<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 2, 1998
Medtronic, Inc.
(Exact name of Registrant as Specified in its Charter)
Minnesota
(State or Other Jurisdiction of Incorporation)
1-7707 41-0793183
(Commission File Number) (IRS Employer
Identification No.)
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432-3576
(Address of Principal Executive Offices and Zip Code)
(612) 514-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. Other Events
The Registrant has restated its financial statements and a related
schedule 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. These restated audited
financial statements and related schedule are set forth in Exhibits 99.1 and
99.2 attached hereto and are incorporated in this Report as if fully set
forth herein.
Item 7. Financial Statements and Exhibits
Exhibit 23.1 Consent of PricewaterhouseCoopers, LLC, independent
accountants, and Report on Supplemental Financial
Statement Schedule
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Restated Audited Financial Statements as of and for the
years ended April 30, 1996, 1997 and 1998:
Report of Independent Accountants
Supplemental Statement of Consolidated Earnings
Supplemental Consolidated Balance Sheets
Supplemental Statement of Consolidated
Shareholders' Equity
Supplemental Statement of Consolidated Cash Flows
Notes to Supplemental Consolidated Financial
Statements
Exhibit 99.2 Schedule II--Valuation and Qualifying Accounts Years
Ended April 30, 1996, 1997 and 1998
<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 hereunto duly authorized.
MEDTRONIC, INC.
By /s/ Robert L. Ryan
-----------------------------------------
Date: November 30, 1998 Robert L. Ryan
Senior Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Medtronic, Inc.
Form 8-K Current Report
Dated November 30, 1998
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
23.1 Consent of PricewaterhouseCoopers, LLC,
independent accountants, and Report on Supplemental Financial
Statement Schedule
27.1 Financial Data Schedule
99.1 Restated Financial Statements as of and for the years ended
April 30, 1996, 1997 and 1998:
Report of Independent Accountants
Supplemental Statement of Consolidated Earnings
Supplemental Consolidated Balance Sheets
Supplemental Statement of Consolidated
Shareholders' Equity
Supplemental Statement of Consolidated Cash Flows
Notes to Supplemental Consolidated Financial
Statements
99.2 Schedule II--Valuation and Qualifying Accounts Years
Ended April 30, 1996, 1997 and 1998
</TABLE>
<PAGE>
Exhibit 23.1
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, 333-07385 and 333-65227) and on Form S-4 (Registration No.
333-62305) of Medtronic, Inc. of our report dated May 26, 1998, except as to
Note 16 which is as of November 2, 1998 and Note 2 which is as of September
30, 1998, appearing in this Current Report on Form 8-K dated November 30,
1998. We also consent to the incorporation by reference of our report on the
Supplemental Financial Statement Schedule, which appears below.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
November 30, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
ON SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Medtronic, Inc.
Our audits of the supplemental consolidated financial statements referred to
in our report dated May 26, 1998, except as to Note 16 which is as of
November 2, 1998 and Note 2 which is as of September 30, 1998, appearing in
this Current Report on Form 8-K dated November 30, 1998, also included an
audit of the Supplemental Financial Statement Schedule listed in Exhibit 99.2
of this Current Report on Form 8-K. In our opinion, this Supplemental
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
supplemental consolidated financial statements.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 30, 1998
<TABLE> <S> <C>
<PAGE>
<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> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> APR-30-1998 APR-30-1997 APR-30-1996
<PERIOD-START> MAY-01-1997 MAY-01-1996 MAY-01-1995
<PERIOD-END> APR-30-1998 APR-30-1997 APR-30-1996
<CASH> 386,191 201,712 157,349
<SECURITIES> 43,148 53,181 355,741
<RECEIVABLES> 623,997 569,591 507,552
<ALLOWANCES> (15,224) (14,420) (18,094)
<INVENTORY> 371,908 317,394 286,418
<CURRENT-ASSETS> 1,642,765 1,320,252 1,463,776
<PP&E> 1,046,647 981,573 842,346
<DEPRECIATION> (519,702) (479,863) (418,826)
<TOTAL-ASSETS> 2,887,387 2,509,308 2,638,537
<CURRENT-LIABILITIES> 605,237 546,812 556,013
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 47,752 47,586 49,472
<OTHER-SE> 2,058,471 1,746,936 1,816,834
<TOTAL-LIABILITY-AND-EQUITY> 2,887,387 2,509,308 2,638,537
<SALES> 2,783,371 2,609,361 2,326,836
<TOTAL-REVENUES> 2,783,371 2,609,361 2,326,836
<CGS> 760,016 692,964 664,531
<TOTAL-COSTS> 760,016 692,964 664,531
<OTHER-EXPENSES> 1,296,976 1,073,467 980,054
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9,756 11,254 10,531
<INCOME-PRETAX> 716,623 831,676 671,720
<INCOME-TAX> 249,746 287,092 235,582
<INCOME-CONTINUING> 466,877 544,584 436,138
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 466,877 544,584 436,138
<EPS-PRIMARY> .98 1.12 .90
<EPS-DILUTED> .96 1.10 .89
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of Medtronic, Inc.
In our opinion, the accompanying supplemental consolidated balance sheets and
the related supplemental 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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 26, 1998, except as to Note 16
which is as of November 2, 1998 and
Note 2 which is as of September 30, 1998
<PAGE>
MEDTRONIC, INC.
SUPPLEMENTAL STATEMENT OF CONSOLIDATED EARNINGS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $2,783,371 $2,609,361 $2,326,836
Costs and expenses:
Cost of products sold 760,016 692,964 664,531
Research and development expense 317,957 299,662 263,933
Selling, general, and administrative expense 809,546 807,852 747,245
Non-recurring charges 156,400
Foundation commitment 36,000
Interest expense 9,756 11,254 10,531
Interest income (22,927) (34,047) (31,124)
---------- ---------- ----------
Total costs and expenses 2,066,748 1,777,685 1,655,116
---------- ---------- ----------
Earnings before income taxes 716,623 831,676 671,720
Provision for income taxes 249,746 287,092 235,582
---------- ---------- ----------
Net earnings $ 466,877 $ 544,584 $ 436,138
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding 477,243 485,506 482,923
Basic earnings per share $ 0.98 $ 1.12 $ 0.90
Earnings per share assuming dilution $ 0.96 $ 1.10 $ 0.89
Weighted average shares outstanding assuming dilution 484,126 494,019 492,209
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
MEDTRONIC, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 386,191 $ 201,712
Short-term investments 43,148 53,181
Accounts receivable, less allowance for doubtful accounts
of $15,224 and $14,420 608,773 555,171
Inventories:
Finished goods 168,121 142,874
Work in process 83,756 75,309
Raw materials 120,031 99,211
---------- ----------
Total inventories 371,908 317,394
Deferred tax assets 148,892 121,087
Prepaid expenses and other current assets 83,853 71,707
---------- ----------
Total current assets 1,642,765 1,320,252
Property, plant, and equipment:
Land and land improvements 27,420 26,329
Buildings and leasehold improvements 239,453 223,786
Equipment 709,865 671,022
Construction in progress 69,909 60,436
---------- ----------
1,046,647 981,573
Accumulated depreciation (519,702) (479,863)
---------- ----------
Net property, plant, and equipment 526,945 501,710
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 113,412 70,531
---------- ----------
Total assets $2,887,387 $2,509,308
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 94,346 $ 106,375
Accounts payable 104,798 121,703
Accrued compensation 179,670 129,636
Accrued income taxes 72,471 68,814
Other accrued expenses 153,952 120,284
---------- ----------
Total current liabilities 605,237 546,812
Long-term debt 32,758 36,116
Deferred tax liabilities 13,409 2,163
Other long-term liabilities 129,760 129,695
---------- ----------
Total liabilities 781,164 714,786
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;
477,514,510 and 475,868,518 shares issued and outstanding 47,752 47,586
Retained earnings 2,153,458 1,831,875
Cumulative translation adjustments and other (67,087) (57,039)
---------- ----------
2,134,123 1,822,422
Receivable from employee stock ownership plan (27,900) (27,900)
---------- ----------
Total shareholders' equity 2,106,223 1,794,522
---------- ----------
Total liabilities and shareholders' equity $2,887,387 $2,509,308
---------- ----------
---------- ----------
</TABLE>
<PAGE>
MEDTRONIC, INC.
SUPPLEMENTAL STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Translation Receivable
Common Retained Adjustments From
Stock Earnings and Other ESOP
------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, April 30, 1995 $12,291 $1,333,458 $ 23,876 $(29,980)
Net earnings 436,138
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
Issuance of common stock of acquired subsidiary 65 13,713
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 (26,507)
Repayment from ESOP 1,308
Adjustment for pooling of interests 499 55,985
------- ---------- -------- --------
Balance, April 30, 1996 24,736 1,872,873 (2,631) (28,672)
Net earnings 544,584
Dividends paid (90,716)
Issuance of common stock under employee
benefit and incentive plans 209 45,897
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 16,307
Translation adjustments (54,408)
Repayment from ESOP 772
------- ---------- -------- --------
Balance, April 30, 1997 24,205 1,855,256 (57,039) (27,900)
Net earnings 466,877
Dividends paid (102,939)
Two-for-one stock split 23,451 (23,451)
Issuance of common stock under employee
benefit and incentive plans 447 56,059
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 47,680
Translation adjustments (8,858)
Minimum pension liability (1,190)
------- ---------- -------- --------
Balance, April 30, 1998 $47,752 $2,153,458 $(67,087) $(27,900)
------- ---------- -------- --------
------- ---------- -------- --------
</TABLE>
<PAGE>
MEDTRONIC, INC.
SUPPLEMENTAL STATEMENT OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 466,877 $ 544,584 $ 436,138
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 140,745 118,032 113,508
Non-recurring charges, net 88,771
Deferred income taxes 18,650 6,276 (29,487)
Changes in operating assets and liabilities:
Increase in accounts receivable (57,703) (58,591) (37,294)
Increase in inventories (65,682) (22,807) (35,098)
(Increase) decrease in prepaid expenses (54,606) (32,692) 17,764
(Decrease) increase in accounts payable and
accrued liabilities 56,375 (42,941) 26,451
(Decrease) increase in accrued income taxes 3,629 (41,791) (12,241)
(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 596,432 469,256 502,152
Investing activities:
Additions to property, plant, and equipment (155,016) (181,847) (170,798)
Acquisitions, net of cash acquired (18,873) (58,002)
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) (97,281) (18,356)
--------- --------- ---------
Net cash provided by (used in) investing
activities (180,656) 69,270 (437,451)
Financing activities:
(Decrease) increase in short-term borrowings (14,153) 33,404 14,330
Payments on long-term debt (57,915) (71,396) (49,727)
Issuance of long-term debt 55,757 68,876 36,534
Proceeds from stock offering of acquired subsidiary 4,134 2,296 55,339
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 (229,085) (489,863) (12,679)
Effect of exchange rate changes on cash and
cash equivalents (2,212) (4,300) (202)
Net change in cash and cash equivalents 184,479 44,363 51,820
Cash and cash equivalents at beginning of year 201,712 157,349 105,529
--------- --------- ---------
Cash and cash equivalents at end of year $ 386,191 $ 201,712 $ 157,349
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Income taxes $ 220,635 $ 314,157 $ 262,200
Interest 9,889 10,824 11,279
Supplemental noncash investing and financing activities:
Issuance of common stock for acquisition of
subsidiary, net of cash acquired $ - $ - $ 73,951
</TABLE>
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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
9, "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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings $466,877 $544,584 $436,138
Weighted average shares outstanding for basic
earnings per share 477,243 485,506 482,923
Dilutive effect of potential shares 6,883 8,513 9,286
Adjusted weighted-average shares outstanding for
diluted earnings per share 484,126 494,019 492,209
Basic earnings per share $ 0.98 $ 1.12 $ 0.90
Earnings per share assuming dilution $ 0.96 $ 1.10 $ 0.89
</TABLE>
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.
2. RECENT BUSINESS COMBINATION
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).
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The acquisition of Physio-Control has been accounted for as a
pooling-of-interests and, accordingly, the company's consolidated
financial statements for all prior years have been restated to include
the results of operations, financial positions, and cash flows of
Physio-Control. The restated consolidated financial results for fiscal
years 1996, 1997 and 1998 include Physio-Control's amounts as of and for
the fiscal years ended March 31, 1996, 1997 and 1998, respectively.
Net sales and net earnings for the individual entities is as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Net sales
Medtronic $2,604,819 $2,438,224 $2,172,100
Physio-Control 178,552 171,137 154,736
---------- ---------- ----------
$2,783,371 $2,609,361 $2,326,836
Net earnings
Medtronic $ 457,382 $ 529,988 $ 428,306
Physio-Control 9,495 14,596 7,832
---------- ---------- ----------
$ 466,877 $ 544,584 $ 436,138
</TABLE>
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.
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 has been excluded from the company's combined
results and has been reported as an adjustment to May 1, 1998 retained
earnings.
3. 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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 4).
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.
4. 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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 13). This commitment is included
within the "Other" category below.
Cash and non-cash applications against the initial charges are as
follows:
<TABLE>
<CAPTION>
Noncancelable
Severance Asset Contractual
Facility and Related Write- Obligations
Reductions Costs Downs and Other Total
---------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Initial charges $ 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
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
The April 30, 1998 reserve balance consisted of $44,756 included in
accrued compensation and $44,015 included in other accrued expenses.
5. 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:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- -------- --------
<S> <C> <C> <C> <C>
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 94,346 94,346 106,375 106,375
Long-term debt 32,758 33,584 36,116 37,724
</TABLE>
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
April 30, 1998 $66,932 $32,666 $ (2,030) $97,568
April 30, 1997 61,314 15,058 (18,035) 58,337
</TABLE>
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 13).
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
April 30,
1998 1997
-------- --------
<S> <C> <C>
Forward exchange contracts $151,807 $154,691
Put options 779 4,841
Call options (143)
-------- --------
Net purchased currency options $ 779 $ 4,698
-------- --------
-------- --------
</TABLE>
The company had aggregate foreign currency transaction gains (losses),
primarily related to purchased currency options and forward contracts, of
$18,008, $1,931, 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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
6. DEBT
Debt consisted of the following at April 30:
<TABLE>
<CAPTION>
Average
SHORT-TERM DEBT Interest Rate 1998 1997
------------- ------- --------
<S> <C> <C> <C>
Bank borrowings 2.2% $90,846 $ 99,716
Current portion of long-term debt 7.1% 3,500 6,659
------- --------
Total short-term debt $94,346 $106,375
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
Average Maturity
LONG-TERM DEBT Interest Rate Date 1998 1997
------------- ----------- ------- -------
<S> <C> <C> <C> <C>
Various notes 4.7% 1999-2007 $30,099 $32,523
Capitalized lease obligations 9.8% 1999-2008 2,659 3,593
------- -------
Total long-term debt $32,758 $36,116
------- -------
------- -------
</TABLE>
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, $3,500; 2000, $3,248; 2001, $18,317;
2002, $1,730; 2003, $7,091, thereafter, $2,372.
7. SHAREHOLDERS' EQUITY
At April 30, 1998, Board of Directors' authorization existed to
repurchase approximately 21.9 million shares of the company's common
stock.
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
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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.
8. 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:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
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
------ ------ ------
------ ------ ------
</TABLE>
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
9. 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:
<TABLE>
<CAPTION>
Option Price
Range Per Number of Expiration
Share Shares Date
-------------- ---------- -----------
<S> <C> <C> <C>
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
Exercisable at April 30, 1998 2.55 - 53.31 6,721,822 1999 - 2008
</TABLE>
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
A summary of stock options as of April 30, 1998, including options
assumed as a result of acquisitions as mentioned above, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Years Average Average
Range of of Contractual Exercise Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 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
---------- ---- ------ --------- ------
---------- ---- ------ --------- ------
</TABLE>
In addition, the company assumed stock options as part of its September
30, 1998 merger with Physio-Control. As of April 30, 1998 there were
1,481,728 options outstanding and 870,620 options exercisable related to
the Physio-Control plan. These options have a price range of $0.06 to
$42.67 per share. In accordance with the Physio-Control plan document,
all outstanding Physio-Control options become immediately exercisable
upon completion of the merger.
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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net earnings
As reported $466,877 $544,584
Pro forma 440,650 526,836
Basic earnings per share
As reported $ 0.98 $ 1.12
Pro forma 0.92 1.09
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
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
</TABLE>
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.
10. 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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States $683,178 $790,863 $539,772
Non-U.S. 33,445 40,813 131,948
-------- -------- --------
Earnings before income taxes $716,623 $831,676 $671,720
-------- -------- --------
-------- -------- --------
</TABLE>
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Taxes currently payable:
U.S. federal $162,164 $188,396 $153,449
U.S. state and other 35,451 55,792 35,568
Non-U.S. 33,064 30,361 64,963
-------- -------- --------
Total currently payable 230,679 274,549 253,980
Deferred tax (benefit) expense:
U.S. federal (31,924) (834) (30,273)
U.S. state and other 1,721 (7,726) (2,187)
Non-U.S. 2,024 962 3,495
-------- -------- --------
Net deferred tax benefit (28,179) (7,598) (28,965)
Tax expense credited directly to shareholders' equity 47,246 20,141 10,567
-------- -------- --------
Total provision $249,746 $287,092 $235,582
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory (intercompany profit in inventory and excess of
tax over book valuation) $ 75,370 $ 98,333
Accrued liabilities 100,541 42,167
Other 25,594 17,881
-------- --------
Total deferred tax assets 201,505 158,381
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 $135,483 $118,924
-------- --------
-------- --------
</TABLE>
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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 (2.2) (1.1) (0.5)
---- ---- ----
Effective tax rate 34.9% 34.5% 35.0%
---- ---- ----
---- ---- ----
</TABLE>
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.
11. 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.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- --------------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of
fiscal year $143,279 $137,538 $32,714 $30,529
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
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- --------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
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)
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
Net periodic benefit cost of plans included the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- --------------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
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
-------- -------- ------- ------
-------- -------- ------- ------
</TABLE>
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------
Year Ended April 30, 1998 1997 1998 1997
----------- ----------- ------ ------
<S> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
One-Percentage-Point One-Percentage-Point
Increase Decrease
-------------------- --------------------
<S> <C> <C>
Effect on postretirement benefit cost $ 611 $ (507)
Effect on postretirement benefit obligation 3,776 (3,134)
</TABLE>
In addition, as part of the September 30, 1998 acquisition of
Physio-Control, the company acquired the assets and related liabilities
of Physio Control's defined benefit retirement plan. The net periodic
pension benefit of this plan was $660 and $685 for Physio-Controls'
fiscal years ended December 31, 1997 and 1996, respectively. The
accumulated benefit obligation and unfunded pension obligation for this
plan was $12,011 and $1,051 and $10,289 and $1,711 at December 31, 1997
and 1996, respectively.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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.
In addition, as part of the September 30, 1998 acquisition of
Physio-Control, the company acquired a defined contribution savings plan
covering eligible Physio-Control employees. Fiscal expense under this
plan was $423, $405 and $703 for the years ended December 31,1998, 1997
and 1996, respectively.
12. 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:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
1999 $ 823 $23,215
2000 668 16,143
2001 490 11,202
2002 415 8,916
2003 415 7,467
2004 and thereafter 1,891 3,905
------- -------
Total minimum lease payments 4,702 $70,848
-------
-------
Less amounts representing interest (1,275)
-------
Present value of net minimum lease payments $ 3,427
-------
-------
</TABLE>
Rent expense for all operating leases was $35,584, $34,567, and $28,945
in fiscal 1998, 1997, and 1996, respectively.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
13. 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.
14. QUARTERLY FINANCIAL DATA (UNAUDITED, IN MILLIONS OF DOLLARS, EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales
1998 $691.3 $686.2 $676.8 $729.0 $2,783.4
1997 643.8 639.8 644.5 681.2 2,609.4
Gross profit
1998 509.2 504.2 482.7 527.3 2,023.4
1997 467.5 468.6 470.2 510.1 1,916.4
Net earnings
1998 149.5 144.9 9.6 162.9 466.9
1997 131.3 131.2 133.9 148.2 544.6
Basic earnings per share:
1998 .31 .30 .02 .34 .98
1997 .27 .27 .27 .31 1.12
Earnings per share
Assuming dilution:
1998 .31 .30 .02 .34 .96
1997 .26 .26 .27 .30 1.10
</TABLE>
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 4, the company recorded pre-tax
non-recurring charges totaling $205.3 million during the third quarter of
fiscal 1998.
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
15. 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
<TABLE>
<CAPTION>
United Asia Other Elimi- Consoli-
States Europe Pacific Americas nations dated
---------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales to unaffiliated customers $1,724,742 $693,567 $278,943 $ 86,119 $ - $2,783,371
Intergeographic sales 296,366 140,264 10 13,893 (450,533) -
---------- --------- --------- --------- --------- ----------
Total sales 2,021,108 833,831 278,953 100,012 (450,533) 2,783,371
Operating profit 471,075 87,243 89,949 16,184 - 664,451
Nonoperating income 52,172
---------- --------- --------- --------- --------- ----------
Earnings before
income taxes 716,623
Identifiable assets 1,726,343 550,661 134,307 53,115 (146,634) 2,317,792
Corporate assets 569,595
---------- --------- --------- --------- --------- ----------
Total assets $2,887,387
1997
Sales to unaffiliated customers $1,523,958 $739,661 $274,355 $ 71,387 $ - $2,609,361
Intergeographic sales 216,773 76,979 20 7,092 (300,864) -
---------- --------- --------- --------- --------- ----------
Total sales 1,740,731 816,640 274,375 78,479 (300,864) 2,609,361
Operating profit 520,568 162,020 103,525 11,522 - 797,635
Nonoperating income 34,041
---------- --------- --------- --------- --------- ----------
Earnings before
income taxes 831,676
Identifiable assets 1,625,296 474,315 185,498 43,489 (160,925) 2,167,673
Corporate assets 341,635
---------- --------- --------- --------- --------- ----------
Total assets $2,509,308
1996
Sales to unaffiliated customers $1,350,279 $652,309 $262,279 $ 61,969 $ - $2,326,836
Intergeographic sales 148,515 94,460 - 7,691 (250,666) -
---------- --------- --------- --------- --------- ----------
Total sales 1,498,794 746,769 262,279 69,660 (250,666) 2,326,836
Operating profit 414,689 161,846 109,238 8,668 - 694,441
Nonoperating expense (22,721)
---------- --------- --------- --------- --------- ----------
Earnings before
income taxes 671,720
Identifiable assets 1,435,222 444,787 179,595 35,785 (161,634) 1,933,755
Corporate assets 704,782
---------- --------- --------- --------- --------- ----------
Total assets $2,638,537
</TABLE>
<PAGE>
MEDTRONIC, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Fiscal 1998 operating profit includes the impact of the $205.3 million
non-recurring charges (see Note 4). 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.
16. SUBSEQUENT EVENTS
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's
shareholders have approved its sale to Medtronic. The transaction is
subject to FTC clearance. This transaction will be accounted for as a
purchase. AVECOR develops, manufacturers and markets specialty medical
devices for heart/lung bypass surgery and long-term respiratory support.
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. Net proceeds from the offering will be utilized by
the company for general corporate purposes, including acquisitions.
In addition, the company's Board of Directors rescinded its remaining
authorization to repurchase shares of the company's common stock as
mentioned in Note 7.
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 transaction will be accounted for as a
purchase. 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.
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.
<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 $14,420 $2,591 $(1,519)(a) $15,224
(268)(b)
Year ended 4/30/97 18,743 (1,691) (1,611)(a) 14,420
(1,021)(b)
Year ended 4/30/96 23,334 484 (2,313)(a) 18,743
(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.
