULER
GERALD W. SIMONSON
GORDON M. SPRENGER
RICHARD A. SWALIN, PH.D.
Ronald E. Lund, by signing his name hereto, does hereby sign this document
on behalf of each of the above named directors of the registrant pursuant to
powers of attorney duly executed by such persons.
Dated: July 21, 1998 BY: /s/ Ronald E. Lund
----------------------------------------
RONALD E. LUND
ATTORNEY-IN-FACT
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Medtronic, Inc.
Our audits of the consolidated financial statements referred to in our
report dated May 26, 1998 appearing on page 5 of the Medtronic, Inc. 1998 Annual
Report -- Financial Review (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
Price Waterhouse LLP
Minneapolis, Minnesota
May 26, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each Registration
Statement on Form S-8 (Registration Nos. 2-65157, 2-68408, 33-169, 33-36552,
2-65156, 33-24212, 33-37529, 33-44230, 33-55329, 33-63805, 33-64585, 333-04099
and 333-07385) of Medtronic, Inc. of our report dated May 26, 1998 appearing on
page 5 of the 1998 Annual Report -- Financial Review which is incorporated by
reference in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule as
shown above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 21, 1998
13
<PAGE>
MEDTRONIC, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
OTHER
BALANCE AT CHARGES/ CHANGES BALANCE
BEGINNING (CREDITS) TO (DEBIT) AT END OF
OF PERIOD EARNINGS CREDIT PERIOD
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended 4/30/98 ............ $13,673 $ 2,490 $(1,426)(a) $14,469
(268)(b)
Year ended 4/30/97 ............ 18,094 (1,952) (1,448)(a) 13,673
(1,021)(b)
Year ended 4/30/96 ............ 22,416 (189) (1,371)(a) 18,094
(857)(b)
(1,905)(c)
</TABLE>
- ------------------
(a) Uncollectible accounts written off, less recoveries.
(b) Reflects primarily the effects of foreign currency fluctuations.
(c) Uncollectible accounts written off related to 1993 divestiture.
14
<PAGE>
Commission File Number 1-7707
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF
THE SECURITIES EXCHANGE ACT 0F 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
METHOD
OF
EXHIBITS INDEX FILING
<S> <C> <C>
3.1 Medtronic Restated Articles of Incorporation, as amended to date --
(Exhibit 3.1).(a)
3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(b) --
4 Form of Rights Agreement dated as of June 27, 1991 between --
Medtronic and Norwest Bank Minnesota, National Association,
including as Exhibit A thereto the form of Preferred Stock Purchase
Right Certificate. (Exhibit 4).(c)
*10.1 1994 Stock Award Plan, as amended. E
*10.2 Management Incentive Plan (Appendix B).(d) --
*10.3 1979 Restricted Stock and Performance Share Award Plan, as amended E
to date.
*10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(b) --
*10.5 Form of Employment Agreement for Medtronic executive officers --
(Exhibit 10.5).(e)
*10.6 1991 Restricted Stock Plan for Non-Employee Directors (Exhibit --
10.6).(b)
*10.7 Capital Accumulation Plan Deferral Program (Exhibit 10.7).(b) --
*10.8 Postretirement Survivor Benefit Plan. E
*10.9 Amendment effective October 1, 1993 to the Directors' Retirement --
Plan (Exhibit 10.9).(f)
*10.10 Executive Nonqualified Supplemental Benefit Plan (Restated May 1, --
1997). (Exhibit 10.10).(c)
*10.11 Stock Option Replacement Program. E
*10.12 1998 Outside Director Stock Compensation Plan. E
*10.13 Agreement with Officer (Exhibit 10).(g) --
*10.14 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock E
Option Plan.
13 Those portions of Medtronic's 1998 Annual Shareholders Report E
expressly incorporated by reference herein, which shall be deemed
filed with the Commission.
21 List of Subsidiaries. E
23 Consent and Report of PricewaterhouseCoopers LLP (set forth on page --
13 of this report).
24 Powers of Attorney. E
27 Financial Data Schedule. E
99.1 Agreement and Plan of Merger dated June 27, 1998 by and among --
Medtronic, Inc., PC Merger Corp. and Physio-Control Corporation,
incorporated by reference to Exhibit C to Schedule 13D filed by the
Registrant relating to ownership of shares of Physio-Control
Corporation (SEC File No. 0-27242).
99.2 Agreement and Plan of Merger dated July 12, 1998 by and among --
Medtronic, Inc., AC Merger Corp. and AVECOR Cardiovascular, Inc.,
incorporated by reference to Exhibit D to Schedule 13D filed by the
Registrant relating to ownership of shares of AVECOR
Cardiovascular, Inc. (SEC File No. 0-21330).
- ------------------
(a) Incorporated herein by reference to the cited exhibit in Medtronic's
Quarterly Report on Form 10-Q for the quarter ended July 28, 1995, filed
with the Commission on September 8, 1995.
(b) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1996, filed with the
Commission on July 24, 1996.
(c) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1997, filed with the
Commission on July 23, 1997.
(d) Incorporated herein by reference to the cited appendix in Medtronic's Proxy
Statement for its 1994 Annual Meeting of Shareholders, filed with the
Commission on July 27, 1994.
(e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1995, filed with the
Commission on July 25, 1995.
(f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual
Report on Form 10-K for the year ended April 30, 1994, filed with the
Commission on July 27, 1994.
(g) Incorporated herein by reference to the cited exhibit in Medtronic's
Quarterly Report on Form 10-Q for the quarter ended January 30, 1998, filed
with the Commission on March 13, 1998.
</TABLE>
EXHIBIT 10.1
1994 STOCK AWARD PLAN
(EFFECTIVE APRIL 29, 1994)
(AMENDED AND RESTATED AS OF JUNE 25, 1998)
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING MEDTRONIC COMMON STOCK
THAT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
1. PURPOSE. The purpose of this 1994 Stock Award Plan (the "Plan") is
to motivate key personnel, including non-employee directors, to produce a
superior return to the shareholders of Medtronic, Inc. (the "Company") and its
Affiliates by offering such individuals an opportunity to realize Stock
appreciation, by facilitating Stock ownership, and by rewarding them for
achieving a high level of corporate performance. This Plan is also intended to
facilitate recruiting and retaining key personnel of outstanding ability.
2. DEFINITIONS. The capitalized terms used in this Plan have the
meanings set forth below.
(a) "Affiliate" means any corporation that is a "parent corporation" or
"subsidiary corporation" of the Company, as those terms are defined in Sections
424(e) and (f) of the Code, or any successor provision, and, for purposes other
than the grant of Incentive Stock Options, any joint venture in which the
Company or any such "parent corporation" or "subsidiary corporation" owns an
equity interest.
(b) "Agreement" means a written contract entered into between the
Company or an Affiliate and a Participant containing the terms and conditions of
an Award in such form (not inconsistent with this Plan) as the Committee
approves from time to time, together with all amendments thereof, which
amendments may be unilaterally made by the Company (with the approval of the
Committee) unless such amendments are deemed by the Committee to be materially
adverse to the Participant and are not required as a matter of law.
(c) "Annual Retainer" means the fixed annual fee of a Non-Employee
Director in effect on the first day of the year for which such Annual Retainer
is payable for services to be rendered as a Non-Employee Director of the
Company. The Annual Retainer does not include meeting or chairmanship fees.
(d) "Award" means a grant made under this Plan in the form of Options,
Stock Appreciation Rights, Restricted Stock, Performance Shares or any Other
Stock-Based Award.
(e) "Board" means the Board of Directors of the Company.
(f) "Change in Control" means:
(i) acquisition by any individual, entity or group (within the
meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either (A) the then outstanding Shares of Stock (the "Outstanding Company Common
Stock") or (B) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change of Control: (A) any
acquisition directly from the Company, (B) any acquisition by the Company or any
Subsidiary, (C) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any Subsidiary or (D) any acquisition
by any corporation with respect to which, following such acquisition, more than
55% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities
<PAGE>
immediately prior to such acquisition in substantially the same proportions as
their ownership, immediately prior to such acquisition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be; or
(ii) individuals who, as of the effective date of this Plan
provided in Section 14(a) of this Plan, constitute the Board (the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents; or
(iii) approval by the shareholders of the Company of a
reorganization, merger, consolidation or statutory exchange of Outstanding
Company Voting Securities, in each case, with respect to which all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such reorganization, merger,
consolidation or exchange do not, following such reorganization, merger,
consolidation or exchange, beneficially own, directly or indirectly, more than
55% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such reorganization, merger, consolidation or exchange in
substantially the same proportions as their ownership, immediately prior to such
reorganization, merger, consolidation or exchange of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be; or
(iv) approval by the shareholders of the Company of (A) a
complete liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other than
to a corporation with respect to which, following such sale or other
disposition, more than 55% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be.
Notwithstanding the foregoing provisions of this definition, a Change
of Control shall not be deemed to occur with respect to a Participant if the
acquisition of the 30% or greater interest referred to in subparagraph (i) of
this definition is by a group, acting in concert, that includes the Participant
or if at least 40% of the then outstanding common stock or combined voting power
of the then outstanding voting securities (or voting equity interests) of the
surviving corporation or of any corporation (or other entity) acquiring all or
substantially all of the assets of the Company shall be beneficially owned,
directly or indirectly, immediately after a reorganization, merger,
consolidation, statutory share exchange or disposition of assets referred to in
subparagraph (iii) or (iv) of this definition by a group, acting in concert,
that includes that Participant.
(g) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any successor statute.
(h) "Committee" means three or more Disinterested Persons designated by
the Board to administer this Plan under Section 3 hereof and constituted so as
to permit this Plan to comply with Exchange Act Rule 16b-3.
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(i) "Company" means Medtronic, Inc., a Minnesota corporation, or any
successor to all or substantially all of its businesses by merger,
consolidation, purchase of assets or otherwise.
(j) "Disability" means the disability of a Participant such that the
Participant is (or in the case of a Non-Employee Director, would, if an
employee, be) considered disabled under any retirement plan of the Company which
is qualified under Section 401 of the Code, or, except as this term is used in
Sections 12 and 13 hereof, as otherwise determined by the Committee.
(k) "Disinterested Person" means a member of the Board who is
considered a disinterested person within the meaning of Exchange Act Rule 16b-3.
(l) "Employee" means any full-time or part-time employee (including an
officer or director who is also an employee) of the Company or an Affiliate.
Except with respect to grants of Incentive Stock Options, "Employee" shall also
include other individuals and entities who are not "employees" of the Company or
an Affiliate but who provide services to the Company or an Affiliate in the
capacity of an independent contractor. References in this Plan to "employment"
and related terms shall include the providing of services in any such capacity.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended; "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the
Securities and Exchange Commission under the Exchange Act as in effect with
respect to the Company or any successor regulation.
(n) "Fair Market Value" as of any date means, unless otherwise
expressly provided in this Plan:
(i) the closing sale price of a Share (A) on the composite
tape for New York Stock Exchange ("NYSE") listed shares, or (B) if the Shares
are not quoted on the NYSE composite tape, on the principal United States
securities exchange registered under the Exchange Act on which the Shares are
listed, or (C) if the Shares are not listed on any such exchange, on the
National Association of Securities Dealers, Inc. Automated Quotation System
National Market System, in any case on the date immediately preceding that date,
or, if no sale of Shares shall have occurred on that date, on the next preceding
day on which a sale of Shares occurred, or
(ii) if clause (i) is not applicable, what the Committee
determines in good faith to be 100% of the fair market value of a Share on that
date. However, if the applicable securities exchange or system has closed for
the day at the time the event occurs that triggers a determination of Fair
Market Value, all references in this paragraph to the "date immediately
preceding that date" shall be deemed to be references to "that date." In the
case of an Incentive Stock Option, if such determination of Fair Market Value is
not consistent with the then current regulations of the Secretary of the
Treasury, Fair Market Value shall be determined in accordance with said
regulations. The determination of Fair Market Value shall be subject to
adjustment as provided in Section 14(f) hereof.
(o) "Fundamental Change" means a dissolution or liquidation of the
Company, a sale of substantially all of the assets of the Company, a merger or
consolidation of the Company with or into any other corporation, regardless of
whether the Company is the surviving corporation, or a statutory share exchange
involving capital stock of the Company.
(p) "Incentive Stock Option" means any Option designated as such and
granted in accordance with the requirements of Section 422 of the Code or any
successor to such section.
(q) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any Affiliate.
<PAGE>
(r) "Non-Qualified Stock Option" means an Option other than an
Incentive Stock Option.
(s) "Other Stock-Based Award" means an Award of Stock or an Award based
on Stock other than Options, Stock Appreciation Rights, Restricted Stock or
Performance Shares.
(t) "Option" means a right to purchase Stock, including both
Non-Qualified Stock Options and Incentive Stock Options.
(u) "Participant" means an Employee or a Non-Employee Director to whom
an Award is made.
(v) "Performance Period" means the period of time as specified in an
Agreement over which Performance Shares are to be earned.
(w) "Performance Shares" means a contingent award of a specified number
of Performance Shares, with each Performance Share equivalent to one Share, a
variable percentage of which may vest depending upon the extent of achievement
of specified performance objectives during the applicable Performance Period.
(x) "Plan" means this 1994 Stock Award Plan, as amended and in effect
from time to time.
(y) "Restricted Stock" means Stock granted under Section 10 or 13
hereof so long as such Stock remains subject to one or more restrictions.
(z) "Retirement" means retirement of an Employee as defined under any
retirement plan of the Company which is qualified under Section 401 of the Code
(which currently provides for retirement on or after age 55, provided the
Employee has been employed by the Company and/or one or more Affiliates for at
least ten years, or retirement on or after age 62), or under any retirement plan
of the Company or any Affiliate applicable to the Employee due to employment by
a non-U.S. Affiliate or employment in a non-U.S. location, or as otherwise
determined by the Committee.
(aa) "Share" means a share of Stock.
(bb) "Stock" means the common stock, $.10 par value per share (as such
par value may be adjusted from time to time), of the Company.
(cc) "Stock Appreciation Right" means a right, the value of which is
determined relative to appreciation in value of Shares pursuant to an Award
granted under Section 8 hereof.
(dd) "Subsidiary" means a "subsidiary corporation," as that term is
defined in Section 424(f) of the Code, or any successor provision.
(ee) "Successor" with respect to a Participant means the legal
representative of an incompetent Participant and, if the Participant is
deceased, the legal representative of the estate of the Participant or the
person or persons who may, by bequest or inheritance, or under the terms of an
Award or of forms submitted by the Participant to the Committee under Section
14(i) hereof, acquire the right to exercise an Option or Stock Appreciation
Right or receive cash and/or Shares issuable in satisfaction of an Award in the
event of a Participant's death.
(ff) "Term" means the period during which an Option or Stock
Appreciation Right may be exercised or the period during which the restrictions
placed on Restricted Stock or any other Award are in effect.
Except when otherwise indicated by the context, reference to the
masculine gender shall include, when used, the feminine gender and any term used
in the singular shall also include the plural.
<PAGE>
3. ADMINISTRATION.
(a) AUTHORITY OF COMMITTEE. The Committee shall administer this Plan.
The Committee shall have exclusive power to make Awards and to determine when
and to whom Awards will be granted, and the form, amount and other terms and
conditions of each Award, subject to the provisions of this Plan. The Committee
may determine whether, to what extent and under what circumstances Awards may be
settled, paid or exercised in cash, Shares or other Awards or other property, or
cancelled, forfeited or suspended. The Committee shall have the authority to
interpret this Plan and any Award or Agreement made under this Plan, to
establish, amend, waive and rescind any rules and regulations relating to the
administration of this Plan, to determine the terms and provisions of any
Agreements entered into hereunder (not inconsistent with this Plan), and to make
all other determinations necessary or advisable for the administration of this
Plan. The Committee may correct any defect, supply any omission or reconcile any
inconsistency in this Plan or in any Award in the manner and to the extent it
shall deem desirable. The determinations of the Committee in the administration
of this Plan, as described herein, shall be final, binding and conclusive.
(b) DELEGATION OF AUTHORITY. The Committee may delegate all or any part
of its authority under this Plan to persons who are not Disinterested Persons
for purposes of determining and administering Awards solely to Employees who are
not then subject to the reporting requirements of Section 16 of the Exchange
Act.
(c) AWARDS TO NON-EMPLOYEE DIRECTORS. Notwithstanding any contrary
provisions of this Plan, the granting, terms, conditions and eligibility
requirements of Awards granted to Non-Employee Directors under Sections 12 and
13 of this Plan are governed solely by the provisions of this Plan pertaining
thereto, and the Committee shall have no discretion with respect to the granting
of such Awards or to alter or amend any terms, conditions or eligibility
requirements of such Awards to Non-Employee Directors.
(d) RULE 16B-3 COMPLIANCE. It is the intent that this Plan and all
Awards granted pursuant to it shall be administered by the Committee so as to
permit this Plan and Awards to comply with Exchange Act Rule 16b-3. If any
provision of this Plan or of any Award would otherwise frustrate or conflict
with the intent expressed in this Section 3(d), that provision to the extent
possible shall be interpreted and deemed amended in the manner determined by the
Committee so as to avoid such conflict. To the extent of any remaining
irreconcilable conflict with such intent, the provision shall be deemed void as
applicable to Participants who are then subject to the reporting requirements of
Section 16 of the Exchange Act to the extent permitted by law and in the manner
deemed advisable by the Committee.
(e) INDEMNIFICATION. To the full extent permitted by law, each member
and former member of the Committee and each person to whom the Committee
delegates or has delegated authority under this Plan shall be entitled to
indemnification by the Company against and from any loss, liability, judgment,
damage, cost and reasonable expense incurred by such member, former member or
other person by reason of any action taken, failure to act or determination made
in good faith under or with respect to this Plan.
4. SHARES AVAILABLE; MAXIMUM PAYOUTS.
(a) Shares Available. The number of Shares available for distribution
under this Plan is 2,800,000 (subject to adjustment under Section 14(f) hereof).
(b) SHARES AGAIN AVAILABLE. Any Shares subject to the terms and
conditions of an Award under this Plan which are not used because the terms and
conditions of the Award are not met may again be used for an Award under this
Plan. However, Shares with respect to which a Stock Appreciation Right has been
exercised, whether paid in cash and/or in Shares, and Shares of Restricted Stock
which have been granted with dividend or voting rights during the Term of the
Restricted Stock may not again be awarded under this Plan.
<PAGE>
(c) UNEXERCISED AWARDS. Any unexercised or undistributed portion of any
terminated, expired, exchanged, or forfeited Award or any Award settled in cash
in lieu of Shares (except as provided in Section 4(b) hereof) shall be available
for further Awards.
(d) NO FRACTIONAL SHARES. No fractional Shares may be issued under this
Plan; fractional Shares will be rounded to the nearest whole Share.
(e) MAXIMUM PAYOUTS. No more than 35% of all Shares subject to this
Plan may be granted in the aggregate pursuant to Restricted Stock, Performance
Share and Other Stock-Based Awards.
5. ELIGIBILITY. Awards may be granted under this Plan to any Employee
at the discretion of the Committee. Non-Employee Directors are eligible for
certain Awards under this Plan, as provided in Sections 12 and 13 hereof and
subject to the restrictions in Section 3(c) hereof.
6. General Terms of Awards.
(a) AWARDS. Awards under this Plan may consist of Options (either
Incentive Stock Options or Non-Qualified Stock Options), Stock Appreciation
Rights, Performance Shares, Restricted Stock and Other Stock-Based Awards.
Awards of Restricted Stock may, in the discretion of the Committee, provide the
Participant with dividends or dividend equivalents and voting rights prior to
vesting (whether vesting is based on a period of time or based on attainment of
specified performance conditions).
(b) AMOUNT OF AWARDS. Each Agreement shall set forth the number of
Shares of Restricted Stock, Stock or Performance Shares subject to such
Agreement, or the number of Shares to which the Option applies or with respect
to which payment upon the exercise of the Stock Appreciation Right is to be
determined, as the case may be, together with such other terms and conditions
applicable to the Award (not inconsistent with this Plan) as determined by the
Committee in its sole discretion.
(c) TERM. Each Agreement, other than those relating solely to Awards of
Stock without restrictions, shall set forth the Term of the Award and any
applicable Performance Period for Performance Shares, as the case may be, but in
no event shall the Term of an Award (other than Awards granted in lieu of cash
compensation pursuant to Section 13 hereof or the Company's Management Incentive
Plan as amended from time to time) or the Performance Period be longer than ten
years after the date of grant. An Agreement with a Participant may permit
acceleration of vesting requirements and of the expiration of the applicable
Term upon such terms and conditions as shall be set forth in the Agreement,
which may, but need not, include, without limitation, acceleration resulting
from the occurrence of a Change in Control, a Fundamental Change, or the
Participant's death, Disability or Retirement. Acceleration of the Performance
Period of Performance Shares shall be subject to Section 9(b) hereof.
(d) AGREEMENTS. Each Award under this Plan shall be evidenced by an
Agreement setting forth the terms and conditions, as determined by the
Committee, which shall apply to such Award, in addition to the terms and
conditions specified in this Plan.
(e) TRANSFERABILITY. During the lifetime of a Participant to whom an
Award is granted, only such Participant (or such Participant's legal
representative or, if so provided in the applicable Agreement in the case of a
Non-Qualified Stock Option, a permitted transferee as hereafter described) may
exercise an Option or Stock Appreciation Right or receive payment with respect
to Performance Shares or any other Award. No Award of Restricted Stock (prior to
the expiration of the restrictions), Options, Stock Appreciation Rights,
Performance Shares or other Award (other than an award of Stock without
restrictions) may be sold, assigned, transferred, exchanged, or otherwise
encumbered, and any attempt to do so shall be of no effect. Notwithstanding the
immediately preceding sentence, (i) an Agreement may provide that an Award shall
be transferable to a Successor in the event of a Participant's death and (ii) an
Agreement may provide that a
<PAGE>
Non-Qualified Stock Option shall be transferable to any member of a
Participant's "immediate family" (as such term is defined in Rule 16a-1(e)
promulgated under the Exchange Act, or any successor rule or regulation) or to
one or more trusts whose beneficiaries are members of such Participant's
"immediate family" or partnerships in which such family members are the only
partners; provided, however, that (1) the Participant receives no consideration
for the transfer and (2) such transferred Non-Qualified Stock Option shall
continue to be subject to the same terms and conditions as were applicable to
such Non-Qualified Stock Option immediately prior to its transfer.
(f) TERMINATION OF EMPLOYMENT. Except as otherwise determined by the
Committee or provided by the Committee in an applicable Agreement, in case of
termination of employment, the following provisions shall apply:
(1) OPTIONS AND STOCK APPRECIATION RIGHTS.
(i) DEATH. If a Participant who has been granted an Option or
Stock Appreciation Rights shall die before such Option or Stock Appreciation
Rights have expired, the Option or Stock Appreciation Rights shall become
exercisable in full, and may be exercised by the Participant's Successor at any
time, or from time to time, within three years after the date of the
Participant's death.
(ii) DISABILITY OR RETIREMENT. If a Participant's employment
terminates because of Disability or Retirement, the Option or Stock Appreciation
Rights shall become exercisable in full, and the Participant may exercise his or
her Options or Stock Appreciation Rights at any time, or from time to time,
within three years after the date of such termination.
(iii) REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. If a
Participant's employment terminates for any reason other than death, Disability
or Retirement, the unvested or unexercised portion of any Award held by such
Participant shall terminate at the date of termination of employment.
(iv) EXPIRATION OF TERM. Notwithstanding the foregoing
paragraphs (i)-(iii), in no event shall an Option or a Stock Appreciation Right
be exercisable after expiration of the Term of such Award.
(2) PERFORMANCE SHARES. If a Participant's employment with the
Company or any of its Affiliates terminates during a Performance Period because
of death, Disability or Retirement, or under other circumstances provided by the
Committee in its discretion in the applicable Agreement, the Participant shall
be entitled to a payment of Performance Shares at the end of the Performance
Period based upon the extent to which achievement of performance targets was
satisfied at the end of such period (as determined at the end of the Performance
Period) and prorated for the portion of the Performance Period during which the
Participant was employed by the Company or any Affiliate. Except as provided in
this Section 6(f)(2) or in the applicable Agreement, if a Participant's
employment terminates with the Company or any of its Affiliates during a
Performance Period, then such Participant shall not be entitled to any payment
with respect to that Performance Period.
(3) RESTRICTED STOCK. In case of a Participant's death, Disability
or Retirement, the Participant shall be entitled to receive that number of
shares of Restricted Stock under outstanding Awards which has been pro rated for
the portion of the Term of the Awards during which the Participant was employed
by the Company or any Affiliate, and with respect to such Shares all
restrictions shall lapse. Upon termination of employment for any reason other
than death, Disability or Retirement, any shares of Restricted Stock whose
restrictions have not lapsed will automatically be forfeited in full and
cancelled by the Company upon such termination of employment.
<PAGE>
(g) RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a
shareholder with respect to any securities covered by an Award until the date
the Participant becomes the holder of record.
7. STOCK OPTIONS.
(a) TERMS OF ALL OPTIONS. Each Option shall be granted pursuant to an
Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option.
Only Non-Qualified Stock Options may be granted to Employees who are not
employees of the Company or an Affiliate. The purchase price of each Share
subject to an Option shall be determined by the Committee and set forth in the
Agreement, but shall not be less than 100% of the Fair Market Value of a Share
as of the date the Option is granted. The purchase price of the Shares with
respect to which an Option is exercised shall be payable in full at the time of
exercise, provided that, to the extent permitted by law, Participants may
simultaneously exercise Options and sell the Shares thereby acquired pursuant to
a brokerage or similar relationship and use the proceeds from such sale to pay
the purchase price of such Shares. The purchase price may be paid in cash, or
through a reduction of the number of Shares delivered to the Participant upon
exercise of the Option or by delivery to the Company of Shares held by such
Participant (in each case, such Shares having a Fair Market Value as of the date
the Option is exercised equal to the purchase price of the Shares being
purchased pursuant to the Option), or a combination thereof, unless otherwise
provided in the Agreement. Each Option shall be exercisable in whole or in part
on the terms provided in the Agreement. In no event shall any Option be
exercisable at any time after its Term. When an Option is no longer exercisable,
it shall be deemed to have lapsed or terminated. No Participant may receive any
combination of Options to purchase and Stock Appreciation Rights relating to
more than 500,000 Shares in the aggregate (which amount includes up to 350,000
Shares pursuant to Awards and up to 150,000 Shares received in lieu of cash
compensation at the Participant's election as permitted by the Compensation
Committee) pursuant to Awards over a five-year period under this Plan.
(b) Incentive Stock Options. In addition to the other terms and
conditions applicable to all Options:
(i) the aggregate Fair Market Value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options held by an individual first become exercisable in any calendar year
(under this Plan and all other incentive stock option plans of the Company and
its Affiliates) shall not exceed $100,000 (or such other limit as may be
required by the Code), if such limitation is necessary to qualify the Option as
an Incentive Stock Option, and to the extent an Option or Options granted to a
Participant exceed such limit, such Option or Options shall be treated as a
Non-Qualified Stock Option;
(ii) an Incentive Stock Option shall not be exercisable and
the Term of the Award shall not be more than ten years after the date of grant
(or such other limit as may be required by the Code) if such limitation is
necessary to qualify the Option as an Incentive Stock Option;
(iii) the Agreement covering an Incentive Stock Option shall
contain such other terms and provisions which the Committee determines necessary
to qualify such Option as an Incentive Stock Option; and
(iv) notwithstanding any other provision of this Plan to the
contrary, no Participant may receive an Incentive Stock Option under this Plan
if, at the time the Award is granted, the Participant owns (after application of
the rules contained in Section 424(d) of the Code, or its successor provision)
Shares possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or its subsidiaries, unless (A) the option
price for such Incentive Stock Option is at least 110% of the Fair Market Value
of the Shares subject to such Incentive Stock Option on the date of grant and
(B) such Option is not exercisable after the date five years from the date such
Incentive Stock Option is granted.
8. STOCK APPRECIATION RIGHTS. An Award of a Stock Appreciation Right
shall entitle the Participant, subject to terms and conditions determined by the
Committee, to receive upon exercise of the Stock Appreciation Right all or a
portion of the excess of (i) the Fair Market Value of a specified number of
Shares
<PAGE>
as of the date of exercise of the Stock Appreciation Right over (ii) a specified
price which shall not be less than 100% of the Fair Market Value of such Shares
as of the date of grant of the Stock Appreciation Right. A Stock Appreciation
Right may be granted in connection with a previously or contemporaneously
granted Option, or independent of any Option. If issued in connection with an
Option, the Committee may impose a condition that exercise of a Stock
Appreciation Right cancels the Option with which it is connected and exercise of
the connected Option cancels the Stock Appreciation Right. Each Stock
Appreciation Right may be exercisable in whole or in part on the terms provided
in the Agreement. Notwithstanding anything to the contrary stated in this Plan,
no Stock Appreciation Right shall be exercisable prior to six months from the
date of grant except in the event of the death or Disability of the Participant.
No Stock Appreciation Right shall be exercisable at any time after its Term.
When a Stock Appreciation Right is no longer exercisable, it shall be deemed to
have lapsed or terminated. Except as otherwise provided in the applicable
Agreement, upon exercise of a Stock Appreciation Right, payment to the
Participant (or to his or her Successor) shall be made in the form of cash,
Stock or a combination of cash and Stock as promptly as practicable after such
exercise. The Agreement may provide for a limitation upon the amount or
percentage of the total appreciation on which payment (whether in cash and/or
Stock) may be made in the event of the exercise of a Stock Appreciation Right.
As specified in Section 7(a) hereof, no Participant may receive any combination
of Options to purchase and Stock Appreciation Rights relating to more than
500,000 Shares in the aggregate pursuant to Awards over a five-year period under
this Plan.
9. PERFORMANCE SHARES.
(a) INITIAL AWARD. An Award of Performance Shares shall entitle a
Participant (or a Successor) to future payments based upon the achievement of
performance targets established in writing by the Committee. Payment shall be
made in Stock, or a combination of cash and Stock, as determined by the
Committee, provided that at least 25% of the value of the vested Performance
Shares shall be distributed in the form of Stock. With respect to those
Participants who are "covered employees" within the meaning of Section 162(m) of
the Code and the regulations thereunder, such performance targets shall consist
of one or any combination of two or more of revenue, revenue per employee,
earnings before income tax (profit before taxes), earnings before interest and
income tax, net earnings (profits after tax), earnings per employee, tangible,
controllable or total asset turnover, earnings per share, operating income,
total shareholder return, market share, return on equity, before- or after-tax
return on net assets, distribution expense, inventory turnover, or economic
value added, and any such targets may relate to one or any combination of two or
more of corporate, group, unit, division, Affiliate or individual performance.
The Agreement may establish that a portion of the maximum amount of a
Participant's Award will be paid for performance which exceeds the minimum
target but falls below the maximum target applicable to such Award. The
Agreement shall also provide for the timing of such payment. Following the
conclusion or acceleration of each Performance Period, the Committee shall
determine the extent to which (i) performance targets have been attained, (ii)
any other terms and conditions with respect to an Award relating to such
Performance Period have been satisfied, and (iii) payment is due with respect to
a Performance Share Award. No Participant may receive Performance Shares
relating to more than 85,000 Shares pursuant to Awards over a five-year period
under this Plan.
(b) ACCELERATION AND ADJUSTMENT. The Agreement may permit an
acceleration of the Performance Period and an adjustment of performance targets
and payments with respect to some or all of the Performance Shares awarded to a
Participant, upon such terms and conditions as shall be set forth in the
Agreement, upon the occurrence of certain events, which may, but need not,
include without limitation a Change in Control, a Fundamental Change, the
Participant's death, Disability or Retirement, a change in accounting practices
of the Company or its Affiliates, or, with respect to payments in Stock for
Performance Share Awards, a reclassification, stock dividend, stock split or
stock combination as provided in Section 14(f) hereof.
(c) VALUATION. Each Performance Share earned after conclusion of a
Performance Period shall have a value equal to the average of the Fair Market
Values of a Share for the 20 consecutive business days ending on and including
the last day of such Performance Period.
<PAGE>
10. RESTRICTED STOCK. Restricted Stock may be granted in the form of
Shares registered in the name of the Participant but held by the Company until
the end of the Term of the Award. Any employment conditions, performance
conditions and the Term of the Award shall be established by the Committee in
its discretion and included in the applicable Agreement. The Committee may
provide in the applicable Agreement for the lapse or waiver of any such
restriction or condition based on such factors or criteria as the Committee, in
its sole discretion, may determine. No Award of Restricted Stock may vest
earlier than one year from the date of grant, except as provided in the
applicable Agreement.
11. OTHER STOCK-BASED AWARDS. The Committee may from time to time grant
Awards of Stock, and other Awards under this Plan (collectively herein defined
as "Other Stock-Based Awards"), including without limitation those Awards
pursuant to which Shares may be acquired in the future, such as Awards
denominated in Stock units, securities convertible into Stock and phantom
securities. The Committee, in its sole discretion, shall determine the terms and
conditions of such Awards provided that such Awards shall not be inconsistent
with the terms and purposes of this Plan. The Committee may, in its sole
discretion, direct the Company to issue Shares subject to restrictive legends
and/or stop transfer instructions which are consistent with the terms and
conditions of the Award to which such Shares relate.
12. AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS.
(a) INITIAL OPTION GRANTS. Each Non-Employee Director first elected or
appointed to the Board on or after the date of the 1994 Annual Meeting of
Shareholders of the Company shall, without any Committee action, automatically
be granted, on the date such director first becomes a director, a Non-Qualified
Stock Option to purchase that number of Shares determined by dividing (i) an
amount equal to $152,000 plus a percentage increase in such $152,000 amount
which is equal to the percentage increase from the $19,000 Annual Retainer in
effect at the time of the 1994 Annual Meeting of Shareholders of the Company to
the Annual Retainer in effect at the date such director first becomes a director
by (ii) the Fair Market Value of a Share on the date of grant. No increase in
the Annual Retainer of the Non-Employee Directors after a person becomes a
Non-Employee Director shall increase the number of Shares for which the
Non-Qualified Stock Option granted under this Section 12(a) to such Non-Employee
Director may be exercised. An employee of the Company or an Affiliate who
terminates such employment and thereafter becomes a Non-Employee Director is not
entitled to receive a Non-Qualified Stock Option under this Section 12(a), but
will be entitled to receive Non-Qualified Stock Options under Section 12(b)
hereof. A Non-Employee Director is not entitled to receive more than one
Non-Qualified Stock Option under this Section 12(a) during his or her lifetime.
(b) ANNUAL OPTION GRANTS. Each year on the date of the Annual Meeting
of Shareholders of the Company, each Non-Employee Director who is a director of
the Company immediately following such Annual Meeting shall, without any
Committee action, automatically be granted a Non-Qualified Stock Option to
purchase that number of Shares equal to the sum of (i) the Annual Retainer for
Non-Employee Directors in effect when the grant is made, (ii) the aggregate
meeting fees in effect when the grant is made for the total number of regular
Board meetings held in the previous fiscal year and the median number of regular
Board committee meetings directors were scheduled to attend during the previous
fiscal year, and (iii) one annual committee chairmanship fee in effect when the
grant is made, divided by the Fair Market Value of a Share on the date of the
grant. No increase in the Annual Retainer, Board or Board committee meeting fee
or committee chairmanship fee for Non-Employee Directors of the Company
following the annual Non-Qualified Stock Option grant shall increase the number
of Shares for which such Non-Qualified Stock Option may be exercised.
(c) AGREEMENTS. Each such Non-Qualified Stock Option shall be evidenced
by and subject to the provisions of an agreement setting forth the terms of the
Non-Qualified Stock Option. It is intended that the provisions of this Section
12 shall not cause the Non-Employee Directors to cease to be considered
Disinterested Persons and, as a result, the provisions of this Section 12 shall
be interpreted to be consistent
<PAGE>
with the foregoing intent. Non-Employee Directors may not be granted Options
under this Plan other than pursuant to the provisions of this Section 12.
(d) PURCHASE PRICE; TERM AND EXERCISABILITY OF OPTIONS. The purchase
price of each Share subject to a Non-Qualified Stock Option granted under this
Section 12 shall be the Fair Market Value of a Share as of the date the
Non-Qualified Stock Option is granted. Notwithstanding anything to the contrary
stated in this Plan, for purposes of this Section 12 and the definition of Fair
Market Value in Section 2(n) hereof, each Non-Qualified Stock Option granted
pursuant to this Section 12 shall be deemed conclusively to have been granted
prior to the close of the applicable securities exchange or system on the date
of grant. Non-Qualified Stock Options granted to a Non-Employee Director shall
vest and become exercisable in full one year after the date of grant, provided,
however, that in no event shall a Non-Employee Director initially appointed by
the Board be entitled to exercise a Non-Qualified Stock Option unless, and until
such time as, such director shall have been elected to the Board by the
shareholders of the Company. Notwithstanding the foregoing, vesting of a
Non-Qualified Stock Option granted to a Non-Employee Director who shall have
been elected by the shareholders of the Company shall accelerate and the
Non-Qualified Stock Option shall become immediately exercisable in full upon the
occurrence of a Change in Control or in the event that the Non-Employee Director
ceases to serve as a director of the Company due to death, Disability or
retirement under the policies of the Company then in effect providing for
retirement of directors from the Board. Non-Qualified Stock Options granted to a
Non-Employee Director shall expire at the earlier of (i) the ten-year
anniversary date of the Non-Qualified Stock Option's grant, or (ii) the
five-year anniversary date of the earlier of (A) termination as a director due
to such death, Disability or retirement or (B) the date the Non-Employee
Director otherwise ceases to be a director of the Company, provided that the
Non-Qualified Stock Option granted to a Non-Employee Director initially
appointed by the Board shall expire on the date such director ceases to be a
director of the Company unless such director shall have been elected by the
shareholders subsequent to the grant of the Non-Qualified Stock Option to such
director.
(e) PAYMENT OF OPTION PRICE. A Non-Employee Director may exercise a
Non-Qualified Stock Option granted pursuant to this Section 12 using as payment
any form of consideration provided for in Section 7(a) hereof, which form of
payment shall be within the sole discretion of the Non-Employee Director,
notwithstanding anything stated in Section 7(a) hereof.
(f) LIMITED RIGHTS.
(i) In conjunction with the grant of any Non-Qualified Stock
Option pursuant to this Section 12 (a "Related Option"), the Non-Employee
Director receiving such grant shall simultaneously be granted a limited Stock
Appreciation Right ("Limited Rights") with respect to all of the Shares covered
by such Related Option. Each Limited Right shall be evidenced by a written
limited right certificate signed by an officer of the Company.
(ii) Limited Rights shall be exercisable at any time within
the thirty-day period after a Change in Control, whether or not the Related
Option is exercisable and regardless of whether the Participant is a
Non-Employee Director at the time of exercise, so long as the holder of the
Related Option is a Non-Employee Director immediately preceding the Change in
Control (provided that in no event shall a Non-Employee Director initially
appointed by the Board be entitled to exercise the Limited Rights granted to
such director under this Plan unless, and until such time as, such director
shall have been elected to the Board by the shareholders of the Company).
(iii) Notwithstanding the provisions of paragraph (ii) above,
no Limited Right shall be exercised within a period of six months after the date
of grant of the Limited Right.
(iv) If Limited Rights are exercised, the Related Option shall
no longer be exercisable to the extent of the number of Shares with respect to
which the Limited Rights were exercised. Upon the exercise
<PAGE>
or termination of a Related Option, Limited Rights granted with respect thereto
shall terminate to the extent of the number of Shares as to which the Related
Option was exercised or terminated.
(v) A person entitled to exercise a Limited Right may, subject
to its terms and conditions and the terms and conditions of this Plan, exercise
such Limited Right in whole or in part by giving written notice to the Company
of an election to exercise such Limited Right. The date the Company receives the
notice is the exercise date. Upon exercise of Limited Rights, the holder shall
promptly be paid an amount in cash for each Share with respect to which the
Limited Rights are exercised equal to the difference between the exercise price
per Share covered by the Related Option and the Fair Market Value per Share
covered by the Related Option as of the date of exercise of the Limited Right.
(vi) A Limited Right may not be assigned and shall be
transferable only if and to the extent that the Related Option is transferable.
(g) Transferability. During the lifetime of a Non-Employee Director who
has been granted a Non-Qualified Stock Option pursuant to this Section 12, only
the Non-Employee Director (or such Non-Employee Director's legal representative
or, if transfers to members of the Non-Employee Director's "immediate family" or
to family trusts or partnerships become permitted as hereinafter provided, a
permitted transferee) may exercise the Non-Qualified Stock Option. No such
Non-Qualified Stock Option may be sold, assigned, transferred, exchanged, or
otherwise encumbered, and any attempt to do so shall be of no effect. The
foregoing sentence notwithstanding, from and after the earlier of (i) the time
that Exchange Act Rule 16b-3 no longer prohibits such transfers as a condition
to application of such Rule or (ii) the time that the Non-Employee Director
retires from the Board and is no longer subject to the reporting requirements of
Section 16 of the Exchange Act, such Non-Employee Director may transfer a
Non-Qualified Stock Option granted pursuant to this Section 12 to any member of
such Non-Employee Director's "immediate family" (as such term is defined in Rule
16a-1(e) promulgated under the Exchange Act, or any successor rule or
regulation) or to one or more trusts whose beneficiaries are members of such
Non-Employee Director's "immediate family" or partnerships in which such family
members are the only partners; provided, however, that (i) the transferor
receives no consideration for the transfer and (ii) such transferred
Non-Qualified Stock Option shall continue to be subject to the same terms and
conditions as were applicable to such Non-Qualified Stock Option immediately
prior to its transfer. Unless a Non-Qualified Stock Option granted pursuant to
this Section 12 shall have expired, in the event of a Non-Employee Director's
death, a Non-Qualified Stock Option granted to such Non-Employee Director
pursuant to this Section 12 shall be transferable to the beneficiary, if any,
designated by the Non-Employee Director in writing to the Company prior to the
Non-Employee Director's death and such beneficiary shall succeed to the rights
of the Non-Employee Director to the extent permitted by law. If no such
designation of a beneficiary has been made, the Non-Employee Director's legal
representative shall succeed to such Non-Qualified Stock Option, which shall be
transferable by will or pursuant to the laws of descent and distribution.
(h) PRIOR PLAN. In the event that this Plan is approved and ratified by
the shareholders of the Company as provided by Section 14(a) hereof, all
Non-Employee Director Non-Qualified Stock Options granted from and after such
approval shall be deemed to have been granted pursuant to this Plan and not
pursuant to any prior plan of the Company or otherwise.
13. ELECTIVE GRANTS TO NON-EMPLOYEE DIRECTORS IN LIEU OF COMPENSATION.
(a) ISSUANCE OF RESTRICTED STOCK. Each Non-Employee Director may
irrevocably elect to receive all or any portion of the Annual Retainer, plus any
applicable fixed annual chairmanship fee payable to such Non-Employee Director,
in the form of Restricted Stock to be issued as of the first day of the year for
which such Annual Retainer is payable (currently October 1) (which issuances of
Restricted Stock shall be prorated for fractional years for those Non-Employee
Directors scheduled to retire, in accordance with the policies of the Company
then in effect, prior to the annual meeting following such date). Each
irrevocable election shall be made by the Non-Employee Director on a form
provided by the Company and returned to the officer or
<PAGE>
other employee of the Company designated on such form at least six months before
the date the Restricted Stock will be issued (currently April 1). In the event
of such an election, a number of shares of Restricted Stock equal to the portion
of the Annual Retainer and such chairmanship fees as to which the election is
made, divided by the Fair Market Value of a Share as of the first business day
of the month in which the Restricted Stock is issued, shall be issued in the
name of the Non-Employee Director as of such date. The remainder of the Annual
Retainer and such chairmanship fees shall be paid in cash to the Non-Employee
Director at such time or times as payments thereof are customarily made by the
Company to Non-Employee Directors who receive such payments in cash, except that
each such payment shall be prorated based upon the total percentage of the
Annual Retainer and such chairmanship fees with respect to which the
Non-Employee Director has not elected to receive Restricted Stock.
(b) LAPSE OF RESTRICTIONS. The Shares of Restricted Stock issued under
this Section 13 may not be assigned, sold, pledged, hypothecated or otherwise
transferred or disposed of (including, without limitation, transfer by gift or
donation) except that such restrictions shall lapse upon the first to occur of
the following events:
(i) death, or resignation or removal of the Non-Employee
Director from the Board as a result of the Disability of the Non-Employee
Director;
(ii) retirement of the Non-Employee Director from the Board in
accordance with the policies of the Company then in effect providing for
retirement of Non-Employee Directors;
(iii) acceptance by the Board of the offer of the Non-Employee
Director to resign from the Board in accordance with the policies of the Company
then in effect after a material change in such Non-Employee Director's full-time
position or responsibilities;
(iv) termination of service as a director with the consent of
a majority of the members of the Board other than the terminating Non-Employee
Director; or
(v) a Change in Control.
The Shares of Restricted Stock shall be held by the Company until the
lapse of the restrictions pursuant to this Section 13 (at which time they shall
be delivered to the Non-Employee Director without any legend on the Share
certificates referencing this Plan); provided, however, that unless and until
the Shares of Restricted Stock are forfeited pursuant to the last sentence of
this paragraph, the Non-Employee Director shall be entitled to all voting,
dividend and distribution rights with respect to such Shares (except that
dividends in Stock and Shares issued upon stock splits shall be deemed to
constitute additional Restricted Stock to be held by the Company pursuant to
this Plan). If the Non-Employee Director ceases to be a director of the Company
before the restrictions on the Restricted Stock lapse pursuant to this Section
13, the Restricted Stock issued to the Non-Employee Director shall be forfeited
and revert to the Company.
(c) PRIOR PLAN. In the event that this Plan is approved and ratified by
the shareholders of the Company as provided by Section 14(a) hereof, all Shares
of Restricted Stock granted to Non-Employee Directors from and after such
approval shall be deemed to have been granted pursuant to this Plan and not
pursuant to any prior plan of the Company or otherwise.
14. GENERAL PROVISIONS.
(a) EFFECTIVE DATE OF THIS PLAN. This Plan shall become effective as of
April 29, 1994, provided that this Plan is approved and ratified by the
affirmative vote of the holders of a majority of the outstanding Shares of Stock
present or represented and entitled to vote in person or by proxy at a meeting
of the shareholders of the Company no later than August 31, 1994.
<PAGE>
(b) DURATION OF THIS PLAN. This Plan shall remain in effect until all
Stock subject to it shall be distributed or all Awards have expired or lapsed,
whichever is latest to occur, or this Plan is terminated pursuant to Section
14(e) hereof. No Award of an Incentive Stock Option shall be made more than ten
years after the effective date provided in Section 14(a) hereof (or such other
limit as may be required by the Code) if such limitation is necessary to qualify
the Option as an Incentive Stock Option. Except with respect to Awards granted
pursuant to Sections 12 and 13 hereof, the date and time of approval by the
Committee of the granting of an Award shall be considered the date and time at
which such Award is made or granted, notwithstanding the date of any Agreement
with respect to such Award; provided, however, that the Committee may grant
Awards other than Incentive Stock Options to be effective and deemed to be
granted on the occurrence of certain specified contingencies.
(c) RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
Agreement shall confer upon any Participant who is an Employee the right to
continue in the employment of the Company or any Affiliate or affect any right
which the Company or any Affiliate may have to terminate or modify the
employment of the Participant with or without cause.
(d) TAX WITHHOLDING. The Company may withhold from any payment of cash
or Stock to a Participant or other person under this Plan an amount sufficient
to cover any required withholding taxes, including the Participant's social
security and medicare taxes (FICA) and federal, state and local income tax with
respect to income arising from payment of the Award. The Company shall have the
right to require the payment of any such taxes before issuing any Stock pursuant
to the Award. In lieu of all or any part of a cash payment from a person
receiving Stock under this Plan, the individual may elect to cover all or any
part of the required withholdings, and to cover any additional withholdings up
to the amount needed to cover the individual's full FICA and federal, state and
local income tax with respect to income arising from payment of the Award,
through a reduction of the number of Shares delivered to such individual or a
subsequent return to the Company of Shares held by the Participant or other
person, in each case valued in the same manner as used in computing the
withholding taxes under the applicable laws; provided, however, that if at any
time withholding shall be required with respect to Non-Employee Directors, the
Committee is required to permit a Non-Employee Director to make such an
election, subject to the limitations of the following sentence. Such elections
are subject to the following limitations if, and to the extent, such limitations
are necessary to comply with Exchange Act Rule 16b-3 or any successor provision:
(1) Except as set forth in clause (iii) below, any such election by
a Participant who is then subject to the reporting requirements of Section 16 of
the Exchange Act or any successor provision ("Section 16") or a Successor of
such a Participant may be made only if the conditions set forth in clauses (i)
and (ii) below are satisfied:
(i) (A) the election may be made during the period beginning
on the third business day following the date of public release of the Company's
quarterly or annual summary statements of sales and earnings and ending on the
twelfth business day following such date, or (B) the election may be made at
least six months prior to the date the Award is paid to the Participant;
(ii) an election may not be made within six months of the date
of grant of the Award to which the payment relates; provided, however, that such
restriction does not apply in the event death or Disability of the Participant
occurs prior to such election and during that six-month period;
(iii) notwithstanding the foregoing, a Participant who tenders
previously owned Shares to the Company in payment of the purchase price of
Shares in connection with exercise of an Option may also tender previously owned
Shares to the Company in satisfaction of any tax withholding obligations in
connection with such Option exercise without regard to the time periods set
forth in clauses (i) and (ii) above.
The foregoing restrictions do not apply to any Participant who is not
subject to the reporting requirements of Section 16 at the time of the election.
<PAGE>
(2) Any such election by a Participant who is subject to the
reporting requirements of Section 16 at the time is irrevocable and is subject
to approval by the Committee. The Committee's approval may be granted in advance
but is subject to revocation by the Committee at any time.
(e) AMENDMENT, MODIFICATION AND TERMINATION OF THIS PLAN. Except as
provided in this Section 14(e), the Board may at any time amend, modify,
terminate or suspend this Plan. Except as provided in this Section 14(e), the
Committee may at any time alter or amend any or all Agreements under this Plan
to the extent permitted by law. Amendments are subject to approval of the
shareholders of the Company only if such approval is necessary to maintain this
Plan in compliance with the requirements of Exchange Act Rule 16b-3, Section 422
of the Code, their successor provisions, or any other applicable law or
regulation. Without the approval of the shareholders of the Company, no
amendment, modification, termination or suspension of this Plan may alter the
provisions of this Plan so as to change the terms, conditions or eligibility
requirements of Awards granted or, subject to the right of the Board to
discontinue this Plan, to be granted to Non-Employee Directors pursuant to
Section 12 or 13 hereof. In no event shall the provisions of this Plan as they
relate to Options, Limited Rights or Shares of Restricted Stock granted pursuant
to Section 12 or 13 hereof be amended more than once every six months other than
to comply with changes in the Code. No termination, suspension or modification
of this Plan may materially and adversely affect any right acquired by any
Participant (or a Participant's legal representative) or any Successor under an
Award granted before the date of termination, suspension or modification, unless
otherwise agreed by the Participant in the Agreement or otherwise or required as
a matter of law. It is conclusively presumed that any adjustment for changes in
capitalization provided for in Section 9(b) or 14(f) hereof does not adversely
affect any right of a Participant under an Award.
(f) ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments
in the aggregate number and type of Shares available for Awards under this Plan,
in the limitations on the number and type of Shares that may be issued to an
individual Participant, in the number and type of Shares and amount of cash
subject to Awards then outstanding, in the Option exercise price as to any
outstanding Options and, subject to Section 9(b) hereof, in outstanding
Performance Shares and payments with respect to outstanding Performance Shares
may be made by the Committee in its sole discretion to give effect to
adjustments made in the number or type of Shares through a Fundamental Change
(subject to Section 14(g) hereof), recapitalization, reclassification, stock
dividend, stock split, stock combination, or other relevant change, provided
that fractional Shares shall be rounded to the nearest whole Share.
(g) FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change:
(a) involving a merger, consolidation or statutory share exchange, unless
appropriate provision shall be made (which the Committee may, but shall not be
obligated to, make) for the protection of the outstanding Options and Stock
Appreciation Rights by the substitution of options, stock appreciation rights
and appropriate voting common stock of the corporation surviving any such merger
or consolidation or, if appropriate, the parent corporation of the Company or
such surviving corporation, to be issuable upon the exercise of options or used
to calculate payments upon the exercise of stock appreciation rights in lieu of
Options, Stock Appreciation Rights and capital stock of the Company, or (b)
involving the dissolution or liquidation of the Company, the Committee may, but
shall not be obligated to, declare, at least twenty days prior to the occurrence
of the Fundamental Change, and provide written notice to each holder of an
Option or Stock Appreciation Right of the declaration, that each outstanding
Option and Stock Appreciation Right, whether or not then exercisable, shall be
cancelled at the time of, or immediately prior to the occurrence of, the
Fundamental Change in exchange for payment to each holder of an Option or Stock
Appreciation Right, within 20 days after the Fundamental Change, of cash equal
to (i) for each Share covered by the cancelled Option, the amount, if any, by
which the Fair Market Value (as defined in this Section 14(g)) per Share exceeds
the exercise price per Share covered by such Option or (ii) for each Stock
Appreciation Right, the price determined pursuant to Section 8 hereof, except
that Fair Market Value of the Shares as of the date of exercise of the Stock
Appreciation Right, as used in clause (i) of Section 8, shall be deemed to mean
Fair Market Value for each Share with respect to which the Stock Appreciation
Right is calculated determined in the manner hereinafter referred to in this
<PAGE>
Section 14(g). At the time of the declaration provided for in the immediately
preceding sentence, each Stock Appreciation Right that has been outstanding for
at least six months and each Option shall immediately become exercisable in full
and each person holding an Option or a Stock Appreciation Right shall have the
right, during the period preceding the time of cancellation of the Option or
Stock Appreciation Right, to exercise the Option as to all or any part of the
Shares covered thereby or the Stock Appreciation Right in whole or in part, as
the case may be. In the event of a declaration pursuant to this Section 14(g),
each outstanding Option and Stock Appreciation Right that shall not have been
exercised prior to the Fundamental Change shall be cancelled at the time of, or
immediately prior to, the Fundamental Change, as provided in the declaration.
Notwithstanding the foregoing, no person holding an Option or Stock Appreciation
Right shall be entitled to the payment provided for in this Section 14(g) if
such Option or Stock Appreciation Right shall have expired pursuant to an
Agreement. For purposes of this Section 14(g) only, "Fair Market Value" per
Share means the cash plus the fair market value, as determined in good faith by
the Committee, of the non-cash consideration to be received per Share by the
shareholders of the Company upon the occurrence of the Fundamental Change,
notwithstanding anything to the contrary provided in this Plan.
(h) OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other
benefits received by a Participant under an Award shall not be deemed a part of
a Participant's regular, recurring compensation for purposes of any termination,
indemnity or severance pay laws and shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan,
contract or similar arrangement provided by the Company or an Affiliate, unless
expressly so provided by such other plan, contract or arrangement or the
Committee determines that an Award or portion of an Award should be included to
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of competitive cash compensation.
(i) BENEFICIARY UPON PARTICIPANT'S DEATH. To the extent that the
transfer of a Participant's Award at death is permitted by this Plan or under an
Agreement, (i) a Participant's Award shall be transferable to the beneficiary,
if any, designated on forms prescribed by and filed with the Committee and (ii)
upon the death of the Participant, such beneficiary shall succeed to the rights
of the Participant to the extent permitted by law and this Plan. If no such
designation of a beneficiary has been made, the Participant's legal
representative shall succeed to the Awards, which shall be transferable by will
or pursuant to laws of descent and distribution to the extent permitted by this
Plan or under an Agreement.
(j) FORFEITURES. In the event an Employee has received or been entitled
to payment of cash, delivery of Stock or a combination thereof pursuant to an
Award within six months prior to the Employee's termination of employment with
the Company and its Affiliates, the Committee, in its sole discretion, may
require the Employee to return or forfeit the cash and/or Stock received with
respect to the Award (or its economic value as of (i) the date of the exercise
of Options or Stock Appreciation Rights, (ii) the date of, and immediately
following, the lapse of restrictions on Restricted Stock or the receipt of Stock
without restrictions, or (iii) the date on which the right of the Employee to
payment with respect to Performance Shares vests, as the case may be) in the
event of any of the following occurrences: competition with the Company or any
Affiliate, unauthorized disclosure of material proprietary information of the
Company or any Affiliate, a violation of applicable business ethics policies or
business policies of the Company or any Affiliate, or any other occurrence
specified in the related Agreement. The Committee's right to require forfeiture
must be exercised within 90 days after discovery of such an occurrence but in no
event later than 15 months after the Employee's termination of employment with
the Company and its Affiliates.
(k) UNFUNDED PLAN. This Plan shall be unfunded and the Company shall
not be required to segregate any assets that may at any time be represented by
Awards under this Plan. Neither the Company, its Affiliates, the Committee, nor
the Board shall be deemed to be a trustee of any amounts to be paid under this
Plan nor shall anything contained in this Plan or any action taken pursuant to
its provisions create or be construed to create a fiduciary relationship between
the Company and/or its Affiliates, and a Participant or Successor. To the extent
any person acquires a right to receive an Award under this Plan, such right
shall be no greater than the right of an unsecured general creditor of the
Company.
<PAGE>
(l) LIMITS OF LIABILITY.
(i) Any liability of the Company to any Participant with
respect to an Award shall be based solely upon contractual obligations created
by this Plan and the Agreement.
(ii) Except as may be required by law, neither the Company nor
any member or former member of the Board or of the Committee, nor any other
person participating (including participation pursuant to a delegation of
authority under Section 3(b) hereof) in any determination of any question under
this Plan, or in the interpretation, administration or application of this Plan,
shall have any liability to any party for any action taken, or not taken, in
good faith under this Plan.
(m) COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS. No certificate for
Shares distributable pursuant to this Plan shall be issued and delivered unless
the issuance of such certificate complies with all applicable legal requirements
including, without limitation, compliance with the provisions of applicable
state securities laws, the Securities Act of 1933, as amended and in effect from
time to time or any successor statute, the Exchange Act and the requirements of
the exchanges on which the Company's Shares may, at the time, be listed.
(n) DEFERRALS AND SETTLEMENTS. The Committee may require or permit
Participants to elect to defer the issuance of Shares or the settlement of
Awards in cash under such rules and procedures as it may establish under this
Plan. It may also provide that deferred settlements include the payment or
crediting of interest on the deferral amounts. Participants who are eligible to
participate in the Medtronic, Inc. Capital Accumulation Plan Deferral Program
("CAP") shall be entitled to defer some or all of the cash portion of any
Performance Shares granted to them hereunder in accordance with the terms of the
CAP.
15. GOVERNING LAW. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken pursuant to
this Plan shall be governed by the laws of Minnesota and construed accordingly.
16. SEVERABILITY. In the event any provision of this Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of this Plan, and this Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
17. TERMINATION OF PRIOR PLANS. Effective upon the approval of this
Plan by the Company's shareholders as provided by Section 14(a) hereof, no
further grants of options, performance shares or restricted stock or any other
awards shall be made under the Company's 1979 Restricted Stock and Performance
Share Award Plan, 1979 Nonqualified Stock Option Plan, 1989 Phantom Stock Award
Plan or 1991 Restricted Stock Plan for Non-Employee Directors (the "Prior
Plans"). Thereafter, all grants and awards made under the Prior Plans prior to
such approval by the shareholders shall continue in accordance with the terms of
the Prior Plans.
EXHIBIT 10.3
MEDTRONIC, INC. 1979 RESTRICTED STOCK
AND PERFORMANCE SHARE AWARD PLAN
1. Purposes
--------
The purposes of the Medtronic, Inc. 1979 Restricted Stock and
Performance Share Award Plan (the "Plan") are to provide long-term
incentives and rewards to those employees of Medtronic, Inc. and its
subsidiaries (the "Company") who are largely responsible for the
success and growth of the Company, to assist the Company in attracting
and retaining executives with experience and ability on a basis
competitive with industry practices, and to associate the interests of
such employees with those of the Company's shareholders.
2. Definitions
-----------
Whenever used herein, the following terms shall have the meanings
indicated below:
a. "Approved Retirement" means retirement on or after age 62 with
the approval of the Committee.
b. "Board of Directors" or "Board" means the Board of Directors
of Medtronic, Inc. as constituted from time to time.
c. "Committee" means the Committee of three or more members of
the Board who shall be appointed by and serve at the pleasure
of the Board. Each of the members of the Committee shall be a
"disinterested person" within the meaning of Rule 16b-3, as
then in effect, of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended. As of June 1,
1992, a "disinterested person" under Rule 16b-3 means a person
who is not, during the one year prior to service as a member
of the Committee, or during such service, granted or awarded
equity securities pursuant to this plan or any other plan of
the Company or any of its affiliates.
d. "Common Stock" means the common stock, $.10 par value, of
Medtronic, Inc.
e. "Company" means Medtronic, Inc. and its subsidiaries.
f. "Disability" means the disability of a Recipient such that he
or she is considered disabled under any retirement plan of the
Company which is qualified under Section 401 of the Internal
Revenue Code of 1954, as amended, or as otherwise determined
by the Committee.
g. "Performance Share Award" means a contingent award of a
specified number of Performance Shares, each Performance Share
equivalent to one share of Common Stock, a variable percentage
of which may vest depending upon the extent of
<PAGE>
achievement of specified performance objectives during the
applicable performance period.
h. "Recipient" means an eligible employee who has been granted
either a Restricted Stock or Performance Share Award or Awards
under the Plan. The term "Recipient" shall be used herein with
reference to the particular Award being described by the
particular Plan provision.
i. "Restricted Stock Award" means an award of shares of Common
Stock which is subject to the terms, restrictions, conditions,
and limitations described in the Plan or otherwise developed
by the Committee.
j. "Subsidiary" means a corporation of which Medtronic, Inc. owns
or controls directly or indirectly 50 percent or more of the
voting power, including any subsidiaries which become such
after adoption of the Plan.
3. Effective Date and Term of Plan
-------------------------------
This Plan and the grant of any Restricted Stock or Performance Share
Awards hereunder are conditioned upon obtaining approval of the Plan by
the holders of a majority of the voting stock of Medtronic, Inc. Upon
such shareholder approval, the Plan shall be effective as of May 1,
1979 and the Plan shall continue until the earlier of (a) the grant of
the maximum number of Restricted Stock and Performance Share Awards
which may be granted hereunder as a result of the application of the
limitations set forth in Section 10 hereof, and (b) termination of the
Plan upon written resolution of the Board of Directors. No termination
of the Plan shall, without the consent of the Recipient, adversely
affect any previously granted Restricted Stock or Performance Share
Award which has not been forfeited and is still outstanding as of the
date of termination.
4. Plan Administration
-------------------
The Plan shall be administered by the Committee which shall have all of
the powers vested in it under the provisions of the Plan, including but
not limited to exclusive authority (where applicable and within the
limitations described herein) to select the employees to be granted
Awards under the Plan, determine the type, size, and terms of Awards to
be granted to each employee selected, determine the time when Awards
will be granted and paid, establish objectives and conditions for
vesting in and earning Awards, determine terms and conditions for the
lapse of restrictions applicable to such Awards, and determine whether
Awards will be paid. The Committee shall have full power and authority
to administer and interpret the Plan and to adopt such rules,
regulations, agreements, guidelines, and instruments for the
administration of the Plan and for the conduct of its business as the
Committee deems necessary or advisable. The Committee's interpretations
of the Plan, and all actions taken and determinations made by the
Committee pursuant to the powers vested in it hereunder, shall be
conclusive and binding on all parties concerned, including the Company,
its shareholders, and any employee of the Company. No member of the
Committee shall be liable for any action taken or determination made in
good faith in
<PAGE>
connection with the administration of the Plan. Any action of the
Committee with respect to the administration of the Plan shall be taken
pursuant to a majority vote of such Committee members or pursuant to
the written consent of all Committee members.
5. Participating Employees
-----------------------
Individuals eligible to participate in the Plan shall be employees of
the Company who are officers, directors, or key employees. While all
such employees are eligible to be considered for receipt of Awards
under the Plan, it is contemplated that only those eligible employees
who perform services of special importance to the Company in the
overall management, growth, and success of its business will be
selected as Recipients. An employee may be granted more than one Award
under the Plan.
6. Grants of Restricted Stock or Performance Share Awards
------------------------------------------------------
Medtronic, Inc.'s Chief Executive Officer ("CEO") may from time to time
nominate in writing to the Committee those eligible employees
recommended for participation in the Plan and the type of Award and
number of shares recommended for award to each such employee. Such
recommendation shall be based upon guidelines developed by the
Committee in conjunction with the CEO from time to time, including but
not limited to one or more of the following: the Recipient's
responsibility level, past performance, potential, cash compensation
level, other incentive compensation awards, or such other
considerations as the Committee deems appropriate. The Committee may
then grant Awards to eligible employees (including, if appropriate, the
CEO) in such amounts as it shall determine in its sold discretion, and
may require any Recipient prior to the grant to enter into a written
agreement evidencing the Award and containing such other provisions as
the Committee determines necessary or desirable.
7. Provisions Relating to Performance Share Awards
-----------------------------------------------
a. Terms of Awards
The performance objectives applicable to each recipient, the
performance period over which such performance will be
measured, and the range of applicable percentages which will
be used to determine vesting of the Award shall be established
in writing by the Committee on or prior to the date of grant
of the Award. The committee may confer and consult with the
CEO in selecting such objectives, performance periods, and
vesting percentages, but the Committee has the sole and final
discretion within the limitations described herein in
establishing such standards. The performance objectives may be
based upon one or more measurements, including but not limited
to those relating to growth in the Company's assets, return on
net assets, and growth in its nonpacing earnings, as such
terms are defined and expanded upon from time to time by the
Committee. The Committee may select a performance period which
commences prior to the date of grant of the Award, but in no
event shall it select a performance period of less than six
months' duration as measured from the date of grant of the
Award. The
<PAGE>
Committee may select a range of applicable vesting percentages
which includes percentages in excess of one hundred percent.
The Committee shall determine in its sole discretion both the
timing of the performance periods and the frequency of grant
of Awards. The applicable performance objectives, performance
period, and vesting percentages may vary from Award to Award
and from Recipient to Recipient.
The CEO shall cause each Recipient to be notified in writing
of the applicable performance objectives, the performance
period, and the applicable vesting percentages on or prior to
grant of the Award. The Committee shall determine whether and
to what extent the performance objectives have been met during
the applicable performance period.
b. Vesting and Distribution of Performance Shares
(i) As of the last day of the applicable performance
period, the Recipient may earn and become vested in a
specific percentage of the Performance Shares covered
by the Award depending upon the extent to which the
performance objectives are met as of such date. In
the event a Recipient's employment with the Company
terminates for any reason prior to the completion of
such performance period, such Recipient shall forfeit
any right or entitlement to or in such Performance
Shares; provided, however, that if the Recipient's
employment with the Company terminates six months or
more after the date of grant of the Award but prior
to the last day of the applicable performance period
upon the occurrence of the Recipient's death,
approved retirement, or disability, the Recipient may
become vested in a percentage of Performance Shares
hereunder, the percentage being determined as
follows:
A. First, the number of Performance Shares
which would have vested in the Recipient as
of the last day of the performance period
had the Recipient remained employed
throughout such period shall be calculated
based upon the extent to which the
performance objectives for the performance
period have actually been met as of such
date.
B. Next, the result obtained in Clause (A) of
this Paragraph (i) shall be multiplied by a
fraction, the numerator of which is the
number of months of such Recipient's
continuous employment within the performance
period prior to termination of employment,
and the denominator of which is the number
of months within the entire performance
period.
(ii) Distribution of a Recipient's vested Performance
Share Award as determined in Paragraph (i) hereof
shall be made as soon as practicable following the
expiration of the performance period to which the
award relates. Distribution shall be made in the form
of Common Stock or a combination
<PAGE>
of Common Stock and cash; provided, however, that at
least twenty-five percent of the value of the vested
Performance Shares shall be distributed in the form
of Common Stock. The final determination of the form
of payment shall rest solely with the Committee. For
purposes hereof, and with respect only to Awards
having a performance period ending on or before April
30, 1990, the "value" of the vested Award is equal to
the number of Performance Shares earned and vested,
multiplied by the fair market value per share of
Common Stock as of the date of distribution. Further
for purposes hereof, and with respect to Awards
having a performance period ending after April 30,
1990, the "value" of the vested Award shall be equal
to the number of Performance Shares earned and
vested, multiplied by the average fair market value
per share of Common Stock. The "average fair market
value" shall be determined by totalling the per share
fair market value of the Common Stock on each of the
last 20 business days including and immediately
preceding the date on which the Award has vested, and
dividing such total by the number 20, with the
resulting figure being the average fair market value.
The "fair market value" of the Common Stock, as such
term is used herein, is the highest closing price of
such Stock on the New York Stock Exchange (or other
established stock exchange, where applicable) on the
applicable date(s) or, if no sale of such Stock has
occurred on such exchange on an applicable date, on
the next preceding date on which there was such a
sale. In the event the Stock is not listed on the New
York Stock Exchange (or any other established stock
exchange) as of an applicable date for valuation, the
"fair market value" is the mean between the "bid" and
"asked" prices quoted by a recognized market maker in
such Stock on such date.
(iii) Notwithstanding the contrary provision of the first
sentence of the immediately preceding Clause (ii),
any Eligible Employee who is the holder of a
Performance Share Award may irrevocably elect to
defer (referred to herein as a "Deferral Election"),
the Company's payment of all or any part of the cash
portion of the Performance Share Award determined
under this Section 7b, such deferral to be available
and made only to the extent and in the manner now and
hereafter permitted under the terms and provisions of
the Company's Compensation Deferral Plan for Officers
and Key Employees (the "Compensation Deferral Plan").
For the purposes of this Clause (iii), "Eligible
Employee" shall have the meaning set forth in Section
2.01(f) of the Compensation Deferral Plan ("Eligible
Employee" is presently defined in such Section
2.01(f) as an elected or appointed officer of the
Company, or any other key employee of the Company or
an Affiliate as designated by the CEO). A Deferral
Election by an Eligible Employee shall in no way
affect the timing or other aspects of the
determination of the value of the vested Performance
Share Award as provided for in Section 7b(ii) above.
<PAGE>
c. Waiver of Requirements
Notwithstanding any provisions hereof to the contrary, the
requirements for vesting in and distribution of a Performance
Share Award may be waived, in whole or part, with respect to
any recipient if it is determined unanimously by the Committee
and by two-thirds vote of the members of the Board that
imposition of such requirements would be in the best interest
of the Company.
8. Provisions Relating to Restricted Stock Awards
----------------------------------------------
a. Restricted Stock Period
The Committee shall establish in writing on or prior to the
date of the grant of a Restricted Stock Award the Restricted
stock period applicable to such Award. For purposes of this
Plan, such Restricted Stock Period shall be a period as
established by the Committee during which the Common Stock
covered by the Award is subject to the restrictions,
conditions, and limitations set forth in Subsections b, c, e,
and g hereof. The Committee may confer and consult with the
CEO in selecting the Restricted Stock Period but the Committee
has sole and final discretion in establishing such Period. On
or prior to the date of grant of the Award, the CEO shall
cause each Recipient to be notified in writing of the
applicable Restricted Stock Period and any restrictions,
conditions, or limitations which may be imposed or applicable
to such Award pursuant to this Section 8. The Restricted Stock
Period as well as such restrictions, conditions, and
limitations may vary from Award to Award and from Recipient to
Recipient and the Committee shall have full discretion, within
the limitations described in this Section 8, to develop and
define such restrictions, conditions, and limitations.
b. Nontransferability
The Recipient shall not assign, sell, transfer, pledge,
hypothecate, or otherwise dispose of any shares of Common
Stock covered by a Restricted Stock Award (including any share
issued by reason of a stock dividend, stock split, or similar
event described in Section 11 hereof) during the Restricted
Stock Period. Any attempt by the Recipient to sell, assign,
transfer, pledge, hypothecate, or otherwise dispose of any
shares of Common Stock covered by such a Restricted Stock
Award during the Restricted Stock Period shall be considered
null and void and of no force or effect. In the event of any
such attempt by the Recipient, the Committee may also take any
other action, including the forfeiture of such Restricted
Stock Award, as it in its sole discretion shall determine.
c. Forfeiture of Award
In the event a Recipient remains continuously employed by the
Company throughout the applicable Restricted Stock Period, all
restrictions, conditions, and limitations imposed upon the
shares of Common Stock covered by the Award
<PAGE>
pursuant to this Section 8 shall lapse as of the last day of
the Restricted Stock Period.
If the Recipient's continuous employment with the Company
terminates prior to the last day of the applicable Restricted
Stock Period for any reason except as provided in Subsection d
hereof, all shares of Common Stock awarded to such Recipient
pursuant to the Restricted Stock Award shall be returned to
the Company forthwith, and all rights of the Recipient to such
shares shall immediately terminate and be forfeited without
any payment or consideration by the Company. The Recipient
shall return the Common Stock hereunder by delivering or
causing to be delivered to Medtronic, Inc. the certificates
for such shares of Common Stock, accompanied by such
endorsements and/or instruments of transfer as may be required
or deemed advisable by Medtronic, Inc., the Committee, or its
counsel.
d. Termination of Employment by Reason of Death, Disability, or
Approved Retirement
If the Recipient's continuous employment with the Company is
terminated during a Restricted Stock Period by reason of the
Recipient's death, disability, or approved retirement, the
restrictions, conditions, and limitations set forth in this
Section 8 shall lapse as of the date of such termination of
employment with respect to that number of shares of Common
Stock covered by such Award which is equal to the product of
the following:
(i) The full number of shares covered by such Award;
(ii) Multiplied by the fraction, the numerator of which is
the number of months of such Recipient's continuous
employment within such Restricted Stock Period prior
to termination of employment, and the denominator of
which is the number of months within the entire
Restricted Stock Period.
All other shares of Common Stock covered by such Award shall
be forfeited and returned to the Company pursuant to Section
8c hereof.
e. Other Conditions
The Committee may from time to time impose restrictions,
conditions, or limitations on shares of Common Stock covered
by a Restricted Stock Award other than or in addition to the
requirements set forth in Subsection c hereof. Any such
restrictions, conditions, or limitations shall apply
throughout the applicable Restricted Stock Period and the
Recipient shall forfeit, under the provisions of Subsection c
hereof except as otherwise provided in Subsection d hereof,
any interest in or right to such shares if the Recipient fails
to meet or otherwise comply with such restrictions,
conditions, or limitations at any time during the Restricted
Stock Period. Any such additional or alternative restriction,
condition, or limitation
<PAGE>
shall be considered for all purposes of the Plan as a
restriction, condition, or limitation imposed by the Plan.
f. Waiver of Restrictions
Notwithstanding any provisions hereof to the contrary, the
restrictions and forfeiture provisions of this Section 8 may
be waived in whole or in part with respect to any Recipient if
it is determined unanimously by the Committee and by
two-thirds vote of the members of the Board that the
imposition of such restrictions and forfeitures would not be
in the best interests of the Company. In such event, the
restrictions, conditions, and limitations imposed on shares of
Common Stock covered by the Restricted Stock Award shall
lapse, in whole or in part, as of the date of such waiver.
g. Restrictive Legends and Certificates Held in Custody
Each certificate evidencing shares of Common Stock granted
pursuant to a Restricted Stock Award shall bear an appropriate
legend during the applicable Restricted Stock Period referring
to the terms, restrictions, conditions, and limitations
applicable to such shares. The Committee may provide that the
certificate or certificates evidencing such shares be held in
custody by a bank or other institution or by the Company until
the restrictions thereon have lapsed.
9. Dividends
---------
The dividend or dividends payable with respect to each share of Common
Stock covered by a Restricted Stock Award shall be payable to the
Recipient of such Award if on the record date for payment of such
dividend the Award has not been forfeited.
10. Available Common Stock
----------------------
Subject to any adjustment referred to in Section 11 hereof, the maximum
number of shares of Common Stock which may be distributed under the
Plan is 300,000* (subject to shareholders' approval of 100,000 share
increase above previously authorized 200,000 shares at the Company's
1988 Annual Meeting of Shareholders) which may be either authorized but
unissued or treasury shares. If shares of Common Stock covered by a
Restricted Stock Award are forfeited in accordance with the Plan or if
the maximum possible shares of Common Stock which are covered by a
Performance Share Award are not paid out in Common Stock at the end of
a Performance Period, then the number of shares so forfeited or not
paid, as the case may be, shall be considered available for grants of
other Awards under the Plan.
*Adjusted to 1,200,000 shares to reflect the 1989 and 1991 two-for-one stock
splits.
<PAGE>
11. Recapitalization
----------------
In the event of any increase or decrease in the total number of issued
and outstanding shares of Common Stock resulting from a subdivision or
consolidation of shares or other capital adjustment or the payment of a
stock dividend or other increase or decrease in such shares effected
without receipt of consideration by Medtronic, Inc., the maximum number
of shares of Common Stock which may be distributed under the Plan, the
number of Restricted Stock or Performance Share Awards granted under
the Plan, and the number of shares of Common Stock covered by each
outstanding Restricted Stock or Performance Share Award shall be
adjusted proportionately. In the event of any other changes in the
Common Stock by reason of recapitalizations, mergers, combinations,
exchanges of shares, or the like, the Committee shall have full power
to make such adjustments as described above with respect to the number
of shares of Common Stock and the number of Restricted
Stock and Performance Share Awards as the Committee shall determine in
its sole discretion. Any shares so credited as a result of any
outstanding Restricted Stock or Performance Share Award shall be
subject to the same restrictions or performance objectives, as the case
may be, as the shares originally covered under the Award.
12. Amendments
----------
The Board of Directors may at any time alter, amend, revise, suspend,
or discontinue the Plan; provided, that such action shall not adversely
affect Awards previously granted under the Plan without the consent of
the Recipient; and provided, further, that no such action of the Board
of Directors may, without the approval of the shareholders of
Medtronic, Inc., alter the provisions of the Plan so as to (a) increase
the total number of shares of Common Stock which may be issued under
the Plan except as provided in Section 11 hereof, (b) materially
increase the benefits accruing to Recipients under the Plan, or (c)
materially change the basis for eligibility for participation in the
Plan.
13. Beneficiary Designation
-----------------------
A recipient may designate in writing on forms prescribed by and filed
with the Committee, a beneficiary or beneficiaries to receive any
benefits payable after his or her death, and may at any time amend or
revoke such designation. If no beneficiary designation is in effect at
the time of the Recipient's death, payments under the Plan, if any,
shall be made to his or her legal representatives.
14. Compliance with Laws and Regulations, Registration, and Listing
---------------------------------------------------------------
No shares of Common Stock shall be issued or transferred pursuant to
the Plan unless or until there has been compliance, in the opinion of
the Company's counsel, with all applicable legal requirements,
including without limitation those relating to securities laws and
stock exchange listing. The Company shall not be deemed by reason of
granting any Restricted Stock or Performance Share Award hereunder to
have any obligation to register
<PAGE>
the shares subject thereto under the Securities Act of 1933, as
amended, or to maintain in effect any registration of such shares, or
to list such shares on any exchange. As a condition to the issuance or
transfer of Common Stock to the Recipient or his or her beneficiary or
legal representatives, the Committee may require the Recipient or
beneficiary to (a) represent that the shares of Stock are taken for
investment and not resale and to make such other representations as the
Committee shall deem necessary to qualify the issuance of the shares as
exempt from the Securities Act of 1933 and any other applicable
securities laws. The Company reserves the right to place a legend on
any stock certificate issued pursuant to the Plan to assure compliance
with this Section 14.
15. Withholding of Tax
------------------
Each Recipient, as a condition precedent to receipt of any benefits
provided hereunder, shall make arrangements with the Company for
payment to the Company or withholding by the Company of the amount of
any tax required by any government authority to be withheld and paid
over by the Company to such government authority for the account of the
person entitled to such distribution.
The Committee may permit a Recipient to elect to satisfy social
security and federal and state income tax withholding obligations
relating to the lapse of restrictions, conditions and limitations on
Common Stock covered by a Restricted Stock Award by having the Company
withhold shares of Common Stock subject to the Restricted Stock Award
in satisfaction of the obligations. Any such election by a Recipient
must be made on or before the date that the amount of tax to be
withheld is determined (the "Tax Date"). Any shares of Common Stock so
withheld by the Company shall be valued at their per share "fair market
value," which shall mean for the purposes of this paragraph the closing
composite transactions listing on the Tax Date (or such other meaning
as the committee may hereafter adopt). The use and availability of the
election to have Common Stock subject to the Restricted Stock Award
withheld to satisfy social security and federal and state income tax
withholding requirements is subject in general, and in particular
instances, to the Committee's complete discretion and such rules and
procedures as the Committee may adopt.
16. Miscellaneous
-------------
a. Employment
No Recipient shall have any right to be retained in the employ
of the Company by virtue of his or her participation in the
Plan and such participation shall not interfere in any way
with the right of the Company to reduce his or her
compensation or to change the nature of his or her employment
responsibilities.
b. Shareholder Rights
No Recipient of a Performance Share Award shall have any
rights as a shareholder with respect to any shares of Common
Stock which may be covered by such Award
<PAGE>
until such shares have been issued and transferred to him or
her. Except as provided in Section 8 b, c, e, and g, with
respect to nontransferability, forfeiture, other conditions,
and custody, a Recipient of a Restricted Stock Award shall
have all rights as a shareholder of the shares of Common Stock
covered by such Award upon the issuance of certificates
representing such shares, including the right to receive
dividends on and vote such shares. No interest in or under the
Plan shall be assignable or transferable or subject to
encumbrance or charge of any nature otherwise than by
designation of a beneficiary pursuant to Section 13 hereof to
receive any amounts which may become payable after the
Recipient's death.
c. Expenses
The costs and expenses of administering the Plan shall be paid
by the Company and not charge to any Award or to any Recipient
hereunder.
d. Unfunded
The portion of the Plan relating to Performance Share Awards
is unfunded and the Company shall not be required to establish
any special or separate fund or make any other segregation of
assets to assure payment of any such Award. The designation
and crediting of Performance Shares to any Recipient hereunder
shall be solely for accounting purposes.
e. Governing Law
This Plan shall be administered and the provisions of this
Plan shall be interpreted in accordance with and under the
laws of the State of Minnesota.
17. Change in Control
-----------------
Anything herein to the contrary notwithstanding, but subject to
Subsection d below, in the event of a "Change in Control" (as defined
below) of the Company:
a. Restrictions Lapse
All restrictions, conditions, and limitations on shares of
Common Stock then outstanding under Restricted Stock Awards
shall immediately lapse and the Restricted Stock Period shall
be deemed to have expired.
b. Vesting and Distribution of Performance Shares
All Performance Shares shall vest and be distributed on the
following bases and subject to the following conditions:
<PAGE>
(i) If a Change in Control occurs prior to the last day
of the applicable performance period, a Recipient
shall become vested in a percentage of Performance
Shares hereunder determined as follows:
A. First, the Recipient or the Company, as
applicable, shall be deemed to have achieved
the greater of (i) the performance
objectives required to vest in such
Recipient 100% of the Performance Shares
covered by the Award or (ii) if the Change
in Control occurs after the first quarter of
the performance period, the performance most
recently projected by the Company prior to
the Change in Control for such performance
period with respect to the measurements
established by the Committee on or prior to
the date of grant of the Award for purposes
of determining whether the Performance
Shares shall become vested for such
Recipient (adjusted to exclude (A) all
legal, accounting, investment banking and
other costs and expenses incurred or
projected by the Company in connection with,
or in opposition to, the events resulting in
the Change in Control and (B) the projected
effect of the Change in Control upon such
measurements). The Company shall compute
such projections for the performance period
at or about the end of each quarter, except
the last quarter, of each performance
period.
B. Next, the result obtained in Clause (A) of
this Paragraph (i) is multiplied by a
fraction, the numerator of which is the
number of months of such Recipient's
continuous employment within the performance
period prior to the Change in Control and
the denominator of which is the number of
months within the entire performance period.
(ii) Distribution of a Recipient's vested Performance
Share Award as determined in Paragraph (i) hereof
shall be made as soon as practicable after the first
occurrence of a Change in Control. Such distribution
shall be in Common Stock and cash in the manner
provided by Section 7 b(ii) hereof and shall be
valued as provided in Section 7 b(ii) hereof. Upon
the making of any such distribution, the Award as to
which it relates shall be deemed canceled and of no
further force and effect.
c. "Change in Control" means:
(i) a majority of the directors of the Company shall be
persons other than persons
A. for whose election proxies shall have been
solicited by the Board of Directors of the
Company, or
<PAGE>
B. who are then serving as directors appointed
by the Board of Directors to fill vacancies
on the Board of Directors caused by death or
resignation (but not by removal) or to fill
newly-created directorships,
(ii) 30% or more of the outstanding voting stock of the
Company is acquired or beneficially owned (as defined
in Rule 13d-3 under the Securities Exchange Act of
1934, as amended, or any successor rule thereto) by
any person (other than the Company, a Subsidiary of
the Company, or the Recipient) or group of persons,
not including the Recipient, acting in concert, or
(iii) the stockholders of the Company approve a definitive
agreement or plan to
A. merge or consolidate the Company with or
into another corporation (other than (1) a
merger or consolidation with a Subsidiary of
the Company or (2) a merger in which the
Company is the surviving corporation and
either (a) no outstanding voting stock of
the Company (other than fractional shares)
held by stockholders immediately prior to
the merger is converted into cash,
securities, or other property or (b) all
holders of outstanding voting stock of the
Company (other than fractional shares)
immediately prior to the merger have
substantially the same proportionate
ownership of the voting stock of the Company
or its parent corporation immediately after
the merger),
B. exchange, pursuant to a statutory exchange
of shares of voting stock of the Company
held by stockholders of the Company
immediately prior to the exchange, shares of
one or more classes or series of voting
stock of the Company for shares of another
corporation,
C. sell or otherwise dispose of all or
substantially all of the assets of the
Company (in one transaction or a series of
transactions) or
D. liquidate or dissolve the Company,
unless a majority of the voting stock (or the voting
equity interest) of the surviving corporation or of
any corporation (or other entity) acquiring all or
substantially all of the assets of the Company (in
the case of a merger, consolidation, or disposition
of assets) or the Company or its parent corporation
(in the case of a statutory share exchange) is,
immediately following the merger, consolidation,
statutory share exchange, or disposition of assets,
beneficially owned by the Recipient or a group of
persons, including the Recipient, acting in concert.
<PAGE>
d. Parachute Payments
(i) Notwithstanding the provisions of Subsections a and b
above, if any Award hereunder, either alone or
together with other payments in the nature of
compensation to a Recipient which are contingent on a
change in the ownership or effective control of the
Company or in the ownership of a substantial portion
of the assets of the Company or otherwise, would
result in any portion thereof being subject to an
excise tax imposed under section 4999 of the Internal
Revenue Code of 1954, as amended (the "Code") or
would not be deductible in whole or in part by the
Company, an affiliate of the Company (as defined in
section 1504 of the Code), or other person making
such payments as a result of section 280G of the
Code, such Award and/or such other benefits and
payments shall be reduced (but not below zero) to the
largest aggregate amount as will result in no portion
thereof being subject to an excise tax or being not
deductible.
(ii) For purposes hereof, (A) no portion of payments the
receipt or enjoyment of which a Recipient shall have
effectively waived in writing prior to the date of
distribution of an Award hereunder shall be taken
into account; (B) no portion of such Award, benefits,
and other payments shall be taken into account which
in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the
Recipient does not constitute a "parachute payment"
within the meaning of Section 280G(b) (2) of the
Code; and (C) the value of any non-cash benefit or
any deferred payment or benefit included in such
payment shall be determined by the Company's
independent auditors in accordance with the
principles of sections 280G(d) (3) and (4) of the
Code.
(iii) Any Award not paid as a result of this Subsection d,
or reduced to zero as a result of the limitations
imposed hereby, shall remain outstanding in full
force and effect in accordance with the other terms
and provisions of this Plan.
Revised October 25, 1991
EXHIBIT 10.8
MEDTRONIC, INC.
POSTRETIREMENT SURVIVOR BENEFIT PLAN
I. RECITALS
--------
1.01 Name and Dates. On June 24, 1987, the Board of Directors of
Medtronic, Inc. (the "Company") approved and adopted the Medtronic, Inc.
Postretirement Survivor Benefit Plan as subsequently revised as authorized by
the Board (the "Plan"), effective as of such date, and as hereinafter set forth.
1.02 Purpose. The purpose of the Plan is to provide survivor benefits
to certain eligible retired officers of the Company.
1.03 Description. The Plan is intended to be (and shall be construed
and administered as) an employee benefit pension plan under the provisions of
the Employee Retirement Income Security Act of 1974, as amended, which is
unfunded and maintained by the Company for the purpose of providing deferred
compensation for a select group of management or highly-compensated employees in
the form of postretirement survivor benefits.
The obligation of the Company to make payments under this Plan
constitutes an unsecured (but legally enforceable) promise of the Company, and
no person shall have any lien, prior claim or other security interest in any
property of the Company as a result of this Plan. The limitations set forth in
this paragraph are subject to the provisions of Article V, however.
II. DEFINITIONS
-----------
2.01 Definitions. As used in this Plan, the following terms have the
meanings indicated below:
(a) "Beneficiary" means the beneficiary or beneficiaries designated by
a retired officer to receive survivor benefits hereunder in such
proportions as designated by the retired officer. Any such designation
shall be on a form provided by the Company and filed with the Company
before the retired officer's death. The retired officer may change such
designation from time to time and the last written designation filed
with the Company prior to the retired officer's death will control. If
the retired officer fails to specifically designate a beneficiary, if
no designated beneficiary survives the retired officer, or if all
designated beneficiaries who survive the retired officer die before
complete payment of benefits is made, any remaining benefit shall be
paid to the retired officer's surviving spouse, or if there is no
surviving spouse, to the retired officer's issue, taking by right of
representation from such retired officer's natural and adoptive
children, or if there is no surviving issue, to the legal
representatives of the retired officer's estate.
<PAGE>
(b) "Committee" means the Compensation Committee of the Board of
Directors of the Company or any successor committee appointed by the
Board of Directors to perform substantially similar functions.
(c) "Company" means Medtronic, Inc. and its successors and assigns, by
merger, purchase or otherwise.
(d) "Event" means an event of change in control of the Company as
defined in Section 3.l(b)(l) through (3) of the Trust.
(e) "Officer" means an individual who is elected as an officer of the
Company by the Board of Directors of the Company or an individual who
is appointed as an officer of the Company by the Chief Executive
Officer of the Company.
(f) "Prime Rate" means the prime rate of interest which is quoted by
Norwest Bank Minneapolis, N.A. as its prime rate, determined each
calendar quarter as the average of the daily prime rates in effect
throughout such calendar quarter, averaged for the number of days for
which such prime rates are quoted during such calendar quarter. The
prime rate for any fractional calendar quarter shall be determined as
the average of the daily prime rates in effect throughout such
fractional quarter, averaged for the number of days during such
fractional quarter for which such prime rates are quoted.
(g) "Preretirement Salary" means the individual's annualized salary
from the Company, based upon the individual's rate of salary in effect
immediately prior to retirement.
(h) "Retired Officer" means an officer who terminates employment with
the Company under circumstances constituting retirement.
(i) "Retirement" means a voluntary or involuntary termination of
employment with the Company (other than an involuntary termination for
any act or acts constituting a felony and substantially detrimental to
the Company or its reputation) after attaining age 62 or after
attaining age 55 and completing ten years of service with the Company.
(j) "Trust" means the Medtronic, Inc. Compensation Trust Agreement, as
amended from time to time.
III. ELIGIBILITY FOR BENEFITS
------------------------
3.01 Eligibility for Benefits. Each officer of the Company who
terminates employment with the Company under circumstances constituting
retirement shall be eligible for survivor benefits under the Plan as a retired
officer.
IV. SURVIVOR BENEFITS
-----------------
4.01 Amount of Benefit. Survivor benefits shall be paid upon the death
of each retired officer in an amount equal to one times the retired officer's
preretirement salary.
<PAGE>
4.02 Payment of Benefit. The Company shall pay the survivor benefit
referred to in Section 4.01 to the retired officer's beneficiary in the form of
a single sum distribution as soon as reasonably practicable following the death
of the retired officer, but in no event later than 45 days after the date of
death.
4.03 Source of Benefits. Except as provided in Article V, the Company's
obligation to pay the survivor benefits referred to in Section 4.01 shall
constitute an unfunded obligation, and the position of any officer, retired
officer or his or her beneficiary with respect to the payment of survivor
benefits is that of a general unsecured creditor of the Company. Nothing
contained in the Plan and no action taken under this Plan shall require or be
construed to require the establishment of a trust of any kind (except as
provided in Article V) or the purchase of life insurance for the payment of
survivor benefits hereunder.
V. EVENTS OF CHANGE IN CONTROL
----------------------------
5.01 Plan Subject to this Article. The provisions of this Article, to
the extent applicable, shall control notwithstanding any other provisions of
this Plan to the contrary.
5.02 Obligation to Fund Trust and Payments From Trust. If the Company
determines that it is probable that an Event may occur within the six-month
period immediately following the date of determination or if an Event in fact
occurs in those situations where the Company has not otherwise made such a
determination, the Company shall make a contribution to the Trust (if in
existence at the date of determination or the date of an Event, as the case may
be) in accordance with the provisions of the Trust. Solely for purposes of
determining the amount of such contribution (but in no way in limitation of the
Company's liability under the Plan as determined under other provisions of the
Plan), the Company's total liability under this Plan shall be equal to the
dollar amount of survivor benefits payable or which may become payable with
respect to all individuals who are officers or retired officers of the Company
as of the date of such determination or the date of the Event, as the case may
be, whether or not any such individual has actually retired or has met the
applicable age and service requirements for retirement at such date plus the
dollar amount of any survivor benefits under the Plan which have not yet been
paid with respect to any retired officer who died prior to the date of
determination or the date of the Event, as the case may be. All such
contributions shall be made as soon as possible after such determination or the
date of the Event, as the case may be, and shall be in cash or property valued
at fair market value. The value of the survivor benefit with respect to an
officer who has not yet retired as of the date of determination or the date of
the Event, as the case may be, shall be determined with reference to the
officer's annualized salary from the Company, based upon the individual's rate
of salary in effect immediately prior to the date of determination or the date
of the Event, as the case may be. Further, the Company may, in its discretion,
make other contributions to the Trust from time to time for purposes of
providing benefits hereunder, whether or not an Event has occurred or may occur.
Notwithstanding the foregoing, any contributions to the Trust, as well
as any income or gains thereon, shall be at all times subject to the provisions
of the Trust, including but not limited
<PAGE>
to the provisions permitting a return to the Company of such contributions and
income and gains thereon in certain circumstances.
Payment of survivor benefits under the Plan with respect to those
officers, retired officers and their beneficiaries for whom contributions to the
Trust have been made shall be paid first from the Trust in accordance with the
terms of the Trust, but, to the extent not paid by the Trust, shall be paid by
the Company.
5.03 Legal Fees and Expenses. The Company shall reimburse a retired
officer, an officer who has not yet terminated employment with the Company but
who otherwise meets the conditions for retirement, and a retired officer's
beneficiary for all reasonable legal fees and expenses incurred after the date
of any Event in seeking to obtain or preserve any right or benefit provided by
the Plan.
5.04 Late Payment and Additional Payment Provisions. If after the date
of an Event there is a delay in the payment of survivor benefits under the Plan
beyond the final date for payment provided in Section 4.02, the survivor
benefits otherwise payable to the retired officer's beneficiary shall be
increased by an amount equal to the stated interest which shall be credited to
such survivor benefits from the final date for payment provided in Section 4.02
through the date that payment of such survivor benefits (plus such credited
interest) is actually made to the retired officer's beneficiary, compounded
quarterly on a calendar year basis. The amount of stated interest to be so
credited shall be equal to the lesser of (a) the prime rate plus five percentage
points, or (b) the prime rate multiplied by two. In the event that stated
interest is to be credited for some period less than a full calendar quarter,
the stated interest shall be determined and compounded for the fractional
quarter. The increase in survivor benefits payable by the crediting of such
stated interest represents a late payment penalty for the delay in payment.
Any payment of benefits by the Company after the final date for payment
provided in Section 4.02 shall be applied first against any applicable late
payment penalty and next against the benefit amount itself.
The beneficiary of the retired officer shall be entitled to the payment
of survivor benefits plus the late payment penalty referred to hereinabove first
from the Trust and secondarily from the Company, as otherwise provided in
Section 5.02.
VI. MISCELLANEOUS
-------------
6.01 Administration of Plan. The Committee has full power and authority
to administer the Plan and to establish rules and procedures for the operation
of the Plan. The Committee may delegate to one or more committees or individuals
any of its authority, power to exercise discretion, duties or responsibilities
under the Plan other than its power to amend or terminate the Plan under Section
6.02. The Committee shall be considered the named fiduciary of the Plan for
purposes of Section 402(a)(2) of the Employee Retirement Income Security Act of
1974, as amended.
<PAGE>
6.02 Amendment and Termination. The Committee has power to amend or
terminate the Plan in any respect, including, but not by way of limitation, the
power to reduce or terminate survivor benefits with respect to any individual
otherwise covered under the Plan. Provided, however, that the Committee may not
amend or terminate the Plan in any manner so as to reduce, eliminate or
otherwise impair the survivor benefits with respect to any individual who has
terminated under circumstances constituting retirement or who is actively
employed by the Company but who otherwise meets the conditions for retirement on
or prior to the date the Plan is so amended or terminated. Further, the
Committee may not amend or terminate the Plan after the date of an Event of
change in control of the Company in any manner so as to reduce, eliminate or
otherwise impair survivor benefits under the Plan with respect to any individual
who is an officer or retired officer immediately prior to the date of an Event
of change in control, whether or not such individual has retired or qualified
for retirement prior to the date of such amendment or termination.
6.03 No Assignment. No person shall have the power to transfer, assign,
anticipate, mortgage or otherwise encumber or dispose of in advance any interest
in amounts payable hereunder or any of the payments provided for herein, nor
shall any interest in amounts payable hereunder or in any payments be subject to
seizure for payment of any debts, judgments, alimony or separate maintenance, or
be reached or transferred by operation of law in the event of bankruptcy,
insolvency, or otherwise.
6.04 Successors and Assigns. The provisions of this Plan are binding
upon and inure to the benefit of the Company, its successors and assigns, by
merger, purchase or otherwise, and the officers and retired officers and their
beneficiaries, heirs and personal representatives.
6.05. Claims Procedure. The Committee or its delegate shall provide
adequate notice in writing to any officer or retired officer or his or her
beneficiary whose claim for benefits under the Plan has been denied, setting
forth the specific reasons for such denial. The Committee or its delegate shall
afford a reasonable opportunity to any such individual whose claim for benefits
has been denied for a full review by the Committee or its delegate of the
decision denying the claim.
6.06. Governing Law. This Plan shall be subject to and construed in
accordance with the laws of the State of Minnesota to the extent not preempted
by the provisions of the Employee Retirement Income Security Act of 1974, as
amended.
EXHIBIT 10.11
STOCK OPTION REPLACEMENT PROGRAM
--------------------------------
In keeping with the company's philosophy of encouraging stock ownership by
officers and employees, the company offers several programs which allow officers
and employees to elect to receive stock options in lieu of some or all of the
compensation earned as sales commissions or under certain incentive plans. By
foregoing such compensation for stock options, the variable "at risk" component
of each officer's or employee's compensation package is increased, motivating
them to perform to enhance shareholder value over the long term. Under the
program, the amount of the stock option grants are determined by the
Compensation Committee of the Board of Directors and to date have primarily been
on the basis of $4 in fair market value of stock options for each $1 of
compensation foregone.
EXHIBIT 10.12
MEDTRONIC, INC.
1998 OUTSIDE DIRECTOR STOCK COMPENSATION PLAN
(EFFECTIVE MARCH 5, 1998)
1. PURPOSE. The purpose of this Plan is to facilitate recruiting and
retaining non-employee directors of outstanding ability.
2. DEFINITIONS. The capitalized terms used in this Plan have the
meanings set forth below.
(a) "Account" means a bookkeeping account maintained for a Participant
to which Deferred Stock Units are credited pursuant to Section 6.
(b) "Affiliate" means any corporation that is a "parent corporation" or
"subsidiary corporation" of the Company, as those terms are defined in Sections
424(e) and (f) of the Code, or any successor provision, and any joint venture in
which the Company or any such "parent corporation" or "subsidiary corporation"
owns an equity interest.
(c) "Agreement" means a written contract entered into between the
Company or an Affiliate and a Participant containing the terms and conditions of
an Option granted hereunder (not inconsistent with this Plan).
(d) "Annual Option" means an Option granted pursuant to Section 5(c) of
this Plan.
(e) "Annual Retainer" of a Participant means the fixed annual fee for
such Participant in effect on the first day of the year for which such Annual
Retainer is payable for services to be rendered as a Non-Employee Director of
the Company, including any committee chair fee.
(f) "Award" means an Option granted pursuant to Section 5 of this Plan
or a credit of Deferred Stock Units pursuant to Section 6 of this Plan.
(g) "Board" means the Board of Directors of the Company.
(h) "Change in Control" means:
(i) acquisition by any individual, entity or group (within the
meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 30% or more of either (A) the then outstanding Shares of Stock (the
"Outstanding Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute a
<PAGE>
Change of Control: (A) any acquisition directly from the Company, (B) any
acquisition by the Company or any Subsidiary, (C) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any Subsidiary or (D) any acquisition by any corporation with respect to
which, following such acquisition, more than 55% of, respectively, the then
outstanding shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
acquisition in substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case may be; or
(ii) individuals who, as of the effective date of this Plan
provided in Section 7(a) of this Plan, constitute the Board (the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents; or
(iii) approval by the shareholders of the Company of a
reorganization, merger, consolidation or statutory exchange of Outstanding
Company Voting Securities, in each case, with respect to which all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such reorganization, merger,
consolidation or exchange do not, following such reorganization, merger,
consolidation or exchange, beneficially own, directly or indirectly, more than
55% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such reorganization, merger, consolidation or exchange in
substantially the same proportions as their ownership, immediately prior to such
reorganization, merger, consolidation or exchange of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be; or
(iv) approval by the shareholders of the Company of (A) a
complete liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other than
to a corporation with respect to which, following such sale or other
disposition, more than 55% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power
<PAGE>
of the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case may be.
Notwithstanding the foregoing provisions of this definition, a Change
of Control shall not be deemed to occur with respect to a Participant if the
acquisition of the 30% or greater interest referred to in subparagraph (i) of
this definition is by a group, acting in concert, that includes the Participant
or if at least 40% of the then outstanding common stock or combined voting power
of the then outstanding voting securities (or voting equity interests) of the
surviving corporation or of any corporation (or other entity) acquiring all or
substantially all of the assets of the Company shall be beneficially owned,
directly or indirectly, immediately after a reorganization, merger,
consolidation, statutory share exchange or disposition of assets referred to in
subparagraph (iii) or (iv) of this definition by a group, acting in concert,
that includes that Participant.
(i) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any successor statute.
(j) "Committee" means any committee of the Board designated by the
Board to administer this Plan under Section 3 hereof, of which shall be composed
of not less than two members, each of whom shall be a "non-employee director" as
defined in Exchange Act Rule 16b-3.
(k) "Company" means Medtronic, Inc., a Minnesota corporation, or any
successor to all or substantially all of its businesses by merger,
consolidation, purchase of assets or otherwise.
(l) "Deferred Stock Unit" means the right to receive one Share pursuant
to Section 6 of this Plan.
(m) "Disability" means the disability of a Participant such that the
Participant would, if an employee, be considered disabled under any retirement
plan of the Company which is qualified under Section 401 of the Code.
(n) "Discretionary Option" means an Option granted pursuant to Section
5(f).
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended; "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the
Securities and Exchange Commission under the Exchange Act as in effect with
respect to the Company or any successor regulation.
<PAGE>
(p) "Fair Market Value" as of any date means, unless otherwise
expressly provided in this Plan:
(i) the closing sale price of a Share (A) on the composite
tape for New York Stock Exchange ("NYSE") listed shares, or (B) if the Shares
are not quoted on the NYSE composite tape, on the principal United States
securities exchange registered under the Exchange Act on which the Shares are
listed, or (C) if the Shares are not listed on any such exchange, on the
National Association of Securities Dealers, Inc. Automated Quotation System
National Market System, in any case on the date immediately preceding that date,
or, if no sale of Shares shall have occurred on that date, on the next preceding
day on which a sale of Shares occurred, or
(ii) if clause (i) is not applicable, what the Committee
determines in good faith to be 100% of the fair market value of a Share on that
date. However, if the applicable securities exchange or system has closed for
the day at the time the event occurs that triggers a determination of Fair
Market Value, all references in this paragraph to the "date immediately
preceding that date" shall be deemed to be references to "that date." The
determination of Fair Market Value shall be subject to adjustment as provided in
Section 7(e) hereof. For purposes of this definition, each Option granted and
each Deferred Stock Unit credited pursuant to this Plan shall be deemed
conclusively to have been granted or credited, as applicable, prior to the close
of the applicable securities exchange or system on the date of grant or credit,
as applicable.
(q) "Fundamental Change" means a dissolution or liquidation of the
Company, a sale of substantially all of the assets of the Company, a merger or
consolidation of the Company with or into any other corporation, regardless of
whether the Company is the surviving corporation, or a statutory share exchange
involving capital stock of the Company.
(r) "Initial Option" means an Option granted pursuant to Section 5(b).
(s) "Initial Plan Year" means the period from March 5, 1998 through
August 31, 1998.
(t) "Meeting" means a regular or special meeting of the Board or of a
committee of the Board on which a particular Participant serves that is actually
held.
(u) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any Affiliate.
(v) "Option" means a right to purchase Stock.
(w) "Participant" means any Non-employee Director to whom an Award is
made.
(x) "Plan" means this 1998 Outside Director Stock Compensation Plan, as
amended and in effect from time to time.
<PAGE>
(y) "Plan Year" means the Initial Plan Year, or the period from
September 1 of 1998 or any subsequent year, through the following August 31.
(z) "Pro-Ration Factor" means: (A) in the case of a Participant who is
a Non-Employee Director for the entire Plan Year in question and attends at
least 75 percent of the Meetings that occur during such Plan Year (such
Meetings, the "Plan Year Meetings"), 100 percent; (B) in the case of a
Participant who is a Non-Employee Director for only a portion of a Plan Year and
attends at least 75 percent of the Meetings that occur during that portion of a
Plan Year (such meetings, the "Applicable Meetings"), a percentage determined by
dividing the number of Applicable Meetings by the total number of Plan Year
Meetings for that Plan Year; and (C) in the case of a Non-Employee Director who
fails to satisfy the Meeting attendance requirement of clause (A) or (B), as
applicable, 75 percent of the percentage specified in clause (A) or (B), as
applicable.
(aa) "Replacement Factor" is defined in Section 5(d)(ii).
(bb) "Replacement Option" means an Option granted pursuant to Section
5(d) of this Plan.
(cc) "Retirement Option" means an Option granted pursuant to Section
5(e) of this Plan.
(dd) "Share" means a share of Stock.
(ee) "Stock" means the common stock, $.10 par value per share (as such
par value may be adjusted from time to time), of the Company.
(ff) "Subsidiary" means a "subsidiary corporation," as that term is
defined in Section 424(f) of the Code, or any successor provision.
(gg) "Successor" with respect to a Participant means the legal
representative of an incompetent Participant and, if the Participant is
deceased, the legal representative of the estate of the Participant or the
person or persons who may, by bequest or inheritance, or pursuant to a transfer
permitted under Section 5(i) of this Plan, acquire the right to exercise an
Option or receive Shares issuable in satisfaction of Deferred Stock Units in the
event of the Participant's death.
(hh) "Term" means the period during which an Option may be exercised.
Except when otherwise indicated by the context, reference to the
masculine gender shall include, when used, the feminine gender and any term used
in the singular shall also include the plural.
3. ADMINISTRATION.
(a) AUTHORITY OF COMMITTEE. The Committee or its delegee shall
administer this Plan. The Committee shall have the authority to interpret this
Plan and any Award or Agreement made under this Plan, to establish, amend, waive
and rescind any rules and
<PAGE>
regulations relating to the administration of this Plan (including without
limitation the manner in which Participants shall make elections provided for
herein), to determine the terms and provisions of any Agreements entered into
hereunder (not inconsistent with this Plan), and to make all other
determinations necessary or advisable for the administration of this Plan. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in this Plan or in any Award in the manner and to the extent it
shall deem desirable. The determinations of the Committee in the administration
of this Plan, as described herein, shall be final, binding and conclusive.
(b) INDEMNIFICATION. To the full extent permitted by law, each member
and former member of the Committee and each person to whom the Committee
delegates or has delegated authority under this Plan shall be entitled to
indemnification by the Company against and from any loss, liability, judgment,
damage, cost and reasonable expense incurred by such member, former member or
other person by reason of any action taken, failure to act or determination made
in good faith under or with respect to this Plan.
4. IN GENERAL.
(a) SHARES AVAILABLE. The number of Shares available for distribution
under this Plan is 1,500,000 (subject to adjustment under Section 7(e) hereof).
Any Shares subject to the terms and conditions of an Award under this Plan which
are not used because the terms and conditions of the Award are not met may again
be used for an Award under this Plan. Any unexercised or undistributed portion
of any terminated, expired, exchanged, or forfeited Award or any Award settled
in cash in lieu of Shares shall be available for further Awards.
(b) NO FRACTIONAL SHARES. No fractional Shares may be issued under this
Plan; fractional Shares will be rounded to the nearest whole Share.
(c) RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a
shareholder with respect to any securities covered by an Award until the date
the Participant becomes the holder of record.
5. OPTIONS.
(a) AGREEMENTS. Each Option granted under this Plan shall be evidenced
by an Agreement setting forth the terms and conditions thereof.
(b) INITIAL OPTION GRANTS. Each Non-Employee Director first elected or
appointed to the Board on or after January 15, 1998 shall automatically be
granted, on the later of (i) the date such director first becomes a director and
(ii) March 5, 1998, an Option (an "Initial Option") to purchase that number of
Shares determined by dividing (i) two times the amount of the Annual Retainer as
in effect immediately following such election or appointment by (ii) the Fair
Market Value of a Share on the date of grant. No increase in the Annual Retainer
of the Non-Employee Directors after a person becomes a Non-Employee Director
shall increase the number of Shares subject to the Initial Option
<PAGE>
granted to such Non-Employee Director. An employee of the Company or an
Affiliate who terminates such employment and thereafter becomes a Non-Employee
Director is not entitled to receive an Initial Option but will be entitled to
receive Annual Options and Replacement Options. A Non-Employee Director is not
entitled to receive more than one Initial Option during his or her lifetime.
(c) ANNUAL OPTION GRANTS. On the first day of each Plan Year other than
the Initial Plan Year, each Non-employee Director shall automatically be granted
an Option (the "Annual Option") to purchase that number of Shares equal to (i)
the amount of the Annual Retainer in effect as of such day, divided by (ii) the
Fair Market Value of a Share on the date of the grant. No increase in the Annual
Retainer for Non-employee Directors of the Company following the grant of an
Annual Option shall increase the number of Shares subject to such Annual Option.
(d) REPLACEMENT OPTION GRANT. (i) Each Non-Employee Director shall be
provided with the opportunity to elect, in advance of the first day of each Plan
Year (or upon becoming a Non-Employee Director, if later), to receive the Annual
Retainer for such Plan Year in the form of a grant of an Option (a "Replacement
Option") under this Section 5(d) rather than in cash. Each Non-Employee Director
who makes such an election who remains a member of the Board on the last day of
the relevant Plan Year shall automatically be granted on such day an Option (the
"Replacement Option") to purchase that number of Shares equal to (A) the
Replacement Factor (as defined below) times the Eligible Retainer Amount (as
defined below) for the Participant for the Plan Year times the Pro-Ration
Factor, divided by (B) the Fair Market Value of a Share on the date of grant. A
Non-Employee Director who elects to receive a Replacement Option for a Plan Year
but is no longer a member of the Board on the last day of such Plan Year shall
receive his or her Annual Retainer for that Plan Year in cash upon ceasing to be
a member of the Board.
(ii) The "Replacement Factor" means four, or such other number
as the Board may designate before the beginning of any Plan Year.
(iii) The "Eligible Retainer Amount" means the amount of the
Annual Retainer for the Participant as in effect as of the beginning of the Plan
Year, less, in the case of the Initial Plan Year only, any portion thereof
earned by the Participant before March 5, 1998.
(e) RETIREMENT OPTIONS. Each Participant who has elected, in connection
with the termination of the [NAME OF DIRECTOR RETIREMENT PLAN] (the "Retirement
Plan"), to receive Options pursuant to this Section 5(e) shall be granted as of
March 5, 1998, an Option (a "Retirement Option") to purchase that number of
Shares equal to (i) four times the amount of such Participant's accrued benefit
under the Retirement Plan as of March 5, 1998, divided by (ii) the Fair Market
Value of a Share on the date of grant.
(f) DISCRETIONARY OPTIONS. The Board or the Committee may, in its
discretion, at any time or from time to time grant to any Non-Employee Director
additional Options
<PAGE>
("Discretionary Options") to purchase such number of Shares, on such terms and
conditions, as it shall determine.
(g) PURCHASE PRICE; TERM AND EXERCISABILITY OF OPTIONS. The purchase
price of each Share subject to an Option shall be the Fair Market Value of a
Share as of the date the Option is granted. Options granted to a Non-Employee
Director under this Section 5 shall vest and be exercisable in full on the date
of grant, except to the extent the Board provides otherwise with respect to
Discretionary Options; provided, however, that in no event shall a Non-Employee
Director initially appointed by the Board be entitled to exercise an Option
unless, and until such time as, such director shall have been elected to the
Board by the shareholders of the Company. Notwithstanding the foregoing, except
as otherwise provided by the Board with respect to Discretionary Options,
vesting of an Option granted to a Non-Employee Director who shall have been
elected by the shareholders of the Company shall accelerate and the Option shall
become immediately exercisable in full upon the occurrence of a Change in
Control or in the event that the Non-Employee Director ceases to serve as a
director of the Company due to death, Disability, resignation or retirement
under the policies of the Company then in effect. Options shall expire on the
ten-year anniversary date of the Option's grant; provided, that Initial Options
and Annual Options (but not Replacement Options or Retirement Options) shall
expire on the five-year anniversary date of the date the Non-Employee Director
ceases to be a director of the Company for any reason, if earlier than the
ten-year anniversary date of the Option's grant; and provided, further, that the
Initial Option granted to a Non-Employee Director initially appointed by the
Board shall expire on the date such director ceases to be a director of the
Company unless such director shall have been elected by the shareholders
subsequent to the grant of the Initial Option to such director.
(h) PAYMENT OF OPTION PRICE. The purchase price of the Shares with
respect to which an Option is exercised shall be payable in full at the time of
exercise; provided, that to the extent permitted by law, Participants may
simultaneously exercise Options and sell the Shares thereby acquired pursuant to
a brokerage or similar relationship and use the proceeds from such sale to pay
the purchase price of such Shares. The purchase price may also be paid in cash,
or through a reduction of the number of Shares delivered to the Participant upon
exercise of the Option or by delivery to the Company of Shares held by such
Participant for at least six months before such exercise (in each case, such
Shares having a Fair Market Value as of the date the Option is exercised equal
to the purchase price of the Shares being purchased pursuant to the Option), or
a combination thereof, in the discretion of the Participant. In no event shall
any Option be exercisable at any time after its Term. When an Option is no
longer exercisable, it shall be deemed to have lapsed or terminated.
(i) TRANSFERABILITY. A Non-Employee Director may transfer an Option
granted pursuant to this Section 5 to any member of such Non-Employee Director's
"immediate family" (as such term is defined in Rule 16a-1(e) promulgated under
the Exchange Act, or any successor rule or regulation) or to one or more trusts
whose beneficiaries are members of such Non-Employee Director's "immediate
family" or partnerships in which
<PAGE>
such family members are the only partners; provided, that (i) the transferor
receives no consideration for the transfer and (ii) such transferred Option
shall continue to be subject to the same terms and conditions as were applicable
to such Option immediately prior to its transfer. Unless an Option granted
pursuant to this Section 5 shall have expired, in the event of a Non-Employee
Director's death, an Option granted to such Non-Employee Director pursuant to
this Section 5 shall be transferable to the beneficiary, if any, designated by
the Non-Employee Director in writing to the Company prior to the Non-Employee
Director's death and such beneficiary shall succeed to the rights of the
Non-Employee Director to the extent permitted by law. If no such designation of
a beneficiary has been made, the Non-Employee Director's legal representative
shall succeed to such Option, which shall be transferable by will or pursuant to
the laws of descent and distribution.
6. DEFERRED STOCK UNITS.
(a) ANNUAL CREDIT. As of the last day of each Plan Year, there shall be
credited to the Account of each Participant who is a Non-Employee Director on
such day a number of Deferred Stock Units (each representing the right to
receive a Share) equal to (i) one-half of the Annual Retainer in effect as of
such day, times the Pro-Ration Factor, divided by (ii) the average of the Fair
Market Value of a Share on each of the last 20 trading days during such Plan
Year determined in accordance with clause (i) of Section 2(p) or, if clause (i)
of Section 2(p) is inapplicable, the Fair Market Value of a Share as of the last
day of such Plan Year determined in accordance with clause (ii) of Section 2(p).
(b) RETIREMENT PLAN CREDIT. The Account of each Participant who has
elected, in connection with the termination of the Retirement Plan, to be
credited with Deferred Stock Units pursuant to this Section 6(b) shall be
credited, as of March 5, 1998, with a number of Deferred Stock Units (each
representing the right to receive a Share) equal to (i) the amount of such
Participant's accrued benefit under the Retirement Plan as of March 5, 1998,
divided by (ii) the average of the Fair Market Value of a Share on each of the
last 20 trading days ending with March 5, 1998 determined in accordance with
clause (i) of Section 2(p) or, if clause (i) of Section 2(p) is inapplicable,
the Fair Market Value of a Share as of the last day of such Plan Year determined
in accordance with clause (ii) of Section 2(p).
(c) DISCRETIONARY CREDITS. The Board or the Committee may, in its
discretion, at any time and from time to time, cause additional Deferred Stock
Units (each representing the right to receive a Share) to be credited to the
account of any Non-Employee Director.
(d) CREDITS OF DIVIDEND EQUIVALENTS; MAINTENANCE OF ACCOUNTS. The
Company shall maintain an Account for each Participant to which the credits
provided for in Sections 6(a), (b) and (c) above shall be made. Each
Participant's Account shall be credited from time to time with additional
Deferred Stock Units to reflect deemed reinvestment of any amounts that would
have been paid as cash dividends with respect to the Deferred Stock Units held
in such Account if they were Shares. Subject to the provisions of Section 6(e)
regarding delivery of Shares, Accounts may be credited with
<PAGE>
fractional Deferred Stock Units pursuant to this Section 6(d) and Sections 6(a),
(b) and (c).
(e) DELIVERY OF SHARES FROM ACCOUNTS.
(i) Each Participant shall be provided the opportunity to
elect, in accordance with procedures established by the Committee, whether to
receive the balance in his or her account in a single lump sum or in five annual
installments. Once made, such an election may be changed, but no such changed
election shall take effect until six months after the date the election is made,
and in any event such changed election shall not take effect unless it is (A)
made at least six months before deliveries pursuant to Section 6(e)(ii) begin
and (B) approved by the Board or a committee of the Board if the Committee
determines that such approval is necessary or appropriate in light of Exchange
Act Rule 16b-3.
(ii) The balance in a Participant's Account shall be delivered
to the Participant or the Participant's Successor in the form of Shares as soon
as practicable after, or beginning as soon as practicable after, the date on
which the Participant ceases for any reason to be a member of the Board (the
"Termination Date"). If a Participant has elected a lump sum delivery, or if a
Participant dies while a member of the Board, the Participant or the
Participant's Successor, as applicable, shall receive a number of Shares equal
to the total number of Deferred Stock Units in the Participant's Account as of
the Termination Date in full satisfaction of all of the Participant's interest
in the Account; provided, that any fractional Deferred Stock Units shall be
rounded to the nearest higher whole number of Shares. If a Participant has
elected installment delivery and ceases to be a member of the Board for any
reason other than the death of the Participant, then the Participant shall
receive the balance in such Participant's Account in the form of five annual
deliveries of Shares (and if a Participant dies after ceasing to be a Board
member, any remaining annual deliveries shall be made to the Participant's
Successor). The precise number of shares delivered in each installment shall be
determined in such a manner as to cause each such delivery to represent
approximately one-fifth of the Deferred Stock Units held in such Account as of
the Termination Date together with any dividend equivalents credited thereon.
Notwithstanding the foregoing, no such installment shall be delivered unless and
until the Board or the Committee shall have approved the delivery (unless such
approval is not necessary under Exchange Act Rule 16b-3).
(iii) Notwithstanding the foregoing, the balance in all
Participants' Accounts shall be delivered to the Participants in a single lump
sum delivery of Shares upon the occurrence of a Change of Control.
7. GENERAL PROVISIONS.
(a) EFFECTIVE DATE OF THIS PLAN. This Plan shall become effective as of
March 5, 1998.
<PAGE>
(b) DURATION OF THIS PLAN. This Plan shall remain in effect until it is
terminated pursuant to Section 7(d) hereof.
(c) NO RIGHT TO BOARD MEMBERSHIP. Nothing in this Plan or in any
Agreement shall confer upon any Participant the right to continue as a member of
the Board.
(d) AMENDMENT, MODIFICATION AND TERMINATION OF THIS PLAN. Except as
provided in this Section 7(d), the Board may at any time amend, modify,
terminate or suspend this Plan or any or all Agreements under this Plan to the
extent permitted by law. No termination, suspension or modification of this Plan
may materially and adversely affect any right acquired by any Participant (or a
Participant's legal representative) or any Successor under an Award granted
before the date of termination, suspension or modification, unless otherwise
agreed by the Participant in the Agreement or otherwise or required as a matter
of law. It is conclusively presumed that any adjustment for changes in
capitalization provided for in Section 7(e) hereof does not adversely affect any
right of a Participant under an Award.
(e) ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments
in the aggregate number and type of Shares available for Awards under this Plan,
in the number and type of Shares subject to Awards then outstanding and in the
Option exercise price as to any outstanding Options and in the number of Defined
Stock Units in the Accounts, may be made by the Committee in its sole discretion
to give effect to adjustments made in the number or type of Shares through a
Fundamental Change, recapitalization, reclassification, stock dividend, stock
split, stock combination, or other relevant change, provided that fractional
Shares shall be rounded to the nearest whole Share.
(f) FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change:
(a) involving a merger, consolidation or statutory share exchange, unless
appropriate provision shall be made (which the Board may, but shall not be
obligated to, make) for the protection of the outstanding Options by the
substitution of appropriate voting common stock of the corporation surviving any
such merger or consolidation or, if appropriate, the parent corporation of the
Company or such surviving corporation, to be issuable upon the exercise of
Options, or (b) involving the dissolution or liquidation of the Company, the
Board may, but shall not be obligated to, declare, at least twenty days prior to
the occurrence of the Fundamental Change, and provide written notice to each
holder of an Option of the declaration, that each outstanding Option, whether or
not then exercisable, shall be canceled at the time of, or immediately prior to
the occurrence of, the Fundamental Change in exchange for payment to each holder
of an Option, within 20 days after the Fundamental Change, of cash for each
Share covered by the canceled Option equal to the amount, if any, by which the
Fair Market Value (as defined in this Section 7(f)) per Share exceeds the
exercise price per Share covered by such Option. At the time of the declaration
provided for in the immediately preceding sentence, each Option shall
immediately become exercisable in full and each person holding an Option shall
have the right, during the period preceding the time of cancellation of the
Option, to exercise the Option as to all or any part of the Shares covered
thereby. In the event of a
<PAGE>
declaration pursuant to this Section 7(f), each outstanding Option that shall
not have been exercised prior to the Fundamental Change shall be canceled at the
time of, or immediately prior to, the Fundamental Change, as provided in the
declaration. Notwithstanding the foregoing, no person holding an Option shall be
entitled to the payment provided for in this Section 7(f) if such Option shall
have previously expired. For purposes of this Section 7(f) only, "Fair Market
Value" per Share means the cash plus the fair market value, as determined in
good faith by the Board, of the non-cash consideration to be received per Share
by the shareholders of the Company upon the occurrence of the Fundamental
Change, notwithstanding anything to the contrary provided in this Plan.
(g) LIMITS OF LIABILITY.
(i) Any liability of the Company to any Participant with
respect to an Award shall be based solely upon contractual obligations created
by this Plan and the Agreement.
(ii) Except as may be required by law, neither the Company nor
any member or former member of the Board or of the Committee, nor any other
person participating (including participation pursuant to a delegation of
authority under Section 3(a) hereof) in any determination of any question under
this Plan, or in the interpretation, administration or application of this Plan,
shall have any liability to any party for any action taken, or not taken, in
good faith under this Plan.
(h) COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS. No certificate for
Shares distributable pursuant to this Plan shall be issued and delivered unless
the issuance of such certificate complies with all applicable legal requirements
including, without limitation, compliance with the provisions of applicable
state securities laws, the Securities Act of 1933, as amended and in effect from
time to time or any successor statute, the Exchange Act and the requirements of
the exchanges on which the Company's Shares may, at the time, be listed.
(i) REMOVAL FOR CAUSE. Notwithstanding any other provision of this
Plan, this Section 7(i) shall apply in the event a Participant is removed from
the Board for cause before a Change of Control. In such event: (i) all of the
Participant's Options shall immediately expire and be forfeited, and (ii) unless
the Board or the Committee specifically determines otherwise in connection with
or after such removal, the balance in such Participant's Account shall be
delivered to the Participant in a single lump sum delivery of Shares after the
expiration of six months from the date of such removal. In addition, if the
Participant has received or been entitled to delivery of Shares pursuant to the
exercise of an Option within six months before such removal, the Board or the
Committee, in its sole discretion, may require the Participant to return or
forfeit all or a portion of such Shares and receive back the exercise price (if
any) paid therefor, or may require the Participant to pay to the Company the
economic value of such Shares less such exercise price, determined as of the
date of the exercise of Options in the event of any of the following occurrences
(whether before or after such removal): competition with the Company or any
Affiliate, unauthorized disclosure of material proprietary information
<PAGE>
of the Company or any Affiliate, a violation of applicable business ethics
policies or business policies of the Company or any Affiliate, or any other
action or event that the Board may determine warrants such a requirement. The
Board's or Committee's right to require such return or forfeiture must be
exercised within 90 days after the later of the date of such removal or the
discovery of such an occurrence, but in no event later than 15 months after such
removal.
8. GOVERNING LAW. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken pursuant to
this Plan shall be governed by the laws of Minnesota and construed accordingly.
9. SEVERABILITY. In the event any provision of this Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of this Plan, and this Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
10. EFFECT OF PRIOR PLAN. From and after the Effective Date of this
Plan, no further awards shall be made to Non-Employee Directors under the
Company's 1994 Stock Award Plan (the "Prior Plan"). Thereafter, all grants and
awards made under the Prior Plan prior to such Effective Date shall continue in
accordance with the terms of the Prior Plan.
EXHIBIT 10.14
AMENDMENT TO 1979 NONQUALIFIED STOCK OPTION PLAN
------------------------------------------------
Paragraph (d) of Section XII of the 1979 Plan was amended by the Board of
Directors of Medtronic, Inc., effective March 5, 1998, to add the language below
at the end of the existing Paragraph (d):
Notwithstanding the foregoing, any stock option granted hereunder
that is held by an individual who is an executive officer or
director subject to Section 16 of the Securities Exchange Act of
1934, as amended (a "Section 16 Person"), shall be transferable
(unless the Committee in its discretion determines otherwise) to
any member of the 'immediate family' (as such term is defined in
Rule 16a-1(e) promulgated under the Securities Exchange Act of
1934, as amended, or any successor rule or regulation) of the
original grantee of such option, or to one or more trusts whose
beneficiaries are members of such 'immediate family' or
partnerships in which such family members are the only partners;
provided that no consideration may be received for such transfer.
Any stock option held by any such transferee shall continue to be
subject to the same terms and conditions that were applicable to
such option immediately prior to its transfer and may be
exercised by such transferee as and to the extent that such
option has become exercisable and has not terminated in
accordance with the provisions of the Plan and the applicable
option agreement. For purposes of any provision of the Plan
relating to notice to an Optionee or to vesting or termination of
an option upon the death, Disability or termination of employment
of an Optionee, the references to 'Optionee' shall mean the
original grantee of an option and not any transferee.
EXHIBIT 13
PARTNERS IN
MEDICAL
INNOVATION
[PHOTOS]
1998 ANNUAL REPORT
FINANCIAL REVIEW
MEDTRONIC [LOGO]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
SUMMARY
Medtronic is the world's leading medical technology company specializing in
implantable and interventional therapies. Primary products include those for
bradycardia pacing, tachyarrhythmia management, atrial fibrillation management,
heart failure management, coronary and peripheral vascular disease, heart valves
replacement, extracorporeal cardiac support, minimally invasive cardiac surgery,
malignant and non-malignant pain, movement disorders, neurosurgery, and
neurodegenerative disorders.
Fiscal 1998 was a solid year for the company, as evidenced by the 13th
consecutive year of increases in revenues. Net sales of $2.60 billion represent
a 6.8% increase over the $2.44 billion in fiscal 1997. Net sales excluding the
effects of foreign currency translation increased 11.1% compared to increases of
15.2% in fiscal 1997 and 23.5% in fiscal 1996. The growth during fiscal 1998 was
led by the performance of core product lines, particularly Cardiac Rhythm
Management and Neurological. The decrease in the growth rates from year to year
is primarily the result of the timing of new product introductions during fiscal
years 1996, 1997, and 1998 as well as declining growth rates in certain markets.
Fiscal 1998 marked a year in which the company announced significant management
initiatives to reduce manufacturing and administrative costs throughout the
company. These initiatives include restructuring the vascular organization and
reducing global infrastructure by streamlining certain manufacturing and
administrative operations within the United States, Europe, and Japan. The
company believes these actions will significantly strengthen the company's
competitive position in the global health care market, which itself is under
increasing cost pressures. Net earnings and earnings per share (diluted) for
fiscal 1998 were $457.4 million and $0.96, respectively, compared to $530.0
million and $1.09, respectively, for fiscal 1997. Excluding the effects of the
$205.3 million pre-tax non-recurring charges taken in the third quarter, fiscal
1998 earnings per share would have been $1.25 (diluted), representing an
increase of 14.7%.
NET SALES
The increase in net sales from fiscal 1997 to fiscal 1998 was primarily the
result of continued unit volume increases. With the exception of angioplasty
catheters, selling prices for the company's products during fiscal 1998 remained
relatively stable overall, although certain products experienced low
single-digit declines in selling prices as a result of the medical market's
continued focus on cost controls and competitive pricing. Sales in the United
States in fiscal 1998 increased 12.8% over the prior year, compared to 14.6% in
fiscal 1997. Sales outside the United States increased 8.7% on a constant
currency basis compared to 16.0% in fiscal 1997. Sales in non-U.S. markets
accounted for 38.6% of worldwide net sales, compared with 41.8% in fiscal 1997
and 43.0% in fiscal 1996. Foreign exchange rate movements had an unfavorable
year-to-year impact on international net sales of $103.2 million and $64.4
million in fiscal 1998 and fiscal 1997, respectively, and a favorable
year-to-year impact of $21.3 million in fiscal 1996. These exchange rate
movements are caused primarily by the impact of the stronger U.S. dollar in
fiscal 1998 and 1997 and the relatively weaker U.S. dollar in fiscal 1996 versus
major European currencies and the Japanese yen. The impact of foreign currency
fluctuations on net sales is not necessarily indicative of the impact on net
earnings due to the offsetting foreign currency impact on operating costs and
expenses and the company's hedging activities (see also Market Risk and Note 4
to the consolidated financial statements for further details on foreign currency
instruments and the company's risk management strategies with respect thereto).
As reflected in Note 4, realized gains and losses on the company's hedging
activities were offset by the transactions being hedged and are therefore
consistent with the company's risk management strategies.
The following is a summary of sales by product line as a percentage of total net
sales:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Cardiac Rhythm Management 64.2% 65.6% 67.9%
Other Cardiovascular 21.0 22.0 23.6
Neurological & Other 14.8 12.4 8.5
================================================================================
Net sales of Cardiac Rhythm Management products, which consist primarily of
products for bradycardia pacing and tachyarrhythmia management, increased 8.7%
in fiscal 1998 after removing the impact of foreign exchange rate fluctuations,
versus growth of 11.5% in fiscal 1997. This growth was led by strong
contributions from Tachyarrhythmia Management's Micro Jewel II implantable
cardioverter defibrillator, which continues to hold a strong market share
position in the highly competitive defibrillator marketplace. The company has
applied for U.S. Food and Drug Administration (FDA) regulatory clearance for the
Gem and Gem DR, part of the next generation Gem family of defibrillators. In
June 1998, the company launched the Gem DR in Europe and certain markets outside
the U.S. Unit sales of bradycardia implantable pulse generators (IPGs) achieved
more than 8.0% growth in fiscal 1998. Bradycardia unit sales continued to
reflect strong growth in both U.S. and non-U.S. markets, primarily on the
strength of the new Medtronic.Kappa 400 series pacemakers, which were released
in Europe in January 1997 and which received FDA clearance in late January 1998.
In addition, the Medtronic.Kappa 700 series, a full family of pacemakers to
replace the Thera (i-SERIES), was launched in Europe in early April 1998.
U.S. VS.
INTERNATIONAL
SALES
In Millions of Dollars
[STACKED BAR GRAPH]
1998 1997 1996
-------- -------- --------
U.S. $1,598.5 $1,403.2 $1,241.0
International 1,006.3 1,035.0 931.1
-------- -------- --------
$2,604.8 $2,438.2 $2,172.1
======== ======== ========
NET SALES BY
PRODUCT LINE
In Millions of Dollars
[STACKED BAR GRAPH]
1998 1997 1996
-------- -------- --------
Cardiac Rhythm Management $1,673.6 $1,600.1 $1,474.2
Other Cardiovascular 546.0 537.4 512.8
Neurological & Other 385.2 300.7 185.1
-------- -------- --------
$2,604.8 $2,438.2 $2,172.1
======== ======== ========
1
<PAGE>
Sales within the Other Cardiovascular product line, consisting of heart valves,
perfusion and blood management systems, cannulae, surgical accessories, balloon
and guiding catheters and stents, increased 6.6% and 8.4% in fiscal 1998 and
fiscal 1997, respectively, after excluding the effects of foreign currency
translation. The fiscal 1998 growth is attributable in significant part to sales
of the Wiktor Prime coronary stent in the first half of fiscal 1998 and by
strong growth in sales of tissue values and surgical cannulae products. The
Medtronic Freestyle stentless aortic tissue heart valve, which received FDA
clearance in November 1997, also contributed to accelerated sales growth of
tissue valves. However, balloon catheter sales decreased significantly from the
prior year as significant competition for balloon catheters continued, resulting
in declining unit sales and continued declining average selling prices. The
stent market has also become increasingly competitive, particularly in the
United States. As a result of recent launches of competitive stents, the last
two quarters of fiscal 1998 marked sequential declines in stent sales. These
disappointing sales results for balloon catheters and stents necessitated
management initiatives during the third quarter of fiscal 1998 to reduce costs
in the vascular organization and focus on new products as discussed in Note 3 to
the consolidated financial statements. The first of several new coronary
vascular products, the Presario single-operator exchange balloon catheter, was
released internationally late in the fourth quarter of fiscal 1998. The
endovascular stent-graft system, launched outside the United States in the
second quarter of fiscal 1998, continues to gain rapid medical acceptance for
minimally-invasive treatment of abdominal aortic aneurysms. Sales of cardiac
perfusion and blood management systems were relatively flat as compared to the
prior fiscal year.
Net sales of Neurological and Other products, consisting primarily of
implantable neurostimulation devices, drug administration systems, neurosurgery
products, and diagnostic systems, continued to experience significant growth.
Exclusive of the effects of foreign currency translation, net sales grew 31.4%
over the previous year compared to growth of 63.4% in fiscal 1997. Particularly
strong sales growth during fiscal 1998 was achieved in the drug delivery product
line as a result of continued increased demand for the SynchroMed drug infusion
system for delivery of morphine for chronic pain and for delivery of Lioresal
(baclofen, USP) Intrathecal for treatment of cerebral and spinal spasticity.
Another strong growth factor was the continued rapid sales growth in Europe of
Medtronic Activa neurostimulation therapy for control of essential tremor and
tremor associated with Parkinson's disease. This therapy received U.S. FDA
clearance in August 1997. Significant progress was made during the latter part
of fiscal 1998 in training physicians and gaining reimbursement for this therapy
in the majority of states. In September 1997, the company received FDA clearance
to market its InterStim continence control therapy. The company is currently
training centers to develop this market. In addition, neurosurgical shunts for
hydrocephalus contributed to the strong growth. The November 1995 and April 1996
acquisitions of PS Medical and Synectics, respectively, contributed
significantly to the fiscal 1997 growth rate.
COSTS AND EXPENSES
The following is a summary of major costs and expenses as a percentage of net
sales:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Cost of Products Sold 25.7% 25.0% 27.2%
Research & Development 11.4 11.5 11.2
Selling, General & Administrative 29.1 31.3 32.3
Non-recurring Charges 7.4 -- --
================================================================================
Cost of products sold as a percentage of net sales increased slightly in fiscal
1998 as compared to fiscal 1997. This increase was primarily the result of a
$12.9 million charge included within the third quarter restructuring charge for
obsolescence on certain vascular inventories. Without the $12.9 million
obsolescence charge, cost of products sold as a percentage of net sales would
have been 25.2%. The decrease in cost of products sold as a percentage of net
sales from fiscal 1996 to fiscal 1997 resulted from the impact of favorable
product and geographic mixes combined with increased volumes, and the favorable
impact of foreign exchange rate fluctuations between the time products were
shipped and sold. Improvements were partially offset by pricing pressures on
certain products and costs related to new product introductions. Future gross
margins will continue to be impacted by competitive pricing pressures, new
product introductions, the mix of products both within and among businesses and
geographies, and the effects of foreign currency fluctuations.
The company remains committed to spending aggressively on research and
development (R&D) to develop technological enhancements and new indications for
existing products, as well as to develop less invasive and new technologies to
address unmet patient needs and to help reduce procedural costs and length of
hospital stay. R&D expense was $297.2 million in fiscal 1998 compared to $280.2
million in fiscal 1997.
Selling, general, and administrative expense (SG&A) as a percent of sales
decreased in both fiscal 1998 and 1997. The decrease in fiscal 1998 is primarily
attributable to continued emphasis on achieving overall cost efficiencies in
response to the weaker than anticipated revenue trends for certain products. The
fiscal 1998 and 1997 decreases were also impacted by gains recognized from the
sale of certain available-for-sale equity securities and increased royalty
income offset in part by increased legal costs, additional investments in
information technology, and marketing initiatives. In addition, the decrease in
fiscal 1998 was impacted by an increase in the dollar amount of gains recognized
from hedging activities as compared to the prior year.
As discussed in Note 3 to the consolidated financial statements, the company
recorded pre-tax charges totaling $205.3 million during the third quarter of
fiscal 1998. These charges included $156.4 million for management initiatives to
restructure the vascular organization and reduce global infrastructure, $12.9
million for obsolescence on certain vascular inventories (included in cost of
products sold in the above table) and a $36.0 million commitment to the
Medtronic Foundation. Management believes these initiatives will eventually
result in annualized pre-tax cost savings in excess of $50.0 million.
INCOME TAXES
The company's effective income tax rate in fiscal 1998 was 34.8% compared to an
effective rate of 34.5% in fiscal 1997 and 35.0% in fiscal 1996, after
restatement for the acquisitions of AneuRx and InStent. Excluding the effect of
the non-recurring charges discussed in Note 3 to the consolidated financial
statements, the effective income tax rate in fiscal 1998 would have been 34.5%.
Despite tax legislation that reduces U.S. tax benefits derived from the
company's operations in Puerto Rico, management believes that other tax planning
initiatives should contribute to a reduction of up to one percentage point in
the effective tax rate for fiscal 1999.
R&D EXPENSE
In Millions of Dollars
[BAR GRAPH]
1998 $297.2
1997 280.2
1996 243.8
DIVIDENDS TO
SHAREHOLDERS
In Millions of Dollars
[BAR GRAPH]
1998 $102.9
1997 90.7
1996 60.4
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The company continued to strengthen its financial position during fiscal 1998.
At April 30, 1998, working capital, the excess of current assets over current
liabilities, totaled $979.6 million compared to $719.2 million at April 30,
1997. The current ratio at April 30, 1998, was 2.7:1 compared with 2.4:1 and
2.6:1 at April 30, 1997 and 1996, respectively. The company's net cash position,
defined as the sum of cash, cash equivalents, and short-term investments less
short-term borrowings and long-term debt was $316.3 million at April 30, 1998,
compared to $130.2 million at April 30, 1997, and $430.8 million at April 30,
1996. The decrease in the company's current ratio and net cash position between
fiscal 1996 and fiscal 1997 was primarily due to the repurchase of $476.6
million of stock during fiscal 1997.
CASH FLOW
Cash provided by operating activities was $590.1 million in fiscal 1998 compared
to $463.6 million in fiscal 1997 and $500.9 million in fiscal 1996. Fiscal 1998
operating cash flows were more than sufficient to fund the company's stock
repurchases, capital expenditures, and dividends paid to shareholders.
Repurchases of common stock totaled $168.2 million in fiscal 1998, compared to
$476.6 million and $33.6 million in fiscal 1997 and fiscal 1996, respectively.
The significant stock repurchases during fiscal 1997 were supported by the
company's existing strong cash position. Additions to property, plant and
equipment totaled $148.2 million in fiscal 1998, compared to $171.3 million and
$165.1 million in fiscal 1997, and 1996, respectively. The company expects
future growth in capital spending to support increased manufacturing capacity
and operational requirements. This spending will be financed primarily by funds
from operations. Dividends paid to shareholders totaled $102.9 million, $90.7
million, and $60.4 million for fiscal 1998, 1997, and 1996, respectively.
Consistent with the company's financial objectives, the company expects to
continue paying dividends at a rate of approximately 20% of the previous year's
net earnings.
In addition, significant items affecting cash flows during fiscal 1997 included
net sales and maturities of marketable securities of $367.3 million and other
investing activities of $99.1 million. Significant items affecting cash flows
during fiscal 1996 included the cash purchase price paid for the acquisition of
Synectics of approximately $56.0 million and net purchases of marketable
securities totaling $190.3 million.
DEBT AND CAPITAL
At April 30, 1998, the total number of shares of common stock authorized by the
Board of Directors for repurchase was approximately 21.9 million shares. During
fiscal 1998, approximately 3.5 million shares were repurchased at an average
price of $47.90. During fiscal 1997, approximately 14.8 million shares were
repurchased at an average price of $32.18. The company repurchased shares in
fiscal 1998 and 1997 to offset dilution resulting from shares issued in
conjunction with purchased acquisitions in fiscal 1996 and fiscal 1997, the
issuance of stock under employee stock purchase and award plans and to take
advantage of market conditions. Future repurchases of common stock will depend
upon the company's systematic stock repurchase plan, market conditions,
restrictions related to pooling transactions, and other factors.
The company's capital structure consists of equity and interest-bearing debt.
Interest-bearing debt as a percent of total capital was 5.1% at April 30, 1998,
compared with 6.4% and 4.0% at April 30, 1997, and 1996, respectively.
One of the company's key financial objectives is achieving an annual return on
equity (ROE) of at least 20%. ROE compares net earnings to average shareholders'
equity and is a key measure of management's ability to utilize the shareholders'
investment in the company effectively. In fiscal 1998, ROE was 24.1% as compared
to 29.6% in fiscal 1997. Excluding the effects of the $205.3 million pre-tax
charges taken in the third quarter, fiscal 1998 ROE would have been 30.3%. In
fiscal 1996, ROE was 27.0% and in each of the preceding eight years, ROE
exceeded 20%.
MARKET RISK
Due to the global nature of its operations, the company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The company is also
exposed to interest rate changes.
The company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The company utilizes a variety of simple
derivative financial instruments, including foreign currency forward and option
contracts, as hedges to meet these objectives. The principal currencies hedged
are the Japanese yen and the German mark. The gains and losses on these
contracts offset changes in the value of the related exposures. It is the
company's policy to enter into foreign currency hedging transactions only to the
extent true exposures exist. The company does not enter into foreign currency
transactions for speculative purposes. The company's risk management activities
for fiscal 1998 were successful in reducing the net earnings impact of currency
fluctuations to an immaterial level despite adverse market conditions.
The fair value of all foreign currency derivative contracts outstanding at April
30, 1998 was $6.8 million, which does not represent the company's annual
exposure. An analysis was prepared to estimate the sensitivity of the fair value
of all derivative foreign exchange contracts to hypothetical 10% favorable and
unfavorable changes in spot exchange rates at April 30, 1998. Premiums paid for
purchased options are included in the fair value. The results of this
estimation, which may vary from actual results, are as follows (in millions):
Fair Value of Derivatives
-------------------------
10% adverse rate movement $(1.0)
At April 30, 1998 rates 6.8
10% favorable rate movement 17.7
Any gains and losses on the fair value of derivative contracts would be largely
offset by losses and gains on the underlying transactions or anticipated
transactions. These offsetting gains and losses are not reflected in the above
analysis. An analysis of the impact on the company's interest rate sensitive
financial instruments of a hypothetical 10% change in short-term interest rates
compared to interest rates at April 30, 1998 shows no significant impact on
expected fiscal 1999 earnings.
GOVERNMENT REGULATION AND OTHER MATTERS
Government and private sector initiatives to limit the growth of health care
costs, including price regulation and competitive pricing, are continuing in
many countries where the company does business, including the United States.
These changes are causing the marketplace to put increased emphasis on the
delivery of more cost-effective medical therapies. Although the company believes
it is well positioned to respond to changes resulting from this worldwide trend
toward cost containment, the uncertainty as to the outcome of any proposed
legislation or changes in the marketplace precludes the company from predicting
the impact these changes may have on future operating results.
3
<PAGE>
In keeping with the increased emphasis on cost effectiveness in health care
delivery, the current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing groups to enhance
purchasing power. The medical device industry has also been consolidating
rapidly, partly in order to offer a broader range of products to large
purchasers. As a result, transactions with customers are more significant, more
complex and tend to involve more long-term contracts than in the past. This
enhanced purchasing power may also increase the pressure on product pricing,
although management is unable to estimate the potential impact at this time.
In the United States, the Food and Drug Administration (FDA), among other
governmental agencies, is responsible for regulating the introduction of new
medical devices, including laboratory and manufacturing practices, labeling and
record keeping for medical devices, and review of manufacturers' required
reports of adverse experience to identify potential problems with marketed
medical devices. The FDA can ban certain medical devices, detain or seize
adulterated or misbranded medical devices, order repair, replacement, or refund
of such devices, and require notification of health professionals and others
with regard to medical devices that present unreasonable risks of substantial
harm to the public health. The FDA may also enjoin and restrain certain
violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act
pertaining to medical devices, or initiate action for criminal prosecution of
such violations. Moreover, the FDA administers certain controls over the export
of such devices from the United States. Many of the devices that Medtronic
develops and markets are in a category for which the FDA has implemented
stringent clinical investigation and pre-market clearance requirements. Any
delay or acceleration experienced by the company in obtaining regulatory
approvals to conduct clinical trials or in obtaining required market clearances
(especially with respect to significant products in the regulatory process that
have been discussed in the company's announcements) may affect the company's
operations or the market's expectations for the timing of such events and,
consequently, the market price for the company's common stock.
Medical device laws are also in effect in many of the countries in which
Medtronic does business outside the United States. These range from
comprehensive device approval requirements for some or all of Medtronic's
medical device products to requests for product data or certifications. The
number and scope of these requirements are increasing.
In the early 1990s, the review time by the FDA to clear medical devices for
commercial release lengthened and the number of clearances, both of 510(k)
submissions and pre-market approval applications (PMAs), decreased. In response
to public and congressional concern, the FDA Modernization Act of 1997 was
adopted with the intent of bringing better definition to the clearance process.
Although it is expected that the 1997 Act will result in improved cycle times
for product clearance, there can be no assurance that the FDA review process
will not involve delays or that clearances will be granted on a timely basis.
Medtronic is also subject to various environmental laws and regulations both
within and outside the United States. The operations of the company, like those
of other medical device companies, involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization processes.
While it is difficult to quantify the potential impact of compliance with
environmental protection laws, management believes that such compliance will not
have a material impact on the company's financial position, results of
operations or liquidity.
The company operates in an industry susceptible to significant product liability
claims. In recent years, there has been increased public interest in product
liability claims for implanted medical devices, including pacemakers and leads.
These claims may be brought by individuals seeking relief for themselves or,
increasingly, by groups seeking to represent a class, and the company has
experienced an increase in such claims. During the past several years, United
States District Courts in California, Florida, Kentucky, and Ohio have refused
to certify class actions in cases brought against the company. This is
consistent with the trend in class action law as it applies to the medical
device industry generally. In addition, product liability claims may be asserted
against the company in the future related to events not known to management at
the present time. Management believes that the company's risk management
practices, including insurance coverage, are reasonably adequate to protect
against potential product liability losses.
In 1994, governmental authorities in Germany began an investigation into certain
business and accounting practices by heart valve manufacturers. As part of this
investigation, documents were seized from the company and certain other
manufacturers. Subsequently, the United States Securities and Exchange
Commission (SEC) also began an inquiry into this matter. In August 1996, the SEC
issued a formal, non-public order of investigation to the company, as it did to
at least one other manufacturer. Based upon currently available information, the
company does not expect these investigations to have a materially adverse impact
on the company's financial position, results of operations, or liquidity.
The company has completed a review of its computer systems with regard to year
2000 compliance and will either replace or correct through programming
modifications those computer systems that have been found to have date-related
deficiencies. In addition, the company is assessing the readiness of third
parties (e.g., vendors and customers) that interact with the company's systems.
Also being assessed are facility and telecommunication systems, as well as
systems used to support manufacturing processes, to ensure that these will be
year 2000 ready. The company's products have been assessed and found to be year
2000 compliant with the exception of a few requiring minor corrective actions.
External and internal costs specifically associated with modifying internal use
software for year 2000 compliance are expensed as incurred. To date, those costs
have not been material. Based upon currently available information, the company
does not expect the costs of addressing potential year 2000 problems to have a
material adverse impact on the company's financial position, results of
operations or liquidity in future periods. The company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Annual Report and other written and oral
statements made from time to time by the company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. The company's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider
forward-looking statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed in the previous section
titled, "Government Regulation and Other Matters." Consequently, no
forward-looking statement can be guaranteed and actual results may vary
materially.
The company undertakes no obligation to update any forward-looking statement,
but investors are advised to consult any further disclosures by the company on
this subject in its filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q, and 8-K (if any), in which the company discusses
in more detail various important factors that could cause actual results to
differ from expected or historic results. The company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
4
<PAGE>
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The management of Medtronic, Inc., is responsible for the integrity of the
financial information presented in the Annual Report. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. Where necessary, they reflect estimates based on management's
judgment.
Management relies upon established accounting procedures and related systems of
internal control for meeting its responsibilities to maintain reliable financial
records. These systems are designed to provide reasonable assurance that assets
are safeguarded and that transactions are properly recorded and executed in
accordance with management's intentions. Internal auditors periodically review
the accounting and control systems, and these systems are revised if and when
weaknesses or deficiencies are found.
The Audit Committee of the Board of Directors, composed of directors from
outside the company, meets regularly with management, the company's internal
auditors, and its independent accountants to discuss audit scope and results,
internal control evaluations, and other accounting, reporting, and financial
matters. The independent accountants and internal auditors have access to the
Audit Committee without management's presence.
/s/ William W. George
William W. George
Chairman and Chief Executive Officer
/s/ Arthur D. Collins, Jr.
Arthur D. Collins, Jr.
President and Chief Operating Officer
/s/ Robert L. Ryan
Robert L. Ryan
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and
Board of Directors of Medtronic, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
statements of consolidated earnings, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Medtronic, Inc., and
its subsidiaries at April 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Minneapolis, Minnesota
May 26, 1998
5
<PAGE>
STATEMENT OF CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- -------------------------------------------------------------------------------------------
Year ended April 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 2,604,819 $ 2,438,224 $ 2,172,100
COSTS AND EXPENSES:
Cost of products sold 670,360 610,190 591,433
Research and development expense 297,177 280,214 243,829
Selling, general, and administrative expense 757,647 763,347 700,876
Non-recurring charges 156,400 -- --
Foundation commitment 36,000 -- --
Interest expense 8,161 9,375 8,089
Interest income (22,927) (34,045) (31,124)
- -------------------------------------------------------------------------------------------
Total costs and expenses 1,902,818 1,629,081 1,513,103
- -------------------------------------------------------------------------------------------
Earnings before income taxes 702,001 809,143 658,997
Provision for income taxes 244,619 279,155 230,691
- -------------------------------------------------------------------------------------------
Net earnings $ 457,382 $ 529,988 $ 428,306
===========================================================================================
Weighted average shares outstanding 468,936 477,386 474,872
Basic earnings per share $ 0.98 $ 1.11 $ 0.90
===========================================================================================
Earnings per share assuming dilution $ 0.96 $ 1.09 $ 0.89
===========================================================================================
Weighted average shares outstanding
assuming dilution 475,584 485,536 483,792
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(in thousands of dollars) Medtronic, Inc.
- ----------------------------------------------------------------------------------------------------------
April 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 382,734 $ 197,388
Short-term investments 43,148 53,181
Accounts receivable, less allowance
for doubtful accounts of $14,469 and $13,673 566,056 516,984
Inventories:
Finished goods 147,689 123,282
Work in process 73,350 68,034
Raw materials 110,094 91,235
- ----------------------------------------------------------------------------------------------------------
Total Inventories 331,133 282,551
Deferred tax assets 146,429 121,087
Prepaid expenses and other current assets 82,110 66,718
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,551,610 1,237,909
PROPERTY, PLANT, AND EQUIPMENT:
Land and land improvements 26,540 25,449
Buildings and leasehold improvements 239,011 223,398
Equipment 687,943 655,719
Construction in progress 69,909 60,436
- ----------------------------------------------------------------------------------------------------------
1,023,403 965,002
Accumulated depreciation (514,616) (477,786)
- ----------------------------------------------------------------------------------------------------------
Net Property, Plant, and Equipment 508,787 487,216
GOODWILL, net of accumulated amortization of $93,197 and $71,700 368,768 394,238
OTHER INTANGIBLE ASSETS, net of
accumulated amortization of $54,505 and $53,325 97,791 96,730
LONG-TERM INVESTMENTS 137,706 125,847
OTHER ASSETS 110,065 67,270
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,774,727 $ 2,409,210
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 93,346 $ 106,375
Accounts payable 89,149 110,337
Accrued compensation 173,141 124,603
Accrued income taxes 72,471 68,814
Other accrued expenses 143,935 108,562
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 572,042 518,691
LONG-TERM DEBT 16,227 13,980
DEFERRED TAX LIABILITIES 13,409 2,163
OTHER LONG-TERM LIABILITIES 128,859 128,155
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 730,537 662,989
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--par value $1.00; 2,500,000 shares authorized, none outstanding
Common stock--par value $.10; 800,000,000 shares authorized,
469,045,244 and 467,627,010 shares issued and outstanding 46,905 46,762
Retained earnings 2,092,296 1,784,319
Cumulative translation adjustments and other (67,111) (56,960)
- ----------------------------------------------------------------------------------------------------------
2,072,090 1,774,121
Receivable from Employee Stock Ownership Plan (27,900) (27,900)
- ----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,044,190 1,746,221
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,774,727 $ 2,409,210
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) Medtronic, Inc.
- -----------------------------------------------------------------------------------------------------------------------
Cumulative
Translation Receivable
Common Retained Adjustments from
Stock Earnings and Other ESOP
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995 $ 11,551 $ 1,325,837 $ 23,848 $ (29,980)
Net earnings 428,306
Dividends paid (60,427)
Two-for-one stock split 11,560 (11,560)
Issuance of common stock under employee benefit
and incentive plans 126 24,720
Issuance of common stock in acquisition
of subsidiaries 261 80,666
Repurchases of common stock (66) (33,508)
Change in unrealized gain (loss) on investments, net of tax 27,187
Income tax benefit from restricted stock and nonstatutory
stock options 6,501
Translation adjustments (26,523)
Repayment from ESOP 1,308
Adjustment for pooling of interests 499 55,985
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1996 $ 23,931 $ 1,843,707 $ (2,675) $ (28,672)
Net earnings 529,988
Dividends paid (90,716)
Issuance of common stock under employee benefit
and incentive plans 190 44,048
Repurchases of common stock (740) (475,825)
Change in unrealized gain (loss) on investments, net of tax (57,864)
Income tax benefit from restricted stock and nonstatutory
stock options 14,362
Translation adjustments (54,285)
Repayment from ESOP 772
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1997 $ 23,381 $ 1,807,700 $ (56,960) $ (27,900)
Net earnings 457,382
Dividends paid (102,939)
Two-for-one stock split 23,451 (23,451)
Issuance of common stock under employee benefit
and incentive plans 424 53,830
Repurchases of common stock (351) (167,872)
Change in unrealized gain (loss) on investments, net of tax 21,848
Income tax benefit from restricted stock and nonstatutory
stock options 45,798
Translation adjustments (8,961)
Minimum pension liability (1,190)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1998 $ 46,905 $ 2,092,296 $ (67,111) $ (27,900)
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(in thousands of dollars) Medtronic, Inc.
- ----------------------------------------------------------------------------------------------------------
Year ended April 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 457,382 $ 529,988 $ 428,306
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 137,558 116,893 112,003
Non-recurring charges, net 88,771 -- --
Deferred income taxes 21,546 2,043 (33,106)
Changes in operating assets and liabilities:
Increase in accounts receivable (53,173) (52,176) (46,873)
Increase in inventories (59,750) (16,904) (30,439)
(Increase) decrease in prepaid expenses
and other assets (57,718) (30,626) 18,922
(Decrease) increase in accounts payable and
accrued liabilities 52,446 (42,996) 34,809
(Decrease) increase in accrued income taxes 3,629 (41,791) (5,174)
(Decrease) increase in deferred income 79 (1,621) 1,230
(Decrease) increase in postretirement benefit accrual (467) 1,337 2,272
(Decrease) increase in other long-term liabilities (236) (530) 18,909
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 590,067 463,617 500,859
INVESTING ACTIVITIES
Additions to property, plant, and equipment (148,152) (171,329) (165,066)
Acquisitions, net of cash acquired -- (18,873) (55,958)
Sales and maturities of marketable securities 103,131 866,911 465,215
Purchases of marketable securities (86,400) (499,640) (655,510)
Other investing activities (42,371) (99,069) (19,896)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (173,792) 78,000 (431,215)
FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (14,153) 33,404 14,330
Payments on long-term debt (7,082) (3,064) (4,062)
Issuance of long-term debt 9,529 1,601 681
Proceeds from stock offering of acquired subsidiary -- -- 41,538
Dividends to shareholders (102,939) (90,716) (60,427)
Repurchases of common stock (168,223) (476,565) (33,574)
Issuance of common stock 54,254 44,238 24,846
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (228,614) (491,102) (16,668)
Effect of exchange rate changes on cash and cash equivalents (2,315) (4,177) (218)
- ----------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 185,346 46,338 52,758
Cash and cash equivalents at beginning of year 197,388 151,050 98,292
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 382,734 $ 197,388 $ 151,050
==========================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 218,635 $ 309,659 $ 258,795
Interest 8,085 9,263 8,134
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for acquisition of
subsidiary, net of cash acquired $ -- $ -- $ 73,951
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Medtronic operates in a single industry segment as the world's leading medical
technology company specializing in implantable and interventional therapies.
Medtronic creates innovative solutions for the health care needs of medical
professionals and their patients and does business in more than 120 countries.
The company is headquartered in Minneapolis, Minnesota, with worldwide
operations that provide therapeutic, diagnostic, and monitoring products for the
cardiac rhythm management, other cardiovascular, and neurological markets. The
company generally markets its products through a direct sales force in the
United States and a combination of direct sales representatives and independent
distributors in international markets. The main markets for products are the
United States, Western Europe, and Japan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medtronic, Inc.,
and all of its subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The company considers highly liquid investments with maturities of three months
or less from the date of purchase to be cash equivalents. These investments are
valued at cost, which approximates fair value.
REVENUE RECOGNITION
The company recognizes revenue from product sales when the goods are shipped to
its customers. For certain products, the company maintains consigned inventory
at customer locations. For these products, revenue is recognized at the time the
company is notified that the device has been used by the customer.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Additions and improvements
extending asset lives are capitalized while expenditures for repairs and
maintenance are expensed as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets.
GOODWILL, OTHER INTANGIBLE ASSETS, AND LONG LIVED ASSETS
Goodwill represents the excess of cost over net assets of businesses acquired,
while other intangible assets consist primarily of purchased technology and
patents. Goodwill and other intangible assets are being amortized using the
straight-line method over their estimated useful lives, of which periods up to
28 and 16 years remain, respectively. The company periodically reviews its
goodwill and other long-lived assets for indicators of impairment in accordance
with SFAS No. 121.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
STOCK-BASED COMPENSATION
In fiscal 1997, the company adopted the disclosure-only provisions of Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which disclosures are presented in Note 8 "Stock Purchase and
Award Plans." Accordingly, the company continues to account for stock-based
compensation using the intrinsic value method as prescribed under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations.
FOREIGN CURRENCY TRANSLATION
Essentially all assets and liabilities are translated to U.S. dollars at
year-end exchange rates, while elements of the income statement are translated
at average exchange rates in effect during the year. Foreign currency
transaction gains and losses are included in the statement of consolidated
earnings as selling, general, and administrative expense. Adjustments arising
from the translation of most net assets located outside the United States (gains
and losses) are recorded as a component of shareholders' equity.
RISK MANAGEMENT CONTRACTS
In the normal course of business, the company utilizes a variety of derivative
financial instruments, including foreign currency forward and option contracts,
to manage its exposure to fluctuations in foreign currency exchange rates. The
company designates and assigns the financial instruments as hedges for specific
assets, liabilities or anticipated transactions. When hedged assets or
liabilities are sold or extinguished or the anticipated transactions being
hedged are no longer expected to occur, the company recognizes the gain or loss
on the designated hedging financial instruments. The company classifies its
derivative financial instruments as held or issued for purposes other than
trading. Prepaid option premiums and unrealized losses on forward contracts are
recorded in the balance sheet as other assets. Unrealized gains on forward
contracts are included in other accrued liabilities. Gains and losses from
hedges of firm commitments are classified in the income statement consistent
with the accounting treatment of the items being hedged.
ROYALTY INCOME
Income earned from royalty and license agreements is recorded as a reduction of
selling, general, and administrative expense.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS No. 128
requires dual presentation of basic earnings per share and diluted earnings per
share. Basic earnings per share is computed based on the weighted average number
of common shares outstanding, while diluted earnings per share is computed based
on the weighted average number of common shares outstanding adjusted by the
number of additional shares that would have been outstanding had the potential
dilutive common shares been issued. Potential dilutive shares of common stock
include stock options and other stock-based awards granted under stock-based
compensation plans and shares committed to be purchased under the employee stock
purchase plan.
The following table sets forth the computation of earnings per share:
Year ended April 30, 1998 1997 1996
- ------------------------------------------------------------------
Net earnings $ 457,382 $ 529,988 $ 428,306
==================================================================
Weighted average shares
outstanding for basic
earnings per share 468,936 477,386 474,872
Dilutive effect of
potential shares 6,648 8,150 8,920
Adjusted weighted-
average shares
outstanding for diluted
earnings per share 475,584 485,536 483,792
==================================================================
Basic earnings
per share $ 0.98 $ 1.11 $ 0.90
Earnings per share
assuming dilution $ 0.96 $ 1.09 $ 0.89
==================================================================
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 "Reporting Comprehensive Income." SFAS No.
130 must be adopted by the company in the first quarter of fiscal 1999. Under
this statement, the company will report in its statement of consolidated
shareholders' equity, in addition to net earnings, comprehensive income and its
components including, as applicable, unrealized gains and losses on
available-for-sale securities, foreign currency translation adjustments, and
minimum pension liability. Implementation of this disclosure standard will not
affect the company's results of operations, cash flows or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 "Disclosure about Segments of an
Enterprise and Related Information." This statement, which must be adopted by
the company for the fiscal year ending April 30, 1999, establishes new standards
for reporting information about operating segments in annual and interim
financial statements. Under SFAS No. 131, operating segments are determined
consistent with the way management organizes and evaluates financial information
internally for making decisions and assessing performance. SFAS No. 131 also
requires related disclosures about products, geographic areas, and major
customers. Implementation of this disclosure standard will not affect the
company's results of operations, cash flows or financial position.
NOTE 2--ACQUISITIONS
In August 1996, the company acquired substantially all of the assets and
liabilities of Avalon Laboratories, Inc. (Avalon) for approximately $19.0
million in cash. Avalon develops, manufactures, and sells cannulae and other
surgical products.
In June 1996, the company issued approximately 7,704,000 shares of its common
stock for all of the outstanding capital stock of InStent Inc. (InStent).
InStent develops, manufactures, and markets a variety of self-expanding and
balloon-expandable stents used in a broad range of medical indications.
In May 1996, the company issued approximately 2,308,000 shares of its common
stock for all of the outstanding capital stock of AneuRx, Inc. (AneuRx), which
provides a minimally invasive endovascular stented graft and delivery system
used to repair life-threatening abdominal aortic aneurysms.
In April 1996, the company acquired the remaining outstanding stock of Synectics
Medical AB (Synectics) at a cost of approximately $59.3 million in cash. The
company had previously purchased approximately 8% of the outstanding stock of
Synectics. Synectics, of Stockholm, Sweden, is a world leader in the development
and marketing of computer-supported systems used to diagnose disorders of the
urological and digestive systems and sleep apnea.
In November 1995, the company acquired all of the outstanding capital stock of
Pudenz-Schulte Medical Corporation (PS Medical) for approximately 2,524,000
shares of the company's common stock. In March 1996, upon the achievement of a
specified milestone, the company made an additional payment of approximately
192,000 shares of the company's common stock. In addition, the company may pay
additional future payments of the company's common stock contingent upon
achieving specified milestones. These contingent payments, if any, will be
reflected as acquisition costs when the contingencies are resolved. PS Medical
manufactures and distributes cerebrospinal fluid shunts and neurosurgical
implants such as catheters, reservoirs, and fluid drainage systems.
In November 1995, the company issued approximately 2,492,000 shares of the
company's common stock for all of the outstanding common stock of Micro
Interventional Systems, Inc. (MIS), a developer of products for the minimally
invasive treatment of stroke and other diseases. During fiscal 1998, the company
announced plans to close MIS as a result of identifying evidence of improper
submissions to the U.S. Food and Drug Administration (FDA) for product
clearances prior to Medtronic's acquisition of MIS in 1995. The company has
begun legal action on this matter and costs related to closing MIS were included
in the $205.3 million of non-recurring charges taken during the third quarter of
fiscal 1998 (See Note 3).
The acquisitions of AneuRx, InStent and MIS have been accounted for as
poolings-of-interests, and, accordingly, the company's consolidated financial
statements for fiscal year 1996 have been restated to include the results of
AneuRx, InStent, and MIS. Activity for years prior to fiscal year 1996 has not
been restated as the impact of these acquisitions in such years is not
considered material, and restatement is therefore not required. Net sales and
net results for the individual entities are not presented as the activity is not
deemed to be material.
The acquisitions of Avalon, PS Medical, and Synectics were accounted for as
purchases. Accordingly, the results of operations of the acquired entities have
been included in the company's consolidated financial statements since the
respective dates of acquisition. Acquired goodwill, patents, trademarks, and
other intangible assets associated with these acquisitions are being amortized
using the straight-line method over periods ranging from 8 to 30 years.
NOTE 3--NON-RECURRING CHARGES AND FOUNDATION COMMITMENT
The company recorded pre-tax charges totaling $205.3 million during the third
quarter of fiscal 1998. $156.4 million of this pre-tax charge pertained to
management initiatives to restructure the vascular organization and reduce
global infrastructure by streamlining certain manufacturing and administrative
operations within the United States, Europe, and Japan. These actions include
the closing of several manufacturing facilities and will result in the
elimination of approximately 1,000 positions and a net reduction of about 600 in
the company's worldwide workforce. Since the inception of this restructuring
program, approximately 400 positions have been eliminated. The company is in the
process of implementing the major strategic actions associated with this
restructuring program, which are expected to be completed by the end of fiscal
1999.
In connection with this initiative, included in the $205.3 million pre-tax
charge was a $12.9 million obsolescence charge to cost of products sold as a
result of identified obsolescence on certain vascular inventories.
Also included in the $205.3 million pre-tax charge was a commitment made by the
company during the third quarter to contribute $36.0 million to the Medtronic
Foundation (See Note 12). This commitment is included within the "Other"
category below.
Cash and non-cash applications against the initial charges are as follows:
Noncancelable
Contractual
Facility Severance and Asset Obligations
Reductions Related Costs Write-downs and Other Total
- --------------------------------------------------------------------------------
Initial charge $ 7,659 $ 58,364 $ 81,700 $ 57,577 $ 205,300
Utilization:
Cash (3,621) (13,608) -- (7,100) (24,329)
Noncash -- -- (81,700) (10,500) (92,200)
- --------------------------------------------------------------------------------
Balance at
April 30, 1998 $ 4,038 $ 44,756 -- $ 39,977 $ 88,771
================================================================================
The April 30, 1998 reserve balance consisted of $44,756 included in accrued
compensation and $44,015 included in other accrued expenses.
NOTE 4--FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, receivables, and short-term debt
approximate their carrying value due to their short maturities. The carrying
amounts and estimated fair values of the company's other significant financial
instruments were as follows:
- -------------------------------------------------------------------------------
April 30, 1998 1997
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------
ASSETS
Short-term investments $43,148 $43,148 $53,181 $53,181
Long-term investments 137,706 137,706 125,847 125,847
Net purchased currency options 779 779 4,698 4,698
Forward exchange contracts 6,053 6,053 5,721 5,721
LIABILITIES
Short-term debt 93,346 93,346 106,375 106,375
Long-term debt 16,227 17,053 13,980 15,588
===============================================================================
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
The fair value of certain short-term and long-term investments are based on
quoted market prices for those or similar investments. For long-term investments
which have no quoted market prices and are accounted for on a cost basis, a
reasonable estimate of fair value was made using available market and financial
information. The fair value of long-term debt is based on the current rates
offered to the company for debt of similar maturities. The estimates presented
on long-term financial instruments are not necessarily indicative of the amounts
that would be realized in a current market exchange. The fair value of foreign
currency instruments was estimated based on quoted market prices at April 30,
1998 and 1997.
Investments in debt and equity securities that have readily determinable fair
values are classified and accounted for in one of two categories:
held-to-maturity, or available-for-sale. Held-to-maturity securities are
recorded at amortized cost in short-term and long-term investments.
Available-for-sale securities are recorded at fair value in short-term or
long-term investments with the change in fair value during the period excluded
from earnings and recorded net of tax as a component of shareholders' equity.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date.
At April 30, 1998 and 1997, available-for-sale investments included only equity
securities. The cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale securities at April 30, 1998 and
1997 were as follows:
Gross Gross
Unrealized Unrealized
Holding Holding
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
APRIL 30, 1998 $66,932 $32,666 $ (2,030) $97,568
April 30, 1997 61,314 15,058 (18,035) 58,337
================================================================================
At April 30, 1998 and 1997, the net unrealized gain (loss) associated with
available-for-sale securities of $19,913 and $(1,935) respectively, net of tax
expense (benefit) of $10,723 and $(1,042), was included in retained earnings.
Proceeds from the sale of available-for-sale securities during fiscal 1998 and
1997 were $37,193 and $45,965, respectively. Net gains included in income in
fiscal 1998 and 1997 were $25,466 and $32,275, respectively. In addition, during
fiscal 1998 and 1997 the company donated equity securities with fair values of
$10,500 and $13,400, respectively, to fund commitments to the Medtronic
Foundation (See Note 12).
Held-to-maturity investments at April 30, 1998 consisted primarily of U.S.
government and corporate debt securities, all of which mature within three
years. Debt securities are classified as held-to-maturity when the company has
the positive intent and ability to hold the securities to maturity. These
securities were carried at amortized cost of $413,217 and have a fair value of
$413,217. During the fourth quarter of fiscal 1997, the company sold previously
categorized held-to-maturity investments with an amortized cost of $316,075 to
fund repurchases of company common stock, resulting in a loss that was not
material. Election of this funding option does not affect the classification of
the April 30, 1998 balance of the securities in the held-to-maturity portfolio
as the company retains the intent and ability to hold those securities until
they mature.
FOREIGN EXCHANGE RISK MANAGEMENT
Due to the global nature of its operations, the company is subject to the
exposures that arise from foreign exchange rate fluctuations. The company's
objective in managing its exposure to foreign currency fluctuations is to
minimize net earnings and cash flow volatility associated with foreign exchange
rate changes. In order to reduce the uncertainty of foreign exchange rate
movements, the company enters into derivative financial instruments in the form
of forward exchange and option contracts with major international financial
institutions. These forward and option contracts, which typically expire within
one year, are designed to hedge anticipated foreign currency transactions. Such
transactions, primarily export intercompany sales, occur throughout the year and
are probable but not firmly committed. The principal currencies hedged are the
Japanese yen and the German mark.
The company had contracts, all of which expire within one year, to exchange
foreign currencies for U.S. dollars in the following notional amounts:
April 30, 1998 1997
- --------------------------------------------------------------------------------
Forward exchange contracts $146,574 $150,635
- --------------------------------------------------------------------------------
Put options 779 4,841
Call options -- (143)
- --------------------------------------------------------------------------------
Net purchased currency options $ 779 $ 4,698
================================================================================
The company had aggregate foreign currency transaction gains (losses), primarily
related to purchased currency options and forward contracts, of $17,462, $1,926,
and $(20,789), in fiscal 1998, 1997, and 1996, respectively. Realized gains
(losses) on these contracts were offset by the (losses) gains on assets,
liabilities, and transactions being hedged. Forward contracts and net premium on
option contracts in existence at the balance sheet date are recorded at their
fair value. Gains and losses on forward and option contracts are recorded in
selling, general, and administrative expense.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the company to significant
concentrations of credit risk, consist principally of interest-bearing
investments, foreign currency exchange contracts, and trade accounts receivable.
The company maintains cash and cash equivalents, investments, and certain other
financial instruments with various major financial institutions. The company
performs periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across many
geographic areas. The company monitors the creditworthiness of its customers to
which it grants credit terms in the normal course of business. However, a
significant amount of trade receivables are with national health care systems in
many countries. Although the company does not currently foresee a credit risk
associated with these receivables, repayment is dependent upon the financial
stability of those countries' national economies.
NOTE 5--DEBT
DEBT CONSISTED OF THE FOLLOWING AT APRIL 30:
Average
Short-Term Debt Interest Rate 1998 1997
- -------------------------------------------------------------------------------
Bank borrowings 2.2% $ 90,846 $ 99,716
Current portion of
long-term debt 6.3% 2,500 6,659
- -------------------------------------------------------------------------------
Total Short-Term Debt $ 93,346 $106,375
================================================================================
Average Maturity
Long-Term Debt Interest Rate Date 1998 1997
- -------------------------------------------------------------------------------
Various notes 2.1% 1999-2007 $ 13,568 $ 10,387
Capitalized lease
obligations 9.8% 1999-2008 2,659 3,593
- -------------------------------------------------------------------------------
Total Long-Term Debt $ 16,227 $ 13,980
================================================================================
Short-term borrowings consisted primarily of borrowings from non-U.S. banks at
favorable interest rates and where natural hedges can be gained for foreign
exchange purposes. The company has existing committed lines of credit of $229
million with various banks, of which $138 million was unused at April 30, 1998.
Maturities of long-term debt for the next five fiscal years are as follows:
1999, $2,500; 2000, $3,248; 2001, $1,786; 2002, $1,730; 2003, $7,091,
thereafter, $2,372.
NOTE 6--SHAREHOLDERS' EQUITY
At April 30, 1998, Board of Directors' authorization existed to repurchase
approximately 21.9 million shares of the company's common stock.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
On July 10, 1997, the Board of Directors approved a two-for-one common stock
split, effected September 12, 1997 in the form of a 100 percent stock dividend
to shareholders of record at the close of business on August 29, 1997. The stock
split resulted in the issuance of 234.5 million additional shares and the
reclass of $23,451 from retained earnings to common stock, representing the par
value of the shares issued.
On August 30, 1995, the Board of Directors approved a two-for-one common stock
split, effected September 29, 1995 in the form of a 100 percent stock dividend
to shareholders of record at the close of business on September 14, 1995. The
stock split resulted in the issuance of 115.6 million additional shares and the
reclass of $11,560 from retained earnings to common stock, representing the par
value of the shares issued. All references in the consolidated financial
statements and notes to consolidated financial statements to per share
information, number of shares, except shares authorized, and related share
prices have been restated to reflect these stock splits.
A shareholder rights plan exists which provides for a dividend distribution of
one right to be attached to each share of common stock. The rights are currently
not exercisable or transferable apart from the common stock. The basic right
entitles the holder to purchase one sixteen-hundredth of a share of a new series
of participating preferred stock, which is substantially equivalent to one share
of common stock, at an exercise price of $37.50 per share. These rights would
become exercisable if a person or group acquires 15% or more of the company's
common stock or announces a tender offer which would increase the person's or
group's beneficial ownership to 15% or more of the company's common stock,
subject to certain exceptions. After the rights become exercisable, each right
entitles the holder (other than the 15% holder), instead, to purchase common
stock having a market price of two times the exercise price. If the company is
acquired in a merger or other business combination transaction, each exercisable
right entitles the holder to purchase common stock of the acquiring company or
an affiliate having a market price of two times the exercise price of the right.
In certain events the Board of Directors may exchange rights for common stock or
equivalent securities having a market price equal to the exercise price of the
rights. Each right is redeemable at $.000625 any time before a person or group
triggers the 15% ownership threshold. The rights expire on July 10, 2001.
NOTE 7--EMPLOYEE STOCK OWNERSHIP PLAN
The company has an Employee Stock Ownership Plan (ESOP) for eligible U.S.
employees. In December 1989, the ESOP borrowed $40,000 from the company and used
the proceeds to purchase 9,466,464 shares of the company's common stock. The
company makes contributions to the plan which are used, in part, by the ESOP to
make loan and interest payments. Expenses related to the ESOP are based on debt
service requirements less any dividends received by the ESOP on the company's
common stock. This amount is further adjusted by any additional company
contribution necessary to meet an annual targeted benefit level. Compensation
and interest expense recognized were as follows:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Interest expense $2,511 $2,580 $2,698
Dividends paid 1,957 1,798 1,310
- --------------------------------------------------------------------------------
Net interest expense 554 782 1,388
Compensation expense 1 779 1,316
- --------------------------------------------------------------------------------
Total expense $ 555 $1,561 $2,704
================================================================================
Shares of common stock acquired by the plan are allocated to each employee in
amounts based on company performance and the employee's annual compensation.
Allocations of 2.5%, 3.0%, and 4.0% of qualified compensation were made to plan
participants' accounts in fiscal 1998, 1997, and 1996, respectively. At April
30, 1998 and 1997, cumulative allocated shares remaining in the trust were
3,870,704 and 3,663,724, respectively, and unallocated shares were 5,396,014 and
5,788,440, respectively, of which, 228,297 and 392,426, respectively, were
committed-to-be allocated. Unallocated shares are released based on the ratio of
current debt service to total remaining principal and interest. The loan from
the company to the ESOP is repayable over 20 years, ending on April 30, 2010.
Interest is payable annually at a rate of 9.0%. The receivable from the ESOP is
recorded as a reduction of the company's shareholders' equity and allocated and
unallocated shares of the ESOP are treated as outstanding common stock in the
computation of earnings per share.
NOTE 8--STOCK PURCHASE AND AWARD PLANS
1994 STOCK AWARD PLAN
The 1994 stock award plan provides for the grant of nonqualified and incentive
stock options, stock appreciation rights, performance shares, and other
stock-based awards. There were 13,403,965 shares available under this plan for
future grants at April 30, 1998.
Under the provisions of the 1994 stock award plan, nonqualified stock options
and other stock awards are granted to officers and key employees at prices not
less than fair market value at the date of grant. In addition, awards granted
under the previous nonqualified stock option and stock award plans as well as
stock options assumed as a result of acquisition transactions remain outstanding
though no additional awards will be made under these plans.
In fiscal 1998, the company adopted a new stock compensation plan for outside
directors which replaces the provisions in the 1994 stock award plan relating to
awards to outside directors. The table below includes awards granted under the
new plan, which at April 30, 1998 had 1,402,806 shares available for future
grants.
A summary of nonqualified option transactions is as follows:
Option Price
Range Per Number of Expiration
Share Shares Date
- --------------------------------------------------------------------------------
Outstanding at
April 30, 1996 $ 2.44 - 29.63 13,060,740 1997 - 2006
Granted 24.88 - 34.57 1,583,550 2002 - 2007
Exercised 2.44 - 29.63 2,390,146 1997 - 2007
Canceled 3.77 - 34.25 177,044 2002 - 2007
- --------------------------------------------------------------------------------
Outstanding at
April 30, 1997 $ 2.44 - 34.57 12,077,100 1998 - 2007
Granted 27.06 - 53.31 2,564,633 2003 - 2008
Exercised 2.44 - 48.44 3,612,002 1998 - 2008
Canceled 9.39 - 53.31 190,666 2003 - 2008
- --------------------------------------------------------------------------------
Outstanding at
April 30, 1998 $ 2.55 - 53.31 10,839,065 1999 - 2008
================================================================================
Exercisable at
April 30, 1997 $ 2.44 - 34.19 8,221,452 1998 - 2007
April 30, 1998 2.55 - 53.31 6,721,822 1999 - 2008
================================================================================
In addition, stock options outstanding at April 30, 1998 assumed as part of
certain fiscal 1997 and 1996 acquisitions were 198,863 and 14,453, respectively.
Stock options exercisable under these plans were 172,164 and 1,032 at April 30,
1998. These options have a price range per share of $0.28 - $28.58 at April 30,
1998 and expire 1999-2007. No additional awards will be made under these plans.
A summary of stock options as of April 30, 1998, including options assumed as a
result of acquisitions, is as follows:
Options Outstanding Options Exercisable
- -------------------------------------------------------- ----------------------
Weighted Average Weighted Weighted
Range of Remaining Years Average Average
Exercise of Contractual Exercise Exercise
Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------- ----------------------
$ 0.28 - 15.00 6,000,928 3.9 $ 8.62 5,656,540 $ 8.26
15.01 - 30.00 1,664,084 7.3 25.06 1,104,641 24.37
30.01 - 45.00 2,182,655 8.6 38.73 33,839 43.13
45.01 - 53.31 1,204,714 9.2 47.45 99,998 51.49
- -------------------------------------------------------- ---------------------
11,052,381 5.9 $ 21.27 6,895,018 $ 11.83
======================================================== =====================
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
Nonqualified options are normally exercisable beginning one year from the date
of grant in cumulative yearly amounts of 25 percent of the shares under option
and generally have a contractual option term of 10 years. However, certain
nonqualified options granted are exercisable immediately.
Restricted stock and performance share awards are dependent upon continued
employment and, in the case of performance shares, achievement of certain
performance objectives. In fiscal 1998, 399,640 restricted shares were issued
and 193,088 shares of common stock were issued pursuant to previous performance
share grants. At April 30, 1998, total restricted shares outstanding under both
the 1994 stock award plan and the previous restricted stock and performance
share award plans were 1,677,501. Performance share awards for up to 407,365
shares, assuming maximum performance payout, were outstanding under the two
plans at April 30, 1998. The actual number of performance shares awarded may
vary depending on the degree to which the performance objectives are met. The
cost of the restricted stock is generally expensed over five years from the date
of issuance ($5,815, $4,761, and $4,375 in fiscal 1998, 1997, and 1996,
respectively). The estimated cost of the performance shares is expensed over
three years from the date of grant ($9,793, $7,582, and $10,313 in fiscal 1998,
1997, and 1996, respectively).
In fiscal 1997, the company adopted Statement of Financial Accounting Standard
(SFAS) No. 123 "Accounting for Stock-Based Compensation" which encourages, but
does not require companies to recognize compensation cost for stock-based
compensation plans over the vesting period based upon the fair value of awards
on the date of grant. However, the statement allows the alternative of the
continued use of the intrinsic value method as prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Therefore, as permitted, the company continues to apply APB No. 25,
and related Interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation expense has been recognized by the company
for its nonqualified stock options and its stock purchase plan.
Had compensation expense for the company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
of SFAS No. 123, the company's net earnings and basic earnings per share would
have been reduced to the pro forma amounts indicated below:
1998 1997
- --------------------------------------------------------------------------------
Net Earnings As reported $457,382 $529,988
Pro forma 436,529 517,470
Basic Earnings
Per Share As reported $ 0.98 $ 1.11
Pro forma 0.93 1.08
================================================================================
Pro forma net earnings reflects only options and other stock-based awards
granted in fiscal 1998, 1997, and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings amounts presented because compensation
cost is reflected over the options' vesting period, which is normally four
years, and compensation cost for options granted prior to fiscal year 1996 is
not considered.
The weighted-average fair value per option at the date of grant for options
granted in fiscal 1998 and 1997 was $17.75 and $13.06, respectively. The fair
value was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions for fiscal 1998 and 1997:
1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 6.04% 6.26%
Expected dividend yield 0.49% 0.61%
Expected volatility factor 25.7% 28.9%
Expected option term 7 years 7 years
================================================================================
STOCK PURCHASE PLAN
The stock purchase plan enables employees to contribute up to 10% of their wages
toward purchase of the company's common stock at 85% of the market value.
Employees purchased 939,971 shares at $27.20 per share in fiscal 1998. As of
April 30, 1998, plan participants have had approximately $15,427 withheld to
purchase shares at a price of $36.98 per share, or 85% of the market value of
the company's common stock at October 31, 1998, whichever is less.
NOTE 9--INCOME TAXES
The company provides for income taxes in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities.
The provision for income taxes is based on earnings before income taxes reported
for financial statement purposes. The components of earnings before income taxes
were:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
United States $672,041 $773,287 $532,297
Non-U.S. 29,960 35,856 126,700
- --------------------------------------------------------------------------------
Earnings before income taxes $702,001 $809,143 $658,997
================================================================================
The provision for income taxes consisted of:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal $154,960 $186,599 $154,941
U.S. state and other 35,049 55,638 35,696
Non-U.S. 32,596 28,443 62,750
- --------------------------------------------------------------------------------
Total currently payable 222,605 270,680 253,387
Deferred tax (benefit) expense:
U.S. federal (29,093) (4,581) (34,232)
U.S. state and other 1,837 (8,047) (2,526)
Non-U.S. 2,024 962 3,495
- --------------------------------------------------------------------------------
Net deferred tax benefit (25,232) (11,666) (33,263)
Tax expense credited directly to
shareholders' equity 47,246 20,141 10,567
- --------------------------------------------------------------------------------
Total provision $244,619 $279,155 $230,691
================================================================================
Deferred tax assets (liabilities) were comprised of the following:
Year ended April 30, 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Inventory (intercompany profit in inventory
and excess of tax over book valuation $ 75,370 $ 98,333
Accrued liabilities 99,297 42,167
Other 24,375 17,881
- --------------------------------------------------------------------------------
Total deferred tax assets 199,042 158,381
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets (5,568) (6,458)
Undistributed earnings of subsidiaries (1,625) (7,048)
Accumulated depreciation (14,641) (12,340)
Unrealized (gain) loss on investments (10,723) 1,042
Other (33,465) (14,653)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (66,022) (39,457)
- --------------------------------------------------------------------------------
Net deferred tax assets $133,020 $118,924
================================================================================
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
The company's effective income tax rate varied from the U.S. federal statutory
tax rate as follows:
Year ended April 30, 1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
U.S. state taxes, net of federal
tax benefit 1.9 2.3 2.3
Tax benefits from operations in
Puerto Rico (2.5) (2.3) (3.4)
Non-U.S. taxes 2.7 0.6 1.6
Other, net (2.3) (1.1) (0.5)
- --------------------------------------------------------------------------------
Effective tax rate 34.8% 34.5% 35.0%
================================================================================
Taxes are not provided on undistributed earnings of non-U.S. subsidiaries
because such earnings are either permanently reinvested or do not exceed
available foreign tax credits. Current U.S. tax regulations provide that
earnings of the company's manufacturing subsidiaries in Puerto Rico may be
repatriated tax free; however, the Commonwealth of Puerto Rico will assess a tax
of up to 10% in the event of repatriation of earnings prior to liquidation. The
company has provided for the anticipated tax attributable to earnings intended
for dividend repatriation. At April 30, 1998, earnings permanently reinvested in
subsidiaries outside the United States were $114,620.
At April 30, 1998, approximately $9,016 of non-U.S. tax losses were available
for carryforward. These carryforwards are subject to valuation allowances and
generally expire within a period of one to five years.
NOTE 10--RETIREMENT BENEFIT PLANS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 does not change the
measurement or recognition of those plans, but revises disclosures about
pensions and other postretirement benefit plans. The company adopted SFAS No.
132 in fiscal 1998. Restatement of disclosures for the prior year has been made
for comparative purposes.
The company has various retirement benefit plans covering substantially all U.S.
employees and many employees outside the United States. The cost of these plans
was $36,999 in fiscal 1998, $36,525 in fiscal 1997, and $36,598 in fiscal 1996.
In the United States, the company maintains a qualified pension plan designed to
provide guaranteed minimum retirement benefits to substantially all U.S.
employees. Pension coverage for non-U.S. employees of the company is provided,
to the extent deemed appropriate, through separate plans. In addition, U.S. and
non-U.S. employees of the company are also eligible to receive specified company
paid health care and life insurance benefits.
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of $143,279 $137,538 $ 32,714 $ 30,529
fiscal year
Service cost 14,475 13,097 2,421 1,982
Interest cost 10,899 9,758 2,470 2,209
Actuarial (gain) loss 9,843 (14,931) 373 (1,656)
Benefits paid (3,332) (2,183) (565) (350)
- --------------------------------------------------------------------------------
Benefit obligation at April 30 $175,164 $143,279 $ 37,413 $ 32,714
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $152,364 $127,521 $ 12,080 $ 5,926
Actual return on plan assets 30,841 17,399 3,014 858
Employer contributions 12,312 9,392 3,447 5,646
Benefits paid (3,098) (1,948) (565) (350)
- --------------------------------------------------------------------------------
Fair value of plan assets at
April 30 $192,419 $152,364 $ 17,976 $ 12,080
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Funded status $ 17,255 $ 9,085 $(19,437) $(20,634)
Unrecognized net actuarial (loss)
gain (832) 4,544 324 1,803
Unrecognized prior service cost (356) (416) -- --
- --------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 16,067 $ 13,213 $(19,113) $(18,831)
================================================================================
Net periodic benefit cost of plans included the following components:
Pension Benefits Other Benefits
---------------- --------------
YEAR ENDED APRIL 30, 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 14,475 $ 13,097 $ 2,421 $ 1,982
Interest cost 10,899 9,758 2,470 2,209
Expected return on plan assets (12,681) (10,525) (1,164) (632)
Amortization of prior service cost 593 573 -- 40
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 13,286 $ 12,903 $ 3,727 $ 3,599
================================================================================
Plan assets for the U.S. plan consist of a diversified portfolio of fixed-income
investments, debt and equity securities, and cash equivalents. Plan assets
include investments in the company's common stock of $33,920 and $22,160 at
April 30, 1998 and 1997, respectively.
Outside the U.S., the funding of pension plans is not a common practice in
certain countries as funding provides no economic benefit. Consequently, the
company has certain non-U.S. plans that are unfunded. It is the company's policy
to fund retirement costs within the limits of allowable tax deductions.
The actuarial assumptions were as follows:
Pension Benefits Other Benefits
---------------- --------------
YEAR ENDED APRIL 30, 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Discount rate 3.5% - 7.3% 4.0% - 8.5% 7.25% 7.75%
Expected return on plan assets 7.0% - 9.0% 8.5% - 9.0% 9.0% 9.0%
Rate of compensation increase 3.0% - 5.0% 3.0% - 6.0% N/A N/A
Health care cost trend rate N/A N/A 8.0% 8.0%
================================================================================
In addition to the benefits provided under the qualified pension plan,
retirement benefits associated with wages in excess of the IRS allowable wages
are provided to certain employees under non-qualified plans. The net periodic
cost of non-qualified pension plans was $2,633 and $1,770 in fiscal 1998 and
1997, respectively. The unfunded accrued pension cost related to these
non-qualified plans totaled $11,840 at April 30, 1998.
The health care cost trend rate is assumed to decrease gradually to 6% by fiscal
2002. Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
One-Percentage-Point One-Percentage-Point
Increase Decrease
- --------------------------------------------------------------------------------
Effect on postretirement benefit
cost $ 611 $ (507)
Effect on postretirement benefit
obligation 3,776 (3,134)
================================================================================
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
DEFINED CONTRIBUTION PLANS
The company has defined contribution savings plans that cover substantially all
U.S. employees and certain non-U.S. employees. The general purpose of these
plans is to provide additional financial security during retirement by providing
employees with an incentive to make regular savings. Company contributions to
the plans are based on employee contributions and company performance. Fiscal
expense under these plans was $15,658 in 1998, $16,402 in 1997, and $17,786 in
1996.
NOTE 11--LEASES
The company leases offices, manufacturing and research facilities, and
warehouses, as well as transportation, data processing, and other equipment,
under capital and operating leases. A substantial number of these leases contain
options that allow the company to renew at the then fair rental value.
Future minimum payments under capitalized leases and noncancelable operating
leases at April 30, 1998, were:
Capitalized Operating
Leases Leases
- --------------------------------------------------------------------------------
1999 $ 823 $ 20,035
2000 668 14,514
2001 490 10,842
2002 415 8,905
2003 415 7,467
2004 and thereafter 1,891 3,905
- --------------------------------------------------------------------------------
Total minimum lease payments 4,702 $ 65,668
========
Less amounts representing interest (1,275)
- ----------------------------------------------------------
Present value of net minimum lease
payments $ 3,427
==========================================================
Rent expense for all operating leases was $32,573, $32,832, and $27,406 in
fiscal 1998, 1997, and 1996, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
The company is involved in litigation and disputes which are normal to its
business. Management believes losses that might eventually be sustained from
such litigation and disputes would not be material to future years. Further,
product liability claims may be asserted in the future relative to events not
known to management at the present time. Management believes that the company's
risk management practices, including insurance coverage, are reasonably adequate
to protect against potential product liability losses.
The Medtronic Foundation (Foundation), funded entirely by the company, was
established to maintain good corporate citizenship in its communities. During
fiscal 1997, the company donated equity securities with a fair value of $13,400
to fund commitments to the Foundation. In fiscal 1998, the company made a
commitment to contribute $36,000. This commitment is expected to fund the
Foundation through the end of fiscal 2001. In April 1998, the company funded the
initial portion of this commitment through the donation of equity securities
with a fair value of $10,500. Commitments to the Foundation are expensed when
authorized and approved by the company's Board of Directors.
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED, IN MILLIONS OF DOLLARS, EXCEPT PER
SHARE DATA)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
Net Sales
1998 $646.3 $642.1 $631.4 $685.1 $2,604.8
1997 600.9 598.2 598.7 640.5 2,438.2
Gross Profit
1998 486.1 483.2 460.6 504.5 1,934.5
1997 445.3 447.1 446.4 489.2 1,828.0
Net Earnings
1998 146.5 143.5 7.3 160.1 457.4
1997 127.4 128.3 128.7 145.5 530.0
Basic Earnings per Share:
1998 .31 .31 .02 .34 .98
1997 .27 .27 .27 .31 1.11
Earnings per Share
Assuming Dilution:
1998 .31 .30 .02 .34 .96
1997 .26 .26 .26 .30 1.09
================================================================================
Quarterly and annual earnings per share are calculated independently based on
the weighted-average number of shares outstanding during the period. As
discussed in Note 3, the company recorded pre-tax non-recurring charges totaling
$205.3 million during the third quarter of fiscal 1998.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands of dollars, except per share data) Medtronic, Inc.
- --------------------------------------------------------------------------------
NOTE 14--SEGMENT REPORTING
The company operates in a single industry segment -- providing medical products
and services. For management purposes, the company is segmented into three
geographic areas -- the Americas, Europe/Middle East/Africa (Europe), and
Asia/Pacific markets. The geographic areas are, to a significant degree,
interdependent with respect to research, product supply, and business expertise.
Sales between geographic areas are made at prices which would approximate
transfers to unaffiliated distributors. In the presentation below, the profit
derived from such transfers is attributed to the area in which the sale to the
unaffiliated customer is eventually made. Because of the interdependence of the
geographic areas, the operating profit as presented may not be representative of
the geographic distribution which would occur if the areas were not
interdependent. In addition, comparison of operating results between geographic
areas and between years may be significantly impacted by foreign currency
fluctuations.
GEOGRAPHIC AREA INFORMATION
United Asia Other Elimi- Consoli-
States Europe Pacific Americas nations dated
- --------------------------------------------------------------------------------
1998
Sales to unaffiliated
customers $1,598,516 $653,517 $272,898 $79,888 $ -- $2,604,819
Intergeographic
sales 296,366 131,872 10 10,858 (439,106) --
- --------------------------------------------------------------------------------
Total sales 1,894,882 785,389 272,908 90,746 (439,106) 2,604,819
- --------------------------------------------------------------------------------
Operating profit 460,752 83,953 89,452 15,672 -- 649,829
Nonoperating
income 52,172
- --------------------------------------------------------------------------------
Earnings before
income taxes 702,001
- --------------------------------------------------------------------------------
Identifiable assets 1,640,271 523,284 134,307 53,115 (145,845) 2,205,132
Corporate assets 569,595
- --------------------------------------------------------------------------------
Total assets $2,774,727
================================================================================
1997
Sales to unaffiliated
customers $1,403,162 $701,255 $268,360 $65,447 $ -- $2,438,224
Intergeographic
sales 216,773 68,936 20 4,182 (289,911) --
- --------------------------------------------------------------------------------
Total sales 1,619,935 770,191 268,380 69,629 (289,911) 2,438,224
- --------------------------------------------------------------------------------
Operating profit 504,660 156,950 102,759 10,733 -- 775,102
Nonoperating
income 34,041
- --------------------------------------------------------------------------------
Earnings before
income taxes 809,143
- --------------------------------------------------------------------------------
Identifiable assets 1,548,821 449,991 185,498 43,489 (160,224) 2,067,575
Corporate assets 341,635
- --------------------------------------------------------------------------------
Total assets $2,409,210
================================================================================
United Asia Other Elimi- Consoli-
States Europe Pacific Americas nations dated
- --------------------------------------------------------------------------------
1996
Sales to unaffiliated
customer $1,240,975 $617,554 $257,018 $56,553 $ -- $2,172,100
Intergeographic
sales 148,515 87,187 -- 5,061 (240,763) --
- --------------------------------------------------------------------------------
Total sales 1,389,490 704,741 257,018 61,614 (240,763) 2,172,100
- --------------------------------------------------------------------------------
Operating profit 405,707 158,983 108,805 8,223 -- 681,718
Nonoperating
expense (22,721)
- --------------------------------------------------------------------------------
Earnings before
income taxes 658,997
- --------------------------------------------------------------------------------
Identifiable assets 1,371,170 424,415 179,595 35,785 (161,047) 1,849,918
Corporate assets 704,782
- --------------------------------------------------------------------------------
Total assets $2,554,700
================================================================================
Fiscal 1998 operating profit includes the impact of the $205.3 million
non-recurring charges (See Note 3). Nonoperating income and expenses consist
principally of non-allocable corporate activities. Intergeographic sales and the
intergeographic profit remaining in ending inventories are the principal items
reflected as eliminations.
NOTE 15--SUBSEQUENT EVENT
On June 29, 1998, Medtronic, Inc. and Physio-Control International Corporation
announced the signing of a definitive merger agreement. The agreement calls for
each Physio-Control shareholder to receive $27.50 in the form of Medtronic
common stock for each share of Physio-Control they now hold. Physio-Control has
approximately 21 million shares outstanding on a diluted basis. It is
anticipated that the transaction will close in the second quarter of fiscal 1999
and be accounted for as a pooling of interests. In order to be eligible for
pooling of interests, Medtronic intends to issue approximately 12 million shares
of common stock to the public prior to the closing of the transaction.
Physio-Control designs, manufactures, markets, and services an integrated line
of noninvasive emergency cardiac defibrillator and vital sign assessment
devices, disposable electrodes, and data management software.
Unaudited pro forma information related to this merger is not included as the
impact of the merger is not deemed to be material.
17
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars, except per share data) Medtronic, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS FOR THE YEAR:
Net sales $2,604.8 $2,438.2 $2,172.1 $1,742.4 $1,390.9 $1,328.2 $1,176.9 $1,021.4 $865.9 $765.8 $669.9
Cost of products sold 670.4 610.2 591.4 540.1 431.7 420.1 381.8 331.7 281.7 248.5 217.4
Research and development
expense 297.2 280.2 243.8 191.4 156.3 133.0 109.2 89.5 81.5 67.7 55.1
Selling, general, and administrative
expense 950.0* 763.3 700.9 574.6 456.3* 460.0* 439.9 399.9* 331.3* 291.9* 267.2
Interest expense 8.2 9.4 8.1 9.0 8.2 10.4 13.4 13.8 10.1 8.4 5.9
Interest income (22.9) (34.0) (31.1) (14.8) (8.4) (8.8) (10.3) (9.7) (6.2) (5.6) (7.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 702.0 809.1 659.0 442.1 346.8 313.5 242.9 196.2 167.5 155.0 131.4
Provision for income taxes 244.6 279.2 230.7 148.1 114.4 101.9 81.4 62.9 54.6 54.7 44.8
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations 457.4 530.0 428.3 294.0 232.4 211.6 161.5 133.4 112.9 100.3 86.6
Cumulative effect of
accounting changes (net) -- -- -- -- -- (14.4) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $457.4 $530.0 $428.3 $294.0 $232.4 $197.2 $161.5 $133.4 $112.9 $100.3 $86.6
===================================================================================================================================
Net earnings as a percent of
net sales 17.6% 21.7% 19.7% 16.9% 16.7% 14.8% 13.7% 13.1% 13.0% 13.1% 12.9%
Net earnings as a percent of average
shareholders' equity 24.1% 29.6% 27.0% 24.6% 24.5% 24.1% 21.8% 21.4% 21.3% 22.2% 21.2%
- -----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:
Earnings from continuing operations
before cumulative effects of
accounting changes $0.98 $1.11 $0.90 $0.64 $0.51 $0.45 $0.34 $0.28 $0.24 $0.22 $0.18
Basic earnings per share 0.98 1.11 0.90 0.64 0.51 0.41 0.34 0.28 0.24 0.22 0.18
Earnings per share assuming dilution 0.96 1.09 0.89 0.63 0.50 0.41 0.33 0.27 0.23 0.22 0.18
Cash dividends declared 0.220 0.190 0.130 0.103 0.085 0.070 0.060 0.053 0.045 0.035 .030
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margin percentage 74.3% 75.0% 72.8% 69.0% 69.0% 68.4% 67.6% 67.5% 67.5% 67.6% 67.5%
Financial Position at April 30:
Working capital $979.6 $719.2 $862.1 $647.8 $406.4 $426.6 $387.3 $320.1 $240.4 $206.1 $244.6
Current ratio 2.7:1 2.4:1 2.6:1 2.4:1 1.9:1 2.2:1 2.3:1 2.1:1 1.9:1 1.9:1 2.3:1
Property, plant, and
equipment, net 508.8 487.2 416.9 331.1 301.8 282.8 256.8 217.2 183.6 157.2 134.6
Total assets 2,774.7 2,409.2 2,554.7 1,946.7 1,623.3 1,292.5 1,163.5 1,024.1 885.3 783.0 661.3
Long-term debt 16.2 14.0 15.3 14.2 20.2 10.9 8.6 7.9 8.0 8.2 11.1
Long-term debt as a percent of
shareholders' equity 0.8% 0.8% 0.8% 1.1% 1.9% 1.3% 1.1% 1.2% 1.4% 1.7% 2.7%
Shareholders' equity 2,044.2 1,746.2 1,836.3 1,335.0 1,053.5 841.5 796.5 683.2 565.2 492.7 412.0
Shareholders' equity
per common share 4.36 3.74 3.84 2.89 2.27 1.82 1.68 1.44 1.20 1.06 0.86
Additional Information:
Additions to property, plant,
and equipment $148.2 $171.3 $165.1 $96.9 $60.8 $77.1 $77.2 $65.8 $56.1 $52.0 $35.4
Full-time employees at year-end 12,466 11,722 10,666 8,896 8,709 8,334 8,314 7,560 7,030 6,529 5,939
Full-time equivalent employees
at year-end 13,954 13,719 12,499 10,313 9,856 9,247 9,392 8,470 7,717 7,152 6,471
===================================================================================================================================
</TABLE>
*Certain costs and income separately disclosed on the statement of consolidated
earnings are included in selling, general, and administrative expense.
Note: Fiscal 1998 results include the impact of $205.3 million pre-tax
non-recurring charges taken in the third quarter (See Note 3).
18
EXHIBIT 21
MEDTRONIC, INC. AND SUBSIDIARIES
--------------------------------
NAME OF COMPANY JURISDICTION OF
- --------------- ---------------
INCORPORATION
-------------
Medtronic, Inc. (Parent company) Minnesota
The Medtronic Foundation (non-profit corporation) Minnesota
ABS Synectics Sarl France
Bakken Research Center, B.V. Netherlands
Biotec International S.r.l. Italy
Cardiotron Medizintechnik G.m.b.H. Germany
CTD Synectics Ltd. Hong Kong
Dantec Electronique S.A. Belgium
Dantec Electronique S.A. France
Dantec Elettronica Srl Italy
Dantec Medical, Inc. California
Dantec Medizinelektronik GmbH Germany
India Biomedical Investment, Ltd. Minnesota
India Medtronic Private Limited India
InStent Europe B.V. Netherlands
Interamerica Medtronic, Inc. Illinois
Interbank Leasing Colorado
International Finance C.V. (INFIN C.V.) Netherlands
International Medical Education Corporation Colorado
Med Rel, Inc. Minnesota
Medtronic (Africa) (Proprietary) Limited South Africa
Medtronic AneuRx, Inc. Minnesota
Medtronic Asia, Ltd. Minnesota
Medtronic Asset Managment, Inc. Minnesota
Medtronic Australasia Pty. Limited Austraila
Medtronic Avalon, Inc. Delaware
Medtronic B.V. Netherlands
Medtronic Belgium, S.A. Belgium
Medtronic Bio-Medicus, Inc. Minnesota
Medtronic do Brasil Ltda. Brazil
Medtronic of Canada, Ltd. Canada
Medtronic Carbon Implants, Inc. Delaware
Medtronic CardioRhythm California
Medtronic China, Ltd. Minnesota
Medtronic Commercial Ltda. Brazil
Medtronic Dominicana C. por A. Dominican Republic
Medtronic Electromedics, Inc. Minnesota
Medtronic Export, Inc. Delaware
Medtronic Europe, N.V. Belgium
Medtronic Europe S.A. Switzerland
Medtronic FSC B.V. Netherlands
Medtronic France S.A. France
Medtronic G.m.b.H. Germany
Medtronic Heart Valves, Inc. Minnesota
Medtronic HemoTec, Inc. Colorado
Medtronic Iberica, S.A. Spain
Medtronic InStent, Inc. Minnesota
Medtronic InStent (Israel), Inc. Israel
Medtronic International, Ltd. Delaware
Medtronic International Technology, Inc. Minnesota
Medtronic Interventional Vascular, Inc. Delaware
Medtronic Interventional Vascular, Inc. Massachussetts
Medtronic Italia S.p.A. Italy
<PAGE>
NAME OF COMPANY JURISDICTION OF
- --------------- ---------------
INCORPORATION
-------------
Medtronic Japan Co., Ltd. Japan
Medtronic Latin America, Inc. Minnesota
Medtronic Limited United Kingdom
Medtronic Medical Device Hellas S.A. Greece
Medtronic Mediterranean SAL Lebanon
Medtronic Micro Interventional Systems, Inc. Minnesota
Medtronic Osterreich Ges.m.b.H. Austria
Medtronic Overseas, Inc. Delaware
Medtronic PS Medical, Inc. California
Medtronic Puerto Rico, Inc. Minnesota
Medtronic S. de R.L. de C.V. Mexico
Medtronic S.A.I.C. Argentina
Medtronic (Shanghai) Ltd. China
Medtronic (Schweiz) A.G. Switzerland
Medtronic (S) Pte., Ltd. Singapore
Medtronic Synectics A.B. Sweden
Medtronic Treasury International, Inc. Minnesota
Medtronic Treasury Management, Inc. Minnesota
Medtronic USA, Inc. Minnesota
Medtronic de Venezuela S.A. Venezuela
Medtronic-Vicare AS Denmark
Medtronic-Vingmed AS Norway
Medtronic World Trade Corporation Minnesota
Medtronic Zinetics Medical, Inc. Utah
Omikcron Ltd. Hungary
OSMED, Inc. Michigan
Sentron Europe BV Netherlands
Sentron Incorporated Washington
Synectics-Dantec Finland OY Finland
Synectics-Dantec France S.A. France
Synectics GmbH Germany
Synectics IR SA Luxembourg
Synectics Medical B.V. Netherlands
Synectics Medical bvba Belgium
Synectics Medical Co., Ltd. South Korea
Synectics Medical Inc. New Jersey
Synectics Medical Limited United Kingdom
Synectics Medical Poland Spolka Z.O.O. (Ltd.) Poland
Synectics Medical Srl Italy
Telecardiocontrol, C.A. Venezuela
Vitafin N.V. Netherlands
Vitatron Austria GmbH Austria
Vitatron Beheersmaatschappij B.V. Netherlands
Vitatron Belgium N.V. Belgium
Vitatron G.m.b.H. Germany
Vitatron, Incorporated Delaware
Vitatron Japan Co., Ltd. Japan
Vitatron Medical B.V. Netherlands
Vitatron Medical Espana S.A. Spain
Vitatron Nederland B.V. Netherlands
Vitatron N.V. Netherlands
Vitatron S.A.R.L. France
Vitatron Scientific B.V. Netherlands
Vitatron Sweden A.B. Sweden
Vitatron U.K. Limited United Kingdom
EXHIBIT 24
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of
Medtronic, Inc., a Minnesota corporation, hereby constitute and appoint each of
William W. George and Ronald E. Lund, acting individually or jointly, their true
and lawful attorney-in-fact and agent, with full power to act for them and in
their name, place and stead, in any and all capacities, to do any and all acts
and things and execute any and all instruments which either said attorney and
agent may deem necessary or desirable to enable Medtronic, Inc. to comply with
the Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing with said Commission of its annual report on Form
10-K for the fiscal year ended April 30, 1998, including specifically, but
without limiting the generality of the foregoing, power and authority to sign
the names of the undersigned directors to the Form 10-K and to any instruments
and documents filed as part of or in connection with said Form 10-K or
amendments thereto; and the undersigned hereby ratify and confirm all that each
said attorney and agent shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have set their hands this 25th day
of June, 1998.
/s/ William R. Brody, M.D., Ph.D. /s/ Glen D. Nelson, M.D.
--------------------------------- ------------------------
William R. Brody, M.D., Ph.D. Glen D. Nelson, M.D.
/s/ Paul W. Chellgren /s/ Richard L. Schall
--------------------- ---------------------
Paul W. Chellgren Richard L. Schall
s/ Arthur D. Collins, Jr. /s/ Jack W. Schuler
------------------------- -------------------
Arthur D. Collins, Jr. Jack W. Schuler
/s/ William W. George /s/ Gerald W. Simonson
--------------------- ----------------------
William W. George Gerald W. Simonson
/s/ Antonio M. Gotto, Jr., M.D. /s/ Gordon M. Sprenger
------------------------------- ----------------------
Antonio M. Gotto, Jr., M.D. Gordon M. Sprenger
/s/ Bernadine P. Healy, M.D. /s/ Richard A. Swalin, Ph.D.
---------------------------- ----------------------------
Bernadine P. Healy, M.D. Richard A. Swalin, Ph.D.
/s/ Thomas E. Holloran
----------------------
Thomas E. Holloran
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONSOLIDATED EARNINGS AND CONSOLIDATED BALANCE SHEET FOR THE YEAR
ENDED APRIL 30, 1998 FILED WITH THE SEC ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
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0
0
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</TABLE>
