UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1-7707
MEDTRONIC, INC.
(Exact name of registrant as specified in its 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
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 ___
Shares of common stock, $.10 par value, outstanding on November 27, 1998:
489,360,365
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- ---------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 728,405 $ 686,218 $ 1,434,060 $ 1,377,508
Costs and expenses:
Cost of products sold 206,137 182,007 402,085 364,127
Research and development
expense 80,750 76,239 160,048 151,820
Selling, general, and
administrative expense 210,228 209,707 413,196 417,777
Non-recurring charges 21,101 0 21,101 0
Interest expense 2,960 2,310 5,222 4,661
Interest income (10,167) (5,263) (17,163) (10,331)
----------- ----------- ----------- -----------
Total costs and expenses 511,009 465,000 984,489 928,054
----------- ----------- ----------- -----------
Earnings before income taxes 217,396 221,218 449,571 449,454
Provision for income taxes 72,357 76,330 150,136 155,095
----------- ----------- ----------- -----------
Net earnings $ 145,039 $ 144,888 $ 299,435 $ 294,359
=========== =========== =========== ===========
Weighted average shares
outstanding 480,937 477,099 479,553 476,872
Basic earnings per share $ 0.30 $ 0.30 $ 0.62 $ 0.62
=========== =========== =========== ===========
Earnings per share
assuming dilution $ 0.30 $ 0.30 $ 0.61 $ 0.61
=========== =========== =========== ===========
Weighted average shares
outstanding assuming dilution 488,222 485,499 486,909 484,847
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
October 30, April 30,
1998 1998
----------- -----------
ASSETS (in thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 572,341 $ 386,191
Short-term investments 244,044 43,148
Accounts receivable, less allowance for
doubtful accounts of $17,131 and $15,224 706,531 608,773
Inventories:
Finished goods 205,722 168,121
Work in process 88,273 83,756
Raw materials 130,596 120,031
----------- -----------
Total inventories 424,591 371,908
Prepaid expenses and other current assets 324,031 232,745
----------- -----------
Total current assets 2,271,538 1,642,765
Property, plant, and equipment 1,138,415 1,046,647
Accumulated depreciation (573,308) (519,702)
----------- -----------
Net property, plant, and equipment 565,107 526,945
Goodwill and other intangible assets, net 673,357 466,559
Long-term investments 210,801 137,706
Other assets 113,772 113,412
----------- -----------
Total assets $ 3,834,575 $ 2,887,387
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 201,320 $ 94,346
Accounts payable 96,179 104,798
Accrued liabilities 476,594 406,093
----------- -----------
Total current liabilities 774,093 605,237
Long-term debt 19,534 32,758
Deferred tax liabilities 509 13,409
Other long-term liabilities 130,293 129,760
----------- -----------
Total liabilities 924,429 781,164
Shareholders' equity:
Common stock--par value $.10 48,934 47,752
Retained earnings 2,963,360 2,133,545
Accumulated other non-owner changes in equity (75,998) (47,174)
----------- -----------
2,936,296 2,134,123
Receivable from Employee Stock Ownership Plan (26,150) (27,900)
----------- -----------
Total shareholders' equity 2,910,146 2,106,223
----------- -----------
Total liabilities and shareholders' equity $ 3,834,575 $ 2,887,387
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MEDTRONIC, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
------------------------
Oct. 30, Oct. 31,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 299,435 $ 294,359
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 79,906 65,551
Change in assets and liabilities:
Increase in accounts receivable (91,100) (19,744)
Increase in inventories (49,952) (49,618)
Increase (decrease) in accounts payable and
accrued liabilities 49,215 (6,753)
Changes in other operating assets and
liabilities (91,530) (27,395)
--------- ---------
Net cash provided by operating activities 195,974 256,400
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (82,211) (58,618)
Acquisition of subsidiary, net of cash acquired (230,000) 0
Purchases of marketable securities (331,000) 0
Sales and maturities of marketable securities 72,225 35,760
Other investing activities (net) (61,317) (18,096)
--------- ---------
Net cash used in investing activities (632,303) (40,954)
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (net) 106,269 (8,763)
Increase (decrease) in long-term debt (net) (13,225) 531
Proceeds from stock offering of acquired subsidiary 0 916
Dividends to shareholders (62,129) (51,431)
Repurchases of common stock (106,764) (80,966)
Issuance of common stock 697,791 22,554
--------- ---------
Net cash provided by (used in)
financing activities 621,942 (117,159)
Effect of exchange rate changes on cash and
cash equivalents 537 1,458
--------- ---------
Net change in cash and cash equivalents 186,150 99,745
Cash and cash equivalents at beginning of period 386,191 157,349
--------- ---------
Cash and cash equivalents at end of period $ 572,341 $ 257,094
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
- ------------------------------
The unaudited condensed consolidated financial statements include the accounts
of Medtronic, Inc. and all of its subsidiaries, after elimination of all
significant intercompany transactions and accounts. In the opinion of
management, all adjustments necessary for a fair presentation of operating
results have been made. All such adjustments are of a normal recurring nature.
Operating results for interim periods are not necessarily indicative of results
that may be expected for the year as a whole.
Note 2 - Acquisitions
- ---------------------
On July 13, 1998, Medtronic, Inc. and AVECOR Cardiovascular Inc. announced the
signing of an agreement under which Medtronic will acquire AVECOR. Under the
original agreement, AVECOR shareholders would receive $11.125 in Medtronic
common stock for each share of AVECOR they now hold, or a total of approximately
$91 million. AVECOR's shareholders have approved its sale to Medtronic. The
transaction is subject to FTC clearance.
On November 24, 1998, AVECOR announced that it had received an unsolicited offer
from a third party to purchase all of AVECOR's outstanding common stock at a
price of $13 per share. On December 6, 1998, Medtronic and AVECOR announced an
amendment to their acquisition agreement, which calls for $13 in Medtronic
common stock to be issued in the transaction for each AVECOR share, or a total
of approximately $106 million. AVECOR agreed not to explore alternative
acquisition proposals and ceased discussions with the third party. The amended
agreement also requires Medtronic to pay up to $10 million to AVECOR if the
merger is not completed by March 15, 1999 due to failure to obtain FTC clearance
by that date. Medtronic intends to complete the acquisition following receipt of
FTC clearance. The transaction will be accounted for as a purchase. AVECOR
develops, manufactures and markets specialty medical devices for heart/lung
bypass surgery and long-term respiratory support.
On September 30, 1998, the company issued approximately 8,547,000 shares of its
common stock for all of the outstanding capital stock of Physio-Control
International Corporation. 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.
The acquisition of Physio-Control has been accounted for as a
pooling-of-interests and, accordingly, the company's consolidated financial
statements for the first quarter of fiscal 1999 and for prior years have been
restated to include the results of operations, financial positions, and cash
flows of Physio-Control.
<PAGE>
Net sales and net earnings for the individual entities are as follows (in
thousands):
Medtronic Physio-Control Combined
--------- -------------- --------
Three months ended
October 31, 1997
Net Sales $642,109 $44,109 $686,218
Net earnings 143,509 1,379 144,888
Six months ended
October 31, 1997
Net Sales 1,288,388 89,120 1,377,508
Net earnings 289,997 4,362 294,359
In connection with the Physio-Control merger, approximately $21.1 million of
pre-tax one-time transaction related costs were incurred and expensed during the
company's second quarter of fiscal 1999. These costs include professional fees,
"change of control" payments, and other direct transaction costs associated with
this merger.
The restated consolidated financial results for the three and six months ended
October 31, 1997, respectively, include Physio-Control's results for the three
and six month periods ended September 30, 1997, respectively. Effective May 1,
1998, Physio-Control's fiscal year end has been changed from December 31 to
April 30 to conform to the company's fiscal year end. Accordingly,
Physio-Control's results for the one month period ended April 30, 1998 have been
excluded from the company's combined results and have been reported as an
adjustment to May 1, 1998 retained earnings.
On October 16, 1998, the company acquired all of the assets and certain
liabilities of Midas Rex, L.P., of Fort Worth, Texas, for approximately $230.0
million in cash. This acquisition has been accounted for as a purchase and,
accordingly, the results of operations have been included in the consolidated
financial statements since the date of acquisition. Midas Rex is the market
leader in high-speed neurological powered instruments, including pneumatic
instrumentation for surgical dissection of bones, biometals, bioceramics and
bioplastics. Other instruments manufactured by Midas Rex assist in orthopedic,
otolaryngological, maxillofacial and craniofacial procedures, as well as plastic
surgery.
Note 3 - Secondary Stock Offering
- ---------------------------------
During late September, 1998, the company sold an additional 12.5 million shares
of its common stock in a public offering for approximately $691.8 million net of
issuance costs. The offering was necessary to permit Medtronic to be eligible
for pooling of interests accounting for the Physio-Control merger and other
future acquisitions. Net proceeds from the offering will be utilized by the
company for general corporate purposes, including acquisitions or other uses
historically made by the company.
<PAGE>
Note 4 - Other Non-Owner Changes in Equity
- ------------------------------------------
During the first quarter of fiscal 1999, the company adopted Statement of
Financial Accounting Standard No. 130 "Reporting Comprehensive Income" (SFAS No.
130). In addition to net earnings, other non-owner changes in equity includes,
as applicable, unrealized gains and losses on available for sale securities,
foreign currency translation adjustments, and minimum pension liability. For the
second quarter ended October 30, 1998 and October 31, 1997, the company's other
non-owner changes in equity was $144.9 million and $164.5 million, respectively.
For the six month periods ended October 30, 1998 and October 31, 1997, the
company's other non-owner changes in equity was $270.6 million and $309.6
million, respectively. The company's adoption of SFAS No. 130 had no effect on
the company's reported results of operations, cash flows or financial position.
Note 5 - Non-Recurring Charges
- ------------------------------
The company recorded pre-tax charges totaling $205.3 million during the third
quarter of fiscal 1998. Applications during the second quarter of fiscal 1999
against the remaining accruals related to the original charges were as follows:
(amounts in thousands)
Balance at Charges Balance at
July 31, 1998 Utilized October 30, 1998
- --------------------------------------------------------------------------------
Facility Reductions $3,062 ($57) $ 3,005
Severance and Related Costs 39,058 (7,390) 31,668
Noncancelable Contractual
Obligations and Other 8,584 (4,516) 4,068
- --------------------------------------------------------------------------------
Total $50,704 ($11,963) $ 38,741
The company is in the process of implementing the major strategic actions, the
majority of which are expected to be completed by the end of fiscal 1999. The
remaining reserve balance at October 30, 1998 is included in current accrued
liabilities.
Note 6 - New Accounting Pronouncements
- --------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
which is required to be adopted for fiscal years beginning after June 15, 1999,
although earlier application is permitted as of the beginning of any fiscal
quarter. This statement will require the company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The company is in the process of determining if earlier application would be
feasible and what effect the adoption of SFAS No. 133 will have on the company's
results of operations, cash flows or financial position.
<PAGE>
Note 7 - Subsequent Events
- --------------------------
On November 2, 1998, the company and Sofamor Danek Group, Inc. (Sofamor)
announced the signing of a definitive merger agreement. The agreement calls for
each Sofamor shareholder to receive $115.00 in the form of Medtronic common
stock for each share of Sofamor they now hold. The merger agreement is subject
to certain collar provisions. Sofamor has approximately 29 million shares
outstanding on a diluted basis. It is anticipated that the transaction will
close in the late third or early fourth quarter of fiscal 1999 and be accounted
for as a pooling-of-interests. Sofamor is primarily involved in developing,
manufacturing, and marketing devices, instruments, computer-assisted
visualization products and biomaterials used in the treatment of spinal and
cranial disorders.
On November 30, 1998, the company and Arterial Vascular Engineering, Inc. (AVE)
announced the signing of a definitive merger agreement. The agreement calls for
each AVE shareholder to receive $54.00 in the form of Medtronic common stock for
each share of AVE they now hold. The merger agreement is subject to certain
collar provisions. AVE has approximately 68 million shares outstanding on a
diluted basis. It is anticipated that the transaction will close in the fourth
quarter of fiscal 1999 and be accounted for as a pooling-of-interests. AVE
designs and manufactures minimally invasive solutions for the treatment of
coronary artery and peripheral vascular disease and is the global technology
leader in coronary stents. AVE's product offerings include coronary stents,
balloon catheters, guidewires and guiding catheters.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net Earnings
- ------------
Net earnings for the second quarter ended October 30, 1998 and October 31, 1997
were $145.0 million and $144.9 million, respectively. Diluted earnings per share
were $0.30 for the second quarter ended October 30, 1998, which is consistent
with the same period last year. Net earnings were $299.4 million or $0.61 per
share diluted for the six month period ended October 30, 1998, compared to
$294.4 million, or $0.61 per share diluted for the comparable period last year.
Without the $21.1 million of pre-tax one-time Physio-Control transaction related
costs, diluted earnings per share would have been $0.33 and $0.64 for the three
and six-month periods ended October 30, 1998, respectively.
Sales
- -----
Sales for the quarter and six-month period ended October 30, 1998 increased 6.2
percent and 4.1 percent, respectively, compared to the same periods last year.
Exclusive of the effects of foreign currency translation, sales for the quarter
and six-month period ended October 30, 1998 increased 6.8 percent and 5.6
percent, respectively, over the comparable periods last year. Sales growth in
the quarter and six-month period was negatively impacted by $4.3 million and
$20.4 million, respectively, of unfavorable exchange rate movements by the U.S.
dollar versus major European currencies and the Japanese Yen.
<PAGE>
Net sales of Cardiac Rhythm Management products, which consist primarily of
products for bradycardia pacing, tachyarrhythmia management, external
defibrillators, ablation, and components, increased 9.2 percent and 8.1 percent
during the quarter and six-month period ended October 30, 1998, respectively,
after removing the impact of foreign exchange rate fluctuations, compared to the
same periods a year ago. Unit sales of bradycardia implantable pulse generators
(IPG's) achieved 5 percent growth during the quarter. This growth was led by
strong sales of the Medtronic.Kappa 700 series pacemakers in international
locations and by solid sales of the Medtronic.Kappa 400 series pacemakers in the
U.S. The Medtronic.Kappa 700 series pacemakers are currently pending FDA
clearance in the U.S. Sales of tachyarrhythmia management products increased
nearly 17 percent during the quarter. The Gem DR, which has been rapidly
accepted since its June 1998 release in Europe and certain other markets outside
the U.S. led international defibrillator sales growth during the quarter of
approximately 45 percent. The Gem DR received FDA clearance in mid October, and
has been positively received in the marketplace since its U.S. launch.
Physio-Control, which was acquired on September 30, 1998 and which was accounted
for as a pooling-of-interests, provided strong contributions to the quarter,
growing in excess of 20 percent over the comparable period last year.
Net sales within Other Cardiovascular product lines, (consisting of heart
valves, perfusion systems, cannulae, surgical accessories, balloon and guiding
catheters, and stents), decreased 13.1 percent and 11.7 percent during the
quarter and six-month period ended October 30, 1998, respectively, compared to
the same periods a year ago after excluding the effects of foreign currency
translation. This decline was primarily attributable to continued significant
declines in sales of stents and balloon catheters used in coronary angioplasty.
The prior year comparative period also included the benefit of the prior year
U.S. launch of the Wiktor(R) Prime coronary stent in the absence of the strong
competitive stents which now dominate the U.S. market. Sales of heart valve
products increased more than 10 percent during the quarter on continuing strong
U.S. sales of the Freestyle stentless aortic tissue valve. Sales of cannulae and
perfusion systems grew in the mid and low-single digits, respectively, compared
to last year's comparable quarter.
Net sales of Neurological products, consisting primarily of implantable
neurostimulation devices, drug administration systems, neurosurgery products,
and diagnostic systems, increased 27.3 percent and 21.3 percent for the quarter
and six-month period ended October 30, 1998, respectively, after excluding the
effects of foreign currency translation. Sales of neurostimulation and drug
delivery products grew by 33 and 30 percent respectively, compared to the same
periods last year. Continued strong sales growth was achieved in the drug
delivery product line as a result of continued increased demand for the
SynchroMed(R) 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. The Medtronic Activa(TM) neurostimulation therapy for
control of essential tremor and tremor associated with Parkinson's disease also
contributed to the significant growth during the quarter. Midas Rex, which was
acquired in late October 1998, contributed to the growth in neurosurgery product
sales during the quarter. The company continues to train centers to develop the
InterStim continence control therapy market. Sales of diagnostic systems during
the quarter were relatively flat compared to the same period a year ago.
<PAGE>
Costs of Products Sold
- ----------------------
Cost of products sold as a percent of sales for the quarter and six-month period
ended October 30, 1998 was 28.3 percent and 28.0 percent compared to 26.5
percent and 26.4 percent for the same periods a year ago. The increase in the
cost of products sold as a percent of sales resulted primarily from the negative
impact of foreign exchange rate fluctuations between the time products are
shipped to non-U.S. locations and the time they are sold to customers. In
addition, certain changes in product and geographic mixes combined with modest
pricing pressures on certain products and costs related to new product
introductions contributed to the increase.
Research and Development Expense
- --------------------------------
Research and development expense was $80.8 million for the quarter and $160.0
for the six-month period ended October 30, 1998. 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 as a percent of
net sales was 11.1 percent and 11.2 percent for the quarter and six-month period
ended October 30, 1998, respectively, compared to 11.1 and 11.0 percent for the
comparable periods last year.
Selling, General, and Administrative Expense (SG&A)
- ---------------------------------------------------
SG&A expense for the quarter ended October 30, 1998, was $210.2 million compared
to $209.7 million for the comparable period last year. SG&A as a percent of
sales decreased from 30.6 percent a year ago to 28.9 percent for the current
quarter. The decrease in SG&A as a percent of sales is primarily attributable to
continued overall cost efficiencies and benefits realized from management
initiatives to restructure the vascular organization and reduce global
infrastructure taken in the third quarter of fiscal 1998. The decrease is also
attributable to gains recognized in the current quarter from the sale of certain
available-for-sale equity securities and by an increase in the dollar amount of
gains recognized in the current quarter from hedging activities as compared to
the comparative period last year.
Non-Recurring Charges
- ---------------------
As discussed in Note 2, the company recorded $21.1 million of pre-tax one-time
transaction related costs during the second quarter of fiscal 1999 in connection
with the Physio-Control merger.
Interest
- --------
Interest expense was $3.0 million for the quarter as compared to $2.3 million
for the same period last year. The increase in interest expense was primarily
the result of changes in average debt balances from year to year for debt
balances assumed as part of the acquisition of Physio-Control. Interest income
during the quarter was $10.2 million compared to $5.3 million for the same
period last year. The increase in interest income was primarily the result of
increased average investment balances over the prior year as a result of the
September 1998 secondary stock offering (See Note 3).
<PAGE>
Income Taxes
- ------------
The estimated effective tax rate for the company's current fiscal year is 33.3
percent compared to an effective tax rate of 34.9 percent, after restatement for
the acquisition of Physio-Control, for the fiscal year ended April 30, 1998.
Despite tax legislation that reduces U.S. tax benefits derived from the
company's operations in Puerto Rico, the reduction in the fiscal 1999 effective
tax rate is primarily due to a greater proportion of income being derived from
Switzerland and other tax planning initiatives.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided $196.0 million of cash and cash equivalents for
the six-month period ended October 30, 1998 compared to $256.4 million for the
same period a year ago. Working capital was $1,497.4 million at October 30,
1998, an increase of $459.9 million over the $1,037.5 million at April 30, 1998.
The current ratio increased to 2.9:1 at October 30, 1998, compared to 2.7:1 at
April 30, 1998. Cash and cash equivalents increased $186.2 million during the
six-month period ended October 30, 1998. Significant uses of cash during the
six-month period ended October 30, 1998 included the cash purchase price paid
for the acquisition of Midas Rex, purchases of property, plant, and equipment,
purchases of marketable securities, repurchases of common stock under the
company's systematic stock repurchase plan, and dividends paid to shareholders.
The September 1998 secondary stock offering provided approximately $691.8
million of cash, net of issuance costs (see Note 3).
Year 2000 Readiness Disclosure
- ------------------------------
Medtronic has had a formal program in place since 1996 with assigned Year 2000
staff to ensure that its critical areas related to business information systems,
products, non-information systems with embedded technology and key third party
suppliers will operate normally at the turn of the century.
The company has completed a review of its business information 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. It is anticipated that this remediation will be
substantially complete by mid-calendar 1999. No significant information
technology projects have been deferred as a result of the company's efforts on
Year 2000.
The company's products have been assessed and found to be Year 2000 compliant
with the exception of a few requiring minor corrective actions. The minor
corrective actions are limited to programmers and other instruments. These minor
corrective actions are date-related and present no adverse health impact to the
patient or system functions. The software for such items will be updated or
instructions will be provided to achieve compliance prior to the Year 2000. The
company's implantable devices, including pacemakers, defibrillators, drug
infusion systems, neurostimulators, and heart valves, are not affected by the
Year 2000 issue because they do not deliver therapy on the basis of a calendar
date.
The company is also assessing facility and telecommunication systems, and
systems used to support manufacturing processes to ensure that these will be
Year 2000 ready. It is anticipated that this assessment and any required
remediation will be completed by mid-calendar 1999.
<PAGE>
The company relies on third party providers for services such as raw materials
procurement, telecommunications, utilities, financial services, distribution
services, and other key services. Interruption of those services due to Year
2000 issues could affect the company's operations. The company is in the process
of contacting its major suppliers to determine its potential exposure to a
supply or sales interruption. Because the company's Year 2000 compliance is
dependent upon key third parties also being Year 2000 compliant, there can be no
guarantee that the company's efforts will prevent a material adverse impact on
its financial position, results of operations or liquidity in future periods
should a significant number of suppliers and customers experience business
disruptions as a result of their lack of Year 2000 readiness.
The company estimates that it has expensed approximately $9 million to date in
external and internal costs on a pre-tax basis to address its Year 2000
readiness issues. The company currently estimates that the total additional
costs for addressing its internal Year 2000 readiness will not exceed $20
million on a pre-tax basis. These costs are being expensed as they are incurred
and are being funded through operating cash flows. The company plans to devote
the necessary resources to resolve all significant Year 2000 issues in a timely
manner. The above cost estimates include costs associated with Year 2000
readiness for businesses acquired through October 30, 1998. Estimates will be
adjusted, as necessary, for acquisitions closing after this date.
Throughout 1999, the company will determine areas where contingency planning is
needed. The planning efforts include, but are not limited to, identification and
mitigation of potential serious business interruptions, adjustment of inventory
levels to meet customer needs, and establishing crisis response processes to
address unexpected problems.
The company's statements regarding its Year 2000 readiness are forward-looking
statements and are therefore subject to change as a result of known and unknown
factors. Both the company's cost estimates and completion time frames could be
influenced by the company's ability to successfully identify all Year 2000
issues, the nature and amount of remediation required, the availability and cost
of trained personnel in this area and the Year 2000 success that key third
parties and customers attain. While these and other unforeseen factors could
have a material adverse impact on the company's financial position, results of
operations or liquidity in future periods due to possible manufacturing delays
or business disruptions caused by a lack of third party Year 2000 readiness,
management believes that it has implemented an effective Year 2000 compliance
program that will minimize the possible negative consequences to the company.
The Year 2000 readiness disclosure statement set forth above is a "Year 2000
Readiness Disclosure" under the federal Year 2000 Information and Readiness
Disclosure Act.
<PAGE>
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
Certain statements contained in this document 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 section entitled
"Government Regulation and Other Matters" in the company's Annual Report and
Form 10-K. 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.
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
During the quarter ended October 30, 1998, the company filed (i) a
Report on Form 8-K dated August 20, 1998 reporting under Item 5 the
announcement of financial results for the fiscal first quarter ended
July 31, 1998, (ii) a Report on Form 8-K dated September 17, 1998
reporting under Item 7 the secondary stock offering underwriting
agreement and pricing agreement, (iii) a Report on Form 8-K dated
September 22, 1998 reporting under Item 5 the announced signing of
an agreement to acquire Midas Rex, L.P., and (iv) a Report on Form
8-K dated September 23, 1998 reporting under Item 5 the closing of
the public offering of 12.5 million shares of common stock, and (v)
a Report on Form 8-K dated October 1, 1998 reporting under Item 2
the completion of the previously announced transaction with
Physio-Control International Corporation.
<PAGE>
Subsequent to the quarter ended October 30, 1998, the company filed
(i) a Report on Form 8-K dated November 9, 1998 reporting under
Item 5 the announced signing of an agreement to acquire Sofamor
Danek Group, Inc., (ii) a Report on Form 8-K dated November 19,
1998 reporting under Item 5 the announcement of financial results
for the fiscal second quarter ended October 30, 1998,(iii) a Report
on Form 8-K dated November 30, 1998 reporting under Item 5 the
restated financial statements for fiscal years ended April 30, 1996,
1997, and 1998, to reflect the acquisition of Physio-Control
International Corporation, which occurred on September 30, 1998, as
a pooling-of-interests, and (iv) a Report on Form 8-K dated December
3, 1998 reporting under Item 5 the announced signing of an agreement
to acquire Arterial Vascular Engineering, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: December 9, 1998 /S/ WILLIAM W. GEORGE
---------------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: December 9, 1998 /S/ ROBERT L. RYAN
---------------------------------------
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET FOR
THE QUARTERLY PERIOD ENDED OCTOBER 30, 1998 FILED WITH THE SEC ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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