As Filed with the Securities and Exchange Commission on August 26, 1998
Registration No: 333-__________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
MEDTRONIC, INC.
(Exact name of registrant as specified in its charter)
Minnesota 3845 41-0793183
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
(612) 514-4000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------------
Carol E. Malkinson
Senior Legal Counsel and Assistant Secretary
Medtronic, Inc.
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
(612) 514-4000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
David C. Grorud, Esq. Bruce A. Machmeier, Esq.
Mary E. Strand, Esq. Timothy J. Scallen, Esq.
Fredrikson & Byron, P.A. Oppenheimer Wolff & Donnelly LLP
900 Second Avenue South, Suite 1100 45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402-3397 Minneapolis, Minnesota 55402-1609
(612) 347-7000 (612) 607-7000
----------------------
Approximate date of commencement of proposed sale of the securities to the
public: Upon consummation of the Merger, as described in this Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------- ------------------- ----------------------- ------------------------ -------------------
Title of each class Proposed maximum Proposed maximum Amount of
of securities Amount to be offering price aggregate offering registration
to be registered registered(1) per share price fee(2)
- --------------------------- ------------------- ----------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $.10 per share(3) 1,557,020 shares Not Applicable Not Applicable $24,268.36
- ---------------------------- ------------------- ----------------------- ------------------------ -------------------
</TABLE>
(1) Represents the approximate maximum number of shares issuable upon
consummation of the Merger as described in the Registration Statement,
based upon the anticipated maximum number of outstanding shares of
AVECOR Cardiovascular Inc. Common Stock immediately prior to the
Merger's Effective Time that are not owned by Medtronic, Inc.
(8,100,000) and assuming the Average Stock Price for Medtronic, Inc.
Common Stock is equal to $57.875 (the reported closing sale price of
Medtronic, Inc. Common Stock as reported by the New York Stock Exchange
on August 21, 1998), thereby resulting in the maximum Conversion
Fraction of 0.1922 of a Medtronic, Inc. share issued for each AVECOR
Cardiovascular Inc. share.
(2) The registration fee was calculated pursuant to Section 6 of the
Securities Act of 1933 (the "Securities Act") and Rules 457(f)(1) and
457(c) thereunder, as 0.000295 multiplied by the product of (A)
8,100,000, the anticipated maximum number of AVECOR Cardiovascular Inc.
shares that may be exchanged pursuant to the Merger, multiplied by (B)
$10.15625, the average of the high and low sale prices of AVECOR
Cardiovascular Inc. Common Stock as reported by the Nasdaq National
Market on August 21, 1998, which date was within five business days
prior to the date of this filing.
(3) Each share of Medtronic, Inc. Common Stock includes a Preferred Stock
Purchase Right pursuant to Medtronic, Inc.'s Shareholder Rights Plan.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
[AVECOR letterhead]
_____________, 1998
Dear AVECOR Shareholder:
I am pleased to invite you to attend the Special Meeting of
Shareholders of AVECOR Cardiovascular Inc. ("AVECOR"), which will be held on
___________, 1998, at 9:00 a.m., local time, at AVECOR's corporate headquarters,
located at 7611 Northland Drive, Minneapolis, Minnesota. At the meeting you will
be asked to consider and vote upon a Plan of Merger and an Agreement and Plan of
Merger dated as of July 12, 1998 (the "Merger Agreement") that provide for the
merger of a wholly-owned subsidiary of Medtronic, Inc. ("Medtronic") into
AVECOR.
Under the terms of the Plan of Merger and the Merger Agreement, AVECOR
shareholders will receive $11.125 in shares of Medtronic Common Stock in
exchange for each of their shares of AVECOR Common Stock. The actual number of
Medtronic shares you will receive in the merger for your AVECOR shares will be
based on the market value of Medtronic Common Stock for a specified time period
before the meeting.
The attached Proxy Statement/Prospectus is intended to provide you with
the information you will need to make an informed decision regarding how your
should vote on the proposed merger. It also serves as a Prospectus for
Medtronic, describing the investment in Medtronic that you will be making if the
merger is approved and you exchange your AVECOR Common Stock for Medtronic
Common Stock. Copies of the Plan of Merger and the Merger Agreement are attached
to the Proxy Statement/Prospectus as Appendices A and B. I urge you to read this
information carefully before voting on the proposed merger.
The Board of Directors believes the proposed transaction is fair and in
the best interests of AVECOR and its shareholders and unanimously recommends
approval of the Plan of Merger and the Merger Agreement. The Board believes that
the merger will, among other things, permit AVECOR shareholders to continue
their equity participation on a tax-free basis in a larger, more diversified
medical products enterprise.
The Board of Directors of AVECOR retained the investment banking firm
of Piper Jaffray Inc. to advise it with respect to the consideration to be
received in the merger. Piper Jaffray has advised the Board that, in its
opinion, the consideration to be received by AVECOR shareholders pursuant to the
Merger Agreement and the Plan of Merger is fair to such shareholders from a
financial point of view. A copy of the opinion is attached to the Proxy
Statement/Prospectus as Appendix D.
The Plan of Merger and the Merger Agreement must be approved by the
holders of a majority of the outstanding shares of AVECOR Common Stock. Your
vote on this matter is very important. We urge you to carefully review the
enclosed material and to return your proxy promptly.
Whether or not you plan to attend the meeting, please sign and promptly
return your proxy card in the enclosed postage-paid envelope. If you attend the
meeting, you may vote in person if you wish, even though you have previously
returned your proxy.
Sincerely,
Anthony Badolato
Chairman and Chief Executive Officer
<PAGE>
AVECOR CARDIOVASCULAR INC.
7611 Northland Drive
Minneapolis, Minnesota 55428
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ________________, 1998
To the Shareholders of AVECOR Cardiovascular Inc.:
A Special Meeting of the Shareholders of AVECOR Cardiovascular Inc.
("AVECOR") will be held at AVECOR's corporate headquarters, located at 7611
Northland Drive, Minneapolis, Minnesota, on ___________, 1998, at 9:00 a.m.,
local time, to consider and act upon a proposal to approve a Plan of Merger and
an Agreement and Plan of Merger (the "Merger Agreement"), copies of which are
included as Appendices A and B to the Proxy Statement/Prospectus accompanying
this Notice. Pursuant to the Plan of Merger and the Merger Agreement, (a) AC
Merger Corp. ("Merger Subsidiary") will be merged into AVECOR, with AVECOR to be
the surviving corporation and to become a wholly-owned subsidiary of Medtronic,
Inc. ("Medtronic"), and (b) holders of AVECOR common stock, par value $.01 per
share ("AVECOR Common Stock"), will receive shares of Medtronic common stock,
par value $.10 per share ("Medtronic Common Stock"), based upon a conversion
fraction described in the Proxy Statement/Prospectus accompanying this Notice.
With respect to the proposal to approve the Plan of Merger and the
Merger Agreement, AVECOR shareholders have a right to dissent and obtain payment
in cash for their shares by complying with the terms and procedures of Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act, copies of which
are included as Appendix C to the Proxy Statement/Prospectus accompanying this
Notice.
Only shareholders of record as shown on the books of AVECOR at the
close of business on ___________, 1998 are entitled to notice of and to vote at
the Special Meeting or any adjournments thereof.
Information relating to the above proposal is set forth in the attached
Proxy Statement/Prospectus. Approval of the Plan of Merger and the Merger
Agreement will require the affirmative vote of the holders of a majority of the
shares of AVECOR Common Stock outstanding on the record date. All shareholders
are cordially invited to attend the Special Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
____________, 1998
Richard G. Lareau
Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN, AND DATE THE ENCLOSED PROXY CARD AND MAIL IT
PROMPTLY IN THE ENCLOSED PROXY RETURN ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES
DO NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD
<PAGE>
PROXY STATEMENT/PROSPECTUS
AVECOR Cardiovascular Inc. Medtronic, Inc.
7611 Northland Drive 7000 Central Avenue N.E.
Minneapolis, Minnesota 55428 Minneapolis, Minnesota 55432
Telephone: (612) 391-9000 Telephone: (612) 514-4000
SPECIAL MEETING OF SHAREHOLDERS OF AVECOR CARDIOVASCULAR INC.
TO BE HELD ON ___________, 1998
This Proxy Statement/Prospectus is being furnished to the shareholders
of AVECOR Cardiovascular Inc. ("AVECOR") in connection with the special meeting
of shareholders (the "Meeting") of AVECOR to be held at AVECOR's corporate
headquarters, located at 7611 Northland Drive, Minneapolis, Minnesota, on
___________, 1998, at 9:00 a.m. At the Meeting, AVECOR shareholders will be
asked to consider and act upon a proposal to approve the Plan of Merger attached
hereto as Appendix A and the Agreement and Plan of Merger attached hereto as
Appendix B (the "Merger Agreement"), pursuant to which (a) AC Merger Corp.
("Merger Subsidiary"), a wholly-owned subsidiary of Medtronic, Inc.
("Medtronic"), will be merged (the "Merger") into AVECOR, which will be the
surviving corporation in the Merger and become a wholly-owned subsidiary of
Medtronic, and (b) each share of AVECOR common stock, par value $.01 per share
("AVECOR Common Stock"), will be converted into a portion of a share of
Medtronic common stock, par value $.10 per share ("Medtronic Common Stock"), as
described in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus also constitutes the Prospectus of
Medtronic with respect to the shares of Medtronic Common Stock to be issued in
the Merger. Medtronic has filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission (the "Commission") covering the shares of
Medtronic Common Stock that may be issued in connection with the Merger, based
on the Conversion Fraction described in this Proxy Statement/Prospectus. The
Medtronic Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "MDT." This Proxy Statement/Prospectus is first being mailed to
AVECOR shareholders on or about ___________, 1998.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained or incorporated by reference in this Proxy
Statement/Prospectus regarding Medtronic has been supplied by Medtronic.
Information contained or incorporated by reference in this Proxy
Statement/Prospectus regarding AVECOR has been supplied by AVECOR.
Additional copies of this Proxy Statement/Prospectus and the Proxy card
to be returned for the Meeting can be obtained from AVECOR, 7611 Northland
Drive, Minneapolis, Minnesota 55428, Attention: Investor Relations, telephone
(612) 391-9000.
The date of this Proxy Statement/Prospectus is ___________, 1998.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus or
the documents incorporated by reference herein, and any information or
representations not contained herein or therein may not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy the Medtronic Common Stock offered by
this Proxy Statement/Prospectus, or the solicitation of a proxy, in any
circumstances in which such offer or solicitation is unlawful. The delivery of
this Proxy Statement/Prospectus does not imply that the information herein is
correct as of any time subsequent to the date of such information.
AVAILABLE INFORMATION
This Proxy Statement/Prospectus is a prospectus of Medtronic delivered
in compliance with the Securities Act of 1933 (the "Securities Act"). This Proxy
Statement/Prospectus constitutes part of a Registration Statement on Form S-4
(the "Registration Statement") filed by Medtronic with the Commission under the
Securities Act with respect to the Medtronic Common Stock to be issued in
connection with the Merger. This Proxy Statement/Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to Medtronic, AVECOR,
and the Medtronic Common Stock offered hereby, reference is made to the
Registration Statement, exhibits, and schedules. Statements contained in this
Proxy Statement/Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
Medtronic and AVECOR are subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance
therewith, each files reports, proxy and information statements, and other
information with the Commission. The public may read and copy the Registration
Statement and the reports, proxy and information statements, and other
information filed by each of Medtronic and AVECOR pursuant to the Exchange Act
at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549, or at one of the Commission's regional offices: 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th
Floor, New York, New York, 10048. Copies of all or any part of such material are
available for inspection at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005. Copies of all or any part of such AVECOR
material are available for inspection at the offices of the National Association
of Securities Dealers, Inc. The public may obtain information on the operation
of the Commission's Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site at
"http://www.sec.gov" containing reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission, including Medtronic and AVECOR.
INFORMATION INCORPORATED BY REFERENCE
This Proxy Statement/Prospectus incorporates certain documents by
reference. Medtronic and AVECOR will provide without charge to each person,
including any beneficial owner of AVECOR Common Stock, to whom a copy of this
Proxy Statement/Prospectus is delivered, on written or oral request, copies of
any and all such documents (other than the exhibits thereto, unless such
exhibits are specifically incorporated by reference into the information that
this Proxy Statement/Prospectus incorporates) of Medtronic or AVECOR, as the
case may be, that are incorporated by reference. Requests should be directed to
Medtronic, Inc., 7000 Central Avenue N.E., Minneapolis, Minnesota 55432,
Attention: Investor Relations Department, telephone (612) 514-3035, or to AVECOR
Cardiovascular Inc., 7611 Northland Drive, Minneapolis, Minnesota 55428,
Attention: Investor Relations, telephone (612) 391-9000. In order to ensure
timely delivery of the documents, any such request should be made no later than
[five business days prior to Meeting date], 1998.
<PAGE>
The following Medtronic documents are incorporated by reference herein:
1. Medtronic's Annual Report on Form 10-K for the fiscal year
ended April 30, 1998.
2. Medtronic's Current Reports on Form 8-K filed July 8, 1998,
July 16, 1998, and August 20, 1998.
3. The description of Medtronic's Common Stock contained in
Medtronic's Registration Statement on Form 8-A filed under
Section 12 of the Exchange Act.
4. The description of Medtronic's Preferred Stock Purchase Rights
attached to its Common Stock contained in Medtronic's
Registration Statement on Form 8-A filed under Section 12 of
the Exchange Act.
All documents filed by Medtronic with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof
and prior to the date of the Meeting shall be deemed to be incorporated by
reference herein and shall be a part hereof from the date of filing of such
documents.
The following AVECOR documents are incorporated by reference herein:
1. AVECOR's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. AVECOR's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998.
All documents filed by AVECOR with the Commission pursuant to Sections
13(a) and 15(d) of the Exchange Act after the date hereof and prior to the date
of the Meeting shall be deemed to be incorporated by reference herein and shall
be a part hereof from the date of filing of such documents.
Any statements contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
that also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain statements contained in this Proxy Statement/Prospectus
(including information included or incorporated by reference herein) and other
written and oral statements made from time to time by Medtronic and AVECOR 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
<PAGE>
expressions. Medtronic's and AVECOR's respective forward-looking statements
generally relate to their respective 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. Consequently, no forward-looking
statement can be guaranteed and actual results may vary materially. It is not
possible to foresee or identify all factors affecting Medtronic's or AVECOR's
respective forward-looking statements, and investors therefore should not
consider any list of factors affecting Medtronic's or AVECOR's respective
forward-looking statements to be an exhaustive statement of all risks,
uncertainties, or potentially inaccurate assumptions. Neither Medtronic nor
AVECOR undertakes any obligation to update any forward-looking statement.
Although it is not possible to create a comprehensive list of all
factors that may cause actual results to differ from Medtronic's or AVECOR's
forward-looking statements, such factors include, among others, (i) trends
toward managed care, health care cost containment, and other changes in
government and private sector initiatives, in the United States and other
countries in which Medtronic or AVECOR do business, that are placing increased
emphasis on the delivery of more cost-effective medical therapies; (ii) the
trend of consolidation in the medical device industry as well as among customers
of medical device manufacturers, resulting in more significant, complex, and
long-term contracts than in the past and potentially greater pricing pressures;
(iii) the difficulties and uncertainties associated with the lengthy and costly
new product development and regulatory approval processes, which may result in
lost market opportunities or preclude product commercialization; (iv) efficacy
or safety concerns with respect to marketed products, whether scientifically
justified or not, that may lead to product recalls, withdrawals, or declining
sales; (v) changes in governmental laws, regulations, and accounting standards
and the enforcement thereof that may be adverse to Medtronic or AVECOR; (vi)
increased public interest in recent years in product liability claims for
implanted medical devices, including pacemakers and leads; (vii) other legal
factors including environmental concerns and patent or other intellectual
property disputes with competitors or others; (viii) agency or government
actions or investigations affecting the industry in general or Medtronic or
AVECOR in particular; (ix) the development of new products or technologies by
competitors, technological obsolescence, and other changes in competitive
factors; (x) risks associated with maintaining and expanding international
operations; (xi) business acquisitions, dispositions, discontinuations or
restructurings by Medtronic or AVECOR; (xii) the integration of businesses
acquired by Medtronic or AVECOR; and (xiii) economic factors over which
Medtronic or AVECOR has no control, including changes in inflation, foreign
currency rates, and interest rates. Medtronic and AVECOR note these factors as
permitted by the Private Securities Litigation Reform Act of 1995.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY.....................................................................7
GENERAL INFORMATION.........................................................20
THE MERGER..................................................................21
General..............................................................21
Effective Time of the Merger.........................................22
Background of the Merger.............................................22
AVECOR's Reasons for the Merger; Recommendation of the
AVECOR Board of Directors........................................25
Medtronic's Reasons for the Merger...................................27
Opinion of AVECOR's Financial Advisor................................28
Vote Required........................................................32
Conversion of AVECOR Common Stock in the Merger......................32
Shareholder Rights Plans.............................................34
Treatment of Stock Options...........................................35
Conduct of Business of AVECOR Pending the Merger.....................35
Interests of Certain Persons in the Merger...........................36
Voting Agreements....................................................37
Stock Option Agreement...............................................37
Conditions; Waiver...................................................38
Amendment and Termination of the Merger Agreement....................38
Expenses and Fees....................................................39
Restrictions on Resale of Medtronic Common Stock.....................40
Deregistration of AVECOR Common Stock................................40
Accounting Treatment of the Merger...................................40
Certain Federal Income Tax Consequences..............................41
Indemnification......................................................42
Regulatory Requirements..............................................43
Rights of Dissenting AVECOR Shareholders.............................43
COMPARATIVE STOCK PRICES AND DIVIDENDS........................................46
RECENT DEVELOPMENTS...........................................................47
COMPARATIVE RIGHTS OF MEDTRONIC AND AVECOR SHAREHOLDERS.......................48
Classification, Removal, and Nomination of Directors.................48
Preferred Stock......................................................50
Special Meetings of Shareholders.....................................50
Voting Rights; Shareholder Approvals.................................50
Cumulative Voting....................................................51
Preemptive Rights....................................................51
Amendment of the Articles of Incorporation...........................51
Business Combinations and Control Share Acquisitions.................51
Shareholder Rights Plans.............................................51
Related Person Business Transactions.................................53
<PAGE>
INFORMATION REGARDING AVECOR..................................................54
General Development of Business......................................54
Industry Background and Markets......................................54
Products.............................................................58
Research and Development.............................................62
Marketing............................................................63
Competition..........................................................64
Manufacturing........................................................65
Governmental Regulation..............................................66
Third-Party Reimbursement and Cost Containment.......................69
Patents and Propriety Rights.........................................70
Employees............................................................72
SELECTED FINANCIAL DATA OF AVECOR.............................................73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AVECOR.................................74
CERTAIN TRANSACTIONS AND RELATIONSHIPS BETWEEN AVECOR AND
MEDTRONIC.....................................................................84
LEGAL MATTERS.................................................................84
EXPERTS.......................................................................84
.
INDEX TO FINANCIAL STATEMENTS F-1
APPENDIX A - Plan of Merger.............................................. A-1
APPENDIX B - Agreement and Plan of Merger................................ B-1
APPENDIX C - Sections 302A.471 and 302A.473 of Minnesota Business
Corporation Act............................................ C-1
APPENDIX D - Opinion of Piper Jaffray Inc............................... D-1
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and in the documents incorporated herein by
reference. Certain capitalized terms used in this Summary are defined elsewhere
in this Proxy Statement/Prospectus. Reference is made to, and this Summary is
qualified in its entirety by, the more detailed information contained in this
Proxy Statement/Prospectus, the Appendices hereto, and the documents
incorporated in this Proxy Statement/Prospectus by reference.
Parties to the Merger
AVECOR: AVECOR Cardiovascular Inc. ("AVECOR"), a Minnesota
corporation, was incorporated in 1990 and began operations in
1991 when it purchased the surgical division of SCIMED Life
Systems, Inc. AVECOR designs, manufactures, markets, and
services specialty medical devices for heart/lung bypass
surgery and long-term respiratory support. Its products
include the Affinity(R)microporous, hollow fiber membrane
oxygenator and related blood reservoirs, a line of solid
silicone membrane oxygenators and related blood reservoirs,
the Affinity blood pump, the MYOtherm(R)cardioplegia delivery
system, Signature(TM)custom tubing packs, and the Affinity
arterial filter.
AVECOR's principal offices and corporate headquarters are
located at 7611 Northland Drive, Minneapolis, Minnesota 55428,
telephone: (612) 391-9000. See "Information Incorporated by
Reference" and "Information Regarding AVECOR."
Medtronic: Medtronic, Inc. ("Medtronic"), a Minnesota corporation, was
incorporated in 1957. Medtronic is the world's leading medical
technology company specializing in implantable and
interventional therapies. Its primary products include those
for bradycardia pacing, tachyarrhythmia management, atrial
fibrillation management, heart failure management, coronary
and peripheral vascular disease, heart valve replacement,
extracorporeal cardiac support, minimally invasive cardiac
surgery, malignant and non-malignant pain, movement disorders,
neurosurgery and neurodegenerative disorders. Medtronic serves
customers and patients in more than 120 countries.
Medtronic's principal offices and corporate headquarters are
located at 7000 Central Avenue N.E., Minneapolis, Minnesota
55432, telephone: (612) 514-4000. See "Information
Incorporated by Reference."
AC Merger Corp.: AC Merger Corp. ("Merger Subsidiary"), a Minnesota
corporation, is a corporation recently organized by Medtronic
for the purpose of effecting the Merger. It has no material
assets and has not engaged in any activities except in
connection with the proposed Merger.
<PAGE>
AVECOR Shareholders' Meeting
Time, Date, and
Place of Meeting: A special meeting of shareholders of AVECOR will be held on
___________, 1998, at 9:00 a.m., local time, at AVECOR's
corporate headquarters, located at 7611 Northland Drive,
Minneapolis, Minnesota (the "Meeting").
Purpose of the
Meeting: The purpose of the Meeting is to consider and vote upon a
proposal to approve the Plan of Merger attached hereto as
Appendix A and the Agreement and Plan of Merger dated as of
July 12, 1998 (the "Merger Agreement"), among Medtronic,
AVECOR, and Merger Subsidiary, which is attached hereto as
Appendix B, providing for the merger (the "Merger") of Merger
Subsidiary into AVECOR, as a result of which AVECOR will
become a wholly-owned subsidiary of Medtronic. Other terms and
provisions related to the Merger are set forth in the Merger
Agreement, which is summarized in this Proxy
Statement/Prospectus.
Record Date: Only holders of record of AVECOR Common Stock at the
close of business on ___________, 1998, will be entitled to
receive notice of and to vote at the Meeting or any
adjournment or adjournments thereof.
Vote Required: The affirmative vote by the holders of a majority of the
outstanding shares of AVECOR Common Stock is required to
approve the Plan of Merger and the Merger Agreement. As of the
record date, [8,044,475] shares of AVECOR Common Stock were
outstanding and entitled to vote. Of such shares, [1,080,749]
shares (approximately [13.4]% of the shares entitled to vote
at the Meeting) are beneficially owned by directors and
executive officers of AVECOR. AVECOR's directors and executive
officers have executed voting agreements under which such
persons agreed to vote shares of AVECOR Common Stock owned by
them in favor of the Merger. Of the shares of AVECOR Common
Stock outstanding as of the record date, Medtronic, through a
wholly-owned subsidiary, owns 346,960 shares of AVECOR Common
Stock representing approximately 4.3% of the shares entitled
to vote. Medtronic intends to have all such shares voted in
favor of the Merger.
AVECOR shareholders have the power to revoke proxies
previously given by them before the shares represented by any
such proxies are voted at the Meeting. See "General
Information."
Approval of the Plan of Merger and the Merger Agreement by
Medtronic shareholders is not required under Minnesota law
and, accordingly, will not be sought. See "The Merger--Vote
Required."
Dissenters'
Rights: Under Minnesota law, holders of AVECOR Common Stock who give
proper notice to AVECOR and who do not vote in favor of the
Merger have the right to receive in cash the "fair value" of
their AVECOR shares in lieu of Medtronic Common Stock as a
result of the Merger. See "The Merger--Rights of Dissenting
AVECOR Shareholders" and Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act (the "MBCA"), copies of
which are attached hereto as Appendix C. Holders of Medtronic
Common Stock do not have dissenters' rights in connection with
the Merger.
<PAGE>
Description of the Merger
General: Upon consummation of the Merger, Merger Subsidiary will be
merged into AVECOR and AVECOR will become a wholly-owned
subsidiary of Medtronic. Each share of AVECOR Common Stock
outstanding immediately prior to the Merger (except shares of
AVECOR Common Stock owned by Medtronic and any shares as to
which dissenters' rights have been properly exercised) will be
converted into the portion of a share (the "Conversion
Fraction") of Medtronic Common Stock equal to $11.125 divided
by the average of the daily closing sale prices of Medtronic
Common Stock as reported on the NYSE Composite Tape (the
"Average Stock Price") for the 18 consecutive NYSE trading
days ending on the second NYSE trading day immediately
preceding the Effective Time of the Merger. Solely for
illustrative purposes, the Conversion Fraction would be .1922
(or one Medtronic share for each 5.2 AVECOR shares held) if
the Average Stock Price were calculated based upon the closing
sale price of Medtronic Common Stock on [August 24], 1998.
The Conversion Fraction is subject to appropriate adjustment
in the event of a stock split, combination, stock dividend, or
other distribution of shares of Medtronic Common Stock prior
to the Effective Time of the Merger. See "The Merger."
Each share of Medtronic Common Stock received in the Merger
will also represent one Preferred Stock Purchase Right under
Medtronic's Shareholder Rights Plan. See "The
Merger--Shareholder Rights Plan."
Persons entitled to a fractional share of Medtronic Common
Stock upon such conversion will receive a cash payment in lieu
thereof. See "The Merger--Conversion of AVECOR Common Stock in
the Merger--Fractional Shares."
If the Merger is approved and the Merger is completed, AVECOR
shareholders will be instructed to deliver to Medtronic's
exchange agent for the Merger a letter of transmittal, which
will be sent to such shareholders following the Merger,
together with certificates evidencing each shareholder's
AVECOR Common Stock, in exchange for the Medtronic Common
Stock and, if applicable, cash in lieu of any fractional
shares of Medtronic Common Stock. AVECOR shareholders should
not send in their certificates until they receive a letter of
transmittal. See "The Merger--Conversion of AVECOR Common
Stock in the Merger."
Effective Time of
the Merger: It is expected that the Merger will become effective as
promptly as practicable following approval of the Plan of
Merger and the Merger Agreement by the requisite vote of the
AVECOR shareholders and the satisfaction or waiver of the
other conditions to the Merger. See "The Merger--Effective
Time" and "--Conditions; Waiver."
<PAGE>
Background of the
Merger: The terms of the Merger Agreement are the result of
arm's-length negotiations between representatives of Medtronic
and AVECOR. The following is a brief discussion of the
background of these negotiations, the Merger, and related
transactions.
In November 1997, AVECOR engaged Piper Jaffray Inc. ("Piper
Jaffray") to explore various strategic alternatives for
AVECOR.
During the period from December 1997 to early July 1998,
AVECOR met at various times with Medtronic and four other
companies regarding a possible business combination between
AVECOR and each of those companies. During the course of
AVECOR's negotiations with Medtronic, which began in June
1998, AVECOR continued to discuss a possible transaction with
two of the other four interested companies.
During June 1998, Medtronic held meetings with AVECOR,
reviewed due diligence information concerning AVECOR's
business, and ultimately proposed the terms of its offer to
acquire AVECOR. On June 25, 1998, the Medtronic Board of
Directors approved the acquisition of AVECOR, subject to final
negotiations by senior management. During the period of July
7-12, 1998, AVECOR, Medtronic, and their respective advisors
negotiated the definitive terms of the Merger Agreement and
related agreements.
On July 12, 1998, the Board of Directors of AVECOR unanimously
approved the terms of the Merger Agreement and the Plan of
Merger. The Merger Agreement was signed following the
conclusion of the meeting of the Board of Directors of AVECOR.
See "The Merger--Background of the Merger," "--AVECOR's
Reasons for the Merger; Recommendation of the AVECOR Board of
Directors," "--Medtronic's Reasons for the Merger," and
"--Opinion of AVECOR's Financial Advisor."
Reasons for the
Merger: In reaching its conclusions to approve the Merger Agreement
and to recommend the approval of the Plan of Merger and the
Merger Agreement by the AVECOR shareholders, the AVECOR Board
of Directors considered various factors, including: (i)
AVECOR's strategic alternatives, including remaining a
separate company, exploring a future acquisition of AVECOR by
another party, or engaging in a merger of equals or joint
venture transaction with another party; (ii) certain factors
influencing the heart/lung bypass device industry, including
pricing pressures, the need to compete by offering a more
complete line of products, and other competitive factors;
(iii) the overall strategic fit between AVECOR and Medtronic
in view of their respective product lines, markets, and
distribution channels and the potential synergies,
efficiencies, and cost savings that could be realized through
a combination of AVECOR and Medtronic; (iv) the opportunity
for AVECOR shareholders to continue equity participation in a
larger, more diversified medical device company at a premium
over market prices for AVECOR Common Stock prior to
announcement of the Merger; (v) the financial advice provided
to AVECOR by Piper Jaffray and Piper Jaffray's opinion that
the consideration to be received by AVECOR shareholders in the
Merger is fair from a financial point of view; (vi) the terms
and conditions of the Merger Agreement; and (vii) that the
Merger will be a tax-free transaction for federal income tax
purposes to AVECOR shareholders receiving Medtronic Common
Stock.
<PAGE>
The Board of Directors of AVECOR has unanimously approved the
Merger, and the Board recommends that the shareholders of
AVECOR vote in favor of the Plan of Merger and the Merger
Agreement.
See "The Merger--AVECOR's Reasons for the Merger;
Recommendation of the AVECOR Board of Directors,"
"--Medtronic's Reasons for the Merger," "--Opinion of AVECOR's
Financial Advisor," and "Comparative Stock Prices and
Dividends." For information on the interests of certain
persons in the Merger, see "The Merger--Interests of Certain
Persons in the Merger."
AVECOR's Financial
Advisor: Piper Jaffray was retained by AVECOR to advise it with respect
to the fairness of the consideration to be received by AVECOR
shareholders in the Merger from a financial point of view.
Piper Jaffray has rendered its written opinion to the effect
that, as of the date of such opinion, the consideration to be
received in the Merger by AVECOR shareholders is fair to the
AVECOR shareholders from a financial point of view. The full
text of the opinion of Piper Jaffray, which contains
information as to the assumptions made, matters considered,
and the scope and limitations on the review undertaken, is set
forth as Appendix D to this Proxy Statement/Prospectus and
should be read in its entirety. See "The Merger--Opinion of
AVECOR's Financial Advisor."
Fluctuation in
Market Price: Although the Merger Agreement fixes the value of Medtronic
Common Stock to be issued with respect to each share of AVECOR
Common Stock at $11.125, the number of shares of Medtronic
Common Stock to be received by AVECOR shareholders in the
Merger will depend on the market value of Medtronic Common
Stock, which is subject to fluctuation. Because of such
fluctuation in the value of Medtronic shares, the market value
of Medtronic Common Stock that AVECOR shareholders receive in
the Merger may increase or decrease following the Merger. See
"Comparative Stock Prices and Dividends" and "The
Merger--Conversion of AVECOR Common Stock in the Merger."
Certain Federal
Income Tax
Consequences: The Merger is expected to be treated as a tax-free
reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended
(the "Code"). Medtronic, AVECOR, and Merger Subsidiary will
each be a "party to the reorganization" within the meaning of
Section 368(b) of the Code.
No gain or loss will be recognized by the shareholders of
AVECOR upon their receipt of Medtronic Common Stock in
exchange for their AVECOR Common Stock. An AVECOR shareholder
receiving cash in lieu of a fractional share or exercising
dissenters' rights, however, will be required to recognize
gain, if any, realized in the transaction but not in excess of
the cash received by such shareholder. See "The
Merger--Certain Federal Income Tax Consequences."
<PAGE>
Accounting
Treatment: Medtronic intends to account for the Merger as a purchase for
accounting and financial reporting purposes under generally
accepted accounting principles. See "The Merger--Accounting
Treatment of the Merger."
Treatment of Stock
Options: Pursuant to the terms of the outstanding options to purchase
AVECOR Common Stock, such options that are not otherwise
vested will be fully vested and exercisable as a result of the
Merger. All options that are not exercised and remain
outstanding at the Effective Time will be assumed by Medtronic
and will thereafter be exercisable on the same terms and
conditions, except for appropriate adjustments to reflect the
Conversion Fraction and conversion into options to purchase
Medtronic Common Stock. See "The Merger--Treatment of Stock
Options" and "--Interests of Certain Persons in the Merger."
Interests of
Certain Persons
in the Merger: In considering the recommendation of the Board of Directors of
AVECOR with respect to the Plan of Merger, the Merger
Agreement, and the transactions contemplated thereby,
shareholders of AVECOR should be aware that certain executive
officers and directors of AVECOR have certain interests in the
Merger that are in addition to, and may conflict with, the
interests of shareholders of AVECOR generally. These interests
include, among other things, the interests of certain
executives and directors of AVECOR in stock options that will
vest and become exercisable as a result of the Merger, and the
obligation of Medtronic to cause AVECOR to continue to provide
certain indemnification and related insurance coverage to
directors, officers, employees, and agents of AVECOR following
the Merger.
Two executive officers of AVECOR have executed separate
noncompetition agreements with Medtronic and, pursuant to the
terms of the Merger Agreement, AVECOR is required to use all
reasonable efforts to cause two other executive officers and
one other member of AVECOR's management to execute proposed
noncompetition agreements with Medtronic. All executed and
proposed agreements are conditioned upon the effectiveness of
the Merger and provide that the individual, upon signing the
agreement, agrees that they will not be employed by,
associated with, or render services to certain competitive
businesses, anywhere in the world, for 24 or 42 months
(depending on the individual) after the Merger. In addition,
four executive officers are parties to change in control
agreements with AVECOR that provide certain payments and other
benefits to these individuals if, during the 12-month period
following a "change in control" of AVECOR or its successors
(such as the Merger), (i) such individual's employment is
terminated other than for death, disability, or "for cause" or
(ii) such individual terminates his employment as a result of
a material adverse change in the nature of such individual's
employment.
<PAGE>
The AVECOR Board of Directors was aware of each of these
interests and considered them, among other matters, in
approving the Merger Agreement. See "The Merger--Interests of
Certain Persons in the Merger."
Regulatory
Approval: The only federal or state regulatory approval needed to effect
the Merger is the expiration or termination of all applicable
waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"). On August 21, 1998,
Medtronic and AVECOR received a request for additional
information relating to the notifications that they had
earlier filed under the HSR Act. This request extends the
waiting period during which the applicable governmental
authorities can review the Merger. The waiting period will
expire on the 20th day after the companies substantially
comply with the request. The companies intend to respond
promptly to the request. Medtronic and AVECOR do not expect
international regulatory filings that may be required, if any,
to affect the expected timing of the Merger. See "The
Merger--Regulatory Requirements."
No Solicitation: Pursuant to the Merger Agreement, AVECOR and its
representatives cannot, prior to the Effective Time or earlier
termination of the Merger Agreement, encourage, solicit,
discuss, or negotiate with any person (other than Medtronic)
concerning any merger, sale, or license of any significant
portion of AVECOR's assets or similar transaction, except to
the extent required by the fiduciary obligations of the AVECOR
Board of Directors and in accordance with the provisions of
the Merger Agreement. See "The Merger--Conduct of Business of
AVECOR Pending the Merger."
Conditions
to Merger: The respective obligations of Medtronic, Merger Subsidiary,
and AVECOR to effect the Merger are subject to the
satisfaction or waiver at or prior to the Merger of certain
conditions. See "The Merger--Conditions; Waiver."
Termination: The Merger Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the
AVECOR shareholders, in certain specified events. Upon a
termination as a result of certain of such events, AVECOR is
required to pay to Medtronic a termination fee of $2.75
million. See "The Merger--Amendment and Termination of the
Merger Agreement."
Stock Option
Agreement: In connection with the execution of the Merger Agreement,
Medtronic and AVECOR entered into a Stock Option Agreement
pursuant to which AVECOR granted to Medtronic an option to
purchase up to 1,600,851 shares of AVECOR Common Stock (or
19.9% of the outstanding shares of AVECOR Common Stock as of
July 12, 1998) at an exercise price of $11.125 per share. The
option is exercisable upon the occurrence of certain events
and provides Medtronic with the right, under certain
circumstances, to require AVECOR to repurchase the option for
its in-the-money value, provided that the sum of any
termination fee and the amount paid to repurchase the option
cannot exceed $3.6 million. The option, which Medtronic
required as a condition to Medtronic's entering into the
Merger Agreement, may increase the likelihood of consummation
of the Merger. See "The Merger--Stock Option Agreement" and
"--Amendment and Termination of the Merger Agreement."
<PAGE>
Comparison of Rights of Medtronic Shareholders and AVECOR Shareholders
Medtronic and AVECOR are incorporated under the laws of the State of
Minnesota. The rights of AVECOR shareholders are currently governed by the
Second Restated Articles of Incorporation, as amended, and Bylaws, as amended,
of AVECOR. Upon consummation of the Merger, AVECOR shareholders will become
shareholders of Medtronic and their rights as such will be governed by the
Restated Articles of Incorporation and Bylaws, as amended, of Medtronic. See
"The Merger--Comparative Rights of Medtronic Shareholders and AVECOR
Shareholders."
Recent Prices of Medtronic and AVECOR Common Stock
On July 10, 1998, the last trading day preceding public announcement of
the Merger Agreement, the reported closing sale price of Medtronic Common Stock
on the NYSE was $69.8125 per share. On that day, the reported closing sale price
of AVECOR Common Stock on the Nasdaq National Market was $9.875 per share. On
[August 24], 1998, the latest practicable trading day prior to the printing of
this Proxy Statement/Prospectus, the reported closing sale price of Medtronic
Common Stock on the NYSE was [$57.875] per share. On that day, the reported
closing sale price of AVECOR Common Stock on the Nasdaq National Market was
[$10.0625] per share.
Pursuant to the Merger Agreement, the actual portion of a Medtronic
share into which one AVECOR share will be converted will be equal to $11.125
divided by the Average Stock Price of Medtronic Common Stock for the 18
consecutive NYSE trading days ending on the second trading day immediately
preceding the Effective Time of the Merger. Solely for illustrative purposes,
the Conversion Fraction would be 0.1594 if the Average Stock Price were
calculated based on the reported closing sale price of Medtronic Common Stock on
July 10, 1998, or [.1922] if the Average Stock Price were calculated based on
the reported closing sale price of Medtronic Common Stock on [August 24], 1998.
See "Comparative Stock Prices and Dividends" and "The Merger--Conversion of
AVECOR Common Stock in the Merger."
Recent Developments
To be eligible to use the pooling of interests accounting method to
account for its merger with Physio-Control International Corporation
("Physio-Control") and future transactions, Medtronic intends to sell, in one or
more transactions, up to approximately 12.5 million shares of Medtronic Common
Stock, which approximates the number of shares tainted for purposes of the
pooling of interests accounting method. Medtronic expects the offering to be
completed prior to the merger with Physio-Control; however, neither the
consummation of the Merger nor the consummation of the merger with
Physio-Control is contingent upon the completion of the above-described
offering.
On June 27, 1998, Medtronic entered into an agreement to acquire
Physio-Control, a company that designs, manufactures, markets, and services an
integrated line of noninvasive emergency cardiac defibrillator and vital sign
assessment devices, disposable electrodes, and data management software.
Pursuant to the acquisition agreement, Physio-Control will become a wholly-owned
subsidiary of Medtronic in a stock-for-stock merger that is expected to be
tax-free and accounted for using the pooling of interests accounting method.
<PAGE>
Selected Historical Financial Data
The following table sets forth selected historical financial data for
Medtronic as of and for each of the five consecutive fiscal years ended April
30, 1998, and for AVECOR as of and for each of the five consecutive fiscal years
ended December 31, 1997 and as of and for the six-month periods ended June 30,
1998 and 1997. Such data should be read in conjunction with the consolidated
financial statements and the unaudited condensed consolidated interim financial
statements of Medtronic and AVECOR, all of which are incorporated by reference
or included herein. The consolidated interim financial data of AVECOR as of and
for the six-month periods ended June 30, 1998 and 1997 included herein has been
prepared, without audit, by AVECOR. Selected unaudited financial data for AVECOR
as of and for the six-month periods ended June 30, 1998 and 1997 include all
adjustments (consisting only of normal recurring adjustments) that AVECOR
considers necessary for a fair presentation of the consolidated operating
results and financial position as of and for such interim periods. Results of
operations for the interim periods are not necessarily indicative of results for
the full years. See "Information Incorporated by Reference," "Selected Financial
Data of AVECOR," and "Index to Financial Statements."
MEDTRONIC, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998(2)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales.................... $1,390,922 $1,742,392 $2,172,100 $2,438,224 $2,604,819
Net earnings................. 232,357 294,000 428,306 529,988 457,382
Basic earnings per share(1).. 0.51 0.64 0.90 1.11 0.98
Diluted earnings per
share(1)..................... 0.50 0.63 0.89 1.09 0.96
Total assets................. 1,623,252 1,946,732 2,554,700 2,409,210 2,774,727
Long-term debt............... 20,232 14,200 15,336 13,980 16,227
Cash dividends per share(1).. 0.09 0.10 0.13 0.19 0.22
</TABLE>
AVECOR CARDIOVASCULAR INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------------------------------------------- ----------------------
June 30, June 30,
1993 1994 1995 1996(3) 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $14,125 $21,486 $33,340 $44,401 $46,864 $24,004 $26,021
Net income (loss)..... (1,650) (39) 3,296 (567) 1,327 790 630
Basic earnings per
share................. (0.26) (0.01) 0.47 (0.07) 0.17 0.10 0.08
Diluted earnings per
share................. (0.26) (0.01) 0.45 (0.07) 0.17 0.10 0.08
Total assets.......... 15,031 15,877 33,519 37,161 42,759 44,363 46,049
Long-term debt........ 0 0 0 0 4,694 4,823 4,632
Cash dividends per
share................. 0 0 0 0 0 0 0
</TABLE>
- -------------------
<PAGE>
(1) In each of September 1994, September 1995, and September 1997,
Medtronic effected a two-for-one common stock split, paid in the form
of a 100% stock dividend. All references in the Selected Historical
Consolidated Financial Data to Medtronic's earnings per share and cash
dividends per share have been restated to reflect these stock splits.
(2) Medtronic's net earnings, basic earnings per share, and diluted
earnings per share reflect the impact of $205.3 million pre-tax
nonrecurring charges recorded in the third quarter of fiscal 1998.
(3) AVECOR's net income (loss), basic earnings per share, and diluted
earnings per share include a $4.2 million pre-tax loss resulting from a
litigation settlement with COBE Laboratories, Inc.
<PAGE>
Comparative Per Share Data
The following summary sets forth certain historical per share data of
Medtronic and AVECOR and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a purchase basis assuming, solely for
illustrative purposes of this presentation, that the Average Stock Price for
Medtronic Common Stock is [$57.875] (the reported closing sale price of
Medtronic Common Stock on [August 24], 1998). The actual Average Stock Price
that will be used in the Merger will be the Average Stock price of Medtronic
Common Stock for the 18 consecutive NYSE trading days ending on the second
trading day immediately preceding the Effective Time of the Merger. The
unaudited pro forma data is provided for comparative purposes only and does not
purport to be indicative of actual or future operating results or financial
position that would have occurred or will occur upon consummation of the Merger.
The information presented below should be read in conjunction with the selected
historical financial data and the separate historical financial statements of
Medtronic and AVECOR, including the notes thereto, included or incorporated by
reference in this Proxy Statement/Prospectus. See "Information Incorporated by
Reference" and "Index to Financial Statements." Presentation of full pro forma
financial statements is not included because the Merger does not constitute a
significant business combination and the disclosure is not deemed to be
material.
<TABLE>
<CAPTION>
Basic Diluted
Earnings Earnings
(Loss) From (Loss) From
Book Continuing Continuing Cash
Value Operations Operations Dividends
<S> <C> <C> <C> <C>
MEDTRONIC HISTORICAL DATA:
Per Medtronic share at and for the fiscal year ended April 30,
1998(1)............................................................$4.36 $0.98 $0.96 $0.22
Per Medtronic share for the fiscal year ended April 30, 1997....... * 1.11 1.09 0.19
Per Medtronic share for the fiscal year ended April 30, 1996.. * 0.90 0.89 0.13
AVECOR HISTORICAL DATA:
Per AVECOR share at and for the 3 months ended June 30, 1998 4.16 0.05 0.05 0
(unaudited)........................................................
Per AVECOR share at and for the 12 months ended March 31, 1998 4.11 0.15 0.14 0
(unaudited)........................................................
Per AVECOR share for the fiscal year ended December 31, 1997....... 4.07 0.17 0.17 0
Per AVECOR share for the fiscal year ended December 31, 1996(2)... * (0.07) (0.07) 0
MEDTRONIC AND AVECOR PRO FORMA
COMBINED DATA(4):
Per Medtronic share at and for the fiscal year ended April 30,
1998(1) (3)........................................................ 4.41 0.96 0.95 0.22
Per AVECOR share equivalent(5) at and for the fiscal year ended
April 30, 1998(1)(3)............................................... 0.85 0.19 0.18 0.04
</TABLE>
- -------------------
(1) Medtronic's basic earnings from continuing operations and diluted
earnings from continuing operations reflect the impact of $205.3
million pre-tax nonrecurring charges recorded in the third quarter of
fiscal 1998.
<PAGE>
(2) AVECOR's net income (loss), basic earnings per share, and diluted
earnings per share include a $4.2 million pre-tax loss resulting from a
litigation settlement with COBE Laboratories, Inc.
(3) The combined pro forma data combine the financial information of
Medtronic at and for the year ended April 30, 1998 with the unaudited
financial information of AVECOR at and for the 12-month period ended
March 31, 1998.
(4) Pro forma information includes the dilutive impact of estimated annual
goodwill amortization and foregone interest income.
(5) The equivalent pro forma combined information represents the pro forma
combined net income and book value multiplied by [.1922], which is the
assumed Conversion Fraction (based on an assumed Average Stock Price of
[$57.875]) solely for purposes of this illustration.
* Disclosure is not required.
<PAGE>
GENERAL INFORMATION
This Proxy Statement/Prospectus is being furnished to the shareholders
of AVECOR in connection with the solicitation by the Board of Directors of
AVECOR of proxies to be voted at the Meeting to be held on ___________, 1998.
At the Meeting, AVECOR shareholders will be asked to consider and vote
upon the approval of the Plan of Merger and the Merger Agreement attached to
this Proxy Statement/Prospectus as Appendices A and B, respectively, providing
for the Merger of Merger Subsidiary, a wholly-owned subsidiary of Medtronic,
with and into AVECOR, as a result of which AVECOR will become a wholly-owned
subsidiary of Medtronic. Other terms and provisions related to the Merger are
set forth in the Merger Agreement, as described herein.
The Board of Directors of AVECOR has unanimously approved the Merger.
The Board of Directors of Medtronic has approved the Merger and the issuance of
shares of Medtronic Common Stock in the Merger. See "The Merger--Background of
the Merger." Applicable Minnesota law does not require that Medtronic
shareholders approve the Merger, and no such approval is being sought.
Medtronic, as the sole shareholder of Merger Subsidiary, has approved the
Merger.
Pursuant to the Plan of Merger and the Merger Agreement, upon
effectiveness of the Merger, each outstanding share of AVECOR Common Stock
(except for shares of AVECOR Common Stock owned by Medtronic and shares of
AVECOR Common Stock held by shareholders who properly exercise dissenters'
rights under Minnesota law) will be converted into the right to receive a
portion of a share of Medtronic Common Stock. See "The Merger--General,"
"--Conversion of AVECOR Common Stock in the Merger," and "--Rights of Dissenting
AVECOR Shareholders."
The close of business on __________, 1998 (the "Record Date") has been
fixed as the record date for determination of the holders of AVECOR Common Stock
who are entitled to receive notice of and to vote at the Meeting or at any
adjournment thereof. As of the Record Date, there were [8,044,475] shares of
AVECOR Common Stock outstanding held by approximately [315] holders of record.
The holders of record on the Record Date of shares of AVECOR Common Stock are
entitled to one vote per share at the Meeting. The presence at the Meeting in
person or by proxy of the holders of a majority of the outstanding shares of
AVECOR Common Stock entitled to vote will constitute a quorum for the
transaction of business. The affirmative vote of the holders of a majority of
the outstanding shares of AVECOR Common Stock is required for approval of the
Merger. Directors and executive officers of AVECOR have agreed to vote AVECOR
shares owned by them in favor of the Merger. Medtronic intends to have all of
the 346,960 shares of AVECOR stock owned by Medtronic voted in favor of the
Merger. See "The Merger--Vote Required" and "--Voting Agreements."
Representatives of PricewaterhouseCoopers LLP, AVECOR's independent
accountants, are expected to be present at the Meeting. Such representatives
will have the opportunity to make a statement if they so desire and are expected
to be available to respond to appropriate questions. (On July 1, 1998, Coopers &
Lybrand L.L.P merged with Price Waterhouse LLP to form PricewaterhouseCoopers
LLP.)
A proxy card is enclosed for use by AVECOR shareholders. Such
shareholders are solicited on behalf of the Board of Directors of AVECOR to SIGN
AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is required
if mailed within the United States.
<PAGE>
All properly executed proxies not revoked will be voted at the Meeting
in accordance with the instructions contained therein. Proxies that are signed
by shareholders but lack specific instructions will be voted in favor of
approval of the Merger. A shareholder who has executed and returned a proxy may
revoke it at any time before it is voted at the Meeting, but only by executing
and returning a proxy bearing a later date, by giving written notice of
revocation to the Secretary of AVECOR, or by attending the Meeting and voting in
person. Abstentions will be treated as shares present for purposes of
determining a quorum for the Meeting but will have the same effect as a vote
against approval of the Merger. If a broker or other record holder or nominee
indicates on a proxy that it does not have direction or authority as to certain
shares to vote on the Merger, those shares will be considered present at the
Meeting for purposes of determining a quorum but will have the same effect as a
vote against approval of the Merger.
If any other matters are properly presented for consideration at the
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
THE BOARD OF DIRECTORS OF AVECOR RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE PLAN OF MERGER. See "The Merger--Interests of Certain
Persons in the Merger" for a discussion of conflicts of interest that certain
directors and members of management of AVECOR may have in connection with the
Merger.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
In addition to soliciting proxies by mail, the directors, officers, or
regular employees of AVECOR may, but without compensation other than their
regular compensation, solicit proxies personally or by telephone or fax. AVECOR
intends to reimburse brokerage houses and other custodians, nominees, and
fiduciaries for reasonable out-of-pocket expenses incurred in forwarding copies
of solicitation material to beneficial owners of AVECOR Common Stock held of
record by such persons. AVECOR and Medtronic have agreed to share equally all
expenses relating to the printing and mailing of this Proxy Statement/Prospectus
and the filing of it with the Commission.
The mailing of this Proxy Statement/Prospectus to shareholders of
AVECOR is expected to commence on or about ______________, 1998.
<PAGE>
THE MERGER
Set forth below is a brief description of certain terms of the Merger
Agreement and related matters. This description does not purport to be complete
and is qualified in its entirety by reference to the Plan of Merger and the
Merger Agreement, which are attached hereto as Appendices A and B and are
incorporated herein by reference.
General
Medtronic, Merger Subsidiary, and AVECOR have entered into the Merger
Agreement, which provides that Merger Subsidiary will be merged with and into
AVECOR, with AVECOR becoming a wholly-owned subsidiary of Medtronic. In the
Merger, AVECOR will change its name to "Medtronic AVECOR Cardiovascular, Inc."
Each outstanding share of AVECOR Common Stock (except shares owned by Medtronic
and shares held by AVECOR shareholders who perfect dissenters' rights under
Minnesota law) will be converted at the Effective Time (as defined below) into
the right to receive the portion of a share of Medtronic Common Stock equal to
$11.125 divided by the Average Stock Price of Medtronic Common Stock for a
specified determination period, as described in further detail below. See "The
Merger--Conversion of AVECOR Common Stock in the Merger."
Effective Time of the Merger
As soon as practicable after the conditions to consummation of the
Merger described below have been satisfied or waived, and unless the Merger
Agreement has been terminated as provided below, articles of merger containing
the Plan of Merger will be filed with the Secretary of State of the State of
Minnesota, at which time the Merger will become effective (the "Effective
Time"). It is presently contemplated that the Effective Time will be as soon as
practicable after approval of the Merger at the Meeting. See "The
Merger--Conditions; Waiver."
Background of the Merger
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Medtronic and AVECOR. The following is a
brief discussion of the background of these negotiations, the Merger and related
discussions.
Over a period of time, AVECOR's Board of Directors and senior
management had explored methods of enhancing shareholder value through internal
growth and development, the acquisition of technology, or the formation of joint
ventures with others in the medical device or cardiopulmonary bypass products
industries.
In November 1997, AVECOR engaged Piper Jaffray exclusively to explore
various strategic alternatives for AVECOR, including the acquisition of 15% or
more of AVECOR's equity or assets by a third party. In connection with its
engagement, Piper Jaffray explored the alternatives of AVECOR continuing its
current strategy of internal growth, expanding into other businesses within the
cardiopulmonary market or making acquisitions within a new market.
In December 1997, AVECOR management was contacted by and met with the
management of Suitor A, a company engaged in, among other things, medical device
businesses other than in the cardiopulmonary market to discuss the
cardiopulmonary industry. No discussions were held as to the terms of a possible
transaction.
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On March 3, 1998, AVECOR executives and executives of Suitor B, a
large, diversified medical products company with an existing business in the
cardiopulmonary market, met to discuss a potential business combination.
Representatives of Piper Jaffray and Suitor B's investment banker, together with
AVECOR and Suitor B's executives, met again on March 31, 1998 to discuss
financial projections of AVECOR and potential combination synergies. Subsequent
to a meeting and additional discussion between Piper Jaffray and Suitor B's
investment banker, Suitor B submitted a nonbinding indication of interest on
April 16, 1998. Piper Jaffray presented such indication of interest to AVECOR's
Board at a meeting held on April 21, 1998.
Following that Board meeting, further discussions took place between
Piper Jaffray and Suitor B's investment banker. These discussions primarily
concerned valuation issues and were undertaken by Piper Jaffray with the
objective of moving Suitor B towards a higher valuation of AVECOR. Suitor B
refused to increase the valuation set forth in its April 16, 1998 indication of
interest. Suitor B was then allowed to conduct due diligence on AVECOR for a
period of three weeks, beginning on May 6, 1998. On May 21, 1998, Anthony
Badolato, the Chief Executive Officer of AVECOR, and an executive of Suitor B
discussed conditions of Suitor B to proceeding with a transaction. These
discussions resulted in an impasse.
On May 5, 1998, Mr. Badolato received a telephone call from Suitor A,
indicating an interest to meet and discuss a potential combination. On May 6,
1998, Piper Jaffray talked with Suitor A to qualify Suitor A's interest and to
discuss Suitor A's preliminary valuation range. The AVECOR Board of Directors
met on May 7, 1998, and Piper Jaffray reviewed some of the aspects of a
potential transaction with either Suitor A or Suitor B, and it was agreed that
management would meet with representatives of Suitor A. On May 11, 1998, members
of AVECOR and Suitor A's senior management met to discuss the cardiopulmonary
market and a potential combination. Following an evaluation and analysis of a
potential combination during the weeks of May 11 and May 18, 1998, Suitor A
decided not to proceed further.
On May 27, 1998, Suitor C, a large potential financial buyer with a
history of acquiring medical device businesses, met with AVECOR management and
Piper Jaffray to discuss, on a very preliminary basis, a potential combination.
Following an evaluation of a potential combination, Suitor C determined not to
pursue such a transaction with AVECOR. This determination was communicated to
Piper Jaffray in early June 1998.
Also on May 27, 1998, Glen D. Nelson, M.D., the Vice Chairman of
Medtronic, contacted Mr. Badolato by telephone and indicated an interest in
meeting with Mr. Badolato to discuss a range of topics concerning AVECOR's
products, consolidation in the medical device industry, and possible synergies
between Medtronic and AVECOR. On June 1, 1998, Dr. Nelson, Philip M. Laughlin,
Medtronic's Senior Vice President and President, Cardiac Surgery, and Mr.
Badolato had a meeting during which Dr. Nelson expressed Medtronic's interest in
acquiring AVECOR. On June 5, 1998, Medtronic submitted a nonbinding indication
of interest to acquire AVECOR. Based on this indication of interest, Medtronic
was permitted to conduct due diligence on AVECOR.
On June 8, 1998, Piper Jaffray had further discussions with Suitor B's
investment banker and informed Suitor B's investment banker that AVECOR had
received an indication of interest from another party.
<PAGE>
During the weeks of June 8 and June 15, 1998, Medtronic conducted due
diligence, examining the same written materials regarding AVECOR's operations
that had been made available on a confidential basis to Suitor B.
On June 12, 1998, Piper Jaffray had additional discussions with Suitor
B's investment banker and informed Suitor B's investment banker that a meeting
of AVECOR's Board of Directors was scheduled for the week of June 22, 1998 to
discuss all indications of interest that had been expressed. Piper Jaffray also
invited Suitor B's investment banker to update Suitor B's indication of interest
before the scheduled meeting of AVECOR's Board, and in doing so to address the
conditions that had previously resulted in an impasse.
On June 19 and June 22, 1998, representatives of Piper Jaffray and
Medtronic had various telephone conversations focusing on valuation and process.
On June 24, 1998, Medtronic submitted a revised indication of interest in the
form of a terms sheet, containing a price greater than that contained in the
June 5, 1998 indication of interest.
During this June time period, Suitor D, another company engaged in the
cardiopulmonary business, called Mr. Badolato to discuss a potential
combination, renewing discussions that had previously been carried on in early
1997. An executive of Suitor D and Mr. Badolato met in New York on June 13, 1998
to discuss a potential transaction. On June 16, 1998, Suitor D submitted a
nonbinding indication of interest.
On June 19, 1998, AVECOR received a revised, nonbinding indication of
interest from Suitor B. This revised indication of interest did not represent a
change in the valuation set forth in Suitor B's April 16, 1998 indication of
interest, but did indicate certain flexibility on the part of Suitor B with
respect to the conditions that had previously resulted in an impasse.
On June 24, 1998, members of AVECOR's senior management made
presentations to Suitor D's management.
On June 25, 1998, the AVECOR Board met to discuss the June 19, 1998
revised, nonbinding indication of interest from Suitor B, the June 16, 1998
nonbinding indication of interest by Suitor D, and the revised Medtronic
indication of interest (in the form of a terms sheet) of June 24, 1998. The
AVECOR Board authorized continued due diligence and negotiation of a possible
agreement with Medtronic.
On June 25, 1998, the Board of Directors of Medtronic approved the
acquistion of AVECOR, subject to final negotiations by senior management, and
authorized Medtronic's officers to undertake all acts necessary or desirable to
effect the Merger.
On June 26, 1998, Piper Jaffray informed Suitor B of the AVECOR Board's
decision to negotiate with another company. On the same date, AVECOR sent a
revised terms sheet modifying Medtronic's written proposal to Medtronic. During
the morning of June 29, 1998, Suitor B submitted a further revised, nonbinding
indication of interest, which did not change the price set forth in the April 16
and June 19, 1998 indications of interest but removed the conditions that had
previously led to the impasse in AVECOR's discussions with Suitor B. Piper
Jaffray contacted Suitor B's investment banker on the same day to discuss an
increased price, but the request for a higher price was refused.
<PAGE>
In addition, on the same date, Piper Jaffray informed Suitor D
regarding the AVECOR Board's decision to negotiate with a company other than
Suitor D.
During the afternoon of June 29, 1998, AVECOR and Medtronic discussed
the revised terms sheet sent to Medtronic on June 26, 1998. Prior to execution
of the terms sheet with Medtronic, Piper Jaffray contacted Suitor B to
acknowledge receipt of Suitor B's June 29, 1998 revised indication of interest
and to inform Suitor B that AVECOR would be proceeding with exclusive
negotiations with another party. Late in the afternoon on June 29, AVECOR
executed a nonbinding terms sheet with Medtronic, containing the $11.125 per
share consideration in the form of Medtronic Common Stock and providing that
negotiations would be held only between AVECOR and Medtronic until July 24,
1998.
On July 1, 1998, Suitor B submitted another revised indication of
interest containing a price higher than set forth in its previous indications of
interest, but still significantly lower than the price offered by Medtronic. No
contact was made with Suitor B, given the exclusivity arrangement contained in
the executed terms sheet with Medtronic.
During the period of July 7-12, 1998, members of Medtronic's senior
management and Medtronic's legal counsel met with members of AVECOR's senior
management, representatives of Piper Jaffray, and AVECOR's legal counsel and
held detailed discussions regarding the possible terms of a merger involving the
two companies. With the advice of legal counsel and financial advisors,
Medtronic and AVECOR negotiated the terms of the Merger Agreement and the Stock
Option Agreement.
On July 10, 1998, AVECOR received a letter from Suitor B indicating
that Suitor B was prepared to significantly increase the price contained in its
prior indications of interest, but which failed to specify a price. Suitor B's
indication of interest was subject to AVECOR not having executed a definitive
agreement with another party, due diligence investigation, Board approval, and
other conditions. AVECOR's senior management, representatives of Piper Jaffray,
and AVECOR's legal counsel discussed the letter from Suitor B at that time.
Later that day, Piper Jaffray informed Medtronic that AVECOR had received a
revised proposal from another party, and invited Medtronic to increase the price
per share it would offer prior to presentation of the Merger Agreement to
AVECOR's Board of Directors. Medtronic declined.
On July 12, 1998, AVECOR's Board of Directors held a special telephone
meeting to review, with the advice and assistance of AVECOR's management and
financial and legal advisors, the proposed Merger Agreement and Stock Option
Agreement and the transactions contemplated thereby. Piper Jaffray also reviewed
the terms of Suitor B's July 10, 1998 letter, pointing out that a new offer
price had not been stated, that the amount of Suitor B's last offer price was
below the price being offered by Medtronic, and that there were other
uncertainties regarding this proposal. Piper Jaffray further indicated that it
had advised Medtronic that a competing offer might be forthcoming, had invited
Medtronic to increase its offer, and that Medtronic chose not to increase its
offer. After extensive discussion and consideration of various materials,
including drafts of the agreements and a presentation by Piper Jaffray setting
forth its analysis of the proposed transaction, the AVECOR Board unanimously
<PAGE>
approved the Merger, subject to the resolution of various issues within
guidelines established by the AVECOR Board. The Board also amended AVECOR's
shareholder rights plan to provide that the Merger would not cause the rights
contemplated by the plan to become exercisable.
In the evening of July 12, 1998, following resolution of the remaining
issues, Medtronic and AVECOR executed the Merger Agreement and Stock Option
Agreement. On July 13, 1998, prior to the opening of trading on the Nasdaq
National Market and the NYSE, Medtronic and AVECOR issued a joint press release
announcing the execution of the Merger Agreement.
AVECOR's Reasons for the Merger; Recommendation of the AVECOR Board of Directors
At the July 12, 1998 meeting, the AVECOR Board unanimously determined
that the Merger is in the best interests of AVECOR and its shareholders,
approved and adopted the Merger Agreement and the Plan of Merger, and
recommended that AVECOR shareholders vote to approve and adopt the Merger
Agreement, the Plan of Merger, and the transactions contemplated thereby.
Prior to making its determination, the AVECOR Board consulted with
senior management with respect to strategic and operational matters and legal
counsel with respect to the legal duties of the AVECOR Board, regulatory
matters, tax matters, and the Merger Agreement, the Stock Option Agreement, and
the voting agreements and issues related thereto. The AVECOR Board also
consulted with Piper Jaffray, financial advisor to AVECOR, with respect to the
financial aspects and fairness from a financial point of view of the $11.125 per
share consideration to be received by the shareholders of AVECOR. In reaching
its determination to approve and adopt the Merger Agreement, the AVECOR Board
also considered a number of factors, including, without limitation:
(i) the business, earnings, operations, financial condition, and
prospects of Medtronic and AVECOR, both individually and on a
combined basis, including, but not limited to, AVECOR's and
Medtronic's respective recent and historic stock and earnings
performance;
(ii) the financial analyses and other information with respect to
AVECOR and Medtronic presented to the AVECOR Board by Piper
Jaffray, as well as the AVECOR Board's own knowledge of AVECOR
and Medtronic and their respective businesses;
(iii) AVECOR's strategic alternatives, including remaining a
separate company and growing internally or through
acquisitions, remaining a separate company for the near term
while continuing to explore a future acquisition of AVECOR, or
engaging in a merger of equals or joint venture transaction
with another party, including certain risks involved in
remaining a separate company such as the risks of being unable
to meet or exceed projections and growth rates due to
increasing competitive pressures in the markets for its
products;
(iv) certain factors influencing the heart/lung bypass device
industry, including pricing pressures affecting products in
the heart/lung bypass circuit, the need to compete by offering
a complete line of devices for the heart/lung bypass circuit,
centralization of customer purchasing decisions by group
purchasing and managed care organizations, and the impact of
competitor acquisitions and control of groups providing
perfusion services to hospitals;
<PAGE>
(v) the overall strategic fit between AVECOR and Medtronic in view
of their respective product lines, which together would
provide current AVECOR customers with a complete line of
products in the heart/lung bypass circuit from a single
source, as well as their respective markets and distribution
channels and the potential synergies, efficiencies, and cost
savings that could be realized through a combination of AVECOR
and Medtronic;
(vi) the amount and form of the consideration to be received by
AVECOR shareholders in the Merger, the historical trading
ranges of AVECOR Common Stock and Medtronic Common Stock, and
the estimated future financial results of AVECOR and
Medtronic;
(vii) the opportunity for AVECOR shareholders to receive a premium
over the market price for their shares immediately prior to
the announcement of the Merger (with the consideration to be
received representing a premium of approximately 74.4% over
the closing price of $6.38 per share of AVECOR Common Stock as
of the date four weeks prior to the announcement of the
Merger);
(viii) the opportunity for AVECOR shareholders to receive future cash
dividends with respect to their shareholdings;
(ix) the opportunity for AVECOR shareholders to continue equity
participation in a larger, more diversified medical products
enterprise and to share in the long-term growth of Medtronic
following the Merger, including participation in the
combination of benefits referred to above, if achieved;
(x) the effect of the Merger on AVECOR employees and benefits and
opportunities potentially available to AVECOR employees within
the combined company;
(xi) the financial advice provided by Piper Jaffray and the written
opinion of Piper Jaffray that, based upon and subject to
certain matters set forth in the opinion and such other
factors as Piper Jaffray considered relevant, it is Piper
Jaffray's opinion that the consideration proposed to be
received by the shareholders of AVECOR in the Merger pursuant
to the Merger Agreement is fair, from a financial point of
view, to the shareholders of AVECOR as of the date of the
opinion of July 12, 1998 (with the full text of such opinion,
which should be read in its entirety by AVECOR shareholders,
attached as Appendix D to this Proxy Statement/Prospectus,
setting forth the procedures followed, the factors considered,
and the assumptions made by Piper Jaffray);
(xii) the terms and conditions of the Merger Agreement, including
the consideration to be received by the shareholders of
AVECOR, the parties' representations, warranties, and
covenants, the conditions to their respective obligations, the
amount of termination fees payable under the Merger Agreement
and the circumstances under which such termination fees will
be payable, and the likelihood that the Merger would be
consummated;
(xiii) the terms and conditions of the Stock Option Agreement,
including the circumstances under which the stock option
granted thereunder will be exercisable; and
<PAGE>
(xiv) that the Merger will be accounted for under the purchase
method of accounting and that as a condition to the Merger
Agreement the Merger will be a tax-free transaction for
federal income tax purposes.
In view of the number and wide variety of factors considered in
connection with its evaluation of the Merger, the AVECOR Board did not consider
it practicable to, nor did it attempt to, quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. The
AVECOR Board viewed its position and recommendations as being based on the
totality of the information and factors presented to and considered by it. In
addition, individual members of the AVECOR Board may have given different weight
to different information and factors. See "--Background of the Merger."
BASED UPON ITS CONSIDERATION OF THE FOREGOING MATTERS AND OTHER ADVICE
AND INFORMATION DEEMED RELEVANT, THE AVECOR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT AVECOR SHAREHOLDERS VOTE TO APPROVE AND ADOPT THE PLAN OF
MERGER, THE MERGER AGREEMENT, AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Medtronic's Reasons for the Merger
Medtronic believes that the acquisition of AVECOR will enhance
Medtronic's surgical perfusion product line offerings and that, by concentrating
on the best technologies from both Medtronic and AVECOR, Medtronic will augment
its offerings of industry-leading products as it streamlines manufacturing
capabilities and achieves efficiencies of scale.
Opinion of AVECOR's Financial Advisor
Pursuant to an engagement letter dated November 14, 1997, AVECOR
retained Piper Jaffray to act as its exclusive representative and financial
advisor and, if requested, to render to the Board of Directors an opinion as to
the fairness, from a financial point of view, of the consideration to be
received by AVECOR shareholders in the Merger.
At a meeting of the Board of Directors on July 12, 1998, Piper Jaffray
made a presentation summarizing the proposal to acquire AVECOR, analyzing the
proposal (in a manner similar to that summarized below), and rendering its
written opinion to the Board of Directors to the effect that, as of such date,
and subject to the assumptions, factors, and limitations set forth therein, the
consideration to be received by AVECOR shareholders pursuant to the Merger
Agreement is fair, from a financial point of view, to AVECOR shareholders. A
copy of Piper Jaffray's written opinion dated July 12, 1998, which sets forth
the assumptions made, matters considered, and limits on the review taken, is
attached as Appendix D to this Proxy Statement/Prospectus and is incorporated
herein by reference (the "Piper Jaffray Opinion"). AVECOR shareholders are urged
to read the Piper Jaffray Opinion in its entirety. The description of the Piper
Jaffray Opinion set forth herein is qualified in its entirety by reference to
the full text of such opinion. The Piper Jaffray Opinion is directed to and is
for the use and benefit of the Board of Directors of AVECOR and is rendered to
the Board of Directors in connection with its consideration of the Merger. The
opinion is not intended to be and does not constitute a recommendation to any
shareholder as to how such shareholder should vote with respect to the Merger.
In arriving at its opinion, Piper Jaffray made such review, analyses,
and inquiries as it deemed necessary and appropriate under the circumstances.
Among other things, it reviewed (i) a draft dated July 10, 1998 of the Merger
Agreement, (ii) certain public information related to Medtronic, (iii) certain
<PAGE>
publicly available financial and securities data of Medtronic and selected
public companies deemed comparable to Medtronic, (iv) certain analyst reports on
Medtronic, (v) to the extent publicly available, information concerning selected
transactions deemed comparable to the proposed Merger, (vi) certain publicly
available information relative to AVECOR and selected public companies deemed
comparable to AVECOR, (vii) certain unaudited internal financial information of
AVECOR on a stand-alone basis prepared for financial planning purposes, and
furnished by AVECOR management, and (viii) certain publicly available financial
and securities data of AVECOR. Piper Jaffray had discussions with members of the
management of AVECOR concerning the financial condition, current operating
results, and business outlook for AVECOR on a stand-alone basis.
Piper Jaffray relied upon and assumed the accuracy, completeness, and
fairness of the financial statements and other information provided by AVECOR,
or otherwise made available to Piper Jaffray, and did not assume responsibility
for the independent verification of such information. Piper Jaffray relied upon
the assurance of the management of AVECOR that the information provided by
AVECOR had been prepared on a reasonable basis, and, with respect to financial
planning data and other business outlook information, reflected the best
currently available estimates, and that they were not aware of any information
or facts that would make the information provided incomplete or misleading.
Set forth below is a summary of selected analyses Piper Jaffray relied
upon in rendering its opinion:
Stock Trading History
Piper Jaffray reviewed the stock trading history of AVECOR Common
Stock. Piper Jaffray presented the following stock price data for AVECOR
relative to specified periods prior to July 9, 1998:
Proposed Merger Price $11.125
30 day average $7.00
60 day average $6.94
90 day average $6.97
52 week high $12.88
52 week low $5.00
Piper Jaffray also presented stock price and volume performance data
for AVECOR Common Stock for specified periods, and the relationship between
movements in the trading prices of AVECOR Common Stock and movements in trading
prices of the common stock of comparable companies and Nasdaq Composite Index.
Comparable Company Analysis
Piper Jaffray compared selected financial data and ratios for AVECOR to
the corresponding data and ratios for a group of companies deemed comparable to
AVECOR, all of which are publicly traded medical technology companies. The
Comparable Company Group consisted of the following nine publicly-held medical
technology companies: ATS Medical Inc., Haemonetics Corporation, ICU Medical
Inc., Merit Medical Systems Inc., Novametrix Medical Systems, Minntech
Corporation, Utah Medical Products, Inc., Vital Signs Inc., and Zoll Medical
Corporation. The financial data and ratios compared as part of this analysis
included the stock price as a percentage of the 52-week high; the multiple of
<PAGE>
company value (market capitalization plus debt less cash) to revenue; the
multiple of company value to earnings before interest and taxes ("EBIT"); the
multiple of market price to latest-12-month ("LTM") earnings per share; the
multiple of market price to estimated 1998 earnings per share; the multiple of
market price to estimated 1999 earnings per share; sales (LTM); gross margin
(LTM); operating margin (LTM); net margin (LTM); and one-year historical revenue
growth.
This analysis showed that this group of medical technology companies
had a stock price as a percentage of the 52-week high ranging from 67.8% to
89.6%, with a mean of 81.5% and a median of 85.7%, compared to 86.4% for AVECOR
based on a merger value of $11.125 per share; a multiple of company value to
revenue ranging from 0.7 to 7.1, with a mean of 2.4 and a median of 2.0,
compared with 1.9 for AVECOR based on a merger value of $11.125 per share; a
multiple of company value to EBIT ranging from 7.6 to 21.0, with a mean of 13.5
and a median of 12.6, compared with 49.8 for AVECOR based on a merger value of
$11.125 per share; a multiple of market price to LTM earnings per share ranging
from 13.7 to 58.0, with a mean of 28.0 and a median of 19.2, compared with 74.2
for AVECOR based on a merger value of $11.125 per share; a multiple of market
price to estimated 1998 earnings per share ranging from 12.1 to 50.0, with a
mean of 22.9 and a median of 20.8, compared with 44.5 for AVECOR based on a
merger value of $11.125 per share; a multiple of market price to estimated 1999
earnings per share ranging from 10.4 to 44.1, with a mean of 18.4 and a median
of 15.0, compared with 30.9 for AVECOR based on a merger value of $11.125 per
share; LTM sales ranging from $15.3 million to $285.8 million, with a mean of
$77.6 million and a median of $54.1 million, compared with $47.3 million for
AVECOR; gross margin (LTM) ranging from 35.4% to 58.1%, with a mean of 48.6% and
a median of 50.3%, compared with 40.8% for AVECOR; operating margin (LTM)
ranging from 4.6% to 24.9%, with a mean of 12.8% and a median of 10.8%, compared
with 3.7% for AVECOR; net margin (LTM) ranging from 1.6% to 17.9%, with a mean
of 9.8% and a median of 9.2%, compared with 2.5% for AVECOR; and one-year
historical revenue growth ranging from -34.2% to 28.7%, with a mean of 8.1% and
a median of 11.9%, compared with 6.5% for AVECOR.
Comparable Transaction Analysis
Piper Jaffray reviewed and analyzed certain financial data from a group
of 21 selected change-in-control transactions in the medical technology industry
announced or completed between January 1, 1995, and July 9, 1998, and deemed
comparable to the Merger. For these transactions, Piper Jaffray analyzed the
ratio of target company value to target company LTM sales; target company value
to LTM earnings before interest and taxes ("EBIT"); and target equity value to
LTM net income. For these transactions, this analysis showed that the ratio of
target company value to target company LTM sales ranged from 1.0 to 5.5, with a
mean of 2.7 and median of 2.5, compared with a multiple of 1.9 for AVECOR based
on a merger value of $11.125 per share; the ratio of target company value to LTM
EBIT ranged from 10.7 to 34.0, with a mean of 20.7 and a median of 18.9,
compared with a multiple of 49.8 for AVECOR based on a merger value of $11.125
per share; and the ratio of target equity value to LTM net income ranged from
13.7 to 72.5, with a mean of 35.1 and a median of 32.0, compared with a multiple
of 74.2 for AVECOR based on a merger value of $11.125 per share.
Premiums Paid Analysis
Piper Jaffray also reviewed and analyzed the premiums paid in recent
acquisitions of a group of publicly held companies. The analysis examined the
ratio between the proposed acquisition offer price and the target company's
price per share at various times prior to the announcement of a possible
transaction. In selecting comparable transactions for the premiums paid
analysis, Piper Jaffray only included medical technology businesses involved in
change-in-control transactions completed or pending since January 1, 1995. This
<PAGE>
analysis revealed 40 transactions that Piper Jaffray deemed to be comparable.
For these transactions, the implied premiums paid, based on the target share
price four weeks prior to the announcement of a possible transaction compared
with the proposed acquisition offer price, ranged from -9.3% to 93.1%, with a
mean of 36.1% and a median of 33.2%, compared with a premium of 74.4% for the
Merger. The implied premiums paid, based on the target company share price one
week prior to announcement compared with the proposed acquisition offer price,
ranged from -11.8% to 60.9%, with a mean of 27.4% and a median of 25.8%,
compared with a premium of 50.7% for AVECOR based on a merger value of $11.125
per share.
Discounted Cash Flow Analysis
Using a discounted cash flow analysis, Piper Jaffray calculated a range
of theoretical per share values for AVECOR, based on the net present value of
implied future cash flows of AVECOR from 1998 to 2001 and a terminal value from
a multiple of operating income in 2001. Piper Jaffray used internal financial
planning data prepared by management of AVECOR for 1998 through 2001 that
reflect AVECOR as a stand-alone entity. Piper Jaffray calculated the range of
net present values for AVECOR based on a range of discount rates of 20% to 25%
and a range of terminal value multiples of forecasted 2001 EBIT of 11.0x to
15.0x. This analysis yielded a range of estimated present values for AVECOR of
between $5.86 per share and $8.86 per share, compared with a merger value of
$11.125 per share.
Analysis of Medtronic Common Stock
Piper Jaffray reviewed general background information concerning
Medtronic. Piper Jaffray reviewed certain publicly available analyst estimates
and ratings of Medtronic Common Stock, the annual returns of Medtronic Common
Stock over various periods, the relative price performance to the S&P 500
Composite Index over the last five years and the stock price over several
periods in the last year. In addition, Piper Jaffray compared selected financial
data and ratios for Medtronic to the corresponding data and ratios for a group
of companies deemed comparable to Medtronic, all of which are publicly traded
medical technology companies. The comparable company group consisted of the
following five companies: Arterial Vascular Engineering Inc., Boston Scientific
Corporation, Guidant Corporation, Sofamor/Danek Group Inc., and Stryker
Corporation. The financial data and ratios compared as part of this analysis
included the stock price as a percentage of the 52-week high; the multiple of
company value to revenue; the multiple of company value to EBIT; the multiple of
market price to LTM earnings per share; the multiple of market price to
estimated 1998 earnings per share; the multiple of market price to estimated
1999 earnings per share; LTM sales; gross margin (LTM); operating margin (LTM);
net margin (LTM); and one-year historical revenue growth.
This analysis showed that this group of medical technology companies
had a stock price as a percentage of the 52-week high ranging from 86.3% to
98.7%, with a mean of 94.0% and a median of 95.2%, compared to 97.3% for
Medtronic; a multiple of company value to revenue ranging from 3.8 to 11.3, with
a mean of 7.6 and a median of 7.8, compared with 12.1 for Medtronic; a multiple
of company value to EBIT ranging from 19.9 to 56.8, with a mean of 32.7 and a
median of 28.0, compared with 35.2 for Medtronic; a multiple of market price to
LTM earnings per share ranging from 31.4 to 98.3, with a mean of 55.0 and a
median of 41.4, compared with 54.0 for Medtronic; a multiple of market price to
estimated 1998 earnings per share ranging from 16.6 to 39.3, with a mean of 30.6
and a median of 34.4, compared with 47.5 for Medtronic; a multiple of market
price to estimated 1999 earnings per share ranging from 20.8 to 30.6, with a
mean of 26.6 and a median of 28.4, compared with 39.2 for Medtronic.
Although the summary set forth above does not purport to be a complete
description of the analyses performed by Piper Jaffray, the material analyses
performed by Piper Jaffray in rendering its opinion have been summarized. The
<PAGE>
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Piper Jaffray believes that its analyses and
the summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or selecting part or
all of the above summary, without considering all factors and analyses, would
create an incomplete view of the processes underlying the analyses set forth in
the Piper Jaffray Opinion. In addition, Piper Jaffray may have given various
analyses more or less weight than other analyses but no analysis was given
materially more weight than any other analysis. The fact that any specific
analysis has been referred to in the summary above is not meant to indicate that
such analysis was given greater weight than any other analysis.
The analyses performed by Piper Jaffray are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as part of Piper Jaffray's analysis of the fairness of the consideration
to be paid in connection with the Merger to AVECOR shareholders. The analyses do
not purport to be appraisals or to reflect the prices at which AVECOR might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future.
Piper Jaffray was selected by AVECOR on the basis of its experience in
connection with mergers and acquisitions and its knowledge of AVECOR. Piper
Jaffray is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings and secondary distributions of
securities, private placements, and valuations for estate, corporate, and other
purposes. Piper Jaffray has acted as exclusive financial advisor to AVECOR in
connection with the Merger and will receive a fee of approximately $950,000 for
its services, which is contingent upon consummation of the Merger. Piper Jaffray
will receive a separate fee of $250,000 for providing its opinion to AVECOR,
which will be credited against the fee for its services. This opinion fee is not
contingent upon the consummation of the Merger. AVECOR has also agreed to
indemnify Piper Jaffray against certain liabilities in connection with the
provision of these services. Piper Jaffray acted as lead manager of a public
stock offering of AVECOR Common Stock on June 21, 1995 and provides research on
AVECOR. In the ordinary course of business, Piper Jaffray and its affiliates may
actively trade securities of Medtronic and AVECOR for their own accounts or the
accounts of their customers and accordingly, may at any time hold a long or
short position in such securities.
Vote Required
Approval of the Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of AVECOR Common Stock. Each holder of
AVECOR Common Stock outstanding as of the Record Date is entitled to one vote
for each share held. On the Record Date, there were [8,044,475] shares of AVECOR
Common Stock outstanding. Of such shares, [1,080,749] shares (approximately
[13.4]% of the outstanding shares of AVECOR Common Stock) are beneficially owned
by directors and executive officers of AVECOR. AVECOR's directors and executive
officers have executed voting agreements under which such persons have agreed to
vote shares of AVECOR Common Stock owned by them in favor of the Merger. See
"The Merger--Voting Agreements." In addition, of the shares of AVECOR Common
Stock outstanding as of the Record Date, Medtronic, through a wholly- owned
subsidiary, owns 346,960 shares of AVECOR Common Stock, which represent
approximately 4.3% of the shares outstanding and entitled to vote as of the
Record Date. Medtronic intends to have all such shares voted in favor of the
Merger.
<PAGE>
Medtronic, as the sole shareholder of Merger Subsidiary, has approved
the Plan of Merger and the Merger Agreement. Approval of the Plan of Merger and
the Merger Agreement by Medtronic's shareholders is not required under Minnesota
law and is not being sought.
Conversion of AVECOR Common Stock in the Merger
At the Effective Time of the Merger, each issued and outstanding share
of AVECOR Common Stock, except shares of AVECOR Common Stock owned by Medtronic
and any shares of AVECOR Common Stock held by holders who have perfected their
dissenters' rights under the MBCA (see "The Merger--Rights of Dissenting AVECOR
Shareholders"), will be automatically converted into the right to receive the
portion of a share (the "Conversion Fraction") of Medtronic Common Stock equal
to $11.125 divided by the average of the daily closing sale prices of Medtronic
Common Stock as reported on the NYSE Composite Tape (the "Average Stock Price")
for the 18 consecutive trading days ending on the second trading day immediately
preceding the Effective Time.
The $11.125 amount per share of AVECOR Common Stock, payable in shares
of Medtronic Common Stock as described above, shall be reduced proportionately
if the sum of the number of shares of AVECOR Common Stock outstanding at the
Effective Time plus the number of shares subject to then outstanding options,
warrants, or other rights to acquire shares of AVECOR Common Stock
(collectively, "Stock Rights") at the Effective Time exceeds 8,879,725 (the
number of AVECOR shares, and options to purchase such shares, outstanding on the
date the Merger Agreement was signed) plus the number of shares issuable
pursuant to the offering period in process as of the date of the Merger
Agreement under AVECOR's Employee Stock Purchase Plan, or if the aggregate
exercise price of all Stock Rights then outstanding is less than the aggregate
exercise price reflected in the Merger Agreement. AVECOR does not anticipate
that any such adjustment will be required.
If, prior to the Effective Time, Medtronic recapitalizes, splits, or
combines the Medtronic Common Stock or pays a stock dividend or other stock
distribution in shares of Medtronic Common Stock, then the Conversion Fraction
will be appropriately adjusted.
Based on the number of shares of AVECOR Common Stock outstanding on the
Record Date (assuming a Conversion Fraction of [.1922], or one Medtronic share
for every [5.2] AVECOR shares, calculated by using the [August 24], 1998
Medtronic closing sale price of $[57.875] as the assumed Average Stock Price
solely for illustrative purposes of this paragraph), an estimated [1,546,150]
shares of Medtronic Common Stock will be issued in exchange for AVECOR Common
Stock upon consummation of the Merger. Such shares would represent less than 1%
of the shares of Medtronic Common Stock that would be outstanding after
consummation of the Merger.
Medtronic intends to purchase, on the open market, a number of its
shares equivalent to the number of shares to be issued as a result of the
Merger.
AVECOR shareholders should understand that shareholders receiving
Medtronic Common Stock in the Merger will receive a number of Medtronic shares
determined pursuant to the Conversion Fraction, as defined at the beginning of
this section. Because the market price of Medtronic Common Stock is subject to
fluctuation, the market value of the Medtronic shares that AVECOR shareholders
receive in the Merger (whether measured at the Effective Time of the Merger or
another date) may be less than or greater than the Average Stock Price used for
purposes of determining the Conversion Fraction. In addition, because of such
fluctuations in the value of Medtronic shares, the market value of the Medtronic
Common Stock that AVECOR shareholders receive in the Merger may increase or
decrease following the Merger. See "Comparative Stock Prices and Dividends" for
information regarding the historical market prices of Medtronic Common Stock.
<PAGE>
Fractional Shares
No certificates or scrip representing fractional shares of Medtronic
Common Stock will be issued, and no Medtronic dividend, stock split, or interest
will relate to any fractional share. No fractional share interests will entitle
the owner thereof to vote or to any rights of a shareholder of Medtronic. All
fractional shares of Medtronic Common Stock to which a holder of AVECOR Common
Stock immediately prior to the Effective Time would otherwise be entitled, at
the Effective Time, shall be aggregated if and to the extent multiple AVECOR
stock certificates of such holder are submitted together to Norwest Bank
Minnesota, N.A., the exchange agent for the Merger (the "Exchange Agent"). If a
fractional share results from such aggregation, then, in lieu of any such
fractional share, each holder of AVECOR Common Stock who otherwise would be
entitled to receive a fractional share of Medtronic Common Stock in the Merger
will receive an amount of cash (without interest) determined by multiplying (i)
the Average Stock Price by (ii) the fractional share interest of Medtronic
Common Stock to which such holder would otherwise be entitled.
Exchange of Shares of AVECOR Common Stock
As soon as practicable after the Effective Time, the Exchange Agent
will mail a letter of transmittal to holders of a certificate or certificates
that prior to the Effective Time represented outstanding shares of AVECOR Common
Stock. The letter of transmittal will include instructions regarding the
surrender of certificates representing shares of AVECOR Common Stock in exchange
for certificates representing shares of Medtronic Common Stock.
As soon as practicable after the Effective Time, the Exchange Agent
will distribute to holders of shares of AVECOR Common Stock, upon surrender to
the Exchange Agent of one or more certificates for such shares of AVECOR Common
Stock for cancellation, together with a duly-executed letter of transmittal, (i)
one or more certificates representing the number of whole shares of Medtronic
Common Stock into which the shares represented by the certificate(s) have been
converted and (ii) a check in the amount of any cash in lieu of fractional
shares. Holders of AVECOR Common Stock will not be entitled to receive interest
on any cash to be received in the Merger.
After the Effective Time, certificates representing shares of AVECOR
Common Stock converted into Medtronic Common Stock in the Merger will be deemed
for all purposes to evidence ownership of the shares of Medtronic Common Stock
into which they were converted. Holders of AVECOR Common Stock will be entitled
to any dividends that become payable to persons who are holders of record of
Medtronic Common Stock as of a record date on or after the Effective Time, but
only after they have surrendered their certificates representing shares of
AVECOR Common Stock for exchange. Any such dividends will be remitted to each
AVECOR shareholder entitled thereto, without interest, at the time that such
certificates representing shares of AVECOR Common Stock are surrendered for
exchange, subject to any applicable abandoned property, escheat, or similar law.
Holders of AVECOR Common Stock will not be entitled, however, to dividends that
become payable before or after the Effective Time to persons who were holders of
record of Medtronic Common Stock as of a record date prior to the Effective
Time.
<PAGE>
Shareholder Rights Plans
Medtronic will not become an Acquiring Person and the Merger will not
cause a Distribution Date under AVECOR's Rights Agreement, as amended, as such
terms are defined therein. Further, pursuant to an amendment to the AVECOR
Rights Agreement adopted on August 21, 1998, Medtronic will not be declared an
Adverse Person under the AVECOR Rights Agreement because of Medtronic's
beneficial ownership of AVECOR Common Stock resulting from the Stock Option
Agreement and the voting agreements entered into with officers and directors of
AVECOR.
Under the terms of the AVECOR Rights Agreement, each outstanding AVECOR
Right (as defined therein) will expire automatically pursuant to the terms of
the AVECOR Rights Agreement upon consummation of the Merger and without any
action on the part of AVECOR shareholders. No additional consideration will be
paid to AVECOR shareholders in connection with the expiration of the AVECOR
Rights as a result of the Merger.
Each AVECOR shareholder entitled to receive shares of Medtronic Common
Stock in connection with the Merger or upon exercise of AVECOR options will
receive, together with each share of Medtronic Common Stock, one Medtronic
Preferred Stock Purchase Right pursuant to the Medtronic Shareholder Rights
Plan, represented by the certificate representing the share of Medtronic Common
Stock. See "Comparative Rights of Medtronic and AVECOR Shareholders--Shareholder
Rights Plans."
Treatment of Stock Options
Under the terms of the outstanding options to purchase shares of AVECOR
Common Stock, any such options not otherwise vested will become fully vested and
exercisable at the Effective Time as a result of the Merger. All such options
that are not exercised and remain outstanding at the Effective Time will be
assumed by Medtronic and, following the Effective Time, will be exercisable upon
the same terms and conditions as such options were exercisable prior to the
Merger, except that the exercise price and the number of shares of Medtronic
Common Stock that can be purchased upon exercise of the options will be revised
to reflect conversion of the options on the same basis as shares of AVECOR
Common Stock are converted into shares of Medtronic Common Stock in the Merger.
As promptly as practicable after the Effective Time, Medtronic will provide to
each holder of an AVECOR option a written statement informing such holder of the
assumption by Medtronic of such option.
Conduct of Business of AVECOR Pending the Merger
AVECOR has agreed that, prior to consummation of the Merger, unless
Medtronic agrees otherwise, it will conduct its business only in the ordinary
course, it will use all reasonable efforts to preserve intact its business
organization and relationships with third parties, and it will not: declare or
pay any dividends or other distributions; amend or alter any material term of
its securities; incur, assume or guarantee any indebtedness other than in the
ordinary course of business; create, assume, or incur any lien on any material
asset; issue or repurchase any securities (other than issuances of securities
upon the exercise of stock options and other rights previously granted); alter
its accounting principles; increase the compensation or benefits of any of its
directors, officers, or other employees (except under existing agreements or in
the ordinary course of business); amend its Articles of Incorporation or Bylaws;
sell any property, pay any liabilities, or waive any claims, except in the
ordinary course of business; make capital investments in any other company;
purchase fixed assets exceeding a specified aggregate purchase price; distribute
mass communications to any group without allowing Medtronic to comment on them;
<PAGE>
merge or consolidate with any person; acquire the stock or assets of any
business; take or fail to take any action that would cause its representations
and warranties in the Merger Agreement to be inaccurate; enter into or make any
material change in any material agreements, except in the ordinary course and
consistent with past practice; institute, settle, or compromise any claim or
suit involving amounts in excess of a specified amount; knowingly take any
action that would jeopardize the treatment of the Merger as a tax-free
transaction; or agree or commit to do any of the foregoing.
AVECOR has agreed that (except as is required by the fiduciary duties
of AVECOR's directors and officers as so advised by independent counsel) neither
AVECOR nor any of its representatives or affiliates will, directly or
indirectly, solicit, initiate, or encourage any alternative proposal, or engage
in any negotiations with, or provide any information to, any person, entity, or
group (other than Medtronic) that has made or may make an alternative proposal
with respect to AVECOR or any subsidiary (except that AVECOR may inform any
third party who contacts AVECOR on an unsolicited basis concerning any
alternative proposal that AVECOR is obligated under the Merger Agreement to
disclose such solicitation to Medtronic). For these purposes, an "alternative
proposal" would include a proposal involving a merger or consolidation, a sale,
lease, or licensing of any significant portion of the assets, or a sale of
shares of capital stock of AVECOR or any subsidiary. AVECOR has agreed that it
will notify Medtronic promptly, and prior to furnishing information or entering
into discussions or negotiations with a third party, regarding the terms of any
such proposal that AVECOR may receive.
Pursuant to the Merger Agreement and a confidentiality agreement
between Medtronic and AVECOR, AVECOR has agreed to give Medtronic and its
representatives access to AVECOR's offices, properties, books, and records, and
to furnish to Medtronic and its representatives such financial and operating
data and other information as Medtronic may reasonably request, and will have
its employees and representatives cooperate with Medtronic in Medtronic's
investigation of the business of AVECOR.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors of AVECOR
with respect to the Plan of Merger, the Merger Agreement, and the transactions
contemplated thereby, shareholders of AVECOR should be aware that certain
members of the management and Board of Directors of AVECOR have certain
interests in the Merger that are in addition to, and may be in conflict with,
the interests of shareholders of AVECOR generally.
Stock Options. Under the terms of the outstanding options to purchase
shares of AVECOR Common Stock, any such options that are not otherwise vested
will become fully vested and exercisable at the Effective Time as a result of
the Merger. AVECOR's executive officers and directors collectively hold
outstanding options to purchase 407,000 shares of AVECOR Common Stock, of which
options to purchase an aggregate 297,750 shares will vest as a result of the
Merger. The following executive officers and directors hold the following number
of options that will become vested as a result of the Merger: Anthony Badolato,
50,000; Gregory Melsen, 86,250; Allan Seck, 30,000; William Haworth, 76,000;
Edward Strickland, 18,500; David Stassen, 18,500; and Gordon Wright, 18,500. See
"--Treatment of Stock Options."
Noncompetition Agreements. Simultaneously with or immediately following
the execution of the Merger Agreement, Messrs. Badolato and Seck executed
separate noncompetition agreements with Medtronic. AVECOR, pursuant to the
Merger Agreement, has agreed to use all reasonable efforts to cause Messrs.
Melsen, Haworth and Bradley Goskowicz to execute proposed noncompetition
agreements with Medtronic. Each of the executed and proposed noncompetition
<PAGE>
agreements is expressly contingent upon the effectiveness of the Merger.
Pursuant to these noncompetition agreements, the individual executing the
agreement agrees that such individual will not be employed by, associated with,
or render services to any person or entity (other than AVECOR or another
Medtronic affiliate) engaged in the design, development, manufacture, marketing,
or sale of products that are similar to current or planned products of AVECOR
anywhere in the world. The noncompetition agreements executed by Messrs.
Badolato and Seck expire 42 months after the Effective Time, and the other
noncompetition agreements will expire 24 months after the Effective Time, if
executed as proposed.
Change in Control Agreements. On April 29, 1996, AVECOR entered into
change in control agreements with four executive officers (Messrs. Badolato,
Melsen, Seck, and Haworth) and other employees. The agreements provide certain
payments and benefits to these individuals in the event that, during the
12-month period following a "change in control" of AVECOR, (i) such individual's
employment is terminated by AVECOR or its successors for any reason other than
for death, disability, retirement, or "cause" or (ii) such individual terminates
his employment for "good reason," which includes certain material adverse
changes in the executive's status, position, base salary, benefits, or work
location. The executive will be paid, in that event, a lump sum cash payment
equal to 24 times the executive's highest monthly compensation for any 12-month
period during the prior 36 months. The terminated executive will also be
entitled to continue to receive coverage under AVECOR's benefit plans for 24
months. Consummation of the Merger will constitute the occurrence of a "change
in control" under the change in control agreements.
Indemnification. Medtronic has agreed to provide to the individuals who
have served as officers and directors of AVECOR, for at least six years after
the Merger (or until any matters arising prior to the Merger have been
resolved), indemnification equivalent to that provided by the Second Restated
Articles of Incorporation, as amended, and Bylaws of AVECOR prior to the
Effective Time. Medtronic has also agreed to provide, for six years, officers'
and directors' liability insurance coverage comparable to that currently
provided by AVECOR with respect to acts occurring prior to the Effective Time.
See "--Indemnification."
Each of Messrs. Badolato, Strickland, Stassen, and Wright participated
in the discussions and deliberations of the AVECOR Board of Directors in
connection with the Merger, and each of them voted in favor of the Merger.
Messrs. Melsen, Seck, and Haworth participated in such discussions but are not
Board members.
Voting Agreements
Pursuant to agreements to facilitate merger between Medtronic and each
of the executive officers and directors of AVECOR (Messrs. Badolato, Seck,
Melsen, Haworth, Strickland, Stassen, and Wright), such individuals have agreed
to vote shares of AVECOR Common Stock owned by them as of the date of the Merger
Agreement (i) in favor of the approval, consent, and ratification of the Merger
and (ii) against any action that would impede, interfere with, or discourage the
Merger, would facilitate an acquisition of AVECOR in any manner by a party
(other than Medtronic), or would result in any breach of any representation,
warranty, covenant, or agreement of AVECOR under the Merger Agreement. These
voting agreements terminate upon termination of the Merger Agreement by
Medtronic. As of the Record Date, the shareholders who executed the voting
agreements owned an aggregate [1,080,749] shares of AVECOR Common Stock,
representing approximately [13.4]% of the AVECOR Common Stock outstanding on the
Record Date.
<PAGE>
Stock Option Agreement
Simultaneously with the execution of the Merger Agreement, AVECOR and
Medtronic entered into a Stock Option Agreement pursuant to which AVECOR granted
to Medtronic an option, exercisable only under certain specified circumstances,
to purchase a number of shares of AVECOR Common Stock equal to an aggregate
19.9% of the shares of AVECOR Common Stock outstanding on the date of the Merger
Agreement, or 1,600,851 such shares, at an exercise price of $11.125 per share.
The specified circumstances under which the stock option becomes exercisable are
the same as those that could result in the payment by AVECOR of a termination
fee upon certain events triggering termination of the Merger Agreement. See "The
Merger--Amendment and Termination of the Merger Agreement."
Under the Stock Option Agreement, Medtronic also has the right, under
certain circumstances following the occurrence of specified proposals by third
parties to acquire stock or assets of AVECOR or to merge or combine with AVECOR,
and in lieu of exercising Medtronic's option, to require AVECOR to pay to
Medtronic, in cancellation of Medtronic's option, the in-the-money value of such
option. Such value is calculated as the lesser of (i) $2.75 million or (ii) the
number of shares subject to Medtronic's option multiplied by the excess of the
then-current trading price of AVECOR Common Stock or the price per share offered
in the third-party proposal, whichever is greater, over $11.125. In no event,
however, can the sum of such cancellation amount and the $2.75 million
termination fee under the Merger Agreement, if then payable, exceed $3.6
million. See "--Amendment and Termination of the Merger Agreement."
Conditions; Waiver
The respective obligations of Medtronic, Merger Subsidiary, and AVECOR
to effect the Merger are subject to the satisfaction at or prior to the Merger
of certain conditions, including, among others: (a) the approval by the AVECOR
shareholders of the Merger; (b) the effectiveness of the Registration Statement;
(c) the expiration or termination of the waiting periods applicable to the
consummation of the Merger under the HSR Act and any foreign merger laws; (d)
the shares of Medtronic Common Stock issuable in the Merger having been duly
authorized for listing by the NYSE, subject to official notice of issuance; and
(e) the absence of an order, decree, or injunction by any federal or state court
or other governmental body, agency, or official that would prevent or materially
delay consummation of the Merger.
In addition, the obligations of AVECOR to effect the Merger are subject
to the satisfaction at or prior to the Merger of certain conditions, including
that: (a) Medtronic and Merger Subsidiary have performed in all material
respects their obligations under the Merger Agreement required to be performed
by them; (b) each representation and warranty of Medtronic contained in the
Merger Agreement is true in all material respects as of the Effective Time; and
(c) AVECOR has received an opinion of Oppenheimer Wolff & Donnelly LLP, to the
effect that the Merger will constitute a "tax-free" reorganization for federal
income tax purposes. See "The Merger--Certain Federal Income Tax Consequences."
In addition, the obligations of Medtronic and Merger Subsidiary to
effect the Merger are subject to the satisfaction at or prior to the Merger of
certain conditions, including that: (a) AVECOR has performed in all material
respects its obligations under the Merger Agreement required to be performed by
it; (b) each representation and warranty of AVECOR contained in the Merger
Agreement is true in all material respects as of the Effective Time; (c) all
necessary consents have been received; (d) Medtronic has received written
<PAGE>
resignations from each of the directors and specified officers of AVECOR
specified by Medtronic effective as of the Effective Time; and (e) Anthony
Badolato has agreed to continue his employment with AVECOR following the Merger.
Amendment and Termination of the Merger Agreement
Any of the provisions of the Merger Agreement may be amended by written
agreement of the respective parties at any time before or after approval of the
Merger by the AVECOR shareholders; however, after such approval, no amendment
may be made to the Plan of Merger attached hereto as Appendix A that materially
affects the rights of the AVECOR shareholders without shareholder approval.
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether before or after approval of the Merger
by the AVECOR shareholders, only as follows:
(a) By mutual consent of the Board of Directors of each of
Medtronic and AVECOR;
(b) By either Medtronic or AVECOR if the Merger has not been
effected by January 12, 1999, except that a party cannot terminate the
Merger Agreement if its own breach of the Merger Agreement is the
primary cause of, or results in, the Merger not being effected by such
date, and except that such date can be extended by 90 days if the
applicable governmental authorities make requests for additional
information under the HSR Act or foreign merger laws;
(c) By either Medtronic or AVECOR if a court or other
governmental authority has issued a final, nonappealable order, decree,
or ruling that permanently enjoins or prohibits the Merger;
(d) By either Medtronic or AVECOR if the AVECOR shareholders
do not vote to approve the Merger, except that a party cannot terminate
the Merger Agreement if its own failure to perform under the Merger
Agreement is the primary cause of, or results in, the failure of the
AVECOR shareholders to approve the Merger;
(e) By Medtronic if AVECOR has solicited, entertained, or
negotiated a competing offer to acquire AVECOR in violation of the
Merger Agreement, or recommended, approved, or entered into an
agreement regarding any such offer, or withdrawn or modified (in a
manner adverse to Medtronic) its recommendation of the Merger, or if a
tender or exchange offer for 15% or more of the AVECOR Common Stock is
commenced and the AVECOR Board, within 10 business days thereafter,
fails to recommend against acceptance or takes no position regarding
acceptance of the offer;
(f) By AVECOR if it is not in material breach of its
obligations under the Merger Agreement and its Board of Directors has
accepted a competing offer by a party other than Medtronic to acquire
AVECOR, and has paid to Medtronic the termination fee described below;
(g) By Medtronic if it is not then in material breach and
there occurs a material breach of any representation, warranty, or
obligation under the Merger Agreement on the part of AVECOR, or by an
affiliate of AVECOR under such person's affiliate's letter, or by an
officer or director of AVECOR under his voting agreement, that cannot
be cured within 30 days; or
<PAGE>
(h) By AVECOR if it is not then in material breach and there
occurs a material breach of any representation, warranty, or obligation
under the Merger Agreement on the part of Medtronic that cannot be
cured within 30 days.
AVECOR has agreed to pay Medtronic $2.75 million if either (i) the
Merger Agreement is terminated as described in paragraph (e) or (f) above or
(ii) a third party either makes an alternative proposal to which AVECOR responds
or in fact acquires 15% or more of the outstanding AVECOR Common Stock prior to
the Meeting, and either (A) the AVECOR shareholders do not approve the Merger or
(B) the Merger Agreement is terminated pursuant to either paragraph (g) above
(where AVECOR's breach is willful and intentional) or paragraph (d) above.
Expenses and Fees
Whether or not the Merger is consummated, all out-of-pocket expenses
incurred in connection with the Merger (including but not limited to accounting
and legal fees) and the transactions contemplated thereby will be paid by the
party incurring such costs and expenses, except that Medtronic and AVECOR will
share equally all expenses related to printing and mailing the Registration
Statement and this Proxy Statement/Prospectus and the filing fees required under
the HSR Act and any foreign merger laws.
Restrictions on Resale of Medtronic Common Stock
The Medtronic Common Stock issuable in connection with the Merger has
been registered under the Securities Act and will be freely transferable by the
recipients, except that this registration does not cover resales by shareholders
of AVECOR who may be deemed to control or be under common control with AVECOR at
the time of the Meeting ("Affiliates"). Affiliates may not sell their shares of
Medtronic Common Stock acquired in connection with the Merger except pursuant to
an effective registration statement under the Securities Act covering such
shares, or in compliance with Rule 145 under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
AVECOR has delivered to Medtronic, and agreed to update as necessary, a list
identifying all persons who, in AVECOR's opinion, upon advice of counsel, are
Affiliates of AVECOR for purposes of Rule 145. AVECOR has delivered to Medtronic
from each person already identified as an Affiliate, and has agreed to use all
reasonable efforts to cause each person who is subsequently identified as an
Affiliate to deliver to Medtronic at or prior to the Effective Time, an
agreement that such persons (i) will not offer to sell, sell, or otherwise
dispose of any shares of Medtronic Common Stock received in the Merger in
violation of the Securities Act, and (ii) have no present intention to sell,
transfer, or otherwise dispose of any of the Medtronic Common Stock received in
the Merger. It is expected that Affiliates will be able to sell such shares
without registration and in accordance with the volume, manner of sale, and
other applicable limitations of the Securities Act and the rules and regulations
of the Commission thereunder.
It is estimated that Affiliates of AVECOR will receive a maximum of
approximately [285,945] shares of Medtronic Common Stock upon consummation of
the Merger (assuming full exercise of all outstanding AVECOR options held by
such Affiliates and assuming a Conversion Fraction of [.1922]). Such shares
would constitute less than 1% of the total number of shares of Medtronic Common
Stock anticipated to be outstanding immediately after the Effective Time after
giving effect to the shares issued pursuant to the Merger. Solely for
illustrative purposes of the foregoing estimate, the Conversion Fraction was
calculated by using the [August 24], 1998 Medtronic closing sale price of
$[57.875] as the assumed Average Stock Price. See "The Merger--Conversion of
AVECOR Common Stock in the Merger."
<PAGE>
Deregistration of AVECOR Common Stock
If the Merger is consummated, the AVECOR Common Stock will cease to be
quoted on the Nasdaq National Market, and Medtronic will apply to the Commission
for the deregistration of AVECOR Common Stock under the Exchange Act.
Accounting Treatment of the Merger
Medtronic intends to account for the Merger as a purchase for
accounting and financial reporting purposes under generally accepted accounting
principles. Under the purchase method, AVECOR's results of operations will be
included in Medtronic's consolidated results of operations from and after the
Effective Time. For purposes of preparing Medtronic's consolidated financial
statements, Medtronic will establish a new accounting basis for AVECOR's
identifiable tangible and intangible assets and liabilities based upon the fair
values thereof, and record goodwill for the difference between Medtronic's
purchase price, including the direct costs of acquisition, and the fair value of
AVECOR's identifiable tangible and intangible net assets. A final determination
of required purchase accounting adjustments and of the fair value of the assets
and liabilities of AVECOR has not yet been made. Accordingly, the purchase
accounting adjustments made in connection with the development of the
comparative pro forma per share financial information appearing elsewhere in
this Proxy Statement/Prospectus are preliminary and subject to change. Using the
purchase method to account of the Merger would not materially affect Medtronic's
cash flow or the results of operations on a continuing basis based on current
and anticipated profitability levels.
Certain Federal Income Tax Consequences
The following is a discussion of certain material United States federal
income tax considerations in connection with the Merger. This discussion merely
summarizes certain principal United States federal income tax consequences of
the Merger and does not purport to be a complete analysis of all of the
potential tax effects relevant to the Merger. In this regard, this discussion
does not deal with all federal income tax considerations that may be relevant to
certain AVECOR shareholders in light of their particular circumstances, such as
dealers in securities, insurance companies, shareholders who do not hold their
AVECOR Common Stock as capital assets, foreign persons, tax-exempt entities, or
persons who are subject to the alternative minimum tax provisions of the Code.
Furthermore, it does not address (i) the tax consequences to AVECOR shareholders
who acquired their shares in connection with stock options or stock purchase
plans or in other compensatory transactions, or (ii) the acceleration of vesting
periods and/or assumption by Medtronic of outstanding options to purchase shares
of AVECOR Common Stock pursuant to the Merger. See "The Merger--Treatment of
Stock Options," and "--Interests of Certain Persons in the Merger." Moreover, it
does not address the tax consequences of the Merger under foreign, state, or
local tax laws.
AVECOR shareholders are urged to consult their own tax advisors as to
the consequences of the Merger, including the applicable federal, state, local,
and foreign tax consequences to them.
Oppenheimer Wolff & Donnelly LLP, counsel to AVECOR, will render at
closing an opinion (the "Tax Opinion") that the Merger constitutes a
reorganization under Section 368 of the Code. Neither AVECOR nor Medtronic will
request a ruling from the Internal Revenue Service (the "IRS") with regard to
<PAGE>
any of the United States federal income tax consequences of the Merger. The Tax
Opinion is based on and subject to certain assumptions and limitations as well
as factual representations received from AVECOR and Medtronic, as discussed
below. An opinion of counsel represents only counsel's best legal judgment and
has no binding effect or official status of any kind, and no assurance can be
given that contrary positions may not be taken by the IRS or a court considering
the issues.
Subject to the accuracy of representations contained in certain
certificates received from AVECOR and Medtronic, it is the opinion of
Oppenheimer Wolff & Donnelly LLP that the material United States federal income
tax consequences of the Merger are as follows:
Nature of the Merger. The Merger will constitute a reorganization as
defined in Section 368(a)(1)(A) of the Code by application of Section
368(a)(2)(E) of the Code, and AVECOR, Medtronic, and Merger Subsidiary will each
be "a party to a reorganization" within the meaning of Section 368(b) of the
Code if the Merger is carried out in the manner set forth in the Merger
Agreement.
Consequences to AVECOR. AVECOR will not recognize gain or loss upon
Medtronic's issuance of Medtronic Common Stock to the AVECOR shareholders in the
Merger and the transfer by operation of law of Merger Subsidiary's assets and
liabilities to AVECOR upon consummation of the Merger.
Consequences to AVECOR's Shareholders. No gain or loss will be
recognized by AVECOR's shareholders upon their receipt in the Merger of
Medtronic Common Stock, except to the extent of cash received in lieu of a
fractional share of Medtronic Common Stock.
The aggregate tax basis of Medtronic Common Stock received by an AVECOR
shareholder in the Merger (including any fractional share deemed received) will
be the same as the aggregate tax basis of the AVECOR Common Stock surrendered in
exchange therefor.
The holding period of each share of Medtronic Common Stock received by
each of AVECOR's shareholders in the Merger will include the period during which
such AVECOR shareholder held his or her AVECOR Common Stock surrendered in
exchange therefor, provided that the AVECOR Common Stock is held as a capital
asset at the time of the Merger.
Cash payments in lieu of a fractional share should be treated as if a
fractional share of Medtronic Common Stock had been issued in the Merger and
then redeemed by Medtronic. An AVECOR shareholder receiving such cash should
generally recognize capital gain or loss upon such payment equal to the
difference (if any) between the amount of cash received and such shareholder's
basis in the fractional share that is being treated as redeemed (which will be a
pro rata portion of the shareholder's basis in the Medtronic Common Stock
received in the Merger (including any fractional share deemed received)).
An AVECOR shareholder who receives solely cash for his or her AVECOR
Common Stock pursuant to the exercise of dissenters' rights will be obligated to
report (i) either capital gain or loss equal to the difference between the cash
received by such shareholder and such shareholder's basis in his or her AVECOR
Common Stock, if the shareholder held his or her AVECOR Common Stock as a
capital asset on the date of the Merger, or (ii) dividend income, depending on
whether the deemed redemption resulting from the exercise of dissenters' rights
qualifies for sale or exchange treatment under the tests set forth in Section
302(b) of the Code. Under those tests, most AVECOR shareholders who exercise
their dissenters' rights should receive capital gain or loss treatment (rather
<PAGE>
than dividend treatment), if the deemed redemption of their AVECOR Common Stock
constitutes a "complete redemption" of their interests in AVECOR (and Medtronic,
after the Merger). To the extent that persons related to any such shareholder
continue to hold stock in Medtronic after the Merger, the rules of Section 318
of the Code may require dividend treatment unless Section 302(c) of the Code
permits those rules to be waived in a particular instance.
Limitations on Opinion and Discussion. As noted above, the Tax Opinion
is subject to certain assumptions, including, but not limited to, the truth and
accuracy of certain representations made by AVECOR and Medtronic. Furthermore,
the Tax Opinion will not bind the IRS and the IRS is, therefore, not precluded
from asserting a contrary position. The Tax Opinion and this discussion are
based on currently existing provisions of the Code, existing and proposed
Treasury regulations, and current administrative rulings and court decisions.
There can be no assurance that future legislative, judicial, or administrative
changes or interpretations will not adversely affect the accuracy of the Tax
Opinion or of statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger.
Indemnification
Under the Merger Agreement, Medtronic has agreed to continue to
indemnify the present and former officers and directors of AVECOR for a period
of at least six years following the Merger with respect to acts or omissions
occurring prior to the Effective Time, to the extent that they are currently
indemnified under AVECOR's Articles of Incorporation and Bylaws as of the date
of the Merger Agreement. Medtronic has also agreed to provide directors' and
officers' liability insurance coverage, comparable to that currently maintained
by AVECOR, for six years after the Effective Time. See "The Merger--Interests of
Certain Persons in the Merger."
Regulatory Requirements
Under the HSR Act, certain acquisition transactions, including the
Merger, cannot be consummated unless certain information has been furnished to
the Federal Trade Commission ("FTC") and the Antitrust Division of the United
States Department of Justice and certain waiting period requirements have been
satisfied. Medtronic and AVECOR each furnished such information on July 22,
1998. Pursuant to the HSR Act, the Merger may not be consummated until the
expiration of at least 30 days following the receipt of each filing, unless the
waiting period is earlier terminated by the FTC and the Antitrust Division. On
August 21, 1998, Medtronic and AVECOR received a request for additional
information relating to the notifications that they had earlier filed under the
HSR Act. This request extends the waiting period during which the FTC and the
Antitrust Division can review the Merger. The waiting period will expire on the
20th day after the companies substantially comply with the request. The
companies intend to respond promptly to the request.
The Antitrust Division of the United States Department of Justice and
the FTC frequently scrutinize the legality under the antitrust laws of
transactions such as the Merger. At any time before or after the consummation of
the Merger, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or seeking the
divestiture of substantial assets of AVECOR or Medtronic. AVECOR and Medtronic
believe that the Merger will not violate the antitrust laws. There can be no
assurance, however, that a challenge to the Merger on antitrust grounds will not
be made or, if such a challenge is made, what the results will be.
<PAGE>
Due to the international scope of Medtronic's and AVECOR's businesses,
regulatory filings may also be required in certain European and other
jurisdictions. Medtronic and AVECOR are in the process of determining whether
any such filings will be required, but they do not expect any such filings to
affect the expected timing of the Merger.
Other than as described herein, the Merger does not require the
approval of any federal, state, or other agency. See "The Merger--Conditions;
Waiver."
Rights of Dissenting AVECOR Shareholders
If the Merger occurs, AVECOR shareholders are entitled to dissenters'
rights under Sections 302A.471 and 302A.473 of the MBCA in connection with the
Merger. Medtronic shareholders are not entitled to dissenters' rights in
connection with the Merger.
The following discussion is not a complete statement of the law
pertaining to dissenters' rights under the MBCA and is qualified in its entirety
by reference to the full text of Sections 302A.471 and 302A.473 of the MBCA,
copies of which are attached to this to this Proxy Statement/Prospectus as
Appendix C. Any shareholder of AVECOR who wishes to exercise, or to preserve his
or her right to exercise, dissenters' rights should review the following
discussion and Appendix C carefully, because failure to timely and properly
comply with the specified procedures will result in the loss of dissenters'
rights under the MBCA.
In accordance with Sections 302A.471 and 302A.473 of the MBCA, AVECOR
shareholders have the right to dissent with respect to the Merger and, subject
to certain conditions, to be paid in cash the "fair value" of their AVECOR
shares. In this context, the term "fair value" means the value of the AVECOR
shares immediately before the Effective Time of the Merger. Under Section
302A.473, where a merger is to be submitted for approval at a meeting of
shareholders, the corporation must notify each of its shareholders of the right
to dissent, include in such notice a copy of Sections 302A.471 and 302A.473 and
provide a brief description of the procedures to be followed under these
sections. This Proxy Statement/Prospectus constitutes such notice to the
shareholders of AVECOR, and the following discussion describes the procedures to
be followed by a dissenting shareholder.
A shareholder of AVECOR wishing to exercise the right to demand the
fair value of his or her shares must:
o Before the vote of shareholders is taken at the Meeting, file with
AVECOR a written notice of intent to demand the fair value of his or
her shares and, in addition, he or she must not vote in favor of the
Merger. Because a proxy that does not contain voting instructions will,
unless revoked, be voted FOR approval of the Merger, a shareholder of
AVECOR who votes by proxy and who wishes to exercise dissenters' rights
must (i) vote AGAINST the approval of the Merger, or (ii) ABSTAIN from
voting on the approval of the Merger. A vote against the Merger in
person or by proxy will not in and of itself constitute a written
notice of intent to demand the fair value of a shareholder's AVECOR
shares satisfying the requirements of the MBCA.
o A demand for fair value must be executed by or for the shareholder of
record as such shareholder's name appears on his or her AVECOR stock
certificate or certificates. If the AVECOR stock is owned of record in
a fiduciary capacity such as by a trustee, guardian or custodian, such
demand must be executed by the fiduciary. If the stock is owned of
record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by all joint owners. An authorized
<PAGE>
agent, including an agent for two or more joint owners, may execute the
demand for a shareholder of record; however, the agent must identify
the record owner and expressly disclose the fact that, in exercising
the demand, he or she is acting as agent for the record owner.
A record owner who holds shares of AVECOR as a nominee for others, such
as a broker, may demand fair value of the shares held for all, or fewer
than all of the beneficial owners of such shares. In such a case, the
written demand should set forth the number of shares to which it
relates. When no number of shares is expressly mentioned, the demand
will be presumed to cover all shares standing in the name of the record
owner. Beneficial owners of AVECOR shares who are not record owners and
who intend to exercise dissenters' rights should submit to AVECOR at or
before the assertion of the rights a written consent of the record
owner or instruct the record owner to comply with the statutory
requirements with respect to the exercise of dissenters' rights before
the date of the Meeting.
o AVECOR shareholders who have previously filed a notice of intent to
demand the fair value of their shares and have not voted in favor of
the Merger may, after shareholder approval of the Merger, elect to
exercise dissenters' rights and demand fair value by mailing or
delivering their written demand to: Gregory Melsen, Chief Financial
Officer, AVECOR Cardiovascular Inc., 7611 Northland Drive, Minneapolis,
Minnesota 55428. The written demand should specify the shareholder's
name and mailing address, the number of shares owned, and that the
shareholder is thereby demanding the fair value of his or her shares.
o After the Effective Time, AVECOR, as the surviving corporation, will
cause to be mailed to each shareholder of AVECOR who has properly
asserted dissenters' rights a notice that contains (i) the address to
which a demand for payment and stock certificates must be sent in order
to receive payment and the date by which they must be received; (ii) a
form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired his
or her AVECOR shares or an interest in them and to demand payment; and
(iii) another copy of Sections 302A.471 and 302A.473 together with a
brief description of these sections. To receive the fair value of his
or her AVECOR shares, a dissenting shareholder must demand payment and
deposit his or her certificates within 30 days after this notice from
AVECOR is given to dissenting shareholders.
o After the Effective Time or after AVECOR receives a valid demand for
payment, whichever is later, AVECOR must remit to each dissenting
shareholder who has complied with the dissenters' rights provisions the
amount AVECOR estimates to be the fair value of the shares, plus
interest, along with (i) AVECOR's closing balance sheet and statement
of income for a fiscal year ending not more than 16 months before the
effective date of the Merger, together with the latest available
interim financial statement; (ii) an estimate by AVECOR of the fair
value of the shares and a brief description of the method used to reach
the estimate; and (iii) another copy of Sections 302A.471 and 302A.473
and a brief description of the procedure to be followed in demanding
supplemental payment. If AVECOR fails to remit payment within 60 days
of the deposit of certificates, AVECOR must return all deposited
certificates. However, AVECOR may again give notice and require deposit
at a later time.
o If a dissenting AVECOR shareholder believes that the amount remitted
by AVECOR is less than the fair value of his or her shares plus
interest, such dissenting shareholder may give written notice to AVECOR
of his or her own estimate of the fair value for the shares plus
<PAGE>
interest and demand a supplemental payment for the difference. Any
written demand for supplemental payment must be made within 30 days
after AVECOR mailed its original remittance. Otherwise, a dissenter is
entitled only to the amount remitted by AVECOR.
o Within 60 days after receiving a demand for supplemental payment,
AVECOR, as the surviving corporation, must either pay the amount of the
supplemental payment demanded (or agreed to between the dissenting
shareholder and AVECOR) or file a petition in the state courts of
Minnesota requesting that the court determine the fair value of the
shares plus interest. Any petition so filed must name as parties all
dissenting shareholders who have demanded supplemental payments and who
have been unable to reach an agreement with AVECOR concerning the fair
value of their shares. If AVECOR files such a petition, it must serve
all parties with a summons and a copy of the petition under the rules
of civil procedure. The court may appoint appraisers, with such power
and authority as the court deems proper, to receive evidence on and
recommend the amount of fair value of the shares. The jurisdiction of
the court is plenary and exclusive, and the fair value as determined by
the court is binding on all shareholders, wherever located. A
dissenting shareholder, if successful, is entitled to a judgment for
the amount in cash by which the fair value of his or her shares as
determined by the court exceeds the amount originally remitted by
AVECOR, plus interest.
Generally, the costs and expenses associated with a court proceeding to
determine the fair value of the AVECOR shares will be borne by AVECOR, as the
surviving corporation, unless the court finds that a dissenting shareholder has
demanded supplemental payment in a manner that is arbitrary, vexatious, or not
in good faith. Similar costs and expenses may also be assessed in instances
where AVECOR has failed to comply with the procedures in Section 302A.473 of the
MBCA pertaining to dissenters' rights discussed above. The court may, in its
discretion, award attorneys' fees to an attorney representing dissenting
shareholders out of any amount awarded to such dissenters.
Failure to follow the steps required by Section 302A.473 for asserting
dissenters' rights may result in the loss of a shareholder's rights to demand
the fair value of his or her AVECOR shares. Shareholders considering seeking
appraisal should realize that the fair value of their shares, as determined
under Section 302A.473 of the MBCA in the manner outlined above, could be more
than, the same as, or less than the amount of value of the shares of Medtronic
Common Stock they would be entitled to receive as a result of the Merger if they
did not seek appraisal of their shares.
COMPARATIVE STOCK PRICES AND DIVIDENDS
Medtronic Common Stock is listed and traded on the New York Stock
Exchange (symbol: MDT), and it is a condition to all parties' obligations to
consummate the Merger that the Medtronic Common Stock to be issued in the Merger
be approved for such listing. AVECOR Common Stock is traded on the Nasdaq
National Market (symbol: AVEC).
The following table sets forth, for the quarters indicated, the high
and low sales prices per share of Medtronic Common Stock on the NYSE and the
cash dividends paid per share of Medtronic Common Stock. Also set forth, for the
calendar period indicated, are the high and low sales prices per share of AVECOR
Common Stock as reported by the Nasdaq National Market. The prices set forth
below for AVECOR Common Stock exclude adjustments for retail mark-ups,
mark-downs, or commissions.
<PAGE>
<TABLE>
<CAPTION>
AVECOR
Medtronic Common Stock Common Stock
High Low Dividends High Low
<S> <C> <C> <C> <C> <C>
Calendar 1996
First Quarter.............. $31.3125 $22.25 $.0325 $17.25 $10.50
Second Quarter............. $29.875 $24.375 $.0325 $14.125 $12.00
Third Quarter.............. $32.4375 $23.50 $.0475 $15.875 $11.625
Fourth Quarter............. $34.9375 $30.25 $.0475 $14.875 $10.875
Calendar 1997
First Quarter.............. $35.875 $28.8125 $.0475 $13.375 $10.75
Second Quarter............. $44.4375 $30.375 $.0475 $12.25 $8.75
Third Quarter.............. $49.25 $42.50 $.055 $12.375 $9.875
Fourth Quarter............. $52.75 $40.5625 $.055 $12.00 $6.00
Calendar 1998
First Quarter.............. $58.4375 $45.4375 $.055 $8.00 $5.625
Second Quarter............. $66.00 $47.9375 $.055 $7.438 $6.125
Third Quarter (through
[August 24]).............. $72.75 $51.1875 $.065 $10.625 $7.25
</TABLE>
AVECOR has never paid cash dividends. Under the Merger Agreement,
AVECOR has agreed not to pay any dividends on AVECOR Common Stock prior to the
Merger. Medtronic has paid regular quarterly cash dividends on Medtronic Common
Stock since 1978. It is expected that the Board of Directors of Medtronic will
continue the practice of declaring cash dividends on a quarterly basis; however,
no assurance can be given as to the amount of future dividends, which will
necessarily be dependent on future earnings, financial requirements of Medtronic
and its subsidiaries, and other factors.
In the Merger, shares of AVECOR Common Stock will be converted into
shares of Medtronic Common Stock based on the Conversion Fraction, which equals
$11.125 divided by the Average Stock Price for the 18 consecutive NYSE trading
days ending on the second NYSE trading day immediately preceding the Effective
Time of the Merger. On July 10, 1998, the last trading day preceding public
announcement of the Merger, the reported closing sale price of Medtronic Common
Stock on the NYSE was $69.8125 per share, resulting in an implied Conversion
Fraction (if it were determined based on the closing sale price that day) of
0.1594. On that day, the reported closing sale price of AVECOR Common Stock on
the Nasdaq National Market was $9.875 per share. On [August 24], 1998, the
latest practicable trading day prior to the printing of this Proxy
Statement/Prospectus, the closing sale price of Medtronic Common Stock on the
NYSE was $[57.875] per share, resulting in an implied Conversion Fraction (if it
were determined based on the closing sale price that day) of [.1922]. The
reported closing sale price of AVECOR Common Stock on the Nasdaq National Market
on that day was $[10.0625] per share. Shareholders are urged to obtain current
market quotations.
As of [August 24], 1998, there were approximately [32,850] registered
holders of Medtronic Common Stock and approximately [315] registered holders of
AVECOR Common Stock.
<PAGE>
RECENT DEVELOPMENTS
Medtronic Stock Offering
To be eligible to use the pooling of interests accounting method to
account for its merger with Physio-Control International Corporation
("Physio-Control") and future acquisitions, Medtronic intends to sell in one or
more transactions up to approximately 12.5 million shares of Medtronic Common
Stock, which approximates that number of shares which are tainted for purposes
of pooling of interests accounting and were purchased by Medtronic in the open
market pursuant to its share repurchase program. This offering of stock is
expected to be completed prior to the merger with Physio-Control, but there can
be no assurance that the offering will be completed successfully. Consummation
of the Merger is not contingent upon the completion of the above-described
offering of Medtronic Common Stock.
Physio-Control International Corporation
On June 27, 1998, Medtronic entered into an agreement to acquire
Physio-Control, a company that designs, manufactures, markets, and services an
integrated line of noninvasive emergency cardiac defibrillator and vital sign
assessment devices, disposable electrodes, and data management software.
Physio-Control's products are used in both out-of-hospital and hospital settings
for the detection and treatment of life-threatening events including trauma,
heart attack, and the acute heart rhythm disturbances of ventricular
fibrillation, tachycardia, and bradycardia.
Pursuant to the acquisition agreement, upon the fulfillment or waiver
of certain conditions, a wholly-owned subsidiary of Medtronic created for the
Physio-Control acquisition will merge with and into Physio-Control.
Physio-Control will then become a wholly-owned subsidiary of Medtronic in a
stock-for-stock merger that is expected to be tax-free and accounted for using
pooling of interests accounting treatment. In the Physio-Control merger, each
outstanding share of stock of Physio-Control will be exchanged for the right to
receive the fraction of a share of Medtronic Common Stock equal to $27.50
divided by the Average Stock Price of Medtronic Common Stock for a specified
period preceding the effective time of the Physio-Control merger. Physio-Control
has approximately 21 million shares outstanding on a fully diluted basis.
Other Investments and Acquisitions
Medtronic has historically been, and continues to be, actively engaged
in exploring business opportunities through investments and acquisitions. As
such, at any particular time, in addition to investments and acquisitions for
which definitive agreements have been executed and publicly announced, Medtronic
is routinely reviewing several other investment or acquisition opportunities of
varying magnitude and significance or negotiating the terms of such potential
investments or acquisitions prior to the execution of definitive agreements and
public announcements thereof.
COMPARATIVE RIGHTS OF MEDTRONIC AND AVECOR SHAREHOLDERS
Upon consummation of the Merger, shareholders of AVECOR will become
shareholders of Medtronic. Although Medtronic and AVECOR are both incorporated
under the laws of the state of Minnesota, the rights of Medtronic shareholders
under Medtronic's Restated Articles of Incorporation as amended ("Medtronic's
Articles") and Medtronic's Bylaws differ in certain respects from the rights of
<PAGE>
AVECOR shareholders under AVECOR's Second Restated Articles of Incorporation, as
amended ("AVECOR's Articles"), and AVECOR's Bylaws, as amended ("AVECOR's
Bylaws"). Certain significant differences between the rights of Medtronic
shareholders and AVECOR shareholders are summarized below. This summary does
not, however, purport to be a complete description of all of the differences
between the rights of shareholders of AVECOR and the rights of shareholders of
Medtronic.
Classification, Removal, and Nomination of Directors
Classification. Medtronic's Articles provide for a classified Board of
Directors, under which directors are elected to three-year terms, with one-third
of the directors being elected each year. AVECOR's Articles do not classify its
Board of Directors, and directors are elected each year for a one-year term.
Removal. Medtronic's Articles provide that directors may be removed,
with or without cause, only by the vote of not less than 75% of the voting power
of all then outstanding voting shares. AVECOR's Bylaws provide that directors
may be removed, with or without cause, by the vote of the holders of a majority
of the shares then entitled to vote at an election of directors.
Nomination. Medtronic's Articles provide that nominations for the
election of directors may be made by or at the direction of the Medtronic Board
of Directors or by any shareholder entitled to vote in the election of directors
generally. Nominations by shareholders must be made pursuant to timely notice in
writing to the Secretary of Medtronic. To be timely, a shareholder's notice must
be delivered to or mailed and received at the principal executive offices of
Medtronic not less than 50 days nor more than 90 days prior to the meeting;
provided, however, that if less than 60 days' notice or prior public disclosure
of the date of the meeting is given or made to the shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. The notice must set
forth certain information concerning such shareholder and his or her nominee(s),
including their names and addresses, the principal occupation or employment of
the nominee(s), the class and number of shares of capital stock of Medtronic
that are beneficially owned by such persons, such other information as would be
required to be included in a proxy statement soliciting proxies for the election
of the nominees of such shareholder, and the consent of each nominee to serve as
a director of Medtronic if so elected. AVECOR's Articles and Bylaws do not
address the issue of nomination of directors.
Amendment of Provisions. Medtronic's Articles require the affirmative
vote of not less than 75% of the voting power of all then outstanding voting
shares to amend, repeal or adopt any provisions inconsistent with provisions of
Medtronic's Articles regarding classification, removal, and nomination of
directors. AVECOR's Bylaws provide that AVECOR's Board of Directors has the
power to make, alter, amend or rescind provisions of AVECOR's Bylaws including
provisions regarding removal of directors.
The above-described provisions of Medtronic's Articles and AVECOR's
Articles regarding directors will be subject to the terms of the certificate of
designation or other instrument creating any class or series of preferred stock
giving the holders of such class or series of preferred stock the right, voting
separately as a class, to elect one or more directors (such as is often required
by the terms of preferred stock in the event that dividend payments are in
arrears for a period of time). See "Comparative Rights of Medtronic Shareholders
and AVECOR Shareholders--Preferred Stock."
<PAGE>
These provisions regarding classification, removal, and nomination of
directors afford some assurance of stability in the composition of the Medtronic
Board of Directors, but may discourage or deter attempts by individuals or
entities to take control of Medtronic by electing their own slate of directors.
To the extent that potential acquirers of Medtronic stock are deterred by the
classified Board, such provision also may deter certain mergers, tender offers,
or other future takeover attempts which some or a majority of holders of
Medtronic Common Stock may deem to be in their best interests. In addition, the
classified Medtronic Board would delay shareholders who do not favor the
policies of Medtronic's Board of Directors from removing a majority of the
Medtronic Board of Directors for two years, unless they can obtain the requisite
vote.
Liability of Directors. Both Medtronic's Articles and AVECOR's Articles
exempt directors from personal liability to the corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director to the full
extent permitted by Minnesota law.
Preferred Stock
Medtronic has 2,500,000 authorized but unissued shares of Preferred
Stock, par value $1 per share. Medtronic's Articles provide that whenever the
holders of a class or series of Preferred Stock have the right to elect any
directors, the election, term and other features of such directorships shall be
governed by the terms set forth in the resolution of the Medtronic Board of
Directors designating the rights and preferences of such class or series of
Preferred Stock, and any directors elected by the holders of Preferred Stock
shall not be divided into classes unless provision is expressly made for such
classification by the terms of such Preferred Stock. Shares of Medtronic
Preferred Stock could be issued that would have the right to elect directors,
either separately or together with the Medtronic Common Stock, with such
directors either divided or not divided into classes.
Under certain circumstances such Medtronic Preferred Stock could be
used to create voting impediments or to deter persons seeking to effect a
takeover or otherwise gain control of Medtronic in a transaction which holders
of some or a majority of the Medtronic Common Stock may deem to be in their best
interests. Such shares of Medtronic Preferred stock could be sold in public or
private transactions to purchasers who might support the Medtronic Board of
Directors in opposing a takeover bid that the Medtronic Board of Directors
determines not to be in the best interests of Medtronic and its shareholders. In
addition, the Medtronic Board of Directors could authorize holders of a class or
series of Preferred Stock to vote, either separately as a class or together with
the holders of Medtronic Common Stock, on any merger, sale, or exchange of
assets by Medtronic or any other extraordinary corporate transaction. The
ability to issue such Medtronic Preferred Stock might have the effect of
discouraging an attempt by another person or entity, through the acquisition of
a substantial number of shares of Medtronic Common Stock, to acquire control of
Medtronic with a view to imposing a merger, sale of all or any part of the
assets or a similar transaction, because the issuance of new shares could be
used to dilute the stock ownership of such person or entity.
AVECOR has 2,000,000 authorized but unissued shares of Preferred Stock,
par value $.01 per share, and the Board of Directors has the authority to fix or
alter the terms of such shares. In connection with the adoption of the AVECOR
Rights Agreement, 200,000 of such shares were designated as Series A Junior
Preferred Stock. See "Comparative Rights of Medtronic and AVECOR
Shareholders--Shareholder Rights Plans."
<PAGE>
Special Meetings of Shareholders
Under Minnesota law, a special meeting of shareholders may be called by
certain officers, two or more directors, a person authorized to do so in the
articles or bylaws, or shareholders holding at least 10% of the voting power of
all shares entitled to vote, except that a special meeting for the purpose of
considering an action to effect, directly or indirectly, a business combination
must be called by shareholders holding at least 25% of the voting power of all
shares entitled to vote.
Voting Rights; Shareholder Approvals
Under both Medtronic's Articles and AVECOR's Articles, holders of
Medtronic Common Stock and AVECOR Common Stock, respectively, are entitled to
one vote per share on all matters submitted to a vote of the shareholders.
Medtronic's Bylaws provide that, except as specifically required otherwise under
Medtronic's Articles, Bylaws or Minnesota law, all matters submitted to the
shareholders are decided by a majority vote of the shares entitled to vote and
represented at a meeting at which there is a quorum.
Cumulative Voting
Neither Medtronic's Articles nor AVECOR's Articles provide for
cumulative voting with regard to the Medtronic Common Stock or the AVECOR Common
Stock, respectively.
Preemptive Rights
Under Medtronic's Articles and AVECOR's Articles, holders of Medtronic
stock and AVECOR stock, respectively, are expressly denied preemptive rights.
The MBCA provides that a corporation's shareholders have preemptive rights only
if such rights are expressly granted in the corporation's articles of
incorporation.
Amendment of the Articles of Incorporation
Under Minnesota law, an amendment to the articles of incorporation
requires the affirmative vote of the holders of a majority of the shares present
and entitled to vote unless a larger affirmative vote is required by the
corporation's articles. Except as specifically described otherwise in this
"Comparative Rights of Medtronic Shareholders and AVECOR Shareholders," neither
Medtronic's Articles nor AVECOR's Articles contain any provisions that require a
larger affirmative vote in order to amend Medtronic's Articles.
Business Combinations and Control Share Acquisitions
Medtronic and AVECOR are governed by Sections 302A.671 and 302A.673 of
the MBCA. In general, Section 302A.671 provides that the shares of a corporation
acquired in a "control share acquisition" have no voting rights unless voting
rights are approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% or more in the
election of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
<PAGE>
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested shareholder. An "interested shareholder" is a person who is the
beneficial owner, directly or indirectly, of 10% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and at any
time within four years prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the corporation's voting stock. Such
provisions of Minnesota law could have the effect of delaying, deferring, or
preventing a change in control of Medtronic or AVECOR.
Shareholder Rights Plans
Medtronic. Medtronic has in effect a Shareholder Rights Plan and has
entered into a Rights Agreement with Norwest Bank Minnesota, N.A., as Rights
Agent. The Rights Plan provides for a dividend distribution of one preferred
stock purchase right (a "Medtronic Right") to be attached to each outstanding
share of Medtronic Common Stock. The Medtronic Right associated with each
outstanding share of Medtronic Common Stock entitles the holder to buy 1/1600th
of a Series A Junior Participating Preferred Share (the "Series A Preferred
Shares") of Medtronic, which is substantially equivalent to one share of
Medtronic Common Stock, at an exercise price of $37.50 per 1/1600th of a Series
A Preferred Share. The Medtronic Rights are not currently exercisable or
transferable apart from the Medtronic Common Stock.
The Medtronic Rights will become exercisable if a person or group
acquires 15% or more of the Medtronic Common Stock (and thereby becomes an
"Acquiring Person") or announces a tender offer or exchange offer that would
increase the Acquiring Person's beneficial ownership to 15% or more of the
outstanding Medtronic Common Stock, subject to certain exceptions. After the
Medtronic Rights become exercisable, each Medtronic Right entitles the holder
(other the Acquiring Person), instead, to purchase Medtronic Common Stock that
has a market value of two times the exercise price of the Medtronic Right. If
Medtronic is acquired in a merger or other business combination transaction,
each exercisable Medtronic Right entitles the holder to purchase common stock of
the Acquiring Person or an affiliate that has a market value of two times the
exercise price of the Medtronic Right. Each Medtronic Right is redeemable by
Medtronic at $.000625 any time before a person or group triggers the 15%
threshold to become an Acquiring Person. The Medtronic Rights expire on July 10,
2001.
The Medtronic Rights issued under the Medtronic Shareholder Rights Plan
may make any merger not approved by Medtronic's Board of Directors prohibitively
expensive, because the Medtronic Rights allow Medtronic shareholders to purchase
the voting securities of Medtronic or a potential acquirer at one-half of its
fair market value.
AVECOR. AVECOR also has entered into a Rights Agreement with Norwest
Bank Minnesota, N.A. (the "AVECOR Rights Agreement"). The AVECOR Rights
Agreement provides for issuance of one preferred share purchase right (an
"AVECOR Right") to be attached to each outstanding share of AVECOR Common Stock.
Upon certain events, each AVECOR Right entitles the registered holder to
purchase from AVECOR one one-thousandth of a share (a "Preferred Share
Fraction") of AVECOR's Series A Junior Preferred Stock or a combination of
securities and assets of equivalent value at a purchase price of $80.00, subject
to adjustment.
The AVECOR Rights Agreement further provides that, with certain
exceptions, upon 10 days after (i) a person or group (an "Acquiring Person")
becomes the beneficial owner of more than 15% of the then outstanding shares of
AVECOR Common Stock, or (ii) at least a majority of the "Continuing Directors"
of AVECOR's Board of Directors (as defined in the AVECOR Rights Agreement)
determine that a person is an "Adverse Person" (also as defined in the AVECOR
<PAGE>
Rights Agreement), then each holder of an AVECOR Right (other than the Acquiring
Person or the Adverse Person, as the case may be) will thereafter have the right
to receive, upon exercise, that number of Preferred Share Fractions (or, in
certain circumstances, that number of shares of AVECOR Common Stock, cash,
property, or other securities of AVECOR) having a market value equal to two
times the exercise price of the AVECOR Right.
In the event that (i) AVECOR is acquired in a merger or other business
combination in which AVECOR is not the surviving corporation or in which AVECOR
Common Stock is changed or exchanged, or (ii) 50% or more of AVECOR's assets or
earning power is sold or transferred, and such transactions described in (i) and
(ii) are not "Permitted Offers" (as defined in the AVECOR Rights Agreement),
then the AVECOR Rights Agreement provides that each holder of an AVECOR Right
(except for an Acquiring Person or an Adverse Person) shall thereafter have the
right to receive, upon exercise, shares of common stock of the acquiring entity
at half of the then-current market price of such shares.
The AVECOR Rights may be redeemed by action taken by a majority of the
Continuing Directors at a price of $.001 per AVECOR Right at any time prior to
the time 10 days after which a person is declared an Adverse Person or after
which an Acquiring Person acquires or obtains the right to acquire beneficial
ownership of 15% or more of the then outstanding shares of AVECOR Common Stock.
In connection with the consideration and approval of the Merger,
AVECOR's Board of Directors approved amendments to the AVECOR Rights Agreement
on July 12 and August 21, 1998. These amendments were adopted to clarify the
effect under the AVECOR Rights Agreement of the Merger with Medtronic or any
similar transaction, and to provide that Medtronic will not be declared an
Adverse Person because of Medtronic's beneficial ownership of AVECOR Common
Stock as a result of the Stock Option Agreement and the voting agreements
between Medtronic and officers and directors of AVECOR. Pursuant to the AVECOR
Rights Agreement, as amended, all AVECOR Rights will expire upon consummation of
the Merger.
Related Person Business Transactions
Medtronic's Articles provide that, in certain circumstances, an
affirmative vote of two-thirds of the voting power of all then outstanding
voting shares is required for the approval or authorization of any "related
person business transaction." Such two-thirds approval is not required, however,
if (i) a majority vote of "continuing directors" (as defined below) expressly
approves the related person business transaction, or (ii) the related person
business transaction is a merger, consolidation, exchange of shares or sale of
all or substantially all of the assets of Medtronic, and the cash or fair market
value of the property received by the Medtronic shareholders is equal to a
defined minimum purchase price. For purposes of this provision, a "continuing
director" means, generally, those directors who were directors before the
"related person" (as defined below) became a related person.
Generally, a related person business transaction includes (i) any
merger or consolidation of Medtronic with or into a related person, (ii) any
exchange of shares of Medtronic (or a subsidiary) for shares of a related person
which would have required an affirmative vote of at least a majority of the
voting power of the outstanding shares entitled to vote, (iii) any sale, lease,
exchange, transfer, or other disposition (in one transaction or a series of
transactions), including without limitation a mortgage or any other security
device, of all or any substantial part of the assets of Medtronic (or a
subsidiary) to or with a related person, (iv) any sale, lease, transfer, or
<PAGE>
other disposition (in one transaction or a series of transactions) of all or any
substantial part of the assets of a related person to or with Medtronic (or a
subsidiary), (v) the issuance, sale, transfer, or other disposition to a related
person of any securities of Medtronic (except pursuant to stock dividends, stock
splits, or similar transactions that would not have the effect of increasing the
proportion of voting power of a related person) or of a subsidiary (except
pursuant to a pro rata distribution to all holders of Medtronic Common Stock),
(vi) any recapitalization or reclassification that would have the effect of
increasing the proportionate voting power of a related person, and (vii) any
agreement, contract, arrangement, or understanding providing for any of the
transactions described above.
Generally, for purposes of a related person business transaction, the
term "related person" is broadly defined to include a wide range of potential
persons, including any person or entity that, together with affiliates and
associates, beneficially owns 15% or more of the outstanding voting stock of
Medtronic.
Such a provision could have the effect of impeding a potential acquirer
of Medtronic by requiring a larger than normal majority of Medtronic
shareholders to approve a transaction. There is no similar "related person
business transaction" provision in AVECOR's Articles.
INFORMATION REGARDING AVECOR
General Development of Business
AVECOR develops, manufactures, and markets specialty medical devices
for heart/lung bypass surgery and long-term respiratory support. AVECOR's
products include the Affinity microporous, hollow fiber membrane oxygenator and
related blood reservoirs, a line of solid silicone membrane oxygenators and
related blood reservoirs, the Affinity blood pump, the MYOtherm cardioplegia
delivery system, Signature custom tubing packs, and the Affinity arterial
filter.
AVECOR was incorporated in Minnesota in December 1990 and began
operations in 1991 when it purchased the surgical division of SCIMED Life
Systems, Inc. (the "Predecessor Business"). The assets purchased included a line
of solid silicone membrane oxygenators. Since the acquisition of the Predecessor
Business, AVECOR has engaged in extensive product development, resulting in the
introduction and receipt of regulatory clearance from the U.S. Food and Drug
Administration (the "FDA") to market the following proprietary products:
Product Approval Date
------------------------------------------------------------ ---------------
MYOtherm cardioplegia delivery system...................... October 1991
Signature custom tubing packs.............................. July 1993
Affinity oxygenator........................................ November 1993
Affinity blood reservoirs.................................. July 1994
Affinity arterial filter................................... October 1995
MYOtherm XP(TM)(improved cardioplegia delivery system)..... July 1997
Affinity blood pump........................................ August 1997
Affinity oxygenator with Trillium(TM)bio-passive surface... February 1998
<PAGE>
In December 1992, AVECOR acquired Cardio Med Ltd., a corporation
organized under the laws of England and Wales ("Cardio Med"). Cardio Med had
been a distributor of AVECOR's disposable membrane oxygenators, cardiotomy
reservoirs, and cardioplegia systems and manufactured its own proprietary line
of custom tubing packs. As a result of the acquisition, Cardio Med has become a
wholly-owned subsidiary of AVECOR. Cardio Med's name has since been changed to
AVECOR Cardiovascular Ltd. ("AVECOR Ltd."). During 1995, AVECOR incorporated
AVECOR Foreign Sales Corporation as a wholly-owned subsidiary of AVECOR and
opened a sales office in France, organized as AVECOR Cardiovascular France
S.A.R.L., a French subsidiary of AVECOR Ltd.
Industry Background and Markets
Industry Background. AVECOR's products are used in surgical procedures
requiring heart/lung bypass, such as the treatment of coronary artery disease by
coronary artery bypass graft surgery ("CABG" or "coronary bypass surgery"),
heart valve replacement surgery, and pediatric and neonatal congenital heart
defect surgery. There were approximately 850,000 heart/lung bypass procedures
performed worldwide in 1997, including approximately 400,000 of such procedures
performed in the United States, and approximately 265,000 of such procedures
performed in Europe. Certain of AVECOR's products are also used in nonsurgical
applications, such as the long-term cardiopulmonary support of premature
infants, newborns, and other patients with life-threatening respiratory
disorders.
The primary use of AVECOR's products is for heart/lung bypass
procedures during the surgical treatment of coronary artery disease. Coronary
artery disease, the leading cause of death in the United States, is the
atherosclerotic narrowing of the coronary arteries that supply blood to the
heart. Atherosclerosis is the accumulation of cholesterol and blood products on
the inner lining of an artery that causes the arterial wall to thicken and lose
elasticity, narrowing the inner diameter of the artery. According to an estimate
by the American Heart Association, approximately 13,490,000 Americans have a
history of heart attack, angina pectoris (chest pain), or both, which are
generally associated with coronary artery disease. The American Heart
Association estimated that, in the United States in 1996, coronary artery
disease would result in 1,500,000 acute myocardial infarctions, or heart
attacks, of which approximately 500,000 would result in death.
In the late 1960s, cardiovascular surgeons pioneered coronary bypass
surgery, a surgical treatment for severe cases of coronary artery disease in
which blood vessel grafts are used to bypass the site of the blocked arteries.
Several of these procedures or "grafts" may be performed during a single surgery
in order to bypass atherosclerotic lesions in more than one of the coronary
arteries, which is commonly referred to as "multi-vessel" coronary artery
disease. Coronary bypass surgery generally requires that the patient be put on a
heart/lung bypass circuit to enable the surgeon to operate on a still,
relatively bloodless heart. The heart/lung bypass circuit is a series of
interconnected specialty medical devices that together function as a patient's
heart and lungs by temporarily oxygenating and circulating blood while the
patient's own heart and lungs are rendered inactive. AVECOR believes coronary
bypass surgery accounts for approximately 75% of the total heart/lung bypass
procedures performed in the United States and over 50% of the procedures
performed in Europe.
Although coronary bypass surgery is a highly invasive procedure, it has
been shown to be highly effective in treating coronary artery disease, and the
number of procedures performed annually in the United States has grown from
approximately 200,000 in 1982 to over 400,000 in 1997 (multiple procedures may
be performed during a single surgery where multi-vessel disease is present). The
annual worldwide growth rate in the number of coronary bypass procedures has
fluctuated from year to year for various reasons.
<PAGE>
Since the development of coronary bypass surgery, a number of
nonsurgical interventional treatments for coronary artery disease have been
developed which, depending on the extent and nature of the disease as well as
physician preference, may be used as an alternative to coronary bypass surgery.
These nonsurgical treatments, while generally less costly per procedure, have
limitations and to date have not resulted in reduced demand for coronary bypass
surgery.
Percutaneous transluminal coronary angioplasty ("PTCA") was introduced
in the early 1980s as a nonsurgical treatment for coronary artery disease. PTCA
is performed by guiding a balloon-tipped catheter to the site of an
atherosclerotic lesion, followed by several courses of dilation under high
balloon pressure. For many patients, PTCA represents a less costly and less
traumatic alternative to bypass surgery, while for other patients it represents
a preferred alternative to drug therapy. While the number of PTCA procedures
performed grew significantly in the 1980s and early 1990s, the number of
coronary bypass procedures performed annually also continued to grow during this
period.
Although the average cost of a PTCA procedure is approximately one-half
of the average cost of coronary bypass surgery, the need for further
interventions for many patients tends to significantly reduce the long-term cost
differential between these two types of procedures. Studies have indicated that
30% to 50% of PTCA procedures are complicated by "restenosis," a renarrowing, or
often reclosure, of the dilated vessel within six months. An artery complicated
by restenosis often requires repeat procedures, reducing the overall
cost-effectiveness of PTCA. For a significant number of PTCA patients, coronary
bypass surgery is ultimately performed. In patients with multi-vessel coronary
artery disease, a randomized study has shown that within three years of
receiving treatment, only 14% of patients receiving coronary bypass surgery
required retreatment ("revascularization") while 60% of patients receiving PTCA
required revascularization. Additional studies have confirmed that approximately
20% of PTCA patients with multi-vessel disease will undergo coronary bypass
surgery within one year of receiving PTCA. Based upon the higher rates of
revascularization of patients receiving PTCA rather than coronary bypass
surgery, several studies have concluded that over a three-year period the
overall average cost of PTCA procedures exceeds 75% of the average cost of
coronary bypass surgery.
In response to the limitations of PTCA, a variety of "second
generation" interventional devices for coronary artery disease have been
developed, including atherectomy devices (catheter devices that cut and remove
atherosclerotic materials from the arterial wall), rotational ablation devices
(catheter devices that use a rotating burr to remove material), laser catheter
devices (devices that use laser energy to reduce accumulated materials in
arteries), and coronary stents (expandable metal frames that are positioned
within the diseased area in the coronary artery to maintain the vessel opening).
Of these devices, coronary stents have demonstrated the best potential to date
to reduce restenosis in a randomized population. Studies have concluded that the
rate of restenosis in patients receiving coronary stents following PTCA is
approximately 30% lower than in patients treated only by PTCA. However, the use
of stenting in connection with PTCA greatly increases the cost of the PTCA
procedure. One study has indicated that the average cost per procedure for
elective stenting in connection with PTCA was approximately twice the cost of
PTCA without stenting (or approximately equal to the cost of coronary bypass
surgery).
In addition to the existing nonsurgical treatments for coronary artery
disease, an additional treatment modality has emerged for both coronary artery
disease and heart valve replacement procedures (discussed below), which involves
"least" or "minimally" invasive surgical procedures. A significant number of
these techniques involve small surgical incisions in the patient's chest in lieu
of the larger incision used in traditional CABG or valve replacement surgeries.
Specialized surgical instruments used in connection with endoscopes enable
surgeons to perform CABG or valve replacement surgeries via these smaller
incisions. In some variations of this type of procedure, only a modified form of
the heart/lung bypass circuit is required, which includes an oxygenator and
related disposables. In other variations of this type of procedure, however, a
heart/lung bypass circuit is not utilized.
<PAGE>
While this modality is in its developmental stages and currently
requires significant surgical skill and training, the potential benefits to
patients from this type of surgery are a reduced recovery period from the
elimination of the heart/lung bypass circuit in some procedures and lower risk
of infection as a result of the smaller incision utilized in some of the
procedures. Although some of the patients currently eligible for treatment using
these types of procedures are not candidates for more invasive and less costly
procedures, there can be no assurance that this type of surgical procedure will
not represent a significant portion of the CABG or heart valve replacement
procedures in the future. Therefore, it cannot be determined at this time what
effect, if any, the development and acceptance of these procedures may have on
the market for AVECOR's disposable heart/lung bypass circuit components.
A second significant use of AVECOR's products in conjunction with
heart/lung bypass procedures is in heart valve replacement surgery. Heart valve
replacement surgery is also an open heart surgical procedure, involving the
replacement of valves that regulate the flow of blood between chambers in the
heart. Valve replacement may be required where the valve has become narrowed or
ineffective due to the build-up of calcium or scar tissue, or where there is a
congenital defect or some other form of physical damage to the valve. Like
coronary bypass surgery, valve replacement surgery requires that the patient be
put on a heart/lung bypass circuit. AVECOR believes approximately 20% of the
heart/lung bypass procedures performed in the United States, and 25% of those
performed in Europe, are performed in heart valve replacement surgery.
Pediatric and neonatal congenital heart defect surgery is another
heart/lung bypass procedure that uses several of AVECOR's products. These
procedures are undertaken to correct developmental defects in the heart of a
child or infant. AVECOR believes approximately 5% of the heart/lung bypass
procedures performed in the United States and approximately 10% of those
performed in Europe are performed in connection with this type of corrective
surgery.
The primary nonsurgical use of AVECOR's products is in connection with
a procedure known as extracorporeal membrane oxygenation ("ECMO"). ECMO is the
long-term cardiopulmonary support of premature infants, newborns, and other
patients with life threatening respiratory disorders. The relatively small ECMO
market served by AVECOR is comprised of 118 established centers worldwide, in
which approximately 1,500 neonatal ECMO procedures (procedures performed on
children younger than one year) were performed in 1997. Neonatal ECMO procedures
constitute the vast majority of all ECMO procedures performed. There has been
relatively little growth in the overall ECMO market in recent years and AVECOR
believes growth in this market will remain limited until technology overcomes
complications that are common in long-term respiratory support, such as
intracranial bleeding due to the associated long-term use of anti-coagulants.
Since AVECOR manufactures what it believes to be the only oxygenator that has
received clearance from the FDA for sale for long-term cardiopulmonary support
for periods greater than 24 hours, AVECOR believes it has a competitive
advantage in this relatively small market.
Heart/Lung Bypass Circuit. In procedures requiring cardiopulmonary
support, the patient is connected to a series of interconnected specialty
medical devices, collectively called a heart/lung bypass circuit. The heart/lung
bypass circuit functions as the patient's heart and lungs by temporarily
oxygenating and circulating blood while the patient's own heart and lungs are
rendered inactive. The devices in the heart/lung bypass circuit are operated by
a skilled medical professional known as a perfusionist, under the direction of a
surgeon. The primary components of a heart/lung bypass circuit, including the
oxygenator, are single-use, disposable products. Heart/lung bypass circuits are
customized for the particular practices of individual perfusionists.
<PAGE>
In a typical heart/lung bypass procedure, blood is removed via
surgically inserted "cannulae" (hollow tubes with specifically designed tips
that facilitate the drainage or infusion of blood into or out of a patient's
body) from the patient's vena cava (the large vessels leading to the heart). The
blood flows from the patient's vena cava by gravity into a venous blood
reservoir where it is collected and "de-bubbled" (air is eliminated from the
blood). In addition, blood that is suctioned from the patient or drained from
the heart is filtered and de-bubbled through a cardiotomy reservoir. This blood
is then also added to the venous blood reservoir. From the venous blood
reservoir, the blood is mechanically pumped by a blood pump serving as a
replacement for the patient's heart through an oxygenator. The oxygenator serves
as a replacement for the patient's lungs by removing carbon dioxide from and
adding oxygen to the blood. The carbon dioxide and oxygen levels in the blood
are monitored with blood gas monitoring equipment, allowing the perfusionist to
make the proper adjustments to maintain the correct concentrations. The
oxygenator also controls the temperature of the blood by means of an integral
heat exchanger connected to a heater-cooler console. The oxygenated blood is
then returned to the patient through a final (arterial) filter that removes any
potential air or small particles. This artificial heart/lung system is the
primary component of the bypass circuit.
In addition to the artificial heart/lung system, most bypass circuits
also include a cardioplegia delivery system. During most cardiac surgical
procedures, the heart is stopped (arrested) to provide the surgeon with a
motionless field for the delicate surgery. When this occurs, the heart muscle
receives very little blood supply. A cardioplegia system infuses specially
formulated solutions (which often include oxygenated blood) directly into the
patient's coronary arteries. In addition to delivering nutrients to the heart,
these solutions are also used to arrest the heart and maintain prescribed
temperatures.
In order to salvage the patient's own blood during surgery, a
cell-saver circuit may be used to collect and concentrate the patient's blood
into washed, packed cells which can be reinfused at a later time to improve the
patient's red blood cell count without the risks associated with donated blood.
Another method of concentrating the patient's red blood cells is with the use of
a hemoconcentrator. This device removes excess fluid from the patient's blood
(concentrating the red blood cells) and also preserves the plasma of the blood
that is generally discarded with typical blood cell salvaging.
The heart/lung bypass circuit is completed by connecting all of the
devices with tubing. Frequently, this tubing is pre-connected according to the
instructions of individual perfusionists with all or some of the devices in the
circuit and marketed as custom tubing packs. Increasingly, all of the components
in the heart/lung bypass circuit are assembled and packaged in a complete,
single container for a single heart/lung bypass procedure.
Markets. AVECOR's products are primarily sold to hospitals that perform
heart/lung bypass surgery. There were approximately 1,000 hospitals in the
United States and about 400 hospitals in Europe that performed these procedures
in 1997. Over 400,000 heart/lung bypass procedures were performed in the United
States and approximately 265,000 such procedures were performed in Europe in
1997. Coronary bypass surgeries constitute a significant portion of the total
number of heart/lung bypass procedures performed each year. Although the number
of heart/lung bypass procedures performed may have been less than the number of
coronary bypass surgeries due to multiple grafts being performed during some
surgeries, the number of graft procedures performed in the United States each
year grew from less than 200,000 in 1982 to over 400,000 in 1997.
<PAGE>
The current annual worldwide market for disposable products and related
hardware and accessories for heart/lung bypass surgery is estimated by industry
analysts to be approximately $800 million, over $600 million of which is
estimated to be attributable to disposable products. The two largest individual
markets for disposable products are the oxygenator market, estimated at
approximately $200 million in annual sales, and the custom tubing pack market,
estimated at approximately $100 million in annual sales. AVECOR's current
proprietary product offerings participate in an annual worldwide market for
disposable products estimated to be approximately $480 million, and AVECOR
anticipates that its proprietary products under development, including
additional products coated with its new Trillium bio-passive surface, should
allow AVECOR to pursue a greater portion of the disposable product market.
Products
AVECOR currently offers four primary product lines: the Affinity line;
the solid silicone membrane oxygenator line; the MYOtherm cardioplegia delivery
system; and Signature custom tubing packs. "Other products" include products
distributed by AVECOR which do not represent any of AVECOR's primary product
lines and, combined or individually, do not represent a primary product line
within AVECOR's business. The following table sets forth the amounts and
percentages of AVECOR's consolidated net sales attributable to these four
product lines for the periods shown.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Affinity line................................ $26,185 56% $25,488 57% $18,329 55%
Signature custom tubing packs................ 9,803 21 7,402 17 3,459 10
Silicone membrane oxygenator line............ 7,081 15 7,517 17 7,793 24
MYOtherm cardioplegia deliver system......... 3,655 8 3,994 9 3,759 11
Other products............................... 140 - - - - -
------- ---- ------- ---- ------- ----
TOTAL........................................ $46,864 100% $44,401 100% $33,340 100%
------- ---- ------- ---- ------- ----
</TABLE>
Affinity Line. AVECOR's Affinity line is currently comprised of the
Affinity oxygenator, the Affinity blood pump, a hardshell cardiotomy venous
reservoir, and a venous reservoir bag.
The Affinity oxygenator is a microporous, hollow fiber membrane
oxygenator which exchanges the carbon dioxide in the patient's blood for oxygen,
returning oxygenated blood to the patient through the heart/lung bypass circuit.
This oxygenator incorporates AVECOR's patented radial flow and graduated density
fiber bundle, both of which were developed through AVECOR's use of
"computational fluid dynamics." Computational fluid dynamics helped AVECOR
design the Affinity oxygenator with features such as a lowered blood phase
pressure drop, a more uniform flow of blood through the device's fiber bundle,
and reduced damage to the blood as it passes through the device's blood phase.
The key features of the Affinity oxygenator include the following:
o High Gas Transfer. AVECOR believes that the Affinity oxygenator offers
superior gas transfer performance. Studies conducted by independent
investigators have demonstrated that the Affinity oxygenator has gas
transfer performance equal or superior to that of most competing
oxygenators. AVECOR believes that most perfusionists desire oxygenators
that provide optimum gas transfer performance to assure safety for
patients requiring greater oxygen transfer capability, such as larger
patients and patients operated on under lighter anesthesia or at warmer
temperatures.
<PAGE>
o Low Pressure Drop. Studies conducted by independent investigators have
determined the pressure drop across the blood phase of the Affinity
oxygenator to be as low or lower than that of other leading products.
AVECOR believes that perfusionists generally wish to avoid large
pressure drops during heart/lung bypass procedures due to the risk of
line failures associated with high pressure drop.
o Low Priming Volume. The Affinity oxygenator has a priming volume which
AVECOR believes to be one of the lowest priming volumes among
oxygenators currently available. Lower priming volume can result in
less set-up time for the perfusionist, reduced dilution of the
patient's blood with priming solutions, and a reduced use of the
patient's blood for priming, which lessens the possibility that costly
and potentially dangerous donor blood products will need to be
introduced during the procedure.
o Ease of Use. The Affinity oxygenator has been designed to be convenient
to set up, prime, and operate. The Affinity oxygenator's relatively
small size and universal adaptability contribute to its ease of
handling, and its clear case helps to assure quick, complete priming
and ongoing visual checks during the procedure. The device's unique
casing design and a proprietary manufacturing technique result in
precise alignment of the uppermost blood port with the top of the fiber
bundle, allowing for ease in venting air during the priming procedure.
AVECOR believes that perfusionists have a preference for oxygenators
that permit easy removal of air during priming and ease of monitoring
for the presence of air during the procedure.
Although competing oxygenators are generally designed to maximize one
or more of these key features, AVECOR believes the performance of the Affinity
oxygenator to be equal or superior to competing products across a broad range of
performance characteristics: gas transfer capability, pressure drop, priming
volume, and ease of use.
In July 1993, AVECOR began international marketing of the Affinity
oxygenator. AVECOR began the commercial release of the Affinity oxygenator in
the U.S. market in February 1994, following marketing clearance from the FDA.
In February 1997, AVECOR received regulatory clearance from the FDA to
market its Affinity oxygenator with Trillium bio-passive surface. The Trillium
bio-passive surface is produced by coating all blood-contact surfaces in the
oxygenator with a non-leaching synthetic hydrophilic polymer that contains a
small amount of heparin, a widely used anti-coagulant. This surface is designed
to minimize activation of blood constituents which otherwise occurs as a result
of contact with conventional synthetic surfaces. By adding the Affinity
oxygenator with Trillium bio-passive surface, AVECOR will be able to offer a
product option that certain competitors now promote.
In the heart/lung bypass circuit, the blood reservoir serves as a
filtering and storage device. The Affinity line offers two blood reservoirs, a
hardshell cardiotomy venous reservoir, and a venous reservoir bag. Computational
fluid dynamics modeling was also used in the development of these reservoirs.
The hardshell reservoir can be used as a stand-alone unit or can be integrated
with the Affinity oxygenator in one unit. The venous reservoir bag maintains
simplicity in its design while offering optimum priming ease, efficient air
handling, and excellent mixing characteristics. AVECOR received U.S. marketing
clearance from the FDA for its Affinity blood reservoirs in July 1994 and began
marketing the devices following clearance. By offering these blood reservoirs in
the Affinity line, AVECOR is able to configure systems to meet its customers'
needs.
The Affinity Blood Pump System incorporates a motor and control
console, a rotor housing, rotor assembly, and a disposable pump chamber. AVECOR
believes that the Affinity Blood Pump System offers a number of clinical safety
advantages over existing centrifugal or standard roller-type pumps. In
<PAGE>
particular, the modified roller-type design of the Affinity Blood Pump System is
designed to (i) prevent significant negative pressure at the inlet, which
minimizes the potential for cavitation; (ii) not permit the draining of the
venous reservoir and the resulting introduction of air into the bypass circuit;
(iii) not create high discharge pressures sufficient to disrupt the tubing
connections in the bypass circuit; and (iv) not allow retrograde flow. AVECOR
believes that the Affinity Blood Pump System is the first and only available
blood pump to combine these safety features with performance comparable to
available pumps.
There can be no assurance that the Affinity Blood Pump System will be
perceived as superior to currently available blood pumps, that competitors will
not introduce future products with superior performance characteristics, or that
the Affinity Blood Pump System will achieve market acceptance or generate
material revenues for AVECOR at any time in the near future, if at all.
In August 1997, AVECOR received regulatory clearance from the FDA to
market the Affinity Blood Pump System. By adding the Affinity Blood Pump System
to its product line, AVECOR is now able to offer a complete line of proprietary
devices comprising the major components of the heart/lung bypass circuit.
Signature Custom Tubing Packs. AVECOR's Signature custom tubing packs
include the tubing and other connections used to integrate the various
components of the heart/lung bypass circuit and ECMO system. The components to
be included in each tubing pack and the manner in which they are arranged and
connected are determined by the specifications provided by AVECOR's individual
customers. AVECOR has developed computer software that allows it to design and
fully document custom tubing packs according to individual customer
specifications and to quote prices based on these specifications within hours of
a customer request. AVECOR believes that this service provides it with a
significant competitive advantage. While many of the devices included in
AVECOR's Signature custom tubing packs are manufactured by AVECOR, AVECOR
currently does not manufacture all the devices that may be requested by
customers. Consequently, AVECOR is currently required to purchase certain
components of its Signature custom tubing packs from other medical device
manufacturers. AVECOR received marketing clearance from the FDA for its
Signature custom tubing packs in June 1993.
In October 1995, AVECOR received FDA clearance to market its Affinity
arterial filter. AVECOR began sales of this product to customers in late 1995,
with full worldwide release in the first quarter of 1996. The Affinity arterial
filter is the final component in the circuit of specialized medical devices used
in heart/lung bypass surgery, ensuring that the oxygenated blood is free of air
or particulate emboli before re-entering the patient's body. AVECOR believes
that the Affinity arterial filter offers low volume priming, high visibility,
and excellent air handling and hemodynamics. The vast majority of Affinity
arterial filter devices are sold as components of its Signature custom tubing
packs. Previously, AVECOR had sold filters from other manufacturers as part of
its custom tubing packs.
Silicone Membrane Oxygenator Line. AVECOR's solid silicone membrane
oxygenator line consists of AVECOR's solid silicone membrane oxygenator and
associated cardiotomy reservoirs and AVECOR's ECMO (extracorporeal membrane
oxygenation) devices. This product line was purchased by AVECOR from the
Predecessor Business.
AVECOR's solid silicone membrane oxygenators allow gases to pass to and
from blood using proprietary silicone membrane technology, as opposed to the
most widely used oxygenators that use microporous membrane technology (including
the Affinity oxygenator). The solid silicone membrane technology permits, and
<PAGE>
may be sold for, extended use applications because it does not experience the
performance deterioration over a longer period of use that occurs in a
microporous membrane oxygenator. In addition, some perfusionists continue to
prefer silicone membrane oxygenators for heart/lung bypass procedures. AVECOR
believes that its solid silicone membrane oxygenator is the only oxygenator
which is approved for sale for extended use of periods greater than 24 hours,
providing AVECOR with a competitive advantage in this relatively small market.
AVECOR markets a full line of solid silicone membrane oxygenators in several
models and sizes.
AVECOR's solid silicone membrane oxygenator is also part of AVECOR's
ECMO system. ECMO is the long-term cardiopulmonary support of premature infants,
newborns, and other patients with life-threatening respiratory disorders. The
ECMO system includes the membrane oxygenator, reservoir bladder bags, and a heat
exchanger.
MYOtherm Cardioplegia Delivery System. AVECOR's MYOtherm cardioplegia
delivery system is used to infuse specially formulated solutions, which often
include oxygenated blood, directly into the patient's coronary arteries while
the heart is stopped during heart/lung bypass surgery. In addition to delivering
nutrients to the heart, these solutions are also used to arrest the heart and
maintain prescribed temperatures. AVECOR believes that the MYOtherm cardioplegia
delivery system provides superior levels of heat exchange performance for
optimum temperature control during both the cooling and warming phases of
heart/lung bypass surgery. The MYOtherm cardioplegia delivery system also offers
adaptability and convenience for varying cardioplegia techniques used by
cardiovascular surgeons. The perfusionist is able to specify mixtures of
cardioplegia solutions and blood in the MYOtherm cardioplegia delivery system
without changing the pump set-up. AVECOR released its MYOtherm cardioplegia
delivery system worldwide in October 1991.
In July 1997, AVECOR received marketing clearance from the FDA for an
improved MYOtherm cardioplegia delivery system known as the MYOtherm XP. The
MYOtherm XP offers lower priming volume, better air handling, and a new safety
valve to prevent an air pressure induced failure of the MYOtherm XP while
retaining all the other advantages of the predecessor MYOtherm cardioplegia
delivery system.
OnCourse(R) Continuous Quality Control Improvement Software. In
addition to AVECOR's medical device products, AVECOR introduced its OnCourse
continuous quality improvement (CQI) manager in December 1995. This Microsoft
Windows(R)-based software program is currently offered free of charge to
customers who make a major commitment to AVECOR's products. OnCourse CQI Manager
guides perfusionists through the necessary steps in establishing a CQI program.
In addition, it generates a variety of useful reports for perfusionists,
including the annual American Board of Cardiovascular Perfusion clinical
activity report and several other specialized reports.
In March 1997, AVECOR released OnCourse II, an improved version of its
original OnCourse CQI software. The major improvements for OnCourse II include
upgraded report generation capabilities, user-defined study parameters, tracking
of blood usage during procedures, and a benchmarking utility to compare the host
hospital data to aggregate data from other hospitals via online communications.
Further improvements and upgrades are planned for 1998. Although AVECOR markets
this product for sale to other customers, AVECOR does not expect that this
product will contribute significantly to its results of operations in the
foreseeable future.
<PAGE>
Research and Development
AVECOR's research and development strategy encompasses continuing the
development of a complete line of products for the heart/lung bypass circuit,
ensuring that existing products are enhanced or replaced, based on changing on
market conditions and developing products that address new markets and
opportunities outside of the heart/lung bypass market and that leverage AVECOR's
core technologies and expertise.
As an integral part of both its research and development and sales and
marketing strategies, AVECOR strives to involve its customers to a large extent
in its product development activities. Under confidentiality agreements, AVECOR
consults with selected customers from time to time as to market needs and
assessments of products under development by AVECOR. AVECOR believes that this
practice allows it to receive end-user assessments of products in development at
an early stage and to better assure market acceptance.
AVECOR's research and development staff consisted of approximately 24
full-time engineers, scientists, designers, and technicians as of December 31,
1997. Research and development expenses in 1997 were $3,902,000, as compared
with $3,651,000 in 1996 and $2,773,000 in 1995.
Marketing
AVECOR markets its products in the United States and internationally,
with domestic sales accounting for 59%, 59%, and 58% of consolidated net sales
in 1997, 1996, and 1995, respectively. The majority of AVECOR's international
sales are in Europe.
To serve the U.S. market, AVECOR has developed a sales organization
that markets its products directly to cardiovascular surgeons, perfusionists,
neonatologists, and ECMO specialists. This organization consists of a staff of
17 direct sales employees and is supplemented by seven independent sales
representative organizations, all with cardiovascular sales experience. This
network is managed by four regional sales managers and a vice president of
marketing and sales. At its inception, AVECOR marketed its products primarily
through distributors and independent sales representatives. Since that time,
AVECOR has shifted the composition of its distribution network in the United
States to its current direct sales organization. Approximately 93% of AVECOR's
U.S. sales in 1997 occurred through direct sales employees and independent sales
representatives. AVECOR believes that this shift to a larger direct sales force
allows better control of the sales process and assists AVECOR in developing
closer relationships with its customers.
Internationally, AVECOR sells its products through 38 cardiovascular
distributors who cover most major foreign markets. AVECOR's U.K. subsidiary,
AVECOR Ltd., is the base of AVECOR's international marketing efforts, and
manufactures, assembles, and distributes AVECOR's products to the majority of
AVECOR's international distribution network. This international distribution
network is managed by an international sales director and an export sales
manager, both of whom are experienced in marketing heart/lung bypass devices in
Europe. AVECOR's international distribution network is supplemented by seven
direct sales employees, three in the U.K., two in France, and two in Canada. In
October 1995, AVECOR opened a sales office in France, which is organized as a
subsidiary of AVECOR Ltd. Total export sales from the U.S. to unaffiliated
entities (primarily to Europe and Asia and payable in U.S. dollars) and sales
made by AVECOR Ltd. were $4,952,000 and $14,230,000, respectively, for the year
ended December 31, 1997; $4,912,000 and $13,111,000, respectively, for the year
ended December 31, 1996; and $3,480,000 and $10,702,000, respectively, for the
year ended December 31, 1995.
<PAGE>
AVECOR currently has written agreements with 21 of its independent
sales representatives and international distributors. These agreements generally
impose geographic exclusivity and noncompetition obligations on AVECOR's
independent sales representatives and distributors. AVECOR's sales
representative agreements typically include a provision that requires AVECOR to
pay a commission to the sales representative for any sales made directly by
AVECOR to customers within such sales representative's or distributor's
territory. Distributor agreements generally do not require AVECOR to pay
commissions. AVECOR may typically terminate these agreements upon breach of the
agreement by the distributor or sales representative, including breach of the
quota or minimum sales obligations imposed by the agreement, as well as certain
extraordinary events. In addition to these written agreements, AVECOR has verbal
arrangements with 17 other international distributors. While AVECOR generally
considers its relationships with its distributors and sales representatives to
be good, the announcement of the Merger with Medtronic may have an adverse
impact on AVECOR's sales of products through certain of its distributors and
sales representatives. The impact of this announcement on AVECOR's relationships
with its distributors could ultimately have a material, adverse impact on
AVECOR's business, financial condition, and results of operations during the
pendancy of the Merger or if the Merger is not consummated for any reason.
AVECOR's products are primarily sold to hospitals that perform
heart/lung bypass procedures. In the United States, AVECOR believes there are
approximately 1,000 hospitals at which heart/lung bypass procedures are
performed, while in Europe approximately 400 hospitals perform such procedures.
There are approximately 118 hospitals worldwide where ECMO is performed.
AVECOR's products are used by perfusionists, and AVECOR estimates that there are
about 3,000 perfusionists practicing in the United States.
A small portion of AVECOR's business is subject to longer term (longer
than one year) commitments with customers. These commitments involve fixed
pricing terms and minimum or exclusive purchase obligations. Many of AVECOR's
competitors, which have greater financial resources and broader and
longer-standing product lines than AVECOR, have experienced relatively greater
success in establishing these types of customer commitments. AVECOR anticipates
that there will be increased use of these longer term, firm commitment
arrangements in its markets due to cost concerns and other factors.
AVECOR's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. AVECOR meets with certain
designated customers several times each year, during which ideas are shared
regarding the marketplace in general, specific products, products under
development and existing or proposed programs. In lieu of expensive advertising
and promotional materials, AVECOR maintains extensive contact with its customers
for the purpose of educating them in AVECOR's technologies and manufacturing
methods as well as to receive input and feedback about AVECOR's product
development and customer service functions. AVECOR believes these efforts to be
cost-effective in producing awareness of, and loyalty to, AVECOR's products.
AVECOR conducts frequent training of its sales force to facilitate
response to customer needs. AVECOR also maintains a 24-hour/day assistance
program in order to respond quickly to clinical questions and problems
encountered by its customers. The assistance services are provided by a former
certified clinical perfusionist employed by AVECOR and are supplemented by other
certified clinical perfusionists employed by AVECOR as well as a network of
perfusionist consultants located across the country.
<PAGE>
No single customer accounted for more than 10% of AVECOR's 1997 net
sales.
Competition
The cardiovascular device market in which AVECOR competes is
characterized by intense competition. This market is dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially greater capital resources, and larger marketing,
research, and development staffs and facilities than AVECOR. Many of these
competitors offer broader product lines within the specific heart/lung bypass
product market and/or in the general field of medical devices and supplies.
Broader product lines give many of AVECOR's competitors the ability to negotiate
exclusive, long-term medical device supply contracts and, consequently, the
ability to offer comprehensive pricing of their competing products. By offering
a broader product line in the general field of medical devices and supplies,
competitors may also have a significant advantage in marketing competing
products to group purchasing organizations, health maintenance organizations,
and other managed-care organizations that increasingly seek to reduce costs
through centralization of purchasing functions. In addition, AVECOR's
competitors continue to use price reductions to preserve market share in the
oxygenator and other product markets. Therefore, AVECOR must present competitive
product pricing when required to protect or improve its market share in certain
key areas. There can be no assurance that AVECOR's competitors will not use more
significant and more prolonged price competition across AVECOR's product lines
in the future.
During 1995 and 1996, one of AVECOR's competitors, the Bentley Division
of Baxter Healthcare Corporation, purchased three companies which provide
contract perfusion services to hospitals. AVECOR believes that control of
contract perfusion groups by its competitors will continue to have a negative
impact on AVECOR's ability to market its products to such groups or to hospitals
or other medical providers that contract with competitor-controlled groups for
perfusion services, and could have a material adverse effect on AVECOR's
business, financial condition, and results of operation. This forward-looking
statement is subject to the degree of control exerted by AVECOR's competitors
with respect to purchasing decisions made by controlled groups of perfusionists,
the extent of future acquisitions of contract perfusion groups by AVECOR's
competitors, the breadth of AVECOR's product offerings relative to those
competitors controlling contract perfusion groups, and the degree to which
AVECOR's research and development and marketing efforts result in the successful
commercialization of products with enhanced or superior performance
characteristics.
AVECOR's primary competitors within the heart/lung bypass market
include COBE Cardiovascular Inc. (a subsidiary of Gambro, Inc.), Medtronic, the
Bentley Division of Baxter Healthcare Corporation, C.R. Bard Inc., Sorin
Biomedical, Inc., Terumo Medical Corporation, and SARNS Inc. (a subsidiary of 3M
Company).
AVECOR believes that the principal competitive factors in the market
for heart/lung bypass and long-term respiratory support products are product
performance, quality, price, ease of use, technical innovation,
cost-effectiveness, field sales support, customer service, and breadth of
product line. AVECOR intends to continue to compete on the basis of its high
performance products, innovative technologies, cost-effective manufacturing
techniques, close customer relations and support, and its strategy to increase
and enhance, as dictated by market conditions, its offerings of products within
the heart/lung bypass circuit and other medical device technologies.
<PAGE>
Manufacturing
AVECOR manufactures oxygenators and other products and assembles custom
tubing packs at its U.S. facility located in Minneapolis, Minnesota. AVECOR also
performs certain final manufacturing processes with respect to its oxygenators
and blood reservoirs and assembles Signature custom tubing packs at its
Bellshill, Scotland facility.
AVECOR's U.K. and U.S. manufacturing facilities have been inspected by
the British Standards Institute ("BSI") and, as a result, AVECOR has received
ISO 9001 certification. BSI is also the "Notified Body" that has verified that
AVECOR's quality certification procedures conform with the essential
requirements necessary for AVECOR to prepare a Declaration of Conformity and
therefore place the "CE" mark on its products. See "Information Regarding
AVECOR--Governmental Regulation."
As a part of the development process for new products, AVECOR
simultaneously designs and develops manufacturing processes and equipment to be
used to manufacture the products. Because of AVECOR's ability to design and
produce its manufacturing equipment internally in conjunction with new product
development, AVECOR has been able to implement a highly automated,
cost-efficient manufacturing process for the products in its Affinity line.
AVECOR manufactures its oxygenators, blood pump, blood reservoirs, and
ancillary products from standard raw materials, components, and custom
manufactured components presently purchased from outside suppliers. AVECOR
intends to continue to purchase these raw materials, components, and custom-
manufactured components from outside suppliers in the future. While AVECOR
believes that the raw materials, components, and custom manufactured components
used in the manufacture of its products are readily available from multiple
sources, certain of these items are purchased from single sources. Although
AVECOR has qualified, or is in the process of investigating, alternate sources
of supply for key components and materials, any significant interruption in
supply of these items could have a material adverse effect on AVECOR's ability
to manufacture its products. AVECOR has not experienced shortages or significant
delays in supply of these materials and components from its suppliers.
Governmental Regulation
AVECOR's products, development activities, and manufacturing processes
are subject to regulation by numerous governmental authorities, principally the
FDA and corresponding foreign agencies. In the United States, the FDA
administers the Federal Food, Drug and Cosmetics Act and amendments thereto,
including the Safe Medical Devices Act of 1990. AVECOR is subject to the
standards and procedures with respect to manufacture and marketing of medical
devices contained in the Federal Food, Drug and Cosmetics Act and the
regulations promulgated thereunder and is subject to inspection by the FDA for
compliance with such standards and procedures. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.
In the United States, medical devices are classified into one of three
classes (class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, class I devices are subject to general controls (e.g., labeling,
premarket notification, and adherence to good manufacturing practices) and class
II devices are subject to general and special controls (e.g., performance
<PAGE>
standards, postmarket surveillance, patient registries, and FDA guidelines ). In
general, class III devices (e.g., life-sustaining, life-supporting, and
implantable devices, or new devices that have not been found substantially
equivalent to a legally marketed device), in addition to being subject to
general and special controls, must receive premarket approval ("PMA") by the FDA
to ensure their safety and effectiveness.
Before a new or significantly modified device can be introduced into
the market, the manufacturer must generally obtain marketing clearance through a
510(k) notification or approval of a PMA application. A 510(k) clearance will be
granted if the proposed device is "substantially equivalent" to a predicate
device (i.e., a legally marketed class I or class II medical device, or a class
III medical device for which the FDA has not called for the submission of a PMA
application). Commercial distribution of a device for which a 510(k)
notification is required can begin only after the FDA issues a written
determination that the device is "substantially equivalent" to a predicate
device. The FDA may determine that a proposed device is not substantially
equivalent to a predicate device, or that additional information or data are
needed before a substantial equivalence determination can be made. A request for
additional data may require that clinical studies of the device's safety and
efficacy be performed. The process of obtaining a 510(k) clearance typically can
take several months to a year or longer.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed class I or class II device, or if
it is a class III device for which the FDA has called for a PMA application.
Certain class III devices that were on the market before May 28, 1976
("preamendments class III devices"), and devices that are substantially
equivalent to them, can be brought to market through the 510(k) process until
the FDA calls for the submission of PMA applications for preamendments class III
devices.
The process of obtaining a PMA can be expensive, uncertain, and
lengthy, frequently requiring anywhere from one to several years from the date
the PMA is submitted to the FDA, if approval is obtained at all. Moreover, a PMA
application, if granted, may include significant limitations on the indicated
uses for which a product may be marketed. FDA enforcement policy strictly limits
the marketing of approved medical devices for unapproved or "off label" uses. In
addition, product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. All of AVECOR's current products have been the subject of successful
510(k) submissions, and AVECOR believes that its products currently in
development will also be eligible for the 510(k) submission process, although
there can be no assurance that the FDA will agree with this view.
Certain of AVECOR's products are within product categories set forth in
an FDA order dated August 14, 1995, issued to all manufacturers of these
devices, which requires all of such manufacturers to submit additional data to
the FDA regarding the safety and the efficacy of the identified devices. The
products affected include AVECOR's blood oxygenators, arterial filters, and
defoamers, which, by current FDA interpretation, include both cardiotomy and
venous blood reservoirs. Each of these devices is currently classified by the
FDA as a class III medical device which, because it was viewed as substantially
equivalent to preamendments class III devices, was cleared for marketing through
the 510(k) premarket notification process. Through its August 14, 1995 order,
the FDA has requested data from AVECOR and other manufacturers of these devices
in order to make a determination as to whether these products should be
reclassified as either class I or class II medical devices. If the FDA were to
determine that such devices should remain classified as class III medical
devices, it would require manufacturers such as AVECOR to submit PMA
applications concerning such devices within 90 days after the final FDA
classification order.
AVECOR has gathered the required data for submission to the FDA, and is
working with various industry groups and the FDA to seek reclassification of
these devices. Although the FDA order requiring the submission of data on blood
oxygenators and arterial filters has characterized these devices as having a
high potential for down-classification, and AVECOR believes that the devices
will be reclassified, there can be no assurance that these devices will be
<PAGE>
reclassified. Although the FDA order requesting data on defoamers has
characterized these devices as unlikely to be reclassified, and, therefore,
likely to require PMA submission, AVECOR is currently working to seek
down-classification. AVECOR's efforts, in conjunction with those of other
manufacturers, are based on the belief that the types of blood reservoirs
currently used in heart/lung bypass circuits are significantly different from
the defoamers used with older, bubble-type oxygenators, and based on safety and
efficacy data, should be reclassified. While there can be no assurance that
these efforts will be successful, AVECOR believes that the likelihood of
reclassification of blood reservoirs is currently greater than indicated in the
FDA order. Reclassification data on all of the affected products was submitted
to the FDA for review on February 13, 1998. In the event that any of the devices
are not reclassified, AVECOR and its competitors may be required to submit a PMA
application. During the gathering and submission of data for any such PMA
application and throughout the FDA review of this information, AVECOR and its
competitors would most likely be allowed to continue marketing their products.
As discussed above, the PMA application process can be expensive, uncertain, and
lengthy, and, if required, could have a material adverse effect on AVECOR's
future business, financial condition or results of operations.
AVECOR is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties, and tax requirements. Many of the regulations applicable to AVECOR's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain of such countries require AVECOR's
products to be qualified before they can be marketed in those countries. AVECOR
relies on its independent distributors and AVECOR regulatory personnel, in
countries where AVECOR has employed direct sales personnel, to comply with the
majority of the foreign regulatory requirements. To date, AVECOR has not
experienced significant difficulty in complying with these regulations.
AVECOR is subject to periodic inspections by the FDA, which is charged
with auditing AVECOR's compliance with quality assurance systems established by
the FDA and other applicable government standards. AVECOR is also subject to
inspections by the United Kingdom's Medical Devices Directorate ("MDD") and
other European regulatory agencies. Strict regulatory action may be initiated in
response to audit deficiencies or to product performance problems. AVECOR
believes that its manufacturing and quality control procedures are in compliance
with the requirements of the FDA and MDD regulations. AVECOR's manufacturing
facilities and processes are also subject to periodic inspection and review by
BSI in conjunction with AVECOR's ISO 9001 certification. ISO certification is a
series of standards that define the basics of establishing, documenting, and
maintaining an effective production quality management system. AVECOR believes
that ISO certification creates value for AVECOR both internally, by providing an
objective criteria for measuring AVECOR's quality assurance efforts, and
externally, through customer recognition of, and demand for, products
manufactured by ISO certified manufacturers.
BSI is also the "Notified Body" that has verified that AVECOR's quality
certification procedures conform with the "essential requirements" set forth by
the MDD for the class of products produced by AVECOR. Conformity with these
essential requirements enables AVECOR to prepare a Declaration of Conformity
which supports the placement of the "CE" mark on AVECOR's products. The CE mark
enables AVECOR's products to be marketed, sold, and used throughout the European
Union (the "EU"), subject to limited "safeguard" powers of member states.
Beginning in June 1998, all of AVECOR's products (and those of its competitors)
are required to comply with the essential requirements in order to be marketed
in the EU.
<PAGE>
The financial arrangements through which AVECOR markets, sells, and
distributes its products may be subject to certain federal and state laws as
well as regulations in the United States with respect to the provision of
services or products to patients who are Medicare or Medicaid beneficiaries. The
"fraud and abuse" laws and regulations prohibit the knowing and willful offer,
payment or receipt of anything of value to induce the referral of Medicare or
Medicaid patients for services or goods. In addition, the physician
anti-referral laws prohibit the referral of Medicare or Medicaid patients for
certain "Designated Health Services" to entities in which the referring
physician has an ownership or compensation interest. Violations of these laws
and regulations may result in civil and criminal penalties, including
substantial fines and imprisonment. In a number of states, the scope of fraud
and abuse or physician anti-referral laws and regulations, or both, have been
extended to include the provision of services or products to all patients,
regardless of the source of payment, although there is variation from state to
state as to the exact provisions of such laws or regulations. In other states,
and, on a national level, several health care reform initiatives have been
proposed which would have a similar impact. AVECOR believes that its operations
and its marketing, sales, and distribution practices currently comply in all
respects with all current fraud and abuse and physician anti-referral laws and
regulations, to the extent they are applicable. Although AVECOR does not believe
that it will need to undertake any significant expense or modification to its
operations or its marketing, sales, and distribution practices to comply with
federal and state fraud and abuse and physician anti-referral regulations
currently in effect or proposed, financial arrangements between manufacturers of
medical devices and other health care providers may be subject to increasing
regulation in the future. Compliance with such regulation could adversely affect
AVECOR's marketing, sales, and distribution practices, and may affect AVECOR in
other respects not presently foreseeable, but which could have a material
adverse impact on AVECOR's business, financial condition, and results of
operations.
Third-Party Reimbursement and Cost Containment
AVECOR's products are purchased by hospitals and other users, which
then bill various third-party payors for the health care products and services
provided to the patients. These payors, which include Medicare, Medicaid,
private insurance companies, and managed care organizations, reimburse part or
all of the costs and fees associated with the procedures performed with these
devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique and, as a result, hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been, and may in the future be, reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using AVECOR's products or the eligibility (or the extent or amount
of coverage) of AVECOR's products could have a material adverse impact on
AVECOR's business, financial condition, and results of operations.
In response to the focus of national attention on rising health care
costs, a number of changes to reduce costs have been proposed or have begun to
emerge. There have been, and may continue to be, proposals by legislators and
regulators and third-party payors to curb these costs. There has also been a
<PAGE>
significant increase in the number of Americans enrolling in some form of
managed care plan, and more than 80% of hospitals participate in or have
agreements with HMOs. It has become a typical practice for hospitals to
affiliate themselves with as many managed care plans as possible. Higher managed
care penetration typically drives down the prices of health care procedures,
which in turn places pressure on medical supply prices. This causes hospitals to
implement tighter vendor selection and certification processes, by reducing the
number of vendors used, purchasing more products from fewer vendors and trading
discounts on price for guaranteed higher volumes to vendors. Hospitals have also
sought to control and reduce costs over the last decade by joining group
purchasing organizations or purchasing alliances. AVECOR cannot predict what
continuing or future impact existing or proposed legislation, regulation or such
third-party payor measures may have on its future business, financial condition
or results of operations.
Because the primary application of AVECOR's products is in coronary
bypass procedures, changes in reimbursement policies and practices of
third-party payors with respect to coronary bypass surgery could have a
substantial and material adverse impact on sales of AVECOR's heart/lung bypass
products. The development or increased use of more cost-effective treatments for
coronary artery disease could cause such payors to decrease or deny
reimbursement for coronary bypass surgery or to favor these other treatments.
Patents and Proprietary Rights
AVECOR protects its technology by filing patent applications for the
patentable technologies that it considers important to the development of its
business. AVECOR also relies upon trade secrets, know-how, and continuing
technological innovations to develop and maintain its competitive position.
AVECOR currently holds eight U.S. patents and has three pending U.S.
patent applications. In addition, AVECOR has eight pending foreign patent
applications. Four of AVECOR's present U.S. patents cover significant design
features of the Affinity oxygenator, including the Affinity oxygenator's winding
mandrel, graduated density fiber bundle, and heat exchanger water diverter.
AVECOR's other issued U.S. patents cover the designs of the Affinity venous
blood reservoirs and Affinity arterial filter. Also, AVECOR owns a patent
relating to the use of its silicone membrane for cell culture applications.
AVECOR has pending U.S. patent applications relating to additional features of
the Affinity venous blood reservoir, the Affinity arterial filter, and its
improved MYOtherm XP cardioplegia heat exchanger. AVECOR's pending foreign
patent applications consist of selected overseas filings addressing the same
intellectual property addressed by AVECOR's issued and pending U.S. patents.
The three U.S. patents acquired by AVECOR from the Predecessor Business
cover AVECOR's solid silicone membrane oxygenator product line and have expired.
AVECOR believes that the market for solid silicone membrane oxygenators might
not be large enough to justify the expenses associated with market entry by a
competitor, and therefore, the effect of the expiration of these patents on the
revenues of AVECOR will not be material.
AVECOR, like other firms that engage in the development and marketing
of medical technology products, must address issues and risks relating to
patents and trade secrets. There can be no assurance that any of AVECOR's
pending or future U.S. or foreign patent applications will result in issued
patents, that any current or future U.S. or foreign patents of AVECOR will not
be challenged or circumvented by competitors or others, or that such patents
will be found to be valid or sufficiently broad to protect AVECOR's technology
or provide AVECOR with its desired competitive advantage. The validity and
breadth of claims covered in medical technology patents involve complex legal
and factual questions and therefore may be highly uncertain. AVECOR may be
required to institute litigation to enforce patents issued to AVECOR or to
determine the enforceability, scope, and validity of the proprietary rights of
others.
<PAGE>
AVECOR also relies on trade secrets and proprietary know-how that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that AVECOR will have adequate remedies for any breach, or
that AVECOR's trade secrets will not otherwise become known to or independently
developed by competitors.
Claims by competitors and other third parties that AVECOR's products
allegedly infringe the patent rights of others could have a material adverse
effect on AVECOR. The medical device industry is characterized by frequent and
substantial intellectual property litigation. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict.
In March 1997, AVECOR filed a suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
Minntech Corporation ("Minntech"), a competing manufacturer of blood oxygenators
and other medical devices, and requesting a determination that AVECOR's Affinity
oxygenator does not infringe the Minntech patent. AVECOR filed the suit in
response to a December 1996 letter from Minntech, alleging that the Affinity
oxygenator infringes certain claims under Minntech's patent, and requesting
discussion regarding a possible license agreement. On October 6, 1997, the
Magistrate Judge of the United States District Court vacated a previous order
and granted a stay in the proceedings, including the suspension of discovery,
pending the outcome of Minntech's request for re-issuance of the aforementioned
patent.
AVECOR's action against Minntech and any future litigation, regardless
of outcome, could result in substantial expense to AVECOR and significant
diversion of the efforts of AVECOR's technical and management personnel. In
addition, if Minntech were successfully to bring an infringement counterclaim
against AVECOR, or if AVECOR were to be subject to an adverse determination in
any other legal proceeding in the future alleging patent infringement, AVECOR
could become subject to an injunction preventing the manufacture and sale of the
infringing products and to monetary damages, or might be forced to seek a
license from the party alleging patent infringement in order to continue to
manufacture and sell any infringing products, which it might not be able to
obtain. The outcome of any such legal action, including the possibility of
entering into such a license, could have a material adverse effect on AVECOR's
business, financial condition, and results of operations.
Pursuant to an Asset Purchase Agreement dated June 7, 1991 ("Asset
Purchase Agreement"), for approximately $1 million in cash and a $2.5 million
note, AVECOR acquired the business and assets, and assumed certain liabilities,
of the Predecessor Business. In addition, under the terms of a Royalty Agreement
also dated June 7, 1991 ("Royalty Agreement"), AVECOR is obligated to pay to
SCIMED Life Systems, Inc. ("SCIMED") specified royalties based on a percentage
of net sales (as defined) of products previously manufactured by the Predecessor
Business and future products developed from then-existing technology if AVECOR
achieves certain net sales thresholds with those products. The Royalty Agreement
also provides for royalty payments on certain new generations of developed
products, if any, that use certain technology embodied in the then-existing
models of such products. In June 1996, the Royalty Agreement expired with
respect to products previously manufactured by the Predecessor Business and
expires with respect to current products under development at the time of the
acquisition and certain new generation products in June 2001. AVECOR has charged
$95,000 in 1996 and $178,000 in 1995 to operations for royalties due under the
Royalty Agreement for sales of products previously manufactured by the
Predecessor Business. No related royalty amounts accrued in 1997. AVECOR
believes that none of the products in the Affinity line nor any of AVECOR's
products currently under development (including the products with the Trillium
coating applied) will require royalty payments under the Royalty Agreement.
<PAGE>
In connection with the Asset Purchase Agreement, SCIMED also assigned
to AVECOR 10 trademarks (one of which is registered) related to AVECOR's current
line of products previously manufactured by the Predecessor Business.
AVECOR also entered into a royalty agreement in connection with
AVECOR's acquisition of an exclusive license to market the Affinity blood pump.
The agreement requires AVECOR to make payments based on net sales of the pump
chamber (the disposable portion of the Affinity blood pump system) and net
profits of the pump console (the equipment portion of the Affinity blood pump
system) through August 2002. The term of the agreement may be extended by AVECOR
until the expiration of the last to expire of the patents covered by this
agreement or the useful life of the know-how (as defined) licensed, whichever is
longer. Under the terms of the agreement, AVECOR is required to pay minimum
royalties each year. AVECOR incurred royalties of $55,000 for the year ended
December 31, 1997, which amount exceeded the minimum royalty related to the
first year of the royalty agreement.
AVECOR also has use of an exclusive license allowing it to apply its
Trillium bio-passive surface to its products. The agreement requires AVECOR to
make quarterly payments based on a percentage of net sales of products utilizing
the bio-passive surface. AVECOR can retain exclusivity of the license if it pays
minimum annual royalties. AVECOR incurred royalties of $35,000 for the year
ended December 31, 1997 under this agreement.
Employees
As of December 31, 1997, AVECOR employed 339 persons full-time
including 29 in research and development, 223 in manufacturing, 53 in sales and
marketing, and 34 in general and administrative functions. AVECOR's employees
are not represented by a union, and AVECOR considers its relationship with its
employees to be good.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF AVECOR
(In thousands, except per share data)
The selected consolidated financial data as of and for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 of AVECOR has been derived from
financial statements of AVECOR audited by PricewaterhouseCoopers LLP,
independent accountants, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
AVECOR" included elsewhere in this Proxy Statement/Prospectus.
The selected unaudited consolidated financial data presented below as
of and for the six-month periods ended June 30, 1997 and 1998 have been prepared
by AVECOR and are derived from the unaudited consolidated financial statements
of AVECOR included and incorporated by reference in this Proxy
Statement/Prospectus. In the opinion of AVECOR's management, the unaudited
interim consolidated financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
consolidated operating results and financial position of AVECOR as of and for
the unaudited periods described above. The results of operations for AVECOR for
the six-month period ended June 30, 1998 are not necessarily indicative of the
results of operations that may be expected for the entire fiscal year ending
December 31, 1998.
<TABLE>
<CAPTION>
Six months ended
June 30 Years ended December 31
---------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- ------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales............................ $26,021 $24,004 $46,864 $44,401 $33,340 $21,486 $14,125
Cost of sales........................ 15,437 13,960 27,574 25,986 18,180 12,556 9,067
-------- -------- ------- -------- -------- ------- --------
Gross profit...................... 10,584 10,044 19,290 18,415 15,160 8,930 5,058
Operating Expenses:
Selling, general and administrative 7,883 6,832 13,428 11,885 8,727 6,779 5,044
Litigation expense................ ---- ---- ---- 4,205 170 ---- ----
Research and development.......... 1,726 2,076 3,902 3,651 2,773 2,309 1,891
-------- -------- ------- -------- -------- ------- --------
Operating income (loss)........ 975 1,136 1,960 (1,326) 3,490 (158) (1,877)
Interest income...................... 164 273 495 725 586 143 204
Interest expense..................... 199 176 383 ---- ---- ---- ----
-------- -------- ------- -------- -------- ------- --------
Income (loss) before income taxes.... 940 1,233 2,072 (601) 4,076 (15) (1,673)
Income tax provision (benefit)....... 310 443 745 (34) 780 24 (23)
-------- -------- ------- -------- -------- ------- --------
Net income (loss).................... $ 630 $ 790 $ 1,327 $ (567) $ 3,296 $ (39) $ (1,650)
======== ========= ======== ======== ======= ======== =========
Diluted earnings (loss) per share.... $.08 $.10 $.17 $(.07) $.45 $(.01) $(.26)
========= ========= ======== ======== ======= ======== =========
Weighted average common and common ..
equivalent shares outstanding(1)........ 8,029 7,979 7,990 7,767 7,353 6,390 6,361
========= ========= ======== ======== ======= ======== =========
Balance Sheet Data:
Working capital...................... $19,974 $19,776 $20,204 $20,563 $26,247 $10,150 $ 9,725
Total assets......................... 46,049 44,363 42,759 37,161 33,519 15,877 15,031
Long-term debt....................... 4,632 4,823 4,694 ---- ---- ---- ----
Shareholders' equity................. $33,445 31,350 32,618 29,938 29,322 13,145 12,970
</TABLE>
(1) Weighted average common and common equivalent shares outstanding are
calculated according to the definitions of "diluted earnings per share" as
defined by the Financial Accounting Standards Board (FASB) in Statement on
Financial Accounting Standards No. 128, "Earnings per Share." All periods
presented were prepared under this standard for computing earnings per share.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AVECOR
The following is a discussion of the results of operations and
financial condition of AVECOR and should be read in conjunction with AVECOR's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Proxy Statement/Prospectus. The discussion set forth below reflects management's
discussion of historical results and trends in the business, financial
condition, and results of operations of AVECOR for periods prior to the public
announcement of the Merger. There can be no assurance that AVECOR's business,
financial condition, and results of operations will not be adversely impacted as
a result of the announcement of the Merger and, in particular, the effect of the
announcement on AVECOR's ability to sell its products through its distributors
and sales representatives.
Results of Operations
Comparison of the Six Months Ended June 30, 1998 with the Six Months Ended June
30, 1997
Net Sales. Net sales increased 8% to $26,021,000 for the six months
ended June 30, 1998 from $24,004,000 for the six months ended June 30, 1997.
This increase was primarily the result of a higher volume of product shipments
of AVECOR's Signature custom tubing pack line, Affinity line and the MYOtherm
cardioplegia line. AVECOR received FDA marketing approval for its new Affinity
blood pump system in August 1997 and the MYOtherm XP cardioplegia delivery
system in July 1997. These products positively influenced the comparative sales
growth. Overall, average prices of product shipments declined slightly when
compared to the corresponding period in 1997, principally due to competitive
pressures.
Sales from the Signature custom tubing pack, Affinity and MYOtherm
cardioplegia lines increased approximately $789,000 (16.5%), $784,000 (5.8%) and
$269,000 (13.8%), respectively, during the six months ended June 30, 1998 as
compared to the corresponding period in 1997.
During the third quarter of 1997, AVECOR terminated agreements with its
last remaining United States distributor and its only Canadian distributor.
These markets are now being served by AVECOR's direct sales force. Sales in the
territories formerly represented by these distributors increased approximately
$1,200,000 in the six month period ended June 30, 1998 as compared to the
corresponding period in 1997. AVECOR cannot be certain whether revenues in these
territories will be maintained, improve or decline.
Sales to customers located outside of the United States were
approximately 40% and 41% of net sales for the six month periods ended June 30,
1998 and 1997, respectively. Sales to customers located outside of the United
States could be adversely impacted in future periods as a result of the
announcement of the Merger and the effect of that announcement on AVECOR's
relationships with its distributors and sales representatives.
AVECOR has continued to experience decreased sales to contract
perfusion groups controlled by certain of its competitors. Sales to contract
perfusion groups controlled by one of AVECOR's competitors decreased $458,000 to
$258,000 for the six months ended June 30, 1998 from $716,000 for the six months
ended June 30, 1997. AVECOR believes that control of contract perfusion groups
by its competitors will continue to have a negative impact on AVECOR's ability
to market its products to such groups or to hospitals or other medical providers
<PAGE>
that contract with competitor-controlled groups for perfusion services, and
could have a material adverse effect on AVECOR's business, financial condition
and results of operation. This forward-looking statement is subject to the
degree of control exerted by AVECOR's competitors with respect to purchasing
decisions made by controlled groups of perfusionists, the extent of future
acquisitions of contract perfusion groups by AVECOR's competitors, the breadth
of AVECOR's product offerings relative to those competitors controlling contract
perfusion groups, and the degree to which AVECOR's research and development and
marketing efforts result in the successful commercialization of products with
enhanced or superior performance characteristics.
Cost of Sales/Gross Profit. Gross profit as a percentage of net sales
decreased 1.1% to 40.7% for the six months ended June 30, 1998 from 41.8% for
the six months ended June 30, 1997. The gross profit percentage for the
six-month period ended June 30, 1998 was unfavorably impacted by significant
increases in sales of AVECOR's lower-margin Signature custom tubing pack line as
well as competitive pricing pressures in the marketplace. The mix of products
sold in any period will influence the cost of sales and gross profit for the
period. Gross margins during the six months ended June 30, 1998 were also
negatively impacted by lower production volumes experienced late in the fourth
quarter of 1997 which continued into the first quarter of 1998.
Affinity oxygenator product costs continued to decline due to
efficiency and material cost improvements, although these improvements were
largely offset by an ongoing decrease in average selling prices.
AVECOR's future gross profit margin percentages will be influenced by
the ongoing pressures of the competitive pricing environment, changes in the
sales mix, the required levels of production, new product introductions and the
extent of further product cost improvements through increased manufacturing
efficiencies and reduced material costs, if any. Given the uncertainty
associated with new product introductions, the ultimate realization of any such
product cost improvements and the continuing price pressures characteristic of
AVECOR's markets, AVECOR cannot be certain if its gross profit margin will be
maintained, improve or decline.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 15% to $7,883,000 for the six months ended
June 30, 1998 from $6,832,000 for the six months ended June 30, 1997. This
increase is primarily attributed to costs associated with the continuing
development of a direct sales force in certain of AVECOR's territories formerly
served by distributors and independent sales representatives, marketing costs
incurred for the introduction of new products, including the Affinity blood
pump, and increased seasonal trade show costs. Various costs associated with the
acquisition of AVECOR also contributed to the incremental increase in selling,
general and administrative expenses during the six-month period ended June 30,
1998 as compared to the corresponding period in 1997. As a percent of sales,
selling, general and administrative expenses increased to 30.3% for the
six-month period ended June 30, 1998 from 28.5% for the six-month period ended
June 30, 1997.
Without considering the impact of the acquisition of AVECOR, management
anticipates that selling, general and administrative expenses for 1998 will be
higher than 1997 and will approximate 1997 levels as a percentage of sales.
These forward-looking statements will be influenced by revenue increases
achieved by AVECOR, its ability to attract and retain qualified sales personnel
as AVECOR continues to develop its direct sales force, and the timing and extent
of promotional activities associated with the Affinity oxygenator with Trillium
bio-passive surface, the new oxygen saturation/hematocrit monitor and other new
product introductions, if any.
<PAGE>
Research and Development Expenses. Research and development expenses
decreased 17% to $1,726,000 for the six months ended June 30, 1998 from
$2,076,000 for the six month period ended June 30, 1997. This decreased spending
is a result of the transition from the completion or near completion of major
projects including the Affinity blood pump, MYOtherm XP and the Affinity
oxygenator with Trillium bio-passive surface to a new generation of products
including the new oxygen saturation/hematocrit monitor.
Without considering the impact of the acquisition of AVECOR, management
anticipates that research and development expenses for 1998 will approximate
1997 levels, as AVECOR continues to expand and improve its proprietary line of
disposable medical devices. This forward-looking projection is dependent upon
the extent and timing of new product development and the impact of the
regulatory process in obtaining marketing clearance for new products, including
the new oxygen saturation/hematocrit device which was submitted for approval to
the FDA near the end of the second quarter of 1998, and the extent of expenses
related to research studies commenced in an attempt to prove the clinical
efficacy and, thus, market advantage of the Trillium coating. The need or desire
to modify AVECOR's existing products could also influence the level of research
and development expenses. There can be no assurance, however, that AVECOR's
research and development efforts will result in any additional regulatory
submissions to the FDA or will result in any commercially successful products.
The forward-looking statements regarding anticipated regulatory submissions
contained in this paragraph will be impacted by the results of AVECOR's
development efforts, the availability of any required clinical data, any changes
in the regulatory scheme for such products, and AVECOR's assessment of the cost
and anticipated benefit of such submissions.
Interest Income and Expense. Interest income decreased to $164,000 for
the six months ended June 30, 1998 from $273,000 for the six months ended June
30, 1997. This decrease in interest income is primarily due to the use of cash
and cash equivalents and investments for the purchase of manufacturing molds and
equipment and additional inventories needed to support AVECOR's new products and
revenue growth. At June 30, 1998, the majority of AVECOR's cash and cash
equivalents was invested with two investment portfolio managers who invested in
bank certificates of deposit, U.S. government securities, agency paper, money
markets, commercial paper, and corporate obligations.
Interest expense for the six-month period ended June 30, 1998 was
$199,000 compared to $176,000 for the six-month period ended June 30, 1997. The
interest expense was exclusively due to the mortgage on AVECOR's U.S. facility.
The closing on the facility purchase occurred in late January 1997.
Income Tax Provision. For the six-month period ended June 30, 1998, a
tax provision of $310,000 was recorded compared to $443,000 for the six-month
period ended June 30, 1997. The tax provisions recorded correspond to the pretax
income for those respective periods. These provisions vary from the statutory
U.S. federal corporate rate primarily due to losses incurred by AVECOR's French
subsidiary for which no tax benefit has been recognized because of uncertainty
of realization, partially offset by the generation of research and
experimentation credits.
Net Income. Net income was $630,000 or $.08 per share, on a diluted
basis, for the six-month period ended June 30, 1998, compared to $790,000 or
$.10 per share, on a diluted basis, for the six- month period ended June 30,
1997.
<PAGE>
Comparison of the Year Ended December 31, 1997 with the Year Ended December 31,
1996
Net sales. Net sales increased 6% to $46,864,000 for 1997 from
$44,401,000 for 1996. This increase was principally the result of a higher
volume of product shipments of AVECOR's Signature custom tubing packs and
Affinity product line. Overall, average prices of product shipments declined
slightly when compared to 1996.
Signature custom tubing pack and the Affinity product line net sales
increased $2,401,000 and $697,000 from 1996, respectively. A significant portion
of the Affinity revenue increase was attributed to the Affinity blood pump which
AVECOR began marketing internationally in June 1997. AVECOR received FDA
marketing approval for this product in August 1997. These increases were
partially offset by decreases in the silicone membrane oxygenator line which
decreased by $436,000 and the MYOtherm cardioplegia line which decreased by
$339,000. Management believed the decline in net sales of the MYOtherm
cardioplegia line was temporary as customers delayed their purchasing decisions
in anticipation of AVECOR's launch of its new version of the MYOtherm
cardioplegia system (MYOtherm XP). As noted above, the MYOtherm XP cardioplegia
system received marketing clearance from the FDA in July 1997 and was launched
both in the United States and internationally in early 1998.
Sales to customers located outside of the United States were
approximately 41% of consolidated net sales for 1997 and 1996.
During the third quarter of 1997, AVECOR terminated agreements with its
last remaining United States distributor and its only Canadian distributor.
Sales in the territories formerly represented by these distributors decreased
approximately $1,400,000 in 1997 when compared to 1996. These markets are now
being served by AVECOR's direct sales force. Management's belief that these
revenue declines were temporary and caused by the transition to a direct sales
force in these territories and the depletion of product inventories of the
former distributors is supported by the previously mentioned $1,200,000 increase
in sales in these territories for the six-month period ended June 30, 1998
compared to the same period in 1997.
Although revenues from distributors in the continental European
countries and Asia increased about $800,000 during the twelve months ended
December 31, 1997 when compared to the corresponding period in 1996, these
distributors' sales for the six-month period ended December 31, 1997 decreased
approximately $690,000 when compared to the six-month period ended December 31,
1996 and decreased about $983,000 when compared to the six-month period ended
June 30, 1997. During the latter half of 1997, currencies in Europe and Asia
substantially weakened relative to the U.S. dollar and the U.K. pound sterling.
AVECOR believes that these types of fluctuations in currency exchange rates
reduce demand for AVECOR's products by increasing the price of AVECOR's products
in the currency of the countries in which the product is sold.
Sales to AVECOR's formerly exclusive Mexican distributor declined about
$340,000 in 1997 when compared to 1996. On October 9, 1997, AVECOR entered into
an agreement with St. Jude Medical to distribute AVECOR's products in Mexico and
in Central and South America. Previous sales in these countries were not
significant to AVECOR. The formerly exclusive Mexican distributor continues to
market AVECOR's silicone membrane product line in Mexico.
The aforementioned factors impacted sales within all of AVECOR's
product lines. The revenue declines discussed above were exceeded by revenue
growth in AVECOR's other domestic and foreign markets.
<PAGE>
Sales to contract perfusion groups controlled by one of AVECOR's
competitors decreased $750,000 to $1,100,000 for 1997 from $1,850,000 for 1996.
Cost of Sales/Gross Profit. Gross profit as a percentage of net sales
decreased to 41.2% for 1997 from 41.5% for 1996. The cost of sales percentage
for 1997 was unfavorably impacted by significant increases in sales of AVECOR's
lower-margin Signature custom tubing pack line, as well as competitive pricing
pressures in the marketplace. The mix of products sold in any period will
influence the cost of sales and gross profit for the period.
Affinity oxygenator costs continued to improve due to material cost and
efficiency improvements, although these improvements were largely offset by an
ongoing decrease in average selling prices and reduced production volume,
primarily in the fourth quarter, due to lower-than-expected sales volume.
Selling, General and Administrative, and Litigation Expense. Selling,
general and administrative expenses increased 13% to $13,428,000 for 1997 from
$11,885,000 for 1996. This increase is primarily attributed to costs associated
with the continuing development of a direct sales force in certain of AVECOR's
territories formerly served by distributors and independent sales
representatives and costs incurred for the introduction of new products,
including the Affinity blood pump. As a percent of sales, selling, general and
administrative expenses increased to 28.7% for 1997 from 26.8% for 1996.
On July 17, 1996, AVECOR reached an agreement with COBE Laboratories
Inc. (COBE) to settle COBE's patent suit against AVECOR. The terms of the
settlement with COBE provided for AVECOR to make net payments totaling
$2,200,000. Two net payments of $1,100,000 were made in August 1996 and August
1997, respectively. AVECOR recorded settlement costs and professional expenses
of approximately $4,205,000 in 1996 in connection with the COBE suit. No related
expenses were incurred for the COBE matter in 1997.
Research and Development Expenses. Research and development expenses
increased 7% to $3,902,000 for 1997 from $3,651,000 for 1996. This increased
research and development spending is a result of AVECOR's ongoing efforts to
pursue a number of potential and realized product opportunities including the
MYOtherm XP, Affinity blood pump, the Affinity oxygenator with Trillium
bio-passive surface and new oxygen saturation/hematocrit technology. AVECOR
received the appropriate marketing clearances from the FDA for the MYOtherm XP,
Affinity blood pump and Affinity oxygenator with Trillium bio-passive surface in
July 1997, August 1997 and February 1998, respectively.
Interest. Interest income decreased to $495,000 for 1997 from $725,000
for 1996. This decrease in interest income is primarily due to the use of cash
and cash equivalents and investments for AVECOR's new facility, the purchase of
manufacturing molds and equipment, additional inventories needed to support
AVECOR's new product lines and revenue growth, and the costs associated with the
COBE matter. Interest income during 1997 and 1996 was earned primarily from the
investment of the remaining net proceeds from AVECOR's June 1995 stock offering.
At December 31, 1997, the majority of these remaining net proceeds were invested
with two investment portfolio managers who invested in U.S. government
securities, agency paper, money markets, commercial paper and corporate
obligations.
Interest expense for 1997 was $383,000 and exclusively due to the
mortgage on the new facility. The closing on the facility purchase occurred in
late January 1997.
<PAGE>
Income Tax Provision. For 1997, a tax provision of $745,000 was
recorded as compared to a tax benefit of $34,000 for 1996. The 1997 and 1996
effective tax rates differ from the normal U.S. statutory tax rate primarily due
to losses incurred by AVECOR's French subsidiary for which no tax benefit has
been recognized because of uncertainty of realization partially offset by the
generation of research and experimentation credits.
Net Income (Loss). Net income was $1,327,000 or $.17 per share, on a
diluted basis, for 1997 compared to net loss of $567,000 or $.07 per share, on a
diluted basis, for 1996. The 1996 loss is primarily due to litigation and
settlement expense incurred during 1996 in connection with the COBE lawsuit,
which resulted in a charge to operations of $4,205,000.
Comparison of the Year Ended December 31, 1996 with the Year Ended December 31,
1995
Net sales. Net sales increased 33% to $44,401,000 for 1996 from
$33,340,000 for 1995. This increase was principally the result of a higher
volume of product shipments of AVECOR's Affinity product line and Signature
custom tubing packs. Overall, average prices associated with 1996 product
shipments declined slightly from those of 1995 in response to competitive
pricing in the marketplace. Selective price increases were implemented in the
last half of 1996.
Sales from the Affinity product line and Signature custom tubing packs
increased $7,159,000 and $3,943,000 from 1995, respectively. The favorable
impact of increased net sales of these product lines was partially offset by a
decrease of $276,000 in net sales of AVECOR's older solid silicone membrane
oxygenator product line.
Cost of Sales / Gross Profit. Gross profit as a percentage of net sales
decreased to 41.5% for 1996 from 45.5% for 1995. The cost of sales percentage
for 1996 was unfavorably impacted by significant increases in sales of AVECOR's
lower-margin Signature custom tubing pack line, as well as competitive pricing
pressures in the marketplace.
Higher production volumes continued to improve Affinity oxygenator
product costs, although these improvements were offset, primarily by an ongoing
decrease in average selling prices due to AVECOR being in a competitive pricing
environment. Also, optimal volume-related manufacturing efficiencies were not
achieved throughout 1996 for production of AVECOR's Affinity arterial filter.
Production of the Affinity arterial filter began on or about December 31, 1995.
Selling, General and Administrative and Litigation Expense. Selling,
general and administrative expenses increased 36% to $11,885,000 for 1996 from
$8,727,000 for 1995. This increase is attributed to costs associated with the
development of a direct sales force in certain of AVECOR's territories formerly
served by distributors and independent sales representatives and the overall
increase in support needed to achieve AVECOR's sales levels. In connection with
AVECOR's development of a direct sales force, in October 1995, AVECOR opened a
sales office in France from which it fields a direct sales force to serve the
French market. AVECOR recorded non-recurring charges in the fourth quarter of
1996 associated with relocation and lease abandonment expenses in connection
with the consolidation of AVECOR's U.S. operations from four leased facilities
into one owned property and the addition and subsequent resignation of a Chief
Operating Officer.
Additionally, AVECOR recorded settlement costs and professional fees of
$4,205,000 in 1996, in connection with the COBE suit, compared to $170,000 in
1995.
<PAGE>
Research and Development Expenses. Research and development expenses
increased 32% to $3,651,000 for 1996 from $2,773,000 for 1995. This increased
research and development spending was a result of AVECOR's efforts to pursue a
number of potential product opportunities, including the Affinity blood pump.
Interest Income. Interest income increased to $725,000 for 1996 from
$586,000 for 1995. Interest income during 1996 and 1995 was earned primarily
from the investment of the remaining net proceeds from AVECOR's June 1995 stock
offering. At December 31, 1996, the majority of these remaining net proceeds was
invested with two investment portfolio managers who invested in U.S. government
securities, agency paper, money markets, commercial paper, and corporate
obligations.
Income Tax Provision. For 1996, a tax benefit of $34,000 was recorded
as compared to a tax provision of $780,000 for 1995. The 1996 effective tax rate
differs from the normal statutory tax rate primarily due to losses incurred by
AVECOR's French subsidiary for which no tax benefit has been recognized because
of uncertainty of realization partially offset by the generation of research and
experimentation credits. The 1995 tax provision reflects an effective rate which
benefited from use of previously generated net operating loss carryforwards and
research and experimentation credits.
Net Income (Loss). Net loss was $567,000 or $.07 per share, on a
diluted basis, for 1996 compared to net income of $3,296,000 or $.45 per share,
on a diluted basis, for 1995. The 1996 loss was primarily due to litigation and
settlement expense incurred during 1996 in connection with the COBE lawsuit,
which resulted in a charge to operations of $4,205,000.
Liquidity and Capital Resources
For the six months ended June 30, 1998, AVECOR's operating activities
provided net cash of $2,848,000 compared to $479,000 provided by operating
activities for the same period in 1997. Net income after adjustments for
depreciation and amortization was $294,000 greater in the six months ended June
30, 1998 as compared to the same period in 1997. The net change of approximately
$2,369,000 is primarily the result of increased accounts payable balances
principally due to the timing of check runs and increased accrued expenses, and
smaller increases in inventories and accounts receivable when compared to the
six months ended June 30, 1997. These net sources of cash were partially offset
by the use of cash for increased other current assets during the six months
ended June 30, 1998.
During 1997, AVECOR used $891,000 in operating activities compared to
$2,470,000 used for operating activities in 1996. The net change of $1,579,000
is primarily the result of $3,100,000 of cash usages during 1996 related to the
COBE litigation compared to $1,100,000 of cash usages during 1997, smaller
increases in levels of inventories and reduced prepaid expenses. These operating
provisions for cash were partially offset by a smaller increase in accrued
expenses in 1997 when compared to 1996, reduced accounts payable and increased
accounts receivable balances in 1997 when compared to 1996. AVECOR's inventories
continued to increase as a result of inventories needed to support AVECOR's new
product lines, revenue growth and, in part, as a result of lower than
anticipated shipments of the Affinity product line primarily in the third and
fourth quarters of 1997.
AVECOR believes that its existing cash and cash equivalents and
investments as well as anticipated cash generated from operations will be
sufficient to satisfy AVECOR's cash requirements for the foreseeable future.
<PAGE>
Cash expenditures for capital additions totaled $2,090,000 for the six
months ended June 30, 1998 compared to $1,911,000 for six months ended June 30,
1997 when excluding the 1997 cash expenditures for AVECOR's U.S. facility and
related furniture, fixtures and equipment. These expenditures were primarily
related to equipment, molds and tooling necessary to further production,
increase production efficiencies, improve quality and reduce raw material costs
of the Affinity blood pump, MYOtherm XP and the Affinity oxygenator and related
blood reservoirs. The investment in equipment for the six months ended June 30,
1998 includes $300,000 related to the Affinity blood pump. This pump equipment
is placed with customers in exchange for a long-term commitment to purchase
disposable products from AVECOR.
For 1997, cash expenditures for capital additions, other than the
purchase of the new facility and related furniture, fixtures and equipment,
totaled $4,628,000 compared to $1,979,000 in 1996. These expenditures were
primarily related to equipment, molds and tooling necessary to begin the
production and marketing of the Affinity blood pump and MYOtherm XP, and to also
increase production efficiencies and reduce raw material costs of the Affinity
oxygenator and related blood reservoirs. The investment in equipment for 1997
included $1,494,000 related to the Affinity blood pump. This pump equipment is
placed with customers in exchange for a long-term commitment to purchase
disposable products from AVECOR. During 1997, the expenditures for furniture,
fixtures and equipment additions related to AVECOR's new U.S. manufacturing,
research and development and administrative facility were approximately
$760,000.
Leases for AVECOR's U.S. manufacturing, research and development, and
administrative facilities expired on December 31, 1996. In January 1997, AVECOR
consolidated its four separate facilities into a newly constructed facility,
which AVECOR has purchased. The cost of this facility was approximately
$8,600,000, plus approximately $1,050,000 for the purchase of furniture,
fixtures and manufacturing equipment for the facility. To finance the $9,650,000
total cost of the project, AVECOR entered into a $5,167,000 bank note payable
agreement in January 1997 and, in addition, paid $4,483,000 out of corporate
funds. Closing occurred on January 30, 1997.
The note payable agreement bears interest at 8.11% and requires monthly
principal payments of $21,531, plus interest, through January 2002 with the
remaining principal and interest due February 2002. The note payable is
collateralized by the new corporate headquarters and manufacturing facility and,
among other things, requires AVECOR to maintain certain ratios related to
leverage, debt service and cash flow. As of June 30, 1998 AVECOR was in
compliance with the ratios required by the note payable. Additionally, the bank
note payable agreement prohibits AVECOR from distributing dividends to its
shareholders.
At June 30, 1998, AVECOR had no restricted cash or investments. Of the
$4,450,000 which was restricted at December 31, 1996 for purchase of the new
facility, $1,000,000 was used in payment of the facility and $3,450,000 became
unrestricted, was reinvested and is being used for general corporate purposes,
research and development and working capital.
Without considering the impact of the Merger, AVECOR's capital
expenditures for 1998 are expected to be approximately $4,000,000. This estimate
includes additional equipment, molds and tooling for the new oxygen
saturation/hematocrit device, Affinity blood pump, MYOtherm XP, and for
furthering production and related efficiencies of the Affinity oxygenator line.
The foregoing forward-looking statements relating to the amount of
capital expenditures and ultimate cash usage are dependent on the progress of
AVECOR's product development efforts, the outcome of certain patent matters, the
timing of the receipt of FDA marketing clearances for any future products and
the investment made in opportunities to further existing products' production
related to production efficiencies and quality, and reduced cost.
<PAGE>
Foreign Currency Transactions
Transactions by AVECOR's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling, and
U.S. dollars. Accordingly, AVECOR is currently subject to risks associated with
fluctuations in exchange rates between the various currencies.
Substantially all of AVECOR's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in other
countries may therefore reduce the demand for AVECOR's products by increasing
the price of AVECOR's products in the currency of the countries in which the
products are sold.
Year 2000 Issues
Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The
so-called "Year 2000" problem or "millennium bug" is the inability of computer
software or hardware to recognize or properly process dates ending in or after
"00." As the year 2000 approaches, significant attention is being focused on
updating or replacing such software and hardware in order to avoid system
failures, miscalculations or business interruptions that might otherwise result.
AVECOR has reviewed its internal information systems and believes that
the costs and effort to address the Year 2000 problem will not be material to
its business, financial condition or results of operations, and, to the extent
necessary, may be resolved through replacement and upgrades to the software it
licenses from third parties. AVECOR has also reviewed its OnCourse software
product, the software embedded in its Affinity blood pump console and the
software for its saturation/hematocrit monitor under development and believes
them to be Year 2000 compliant. However, the Year 2000 problem may also
adversely impact AVECOR by affecting the business and operations of parties with
which AVECOR transacts business. AVECOR expects to initiate formal communication
with such parties regarding the Year 2000 problem later in 1998. There can be no
assurance that AVECOR will be able to effectively address Year 2000 issues
internally in a cost-efficient manner and without interruption to its business,
or that Year 2000 difficulties encountered by its suppliers, customers or other
parties will not have a material impact on AVECOR's business, financial
condition and results of operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," a new standard of reporting information
about operating or business segments in financial statements. The new standard
will be effective for AVECOR's annual financial statements in 1998. Although
AVECOR has not specifically evaluated what impact, if any, this new standard
will have on AVECOR's current reporting of operating and business segments,
AVECOR believes it will continue reporting as one operating and business
segment.
<PAGE>
Quarterly Operating Data
The following table sets forth certain unaudited operating data of
AVECOR for the first two quarters in 1998 and each of the four quarters in 1997
and 1996. In the opinion of AVECOR's management, the data include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the information set forth therein.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Net sales............................................ $12,456 $13,565 - -
Gross profit......................................... 4,982 5,602 - -
Net income........................................... 220 410 - -
Diluted earnings per share........................... $.03 $.05 - -
1997
Net sales........................................... $12,043 $11,961 $11,273 $11,587
Gross profit......................................... 4,983 5,061 4,785 4,461
Net income.......................................... 387 403 365 172
Diluted earnings per share........................... $.05 $.05 $.05 $.02
1996
Net sales........................................... $10,293 $11,145 $11,315 $11,648
Gross profit......................................... 4,342 4,702 4,534 4,837
Net income (loss).................................... 211 (1,876) 628 470
Diluted earnings (loss) per share.................... $.03 $(.24) $.08 $.06
</TABLE>
The summation of quarterly diluted earnings (loss) per share may not
equate to the calculation for the year, as quarterly calculations are prepared
on a discrete basis. All earnings per share calculations are presented per the
definition of "diluted earnings per share" from FASB Statement No. 128.
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
BETWEEN AVECOR AND MEDTRONIC
Stock Option Agreement. AVECOR and Medtronic are parties to a Stock
Option Agreement dated July 12, 1998, pursuant to which AVECOR has granted to
Medtronic an option, exercisable under certain specified circumstances, to
purchase 19.9% of the AVECOR Common Stock. See "The Merger--Stock Option
Agreement."
LEGAL MATTERS
The validity of the Medtronic Common Stock to be issued in connection
with the Merger will be passed upon for Medtronic by Fredrikson & Byron, P.A.,
Minneapolis, Minnesota. Members of such firm own, in the aggregate,
approximately 86,400 shares of Medtronic Common Stock.
Certain legal matters for AVECOR, including the federal income tax
consequences in connection with the Merger, were passed upon by Oppenheimer
Wolff & Donnelly LLP, Minneapolis, Minnesota. Members of such firm own, in the
aggregate, approximately 46,235 shares of Medtronic Common Stock.
EXPERTS
The consolidated financial statements incorporated in this Proxy
Statement/Prospectus by reference to the Annual Report on Form 10-K of
Medtronic, Inc. for the year ended April 30, 1998 have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated balance sheets as of December 31, 1997 and 1996 and
the consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997 of
AVECOR Cardiovascular Inc. included or incorporated by reference herein have
been included or incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
AVECOR Cardiovascular Inc.
Audited Financial Statements and Related Notes
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 .............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995........................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995 .............................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 .......................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Unaudited Financial Statements and Related Notes
Consolidated Balance Sheet as of June 30, 1998............................. F-21
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997, and the six months ended
June 30, 1998 and 1997..................................................... F-22
Consolidated Statements of Cash Flow for the six months ended
June 30, 1998 and 1997..................................................... F-23
Notes to Consolidated Financial Statements................................. F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
AVECOR Cardiovascular Inc.:
We have audited the accompanying consolidated balance sheets of AVECOR
Cardiovascular Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AVECOR
Cardiovascular Inc. as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 16, 1998
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS as of December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $1,215 $6,114
Short-term investments............................. 3,727 2,638
Accounts receivable, net........................... 8,277 7,298
Inventories........................................ 10,634 9,476
Deferred taxes..................................... 1,315 1,274
Other current assets............................... 330 744
----------------- -----------------
Total current assets........................... 25,498 27,544
Restricted cash and investments......................... -- 4,450
Property, plant and equipment, net...................... 16,689 4,808
Other assets............................................ 572 359
----------------- -----------------
Total assets $42,759 $37,161
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:....................................
Accounts payable................................... $1,978 $2,790
Accrued expenses................................... 3,058 3,091
Current maturities of long-term debt............... 258 --
Accrued litigation settlement...................... -- 1,100
------------------ -----------------
Total current liabilities...................... 5,294 6,981
Deferred grant.......................................... 153 205
Deferred taxes.......................................... -- 37
Long-term debt.......................................... 4,694 --
Commitments and contingencies (Notes 5 and 9)
Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 20,000,000 shares;
issued and outstanding shares
8,021,000 and 7,812,000 shares at
December 31, 1997 and 1996, respectively................... 80 78
Additional paid-in capital......................... 30,482 29,024
Retained earnings.................................. 1,936 609
Cumulative translation adjustments 120 227
----------------- -----------------
Total shareholders' equity..................... 32,618 29,938
----------------- -----------------
Total liabilities and shareholders' equity..... $42,759 $37,161
================= =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
for the years ended December 31,
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Net sales................................. $46,864 $44,401 $33,340
Cost of sales............................. 27,574 25,986 18,180
------------- ------------- -------------
Gross profit...................... 19,290 18,415 15,160
Operating expenses:
Selling, general and
administrative....................... 13,428 11,885 8,727
Litigation expense.................... -- 4,205 170
Research and development.............. 3,902 3,651 2,773
-------------- ------------- -------------
Operating income (loss)........... 1,960 (1,326) 3,490
Interest income....................... 495 725 586
Interest expense...................... 383 -- --
-------------- -------------- -------------
Income (loss) before income taxes......... 2,072 (601) 4,076
Income tax provision (benefit)............ 745 (34) 780
-------------- --------------- -------------
Net income (loss)................. $1,327 $(567) $3,296
============== ============== =============
Earnings per share:
Basic................................. $0.17 $(0.07) $0.47
============= ============== =============
Diluted............................... $0.17 $(0.07) $0.45
============= ============== =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid-In Retained Translation
Shares Par Value Capital Earnings Adjustments Total
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994...... 6,414 $64 $15,205 $(2,120) $(4) $13,145
Sale of shares pursuant to public
stock offering, net of expenses
of $1,283........................ 1,161 12 12,641 -- -- 12,653
Sale of shares for cash pursuant
to Employee Stock Purchase Plan.. 18 -- 178 -- -- 178
Exercise of stock options.......... 71 1 (155) -- -- (154)
Tax benefit realized upon exercise
of stock options................. -- -- 255 -- -- 255
Net income for 1995................ -- -- -- 3,296 -- 3,296
Cumulative translation adjustments.
-- -- -- -- (51) (51)
----------- ----------- ----------- ----------- -------- ---------
Balances at December 31, 1995...... 7,664 77 28,124 1,176 (55) 29,322
Exercise of stock warrants, net of
expenses of $35.................. 85 1 528 -- -- 529
Sale of shares for cash pursuant
to Employee Stock Purchase Plan.. 23 -- 250 -- -- 250
Exercise of stock options.......... 40 -- (70) -- -- (70)
Tax benefit realized upon exercise
of stock options................. -- -- 192 -- -- 192
Net loss for 1996.................. -- -- -- (567) -- (567)
Cumulative translation adjustments. -- -- -- -- 282 282
----------- ----------- ----------- ----------- ------- -------
Balances at December 31, 1996...... 7,812 78 29,024 609 227 29,938
Exercise of stock warrants......... 5 -- 28 -- -- 28
Sale of shares for cash pursuant
to Employee Stock Purchase Plan.. 34 -- 283 -- -- 283
Exercise of stock options.......... 168 2 975 -- -- 977
Shares issued pursuant to Medical
Advisory Board agreement......... 2 -- 29 -- -- 29
Tax benefit realized upon exercise
of stock options................. -- -- 143 -- -- 143
Net income for 1997................ -- -- -- 1,327 -- 1,327
Cumulative translation adjustments
-- -- -- -- (107) (107)
----------- ----------- ----------- ----------- -------- --------
Balances at December 31, 1997...... 8,021 $80 $30,482 $1,936 $120 $32,618
=========== ========== ========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
for years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $1,327 $(567) $3,296
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 1,748 1,375 1,063
Accretion of discount on investments.................. (280) (508) (189)
Provision for bad debts............................... 214 104 42
Deferred income taxes................................. (78) (867) (370)
Stock compensation.................................... 29 -- --
Deferred grant........................................ (52) (67) (19)
Changes in operating assets and liabilities:
Accounts receivable................................. (1,292) (958) (2,088)
Inventories......................................... (1,185) (3,547) (1,696)
Other current assets................................ 401 (199) (127)
Accounts payable.................................... (762) 122 946
Accrued expenses.................................... 139 1,542 623
Accrued litigation settlement....................... (1,100) 1,100 --
--------- ---------- ------------
Net cash (used in) provided by operating activities (891) (2,470) 1,481
---------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment................ (12,628) (2,629) (1,146)
Purchase of short-term investments....................... (6,891) (6,183) (7,666)
Proceeds upon sale or maturity of short-term investments. 6,082 11,810 2,000
Restricted cash and investments.......................... 3,450 (4,450) --
Increase in other assets................................. (222) (53) (162)
-------- -------- -------
Net cash used in investing activities............. (10,209) (1,505) (6,974)
-------- ------------ ------------
Cash flows from financing activities:
Net proceeds from sales of common stock.................. 283 250 12,831
Net proceeds from options exercised...................... 977 (70) (154)
Net proceeds from warrants exercised..................... 28 529 --
Borrowings on long-term debt............................. 5,167 -- --
Principal payments on long-term debt..................... (215) -- --
Grant proceeds........................................... -- 102 --
---------- ------------- ------------
Net cash provided by financing activities......... 6,240 811 12,677
--------- ------------- ----------
Effect of exchange rates on cash............................ (39) 100 (41)
------------ ------------- --------------
Net (decrease) increase in cash and cash equivalents........ (4,899) (3,064) 7,143
Cash and cash equivalents, beginning of year................ 6,114 9,178 2,035
--------- ----------- -----------
Cash and cash equivalents, end of year...................... $1,215 $6,114 $9,178
======== ========== ==========
Supplemental disclosure:
Significant non-cash investing and financing transactions:
Use of restricted funds for purchase of the U.S.
facility........................................... $1,000 -- --
Accounts payable recorded for the purchase of
property, plant and equipment...................... -- $387 --
Cash paid for income taxes.................................. $235 $57 $654
Cash paid for interest...................................... $348 -- --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Significant Accounting Policies:
BUSINESS DESCRIPTION:
AVECOR Cardiovascular Inc. (the "Company") was incorporated on December
13, 1990. The Company develops, manufactures and markets specialty
medical devices for heart/lung bypass surgery and long-term respiratory
support.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of AVECOR
Cardiovascular Inc. and its wholly-owned subsidiaries, AVECOR
Cardiovascular Ltd. and AVECOR Foreign Sales Corporation, after
elimination of all significant intercompany transactions and accounts.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
For financial reporting purposes, the Company considers all highly
liquid investments purchased with an original maturity of three months
or less to be cash equivalents. The Company's cash and cash equivalent
balances are concentrated primarily with two investment managers, the
majority of which is invested in daily money market funds.
Short-term investments consist of bank certificates of deposit, U.S.
government securities, agency paper, commercial paper and other
corporate obligations, and money market instruments and are classified
as short-term in the balance sheet based on their maturity date. All of
the Company's short-term investments mature in 1998 and are considered
by management to be "available for sale." At December 31, 1997 and
1996, the estimated fair value of the short-term investments
approximated their cost. Unrealized gains and losses were not
significant.
At December 31, 1997, the Company had no restricted cash or
investments. At December 31, 1996, cash and short-term investments
totaling $4,450,000 were restricted as to their use.
CONCENTRATIONS OF CREDIT RISK:
The Company's accounts receivable are primarily due from hospitals and
independent foreign distributors located mainly in the U.S. and Western
Europe. Although the Company does not require collateral from its
customers, concentrations of credit risk in the U.S. are somewhat
mitigated by a large number of geographically dispersed customers. The
Company does not presently anticipate credit risk associated with
foreign trade receivables (see Note 6), although collection could be
impacted by the underlying economies of the respective countries.
INVENTORIES:
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out method.
<PAGE>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are
generally recorded using the straight-line method over estimated useful
asset lives. The Company's new U.S. facility carries asset lives of
forty, fifteen and seven years for the building and shell,
improvements, and equipment and furniture, respectively. The cost of
molds, tooling and dies is capitalized and depreciated generally over
periods of three to five years using straight-line or units of
production methods. Other equipment and leasehold improvements are
generally carry estimated useful lives of five years or less (shorter
of asset life or lease term for leasehold improvements). See "REVENUE
RECOGNITION" below for the Company's policy with regards to its blood
pump equipment placed with customers.
Maintenance, repairs and minor improvements are charged to expense as
incurred while major betterments and renewals are capitalized. When
assets are sold or retired, the cost and related accumulated
depreciation and amortization are removed from the accounts and the
resulting gain or loss is included in operations.
LONG-LIVED ASSETS:
The recoverability of long-lived assets is assessed annually or
whenever adverse events or changes in circumstances or business climate
indicate that the expected cash flows previously anticipated warrant
reassessment. When such reassessments indicate the potential of
impairment, all business factors are considered and, if the carrying
values of long-lived assets are not likely to be recovered from future
net operating cash flows, they will be written down for financial
reporting purposes.
REVENUE RECOGNITION:
For all products, other than when the equipment portion of the Affinity
blood pump system is shipped to the customer but title remains with the
Company, the Company recognizes sales upon product shipment.
During 1997, the Company began marketing the Affinity blood pump
system. This blood pump system has both equipment and disposable
products which are manufactured and marketed by the Company. Typically,
when the equipment portion of the system is shipped, title to the
equipment remains with the Company. Subsequently, the total cost of
this equipment is realized through ongoing sales of disposable products
to the customer, and accordingly is amortized and recorded as a charge
to operations over the life of the equipment, generally using an asset
life of three to five years.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
INCOME TAXES:
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences") using enacted tax rates in effect in the
years in which the differences are expected to reverse. Temporary
differences relate primarily to the allowance for doubtful accounts,
obsolete inventory allowances, depreciation, and accruals for vacation,
product liability and warranty costs.
<PAGE>
NET INCOME (LOSS) PER SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, a new standard for computing and presenting earnings
per share. As required, the Company adopted this new standard in the
fourth quarter of 1997. Net income (loss) per share for all periods
presented have been computed by dividing net income (loss) by the
weighted average number of common shares outstanding ("basic EPS") and
by the weighted average number of common and common equivalent shares
outstanding ("diluted EPS"). Common equivalent shares relate to stock
options and stock warrants when their effect is not antidilutive.
For all periods presented, the weighted average common and common
equivalent shares outstanding are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
------------------- ---------------- ------------------
<S> <C> <C> <C>
Weighted average common
shares outstanding 7,921,000 7,767,000 7,046,000
Common equivalent shares
outstanding:
Option equivalents 68,000 - 262,000
Warrant equivalents 1,000 - 45,000
------------------- ---------------- ------------------
Weighted average common
and common equivalent
shares outstanding 7,990,000 7,767,000 7,353,000
=================== ================ ==================
</TABLE>
FOREIGN CURRENCY TRANSLATION:
All assets and liabilities of the Company's international subsidiaries
are translated to U.S. dollars at year-end exchange rates, while
elements of the statement of operations are translated at average
exchange rates in effect during the year. Translation adjustments
arising from the use of differing exchange rates are included in
cumulative translation adjustments in shareholders' equity.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The most significant areas which require the use
of management's estimates relate to the determination of the allowances
for doubtful accounts receivable and obsolete inventories, the need for
a valuation allowance on deferred tax assets and the determination
related to the probability of the patent contingency matter.
<PAGE>
2. Balance Sheet Information:
The following provides additional information concerning selected
balance sheet accounts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 8,611,000 $ 7,418,000
Allowance for doubtful
accounts (334,000) (120,000)
------------ ------------
$ 8,277,000 $ 7,298,000
============ ============
Inventories:
Raw materials $ 3,758,000 $ 3,424,000
Work-in-progress 2,189,000 2,343,000
Finished goods 4,687,000 3,709,000
------------ ------------
$ 10,634,000 $ 9,476,000
============ ============
Property, plant and equipment, net:
Land $ 1,409,000 $ --
Building 7,413,000 557,000
Machinery and equipment 5,181,000 3,324,000
Office and laboratory equipment 3,448,000 2,430,000
Molds, tooling and dies 3,011,000 2,183,000
Leasehold improvements 829,000 786,000
Equipment placed with customers 1,494,000 --
------------ ------------
22,785,000 9,280,000
Accumulated depreciation and
amortization (6,096,000) (4,472,000)
------------ ------------
$ 16,689,000 $ 4,808,000
============ ============
Accrued expenses:
Payroll $ 150,000 $ 472,000
Vacation 319,000 288,000
Commissions 290,000 447,000
Income taxes 709,000 616,000
Real estate taxes 355,000 --
Other 1,235,000 1,268,000
------------ ------------
$ 3,058,000 $ 3,091,000
============ ============
</TABLE>
<PAGE>
3. Shareholders' Equity:
SERIAL PREFERRED STOCK:
The Company's Second Restated Articles of Incorporation, as amended,
provide for 2,000,000 shares of preferred stock, par value $.01 per
share, issuable in series ("Serial Preferred Stock"). The Board of
Directors is empowered to authorize the issuance and establish the
terms of any shares of the Serial Preferred Stock without shareholder
approval. In 1996, the Board of Directors authorized 200,000 shares for
issuance as Series A Junior Preferred Stock under the Shareholder
Rights Plan.
STOCK INCENTIVE PLAN:
The Company's 1991 Stock Incentive Plan ("Plan") provides for granting
to eligible employees and certain other individuals nonqualified and
incentive options. The Company has reserved 1,050,000 shares of common
stock for issuance under the Plan. At December 31, 1997 there were
20,000 options available for grant under the Plan. In December 1997,
the Company's Board of Directors authorized, subject to shareholder
approval, an additional 450,000 shares of common stock to be reserved
for issuance under the Plan. Also, in December 1997, the Company's
Board of Directors authorized 50,000 stock option grants under the
Plan, subject to shareholder approval. Options granted under the Plan
are generally exercisable beginning one year from the date of grant in
cumulative yearly amounts of 25% of the shares under option and expire,
if not exercised, five to ten years after the date of grant.
Pursuant to the terms of the Plan, optionees may use cash, tender
previously owned shares, or be credited for a portion of the shares
exercised to reimburse the Company for the cost of exercising the
options and the taxes due on the recognized gain. The shares tendered
from the optionee or credited at time of exercise are at the fair
market value of the stock on the transaction date. No common shares
were credited to optionees to satisfy such obligations in 1997. In
1996, 19,000 common shares valued at $278,000 and, in 1995, 33,000
shares valued at $486,000 were credited the optionees at the exercise
date to satisfy such obligations.
Upon the occurrence of a change of control (as defined), all
outstanding options become immediately exercisable in full and all
restrictions with respect to outstanding restricted stock awards
immediately lapse.
The Plan also provides for stock bonuses and awards of restricted
shares of the Company's common stock to eligible recipients. Restricted
shares awarded may not be sold, assigned, or otherwise transferred by
the recipient until the shares awarded become free of restrictions on
transferability. All shares still subject to restrictions will be
forfeited and returned to the Plan if affiliation with the Company
terminates. Plan administrators may waive or accelerate the lapsing of
restrictions.
There were no stock bonuses and no restricted shares issued under the
Plan for the years ended December 31, 1997, 1996 and 1995.
<PAGE>
A summary of option transactions under the Plan for 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
Weighted Average Option
Exercise Price Range
Shares Price Per Share Per Share
------------------------------------- ------------- -- --------------------- -- --------------------
<S> <C> <C> <C>
Balances, December 31, 1994 570,000 $6.65 $1.00 - $9.94
Options granted 42,000 $10.63 $8.38 - $12.63
Options exercised (104,000) $3.20 $1.00 - $9.88
Options cancelled (3,000) $9.88 $9.88
-------------
Balances, December 31, 1995 505,000 $7.67 $1.00 - $12.63
Options granted 309,000 $12.32 $10.88 - $14.75
Options exercised (58,000) $3.58 $1.00 - $12.00
Options cancelled (113,000) $11.99 $9.88 - $12.00
-------------
Balances, December 31, 1996 643,000 $9.51 $2.00 - $14.75
Options granted 286,000 $8.28 $7.00 - $12.00
Options exercised (168,000) $5.81 $2.00 - $9.94
Options cancelled (77,000) $11.16 $6.38 - $14.00
-------------
Balances, December 31, 1997 684,000 $9.72 $5.13 - $14.75
=============
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted-
Avg. Weighted- Weighted-
Range of Remaining Avg. Avg.
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------- -------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$5.13 - $7.00 29,000 2.0 years $6.72 19,000 $6.57
$7.13 182,000 9.9 years $7.13 - -
$7.63 - $10.00 222,000 3.1 years $9.74 114,000 $9.70
$10.13 - $14.75 251,000 3.4 years $11.94 56,000 $12.00
-------------- ---------------
684,000 5.0 years $9.72 189,000 $10.08
============== ===============
</TABLE>
1995 NON-EMPLOYEE DIRECTOR PLAN:
In 1995, the Company's Board of Directors authorized, and in 1996, the
Company's shareholders approved, a reserve of 250,000 shares of the
Company's common stock for issuance to Non-Employee Directors of the
Company, pursuant to the 1995 Non-Employee Director Plan (the "1995
Director Plan"). Options granted under the 1995 Director Plan vest on a
cumulative basis, with one third exercisable as of the date of grant
and the remainder becoming exercisable in equal installments on each of
the first and second anniversaries of the date of grant. Each option
expires and is no longer exercisable on the date ten years from its
<PAGE>
date of grant. Options to purchase 42,000 shares at $13.38 and 10,500
shares at $12.25 per share were granted during 1995 and 1996,
respectively. At December 31, 1997, there were 197,500 options
available for grant under the 1995 Director Plan.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted-
Avg. Weighted- Weighted-
Range of Remaining Avg. Avg.
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------- --------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$12.25 - $13.38 52,500 7.7 years $13.15 49,000 $13.21
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION:
The Company adopted Financial Accounting Standards Board Issued
Statement No. 123, "Accounting for Stock-Based Compensation", in 1996.
The Company has continued to measure compensation cost for its
stock-based compensation plans using the intrinsic value-based method
of accounting and, therefore, the new standard has had no effect on the
Company's operating results.
Had the Company used the fair value-based method of accounting for its
1991 Stock Incentive Plan and 1995 Non-Employee Director Plan beginning
with options granted in 1995 and charged this compensation cost along
with the value of the shares granted through the Employee Stock
Purchase Plan against income, over the plans' vesting periods, based on
the fair value of options at the date of grant, net income (loss) and
diluted earnings (loss) per share for 1997, 1996 and 1995 would have
been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------ ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $1,327,000 $(567,000) $3,296,000
Pro forma $1,011,000 $(845,000) $3,117,000
Diluted net earnings (loss)
per share As reported $0.17 $(0.07) $0.45
Pro forma $0.13 $(0.11) $0.42
</TABLE>
The pro forma information above only includes stock options granted and
stock purchased under the Employee Stock Purchase Plan in 1995, 1996
and 1997.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model for the 1991 Stock
Incentive Plan and the 1995 Non-Employee Director Plan. The assumptions
for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------- ----------------------------
1991 Incentive 1995 1991 Incentive 1995 1991 Incentive 1995
Plan Director Plan Director Plan Director
Plan Plan Plan
---------------------------- ---------------- ----------- ----------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates 5.8% - 6.6% 6.2% 5.2% - 6.8% 6.2% 6.2% - 7.8% 6.6%
Expected life 4.3 - 8 years 8 years 4.3 years 8 years 4.3 years 8 years
Expected volatility 50% 50% 50% 50% 50% 50%
Expected dividends 0% 0% 0% 0% 0% 0%
</TABLE>
<PAGE>
WARRANTS:
In connection with the completion of its initial public offering of
common shares in 1992, the Company granted to the representatives of
the underwriters warrants for 90,000 shares of common stock at an
exercise price of $6.60 per share. During 1997 and 1996, the Company
issued 5,000 and 85,000 shares of common stock, respectively, pursuant
to the exercise of these warrants. At December 31, 1997, there are no
outstanding warrants.
EMPLOYEE STOCK PURCHASE PLAN:
The AVECOR Cardiovascular Inc. Employee Stock Purchase Plan ("Stock
Purchase Plan"), which is available to substantially all employees,
enables eligible employees to contribute up to 10% of their wages
toward quarterly purchases of the Company's common stock at 85% of
market value on the first or last day of each calendar quarter,
whichever had the lower stock price. The Company has reserved 100,000
shares of common stock for issuance under the Stock Purchase Plan.
Employees purchased 34,000 shares at an average price of $7.72 per
share in 1997, 23,000 shares at an average price of $11.00 per share in
1996, and 18,000 shares at an average price of $10.17 per share in
1995. In 1997, the Company's Board of Directors authorized, subject to
shareholder approval, an additional 125,000 shares of common stock to
be reserved for issuance under the Stock Purchase Plan as, at December
31, 1997, there were no shares of common stock available for purchase
under this plan.
SHAREHOLDER RIGHTS PLAN:
In June 1996, the Company adopted a shareholder rights plan, pursuant
to which the Company declared a dividend distribution of one Preferred
Share Purchase Right on each share of the Company's Common Stock
outstanding on August 2, 1996. Each Right entitles the holder to buy
one-thousandth of a share of the Company's Series A Junior Preferred
Stock, or a combination of securities and assets of equivalent value,
at an exercise price of $80.00, subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement dated June
26, 1996, as amended, between the Company and Norwest Bank Minnesota,
N.A., as Rights Agent.
4. Long-term Debt:
In January 1997, the Company purchased a new corporate headquarters and
manufacturing facility for $9,650,000 and consolidated its former four
separate U.S. facilities. In connection with this purchase, the Company
entered into a $5,167,000 bank note payable agreement in January 1997
and, in addition, utilizing restricted cash and investments, funded the
remaining cost of the new building.
The bank note payable agreement bears interest at 8.11% and requires
monthly principal payments of $21,531, plus interest, through January
2002 with the remaining principal and interest due February 2002. The
bank note payable is collateralized by the new corporate headquarters
and manufacturing facility and, among other things, requires the
Company to meet certain ratios related to leverage, debt service and
cash flow. Additionally, the bank note payable agreement prohibits the
Company from distributing dividends to its shareholders. The Company
believes the fair value of this debt approximates its carrying value at
December 31, 1997.
<PAGE>
At December 31, 1997, remaining principal payments on the bank note
payable are as follows:
Year Ending December 31
------------------------------------------------
1998 $ 258,000
1999 258,000
2000 258,000
2001 258,000
2002 3,920,000
-------------------
$4,952,000
===================
5. Commitments:
LEASES:
In 1996 and years prior, the Company leased all of its facilities and
certain equipment pursuant to operating leases. The leases for the
Company's United States operating facilities expired in December 1996,
at which time the Company occupied its new corporate headquarters. The
Company's facility near Glasgow, Scotland is leased for a period of ten
years ending in October 2003. This lease agreement provides for
adjustment of minimum rentals based upon market rates in 1998 and
requires minimum monthly rental payments plus real estate taxes and
applicable common facility operating expenses.
Rent expense, including allocated real estate taxes and operating
expenses, under all rental agreements was $325,000, $725,000 and
$596,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following is a schedule of future minimum lease payments pursuant
to the terms of the non-cancellable leases for the Glasgow, Scotland
facility described above:
Year Ending December 31
----------------------------------------- -----------------
1998 $ 147,000
1999 147,000
2000 147,000
2001 147,000
2002 147,000
2003 and thereafter 112,000
-----------
$ 847,000
===========
ROYALTY AGREEMENTS:
Silicone products -
In connection with the Company's June 1991 acquisition of the Surgical
Division of SCIMED Life Systems, Inc. (the Predecessor Business), the
Company entered into a royalty agreement with SCIMED. The agreement
required the Company to make payments to SCIMED primarily based on net
sales (as defined), through June 1996, of products previously
manufactured by the Predecessor Business as of the acquisition date.
The Company incurred royalties of $95,000 and $178,000 for the years
ended December 31, 1996 and 1995, respectively, under this agreement.
<PAGE>
The agreement also provides for royalty payments should the Company
develop and sell new products (new generation products) using certain
technology embodied in product models developed by the Predecessor
Business. This element of the agreement expires in June 2001. The
Company has not paid or incurred any such royalties through December
31, 1997.
Affinity blood pump -
The Company also entered into a royalty agreement in connection with
the Company's acquisition of an exclusive license to market the
Affinity blood pump. This agreement requires the Company to make
payments based on net sales of the pump chamber (the disposable portion
of the Affinity blood pump system) and net profits of the pump console
(the equipment portion of the Affinity blood pump system) through
August 2002. The term of the agreement may be extended by the Company
until the expiration of the last-to-expire of the patents covered by
this agreement or the useful life of the know-how (as defined)
licensed, whichever is longer. Under the terms of the royalty
agreement, the Company must pay minimum royalties each year. The
Company's royalties incurred of $55,000 for the year ended December 31,
1997 exceeded the minimum royalty related to the first year of the
royalty agreement.
Bio-passive surface -
The Company also has use of an exclusive license allowing it to apply a
bio-passive surface to its products. The agreement requires the Company
to make quarterly payments based on a percentage of net sales of
products utilizing the bio-passive surface. The Company can retain
exclusivity of the license if it pays minimum annual royalties. The
Company incurred royalties of $35,000 for the year ended December 31,
1997 under this agreement.
PRODUCT LIABILITY:
The Company is self-insured on product liability claims below a certain
dollar limitation and maintains product liability insurance above this
limitation per claim and in the aggregate.
CONFIDENTIALITY AND NONCOMPETE AGREEMENTS:
The Company has entered into confidentiality and non-compete agreements
with certain employees. If any of these employees are terminated, the
Company is conditionally required to pay the employee 75% of his or her
base salary, as defined, during the non-compete period (one to two
years) if the employee remains unemployed during this period.
6. Industry Segment Information:
Since its inception, the Company has operated in the single industry
segment of developing, manufacturing and marketing medical devices.
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, the
United Kingdom and France. Additionally, the Company distributes its
products through foreign independent distributors, primarily in Europe
and Asia, who then market the products directly to medical
institutions. During 1997, the Company terminated agreements with its
last remaining domestic distributor and its only Canadian distributor.
A direct sales force now serves the markets formerly assigned to these
<PAGE>
distributors. Management does not believe the Company is primarily
dependent upon any one distributor for the ultimate sale of products to
medical institutions. Sales to distributors accounting for 10% or more
of the Company's net sales were as follows:
1997 1996 1995
-------------------------- ------------ ------------- ------------
Distributor #1 (1) (1) $ 3,503,000
(1) Accounted for less than 10% of the Company's net sales.
Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $4,952,000, $4,912,000 and
$3,480,000, respectively, for the years ended December 31, 1997, 1996
and 1995.
At December 31, 1997 and 1996, consolidated accounts receivable include
$4,366,000 and $3,738,000, respectively, due from customers located
outside of the U.S.
<TABLE>
<CAPTION>
AVECOR AVECOR
Cardiovascular Cardiovascular
Year Ended December 31 Inc. Ltd. Consolidated
-------------------------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
1997
Sales to unaffiliated customers $32,634,000 $14,230,000 $46,864,000
Operating income 1,640,000 320,000 1,960,000
Identifiable assets 36,705,000 6,054,000 42,759,000
1996
Sales to unaffiliated customers 31,290,000 13,111,000 44,401,000
Operating income (loss) (1,738,000) 412,000 (1,326,000)
Identifiable assets 30,699,000 6,462,000 37,161,000
1995
Sales to unaffiliated customers 22,638,000 10,702,000 33,340,000
Operating income 2,806,000 684,000 3,490,000
Identifiable assets 27,902,000 5,617,000 33,519,000
</TABLE>
During the years ended December 31, 1997, 1996, and 1995, AVECOR
Cardiovascular Ltd. made capital expenditures of approximately
$393,000, $146,000 and $57,000, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
131, "Disclosures About Segments of an Enterprise and Related
Information," a new standard of reporting information about operating
or business segments in financial statements. The new standard will be
effective for the Company's annual financial statements in 1998.
Although the Company has not evaluated what impact, if any, this new
standard will have on the Company's current reporting of operating and
business segments, the Company believes it will continue reporting as
one operating and business segment.
<PAGE>
7. Retirement Savings Plan:
The AVECOR Cardiovascular Inc. Retirement Savings Plan (the "Savings
Plan") is a profit sharing plan which provides for voluntary pre-tax
employee contributions and discretionary employer matching and profit
sharing contributions and is intended to satisfy the requirements of
Section 401(k) of the Internal Revenue Code. Generally, all employees
of the Company who are over 21 years of age and who have completed one
year of service with the Company are eligible to participate in the
Savings Plan. The Company did not make any contributions to the Savings
Plan in 1997, and made contributions of $23,000 and $10,000 to the
Savings Plan related to 1996 and 1995, respectively.
8. Income Taxes:
The components of the Company's income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---------------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Current
U.S. federal $ 585,000 $ 484,000 $ 875,000
U.S. state 15,000 57,000 5,000
International 223,000 292,000 270,000
Deferred (78,000) (867,000) (370,000)
------------------ ----------------- ------------------
$ 745,000 $ (34,000) $ 780,000
================== ================= ==================
</TABLE>
The variance of the 1997 and 1996 effective tax rate from the U.S.
statutory tax rate was primarily due to losses incurred by the
Company's French subsidiary for which no tax benefit has been recorded
because of the uncertainty of their realization, offset by the
generation of research and experimentation credits. The variance of the
1995 effective tax rate from the U.S. statutory tax rate was primarily
due to utilization of $1,730,000 of net operating loss carryforwards
("NOLs") and $26,000 of state research and experimentation credits.
Components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Patent settlement $ - $ 418,000
Research and experimentation credits 881,000 560,000
French subsidiary NOL carryforwards 226,000 119,000
AMT carryforwards 195,000
-
Other, primarily certain accrued expenses 239,000 296,000
Valuation allowance (226,000) (119,000)
-------------------- -------------------
1,315,000 1,274,000
Deferred tax liabilities:
Depreciation - (37,000)
-------------------- -------------------
Net deferred tax assets $1,315,000 $1,237,000
==================== ===================
</TABLE>
The Company has established a valuation allowance to offset its
deferred tax asset related to its French subsidiary's NOL carryforwards
due to the uncertainty of their realization. The NOL carryforwards
expire from 2000 to 2002. The Company expects its future taxable income
will be sufficient to realize its other deferred tax assets; therefore,
there is no valuation allowance offsetting them.
<PAGE>
Available research and experimentation credits at December 31, 1997,
represent federal and state amounts of approximately $632,000 and
$249,000, respectively, with expiration dates ranging from 2007 to
2012. The Company's AMT credit carryforwards do not expire.
Domestic and international components of income (loss) before income
taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------------------------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
AVECOR Cardiovascular Inc. $ 1,663,000 $(1,088,000) $ 3,351,000
AVECOR Cardiovascular Ltd. 409,000 487,000 725,000
================== ================= ==================
$ 2,072,000 $ (601,000) $ 4,076,000
================== ================= ==================
</TABLE>
Undistributed earnings of the Company's foreign subsidiary are
indefinitely reinvested in foreign operations. Accordingly, no
provision has been made for income taxes that might be payable upon
remittance.
9. Patent Matters:
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent
held by a competing manufacturer of blood oxygenators and other medical
devices, and requesting a determination that the Company's Affinity
oxygenator does not infringe the competitor's patent. The Company filed
suit in response to a December 1996 letter from the competitor,
alleging that the Affinity oxygenator infringes certain claims under
the competitor's patent, and requesting discussion regarding a possible
license agreement. The Company reviewed the subject patent and
concluded, based on an opinion from its patent counsel, that none of
the claims in the patent are infringed by the Affinity oxygenator, and
that the patent is, in any event, invalid. On October 6, 1997, the
Magistrate Judge of the United States District Court vacated a previous
order and granted a stay in the proceedings, including the suspension
of discovery, pending the outcome of the competitor's request for
re-issuance of the aforementioned patent. The expense and effort
potentially required to bring this action, as well as the outcome of
any counterclaim successfully brought against the Company by the
competitor, could have a material adverse effect on the Company's
business, financial condition and results of operations.
In 1996, the Company reached an agreement with COBE Laboratories Inc.
(COBE) to settle COBE's patent suit against the Company. The terms of
the settlement with COBE provided for the Company to make net payments
totaling $2,200,000. Two net payments of $1,100,000 were made in August
1996 and August 1997, respectively. The net settlement costs of
$2,200,000 and the associated legal costs were recognized as a charge
to operations in 1996.
10. Quarterly Data (Unaudited):
The following table sets forth certain unaudited operating data for the
four quarters in 1997 and 1996. In the opinion of management, the data
include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the information set forth
therein.
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
(unaudited) Quarter Quarter Quarter Quarter
----------------------------------- -------------- -------------- -------------- --------------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
1997
Net sales $ 12,043 $ 11,961 $ 11,273 $ 11,587
Gross profit 4,983 5,061 4,785 4,461
Net income 387 403 365 172
Diluted income per share $ .05 $ .05 $ .05 $ .02
1996
Net sales $ 10,293 $ 11,145 $ 11,315 $ 11,648
Gross profit 4,342 4,702 4,534 4,837
Net income (loss) 211 (1,876) 628 470
Diluted income (loss) per share $ .03 $ (.24) $ .08 $ .06
</TABLE>
The summation of quarterly diluted earnings (loss) per share may not
equate to the calculation for the year as quarterly calculations are
prepared on a discrete basis. All earnings per share calculations are
presented per the definition of "diluted earnings per share" from
FASB Statement No. 128.
11. New Accounting Standard:
In June 1997, the Financial Accounting Standards Board issued
Statement 130, "Reporting Comprehensive Income," a new standard
requiring the reporting and display of "comprehensive income"
(defined as the change in equity of a business enterprise during a
period from sources other than those resulting from investments by
owners and distributors to owners) and its components in a full set
of general purpose financial statements. The new standard will be
effective for the Company's annual financial statements in 1998. The
Company's cumulative translation adjustment is considered a component
of "comprehensive income," however the Company has not evaluated what
other components of its changes in equity would be components of
"comprehensive income."
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS June 30,
1998
<S> <C>
Current assets:
Cash and cash equivalents $3,837
Short-term investments 1,966
Accounts receivable, net 9,443
Inventories 10,837
Deferred taxes 1,315
Other current assets 412
---------
Total current assets 27,810
Property, plant and equipment, net 17,658
Other assets 581
Total assets $46,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,845
Accrued expenses 3,733
Current portion of long-term debt 258
--------
Total current liabilities 7,836
Deferred grant 136
Long-term debt 4,632
Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 20,000,000 shares;
issued and outstanding shares 8,042,000 and
8,021,000 shares at June 30, 1998 and
December 31, 1997, respectively 80
Additional paid-in capital 30,622
Retained earnings 2,566
Cumulative translation adjustments 177
--------
Total shareholders' equity 33,445
--------
Total liabilities and shareholders' equity $46,049
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $13,565 $11,961 $26,021 $24,004
Cost of sales 7,963 6,900 15,437 13,960
------- ------- ------- -------
Gross profit 5,602 5,061 10,584 10,044
Operating expenses:
Selling, general and
administrative 4,075 3,482 7,883 6,832
Research and development 895,000 974 1,726 2,076
------- ------- ------- -------
Operating income 632 605 975 1,136
Interest income 78 129 164 273
Interest expense (99) (105) (199) (176)
------- ------- ------- -------
Income before income taxes 611 629 940 1,233
Income tax provision 201 226 310 443
------- ------- ------- -------
Net income $410 $403 $630 $790
======= ======= ======= =======
Earnings per share:
Basic $0.05 $0.05 $0.08 $0.10
======= ======= ======= =======
Diluted $0.05 $0.05 $0.08 $0.10
======= ======= ======= =======
Weighted average common shares
outstanding 8,032,000 7,914,000 8,027,000 7,880,000
Common equivalents:
Options 2,000 63,000 2,000 97,000
Warrants - 2,000 - 2,000
------- ------- ------- -------
Weighted average common and
common equivalents 8,034,000 7,979,000 8,029,000 7,979,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
AVECOR CARDIOVASCULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $630 $790
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,191 737
Accretion of discount on investments (83) (170)
Changes in operating assets and liabilities:
Accounts receivable (1,118) (1,524)
Inventories (197) (782)
Other current assets (80) 277
Accounts payable 1,845 758
Accrued expenses 660 393
-------- --------
Net cash provided by operating activities 2,848 479
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,090) (9,911)
Purchase of investments - (8,768)
Proceeds upon sale or maturity of short-term investments 1,844 5,140
Cash and investments restricted as to use - 3,450
Increase in other assets (11) 154)
-------- --------
Net cash used in investing activities (257,000) (10,243,000)
-------- --------
Cash flows from financing activities:
Net proceeds from sales of common stock 140 130
Net proceeds from options exercised -- 582
Borrowings on long-term debt -- 5,167
Principal payments on long-term debt (129) (86)
======== ========
Net cash provided by financing activities 11 5,793
======== ========
Effect of exchange rates on cash 20 (35)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,622 (4,006)
Cash and cash equivalents at beginning of period 1,215 6,114
-------- --------
Cash and cash equivalents at end of period $3,837 $2,108
======== ========
Significant non-cash investing and financing transactions:
Acquisition of equipment through capital leases $67 --
======== ========
Use of restricted funds for purchase of the U.S. facility -- $1,000
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
AVECOR CARDIOVASCULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements included in this Proxy
Statement/Prospectus have been prepared by AVECOR Cardiovascular Inc. (the
Company), without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to
these rules and regulations. The year-end balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. These unaudited consolidated interim financial
statements should be read in conjunction with the audited financial statements
and related notes included elsewhere in this Proxy Statement/Prospectus.
The consolidated interim financial statements presented herein as of
June 30, 1998 and for the three and six month periods ended June 30, 1998 and
1997 reflect, in the opinion of management, all adjustments (which include only
normal, recurring adjustments) necessary for a fair presentation of financial
position and the results of operations and cash flows for the periods presented.
The results of operations for any interim period are not necessarily indicative
of results for the full year.
2. Organization
The Company was incorporated on December 13, 1990. The Company designs,
develops, manufactures and markets specialty medical devices for heart/lung
bypass surgery and long-term respiratory support.
The consolidated financial statements include the accounts of AVECOR
Cardiovascular Inc. and its wholly-owned subsidiaries, AVECOR Cardiovascular
Ltd. and AVECOR Foreign Sales Corporation after elimination of all significant
intercompany transactions and accounts.
3. Inventories
Inventories consist of the following:
June 30,
1998
-----------
Raw materials $ 3,735,000
Work-in-process 2,121,000
Finished goods 4,981,000
-----------
$10,837,000
===========
<PAGE>
4. Industry Segment Information
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, the United
Kingdom and France. Additionally, the Company distributes its products through
foreign independent distributors who then market the products directly to
medical institutions. No one independent distributor or other customer accounted
for 10% or more of the Company's net sales for the six months ended June 30,
1998 or 1997.
Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $1,960,000 and $3,338,000 for the three
and six month periods ended June 30, 1998, respectively, compared to $1,248,000
and $2,563,000 for the three and six month periods ended June 30, 1997,
respectively. Sales to customers located outside of the United States were
approximately 41% and 40% of net sales for the three and six month periods ended
June 30, 1998, respectively, compared to 41% for the three and six month periods
ended June 30, 1997.
At June 30, 1998, consolidated accounts receivable included $4,943,000
due from customers located outside of the U.S.
In June 1997, the Financial Accounting Standards Board issued Statement
131, "Disclosures About Segments of an Enterprise and Related Information," a
new standard of reporting information about operating or business segments in
financial statements. The new standard will be effective for the Company's
annual financial statements in 1998. Although the Company has not specifically
evaluated what impact, if any, this new standard will have on the Company's
current reporting of operating and business segments, the Company believes it
will continue reporting as one operating and business segment.
5. Comprehensive Income
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
standard requires the display and reporting of comprehensive income, which
includes all changes in shareholders' equity with the exception of additional
investments by shareholders or distributions to shareholders. Comprehensive
income for the Company includes net income and foreign currency translation
which is charged or credited to the cumulative translation account within
shareholders' equity. Comprehensive income for the three and six months ended
June 30, 1998 and 1997 and the year ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended,
June 30, June 30,
1998 1997 1998 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income $410,000 $403,000 $630,000 $790,000
Changes in cumulative
translation (9,000) 74,000 58,000 (90,000)
------------- ------------ ------------- -------------
Comprehensive income $401,000 $477,000 $688,000 $700,000
============= ============ ============= =============
</TABLE>
<PAGE>
6. Patent Matters
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's Affinity oxygenator does not
infringe the competitor's patent. The Company filed suit in response to a
December 1996 letter from the competitor, alleging that the Affinity oxygenator
infringes certain claims under the competitor's patent, and requesting
discussion regarding a possible license agreement. The Company reviewed the
subject patent and concluded, based on an opinion from its patent counsel, that
none of the claims in the patent are infringed by the Affinity oxygenator, and
that the patent is, in any event, invalid. On October 6, 1997, the Magistrate
Judge of the U.S. District Court vacated a previous order and granted a stay in
the proceedings, including the suspension of discovery, pending the outcome of
the competitor's request for re-issuance of the aforementioned patent. The
expense and effort potentially required to bring this action, as well as the
outcome of any counterclaim successfully brought against the Company by the
competitor, could have a material adverse effect on the Company's business,
financial condition and results of operations.
7. Acquisition of the Company
On July 12, 1998, Medtronic, Inc. ("Medtronic") and the Company entered
into an agreement under which Medtronic will acquire the Company in a
transaction valued at approximately $91 million. The transaction calls for the
Company's shareholders to receive $11.125 in Medtronic stock for each share of
the Company's stock they hold at the transaction close date. In addition to
shareholder approval, the transaction is subject to customary conditions
including Hart-Scott-Rodino clearance. The companies expect completion of the
transaction in late 1998.
<PAGE>
Appendix A
PLAN OF MERGER
OF
AC MERGER CORP.
INTO
AVECOR CARDIOVASCULAR, INC.
ARTICLE 1
NAMES OF CONSTITUENT CORPORATIONS
1.1 Constituent Corporations. The names of the Constituent Corporations
are AC Merger Corp., a Minnesota corporation ("Merger Subsidiary"), and AVECOR
Cardiovascular, Inc., a Minnesota corporation (the "Company"). The Constituent
Corporations shall be combined by the merger of Merger Subsidiary into the
Company as the Surviving Corporation (the "Merger"), pursuant to the applicable
provisions of the Minnesota Business Corporation Act ("MBCA").
1.2 Certain Definitions. As used in this Plan of Merger, the following
capitalized terms shall have the following meanings:
(a) "Company Common Stock" means common stock of the Company,
par value $.01 per share.
(b) "Company Options" means all options to purchase shares of
Company Common Stock that are outstanding at the Effective Time.
(c) "Conversion Fraction" means as defined in Section 2.2(a)
hereof.
(d) "Merger Agreement" means that certain Agreement and Plan
of Merger dated July 12, 1998, by and among Medtronic, Inc., a
Minnesota corporation and sole shareholder of Merger Subsidiary
("Parent"), Merger Subsidiary, and the Company, a copy of which shall
be maintained at the Surviving Corporation's principal executive office
and made available to any shareholder of either Constituent Corporation
upon request.
(e) "Merger Subsidiary Common Stock" means common stock of
Merger Subsidiary, par value $.01 per share.
(f) "Parent Average Stock Price" shall mean the average
(rounded to the nearest full cent, with the cents rounded up if the
third decimal place is 5 or more) of the daily closing sale prices of a
share of Parent Common Stock as reported on the New York Stock Exchange
("NYSE") Composite Tape, as reported in The Wall Street Journal, for
the 18 consecutive NYSE trading days ending on and including the second
NYSE trading day immediately preceding the Effective Time.
(g) "Parent Common Stock" means common stock of Parent, par
value $.10 per share.
(h) "Surviving Corporation" means the Company as the surviving
corporation of the merger of Merger Subsidiary with and into the
Company.
<PAGE>
(i) "Surviving Corporation Common Stock" means common stock of
the Surviving Corporation, par value $.01 per share.
ARTICLE 2
TERMS AND CONDITIONS
2.1 Merger; Effective Time. The Merger shall be effective upon the
filing with the Minnesota Secretary of State of Articles of Merger including
this Plan of Merger and such other documents as are required by the MBCA to be
filed with the Secretary of State of Minnesota (the time of such filing being
the "Effective Time"). At the Effective Time, the separate existence of Merger
Subsidiary shall cease and the Company shall alone continue in existence as the
Surviving Corporation. All transactions on and after the Effective Time shall be
deemed transactions of and for the account of the Company as the Surviving
Corporation.
2.2 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any share of capital
stock of the Company or Merger Subsidiary:
(a) Each share of Company Common Stock issued and outstanding
immediately prior thereto (except for Dissenting Shares, as defined in
Section 2.3 hereof, and except for shares referred to in Section 2.2(b)
hereof) shall be converted into the right to receive the fraction of a
share (subject to adjustment as provided below, the "Conversion
Fraction") of Parent Common Stock equal to $11.125 divided by the
Parent Average Stock Price.
Notwithstanding the foregoing, if the sum of the number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time plus the number of shares subject to then outstanding
options, warrants, or other rights to acquire shares of Company Common
Stock (collectively, "Company Stock Acquisition Rights") is greater
than 8,879,725 shares plus that number of shares issuable pursuant to
the current offering period in process as of the date of the Merger
Agreement under the Company's Employee Stock Purchase Plan or if the
aggregate exercise price of all such Company Stock Acquisition Rights
then outstanding is less than the aggregate exercise price reflected in
Section 3.4 of the Merger Agreement, then the $11.125 amount per share
of Company Common Stock, as described above, shall be reduced to an
amount, if lower, equal to (i) $11.125 times [8,879,725 shares plus
that number of shares issuable pursuant to the current offering period
in process as of the date of the Merger Agreement under the Company's
Employee Stock Purchase Plan] minus the aggregate exercise price
reflected in Section 3.4 of the Merger Agreement plus the aggregate
amount received by the Company as a result of any issuance of Company
Common Stock after the date of this Agreement and prior to the
Effective Time plus the aggregate exercise price of all Company Stock
Acquisition Rights outstanding immediately prior to the Effective Time
divided by (ii) the sum of (A) the number of shares of Company Common
Stock outstanding immediately prior to the Effective Time plus (B) the
number of shares subject to Company Stock Acquisition Rights then
outstanding.
An appropriate adjustment shall similarly be made in the event
that, prior to the Effective Time, the outstanding shares of Company
Common Stock, without new consideration, are changed into or exchanged
for a different kind of shares or securities through a reorganization,
reclassification, stock dividend, stock combination, or other like
change in the Company's capitalization. Notwithstanding the foregoing,
<PAGE>
nothing in this section shall be deemed to constitute authorization or
permission for or consent from Parent or Merger Subsidiary to any
increase in the number of shares of Company Common Stock outstanding or
subject to outstanding Company Stock Acquisition Rights, to any
decrease in the exercise price of such Rights, or to any
reorganization, reclassification, stock dividend, stock combination, or
other like change in capitalization.
(b) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time that is then owned beneficially
or of record by Parent, Merger Subsidiary, or any direct or indirect
subsidiary of Parent or the Company shall be cancelled without payment
of any consideration therefor and without any conversion thereof.
(c) Each share of any other class of capital stock of the
Company (other than Company Common Stock) shall be cancelled without
payment of any consideration therefor and without any conversion
thereof.
(d) Each share of Merger Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted
into one share of Surviving Corporation Common Stock.
. Notwithstanding any provision of the Merger Agreement to the contrary, each
outstanding share of Company Common Stock, the holder of which has demanded and
perfected such holder's right to dissent from the Merger and to be paid the fair
value of such shares in accordance with Sections 302A.471 and 302A.473 of the
MBCA and, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive the Parent Common Stock into which shares of
Company Common Stock are converted pursuant to Section 2.2 hereof, but the
holder thereof shall be entitled only to such rights as are granted by the MBCA.
Parent shall cause the Company to make all payments to holders of shares of
Company Common Stock with respect to such demands in accordance with the MBCA.
The Company shall give Parent (i) prompt written notice of any notice of intent
to demand fair value for any shares of Company Common Stock, withdrawals of such
notices, and any other instruments served pursuant to the MBCA or any other
provisions of Minnesota law and received by the Company, and (ii) the
opportunity to conduct jointly all negotiations and proceedings with respect to
demands for fair value for shares of Company Common Stock under the MBCA. The
Company shall not, except with the prior written consent of Parent, voluntarily
make any payment with respect to any demands for fair value for shares of
Company Common Stock or offer to settle or settle any such demands.
2.4 Exchange of Company Common Stock.
(a) Promptly after the Effective Time, Parent shall cause
Parent's stock transfer agent or such other person as Parent may
appoint to act as exchange agent (the "Exchange Agent") to mail to each
holder of record (other than Parent, Merger Subsidiary, or any other
subsidiary of Parent or the Company) of a certificate or certificates
that immediately prior to the Effective Time represented outstanding
shares of Company Common Stock ("Company Certificates") a form letter
of transmittal (which shall specify that delivery shall be effective,
and risk of loss and title to the Company Certificate(s) shall pass,
only upon delivery of the Company Certificate(s) to the Exchange Agent)
and instructions for such holder's use in effecting the surrender of
the Company Certificates in exchange for certificates representing
shares of Parent Common Stock.
<PAGE>
(b) As soon as practicable after the Effective Time, the
Exchange Agent shall distribute to holders of shares of Company Common
Stock, upon surrender to the Exchange Agent of one or more Company
Certificates for cancellation, together with a duly-executed letter of
transmittal, (i) one or more Parent certificates representing the
number of whole shares of Parent Common Stock into which the shares
represented by the Company Certificate(s) shall have been converted
pursuant to Section 2.2(a), and (ii) a bank check in the amount of cash
into which the shares represented by the Company Certificate(s) shall
have been converted pursuant to Section 2.4(f) (relating to fractional
shares), and the Company Certificate(s) so surrendered shall be
cancelled. In the event of a transfer of ownership of Company Common
Stock that is not registered in the transfer records of the Company, it
shall be a condition to the issuance of shares of Parent Common Stock
that the Company Certificate(s) so surrendered shall be properly
endorsed or be otherwise in proper form for transfer and that such
transferee shall (i) pay to the Exchange Agent any transfer or other
taxes required, or (ii) establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(c) Holders of Company Common Stock will be entitled to any
dividends or other distributions pertaining to the Parent Common Stock
received in exchange therefor that become payable to persons who are
holders of record of Parent Common Stock as of a record date on the
same date as or after the Effective Time, but only after they have
surrendered their Company Certificates for exchange. Subject to the
effect, if any, of applicable law, the Exchange Agent shall receive,
hold, and remit any such dividends or other distributions to each such
record holder entitled thereto, without interest, at the time that such
Company Certificates are surrendered to the Exchange Agent for
exchange. Holders of Company Common Stock will not be entitled,
however, to dividends or other distributions that become payable before
or after the Effective Time to persons who were holders of record of
Parent Common Stock as of a record date that is prior to the Effective
Time.
(d) All shares of Parent Common Stock issued upon the
surrender for exchange of Company Common Stock in accordance with the
terms hereof (including any cash paid for fractional shares pursuant to
Section 2.4(f) hereof) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Common
Stock.
(e) After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Company Certificates representing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged as
provided in this Article 2. As of the Effective Time, the holders of
Company Certificates representing shares of Company Common Stock shall
cease to have any rights as shareholders of the Company, except such
rights, if any, as they may have pursuant to the MBCA. Except as
provided above, until such Company Certificates are surrendered for
exchange, each such Company Certificate shall, after the Effective
Time, represent for all purposes only the right to receive the number
of whole shares of Parent Common Stock into which the shares of Company
Common Stock shall have been converted pursuant to the Merger as
provided in Section 2.2(a) hereof and the right to receive the cash
value of any fraction of a share of Parent Common Stock as provided in
Section 2.4(f) hereof.
(f) No fractional shares of Parent Common Stock and no
certificates or scrip therefor, or other evidence of ownership thereof,
shall be issued upon the surrender for exchange of Company
Certificates, no dividend or other distribution of Parent shall relate
to any fractional share, and such fractional share interests shall not
<PAGE>
entitle the owner thereof to vote or to any rights of a shareholder of
Parent. All fractional shares of Parent Common Stock to which a holder
of Company Common Stock immediately prior to the Effective Time would
otherwise be entitled, at the Effective Time, shall be aggregated if
and to the extent multiple Company Certificates of such holder are
submitted together to the Exchange Agent. If a fractional share results
from such aggregation, then (in lieu of such fractional share) the
Exchange Agent shall pay to each holder of shares of Company Common
Stock who otherwise would be entitled to receive such fractional share
of Parent Common Stock an amount of cash (without interest) determined
by multiplying (i) the Parent Average Stock Price by (ii) the
fractional share of Parent Common Stock to which such holder would
otherwise be entitled. Parent will make available to the Exchange Agent
any cash necessary for this purpose.
(g) In the event any Company Certificates shall have been
lost, stolen, or destroyed, the Exchange Agent shall issue in exchange
for such lost, stolen, or destroyed Company Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares
of Parent Common Stock and cash for fractional shares, if any, as may
be required pursuant to this Article 2; provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed Company
Certificate to deliver a bond in such sum as Parent may direct as
indemnity against any claim that may be made against Parent or the
Exchange Agent with respect to such Company Certificate alleged to have
been lost, stolen, or destroyed.
(h) Each person entitled to receive shares of Parent Common
Stock pursuant to this Article 2 shall receive together with such
shares the number of Parent preferred share purchase rights (pursuant
to the Rights Agreement dated as of June 27, 1991, between Parent and
Norwest Bank Minnesota, N.A., the "Parent Rights Plan") per share of
Parent Common Stock equal to the number of Parent preferred share
purchase rights associated with one share of Parent Common Stock at the
Effective Time.
2.5 Exchange of Merger Subsidiary Common Stock. From and after the
Effective Time, each outstanding certificate previously representing shares of
Merger Subsidiary Common Stock shall be deemed for all purposes to evidence
ownership of and to represent the number of shares of Surviving Corporation
Common Stock into which such shares of Merger Subsidiary Common Stock shall have
been converted. Promptly after the Effective Time, the Surviving Corporation
shall issue to Parent a stock certificate or certificates representing such
shares of Surviving Corporation Common Stock in exchange for the certificate or
certificates that formerly represented shares of Merger Subsidiary Common Stock,
which shall be cancelled.
2.6 Stock Options.
(a) Except as provided below with respect to the Company's
Employee Stock Purchase Plan, each option to purchase shares of Company
Common Stock that is outstanding at the Effective Time (a "Company
Option") shall, by virtue of the Merger and without any action on the
part of the holder thereof, be assumed by Parent (and a registration
statement on Form S-8 therefor shall be filed promptly after the
Effective Time) in such manner that Parent (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a)
applies" within the meaning of Section 424 of the Code and the
regulations thereunder or (ii) to the extent that Section 424 of the
<PAGE>
Code does not apply to any such Company Option, would be such a
corporation were Section 424 of the Code applicable to such Company
Option. From and after the Effective Time, all references to the
Company in the Company Options shall be deemed to refer to Parent
(other than for purposes of determining whether there has been a change
in control of the Company). The Company Options assumed by Parent shall
be exercisable upon the same terms and conditions as under the Company
Options (including provisions thereof, if any, relating to the
acceleration of vesting upon a change in control of the Company) except
that (i) such Company Options shall entitle the holder to purchase from
Parent the number of shares of Parent Common Stock (rounded to the
nearest whole number of such shares) that equals the product of the
Conversion Fraction multiplied by the number of shares of Company
Common Stock subject to such option immediately prior to the Effective
Time, and (ii) the option exercise price per share of Parent Common
Stock shall be an amount (rounded to the nearest full cent) equal to
the option exercise price per share of Company Common Stock in effect
immediately prior to the Effective Time divided by the Conversion
Fraction; provided, however, that in the case of any Company Option to
which Section 421 of the Code applies by reason of its qualification
under Section 422 of the Code ("incentive stock option"), the option
price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such options shall be determined in
order to comply with Section 424(a) of the Code. As promptly as
practicable after the Effective Time, Parent shall issue to each holder
of a Company Option a written instrument informing such holder of the
assumption by Parent of such Company Option.
(b) The current offering period in process as of the date of
the Merger Agreement under the Company's Employee Stock Purchase Plan
shall continue and shares shall be issued to participants thereunder as
provided under, and subject to the terms and conditions of, such Plan;
provided, however, that if the Effective Time occurs prior to the
originally scheduled expiration of such current offering period on
September 30, 1998, then immediately prior to the Effective Time, the
current offering period under the Company's Employee Stock Purchase
Plan shall be ended, and each participant shall be deemed to have
purchased immediately prior to the Effective Time, to the extent of
payroll deductions accumulated by such participant as of such offering
period end, the number of whole shares of Company Common Stock at a per
share price determined pursuant to the provisions of the Company's
Employee Stock Purchase Plan, and each participant shall receive a cash
payment equal to the balance, if any, of such accumulated payroll
deductions remaining after such purchase of such shares. As of the
Effective Time, all such shares shall be converted in the manner
provided in Section 2.2. No offering periods under the Company's
Employee Stock Purchase Plan that are subsequent to the current
offering period in process as of the date of the Merger Agreement shall
be commenced, and, the Company's Employee Stock Purchase Plan and all
purchase rights thereunder shall terminate effective as of the
Effective Time.
2.7 Capitalization Changes. If, between the date of the Merger
Agreement and the Effective Time, the outstanding shares of Parent Common Stock
shall have been changed into a different number of shares or a different class
by reason of any reclassification, recapitalization, split-up, combination,
exchange of shares, or stock dividend, the Conversion Fraction and all per-share
price amounts and calculations set forth in the Merger Agreement shall be
appropriately adjusted.
<PAGE>
ARTICLE 3
ORGANIZATION OF THE SURVIVING CORPORATION
3.1 Articles of Incorporation of the Surviving Corporation. The
Articles of Incorporation of the Company, as the Surviving Corporation, shall,
as of the Effective Time, be amended so as to be restated in their entity to
read as set forth on Schedule A-1 attached to this Plan of Merger.
3.2 Bylaws of the Surviving Corporation. The Bylaws of Merger
Subsidiary, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter amended in accordance with
applicable law.
3.3 Directors and Officers of the Surviving Corporation. The directors
and officers of Merger Subsidiary immediately prior to the Effective Time shall
be the directors and officers, respectively, of the Surviving Corporation until
their respective successors shall be duly elected and qualified.
ARTICLE 4
GENERAL PROVISIONS
4.1 Certain Effects of the Merger. As of the Effective Time, the
Company, as the Surviving Corporation, shall succeed to and possess all the
rights, privileges, powers, immunities, franchises, concessions, certificates
and authority, of a public as well as a private nature, of each of the
Constituent Corporations; and all property, real, personal and mixed, and every
interest therein, and all other choses in action of or belonging to either of
the Constituent Corporations on whatever account shall be vested in the Company
as the Surviving Corporation, without any further act or deed; and all property,
assets, rights, privileges, powers, immunities, franchises, concessions,
certificates and authority shall be thereafter as effectively the property of
the Company, as the Surviving Corporation, as they were or would be of the
Constituent Corporations or either of them; and title to any real estate or any
interest therein vested by deed or otherwise in either of the Constituent
Corporations shall not revert or be in any way impaired by reason of the Merger.
4.2 Rights and Duties of Surviving Corporation. The Company, as the
Surviving Corporation, shall be responsible and liable for all the debts,
liabilities, duties and obligations of each of the Constituent Corporations, and
as of the Effective Time all such debts, liabilities, duties and obligations
shall attach to the Company, as the Surviving Corporation, and may be enforced
against it to the same extent as if such debts, liabilities, duties and
obligations had been originally incurred or contracted by it; and any claim
existing or action or proceeding pending by or against either of the Constituent
Corporations may be prosecuted to judgment as if the merger had not taken place;
or the Company, as the Surviving Corporation, may be substituted in its place;
and neither the rights of creditors nor any liens upon property of either of the
Constituent Corporations shall be impaired by the merger.
4.3 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any instruments of
further assurance are desirable in order to evidence the vesting in it of the
title of either of the Constituent Corporations to any of the property rights of
the Constituent Corporations, the appropriate officers or directors of Merger
Subsidiary and the Company are hereby authorized to execute, acknowledge, and
deliver all such instruments of further assurance and to do all acts or things,
either in the name of Merger Subsidiary or the Company, as may be requisite or
desirable to carry out the provisions hereof.
<PAGE>
Schedule A-1
RESTATED ARTICLES OF INCORPORATION
OF
AVECOR CARDIOVASCULAR, INC.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be Medtronic AVECOR
Cardiovascular, Inc.
ARTICLE 2 - REGISTERED OFFICE AND AGENT
2.1) The registered office of the corporation in the State of Minnesota
is 405 Second Aveaue South, Minneapolis, Minnesota 55401. The name of its
registered agent at such address is CT Corporation System, Inc.
ARTICLE 3 - STOCK
3.1) Authorized Shares. The aggregate number of shares the corporation
has authority to issue shall be 2,500 shares of Common Stock, $.10 par value.
Holders of Common Stock shall be entitled to one vote for each share of Common
Stock held of record.
3.2) Issuance of Shares to Holders of Another Class or Series. The
Board of Directors is authorized to issue shares of the corporation of one class
or series to holders of that class or series or to holders of another class or
series to effectuate share dividends or splits.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
4.1) No Preemptive Rights. No holder of any class of stock of the
corporation shall be entitled to subscribe for or purchase such holder's
proportionate share of stock of any class of the corporation now or hereafter
authorized or issued.
4.2) No Cumulative Voting Rights. No shareholder shall be entitled to
cumulate votes for the election of directors and there shall be no cumulative
voting for any purpose whatsoever.
4.3) Voting Agreements. A written agreement among shareholders or
subscribers for shares to be issued, relating to the voting of their shares, is
valid and specifically enforceable by and against the parties to the agreement
under Section 302A.455 of the Minnesota Statutes.
ARTICLE 5 - WRITTEN ACTION BY DIRECTORS
5.1) Any action required or permitted to be taken at a Board meeting
may be taken by written action signed by all of the directors or, in cases where
the action need not be approved by the shareholders, by written action signed by
the number of directors that would be required to take the same action at a
meeting of the Board at which all directors were present.
ARTICLE 6 - LIMITATION OF DIRECTOR LIABILITY
6.1) A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except to the extent provided by applicable law
(i) for any breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Sections
302A.559 or 80A.23 of the Minnesota Statutes, as amended, (iv) for any
transaction from which the director derived an improper personal benefit, or (v)
for any act or omission occurring prior to the date that this Article becomes
effective. No amendment to or repeal of this Article shall apply to or have any
effect on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
<PAGE>
Appendix B
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MEDTRONIC, INC.,
AC MERGER CORP.,
AND
AVECOR CARDIOVASCULAR, INC.
July 12, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 THE MERGER; CONVERSION OF SHARES...................................B-5
1.1 The Merger.........................................................B-5
1.2 Effective Time.....................................................B-5
1.3 Conversion of Shares...............................................B-6
1.4 Dissenting Shares..................................................B-7
1.5 Exchange of Company Common Stock...................................B-7
1.6 Exchange of Merger Subsidiary Common Stock.........................B-9
1.7 Stock Options......................................................B-9
1.8 Capitalization Changes............................................B-10
1.9 Articles of Incorporation of the Surviving Corporation............B-10
1.10 Bylaws of the Surviving Corporation..............................B-10
1.11 Directors and Officers of the Surviving Corporation..............B-11
ARTICLE 2 CLOSING...........................................................B-11
2.1 Time and Place....................................................B-11
2.2 Filings at the Closing............................................B-11
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................B-11
3.1 Disclosure Schedule...............................................B-11
3.2 Organization......................................................B-11
3.3 Authorization.....................................................B-12
3.4 Capitalization....................................................B-12
3.5 Reports and Financial Statements..................................B-13
3.6 Absence of Undisclosed Liabilities................................B-14
3.7 Consents and Approvals............................................B-14
3.8 Compliance with Laws..............................................B-15
3.9 Litigation........................................................B-15
3.10 Absence of Material Adverse Changes..............................B-15
3.11 Environmental Laws and Regulations...............................B-16
3.12 Officers, Directors and Employees................................B-17
3.13 Taxes............................................................B-17
3.14 Contracts........................................................B-18
3.15 Title to Properties; Liens.......................................B-19
3.16 Permits, Licenses, Etc...........................................B-19
3.17 Intellectual Property Rights.....................................B-19
3.18 Benefit Plans....................................................B-20
3.19 Minute Books.....................................................B-22
3.20 Insurance Policies...............................................B-22
3.21 Bank Accounts....................................................B-22
3.22 Powers of Attorney...............................................B-22
3.23 Product Liability Claims.........................................B-22
3.24 Warranties.......................................................B-22
3.25 Inventories......................................................B-22
3.26 Relations with Suppliers and Customers...........................B-23
3.27 No Finders.......................................................B-23
3.28 Proxy Statement..................................................B-23
3.29 Merger Filings...................................................B-23
3.30 Fairness Opinion.................................................B-24
3.31 State Takeover Laws..............................................B-24
<PAGE>
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBSIDIARY....B-24
4.1 Organization......................................................B-24
4.2 Authorization.....................................................B-25
4.3 Capitalization....................................................B-25
4.4 Consents and Approvals............................................B-25
4.5 Reports; Financial Statements; Absence of Changes.................B-26
4.6 Registration Statement............................................B-27
4.7 Merger Filings....................................................B-27
4.8 No Finders........................................................B-27
ARTICLE 5 COVENANTS.........................................................B-27
5.1 Conduct of Business of the Company................................B-27
5.2 No Solicitation...................................................B-30
5.3 Access and Information............................................B-31
5.4 Approval of Shareholders; Proxy Statement; Registration Statement.B-31
5.5 Consents..........................................................B-32
5.6 Affiliates' Letters...............................................B-33
5.7 Expenses..........................................................B-33
5.8 Further Actions...................................................B-33
5.9 Regulatory Approvals..............................................B-33
5.10 Certain Notifications............................................B-34
5.11 Voting of Shares.................................................B-34
5.12 Noncompetition Agreements........................................B-34
5.13 NYSE Listing Application.........................................B-34
5.14 Indemnification..................................................B-34
5.15
5.16 Subsidiary Shares................................................B-35
5.17 Stock Option Agreement...........................................B-35
5.18 Benefit Plans and Employee Matters...............................B-35
5.19 Tax..............................................................B-35
ARTICLE 6 CLOSING CONDITIONS................................................B-35
6.1 Conditions to Obligations of Parent, Merger Subsidiary, and the
Company...........................................................B-35
6.2 Conditions to Obligations of Parent and Merger Subsidiary.........B-36
6.3 Conditions to Obligations of the Company..........................B-37
ARTICLE 7 TERMINATION AND ABANDONMENT.......................................B-38
7.1 Termination.......................................................B-38
7.2 Effect of Termination.............................................B-39
ARTICLE 8 MISCELLANEOUS.....................................................B-40
8.1 Amendment and Modification........................................B-40
8.2 Waiver of Compliance; Consents....................................B-40
8.3 Investigation; Survival of Representations and Warranties.........B-40
8.4 Notices...........................................................B-41
8.5 Assignment........................................................B-42
8.6 Governing Law.....................................................B-42
8.7 Counterparts......................................................B-42
8.8 Knowledge.........................................................B-42
8.9 Interpretation....................................................B-42
8.10 Publicity........................................................B-42
8.11 Entire Agreement.................................................B-42
EXHIBITS:
Exhibit A: Form of Plan of Merger
Exhibit B: Form of Affiliate's Letter
Exhibit C: Form of Agreement to Facilitate Merger
Exhibit D: Form of Noncompetition Agreement
Exhibit E: Form of Stock Option Agreement
Exhibit F: Form of Opinion of the Company's Counsel
Exhibit G: Form of Opinion of Parent's Counsel
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is dated as of July 12, 1998, by and among Medtronic,
Inc., a Minnesota corporation ("Parent"), AC Merger Corp., a Minnesota
corporation and wholly-owned subsidiary of Parent ("Merger Subsidiary"), and
AVECOR Cardiovascular, Inc., a Minnesota corporation (the "Company").
WHEREAS, the Boards of Directors of Parent, Merger Subsidiary, and the
Company have approved the merger of Merger Subsidiary with and into the Company
(the "Merger") upon the terms and subject to the conditions set forth herein;
and
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section
368(a)(1)(A) and (a)(2)(E) of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, prior to the execution of the Stock Option Agreement described
in Section 5.17, officers and directors of the Company have, to induce Parent to
execute this Agreement, executed and delivered to Parent the Agreements to
Facilitate Merger described in Section 5.11; and
WHEREAS, as a further and subsequent inducement to have Parent execute
this Agreement, Parent and the Company are entering into the Stock Option
Agreement described in Section 5.17 hereof after execution and delivery of the
Agreements to Facilitate Merger described in Section 5.11; and
WHEREAS, the parties hereto desire to make certain representations,
warranties, and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants, and agreements contained herein,
the parties hereto agree as follows:
ARTICLE 1
THE MERGER; CONVERSION OF SHARES
1.1......The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), Merger
Subsidiary shall be merged with and into the Company in accordance with the
provisions of the Minnesota Business Corporation Act (the "MBCA"), whereupon the
separate corporate existence of Merger Subsidiary shall cease, and the Company
shall continue as the surviving corporation (the "Surviving Corporation"). From
and after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers, and franchises and be subject to all the
restrictions, disabilities, and duties of the Company and Merger Subsidiary, all
as more fully described in the MBCA.
1.2......Effective Time. As soon as practicable after each of the
conditions set forth in Article 6 has been satisfied or waived, the Company and
Merger Subsidiary will file, or cause to be filed, with the Secretary of State
of the State of Minnesota Articles of Merger for the Merger, which Articles
shall be in the form required by and executed in accordance with the applicable
provisions of the MBCA and shall include as a part thereof a plan of merger (the
"Plan of Merger") substantially in the form attached hereto as Exhibit A. The
Merger shall become effective at the time such filing is made or, if agreed to
by Parent and the Company, such later time or date set forth in the Articles of
Merger (the "Effective Time").
<PAGE>
1.3......Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any share of capital
stock of the Company or Merger Subsidiary:
(a) Each share of common stock of the Company, par value $.01
per share ("Company Common Stock"), issued and outstanding immediately
prior thereto (except for Dissenting Shares, as defined in Section 1.4
hereof, and except for shares referred to in Section 1.3(b) hereof)
shall be converted into the right to receive the fraction of a share
(subject to adjustment as provided below, the "Conversion Fraction") of
common stock of Parent, par value $.10 per share ("Parent Common
Stock"), equal to $11.125 divided by the Parent Average Stock Price.
The "Parent Average Stock Price" shall mean the average (rounded to the
nearest full cent, with the cents rounded up if the third decimal place
is 5 or more) of the daily closing sale prices of a share of Parent
Common Stock as reported on the New York Stock Exchange ("NYSE")
Composite Tape, as reported in The Wall Street Journal, for the 18
consecutive NYSE trading days ending on and including the second NYSE
trading day immediately preceding the Effective Time.
Notwithstanding the foregoing, if the sum of the number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time plus the number of shares subject to then outstanding
options, warrants, or other rights to acquire shares of Company Common
Stock (collectively, "Company Stock Acquisition Rights") is greater
than 8,879,725 shares plus that number of shares issuable pursuant to
the current offering period in process as of the date of this Agreement
under the Company's Employee Stock Purchase Plan or if the aggregate
exercise price of all such Company Stock Acquisition Rights then
outstanding is less than the aggregate exercise price reflected in
Section 3.4 hereof, then the $11.125 amount per share of Company Common
Stock, as described above, shall be reduced to an amount, if lower,
equal to (i) $11.125 times [8,879,725 shares plus that number of shares
issuable pursuant to the current offering period in process as of the
date of this Agreement under the Company's Employee Stock Purchase
Plan] minus the aggregate exercise price reflected in Section 3.4
hereof plus the aggregate amount received by the Company as a result of
any issuance of Company Common Stock after the date of this Agreement
and prior to the Effective Time plus the aggregate exercise price of
all Company Stock Acquisition Rights outstanding immediately prior to
the Effective Time divided by (ii) the sum of (A) the number of shares
of Company Common Stock outstanding immediately prior to the Effective
Time plus (B) the number of shares subject to Company Stock Acquisition
Rights then outstanding.
An appropriate adjustment shall similarly be made in the event
that, prior to the Effective Time, the outstanding shares of Company
Common Stock, without new consideration, are changed into or exchanged
for a different kind of shares or securities through a reorganization,
reclassification, stock dividend, stock combination, or other like
change in the Company's capitalization. Notwithstanding the foregoing,
nothing in this section shall be deemed to constitute authorization or
permission for or consent from Parent or Merger Subsidiary to any
increase in the number of shares of Company Common Stock outstanding or
subject to outstanding Company Stock Acquisition Rights, to any
decrease in the exercise price of such Rights, or to any
reorganization, reclassification, stock dividend, stock combination, or
other like change in capitalization.
<PAGE>
(b) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time that is then owned beneficially
or of record by Parent, Merger Subsidiary, or any direct or indirect
subsidiary of Parent or the Company shall be cancelled without payment
of any consideration therefor and without any conversion thereof.
(c) Each share of any other class of capital stock of the
Company (other than Company Common Stock) shall be cancelled without
payment of any consideration therefor and without any conversion
thereof.
(d) Each share of common stock of Merger Subsidiary, par value
$.01 per share ("Merger Subsidiary Common Stock"), issued and
outstanding immediately prior to the Effective Time shall be converted
into one share of the common stock of the Surviving Corporation, par
value $.01 per share ("Surviving Corporation Common Stock").
1.4 Dissenting Shares. Notwithstanding any provision of this Agreement
to the contrary, each outstanding share of Company Common Stock, the holder of
which has demanded and perfected such holder's right to dissent from the Merger
and to be paid the fair value of such shares in accordance with Sections
302A.471 and 302A.473 of the MBCA and, as of the Effective Time, has not
effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"),
shall not be converted into or represent a right to receive the Parent Common
Stock into which shares of Company Common Stock are converted pursuant to
Section 1.3 hereof, but the holder thereof shall be entitled only to such rights
as are granted by the MBCA. Parent shall cause the Company to make all payments
to holders of shares of Company Common Stock with respect to such demands in
accordance with the MBCA. The Company shall give Parent (i) prompt written
notice of any notice of intent to demand fair value for any shares of Company
Common Stock, withdrawals of such notices, and any other instruments served
pursuant to the MBCA and received by the Company, and (ii) the opportunity to
conduct jointly all negotiations and proceedings with respect to demands for
fair value for shares of Company Common Stock under the MBCA. The Company shall
not, except with the prior written consent of Parent or as otherwise required by
law, voluntarily make any payment with respect to any demands for fair value for
shares of Company Common Stock or offer to settle or settle any such demands.
1.5 Exchange of Company Common Stock.
(a) Promptly after the Effective Time, Parent shall cause
Parent's stock transfer agent or such other person as Parent may
appoint to act as exchange agent (the "Exchange Agent") to mail to each
holder of record (other than Parent, Merger Subsidiary, or any other
subsidiary of Parent or the Company) of a certificate or certificates
that immediately prior to the Effective Time represented outstanding
shares of Company Common Stock ("Company Certificates") a form letter
of transmittal (which shall specify that delivery shall be effective,
and risk of loss and title to the Company Certificate(s) shall pass,
only upon delivery of the Company Certificate(s) to the Exchange Agent)
and instructions for such holder's use in effecting the surrender of
the Company Certificates in exchange for certificates representing
shares of Parent Common Stock.
(b) As soon as practicable after the Effective Time, the
Exchange Agent shall distribute to holders of shares of Company Common
Stock, upon surrender to the Exchange Agent of one or more Company
Certificates for cancellation, together with a duly-executed letter of
transmittal, (i) one or more Parent certificates representing the
number of whole shares of Parent Common Stock into which the shares
represented by the Company Certificate(s) shall have been converted
pursuant to Section 1.3(a), and (ii) a bank check in the amount of cash
<PAGE>
into which the shares represented by the Company Certificate(s) shall
have been converted pursuant to Section 1.5(f) (relating to fractional
shares), and the Company Certificate(s) so surrendered shall be
cancelled. In the event of a transfer of ownership of Company Common
Stock that is not registered in the transfer records of the Company, it
shall be a condition to the issuance of shares of Parent Common Stock
that the Company Certificate(s) so surrendered shall be properly
endorsed or be otherwise in proper form for transfer and that such
transferee shall (i) pay to the Exchange Agent any transfer or other
taxes required, or (ii) establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(c) Holders of Company Common Stock will be entitled to any
dividends or other distributions pertaining to the Parent Common Stock
received in exchange therefor that become payable to persons who are
holders of record of Parent Common Stock as of a record date on the
same date as or after the Effective Time, but only after they have
surrendered their Company Certificates for exchange. Subject to the
effect, if any, of applicable law, the Exchange Agent shall receive,
hold, and remit any such dividends or other distributions to each such
record holder entitled thereto, without interest, at the time that such
Company Certificates are surrendered to the Exchange Agent for
exchange. Holders of Company Common Stock will not be entitled,
however, to dividends or other distributions that become payable before
or after the Effective Time to persons who were holders of record of
Parent Common Stock as of a record date that is prior to the Effective
Time.
(d) All shares of Parent Common Stock issued upon the
surrender for exchange of Company Common Stock in accordance with the
terms hereof (including any cash paid for fractional shares pursuant to
Section 1.5(f) hereof) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Common
Stock.
(e) After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Company Certificates representing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged as
provided in this Article 1. As of the Effective Time, the holders of
Company Certificates representing shares of Company Common Stock shall
cease to have any rights as shareholders of the Company, except such
rights, if any, as they may have pursuant to the MBCA. Except as
provided above, until such Company Certificates are surrendered for
exchange, each such Company Certificate shall, after the Effective
Time, represent for all purposes only the right to receive the number
of whole shares of Parent Common Stock into which the shares of Company
Common Stock shall have been converted pursuant to the Merger as
provided in Section 1.3(a) hereof and the right to receive the cash
value of any fraction of a share of Parent Common Stock as provided in
Section 1.5(f) hereof.
(f) No fractional shares of Parent Common Stock and no
certificates or scrip therefor, or other evidence of ownership thereof,
shall be issued upon the surrender for exchange of Company
Certificates, no dividend or other distribution of Parent shall relate
to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any rights of a shareholder of
Parent. All fractional shares of Parent Common Stock to which a holder
of Company Common Stock immediately prior to the Effective Time would
otherwise be entitled, at the Effective Time, shall be aggregated if
and to the extent multiple Company Certificates of such holder are
<PAGE>
submitted together to the Exchange Agent. If a fractional share results
from such aggregation, then (in lieu of such fractional share) the
Exchange Agent shall pay to each holder of shares of Company Common
Stock who otherwise would be entitled to receive such fractional share
of Parent Common Stock an amount of cash (without interest) determined
by multiplying (i) the Parent Average Stock Price by (ii) the
fractional share of Parent Common Stock to which such holder would
otherwise be entitled. Parent will make available to the Exchange Agent
any cash necessary for this purpose.
(g) In the event any Company Certificates shall have been
lost, stolen, or destroyed, the Exchange Agent shall issue in exchange
for such lost, stolen, or destroyed Company Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares
of Parent Common Stock and cash for fractional shares, if any, as may
be required pursuant to this Article 1; provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed Company
Certificate to deliver a bond in such sum as Parent may direct as
indemnity against any claim that may be made against Parent or the
Exchange Agent with respect to such Company Certificate alleged to have
been lost, stolen, or destroyed.
(h) Each person entitled to receive shares of Parent Common
Stock pursuant to this Article 1 shall receive together with such
shares the number of Parent preferred share purchase rights (pursuant
to the Rights Agreement dated as of June 27, 1991, between Parent and
Norwest Bank Minnesota, N.A., the "Parent Rights Plan") per share of
Parent Common Stock equal to the number of Parent preferred share
purchase rights associated with one share of Parent Common Stock at the
Effective Time.
1.6 Exchange of Merger Subsidiary Common Stock. From and after the
Effective Time, each outstanding certificate previously representing shares of
Merger Subsidiary Common Stock shall be deemed for all purposes to evidence
ownership of and to represent the number of shares of Surviving Corporation
Common Stock into which such shares of Merger Subsidiary Common Stock shall have
been converted. Promptly after the Effective Time, the Surviving Corporation
shall issue to Parent a stock certificate or certificates representing such
shares of Surviving Corporation Common Stock in exchange for the certificate or
certificates that formerly represented shares of Merger Subsidiary Common Stock,
which shall be cancelled.
1.7 Stock Options.
(a) Except as provided below with respect to the Company's
Employee Stock Purchase Plan, each option to purchase shares of Company
Common Stock that is outstanding at the Effective Time (a "Company
Option") shall, by virtue of the Merger and without any action on the
part of the holder thereof, be assumed by Parent (and a registration
statement on Form S-8 therefor shall be filed promptly after the
Effective Time) in such manner that Parent (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a)
applies" within the meaning of Section 424 of the Code and the
regulations thereunder or (ii) to the extent that Section 424 of the
Code does not apply to any such Company Option, would be such a
corporation were Section 424 of the Code applicable to such Company
Option. From and after the Effective Time, all references to the
Company in the Company Options shall be deemed to refer to Parent
<PAGE>
(other than for purposes of determining whether there has been a change
in control of the Company). The Company Options assumed by Parent shall
be exercisable upon the same terms and conditions as under the Company
Options (including provisions thereof, if any, relating to the
acceleration of vesting upon a change in control of the Company) except
that (i) such Company Options shall entitle the holder to purchase from
Parent the number of shares of Parent Common Stock (rounded to the
nearest whole number of such shares) that equals the product of the
Conversion Fraction multiplied by the number of shares of Company
Common Stock subject to such option immediately prior to the Effective
Time, and (ii) the option exercise price per share of Parent Common
Stock shall be an amount (rounded to the nearest full cent) equal to
the option exercise price per share of Company Common Stock in effect
immediately prior to the Effective Time divided by the Conversion
Fraction; provided, however, that in the case of any Company Option to
which Section 421 of the Code applies by reason of its qualification
under Section 422 of the Code ("incentive stock options"), the option
price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such options shall be determined in
order to comply with Section 424(a) of the Code. As promptly as
practicable after the Effective Time, Parent shall issue to each holder
of a Company Option a written instrument informing such holder of the
assumption by Parent of such Company Option.
(b) The current offering period in process as of the date of
this Agreement under the Company's Employee Stock Purchase Plan shall
continue and shares shall be issued to participants thereunder as
provided under, and subject to the terms and conditions of, such Plan;
provided, however, that if the Effective Time occurs prior to the
originally scheduled expiration of such current offering period on
September 30, 1998, then immediately prior to the Effective Time, such
current offering period under the Company's Employee Stock Purchase
Plan shall be ended, and each participant shall be deemed to have
purchased immediately prior to the Effective Time, to the extent of
payroll deductions accumulated by such participant as of such offering
period end, the number of whole shares of Company Common Stock at a per
share price determined pursuant to the provisions of the Company's
Employee Stock Purchase Plan, and each participant shall receive a cash
payment equal to the balance, if any, of such accumulated payroll
deductions remaining after such purchase of such shares. As of the
Effective Time, all such shares shall be converted in the manner
provided in Section 1.3. No offering periods under the Company's
Employee Stock Purchase Plan that are subsequent to the current
offering period in process as of the date of this Agreement shall be
commenced, and the Company's Employee Stock Purchase Plan and all
purchase rights thereunder shall terminate effective as of the
Effective Time.
1.8 Capitalization Changes. If, between the date of this Agreement and
the Effective Time, the outstanding shares of Parent Common Stock shall have
been changed into a different number of shares or a different class by reason of
any reclassification, recapitalization, split-up, combination, exchange of
shares, or stock dividend, the Conversion Fraction and all per-share price
amounts and calculations set forth in this Agreement shall be appropriately
adjusted.
1.9 Articles of Incorporation of the Surviving Corporation. The
Articles of Incorporation of Merger Subsidiary, as in effect immediately prior
to the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable law;
provided, however, that upon the Effective Time, Article 1 of the Articles of
Incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of the corporation shall be Medtronic AVECOR
Cardiovascular, Inc."
1.10 Bylaws of the Surviving Corporation. The Bylaws of Merger
Subsidiary, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter amended in accordance with
applicable law.
<PAGE>
1.11 Directors and Officers of the Surviving Corporation. The directors
and officers of Merger Subsidiary immediately prior to the Effective Time shall
be the directors and officers, respectively, of the Surviving Corporation until
their respective successors shall be duly elected and qualified.
ARTICLE 2
CLOSING
2.1 Time and Place. Subject to the satisfaction or waiver of the
provisions of Article 6, the closing of the Merger (the "Closing") shall take
place at 10:00 a.m., local time, on the day the Merger is approved by the
shareholders of the Company at the Company Shareholders Meeting (as defined in
Section 5.4 hereof), or as soon thereafter as all conditions to Closing have
been satisfied or waived, or on such other date and/or at such other time as
Parent and the Company may mutually agree. The date on which the Closing
actually occurs is herein referred to as the "Closing Date." The Closing shall
take place at the corporate headquarters offices of Parent, or at such other
place or in such other manner (e.g., by telecopy exchange of signature pages
with originals to follow by overnight delivery) as the parties hereto may agree.
2.2 Filings at the Closing. At the Closing, subject to the provisions
of Article 6, Parent, Merger Subsidiary, and the Company shall cause Articles of
Merger to be filed in accordance with the provisions of Section 302A.615 of the
MBCA, and take any and all other lawful actions and do any and all other lawful
things necessary to cause the Merger to become effective.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Subsidiary as
of the date hereof as follows:
3.1 Disclosure Schedule. As of the date hereof, the Company has not
completed its internal investigation and review for purposes of confirming and
verifying the representations and warranties of the Company contained in this
Agreement. On or prior to the close of business on the tenth business day after
the date hereof, the Company shall deliver to Parent a disclosure schedule ( the
"Disclosure Schedule") with each disclosure therein set forth in the section or
subsection which corresponds by number for purposes of exceptions to a
representation or warranty to the applicable section or subsection of this
Article 3. In the event that Parent determines that the Disclosure Schedule
contains information which in Parent's good faith, reasonable business judgment
adversely affects the value of the Company's business or prospects, then Parent
shall have the right, within 10 business days of the receipt of the full and
complete Disclosure Schedule, to terminate this Agreement as set forth in
Section 7.1(i) hereto.
3.2 Organization. The Company and each subsidiary of the Company
(referred to herein as a "Subsidiary") is a corporation duly organized, validly
existing, and in good standing under the laws of its respective jurisdiction of
incorporation and has all requisite corporate power and authority to own, lease,
and operate its properties and to carry on its business as now being conducted.
The Company and each Subsidiary is duly qualified and in good standing to do
business in each jurisdiction in which the property owned, leased, or operated
<PAGE>
by it or the nature of the business conducted by it makes such qualification
necessary and where the failure to qualify could reasonably be expected to have
a Company Material Adverse Effect (as defined below). "Company Material Adverse
Effect" means any effect, change or event that, individually or in the aggregate
with all similar effects, changes or events, is or would reasonably be expected
to be material and adverse: (i) either before or immediately after the Effective
Time, to the business, properties, liabilities, results of operation, or
financial condition of the Company and its Subsidiaries, considered as a whole;
or (ii) to the Company's ability to perform any of its obligations under this
Agreement or to consummate the Merger; provided, however, that Company Material
Adverse Effect shall not be deemed to include the impact of actions or omissions
of the Company taken with the prior written consent of Parent in contemplation
of the transactions contemplated hereby, or the effects of the Merger (or any
announcement with respect thereto) and compliance with the provisions of this
Agreement on the operating performance or prospects of the Company and its
subsidiaries, including without limitation, any such loss of customer or
distributor relationships or employees following the announcement of the Merger.
The jurisdictions in which the Company and each Subsidiary are qualified are
listed on the Disclosure Schedule. The Company has heretofore delivered to
Parent complete and accurate copies of the Articles of Incorporation and Bylaws
of the Company and each Subsidiary, as currently in effect. Except to the extent
specifically disclosed on the Disclosure Schedule, or any entity in which the
Company owns, directly or indirectly, an equity interest of less than 1% of the
fair market value of such entity's outstanding equity securities, neither the
Company nor any Subsidiary, directly or indirectly, owns or controls or has any
capital, equity, partnership, participation, or other ownership interest in any
corporation, partnership, joint venture, or other business association or
entity.
3.3 Authorization. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and, subject to obtaining the
necessary approval of its shareholders, the requisite corporate power and
authority to consummate the transactions contemplated hereby, and to file and
distribute the Proxy Statement/Prospectus (as defined in Section 5.4 hereof).
The execution and delivery of this Agreement by the Company and the consummation
of the transactions contemplated hereby have been duly and validly authorized
and approved by the Company's Board of Directors and, in accordance with Section
302A.673 of the MBCA, by the required committee of such Board of Directors, no
other corporate proceedings on the part of the Company or any Subsidiary are
necessary to authorize this Agreement, and, subject to obtaining the approval of
the Company's shareholders, no other corporate action on the part of the Company
or any Subsidiary is necessary to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Company and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and rules
of law governing specific performance, injunctive relief, or other equitable
remedies. To the Company's knowledge, each Agreement to Facilitate Merger and
Affiliate's Letter (as described in Sections 5.11 and 5.6) has been duly and
validly executed and delivered by the Company shareholder who is a party thereto
and constitutes the valid and binding obligation of such shareholder,
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and rules of law governing specific
performance, injunctive relief, or other equitable remedies.
3.4 Capitalization. The authorized capital stock of the Company
consists of (i) 20,000,000 shares of Company Common Stock, par value $.01 per
share, of which 8,044,475 shares are issued and outstanding, and (ii) 2,000,000
shares of Company Preferred Stock, par value $.01 per share, including 200,000
shares of Series A Junior Preferred Stock, none of which are issued or
outstanding. Except as set forth on the Disclosure Schedule, all issued and
outstanding shares of capital stock of each Subsidiary are owned, beneficially
and of record, by the Company, free and clear of any Liens (as defined in
Section 3.15). All issued and outstanding shares of Company Common Stock have
been validly issued, are fully paid and nonassessable, and have not been issued
<PAGE>
in violation of and are not currently subject to any preemptive rights. Except
as set forth on the Disclosure Schedule and except for options to purchase an
aggregate 832,250 shares of Company Common Stock at an aggregate exercise price
of $8,005,782 granted pursuant to the Company's 1991 Stock Incentive Plan and
1995 Non-Employee Director Option Plan (collectively, the "Company Option
Plans") listed, together with their respective exercise prices, on the
Disclosure Schedule, and except for the rights to purchase under the Company's
Employee Stock Purchase Plan shares of Company Common Stock (estimated to be
approximately 10,000 shares, at a per share price of $7.44, based on the current
contribution rates of the participants, as listed on the Disclosure Schedule,
and assuming the current Plan offering period in process as of the date of this
Agreement is ended on September 30, 1998 for this purpose), there are not any
outstanding or authorized subscriptions, options, warrants, calls, rights,
convertible securities, commitments, restrictions, arrangements, or any other
agreements of any character to which the Company or any Subsidiary is a party
that, directly or indirectly, (i) obligate the Company or any Subsidiary to
issue any shares of capital stock or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
shares of capital stock, (ii) call for or relate to the sale, pledge, transfer,
or other disposition or encumbrance by the Company or any Subsidiary of any
shares of its capital stock, or (iii) to the knowledge of the Company, relate to
the voting or control of such capital stock. The Disclosure Schedule sets forth
a complete and accurate list of all stock options, warrants, and other rights to
acquire Company Common Stock, including the name of the holder, the date of
grant, acquisition price, expiration date, number of shares, exercisability
schedule, and, in the case of options, the type of option under the Code. The
Disclosure Schedule also sets forth the contractual restrictions to which any
shares of Company Common Stock issued pursuant to the Company Option Plans or
otherwise are currently subject and also sets forth the restrictions to which
such shares will be subject immediately after the Effective Time, other than as
set forth in the Company Option Plans or stock option agreements thereunder. No
consent of holders or participants under the Company Option Plans or Employee
Stock Purchase Plan is required to carry out the provisions of Section 1.7. All
actions, if any, required on the part of the Company under the Company Option
Plans or Employee Stock Purchase Plan to allow for the treatment of Company
Options and the Employee Stock Purchase Plan as is provided in Section 1.7, has
been, or prior to the Closing will be, validly taken by the Company, and the
Company will not from and after the date hereof allow any increase in the rate
of a participant's contributions to the Employee Stock Purchase Plan, any new
enrollments or re-enrollments in the current offering period in process as of
the date of this Agreement under such Plan or the commencement of any offering
periods under such Plan subsequent to the current offering period in process as
of the date of this Agreement.
3.5 Reports and Financial Statements. The Company has filed all forms,
reports, registration statements, and documents required to be filed by it with
the Securities and Exchange Commission ("SEC") since January 1, 1995 (such
forms, reports, registration statements, and documents, together with any
amendments thereto, are referred to as the "Company SEC Filings"). As of their
respective dates, the Company SEC Filings (i) complied as to form in all
material respects with the applicable requirements of the Securities Act of 1933
and the rules and regulations thereunder (the "1933 Act") and the Securities
Exchange Act of 1934 and the rules and regulations thereunder (the "1934 Act"),
as the case may be, and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. The audited financial statements and unaudited
interim financial statements included or incorporated by reference in the
Company SEC Filings, including but not limited to the Company's audited
financial statements at and for the year ended December 31, 1997 (the "Company
1997 Financials"), (i) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto), subject, in the
case of unaudited interim financial statements, to the absence of notes and to
year-end adjustments, (ii) complied as of their respective dates in all material
respects with applicable accounting requirements and the published rules and
<PAGE>
regulations of the SEC with respect thereto, and (iii) fairly presented the
consolidated financial position of the Company as of the dates thereof and the
income, cash flows, and changes in shareholders' equity for the periods
involved. The statements of earnings included in the audited or unaudited
interim financial statements in the Company SEC Filings do not contain any items
of special or nonrecurring income or any other income not earned in the ordinary
course of business, except as expressly specified in the applicable statement of
operations or notes thereto. Prior to the date hereof, the Company has delivered
to Parent complete and accurate copies of all Company SEC Filings since January
1, 1995. The Company has also delivered to Parent complete and accurate copies
of all statements on Schedule 13D and Schedule 13G known to the Company to have
been filed with the SEC since January 1, 1997, with respect to capital stock of
the Company. Since January 1, 1997, the Company has filed in a timely manner all
reports required to be filed by it pursuant to Sections 13, 14, or 15(d) of the
1934 Act.
3.6 Absence of Undisclosed Liabilities. Except to the extent
specifically disclosed on the Disclosure Schedule, neither the Company nor any
Subsidiary has any liabilities or obligations of any nature (whether absolute,
accrued, contingent, or otherwise) which would have a Company Material Adverse
Effect except (a) liabilities or obligations that are accrued or reserved
against in the audited consolidated balance sheet of the Company as of December
31, 1997 contained in the Company 1997 Financials (the "Company Audited Balance
Sheet") or in the unaudited consolidated balance sheet of the Company as of
March 31, 1998 contained in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998 (the "Company Interim Balance Sheet"), and
(b) liabilities or obligations disclosed in this Agreement.
3.7 Consents and Approvals. Except for (i) any applicable requirements
of the 1933 Act, the 1934 Act, state securities laws, the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the regulations thereunder (the "HSR
Act"), and the antitrust, competition, foreign investment, or similar laws of
any foreign countries or supranational commissions or boards that require
pre-merger notifications or filings with respect to the Merger (collectively,
"Foreign Merger Laws"), (ii) approval by the Company's shareholders, (iii) the
filing and recordation of appropriate merger documents as required by the MBCA,
(iv) compliance with Sections 302A.471 and 302A.473 of the MBCA regarding
dissenters' rights, or (v) any items disclosed on the Disclosure Schedule, the
execution and delivery of this Agreement and the Stock Option Agreement by the
Company, and, to the Company's knowledge, the execution and delivery of the
Agreements to Facilitate Merger, and the consummation of the transactions
contemplated hereby and thereby will not: (a) violate any provision of the
Articles of Incorporation or Bylaws of the Company or any Subsidiary; (b)
violate any statute, rule, regulation, order, or decree of any federal, state,
local, or foreign body or authority (including, but not limited to, the Food and
Drug Administration (the "FDA") or any nongovernmental self-regulatory agency)
by which the Company or any Subsidiary or any of their respective properties or
assets may be bound; (c) require any filing with or permit, consent, or approval
of any federal, state, local, or foreign public body or authority (including,
but not limited to, the FDA or any nongovernmental self-regulatory agency); or
(d) result in any violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default under, result in the loss of any
material benefit under, or give rise to any right of termination, cancellation,
increased payments, or acceleration under, or result in the creation of any Lien
(as defined in Section 3.15) on any of the properties or assets of the Company
or any Subsidiary under, any of the terms, conditions, or provisions of any
<PAGE>
note, bond, mortgage, indenture, license, franchise, permit, authorization,
agreement, or other instrument or obligation to which the Company or any
Subsidiary is a party, or by which it or any of its properties or assets may be
bound, except, (x) in the cases of clauses (b) or (c), where such violation,
failure to make any such filing or failure to obtain such permit, consent or
approval, would not prevent or delay consummation of this Merger or otherwise
prevent the Company from performing its obligations under this Agreement and
would not have a Company Material Adverse Effect, and (y) in the case of clause
(d), for any such violations, breaches, defaults, or other occurrences that
would not prevent or delay consummation of any of the transactions contemplated
hereby in any material respect, or otherwise prevent the Company from performing
its obligations under this Agreement in any material respect, and would not have
a Company Material Adverse Effect.
3.8 Compliance with Laws. Except to the extent specifically disclosed
on the Disclosure Schedule, all activities of the Company and each Subsidiary
have been, and are currently being, conducted in compliance with all applicable
federal, state, local, and foreign laws, ordinances, regulations,
interpretations, judgments, decrees, injunctions, permits, licenses,
certificates, governmental requirements (including, but not limited to FDA Good
Manufacturing Practices), orders, and other similar items of any court or other
governmental entity (including, but not limited to, those of the FDA or any
nongovernmental self-regulatory agency), the failure to comply with which could
reasonably be expected to have a Company Material Adverse Effect. The Company
and each Subsidiary has timely filed or otherwise provided all registrations,
reports, data, and other information and applications with respect to its
medical device, pharmaceutical, consumer, health care, and other governmentally
regulated products (the "Regulated Products") required to be filed with or
otherwise provided to the FDA or any other federal, state, local, or foreign
governmental authorities with jurisdiction over the manufacture, use, or sale of
the Regulated Products, and all regulatory licenses or approvals in respect
thereof are in full force and effect, except where the failure to file timely
such registrations, reports, data, information, and applications or the failure
to have such licenses and approvals in full force and effect would not have a
Company Material Adverse Effect.
3.9 Litigation. Except to the extent specifically disclosed on the
Disclosure Schedule, to the Company's knowledge, no investigation or review by
any federal, state, local, or foreign body or authority (including, but not
limited to, the FDA or any nongovernmental self-regulatory agency) with respect
to the Company or any Subsidiary is pending or threatened, nor has any such body
or authority (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency) indicated to the Company or any Subsidiary an intention
to conduct the same. Except to the extent specifically disclosed on the
Disclosure Schedule, there are no claims, actions, suits, or proceedings by any
private party that could reasonably be expected to involve individually an
amount in excess of $50,000 or collectively an aggregate amount in excess of
$200,000, or by any governmental body or authority (including, but not limited
to, the FDA or any nongovernmental self-regulatory agency), against or affecting
the Company or any Subsidiary, pending or, to the knowledge of the Company,
threatened at law or in equity, or before any federal, state, local, foreign, or
other governmental department, commission, board, bureau, agency, or
instrumentality (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency).
3.10 Absence of Material Adverse Changes. Except to the extent
specifically disclosed in the Disclosure Schedule, since December 31, 1997 there
has not been any (a) change or circumstance that could reasonably be expected to
have a Company Material Adverse Effect; (b) action by the Company or any
Subsidiary that, if taken on or after the date of this Agreement, would require
the consent or approval of Parent pursuant to Section 5.1 hereof, except for
actions as to which consent or approval has been given as provided therein or
actions prior to March 31, 1998; (c) damage, destruction, or loss, whether or
not covered by insurance, that could reasonably be expected to have a Company
Material Adverse Effect; (d) change by the Company or any Subsidiary in
accounting methods or principles used for financial reporting purposes, except
as required by a change in generally accepted accounting principles and
<PAGE>
concurred with by the Company's independent public accountants; or (e)
agreement, whether in writing or otherwise, to take any action described or
referenced in this Section 3.10.
3.11 Environmental Laws and Regulations. The Disclosure Schedule
completely and accurately sets forth the following: (a) a list of all
above-ground storage tanks or underground storage tanks for Hazardous Materials
(as defined below) on real property now or at any time in the past owned,
leased, or occupied by the Company or any Subsidiary (such real property
referred to in this section as the "Real Property"); (b) the identity of any
Hazardous Materials (as defined below) used, generated, transported or disposed
of by the Company or any Subsidiary now or at any time in the past, together
with a brief description and location of each activity using such Hazardous
Materials; (c) a summary of the identity of, to the Company's knowledge, any
Hazardous Materials that have been disposed of or found on, above or below any
Real Property; and (d) a list of all reports, studies, and tests in the
possession of the Company or any Subsidiary or initiated by the Company or any
Subsidiary pertaining to the existence of Hazardous Materials on, above, or
below any Real Property or any property adjoining or which could reasonably be
expected to affect the Real Property, or concerning compliance with or liability
under the Regulations (as defined below). The Company has heretofore delivered
to Parent complete and accurate copies of such reports, studies, and tests.
The Company and each Subsidiary have obtained, and maintained in full
force and effect, all required environmental permits and other governmental
approvals and are in compliance with all applicable Regulations (as defined
below), except where the failure to so obtain and maintain or to be in
compliance would not have a Company Material Adverse Effect. Neither the Company
nor any Subsidiary (i) has received a written notice or Claim (as defined below)
alleging potential liability under any of the Regulations or alleging a
violation of the Regulations or (ii) has any knowledge that such a notice or
Claim may be issued in the future. Neither the Company nor any Subsidiary has
any knowledge of any notices to or Claims against any persons, alleging
potential liability under any of the Regulations with respect to the Real
Property or any adjoining properties or which could reasonably be expected to
affect the Real Property. Neither the Company nor any Subsidiary (i) has been or
is presently subject to or, to the knowledge of the Company, threatened with any
administrative or judicial proceeding pursuant to the Regulations, or (ii) has
any information that it may be subject to or, to the knowledge of the Company,
threatened with such a proceeding in the future. Neither the Company nor any
Subsidiary has knowledge of any conditions or circumstances that could
reasonably be expected to result in the determination of liability against the
Company or any Subsidiary relating to environmental matters that would have a
Company Material Adverse Effect, including, but not limited to, any Claim
arising from past or present environmental practices with respect to Hazardous
Materials, the Real Property, or any disposal sites. To the knowledge of the
Company, and except as allowed under applicable Laws or Regulations, no
Hazardous Materials have been or are threatened to be discharged, emitted, or
released into the air, water, soil, or subsurface at or from the Real Property
by the Company.
For purposes of this Section 3.11, the following terms shall have the
following meanings: (i) "Hazardous Materials" means asbestos, urea formaldehyde,
polychlorinated biphenyls, nuclear fuel or materials, chemical waste,
radioactive materials, explosives, known human carcinogens, petroleum products
or other substances or materials listed, identified, or designated as toxic or
hazardous or as a pollutant or contaminant in, or the use, release or disposal
of which is regulated by, the Regulations; (ii) "Regulations" means the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
42 U.S.C. ss.ss. 9601 et seq.; the Federal Resource Conservation and Recovery
Act of 1976 ("RCRA"), 42 U.S.C. ss.ss. 6901 et seq.; the Clean Water Act, 33
U.S.C. ss.ss. 1321 et seq.; the Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq.,
<PAGE>
and any other federal, state, county, local, foreign, or other governmental
statute, regulation, or ordinance, as adopted and in effect as of the date
hereof, that relates to or deals with employee safety and human health,
pollution, health, or the environment including, but not limited to, the use,
generation, discharge, transportation, disposal, recordkeeping, notification,
and reporting of Hazardous Materials; and (iii) "Claim" means any and all
claims, demands, causes of actions, suits, proceedings, administrative
proceedings, losses, judgments, decrees, debts, damages, liabilities, court
costs, penalties, attorneys' fees, and any other expenses incurred, assessed,
sustained or alleged by or against the Company or any Subsidiary.
3.12 Officers, Directors and Employees. Prior to the date hereof, the
Company has provided to Parent a list that completely and accurately sets forth
the name and current annual salary rate of each officer or exempt employee of
the Company or any Subsidiary whose total remuneration for the last fiscal year
was, or for the current fiscal year has been set at, in excess of $50,000,
together with a summary of the bonuses, commissions and additional compensation,
if any, paid or payable to such persons for the last fiscal year and proposed
for the current fiscal year. The Disclosure Schedule completely and accurately
sets forth (i) the names of all former employees whose employment with the
Company or any Subsidiary has terminated either voluntarily or involuntarily
during the preceding 12-month period; and (ii) the names of the officers (with
all positions and titles indicated) and directors of the Company and each
Subsidiary. No unfair labor practice complaint against the Company or any
Subsidiary is pending before the National Labor Relations Board, and there is no
labor strike, slowdown or stoppage pending or, to the knowledge of the Company,
threatened against or involving the Company or any Subsidiary. Since January 1,
1995, no unionizing efforts have, to the knowledge of the Company, been made by
employees of the Company or any Subsidiary, neither the Company nor any
Subsidiary is a party to or subject to any collective bargaining agreement, and
no collective bargaining agreement is currently being negotiated by the Company
or any Subsidiary. There is no material labor dispute pending or, to the
knowledge of the Company, threatened between the Company or any Subsidiary and
its employees.
3.13 Taxes. The Company has previously furnished to Parent complete and
accurate copies of all tax or assessment reports and tax returns (including any
applicable information returns) required by any law or regulation (whether
United States, foreign, state, local, or other jurisdiction) and filed by the
Company for each of the three fiscal years ended December 31, 1995, 1996, and
1997 and of all such returns filed separately by any Subsidiary for fiscal years
ended during or after 1995. The Company and each Subsidiary has filed, or has
obtained extensions to file (which extensions have not expired without filing),
all state, local, United States, foreign, or other tax reports and returns
required to be filed by any of them. The Company and each Subsidiary has duly
paid, or accrued on its books of account, all taxes (including estimated taxes)
shown as due on such reports and returns (or such extension requests), or
assessed against it, or that it is obligated to withhold from amounts owed by it
to any person. The liabilities and reserves for taxes reflected on the Company
Audited Balance Sheet or the Company Interim Balance Sheet are adequate to cover
all taxes payable by the Company and its Subsidiaries for all taxable periods
and portions thereof ending on or before the dates thereof. There are no Liens
(as defined in Section 3.14) for taxes upon any property or asset of the Company
or any Subsidiary. Neither the Company nor any Subsidiary is delinquent in the
payment of any tax assessment (including, but not limited to, any applicable
withholding taxes). None of the tax returns or reports for the tax periods ended
December 31, 1995, 1996, and 1997 have been audited by the Internal Revenue
Service (the "IRS") or by any other taxing authority. Further, to the knowledge
of the Company, except as set forth in the Disclosure Schedule, no state of
facts exists or has existed that could reasonably be expected to subject the
Company or any Subsidiary to an additional tax liability for any taxes
assessable by either the IRS or any separate state, local, foreign, or other
taxing authority with respect to any reports or returns filed on or before the
date hereof (other than extension requests for which returns have not been filed
as of the date hereof) that would have a Company Material Adverse Effect.
<PAGE>
Neither the Company nor any Subsidiary has, with regard to any assets or
property held, acquired or to be acquired by any of them, filed a consent to the
application of Section 341(f)(2) of the Code. Except to the extent specifically
disclosed on the Disclosure Schedule, neither the Company nor any Subsidiary has
(i) received notification of any pending or proposed examination by either the
IRS or any state, local, foreign, or other taxing authority, (ii) received
notification of any pending or proposed deficiency by either the IRS or any
state, local, foreign, or other taxing authority, or (iii) granted any extension
of the limitations period applicable to any claim for taxes.
For the purposes of this Section 3.12, "tax" shall mean and include
taxes, additions to tax, penalties, interest, fines, duties, withholdings,
assessments, and charges assessed or imposed by any governmental authority,
including but not limited to all federal, state, county, local, and foreign
income, profits, gross receipts, import, ad valorem, real and personal property,
franchise, license, sales, use, value added, stamp, transfer, withholding,
payroll, employment, excise, custom, duty, and any other taxes, obligations and
assessments of any kind whatsoever; "tax" shall also include any liability
arising as a result of being (or ceasing to be) a member of any affiliated,
consolidated, combined, or unitary group as well as any liability under any tax
allocation, tax sharing, tax indemnity, or similar agreement.
3.14 Contracts. Except as set forth on the Disclosure Schedule, neither
the Company nor any Subsidiary (i) is a party to any collective bargaining
agreement or contract with any labor union, (ii) is a party to any written or
oral contract for the employment of any officer, individual employee or other
person on a full-time or consulting basis, or relating to severance pay for any
such person, (iii) is a party to any (A) written or oral agreement or
understanding to repurchase assets previously sold (or to indemnify or otherwise
compensate the purchaser in respect of such assets) or (B) agreement for the
sale of any capital asset, (iv) is a party to any contract, arrangement,
commitment or understanding (whether written or oral) which provides for future
payments by the Company in excess of $50,000 and is not terminable by the
Company nor any Subsidiary within 60 days without payment of a penalty or
premium, other than employment contracts, benefit plans and leases otherwise
disclosed in the Disclosure Schedule or listed as an exhibit in the Company SEC
Filings, (v) is a party to any independent sales representative, OEM, supply,
distribution, manufacturers' representative, dealer, licensing (except for
immaterial licenses, which include without limitation, licenses for
off-the-shelf software) joint development, joint venture, research and
development, or similar contract, (vi) is a party to any contract, arrangement,
commitment or understanding which is a material contract (as defined in Item
601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this
Agreement that has not been filed or incorporated by reference in the Company
SEC Filings, (vii) is a party to any confidentiality agreement or any agreement
which prohibits the Company or the Subsidiary from freely engaging in any
business anywhere in the world, (viii) is a party to any agreement or indenture
relating to the borrowing of money, (ix) has guaranteed any obligation for
borrowed money, or (x) is a party to any agreement or contract that obligates
the Company to pay consequential damages. The Company and each Subsidiary has
performed all obligations required to be performed by it under any listed or
material contract, plan, agreement, understanding, or arrangement made or
obligation owed by or to the Company or any Subsidiary, except where the failure
would not have a Company Material Adverse Effect; there has not been any event
of default (or any event or condition which with notice or the lapse of time,
both or otherwise, would constitute an event of default) thereunder on the part
of the Company, any Subsidiary, or, to the Company's knowledge, any other party
to any thereof that would have a Company Material Adverse Effect; the same are
in full force and effect and valid and enforceable by the Company or its
<PAGE>
Subsidiaries in accordance with their respective terms subject to laws of
general application relating to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and rules
or law governing specific performance, injunctive relief, and other equitable
remedies; and the performance of any such contracts, plans, agreements,
understandings, arrangements, or obligations would not have a Company Material
Adverse Effect.
3.15 Title to Properties; Liens. The Company and/or its Subsidiaries
have good and marketable title to all properties and assets reflected on the
Company Audited Balance Sheet or the Company Interim Balance Sheet or acquired
after the dates thereof (except for properties and assets sold or otherwise
disposed of in the ordinary course of business since the dates thereof), which
includes each asset the absence or unavailability of which would have a Company
Material Adverse Effect, subject only to (a) statutory Liens arising or incurred
in the ordinary course of business with respect to which the underlying
obligations are not delinquent, (b) with respect to personal property, the
rights of customers of the Company or any Subsidiary with respect to inventory
or work in progress under orders or contracts entered into by the Company or any
Subsidiary in the ordinary course of business, (c) Liens reflected on the
Company Audited Balance Sheet or the Company Interim Balance Sheet, (d) Liens
for taxes not yet delinquent, and (e) and defects in title that would not have a
Company Material Adverse Effect. The term "Lien" as used in this Agreement means
any mortgage, pledge, security interest, encumbrance, lien, claim, or charge of
any kind. All properties and assets purported to be leased by the Company or any
Subsidiary are subject to valid and effective leases that are in full force and
effect, and there does not exist, and the Merger will not result in, any default
or event that with notice or lapse of time, or both or otherwise, would
constitute a default under any such leases which would have a Company Material
Adverse Effect. The properties and assets of the Company and each Subsidiary are
in good working condition.
3.16 Permits, Licenses, Etc. Except as specifically disclosed on the
Disclosure Schedule, the Company and each Subsidiary has all rights, permits,
certificates, licenses, consents, franchises, approvals, registrations, and
other authorizations necessary to sell its products and services and otherwise
carry on and conduct its business and to own, lease, use, and operate its
properties and assets at the places and in the manner now conducted and
operated, except those the absence of which would not have a Company Material
Adverse Effect. Neither the Company nor any Subsidiary has received any notice
or claim pertaining to the failure to obtain any permit, certificate, license,
franchise, approval, registration, or other authorization required by any
federal, state, local, or foreign body or authority (including, but not limited
to, any nongovernmental self-regulatory agency) except for any such notice or
claim regarding any such failure that would not have a Company Material Adverse
Effect, nor has the Company or any Subsidiary received any notice or claim
pertaining to the failure to obtain any permit, certificate, license, franchise,
approval, registration, or other authorization from the FDA or any similar
foreign regulatory agency.
3.17 Intellectual Property Rights. The Disclosure Schedule contains a
complete and accurate list of all patents, trademarks, trade names, service
marks, and all applications for or registrations of any of the foregoing that
the Company uses in its business (other than generally available computer
software) as to which the Company or any Subsidiary is the owner or a licensee
(indicating whether such license is exclusive or nonexclusive). To the knowledge
of the Company and except as disclosed on the Disclosure Schedule, the Company
and each Subsidiary exclusively owns, free and clear of any Lien (as defined in
Section 3.14), or is exclusively (unless otherwise indicated in the Disclosure
Schedule) licensed to use, all patents, trademarks, trade names, service marks,
applications for or registrations of any of the foregoing, processes,
inventions, designs, technology, formulas, computer software programs, know-how,
and trade secrets used in or necessary for the conduct of its respective
<PAGE>
business as currently conducted or proposed to be conducted and where the lack
of ownership or such license would have a Company Material Adverse Effect (the
"Company Intellectual Property"). Except to the extent specifically disclosed on
the Disclosure Schedule, no claim has been asserted or, to the knowledge of the
Company, threatened by any person, and, to the Company's knowledge, its patent
counsel has not concluded that any claim exists, with respect to the Company's
ownership of the Company Intellectual Property or challenging or questioning the
validity or effectiveness of any license or agreement to which the Company is a
party with respect thereto. To the knowledge of the Company, neither the use of
the Company Intellectual Property by the Company or any Subsidiary in the
present or planned conduct of its business nor any product or service of the
Company or any Subsidiary infringes on the intellectual property rights of any
person. No current or former shareholder, employee, or consultant of the Company
or any Subsidiary has any material rights in or to any of the Company
Intellectual Property. All Company Intellectual Property listed on the
Disclosure Schedule has the status indicated therein and all applications are
still pending in good standing and have not been abandoned. Except to the extent
disclosed on the Disclosure Schedule: (i) to the Company's knowledge, patents
included within the Company Intellectual Property are valid and have not been
challenged in any judicial or administrative proceeding; (ii) the Company and
each Subsidiary have made all statutorily required filings, if any, to record
their interests, and taken reasonable actions to protect their rights, in the
Company Intellectual Property, where the failure to make any such filing, record
such interest or take such other actions could reasonably be expected to have a
Company Material Adverse Effect; (iii) to the knowledge of the Company, no
person or entity nor such person's or entity's business or products has
infringed or misappropriated any Company Intellectual Property or currently is
infringing or misappropriating any Company Intellectual Property; and (iv) no
other person or entity has any right to receive or any obligation to pay a
royalty with respect to any Company Intellectual Property or any product or
service of the Company or any Subsidiary.
3.18 Benefit Plans.
(a) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, contributes to, or has sponsored, maintained, or contributed
to or been required to contribute to, any "employee pension benefit
plan" ("Pension Plan"), as such term is defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including, solely for the purpose of this subsection, a plan excluded
from coverage by Section 4(b)(5) of ERISA. No failure to comply with
applicable provisions of ERISA, the Code and other applicable law in
connection with any Pension Plan presently maintained by the Company or
any Subsidiary could reasonably be expected to have a Company Material
Adverse Effect.
(b) Neither the Company nor any Subsidiary sponsors,
maintains, contributes to, or has sponsored, maintained, or contributed
to or been required to contribute to, any Pension Plan that is a
"Multiemployer Plan" within the meaning of Section 4001(a)(3) of ERISA.
(c) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, contributes to, or has sponsored, maintained, contributed
to, or been required to contribute to, any "employee welfare benefit
plan" ("Welfare Plan"), as such term is defined in Section 3(1) of
ERISA, whether insured or otherwise. No failure to comply with
applicable provisions of ERISA, the Code and other applicable law,
including, but not limited to, Section 4980B of the Code and Part 6 of
<PAGE>
Subtitle B of Title I of ERISA, in connection with any Welfare Plan
presently maintained by the Company or any Subsidiary could reasonably
be expected to have a Company Material Adverse Effect. Neither the
Company nor any Subsidiary has established or contributed to any
"voluntary employees' beneficiary association" within the meaning of
Section 501(c)(9) of the Code.
(d) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, or contributes to, or has sponsored, maintained, or
contributed to, a "self-insured medical reimbursement plan" within the
meaning of Section 105(h) of the Code and the regulations thereunder.
(e) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary currently
maintains or contributes to any oral or written bonus, profit-sharing,
compensation (incentive or otherwise), commission, stock option, or
other stock-based compensation, retirement, severance, change of
control, vacation, sick or parental leave, dependent care, deferred
compensation, cafeteria, disability, hospitalization, medical, death,
retiree, insurance, or other benefit or welfare or other similar plan,
policy, agreement, trust, fund, or arrangement providing for the
remuneration or benefit of all or any employees or shareholders or any
other person, that is neither a Pension Plan nor a Welfare Plan
(collectively, the "Compensation Plans").
(f) To the knowledge of the Company, neither any Pension Plans
or Welfare Plans nor any trust created or insurance contract issued
thereunder nor any trustee, fiduciary, custodian, or administrator
thereof, nor any officer, director, or employee of the Company or any
Subsidiary, custodian, or any other "disqualified person" within the
meaning of Section 4975(e)(2) of the Code, or "party in interest"
within the meaning of Section 3(14) of ERISA, with respect to any such
plan has engaged in any act or omission that could reasonably be
expected to result in a Company Material Adverse Effect in connection
with a liability for breach of fiduciary duties under ERISA or a tax or
penalty imposed by Section 502 of ERISA.
(g) Except to the extent specifically disclosed on the
Disclosure Schedule, (i) full and timely payment has been made of all
amounts that the Company or any Subsidiary is required, under
applicable law, with respect to any Pension Plan, Welfare Plan, or
Compensation Plan, or any agreement relating to any Pension Plan,
Welfare Plan, or Compensation Plan, to have paid as a contribution to
each Pension Plan, Welfare Plan, or Compensation Plan, (ii) to the
extent required by generally accepted accounting principles, the
Company has made adequate provisions for reserves to meet contributions
that have not been made because they are not yet due under the terms of
any Pension Plan, Welfare Plan, or Compensation Plan or related
agreements, (iii) there will be no change on or before the Closing Date
in the operation of any Pension Plan, Welfare Plan, or Compensation
Plan or documents under which any such plan is maintained that will
result in an increase in the benefit liabilities under such plan,
except as may be required by law or as provided by the terms of the
Pension Plan, Welfare Plan, Compensation Plan or document in effect on
the date of this Agreement, to the extent disclosed in or attached to
the Disclosure Schedule, (iv) the IRS has issued favorable
determination letters with respect to all Company and Subsidiary
Pension Plans that are intended to be qualified under Section 401(a) of
the Code, and (v) the Company has made available to Parent complete and
accurate copies of all Pension Plans, Welfare Plans, Compensation
Plans, and related agreements, annual reports (Form 5500), favorable
determination letters, current summary plan descriptions, and all
employee handbooks or manuals.
(h) Except to the extent specifically disclosed on the
Disclosure Schedule, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or
upon the occurrence of any additional or subsequent events) result in
forgiveness of indebtedness or an increase in benefits or result in the
<PAGE>
acceleration of vesting, funding, benefit accruals or benefit payments
under any Pension Plan, Welfare Plan or Compensation Plan. Except to
the extent specifically disclosed on the Disclosure Schedule, no amount
that could reasonably be expected to be received (whether in cash or
property or the vesting of property) by any employee, officer, or
director of the Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any Pension Plan, Welfare Plan, or Compensation
Plan currently in effect as a result of any of the transactions
contemplated by this Agreement would be an "excess parachute payment"
(as such term is defined in Section 280G(b)(1) of the Code).
3.19 Minute Books. The minute books of the Company and the
Subsidiaries, as previously made available to Parent and its representatives,
contain records of all actions taken at all meetings of and corporate actions or
written consents by the shareholders, Boards of Directors, and committees of the
Boards of Directors of the Company and the Subsidiaries, except for the absence
of such records as would not have a Company Material Adverse Effect.
3.20 Insurance Policies. The Disclosure Schedule sets forth a complete
and accurate list of all policies of insurance (with copies attached) maintained
by the Company or any Subsidiary with respect to any of its officers, directors,
employees, shareholders, agents, properties, buildings, machinery, equipment,
furniture, fixtures or operations and a description of each claim made in excess
of $5,000 by the Company or any Subsidiary during the three-year period
preceding the date hereof under any such policy of insurance. All such policies
of insurance are in full force and effect.
3.21 Bank Accounts. The Disclosure Schedule sets forth a list of each
bank, broker, or other depository with which the Company or any Subsidiary has
an account or safe deposit box, the names and numbers of such accounts or boxes
and the names of all persons authorized to draw thereon or execute transactions.
3.22 Powers of Attorney. The Disclosure Schedule sets forth the names
of all persons, if any, holding powers of attorney from the Company or any
Subsidiary and a description of the scope of each such power of attorney. The
Company has delivered to Parent prior to the date hereof complete and accurate
copies of all such powers of attorney.
3.23 Product Liability Claims. Except to the extent specifically
disclosed on the Disclosure Schedule, during the three-year period preceding the
date hereof neither the Company nor any Subsidiary has received a claim for or
based upon breach of product warranty (other than warranty service and repair
claims in the ordinary course of business not material in amount or
significance), strict liability in tort, negligent manufacture of product,
negligent provision of services or any other allegation of liability, including
or resulting in, but not limited to, product recalls, arising from the
materials, design, testing, manufacture, packaging, labeling (including
instructions for use), or sale of its products or from the provision of services
(hereafter collectively referred to as "Product Liability").
3.24 Warranties. The terms of all product and service warranties and
product return, sales credit, discount, warehouse allowance, advertising
allowance, demo sales, and credit policies of the Company and each Subsidiary
are specifically set forth on the Disclosure Schedule. The Company has attached
to the Disclosure Schedule complete and accurate copies of all such warranties
and policies.
3.25 Inventories. Except as specifically set forth on the Disclosure
Schedule, all inventories of the Company and its Subsidiaries consist of items
of merchantable quality and quantity usable or salable in the ordinary course of
business, are salable at prevailing market prices that are not less than the
<PAGE>
book value amounts thereof or the price customarily charged by the Company or
the applicable Subsidiary therefor, conform to the specifications established
therefor, and have been manufactured in accordance with applicable regulatory
requirements, except to the extent that the failure of such inventories so to
consist, be saleable, conform, or be manufactured would not have a Company
Material Adverse Effect. Except as specifically set forth on the Disclosure
Schedule, the quantities of all inventories, materials, and supplies of the
Company and each Subsidiary (net of the obsolescence reserve therefor shown on
the Company Interim Balance Sheet and determined in the ordinary course of
business consistent with past practice) are not obsolete, damaged, slow-moving,
defective, or excessive, and are reasonable and balanced in the circumstances of
the Company and its Subsidiaries, except to the extent that the failure of such
inventories to be in such conditions would not have a Company Material Adverse
Effect. The Disclosure Schedule sets forth a true and complete list of the
addresses of all warehouses or other facilities in which inventories of the
Company or any Subsidiary are located.
3.26 Relations with Suppliers and Customers. Since January 1, 1995, no
current supplier of the Company or any Subsidiary has cancelled any contract or
order for provision of, and, to the knowledge of the Company, there has been no
threat by any such supplier not to provide, raw materials, products, supplies,
or services to the businesses of the Company and its Subsidiaries either prior
to or following the Merger except for any cancellation or threat which would not
have a Company Material Adverse Effect. Except as specifically set forth on the
Disclosure Schedule, neither the Company nor any Subsidiary has, to the
knowledge of the Company, received any information from any customer that
accounted for more than 5% of the revenues of the Company and its Subsidiaries
during the last full fiscal year reasonably to the effect that such customer
intends to materially decrease the amount of business it does with the
businesses of the Company and its Subsidiaries either prior to or following the
Merger. The Disclosure Schedule lists each supplier to the Company or any
Subsidiary that is the sole source of a particular raw material, product,
supply, or service.
3.27 No Finders. No act of the Company or any Subsidiary has given or
will give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein, except payments in the amounts specified on
the Disclosure Schedule to those parties identified thereon who have acted as a
finder for the Company or have been retained by the Company as financial
advisors pursuant to the agreements or other documents described in the
Disclosure Schedule, copies of which have been provided to Parent prior to the
date of this Agreement.
3.28 Proxy Statement. The Proxy Statement/Prospectus (as defined in
Section 5.4 hereof) and any amendments or supplements thereto will comply as to
form in all material respects with the provisions of the 1934 Act as amended,
and the rules and regulations promulgated thereunder, and none of the
information relating to the Company or its affiliates included or incorporated
therein or in any amendments or supplements thereto, or any schedules required
to be filed with the SEC in connection therewith, will, as of the date mailed to
the Company's shareholders and at the time of the Company Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation or warranty is made by the
Company with respect to information relating to Parent or any affiliate of
Parent.
3.29 Merger Filings. The information as to the Company and the
Subsidiaries or any of their affiliates or shareholders included in the
Company's filing, or submitted to Parent for inclusion in its filing, if any,
required to be submitted under the HSR Act or under any Foreign Merger Laws
<PAGE>
shall be true, correct, and complete in all material respects and shall comply
in all material respects with the applicable requirements of the HSR Act, the
rules and regulations issued by the Federal Trade Commission pursuant thereto,
and the Foreign Merger Laws.
3.30 Fairness Opinion. The Company has received a written opinion from
Piper Jaffray, Inc. to the effect that, as of the date hereof, the consideration
to be received by the holders of Company Common Stock in the Merger is fair to
such holders from a financial point of view, and the Company will promptly
deliver a copy of such opinion to Parent.
3.31 State Takeover Laws; Rights Agreement.
(a) The Board of Directors of the Company and, in accordance
with Section 302A.673 of the MBCA, the required committee of such Board
of Directors have approved the transactions contemplated by this
Agreement, the Agreements to Facilitate Merger described in Section
5.11 hereof, and the Stock Option Agreement described in Section 5.17
hereof such that the provisions of Sections 302A.671 and 302A.673 of
the MBCA will not apply to this Agreement or the Agreements to
Facilitate Merger or the Stock Option Agreement or any of the
transactions contemplated hereby or thereby.
(b) The Company has taken all action and completed all
amendments, if any, necessary or appropriate so that (i) the Rights
Agreement dated as of June 26, 1996, as amended, between the Company
and Northwest Bank Minnesota, N.A. (the "Company Rights Agreement"), is
inapplicable to the transactions contemplated by the Agreements to
Facilitate Merger, the Stock Option Agreement and this Agreement, (ii)
the execution of this Agreement, the Stock Option Agreement, and the
Agreements to Facilitate Merger, and the consummation of the
transactions contemplated hereby and thereby, do not and will not
result in the ability of any person to exercise any Rights under the
Company Rights Agreement or enable or require the Rights to separate
from the shares of Company Common Stock to which they are attached or
to be triggered or become exercisable, or otherwise result in the
occurrence of a "Distribution Date" or "Stock Acquisition Date" (as
such terms are defined in the Company Rights Agreement), and (iii)
immediately prior to the Effective Time, the Rights under the Company
Rights Agreement shall, without any payment by the Company or Parent,
expire with neither the Company nor Parent having any obligations
under, and no holder of Rights having any rights under, the Rights or
the Company Rights Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUBSIDIARY
Parent and Merger Subsidiary hereby jointly and severally represent and
warrant to the Company as of the date hereof as follows:
4.1 Organization. Each of Parent and Merger Subsidiary is a corporation
duly organized, validly existing, and in good standing under the laws of the
state of Minnesota and has all requisite corporate power and authority to own,
lease, and operate its properties and to carry on its business as now being
conducted. Each of Parent and Merger Subsidiary is duly qualified and in good
standing to do business in each jurisdiction in which the property owned,
leased, or operated by it or the nature of the business conducted by it makes
<PAGE>
such qualification necessary and where the failure to qualify could reasonably
be expected to have a Parent Material Adverse Effect (as defined below). "Parent
Material Adverse Effect" means any effect, change or event that, individually or
in the aggregate with all similar effects, changes or events, is or would
reasonably be expected to be material and adverse: (i) to the business,
properties, liabilities, results of operation, or financial condition of Parent
and its subsidiaries, considered as a whole, or (ii) to Parent's ability to
perform any of its obligations under this Agreement or to consummate the Merger.
4.2 Authorization. Each of Parent and Merger Subsidiary has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, and Parent has full
corporate power and authority to prepare, file, and distribute the Registration
Statement (as defined in Section 5.4 hereof). The execution and delivery of this
Agreement by Parent and Merger Subsidiary and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Boards of Directors of Parent and Merger Subsidiary and by
Parent as the sole shareholder of Merger Subsidiary, and no other corporate
proceedings on the part of Parent and Merger Subsidiary are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Parent and Merger Subsidiary and constitutes the valid and binding obligation of
Parent and Merger Subsidiary, enforceable against each of them in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and rules of law governing specific performance,
injunctive relief, or other equitable remedies.
4.3 Capitalization. As of July 2, 1998, the authorized capital stock of
Parent consisted of (a) 800,000,000 shares of Common Stock with a par value of
$.10 per share, of which there were 469,350,541 shares issued and outstanding
and no shares held in Parent's treasury, and (b) 2,500,000 shares of Preferred
Stock with a par value of $1.00 per share, of which there were no shares issued
and outstanding. The authorized capital stock of Merger Subsidiary consists of
2,500 shares of Merger Subsidiary Common Stock, 100 of which are issued and
outstanding and owned by Parent. All issued and outstanding shares of Parent
Common Stock and Merger Subsidiary Common Stock are, and the shares of Parent
Common Stock to be issued and delivered in the Merger pursuant to Article 1
hereof shall be, at the time of issuance and delivery, validly issued, fully
paid, nonassessable, and free of preemptive rights. The shares of Parent Common
Stock to be issued and delivered in the Merger pursuant to Article 1 hereof
shall be registered under the 1933 Act and duly listed for trading on the NYSE,
subject to official notice of issuance.
4.4 Consents and Approvals. Except for (i) any applicable requirements
of the 1933 Act, the 1934 Act, state securities laws, the NYSE, the HSR Act, and
Foreign Merger Laws, (ii) the filing and recordation of appropriate merger
documents as required by the MBCA, and (iii) compliance with Sections 302A.471
and 302A.473 of the MBCA regarding dissenters' rights of the Company's
shareholders, the execution and delivery of this Agreement by Parent and Merger
Subsidiary and the consummation of the transactions contemplated hereby will
not: (a) violate any provision of the Articles of Incorporation or Bylaws of
Parent or Merger Subsidiary; (b) violate any statute, rule, regulation, order,
or decree of any public body or authority (including, but not limited to, the
FDA or any nongovernmental self-regulatory agency) by which Parent or any of its
subsidiaries or any of their respective properties or assets may be bound; (c)
<PAGE>
require any filing with or permit, consent, or approval of any public body or
authority (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency); or (d) result in any violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
under, result in the loss of any material benefit under, or give rise to any
right of termination, cancellation, increased payments, or acceleration under,
or result in the creation of any Lien on any of the properties or assets of
Parent or its subsidiaries under, any of the terms, conditions, or provisions of
any note, bond, mortgage, indenture, license, franchise, permit, agreement, or
other instrument or obligation to which Parent or any of its subsidiaries is a
party, or by which any of them or any of their respective properties or assets
may be bound, except (x) in the cases of clauses (b) or (c), where such
violation, failure to make any such filing or failure to obtain such permit,
consent or approval, would not prevent or delay consummation of this Merger or
otherwise prevent Parent from performing its obligations under the Agreement and
would not have a Parent Material Adverse Effect, and (y) in the case of clause
(d), for any such violations, breaches, defaults, or other occurrences that
would not prevent or delay consummation of any of the transaction contemplated
hereby in any material respect, or otherwise prevent Parent from performing its
obligations under this Agreement in any material respect, and would not have a
Parent Material Adverse Effect.
4.5 Reports; Financial Statements; Absence of Changes. Parent has filed
all forms, reports, registration statements, and documents required to be filed
by it with the SEC since January 1, 1995 (such forms, reports, registration
statements and documents, together with any amendments thereto, are referred to
as the "Parent SEC Filings"). As of their respective dates, the Parent SEC
Filings (i) complied as to form in all material respects with the applicable
requirements of the 1933 Act and the 1934 Act, as the case may be, and (ii) did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. The audited financial statements and unaudited interim financial
statements included or incorporated by reference in the Parent SEC Filings (i)
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto), (ii) complied as of their respective
dates in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, and (iii)
fairly present the consolidated financial position of Parent as of the dates
thereof and the income, cash flows, and changes in shareholders' equity for the
periods involved. Except to the extent disclosed in Parent's subsequent filings
with the SEC or specifically disclosed on Schedule 4.5, since April 30, 1997,
there has not been any change or circumstance that would have a Parent Material
Adverse Effect or as of the date hereof any liabilities or obligations of any
nature (whether absolute, accrued, contingent or otherwise) that would have a
Parent Material Adverse Effect. Except to the extent disclosed in the Parent SEC
Filings or on Schedule 4.5, (i) to Parent's knowledge, there is no
investigation, review, claim, action, suit or proceeding by any federal, state,
local or foreign body or authority (including, but not limited to, the FDA or
any nongovernmental self-regulatory agency) or private party with respect to
Parent that could reasonably be expected to have a Parent Material Adverse
Effect, (ii) all activities of Parent and its subsidiaries have been, and are
currently being, conducted in compliance with all applicable federal, state,
local, and foreign laws, ordinances, regulations, interpretations, judgments,
decrees, injunctions, permits, licenses, certificates, governmental
requirements, orders and other similar items of any court or other governmental
entity (including, but not limited to, those of the FDA or any nongovernmental
self-regulatory agency), the failure to comply with which could reasonably be
expected to have a Parent Material Adverse Effect, (iii) Parent and each of its
subsidiaries has timely filed or otherwise provided all registrations, reports,
data, and other information and applications with respect to its Regulated
Products required to be filed with or otherwise provided to the FDA or any other
federal, state, local, or foreign governmental authorities with jurisdiction
over the manufacture, use or sale of the Regulated Products, and all regulatory
licenses or approvals in respect thereof are in full force and effect, except
for the failure to file timely such registrations, reports, data, information,
and applications or the failure to have such licenses and approvals in full
force and effect would not have a Parent Material Adverse Effect.
<PAGE>
4.6 Registration Statement. The Registration Statement (as defined in
Section 5.4 hereof) and any amendments or supplements thereto will comply in all
material respects as to form with the 1933 Act, and none of the information
relating to Parent or its affiliates included or incorporated therein or in any
amendments or supplements thereto, or any schedules required to be filed with
the SEC in connection therewith, will, at the time the Registration Statement
becomes effective or as of the date of the Company Shareholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation or warranty is made by
Parent with respect to information relating to the Company or any affiliate of
the Company.
4.7 Merger Filings. The information as to Parent and Merger Subsidiary
or any of their affiliates or shareholders included in Parent's filing, or
submitted to the Company for inclusion in its filing, if any, required to be
submitted under the HSR Act or under any Foreign Merger Laws shall be true,
correct, and complete in all material respects and shall comply in all material
respects with the applicable requirements of the HSR Act, the rules and
regulations issued by the Federal Trade Commission pursuant thereto, and Foreign
Merger Laws.
4.8 No Finders. No act of Parent or Merger Subsidiary has given or will
give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein.
ARTICLE 5
COVENANTS
5.1 Conduct of Business of the Company. Except as contemplated by this
Agreement or to the extent that Parent otherwise consents in writing, during the
period from the date of this Agreement to the Effective Time, the Company and
each Subsidiary will conduct its respective operations according to its ordinary
and usual course of business and consistent with past practice, and the Company
and each Subsidiary will use all reasonable efforts to preserve intact in all
material respects its respective business organizations, to maintain its present
<PAGE>
and planned business, to keep available the services of its respective officers
and employees and to maintain satisfactory relationships with licensors,
licensees, suppliers, contractors, distributors, physicians, consultants,
customers, and others having business relationships with it; provided, however,
that the Company will not be required to make any payments or enter into or
amend any contractual arrangements or understandings to satisfy the foregoing
obligations. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in or contemplated by this Agreement, prior to the
Effective Time, neither the Company nor any Subsidiary will, without the prior
written consent of Parent:
(a) amend its Articles of Incorporation or Bylaws;
(b) authorize for issuance, issue, sell, pledge, or deliver
(whether through the issuance or granting of additional options,
warrants, commitments, subscriptions, rights to purchase, or otherwise)
any stock of any class or any securities convertible into shares of
stock of any class (other than the issuance of the number of shares of
Company Common Stock indicated in Section 3.4 hereof upon the exercise
in accordance with the current terms of the stock options and other
rights listed in the Disclosure Schedule hereof as outstanding on the
date of this Agreement, and the actual number of shares issued for the
final offering period under the Company's Employee Stock Purchase Plan
in accordance with the Section 3.3 hereof);
(c) split, combine, or reclassify any shares of its capital
stock, declare, set aside, or pay any dividend or other distribution
(whether in cash, stock, or property or any combination thereof) in
respect of its capital stock; or redeem or otherwise acquire any shares
of its capital stock or other securities; or amend or alter any
material term of any of its outstanding securities;
(d) other than in the ordinary course of business and
consistent with past practice, create, incur, or assume any
indebtedness for borrowed money, or assume, guarantee, endorse, or
otherwise become liable or responsible (whether directly, contingently,
or otherwise) for the obligations of any other person, or make any
loans, advances or capital contributions to, or investments in, any
other person; or create, incur or assume any Lien on any material
asset;
(e) knowingly take any action that would have the effect of
jeopardizing the qualification of the Merger as a reorganization within
the meaning of Section 368(a)(2)(E) of the Code;
(f) (i) increase in any manner the compensation of any of its
directors, officers, employees, shareholders, or consultants, except in
the ordinary course of business and consistent with past practice or
consistent with existing contractual commitments, in each case to the
extent disclosed in the Disclosure Schedule or accelerate the payment
of any such compensation (whether or not any such acceleration is
consistent with past practice) other than as required by existing
contractual commitments to the extent disclosed in the Disclosure
Schedule; (ii) pay or accelerate or otherwise modify the payment,
vesting, exercisability, Company matching amount, or other feature or
requirement of any pension, retirement allowance, severance, change of
<PAGE>
control, stock option, or other employee benefit not required by any
existing plan, agreement, or arrangement or by applicable law to any
such director, officer, employee, shareholder, or consultant, whether
past or present, except as determined by the Company to be necessary to
comply with applicable law or maintain tax-favored status (and any
nonmaterial changes incidental thereto); or (iii) except for normal
increases in the ordinary course of business in accordance with its
customary past practices or consistent with existing contractual
commitments, in each case to the extent disclosed in the Disclosure
Schedule, commit itself to any additional or increased pension,
profit-sharing, bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance, change of control, retirement or other benefit, plan,
agreement, or arrangement, or to any employment or consulting
agreement, with or for the benefit of any person, or amend any of such
plans or any of such agreements in existence on the date hereof;
(g) except in the ordinary course of business and consistent
with past practice or pursuant to contractual obligations existing on
the date hereof, (i) sell, transfer, mortgage, or otherwise dispose of
or encumber any real or personal property, (ii) pay, discharge, or
satisfy any material claim, liability, or obligation (absolute,
accrued, contingent, or otherwise), or (iii) cancel any debts or waive
any claims or rights, which involve payments or commitments to make
payments that individually exceed $50,000 or, in the aggregate, exceed
$100,000;
(h) acquire or agree to acquire (i) by merging or
consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any portion of the assets of, or by
any other manner, any business of any corporation, partnership, joint
venture, association, or other business organization or division
thereof or (ii) any assets that are material, individually or in the
aggregate, to the Company, except as provided in subsection (i) below
and except purchases of inventory in the ordinary course of business
consistent with past practice;
(i) make or agree to make any new capital expenditure or
expenditures that, individually, is in excess of $50,000 or, in the
aggregate, are in excess of $100,000;
(j) enter into, amend, or terminate any joint ventures or any
other agreements, commitments, or contracts that, individually or in
the aggregate, are material to the Company or any Subsidiary (except
agreements, commitments, or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale, or lease of
goods, services, or properties in the ordinary course of business,
consistent with past practice), or otherwise make any material change
in the conduct of the business or operations of the Company or any
Subsidiary;
(k) enter into or terminate, or amend, extend, renew, or
otherwise modify (including, but not limited to, by default or by
failure to act) any distribution, OEM, independent sales
representative, noncompetition, licensing, franchise, research and
development, supply, or similar contract, agreement, or understanding
(except agreements, commitments, or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale, or lease of
goods, services, or properties in the ordinary course of business,
consistent with past practice);
(l) change in any material respect its credit policy as to
sales of inventories or collection of receivables or its inventory
consignment practices;
(m) remove or permit to be removed from any building,
facility, or real property any machinery, equipment, fixture, vehicle,
or other personal property or parts thereof, except in the ordinary
course of business;
<PAGE>
(n) alter or revise its accounting principles, procedures,
methods, or practices, except as required by a change in generally
accepted accounting principles and concurred with by the Company's
independent public accountants;
(o) institute, settle, or compromise any claim, action, suit,
or proceeding pending or threatened by or against it involving amounts
in excess of $100,000, at law or in equity or before any federal,
state, local, foreign, or other governmental department, commission,
board, bureau, agency, or instrumentality (including, but not limited
to, the FDA or any nongovernmental self-regulatory agency);
(p) distribute or otherwise circulate any notices, directives,
or other communications directed to all or groups of customers,
vendors, employees, distributors, or others associated with its
business relating to the transactions contemplated hereby or to the
operation of business after completion of the Merger without consulting
with Parent, giving Parent reasonable opportunity to comment thereon,
and obtaining prior to distribution Parent's approval thereof, which
shall not unreasonably be withheld;
(q) knowingly take any action that would cause the condition
set forth in Section 6.2(a) not to be met; or
(r) agree, whether in writing or otherwise, to do any of the
foregoing.
provided, however, that in the event that the Company or any of its Subsidiaries
would be prohibited from taking any action by reason of this Section 5.1 without
the prior written consent of Parent, such action may nevertheless be taken if
the Company or any of its Subsidiaries is expressly required to do so by law and
the Company prior to taking such action informs Parent in writing of such
requirement.
5.2 No Solicitation. From the date hereof until the termination of this
Agreement, the Company will not and will cause its Subsidiaries and its and
their respective officers, directors, employees, representatives, agents, or
affiliates (including, but not limited to any investment banker, attorney, or
accountant retained by the Company or any Subsidiary), to not, directly or
indirectly, solicit, encourage, initiate, or participate in any way in
discussions or negotiations with, or knowingly provide any information to, any
corporation, partnership, person, or other entity or group (other than Parent or
any affiliate or agent of Parent) concerning any merger, sale or licensing of
any significant portion of the assets, sale of shares of capital stock
(including without limitation any proposal or offer to the Company's
shareholders), or similar transactions involving the Company or any Subsidiary
(an "Alternative Proposal"), or otherwise facilitate any effort or attempt to
make or implement an Alternative Proposal. The Company will promptly communicate
to Parent the terms of any proposal or inquiry that it has received or may
receive in respect of any such transaction or of any such information requested
from it or of any such negotiations or discussions being sought to be initiated
with the Company and may inform any third party who contacts the Company on an
unsolicited basis concerning an Alternative Proposal that the Company is
obligated hereunder to disclose such to Parent. Notwithstanding the foregoing,
this section shall not prohibit the Board of Directors of the Company from (i)
furnishing information to or entering into discussions or negotiations with, any
person or entity that makes an unsolicited bona fide Alternative Proposal, if,
and only to the extent that, (a) the Board of Directors of the Company
determines in good faith, after receipt of advice to such effect from outside
legal counsel, that such action is so required for the board of Directors to
comply with its fiduciary duties to shareholders imposed by law, (b) prior to
furnishing information to, or entering into discussions and negotiations with,
such person or entity, the Company promptly provides written notice to Parent to
the effect that it is furnishing information to, or entering into discussions or
<PAGE>
negotiations with, such person or entity, and (c) the Company keeps Parent
informed of the status and all material terms and events with respect to any
such Alternative Proposal; and (ii) to the extent applicable, complying with
Rules 14d-9 and 14e-2 promulgated under the 1934 Act, as amended, with regard to
an Alternative Proposal. Nothing in this section shall (x) permit the Company to
terminate this Agreement (except as specifically provided in Article 7 hereof),
(y) permit the Company to enter into any agreement with respect to an
Alternative Proposal for as long as this Agreement remains in effect (it being
agreed that for as long as this Agreement remains in effect, the Company shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Alternative Proposal), or (z) affect any other obligation of the
Company under this Agreement while this Agreement remains in effect.
5.3 Access and Information. The Company shall afford to Parent, and to
Parent's accountants, officers, directors, employees, counsel, and other
representatives, reasonable access during normal business hours, from the date
hereof through the Effective Time, to all of its properties, books, contracts,
commitments, and records, and, during such period, the Company shall furnish
promptly to Parent all information concerning the Company's and its
Subsidiaries' businesses, prospects, properties, liabilities, results of
operations, financial condition, testing, clinicals, officers, employees,
investigators, distributors, customers, suppliers, and others having dealings
with the Company as Parent may reasonably request and reasonable opportunity to
contact and obtain information from such officers, employees, investigators,
distributors, customers, suppliers, and others having dealings with the Company
as Parent may reasonably request, subject, however, to limitations under
existing confidentiality agreements with other bidders with respect to prior
offers. During the period from the date hereof to the Effective Time, the
parties shall in good faith meet and correspond on a regular basis for mutual
consultation concerning the conduct of the Company's and the Subsidiaries'
businesses and, in connection therewith, Parent shall be entitled to have
employees or other representatives present at the offices of the Company and its
Subsidiaries to observe, and be kept informed concerning, the Company's and the
Subsidiaries' operations and business planning. Parent shall hold in confidence
all such nonpublic information as required and in accordance with the
confidentiality letter agreement dated June 2, 1998, between Parent and the
Company, as amended by the amendment to confidentiality letter agreement dated
the same date (the "Confidentiality Agreement").
5.4 Approval of Shareholders; Proxy Statement; Registration Statement.
(a) The Company shall take all action necessary in accordance
with Minnesota law and the Company's Articles of Incorporation and
Bylaws to cause a special meeting of the Company's shareholders (the
"Company Shareholders Meeting") to be duly called and held as soon as
reasonably practicable following the date upon which the Registration
Statement (as defined below) becomes effective for the purpose of
voting upon the Merger. The shareholder vote or consent required for
approval of the Plan of Merger and the Merger shall be no greater than
that set forth in the MBCA and the Company's Articles of Incorporation
as previously provided to Parent. Accordingly, the Company represents
and warrants that the affirmative vote of the holders of record of a
majority of the outstanding shares of Company Common Stock is all that
is necessary to obtain shareholder approval of the Plan of Merger and
the Merger. The Company shall use all reasonable efforts to obtain the
approval by the Company's shareholders of this Agreement, the Plan of
Merger, and the Merger. In accordance therewith, the Company shall,
with the cooperation of Parent, prepare and file, as soon as reasonably
practicable, a proxy statement/prospectus included as part of the
<PAGE>
Registration Statement (such proxy statement/prospectus, together with
notice of meeting, form of proxy, and any letter or other materials to
the Company's shareholders included therein are referred to in this
Agreement as the "Proxy Statement/Prospectus"). The Company shall use
all reasonable efforts to cause the definitive Proxy
Statement/Prospectus to be mailed to the shareholders of the Company,
as soon as reasonably practicable following its effectiveness, with the
date of mailing as mutually determined by the Company and Parent. The
Company will, through its Board of Directors, recommend to its
shareholders approval of the Merger in the definitive Proxy
Statement/Prospectus.
(b) Parent shall, with the cooperation of the Company, prepare
and file, as soon as reasonably practicable, a registration statement
under the 1933 Act registering the shares of Parent Common Stock to be
issued in the Merger (the "Registration Statement"), which Registration
Statement shall include the Proxy Statement/Prospectus. Parent will use
all reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly thereafter as practicable. Parent
shall also take any action required to be taken under state blue sky or
securities laws in connection with the issuance of Parent Common Stock
pursuant to the Merger. The Company shall furnish to Parent all
information concerning the Company and its Subsidiaries and the holders
of its capital stock, and shall take such other action and otherwise
cooperate, as Parent may reasonably request in connection with any such
action.
(c) Parent shall notify the Company promptly of the receipt of
the comments of the SEC and of any request by the SEC for amendments or
supplements to the Registration Statement and shall supply the Company
with copies of all correspondence with the SEC with respect to the
Registration Statement.
(d) If at any time prior to the Company Shareholders Meeting,
any event should occur relating to the Company, any Subsidiary, or the
Company's officers or directors that is required to be described in an
amendment or supplement to the definitive Proxy Statement/Prospectus or
the Registration Statement, the Company shall promptly inform Parent.
If at any time prior to the Company Shareholders Meeting, any event
shall occur relating to Parent or Merger Subsidiary or their respective
officers or directors that is required to be described in an amendment
or supplement to the definitive Proxy Statement/Prospectus or the
Registration Statement, Parent shall promptly inform the Company.
Whenever any event occurs that should be described in an amendment of,
or supplement to, the definitive Proxy Statement/Prospectus or the
Registration Statement, the Company or Parent, as the case may be,
shall, upon learning of such event, promptly notify the other and
consult and cooperate with the other in connection with the preparation
of a mutually acceptable amendment or supplement. The parties shall
promptly file such amendment or supplement with the SEC and mail such
amendment or supplement as soon as practicable after it is cleared by
the SEC.
5.5 Consents. The Company will, at its cost and expense, use all
reasonable efforts to obtain all approvals and consents of all third parties
necessary on the part of the Company or its Subsidiaries to consummate the
transactions contemplated hereby. Parent agrees to cooperate with the Company in
connection with obtaining such approvals and consents. Parent will, at its cost
and expense, use all reasonable efforts to obtain all approvals and consents of
<PAGE>
all third parties necessary on the part of Parent to consummate the transactions
contemplated hereby. The Company agrees to cooperate with Parent in connection
with obtaining such approvals and consents.
5.6 Affiliates' Letters.
(a) The Company has delivered to Parent a list of names and
addresses of those persons, in the Company's reasonable judgment after
consultation with outside legal counsel, who, as of the date hereof,
are affiliates within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act (each such person, an
"Affiliate") of the Company. The Company shall provide Parent such
information and documents as Parent shall reasonably request for
purposes of reviewing such list and shall promptly update such list to
reflect any changes thereto. The Company has caused to be delivered to
Parent an affiliate's letter in the form attached hereto as Exhibit B,
executed by each of the Affiliates of the Company identified in the
foregoing list who were available, and shall use all reasonable efforts
to deliver or cause to be delivered to Parent as soon as practicable
prior to the Effective Time such an affiliate's letter executed by any
Affiliate who was not available to sign and deliver such letter on or
prior to the date hereof and by any additional persons who become
Affiliates after the date hereof. Parent shall be entitled to place
legends as specified in such affiliates' letters on the certificates
evidencing any of the Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the
Parent Common Stock, consistent with the terms of such letters.
(b) For so long as resales of shares of Parent Common Stock
issued pursuant to the Merger are subject to the resale restrictions
set forth in Rule 145 under the Securities Act, Parent will use all
reasonable efforts to comply with Rule 144(c)(1) under the Securities
Act.
5.7 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the transactions
contemplated hereby, the Proxy Statement/Prospectus, and the Registration
Statement will be paid by the party incurring such costs and expenses, except
that the Company and Parent will share equally the cost of printing and filing
with the SEC the Proxy Statement/Prospectus and the Registration Statement, the
filing fees required under the HSR Act or any Foreign Merger Laws, and the fees
charged by PricewaterhouseCoopers LLP for the letters described in Section 5.15
(the "Shared Expenses").
5.8 Further Actions. Subject to the terms and conditions herein
provided and without being required to waive any conditions herein (whether
absolute, discretionary, or otherwise), each of the parties hereto agrees to use
all commercially reasonable efforts to take, or cause to be taken, all action,
and to do, or cause to be done, all things necessary, proper, or advisable to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
5.9 Regulatory Approvals. The Company and Parent will take all
reasonable action as may be necessary under federal or state securities laws or
the HSR Act or Foreign Merger Laws applicable to or necessary for, and will file
as soon as reasonably practicable and, if appropriate, use all reasonable
<PAGE>
efforts to have declared effective or approved all documents and notifications
with the SEC and other governmental or regulatory bodies (including, without
limitation, the FDA and equivalent foreign regulatory bodies, and other foreign
regulatory bodies that administer Foreign Merger Laws, and any foreign labor
councils or bodies as may be required) that they deem necessary or appropriate
for, the consummation of the Merger and the transactions contemplated hereby,
and each party shall give the other information reasonably requested by such
other party pertaining to it and its subsidiaries and affiliates to enable such
other party to take such actions. Notwithstanding the foregoing or anything
herein to the contrary, neither Parent nor Merger Subsidiary shall be required
to make arrangements for or to effect the cessation, sale, or other disposition
of particular assets or categories of assets or businesses of Parent, Merger
Subsidiary, the Company, or any of their affiliates.
5.10 Certain Notifications. From time to time prior to the Effective
Time within 5 days of the end of each calendar month, the Company will provide
written notice to the Parent of any matter which, if existing, occurring or
known at the date of this Agreement, would have been required to be set forth or
described in the Disclosure Schedule or which is necessary to correct any
information in the Disclosure Schedule which has been rendered inaccurate
thereby, or (b) would constitute a breach of any covenant contained in this
Agreement. For purposes of determining the accuracy of the representations and
warranties of the Company contained in Article 3 of this Agreement in order to
determine the fulfillment of the conditions set forth in Section 6.2(a) and to
determine whether a breach has occurred for purposes of Section 6.2(b) or
pursuant to Section 7.1(g) hereof, the Disclosure Schedule delivered by Company
in accordance with Section 3.1 shall be deemed to include only the information
contained therein when delivered in accordance with Section 3.1 and shall be
deemed to exclude any information contained in any subsequent notifications
hereunder.
5.11 Voting of Shares. To induce Parent to execute this Agreement,
certain officers and directors of the Company have executed and delivered as of
the date hereof (and prior to the Company's execution and delivery of the Stock
Option Agreement described in Section 5.17 below) Agreements to Facilitate
Merger in the form attached hereto as Exhibit C, pursuant to which each such
person has agreed to vote his or her shares of Company Common Stock in favor of
the Merger at the Company Shareholders Meeting. At the request of Parent, after
the execution of this Agreement the Company will use all reasonable efforts to
have other officers and directors of the Company also execute Agreements to
Facilitate Merger.
5.12 Noncompetition Agreements. To induce Parent to execute this
Agreement, the Company has caused Anthony Badolato and Allan Seck to execute and
deliver to Parent as of the date hereof (but expressly contingent upon the
Closing of the Merger), noncompetition agreements substantially in the form of
Exhibit D hereto each with a term of 42 months from the Effective Time, and the
Company shall use all reasonable efforts to cause Gregory Melsen, William
Haworth and Bradley Goskowicz to execute and deliver to Parent within 30 days of
the date hereof (but expressly contingent upon the Closing of the Merger)
noncompetition agreements substantially in the form of Exhibit D hereto each
with a term of 24 months from the Effective Time.
5.13 NYSE Listing Application. Parent shall prepare and submit to the
NYSE a listing application for the Parent Common Stock to be issued in the
Merger pursuant to Article 1 of this Agreement. The Company shall cooperate with
Parent in such listing application.
5.14 Indemnification. Parent agrees that it will, after the Effective
Time, provide to those individuals who have served as directors or officers of
the Company or its Subsidiaries indemnification equivalent to that provided by
the Articles of Incorporation and Bylaws of the Company with respect to matters
occurring prior to the Effective Time, including without limitation the
authorization of this Agreement and the transactions contemplated hereby, for a
period of six years from the Effective Time (or, in the case of matters
<PAGE>
occurring prior to the Effective Time which, have not been resolved prior to the
sixth anniversary, until such matters are finally resolved). To the extent
permitted by law, Parent will advance expenses in connection with the foregoing
indemnification. In the event the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other person and the
Surviving Corporation shall not be the continuing or surviving corporation or
entity of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation shall assume the obligations set forth in this Section
5.14. For a period of six years after the Effective Time, Parent will provide
that portion of directors' and officers' liability insurance that serves to
reimburse officers and directors of the Company and its Subsidiaries with
respect to claims against such officers and directors arising from facts or
events that occurred before the Effective Time of at least the same coverage and
amounts, and containing terms and conditions no less advantageous, as that
coverage currently provided by the Company and its Subsidiaries.
5.15 [Intentionally omitted]
5.16 Subsidiary Shares. At or prior to the Closing, the Company shall
cause all issued and outstanding Subsidiary shares owned by any person other
than the Company to be transferred for no or nominal consideration to such
person or persons designated by Parent.
5.17 Stock Option Agreement. To induce Parent to execute this
Agreement, the Company has executed and delivered to Parent as of the date
hereof (and after the execution and delivery of certain Agreements to Facilitate
Merger described in Section 5.11 above) a Stock Option Agreement in the form
attached hereto as Exhibit E, pursuant to which the Company has granted to
Parent an option to acquire from the Company such number of shares of Company
Common Stock as equals 19.9% of the aggregate number of outstanding shares of
Company Common Stock, at an exercise price equal to $11.125 per share or such
lesser amount as is described in the second paragraph of Section 1.3(a) hereof.
Such option shall become exercisable only in the events described in the Stock
Option Agreement.
5.18 Benefit Plans and Employee Matters. From and after the Effective
Time, Parent shall to the extent practicable cause the Surviving Corporation to
provide employee benefits and programs to the Company's employees that, in the
aggregate, are substantially comparable or more favorable than those in
existence as of the date hereof and disclosed in writing to Parent prior to the
date hereof.
5.19 Tax. Parent agrees that it will not knowingly take any action that
would have the effect of jeopardizing the qualification of the Merger as a
reorganization within the meaning of Section 368(a)(2)(E) of the Code.
ARTICLE 6
CLOSING CONDITIONS
6.1 Conditions to Obligations of Parent, Merger Subsidiary, and the
Company. The respective obligations of each party to consummate the Merger shall
be subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) No Injunction. None of Parent, Merger Subsidiary, or the
Company shall be subject to any final order, decree, or injunction of a
court of competent jurisdiction within the United States that (i)
<PAGE>
prevents or materially delays the consummation of the Merger, or (ii)
would impose any material limitation on the ability of Parent
effectively to exercise full rights of ownership of the Company or the
assets or business of the Company.
(b) Shareholder Approval. The approval of the shareholders of
the Company referred to in Section 5.4 hereof shall have been obtained,
in accordance with the MBCA and the Company's Articles of Incorporation
and Bylaws.
(c) Registration Statement. The Registration Statement (as
amended or supplemented) shall have become effective under the 1933 Act
and shall not be subject to any "stop order," and no action, suit,
proceeding, or investigation by the SEC to suspend the effectiveness or
qualification thereof shall have been initiated and be continuing or
have been threatened and be unresolved. Parent shall also have received
all state securities law or blue sky authorizations necessary to carry
out the transactions contemplated hereby.
(d) NYSE Listing. The shares of Parent Common Stock to be
delivered pursuant to the Merger shall have been duly listed on the
NYSE, subject to official notice of issuance.
(e) Waiting Periods. The waiting periods applicable to the
consummation of the Merger under the HSR Act and any Foreign Merger
Laws shall have expired or been terminated.
6.2 Conditions to Obligations of Parent and Merger Subsidiary. The
respective obligations of Parent and Merger Subsidiary to consummate the Merger
shall be subject to the fulfillment at or prior to the Closing of the following
additional conditions:
(a) Representations and Warranties True. Each representation
and warranty of the Company contained in this Agreement, without regard
to any qualification or reference to immateriality or "Company Material
Adverse Effect," shall be true and correct on the date hereof and on
the Closing Date as though such representations and warranties were
made on such date (except those representations and warranties that
address matters only as of a particular date shall remain true and
correct as of such date), except for any inaccuracies that,
individually or in the aggregate, have not had, and would not have, a
Company Material Adverse Effect.
(b) Performance. The Company shall have performed and complied
in all material respects with all agreements, obligations, and
conditions required by this Agreement to be performed or complied with
by it on or prior to the Closing, and Parent shall have received a
certificate to such effect signed by the Chief Executive Officer of the
Company.
(c) Consents. The Company shall have obtained all permits,
authorizations, consents, and approvals required on its part to perform
its obligations under, and consummate the transactions contemplated by,
this Agreement, in form and substance reasonably satisfactory to
Parent, and Parent and Merger Subsidiary shall have received evidence
reasonably satisfactory to them of the receipt of such permits,
authorizations, consents, and approvals.
(d) Opinion of Counsel for the Company. Parent and Merger
Subsidiary shall have received an opinion of Oppenheimer Wolff &
Donnelly LLP, counsel to the Company, dated the Closing Date, in form
and substance reasonably satisfactory to Parent, to the effect set
forth in Exhibit F hereto.
<PAGE>
(e) Affiliates' Letters. Parent shall have received a letter
from each of the Affiliates pursuant to Section 5.6 hereof.
(f) Noncompetition Agreements. Parent shall have received
executed agreements from such persons, and in such form satisfactory to
Parent, as described in Section 5.12 hereof.
(g) Resignations. Such officers and directors of the Company
or of any Subsidiary as shall have been specified Parent shall have
tendered their respective resignations effective as of the Effective
Time.
(h) [Intentionally omitted]
(i) Continued Employment of CEO. The chief executive officer
of the Company shall have agreed to continue his employment with the
Company following the Merger on such terms as are mutually satisfactory
to Parent and such officer.
(j) Subsidiary Shares. The transfer of Subsidiary shares as
provided in Section 5.16 shall have occurred.
6.3 Conditions to Obligations of the Company. The obligation of the
Company to consummate the Merger shall be subject to the fulfillment at or prior
to the Closing of the following additional conditions:
(a) Representations and Warranties True. Each representation
and warranty of Parent contained in this Agreement, without regard to
any qualification or reference to immateriality or "Parent Material
Adverse Effect," shall be true and correct on the date of this
Agreement and on the Closing Date as though such representations and
warranties were made on such date (except those representations and
warranties that address matters only as of a particular date shall
remain true and correct as of such date), except for any inaccuracies
that, individually or in the aggregate, have not had, and would not
have, a Parent Material Adverse Effect.
(b) Performance. Parent and Merger Subsidiary shall have
performed and complied in all material respects with all agreements,
obligations, and conditions required by this Agreement to be performed
or complied with by them on or prior to the Closing.
(c) Consents. Parent and Merger Subsidiary shall have obtained
all permits, authorizations, consents, and approvals required on their
part to perform their obligations under, and consummate the
transactions contemplated by, this Agreement, in form and substance
satisfactory to the Company, and the Company shall have received
evidence satisfactory to it of the receipt of such permits,
authorizations, consents, and approvals.
(d) Opinion of Counsel for Parent. The Company shall have
received an opinion of Fredrikson & Byron, P.A., counsel to Parent,
dated the Closing Date, in form and substance reasonably satisfactory
to the Company, to the effect set forth in Exhibit G hereto.
(e) Tax Opinion. The Company shall have received an opinion of
Oppenheimer Wolff & Donnelly LLP, counsel to the Company, to the effect
that, subject to customary conditions and representations, the Merger
<PAGE>
will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a)(2)(E) of the Code. This condition
shall be deemed waived in the event that such tax opinion is not
rendered because the Company or its shareholders have failed to provide
such customary representations.
ARTICLE 7
TERMINATION AND ABANDONMENT
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the shareholders of the
Company, only:
(a) by mutual written consent duly authorized by the Board of
Directors of Parent and the Board of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not
have been consummated on or before the date that is six months after
the date hereof; provided, however, that the terminating party shall
not have breached in any material respect its obligations under this
Agreement in any manner that shall have been the proximate cause of, or
resulted in, the failure to consummate the Merger by such date and
provided further, however, that, if a request for additional
information is received from the U.S. Federal Trade Commission ("FTC")
or Department of Justice ("DOJ") pursuant to the HSR Act or additional
information is requested by an authority (a "Foreign Authority")
pursuant to Foreign Merger Laws, such date shall be extended to the
90th day following acknowledgment by the FTC, DOJ, or Foreign
Authority, as applicable, that Parent and the Company have complied
with such request, but in any event not later than nine months from the
date hereof;
(c) by either Parent or the Company if a court of competent
jurisdiction or an administrative, governmental, or regulatory
authority has issued a final nonappealable order, decree, or ruling, or
taken any other action, having the effect of permanently restraining,
enjoining, or otherwise prohibiting the Merger;
(d) by either Parent or the Company if, at the Company
Shareholders Meeting, the requisite vote of the shareholders of the
Company is not obtained, except that the right to terminate this
Agreement under this Section 7.1(d) will not be available to any party
whose failure to perform any material obligation under this Agreement
has been the proximate cause of, or resulted in, the failure to obtain
the requisite vote of the shareholders of the Company;
(e) by Parent if either (i) the Company has breached its
obligations under Section 5.2 in any material respect, (ii) the Board
of Directors of the Company has recommended, approved, accepted, or
entered into an agreement regarding, an Alternative Proposal, as
defined in Section 5.2, (iii) the Board of Directors of the Company has
withdrawn or modified in a manner adverse to Parent its recommendation
of the Merger, or (iv) a tender offer or exchange offer for 15% or more
of the outstanding shares of Company Common Stock is commenced, and the
Board of Directors of the Company, within 10 business days after such
tender offer or exchange offer is so commenced, either fails to
recommend against acceptance of such tender offer or exchange offer by
its shareholders or takes no position with respect to the acceptance of
such tender offer or exchange offer by its shareholders;
<PAGE>
(f) by the Company if (i) it is not in material breach of its
obligations under Section 5.2, (ii) the Board of Directors of the
Company has authorized acceptance of an Alternative Proposal, and (iii)
the Company has paid to Parent the fee required by Section 7.2 to be
paid to Parent in the manner therein provided;
(g) by Parent if (i) Parent is not in material breach of its
obligations under this Agreement and (ii) there has been a material
breach by the Company of any of its representations, warranties, or
obligations under this Agreement of by an Affiliate of the Company
under such person's affiliate's letter described in Section 5.6 or by
an officer or director of the Company under such person's Agreement to
Facilitate Merger described in Section 5.11 such that the conditions in
Section 6.2 will not be satisfied, and the breach is not curable or, if
curable, is not cured by the Company within 30 calendar days after
receipt by the Company of written notice from Parent of such breach;
(h) by the Company if (i) the Company is not in material
breach of its obligations under this Agreement and (ii) there has been
a material breach by Parent of any of its representations, warranties,
or obligations under this Agreement such that the conditions in Section
6.3 will not be satisfied, and the breach is not curable or, if
curable, is not cured by Parent within 30 calendar days after receipt
by Parent of written notice from the Company of such breach.
(i) by Parent if, within 10 business days following receipt of
the Disclosure Schedule as described in Section 3.1, Parent determines
that the Disclosure Schedule contains information which in Parent's
good faith, reasonable business judgment adversely affects the value of
the Company's business or prospects.
7.2 Effect of Termination.
(a) In recognition of the time, efforts, and expenses expended
and incurred by Parent with respect to the Company and the opportunity
that the acquisition of the Company presents to Parent, if:
(i) this Agreement is terminated pursuant to Section
7.1(e) or 7.1(f); or
(ii) any third party makes an Alternative Proposal to
which the Company has made a response or any third party
acquires 15% or more of the outstanding Company Common Stock
prior to the Company Shareholders Meeting, and either (A) the
requisite vote of the shareholders of the Company to approve
the Merger is not obtained or (B) this Agreement is terminated
pursuant to Section 7.1(g) where the Company's breach is
willful and intentional or is terminated pursuant to Section
7.1(d),
then, in any such event, the Company will pay to Parent, upon the
termination date in the event of termination pursuant to Section
7.1(f), and immediately upon the date of entering into an agreement
providing for an Alternative Proposal (if such agreement is entered
into within 12 months of the termination of this Agreement), in the
case of a termination pursuant to Section 7.1(e) or in the case of the
events specified in clause (ii) above (by wire transfer of immediately
available funds to an account designated by Parent for such purpose), a
fee equal to $2.75 million. The Company acknowledges that the
agreements contained in this Section 7.2 are an integral part of the
<PAGE>
transactions contemplated by this Agreement and are not a penalty, and
that, without these agreements, Parent would not enter into this
Agreement. If the Company fails to pay promptly the fee due pursuant to
this Section 7.2, the Company shall also pay to Parent Parent's costs
and expenses (including legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action,
taken to collect payment, together with interest on the amount of the
unpaid fee under this section, accruing from its due date, at an
interest rate per annum equal to two percentage points in excess of the
prime commercial lending rate quoted by Norwest Bank Minnesota, N.A.
Any change in the interest rate hereunder resulting from a change in
such prime rate shall be effective at the beginning of the day of such
change in such prime rate.
(b) Except as provided in the next sentence of this paragraph,
in the event of the termination of this Agreement pursuant to any
paragraph of Section 7.1, the obligations of the parties to consummate
the Merger will expire, and none of the parties will have any further
obligations under this Agreement except pursuant to Sections 5.3, 5.7,
and 7.2(a) and which shall survive termination of this Agreement. In
the event of the termination of this Agreement pursuant to any
paragraph of Section 7.1 that is caused by a breach of a party, the
party whose breach was the basis for the termination will not be
relieved from any liability for its breach or its obligations pursuant
to Section 7.2(a), and the other party will have no further obligations
under this Agreement except as provided in Sections 5.3 and 5.7 and
Article 8.
ARTICLE 8
MISCELLANEOUS
8.1 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified, or supplemented only by written agreement of
Parent, Merger Subsidiary, and the Company at any time prior to the Effective
Time with respect to any of the terms contained herein. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.2 Waiver of Compliance; Consents. Any failure of Parent or Merger
Subsidiary on the one hand, or the Company on the other hand, to comply with any
obligation, covenant, agreement, or condition herein may be waived by the
Company or Parent, respectively, only by a written instrument signed by an
officer of the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement, or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing. Merger
Subsidiary agrees that any consent or waiver of compliance given by Parent
hereunder shall be conclusively binding upon Merger Subsidiary, whether or not
given expressly on its behalf.
8.3 Investigation; Survival of Representations and Warranties. The
respective representations and warranties of Parent and the Company contained
herein or in any certificates or other documents delivered prior to or at the
Closing shall not be deemed waived or otherwise affected by any investigation
made by any party hereto. Each and every representation and warranty contained
herein shall be deemed to be conditions to the Merger and shall not survive the
Merger. This Section 8.3 shall have no effect upon any other obligation of the
parties hereto, whether to be performed before or after the Closing. Parent
acknowledges and agrees that (i) other than the representations and warranties
of the Company and its Subsidiaries specifically contained in this Agreement,
including for this purpose the Disclosure Schedule and other matters referred to
in this Agreement or the Disclosure Schedule, there are no representations or
warranties of the Company or its Subsidiaries either expressed or implied with
<PAGE>
respect to the Company, its Subsidiaries or their respective assets, liabilities
and businesses, and (ii) other than as incorporated, referred to or repeated in
the representations and warranties of the Company made in this Agreement or in
the Disclosure Schedule, it shall have no claim or right to indemnification with
respect to any information (whether written or oral), documents or material
furnished by the Company, its Subsidiaries or any of their respective officers,
directors, employees, agents or advisors to Parent, including any information,
documents or material made available to Parent in certain "data rooms,"
management presentations or any other form in expectation of the transactions
contemplated by this Agreement
8.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally by commercial
courier service or otherwise, or by telecopier, or three days after such notice
is mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Merger Subsidiary, to it at:
Medtronic, Inc.
7000 Central Avenue, N.E.
Minneapolis, MN 55432
with separate copies thereof addressed to
Attention: General Counsel
FAX: (612) 572-5459
and
Attention: Vice President and Chief Development Officer
FAX: (612) 572-5404
(b) If to the Company, to it at:
AVECOR Cardiovascular, Inc.
7611 Northland Drive
Minneapolis, MN 55428
FAX: (612) 391-9020
Attention: Anthony Badolato, CEO
with a copy to:
Oppenheimer Wolff & Donnelly LLP
Plaza VII Building, Suite 3400
45 South Seventh Street
Minneapolis, MN 55402
FAX: (612) 607-7100
Attention: Richard Lareau
<PAGE>
8.5 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties, nor
is this Agreement intended to confer upon any other person except the parties
hereto any rights or remedies hereunder, except that Section 5.14 of this
Agreement shall inure to the benefit of the persons identified therein.
8.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Minnesota (regardless of
the laws that might otherwise govern under applicable Minnesota principles of
conflicts of law).
8.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
8.8 Knowledge. As used in this Agreement or the instruments,
certificates or other documents required hereunder, the term "knowledge" of an
entity shall mean knowledge actually possessed by any director or officer of
such entity.
8.9 Interpretation. The Table of Contents, article and section headings
contained in this Agreement are inserted for reference purposes only and shall
not affect the meaning or interpretation of this Agreement. This Agreement shall
be construed without regard to any presumption or other rule requiring the
resolution of any ambiguity regarding the interpretation or construction hereof
against the party causing this Agreement to be drafted.
8.10 Publicity. Upon execution of this Agreement by Parent, Merger
Subsidiary, and the Company, the parties shall jointly issue a press release, as
agreed upon by them. The parties intend that all future statements or
communications to the public or press regarding this Agreement or the Merger
will be mutually agreed upon by them and neither party shall, without such
mutual agreement or the prior consent of the other, issue any statement or
communication to the public or to the press regarding this Agreement, or any of
the terms, conditions, or other matters with respect to this Agreement, except
as required by law or the rules of the NYSE or Nasdaq and then only (a) upon the
advice of such party's legal counsel; (b) to the extent required by law or the
rules of the NYSE or Nasdaq; and (c) following prior notice to the other party
and an opportunity for the other party to discuss with the disclosing party
(which notice shall include a copy of the proposed statement or communication to
be issued to the press or public). The foregoing shall not restrict Parent's or
the Company's communications with their employees or customers in the ordinary
course of business.
8.11 Entire Agreement. This Agreement, including the exhibits and
schedules hereto and the Confidentiality Agreement referred to herein, embodies
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement and the Confidentiality
Agreement supersede all prior agreements and the understandings between the
parties with respect to such subject matter. No discussions regarding or
exchange of drafts or comments in connection with the transactions contemplated
herein shall constitute an agreement among the parties hereto. Any agreement
among the parties shall exist only when the parties have fully executed and
delivered this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MEDTRONIC, INC.
By /s/ Michael D. Ellwein
Its: Vice President
AC MERGER CORP.
By /s/ Michael D. Ellwein
Its: President
AVECOR CARDIOVASCULAR, INC.
By /s/ Anthony Badolato
Its: CEO
<PAGE>
APPENDIX C
MINNESOTA BUSINESS CORPORATION ACT
302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or rights
to purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting
rights; except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to vote on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
<PAGE>
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
Subd. 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
<PAGE>
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
<PAGE>
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
<PAGE>
APPENDIX D
July 12, 1998
The Board of Directors
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, MN 55428
Members of the Board:
In connection with the proposed transaction ("Transaction") in which Medtronic
Merger Corporation, a wholly-owned subsidiary of Medtronic, Inc. ("Medtronic"),
will be merged with and into AVECOR Cardiovascular Inc. ("AVECOR") and AVECOR
will become a wholly-owned subsidiary of Medtronic, you have requested our
opinion as to the fairness, from a financial point of view, to the shareholders
of AVECOR of the proposed consideration to be received by the shareholders of
AVECOR in the Transaction pursuant to the Agreement referred to below. Under the
terms of the Agreement and Plan of Merger (the "Agreement"), at the effective
time of the Transaction, each issued and outstanding share of AVECOR Common
Stock will be converted into the fraction of a share of Medtronic common stock
which is equivalent to $11.125 per share based upon the average of the daily
closing stock price of Medtronic for the 18 consecutive trading days ending on
and including the second trading day immediately preceding the closing. The
terms and conditions of the Merger are more fully set forth in the Agreement.
The Transaction is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Piper Jaffray Inc., as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwriting and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. We have acted as exclusive financial advisor to AVECOR in connection
with the Transaction and will receive a fee for our services which is contingent
upon consummation of the Transaction. In addition, we will receive a separate
fee for providing this opinion, which will be credited against the fee for our
services. This opinion fee is not contingent upon the consummation of the
Transaction. AVECOR has also agreed to indemnify us against certain liabilities
in connection with our services. We acted as lead manager of a public stock
offering of AVECOR Common Stock on June 21, 1995. In the ordinary course of our
business, we and our affiliates may actively trade securities of Medtronic and
AVECOR for our own account or the account of our customers and, accordingly, may
at any time hold a long or short position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) a draft dated July 10, 1998 of the Agreement
and Plan of Merger, (ii) certain public information related to Medtronic, (iii)
certain publicly available financial and securities data of Medtronic and
selected public companies deemed comparable to Medtronic, (iv) certain analyst
reports on Medtronic, (v) to the extent publicly available, information
concerning selected transactions deemed comparable to the proposed Transaction ,
(vi) certain publicly available information relative to AVECOR and selected
public companies deemed comparable to AVECOR, (vii) certain internal financial
<PAGE>
information of AVECOR on a stand-alone basis prepared for financial planning
purposes, and furnished by AVECOR management and (viii) certain publicly
available financial and securities data of AVECOR. We had discussions with
members of the management of AVECOR concerning the financial condition, current
operating results and business outlook for AVECOR on a stand-alone basis.
We have relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to us by AVECOR, or
otherwise made available to us, and have not assumed responsibility for the
independent verification of such information. AVECOR has advised us that it does
not publicly disclose internal financial information of the type provided to us
and that such information was prepared for financial planning purposes and not
with the expectation of public disclosure. We have relied upon the assurance of
the management of AVECOR that the information provided to us by AVECOR has been
prepared on a reasonable basis, and, with respect to financial planning data and
other business outlook information, reflects the best currently available
estimates, and that they are not aware of any information or facts that would
make the information provided to us incomplete or misleading.
We have assumed that the final form of the Agreement will be substantially
similar to the last draft reviewed by us, without modification of material terms
or conditions by AVECOR or Medtronic. We have also assumed that the Transaction
contemplated by the Agreement will constitute a "reorganization" within the
meaning of Section 368(a) of the Code. In addition, we have assumed that, in the
course of obtaining the necessary regulatory approvals for the Transaction, no
restrictions, including any divestiture requirements, will be imposed that will
have a material adverse effect on the contemplated benefits of the Transaction.
In arriving at our opinion, we have not performed any appraisals or valuations
of any specific assets or liabilities of AVECOR or Medtronic, and have not been
furnished with any such appraisals or valuations. We express no opinion
regarding the liquidation value of any entity.
This opinion is necessarily based upon the information available to us and facts
and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the price at which shares of AVECOR or Medtronic Common Stock have
traded or may trade at any future time. We have not undertaken to reaffirm or
revise this opinion or otherwise comment upon any events occurring after the
date hereof and do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is directed to and is for the use and benefit of the Board of
Directors of AVECOR and is rendered to the Board of Directors in connection with
its consideration of the Transaction. This opinion is not intended to be and
does not constitute a recommendation to any shareholder as to how such
shareholder should vote with respect to the Transaction. We were not requested
to opine as to, and this opinion does not address, the basic business decision
to proceed with or effect the Transaction. This opinion shall not be published
or otherwise used, nor shall any public references to us be made, without our
prior written approval.
Based upon and subject to the foregoing and based upon such other factors as we
consider relevant, it is our opinion that the consideration proposed to be
received by the shareholders of AVECOR in the Transaction pursuant to the
Agreement is fair, from a financial point of view, to the shareholders of AVECOR
as of the date hereof.
Sincerely,
/s/ Piper Jaffray, Inc.
PIPER JAFFRAY INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Minnesota Statutes Section 302A.521, Subd. 2, requires Medtronic to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
Medtronic, against judgments, penalties, fines, settlements, and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if certain statutory standards are met. In
addition, Section 302A.521, Subd. 3, requires payment by Medtronic, upon written
request, of reasonable expenses in advance of final disposition of the
proceeding in certain circumstances. A decision as to required indemnification
is made by a disinterested majority of the Board of Directors present at a
meeting at which a disinterested quorum is present, or by a designated committee
of the Board, by special legal counsel, by the shareholders, or by a court.
Section 302A.521 contains detailed terms regarding such right of indemnification
and reference is made thereto for a complete statement of such indemnification
rights.
Medtronic's Bylaws provide for indemnification by Medtronic to the full
extent permitted by Minnesota Statutes Section 302A.521, as now enacted or
hereafter amended, against and with respect to threatened, pending, or completed
actions, suits, or proceedings arising from, or alleged to arise from, a party's
actions or omissions as a director, officer, employee, or agent of Medtronic or
any subsidiary of Medtronic or of any other corporation, partnership, joint
venture, trust, or other enterprise that has served in such capacity at the
request of Medtronic if such acts or omissions occurred, or were or are alleged
to have occurred, while such party was a director or officer of Medtronic.
Generally, under Minnesota law, indemnification will be available only where an
officer or director can establish that he or she acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of Medtronic. As permitted by Minnesota Statutes Section 302A.521,
Medtronic's Restated Articles of Incorporation provide that a director shall
have no personal liability to Medtronic or its shareholders for breach of his or
her fiduciary duty as a director, to the fullest extent permitted by law.
In addition to providing indemnification as outlined above, Medtronic
also purchases individual insurance coverage for its directors and officers.
Subject to the stated conditions, the policy insures the directors and officers
of Medtronic against liability arising out of actions taken in their official
capacities. To the extent that such actions cannot be indemnified by Medtronic,
the policy provides individual liability insurance protection for the directors
and officers of Medtronic.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2 Agreement and Plan of Merger, dated July 12, 1998, by and
among Medtronic, Inc., AVECOR Cardiovascular Inc., and AC
Merger Corp., including the Exhibits thereto. (The Agreement
and Plan of Merger and Exhibit A thereto are furnished as
Appendices B and A, respectively, to the Proxy
Statement/Prospectus forming a part of this Registration
Statement.) Upon the request of the Commission, Medtronic
agrees to furnish supplementally to the Commission a copy of
any disclosure schedules to the Agreement and Plan of Merger.
<PAGE>
5 Opinion and Consent of Fredrikson & Byron, P.A. regarding
validity of shares.
8 Form of Opinion and Consent of Oppenheimer Wolff & Donnelly
LLP regarding certain tax matters.
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
23.2* Consent of Oppenheimer Wolff & Donnelly LLP regarding certain
tax matters (included in Exhibit 8).
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants
for Medtronic, Inc.
23.4 Consent of PricewaterhouseCoopers LLP, independent accountants
for AVECOR Cardiovascular Inc.
23.5 Consent of Piper Jaffray Inc.
24 Power of Attorney.
99.1 Form of Proxy to be used by AVECOR Cardiovascular Inc.
shareholders.
(b) Financial Statement Schedules.
Not applicable.
(c) Reports, Opinions and Appraisals Materially Related to the
Transaction.
Opinion of Piper Jaffray Inc. is furnished as Appendix D to
the Proxy Statement/Prospectus forming a part of this
Registration Statement.
--------
*To be filed by amendment
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) (i) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
<PAGE>
(ii) The registrant undertakes that every prospectus [a] that
is filed pursuant to paragraph (b)(i) immediately preceding, or [b] that
purports to meet the requirements of Section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on August 26, 1998.
MEDTRONIC, INC.
By /s/ William W. George
William W. George, Chairman
and Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on August 26, 1998 by the following
persons in the capacities indicated.
<TABLE>
<S><C>
Signature Title
/s/ William W. George Chairman, Chief Executive Officer and August 26, 1998
William W. George Director (principal executive officer)
/s/ Robert L. Ryan Senior Vice President and Chief August 26, 1998
Robert L. Ryan Financial Officer (principal
financial and accounting officer)
* Vice Chairman and Director )
Glen D. Nelson, M.D. )
)
* Director )
William R. Brody, M.D., Ph.D. )
)
* Director ) * By /s/ Ronald E. Lund
Paul W. Chellgren ) Ronald E. Lund
) Attorney-in-Fact
* Director )
Arthur D. Collins, Jr. ) Date: August 26, 1998
)
* Director )
Antonio M. Gotto, Jr., M.D. )
)
* Director )
Bernadine P. Healy, M.D. )
)
* Director )
Thomas E. Holloran )
)
* Director )
Richard L. Schall )
)
* Director )
Jack W. Schuler )
)
* Director )
Gerald W. Simonson )
)
* Director )
Gordon M. Sprenger )
)
* Director )
Richard A. Swalin, Ph.D. )
Director
Jean-Pierre Rosso
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
EXHIBIT INDEX
TO
FORM S-4 REGISTRATION STATEMENT
---------------------
MEDTRONIC, INC.
Exhibit Description
2 Agreement and Plan of Merger, dated July 12, 1998, by and among
Medtronic, Inc., AVECOR Cardiovascular Inc., and AC Merger Corp. ,
including the Exhibits thereto (The Agreement and Plan of Merger and
Exhibit A thereto are furnished as Appendices B and A, respectively, to
the Proxy Statement/Prospectus forming a part of this Registration
Statement)
5 Opinion and Consent of Fredrikson & Byron, P.A. regarding validity of
shares
8 Form of Opinion and Consent of Oppenheimer Wolff & Donnelly LLP
regarding certain tax matters
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5)
23.2* Consent of Oppenheimer Wolff & Donnelly LLP regarding certain tax
matters (included in Exhibit 8)
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants for
.Medtronic, Inc.
23.4 Consent of PricewaterhouseCoopers LLP, independent accountants for
AVECOR Cardiovascular Inc.
23.5 Consent of Piper Jaffray Inc.
24 Power of Attorney of certain officers and directors
99.1 Form of Proxy to be used by AVECOR Cardiovascular Inc. shareholders
--------
*To be filed by amendment
Exhibit B
AFFILIATE'S LETTER
Medtronic, Inc.
7000 Central Ave. NE
Minneapolis, MN 55432
Ladies and Gentlemen:
The undersigned officer and/or director of AVECOR Cardiovascular, Inc. (the
"Company") has been advised that the undersigned is deemed by the Company to be
an "affiliate" of the Company, as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended (the "Securities Act")
(such rule, as amended or replaced by any successor rule, referred to herein as
"Rule 145"). Pursuant to the terms of the Agreement and Plan of Merger dated on
or about the date hereof (the "Merger Agreement"), among Medtronic, Inc.
("Parent"), AC Merger Corp. ("Merger Subsidiary"), and the Company, Merger
Subsidiary will be merged with and into the Company (the "Merger"). As a result
of the Merger, outstanding shares of common stock, $.01 par value per share, of
the Company ("Company Common Stock") will be converted into the right to receive
shares of common stock, $.10 par value per share, of Parent ("Parent Common
Stock"), as determined pursuant to the Merger Agreement.
In order to induce Parent and the Company to enter into the Merger Agreement,
the undersigned (referred to herein as "Affiliate") represents, warrants and
agrees as follows:
1. [Intentionally omitted]
2. Affiliate has been advised that the issuance of the Parent Common
Stock, if any, to Affiliate pursuant to the Merger is being registered
with the SEC under the Securities Act and the rules and regulations
promulgated thereunder on a Registration Statement on Form S-4.
However, Affiliate has also been advised that, because Affiliate is
deemed to be an "affiliate" of the Company (as that term is used in
paragraphs (c) and (d) of Rule 145), any sale, transfer or other
disposition by Affiliate of any Parent Common Stock issued pursuant to
the Merger will, under current law, require either (a) further
registration under the Securities Act of the Parent Common Stock to be
sold, transferred, or otherwise disposed of, or (b) compliance with
Rule 145, or (c) the availability of another exemption from such
registration.
3. Affiliate will not offer to sell, sell, or otherwise dispose of any
Parent Common Stock issued pursuant to the Merger except pursuant to an
effective registration statement or in compliance with Rule 145 or
another exemption from the registration requirements of the Securities
Act (the compliance with Rule 145 or the availability of such other
exemption to be established by Affiliate to the reasonable satisfaction
of Parent's counsel).
4. Affiliate consents to the placement of a stop transfer order with the
Company's and Parent's stock transfer agent and registrar, and to the
placement of the following legend on certificates representing the
Company Common Stock and Parent Common Stock issued or to be issued to
Affiliate:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH AN AFFILIATE'S
LETTER FROM THE UNDERSIGNED TO [PARENT], AND IN COMPLIANCE
WITH RULE 145 OF THE SECURITIES ACT OF 1933."
5. Affiliate has carefully read this letter and has discussed with counsel
for Affiliate or counsel for the Company, to the extent Affiliate felt
necessary, the requirements of this letter and other applicable
limitations on the ability of Affiliate to sell, transfer, or otherwise
dispose of Company Common Stock and Parent Common Stock.
6. The Company agrees to take all reasonable actions up to the date of the
Merger, including but not limited to the placement of a stop transfer
order with the Company's stock transfer agent and registrar, to ensure
compliance by Affiliate with the provisions of this letter.
Very truly yours,
July 12, 1998
(Signature)
(Name) (Please Print)
AVECOR CARDIOVASCULAR, INC.
By:
<PAGE>
Exhibit C
AGREEMENT TO FACILITATE MERGER
DATE: July 12, 1998
PARTIES:
Medtronic, Inc., (hereinafter "Parent")
a Minnesota corporation
and
------------------------,
an individual officer and/or director
of AVECOR Cardiovascular, Inc. (hereinafter "Shareholder")
RECITALS:
A. Shareholder is the legal or beneficial owner of shares of Common
Stock of AVECOR Cardiovascular, Inc., a Minnesota corporation (the "Company"),
and the holder of options, warrants, or other rights to acquire shares of
Company Common Stock.
B. Parent, the Company, and a wholly-owned subsidiary of Parent are
entering into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which it is proposed that Parent's subsidiary will merge with and into the
Company (the "Merger") and as a result of which the outstanding shares of
Company Common Stock shall be converted into Parent Common Stock.
C. Shareholder deems it to be in Shareholder's best interest and in the
best interests of the Company and all other shareholders of the Company that the
Merger Agreement be approved, ratified, and confirmed by the shareholders of the
Company, and it is a condition to Parent's obligations under the Merger
Agreement that Shareholder enter into this Agreement.
D. It is understood and acknowledged by Shareholder that Parent's
execution of the Merger Agreement is being done in reliance upon the prior
execution and delivery of this Agreement, that Shareholder is entering into this
Agreement prior to the Company's execution and delivery of the Stock Option
Agreement referred to in the Merger Agreement, that Parent will incur
substantial expenses proceeding toward consummation of the Merger as
contemplated by the Merger Agreement, and that such expenses will be undertaken
in reliance upon and as a result of the agreements and undertakings of
Shareholder set forth herein.
NOW, THEREFORE, in consideration of the foregoing, and in order to
induce Parent to execute the Merger Agreement and to proceed as contemplated by
the Merger Agreement toward the consummation of the Merger, and for other good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Vote in Favor of Merger. Shareholder, in his or her capacity as a
shareholder of the Company or as a representative with the authority to vote
shares of Company Common Stock, agrees to vote (or caused to be voted) all
shares of Company Common Stock with respect to which Shareholder presently owns
or controls voting power, and all shares of Company Common Stock with respect to
which Shareholder in the future acquires ownership or voting power, at any
meeting of the shareholders of the Company, and in any action by written consent
of the shareholders of the Company, (i) in favor of the approval, consent, and
ratification of the Merger Agreement and the Merger, and (ii) against any action
that would impede, interfere, or discourage the Merger, would facilitate an
acquisition of the Company, in any manner, by a party (other than Parent), or
would result in any breach of representation, warranty, covenant, or agreement
of the Company under the Merger Agreement. To the extent inconsistent with the
foregoing provisions of this Section 1, Shareholder hereby revokes any and all
previous proxies with respect to any shares of Company Common Stock that
Shareholder owns or has the right to vote. Nothing in this Agreement shall be
deemed to restrict or limit Shareholder's right to act in his or her capacity as
an officer or director of the Company consistent with his or her fiduciary
obligations in such capacity.
2. Representations and Warranties of Shareholder. Shareholder
represents and warrants to Parent that Shareholder has the legal capacity to
enter into and perform all of Shareholder's obligations under this Agreement.
The execution, delivery, and performance of this Agreement by Shareholder will
not violate any other agreement to which Shareholder is a party, including,
without limitation, any voting agreement, shareholders agreement, or voting
trust. This Agreement has been duly executed and delivered by Shareholder and
constitutes a legal, valid, and binding agreement of Shareholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and
similar laws, now or hereafter in effect.
<PAGE>
3. Successors and Assigns. This Agreement shall be binding upon any
permitted purchasers, donees, pledgees, and other transferees of Company Common
stock legally or beneficially owned by Shareholder. Shareholder agrees not to
make any sales, gifts, transfers, pledges, or other dispositions of Company
Common Stock without first making any such transferee or pledgee fully aware of
the obligations under this Agreement and obtaining such transferee's or
pledgee's written agreement to comply with the terms hereof.
4. Injunctive Relief. Shareholder agrees that in the event of
Shareholder's breach of any provision of this Agreement, Parent may be without
an adequate remedy at law. Shareholder therefore agrees that in the event of
Shareholder's breach of any provision of this Agreement, Parent may elect to
institute and prosecute proceedings in any court of competent jurisdiction to
enforce specific performance or to enjoin the continuing breach of such
provision, as well as to obtain damages for breach of this Agreement. By seeking
or obtaining any such relief, Parent will not be precluded from seeking or
obtaining any other relief to which it may be entitled.
5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same document.
6. Further Assurances. Shareholder shall execute and deliver such
additional documents and take such further action as may be necessary or
desirable to consummate the transactions contemplated by this Agreement.
7. Third-Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person other than the parties hereto any
legal or equitable right, remedy, or claim under or by reason of this Agreement
or any provision contained herein.
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota (regardless of the laws that
might otherwise govern under applicable Minnesota principles of conflicts of
laws).
9. Effectiveness. If this Agreement is executed by Shareholder prior to
the approval of the Merger Agreement by the Company's Board of Directors, then
this Agreement shall be subject to, and shall become effective only upon, the
approval of the Merger Agreement by the Company's Board of Directors. This
Agreement shall terminate upon termination of the Merger Agreement in accordance
with its terms.
IN WITNESS WHEREOF, Parent has caused this Agreement to Facilitate
Merger to be executed by its duly authorized officer, and Shareholder has
executed this Agreement, as of the date and year first above written.
MEDTRONIC, INC.
By
Its: Vice President
SHAREHOLDER:
[signature]
[print name]
<PAGE>
Exhibit D
NONCOMPETITION AGREEMENT
THIS AGREEMENT is entered into by and between __________________
("Individual") and Medtronic, Inc., a Minnesota corporation ("Parent"), as of
________, 1998, but effective commencing on the date of the consummation of the
Merger described in the Merger Agreement referred to herein (the "Effective
Date").
RECITALS:
WHEREAS, Individual is an employee, consultant, officer, director or a
shareholder of AVECOR Cardiovascular, Inc., a Minnesota corporation (the
"Company"); and
WHEREAS, Parent, the Company, and a wholly-owned subsidiary of Parent
("Merger Subsidiary") is entering, or has entered, into an Agreement and Plan of
Merger dated on or about July 12, 1998 (the "Merger Agreement"), pursuant to
which, on the Effective Date, Parent will acquire the capital stock and business
(including goodwill) of the Company by the merger of Merger Subsidiary with and
into the Company (the "Merger"); and
WHEREAS, Individual will receive Parent common stock in the Merger; and
WHEREAS, Individual desires to further induce Parent to proceed with
the Merger Agreement and consummate the transactions contemplated thereby, and
it is a condition to Parent's obligations under the Merger Agreement that
Individual enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and to induce Parent
to proceed with the Merger Agreement and to consummate the Merger, and subject
to the terms and conditions set forth herein, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement, the following terms shall
have the meanings set forth or referenced below:
"Company Product" means any product, product line, process,
formulation, or service (including any component thereof or research to develop
information useful in connection therewith) that, as of the Effective Date, is
being designed, developed, manufactured, marketed, or sold by the Company or is
in planning by the Company for design, development, manufacture, marketing, or
sale.
"Competitive Product" means any product, product line, process,
formulation, or service (including any component thereof or research to develop
information useful in connection therewith) that is designed, developed,
manufactured, marketed, or sold by anyone other than Parent and performs similar
functions, or is used for the same purposes as a Company Product.
"Parent" means Medtronic, Inc. and all of its subsidiary and affiliated
corporations (as defined under the Securities and Exchange Act of 1934, as
amended) and the operating divisions of any of them (including but not limited
to the Company from and after the Merger).
2. Noncompetition Covenant. From and after the Effective Date until the
[42-month/24-month] anniversary of the Effective Date, Individual will not,
either alone or in any capacity with another person or legal entity:
(a) directly or indirectly own any interest in, control, be employed by
or render services (including but not limited to services in research) to any
person or entity, or subsidiary, subdivision, division, or joint venture of such
entity (except Parent), in connection with the design, development, manufacture,
marketing, or sale of a Competitive Product; provided, however, that the
foregoing shall not prohibit Individual from holding a passive equity ownership
interest of less than 5% in a publicly traded entity and, if Individual is an
employee of Parent, to the extent such ownership is permitted by Parent's
conflict policies as generally applied);
(b) directly or indirectly hire or solicit any of the Company's or
Parent's present or future employees for the purpose of hiring them or inducing
them to leave their employment with the Company or Parent (provided, however,
such restriction shall be of no force and effect if any such employee leaves the
employ of Parent without any solicitation by Individual or such employee is
terminated by Parent);
(c) directly or indirectly solicit, attempt to solicit, interfere, or
attempt to interfere with the Company's or Parent's relationship with its
customers or potential customers for Company Products, on behalf of Individual
or any other person or entity engaged in the design, development, manufacture,
marketing, or sale of a Competitive Product; or
<PAGE>
(d) directly or indirectly design, develop, manufacture, market, or
sell any Competitive Product.
The restrictions contained in this Section 2 of this Agreement will not
prevent Individual from accepting employment with a large diversified
organization with separate and distinct divisions that do not compete, directly
or indirectly, with Parent, as long as prior to accepting such employment Parent
receives separate written assurances from the prospective employer and from
Individual, satisfactory to Parent, to the effect that Individual will not
render any services, directly or indirectly, to any division or business unit
that competes, directly or indirectly, with Parent. From and after such time as
Parent has made a decision through its Board of Directors not to continue, and
has ceased for a period of six (6) consecutive months, all of the business
activities with which the activity in question of Individual would be
competitive, then this Agreement will cease to be applicable to such specific
activity of Individual.
3. Geographic Scope. Individual acknowledges that each of the Company
and Parent operates throughout the world and that the market for Company
Products is worldwide. Individual therefore agrees that the covenants contained
in Section 2 shall apply within all counties of all states of the United States
and within all counties, provinces, districts, and/or other comparable legal
boundaries elsewhere throughout the world.
4. Injunctive Relief. In addition to any other relief or remedies
afforded by law or in equity, if Individual breaches this Agreement, Individual
agrees that Parent shall be entitled, as a matter of right, to injunctive relief
in any court of competent jurisdiction plus reasonable attorneys' fees if
successful in securing such relief. Individual recognizes that products and
inventions generated by Individual while an employee of the Company or pursuant
to the consulting while a consultant to the Company are the property of the
Company, the value of which would be adversely affected by Individual's
violation of this Agreement, and Individual hereby admits that irreparable
damage will result to Parent if Individual violates or threatens to violate the
terms of this Agreement. This Section 4 shall not preclude the granting of any
other appropriate relief including, without limitation, money damages against
Individual for breach of such sections of this Agreement.
5. Severability. If it is determined by a court of competent
jurisdiction that any term or provision of this Agreement is invalid or
unenforceable, then (i) the remaining terms and provisions hereof shall be
unimpaired, and (ii) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision.
6. Authority. Individual represents and warrants to Parent as follows:
(a) Individual has full capacity and authority to enter into this Agreement and
to perform Individual's obligations hereunder; (b) this Agreement has been duly
executed and delivered by Individual and constitutes a legal, valid, and binding
agreement of Individual, enforceable against Individual in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and (c) neither the
execution and delivery of this Agreement nor compliance by Individual with its
terms and provisions will violate any law, statute, regulation, injunction,
order, or decree of any government agency or authority or court to which
Individual is subject.
<PAGE>
7. Complete Agreement; Effectiveness. This Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements between the parties, whether written
or oral, relating hereto. Notwithstanding any contrary provisions of this
Agreement, the effectiveness of this Agreement is conditioned upon and subject
to the occurrence of the Merger.
8. Waiver, Discharge, Amendment, Etc. The failure of any party hereto
to enforce at any time any of the provisions of this Agreement shall in no way
be construed to be a waiver of any such provision, nor in any way to affect the
validity of this Agreement or any part thereof or the right of the party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to be a waiver of any other or subsequent breach.
Any amendment to this Agreement shall be in writing and signed by the parties
hereto. This Agreement shall not be superseded by any future agreement entered
into between Individual and Parent unless such future agreement specifically
refers to this Agreement by date and states specifically by section reference
the portions of this Agreement that such future agreement is intended to
supersede.
9. Titles and Headings; Construction. The titles and headings to
sections herein are inserted for the convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. Individual acknowledges that Individual and Parent have jointly
participated in the negotiation and drafting of this Agreement, and the parties
agree that this Agreement shall be construed without regard to any presumption
or other rule requiring construction hereof against the party causing this
Agreement to be drafted.
10. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, this Agreement may not be assigned without the
express written consent of all parties, except Parent may assign this Agreement
to a subsidiary of Parent or to such business organization that shall succeed to
the business of Parent or of such subsidiary to which this Agreement relates.
11. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Minnesota, including all matters of
construction, validity, performance, and enforcement, without giving effect to
principles of conflict of laws.
12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, each of the parties has caused this Noncompetition
Agreement to be executed in the manner appropriate to each, as of the date first
above written.
[Individual]
MEDTRONIC, INC.
By:
Its: Vice President
<PAGE>
Exhibit E
STOCK OPTION AGREEMENT
THIS AGREEMENT is dated as of July 12, 1998, between Medtronic, Inc., a
Minnesota corporation ("Grantee"), and AVECOR Cardiovascular, Inc., a Minnesota
corporation ("Issuer").
RECITALS
A. Grantee, Issuer, and AC Merger Corp., a Minnesota corporation and
wholly-owned subsidiary of Grantee ("Merger Subsidiary"), are entering into an
Agreement and Plan of Merger (the "Merger Agreement") which provides, among
other things, that, upon the terms and subject to the conditions thereof, Merger
Subsidiary will be merged with and into Issuer (the "Merger").
B. Prior to the execution and delivery of this Agreement, certain
directors and officers of Issuer have, to induce Grantee to execute the Merger
Agreement, executed and delivered to Grantee the Agreements to Facilitate Merger
described in the Merger Agreement.
C. As a further and subsequent inducement to have Grantee enter into
the Merger Agreement, Grantee has required that Issuer enter into this
Agreement, which provides, among other things, that Issuer grant to Grantee an
option to purchase shares of Issuer's Common Stock, par value $.0l per share
("Issuer Common Stock"), upon the terms and subject to the conditions provided
for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements contained in this Agreement and the Merger Agreement, the parties
agree as follows:
1. Grant of Option. Subject to the terms and conditions of this
Agreement, Issuer hereby grants to Grantee an irrevocable option (the "Option")
to purchase 1,600,851 shares of Issuer Common Stock (the "Option Shares"), in
the manner set forth below, at an exercise price of $11.125 per share of Issuer
Common Stock, subject to adjustment as provided below (the "Option Price").
Issuer represents that the Option Shares represent at least 19.9% of the number
of shares of Issuer Common Stock outstanding on the date hereof. Capitalized
terms used herein but not defined herein shall have the meanings set forth in
the Merger Agreement.
2. Exercise of option.
(a) Subject to the satisfaction or waiver of the conditions
set forth in Section 9 of this Agreement, prior to the termination or
expiration of this Agreement in accordance with its terms, Grantee or
its designee (which shall be a wholly-owned subsidiary of Grantee) may
exercise the option, in whole or in part, at any time or from time to
time on or after the public disclosure of, or the time at which Grantee
shall have learned of, the earliest of (i) or (ii) below to occur:
(i) the Merger Agreement is terminated pursuant to
Section 7.1(e) of the Merger Agreement and within 12 months
after termination of the Merger Agreement the Issuer enters
into an agreement providing for an Alternative Proposal, or
the Merger Agreement is terminated pursuant to 7.1(f) of the
Merger Agreement; or
(ii) any third party makes an Alternative Proposal to
which the Issuer has made a response or any third party
acquires 15% or more of the outstanding Issuer Common Stock
prior to the Company Shareholders Meeting, and either (A) the
requisite vote of the shareholders of Issuer to approve the
Merger is not obtained or (B) the Merger Agreement is
terminated pursuant to Section 7.1(g) of the Merger Agreement
where the Issuer's breach is willful and intentional or is
terminated pursuant to Section 7.1(d) of the Merger Agreement,
and in the case of either (A) or (B) above, within 12 months
after termination of the Merger Agreement the Issuer enters
into an agreement providing for an Alternative Proposal.
<PAGE>
(b) In the event Grantee wishes to exercise the Option at
such time as the Option is exercisable, Grantee shall deliver written
notice (the "Exercise Notice") to Issuer specifying its intention to
exercise the Option, the total number of Option Shares it wishes to
purchase, and a date and time for the closing of such purchase (a
"Closing") not less than three nor more than 30 business days after the
later of (i) the date such Exercise Notice is given and (ii) the
expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). If prior to the Expiration Date (as defined in Section 11
below) any person or group (other than Grantee or its affiliates) shall
have made a bona fide proposal that becomes publicly disclosed, with
respect to a tender offer or exchange offer for 50% or more of the then
outstanding shares of Issuer Common Stock (a "Share Proposal"), a
merger, consolidation, or other business combination (a "Merger
Proposal"), or any acquisition of a material portion of the assets of
Issuer (an "Asset Proposal"), or shall have acquired 50% or more of the
then outstanding shares of Issuer Common Stock (a "Share Acquisition")
, and this Option is then exercisable, then Grantee, in lieu of
exercising the Option, shall have the right at any time on or after the
date the Termination Fee (defined below) under the Merger Agreement
becomes due and payable to request in writing that Issuer pay, and
promptly (but in any event not more than five business days) after
Grantee makes such request, Issuer shall, subject to Section 2(c)
below, pay to Grantee by certified check, official bank check or wire
transfer pursuant to Grantee's instructions, in cancellation of the
option, an amount in cash (the "Cancellation Amount") equal to (i) the
lesser of
(x) the excess over the Option Price of the greater
of (A) the last sale price of a share of Issuer Common Stock
as reported on the Nasdaq National Market on the last trading
day prior to the date of the Exercise Notice, or (B)(1) the
highest price per share of Issuer Common Stock offered to be
paid or paid by any such person or group pursuant to or in
connection with a Share Proposal, a Share Acquisition, or a
Merger Proposal, or (2) the aggregate consideration offered to
be paid or paid in any transaction or proposed transaction in
connection with an Asset Proposal, divided by the number of
shares of Issuer Common Stock then outstanding, and
(y) $1.718 [$2.75 million divided by initial number
of Option Shares],
multiplied by (ii) the number of Option Shares then covered by the
Option; provided, however, that if, prior to payment of the
Cancellation Amount, Grantee has been paid by Issuer the termination
fee described in Section 7.2 of the Merger Agreement (the "Termination
Fee"), then the Cancellation Amount shall be reduced (but not below
zero) to the extent necessary so that the sum of the Termination Fee
and the Cancellation Amount shall not exceed $3.6 million. If all or a
portion of the price per share of Issuer Common Stock offered, paid, or
payable or the aggregate consideration offered, paid, or payable for
the assets of Issuer, each as contemplated by the preceding sentence,
consists of noncash consideration, such price or aggregate
consideration shall be the cash consideration, if any, plus the fair
market value of the noncash consideration as mutually determined by the
investment bankers of Issuer and the investment bankers of Grantee.
(c) Following exercise of the Option by Grantee, in the event
that Grantee sells, pledges, or otherwise disposes of (including,
without limitation, by merger or exchange) any of the Option Shares (a
"Sale"), then any Termination Fee due and payable by Issuer following
such time shall be reduced to the extent necessary so that the sum of
(x) the Termination Fee and
(y) the amount received (whether in cash, loan
proceeds, securities, or otherwise) by Grantee in such Sale
less the exercise price of such Option Shares sold in the Sale
(the "Option Share Profit")
shall not exceed $3.6 million. If Issuer has paid to Grantee the
Termination Fee prior to the Sale, then Grantee shall immediately remit
to Issuer by wire transfer of immediately available funds to a bank
account designated by Issuer the excess, if any, of the Option Share
Profit over $850,000.
<PAGE>
3. Payment of Option Price and Delivery of Certificate. Any Closings
under Section 2 of this Agreement shall be held at the principal executive
offices of Issuer, or at such other place as Issuer and Grantee may agree. At
any Closing hereunder, (a) Grantee or its designee will make payment to Issuer
of the aggregate price for the Option Shares being so purchased by delivery of a
certified check, official bank check, or wire transfer of funds pursuant to
Issuer's instructions payable to Issuer in an amount equal to the product
obtained by multiplying the Option Price by the number of Option Shares to be
purchased, and (b) upon receipt of such payment Issuer will deliver to Grantee
or its designee (which shall be a wholly-owned subsidiary of Grantee) a
certificate or certificates representing the number of validly issued, fully
paid, and nonassessable Option Shares so purchased, in the denominations and
registered in such names (which shall be Grantee or a wholly-owned subsidiary of
Grantee) designated in writing to Issuer by Grantee.
4. Registration and Listing of Option Shares.
(a) Issuer agrees to use its reasonable best efforts to (i)
effect as promptly as possible upon the request of Grantee and (ii)
cause to become and remain effective for a period of not less than six
months (or such shorter period as may be necessary to effect the
distribution of such shares) the registration under the 1933 Act, and
any applicable state securities laws, of all or any part of the Option
Shares as may be specified in such request; provided, however, that (i)
Grantee shall have the right to select the managing underwriter for any
such offering after consultation with Issuer, which managing
underwriter shall be reasonably acceptable to Issuer, and (ii) Grantee
shall not be entitled to more than two effective registration
statements hereunder.
(b) In addition to such demand registrations, if Issuer
proposes to effect a registration of Issuer Common Stock for its own
account or for the account of any other shareholder of Issuer (other
than on Form S-4 or Form S-8), Issuer will give prompt written notice
to all holders of Options or Option Shares of its intention to do so
and shall use its reasonable best efforts to include therein all Option
Shares requested by Grantee to be so included, provided, however, if
Issuer is in registration with respect to an underwritten public
offering of shares of Issuer Common Stock, and if in the good faith
judgment of the managing underwriter or managing underwriters, or, if
none, the sole underwriter, of such offering the inclusion of the
Option Shares and any other selling shareholder's shares would
interfere with the successful marketing of the shares of Issuer Common
Stock, the number of Option Shares and shares of other selling
shareholders otherwise to be covered in the registration statement
contemplated hereby may be reduced prorata. No registration effected
under this Section 4(b) shall relieve Issuer of its obligations to
effect demand registrations under Section 4(a) hereof.
(c) Registrations effected under this Section 4 shall be
effected at Issuer's expense, including the reasonable fees and
expenses of counsel to the holder of Options or Option Shares, but
excluding underwriting discounts and commissions to brokers or dealers.
In connection with each registration under this Section 4, Issuer shall
indemnify and hold each holder of Options or Option Shares
participating in such offering (a "Holder"), its underwriters, and each
of their respective affiliates harmless against any and all losses,
claims, damage, liabilities, and expenses (including, without
limitation, investigation expenses and fees and disbursements of
counsel and accountants), joint or several, to which such Holder, its
underwriters, and each of their respective affiliates may become
subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages, liabilities, or expenses (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any registration
statement (including any prospectus therein), or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
other than such losses, claims, damages, liabilities, or expenses (or
actions in respect thereof) that arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact
contained in written information furnished by a Holder to Issuer
expressly for use in such registration statement.
<PAGE>
(d) In connection with any registration statement pursuant to
this Section 4, each Holder agrees to furnish Issuer with such
information concerning itself and the proposed sale or distribution as
shall reasonably be required in order to ensure compliance with the
requirements of the 1933 Act. In addition, Grantee shall indemnify and
hold Issuer, its underwriters and each of their respective affiliates
harmless against any and all losses, claims, damages, liabilities, and
expenses (including, without limitation, investigation expenses and
fees and disbursements of counsel and accountants), joint or several,
to which Issuer, its underwriters, and each of their respective
affiliates may become subject under the 1933 Act or otherwise, insofar
as such losses, claims, damages, liabilities, or expenses (or actions
in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in written
information furnished by any Holder to Issuer expressly for use in such
registration statement.
(e) Upon the issuance of Option Shares hereunder, Issuer will
use its reasonable best efforts promptly to list such Option Shares
with the Nasdaq National Market or on such national or other exchange
on which the shares of Issuer Common Stock are at the time listed.
5. Representations and Warranties of Issuer. Issuer hereby represents
and warrants to Grantee as follows:
(a) Issuer is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Minnesota and has
requisite power and authority to enter into and perform this Agreement.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Issuer, and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby.
The Board of Directors of Issuer has duly approved the issuance and
sale of the Option Shares, upon the terms and subject to the conditions
contained in this Agreement, and the consummation of the transactions
contemplated hereby. This Agreement has been duly and validly executed
and delivered by Issuer and, assuming this Agreement has been duly and
validly authorized, executed, and delivered by Grantee, constitutes a
valid and binding obligation of Issuer enforceable against Issuer in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting or relating
to creditors, rights generally; the availability of injunctive relief
and other equitable remedies; and limitations imposed by law on
indemnification for liability under federal securities laws.
(c) Issuer has taken all necessary action to authorize and
reserve for issuance and to permit it to issue, and at all times from
the date of this Agreement through the date of expiration of the Option
will have reserved for issuance upon exercise of the Option, such
number of authorized shares of Issuer Common Stock as is equal to the
number of Option Shares (or such other amount as may be required
pursuant to Section 10 hereof), each of which, upon issuance pursuant
to this Agreement and when paid for as provided herein, will be validly
issued, fully paid, and nonassessable, and shall be delivered free and
clear of all claims, liens, charges, encumbrances, and security
interests and not subject to any preemptive rights.
(d) The execution, delivery, and performance of this Agreement
by Issuer and the consummation by it of the transactions contemplated
hereby except as required by the HSR Act (if applicable), and, with
respect to Section 4, compliance with the provisions of the 1933 Act
and any applicable state securities laws, do not require the consent,
waiver, approval, license, or authorization of or result in the
acceleration of any obligation under, or constitute a default under,
any term, condition, or provision of any charter or bylaw, or any
indenture, mortgage, lien, lease, agreement, contract, instrument,
order, judgment, ordinance, regulation, or decree or any restriction to
which Issuer or any property of Issuer or its subsidiaries is bound,
except where the failure to obtain such consents, waivers, approvals,
licenses, or authorizations or where such acceleration or defaults
could not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect.
<PAGE>
6. Representations and Warranties of Grantee. Grantee hereby represents
and warrants to Issuer that:
(a) Grantee is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Minnesota and has
requisite power and authority to enter into and perform this Agreement.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Grantee, and no other
corporate proceedings on the part of Grantee are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by
Grantee and, assuming this Agreement has been duly executed and
delivered by Issuer, constitutes a valid and binding obligation of
Grantee enforceable against Grantee in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting or relating to creditors' rights generally; the
availability of injunctive relief and other equitable remedies; and
limitations imposed by law on indemnification for liability under
federal securities laws.
(c) Grantee or its designee is acquiring the Option and it
will acquire the Option Shares issuable upon the exercise thereof for
its own account and not with a view to the distribution or resale
thereof in any manner not in accordance with applicable law.
7. Covenants of Grantee. Grantee agrees not to transfer or otherwise
dispose of the Option or the Option Shares, or any interest therein, except in
compliance with the 1933 Act and any applicable state securities law. Grantee
further agrees to the placement of the following legend on the certificates)
representing the Option Shares (in addition to any legend required under
applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER EITHER (1) THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR (2) ANY APPLICABLE STATE LAW GOVERNING
THE OFFER AND SALE OF SECURITIES. NO TRANSFER OR OTHER
DISPOSITION OF THESE SHARES, OR OF ANY INTEREST THEREIN, MAY
BE MADE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT AND SUCH OTHER STATE LAWS OR PURSUANT TO
EXEMPTIONS FROM REGISTRATION UNDER THE ACT, SUCH OTHER STATE
LAWS, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER."
8. Reasonable Best Efforts. Grantee and Issuer shall take, or cause to
be taken, all reasonable action to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
reasonable best efforts to obtain any necessary consents of third parties and
governmental agencies and the filing by Grantee and Issuer promptly after the
date hereof of any required HSR Act notification forms and the documents
required to comply with the HSR Act.
9. Certain Conditions. The obligation of Issuer to issue Option Shares
under this Agreement upon exercise of the Option shall be subject to the
satisfaction or waiver of the following conditions:
(a) any waiting periods applicable to the acquisition of the
Option Shares by Grantee pursuant to this Agreement under the HSR Act
shall have expired or been terminated;
(b) the representations and warranties of Grantee made in
Section 6 of this Agreement shall be true and correct in all material
respects as of the date of the Closing for the issuance of such Option
Shares; and
(c) no order, decree, or injunction entered by any court of
competent jurisdiction or governmental, regulatory, or administrative
agency or commission in the United States shall be in effect that
prohibits the exercise of the option or acquisition of Option Shares
pursuant to this Agreement.
<PAGE>
10. Adjustments Upon Changes in Capitalization. In the event of any
change in the number of issued and outstanding shares of Issuer Common Stock by
reason of any stock dividend, stock split, recapitalization, merger, rights
offering, share exchange, or other change in the corporate or capital structure
of Issuer, Grantee shall receive, upon exercise of the Option, the stock or
other securities, cash, or property to which Grantee would have been entitled if
Grantee had exercised the Option and had been a holder of record of shares of
Issuer Common Stock on the record date fixed for determination of holders of
shares of Issuer Common Stock entitled to receive such stock or other
securities, cash, or property at the same aggregate price as the aggregate
Option Price of the Option Shares.
11. Expiration. The Option shall expire at the earlier of (a) the
Effective Time (as defined in the Merger Agreement) or (b) if exercisable
pursuant to Section 2 hereof, 18 months after termination of the Merger
Agreement in accordance with the terms thereof (such expiration date is referred
to as the "Expiration Date").
12. General Provisions.
(a) Survival. All of the representations, warranties, and
covenants contained herein shall survive each Closing and shall be
deemed to have been made as of the date hereof and as of the date of
each Closing.
(b) Further Assurances. If Grantee exercises the Option, or
any portion thereof, in accordance with the terms of this Agreement,
Issuer and Grantee will execute and deliver all such further documents
and instruments and use their reasonable best efforts to take all such
further action as may be necessary in order to consummate the
transactions contemplated thereby.
(c) Severability. It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the law and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, in the event
that any provision of this Agreement would be held in any jurisdiction
to be invalid, prohibited, or unenforceable for any reason, such
provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting
the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not be invalid, prohibited, or unenforceable
in such jurisdiction, it shall, as to such jurisdiction, be so narrowly
drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any
other jurisdiction.
(d) Assignment. This Agreement shall be binding on and inure
to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that Issuer shall not be entitled to
assign or otherwise transfer any of its rights or obligations hereunder
and, prior to the option becoming exercisable pursuant to Section 2,
this Agreement may not be assigned by Grantee.
(e) Specific Performance. The parties agree and acknowledge
that in the event of a breach of any provision of this Agreement, the
aggrieved party would be without an adequate remedy at law. The parties
therefore agree that in the event of a breach of any provision of this
Agreement, the aggrieved party may elect to institute and prosecute
proceedings in any court of competent jurisdiction to enforce specific
performance or to enjoin the continuing breach of such provision, as
well as to obtain damages for breach of this Agreement. By seeking or
obtaining any such relief, the aggrieved party will not be precluded
from seeking or obtaining any other relief to which it may be entitled.
(f) Amendments. This Agreement may not be modified, amended,
altered, or supplemented except upon the execution and delivery of a
written agreement executed by Grantee and Issuer.
<PAGE>
(g) Notices. All notices, requests, claims, demands, and other
communications hereunder shall be in writing and shall be deemed to be
sufficient if contained in a written instrument and shall be deemed
given if delivered personally, telecopied, sent by
nationally-recognized overnight courier or mailed by registered or
certified mail (return receipt requested), postage prepaid, to the
other party at the following addresses (or such other address for a
party as shall be specified by like notice):
If to Grantee:
Medtronic, Inc.
7000 Central Avenue N.E.
Minneapolis, MN 55432
with separate copies thereof addressed to
Attention: General Counsel
FAX: (612) 572-5459
and
Attention: Vice President and Chief Development Officer
FAX: (612) 572-5404
If to Issuer:
AVECOR Cardiovascular, Inc.
7611 Northland Drive
Minneapolis, MN 55428
FAX: (612) 391-9106
Attention: Anthony Badolato, CEO
with a copy to:
Oppenheimer Wolff & Donnelly LLP
Plaza VII Building
45 South Seventh Street
Minneapolis, MN 55402
FAX: (612) 7100
Attention: Richard Lareau
(h) Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be an original, but all of which
together shall constitute one and the same agreement.
(j) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota
applicable to contracts made and to be performed therein.
(k) Jurisdiction and Venue. Each of Issuer and Grantee hereby
agrees that any proceeding relating to this Agreement shall be brought
in a state court of Minnesota. Each of Issuer and Grantee hereby
consents to personal jurisdiction in any such action brought in any
such Minnesota court, consents to service of process by registered mail
made upon such party and such party's agent, and waives any objection
to venue in any such Minnesota court or to any claim that any such
Minnesota court is an inconvenient forum.
(l) Entire Agreement. This Agreement, the Confidentiality
Agreement, and the Merger Agreement and any documents and instruments
referred to herein and therein constitute the entire agreement between
the parties hereto and thereto with respect to the subject matter
hereof and thereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect
to the subject matter hereof and thereof. This Agreement shall be
binding upon, inure to the benefit of, and be enforceable by the
successors and permitted assigns of the parties hereto. Nothing in this
Agreement shall be construed to give any person other than the parties
to this Agreement or their respective successors or permitted assigns
any legal or equitable right, remedy, or claim under or in respect of
this Agreement or any provision contained herein.
(m) Expenses. Except as otherwise provided in this Agreement
or the Merger Agreement, each party shall pay its own expenses incurred
in connection with this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunto duly authorized as of the date first
written above.
MEDTRONIC, INC.
By /s/ Michael D. Ellwein
Its: Vice President
AVECOR CARDIOVASCULAR, INC.
By /s/ Anthony Badolato
Its: CEO
<PAGE>
Exhibit F
OPINION OF THE COMPANY'S COUNSEL
1. The Company has the requisite corporate power to execute, deliver,
and perform the Merger Agreement and to consummate the transactions contemplated
thereby.
2. The execution, delivery, and performance by the Company of the
Merger Agreement and the consummation by the Company of the transactions
contemplated thereby have been duly authorized by the shareholders and the Board
of Directors of the Company, and no other corporate action on the part of the
Company is necessary to authorize the execution, delivery, and performance by
the Company of the Merger Agreement and the consummation by the Company of the
transactions contemplated thereby.
3. The Merger Agreement has been duly and validly executed and
delivered by the Company and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
4. Except as specifically disclosed in Section 3.6 of the Merger
Agreement or Section 3.6 of the Company Disclosure Schedule, the execution,
delivery and performance by the Company of the Merger Agreement, the compliance
by the Company with the provisions thereof, and the consummation by the Company
of the transactions contemplated thereby will not: (i) violate any provision of
the Articles of Incorporation or Bylaws of the Company or any Subsidiary; (ii)
violate any statute, rule, regulation, order or decree of any public body or
authority (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency) by which the Company or any Subsidiary or any of their
respective properties or assets may be bound; (iii) require any filing with or
permit, consent or approval of any federal, state, local or foreign public body
or authority (including, but not limited to, the FDA or any non-governmental
self-regulatory agency); or (iv) result in any violation or breach of, or
constitute a default under, or give rise to any right of termination,
cancellation, increased payments, or acceleration under, or result in the
creation of any Lien on any of the properties or assets of the Company or any
Subsidiary under, any of the terms, conditions or provisions of any agreement
listed in the Disclosure Schedule, except, (x) in the case of clauses (ii) or
(iii), where such violation, failure to make any such filing or failure to
obtain such permit, consent or approval, would not prevent or delay consummation
of this Merger or otherwise prevent the Company from performing its obligations
under this Agreement and would not have a Company Material Adverse Effect, and
(y) in the case of clause (iv), for any such violations, breaches, defaults, or
other occurrences that would not prevent or delay consummation of any of the
transactions contemplated by the Merger Agreement in any material respect, or
otherwise prevent the Company from performing its obligations under the Merger
Agreement in any material respect, and would not have a Company Material Adverse
Effect.
<PAGE>
Exhibit G
OPINION OF PARENT'S COUNSEL
1. Each of Parent and Merger Subsidiary has the requisite corporate
power to execute, deliver, and perform the Merger Agreement and to consummate
the transactions contemplated thereby.
2. The execution, delivery, and performance by Parent and Merger
Subsidiary of the Merger Agreement and the consummation by them of the
transactions contemplated thereby have been duly authorized by the Board of
Directors of Parent and the shareholder and the Board of Directors of Merger
Subsidiary, and no other corporate action on the part of Parent or Merger
Subsidiary is necessary to authorize the execution, delivery, and performance by
Parent and Merger Subsidiary of the Merger Agreement and the consummation by
them of the transactions contemplated thereby.
3. The Merger Agreement has been duly and validly executed and
delivered by Parent and Merger Subsidiary and constitutes a valid and binding
obligation of them, enforceable against them in accordance with its terms.
4. Except as specifically disclosed in Section 4.4 of the Merger
Agreement, the execution, delivery and performance by Parent and Merger
Subsidiary of the Merger Agreement, the compliance by them with the provisions
thereof, and the consummation by them of the transactions contemplated thereby
will not: (i) violate any provision of the Articles of Incorporation or Bylaws
of Parent or Merger Subsidiary; (ii) violate any statute, rule, regulation,
order, or decree of any public body or authority (including, but not limited to,
the FDA or any non-governmental self-regulatory agency) by which Parent or any
of its subsidiaries or any of their respective properties or assets may be
bound; (iii) require any filing with or permit, consent or approval of any
public body or authority (including, but not limited to, the FDA or any
nongovernmental self-regulatory agency); or (iv) result in any violation or
breach of, or constitute a default under, or give rise to any right of
termination, cancellation, increased payments, or acceleration under, or result
in the creation of any lien on any of the properties or assets of Parent or its
subsidiaries under, any of the terms, conditions, or provisions of any agreement
filed as an exhibit to Parent's Form 10-K for its 1997 fiscal year, except, (x)
in the case of clauses (ii) or (iii), where such violation, failure to make any
such filing or failure to obtain such permit, consent or approval, would not
prevent or delay consummation of this Merger or otherwise prevent Parent from
performing its obligations under this Agreement and would not have a Parent
Material Adverse Effect, and (y) in the case of clause (iv), for any such
violations, breaches, defaults or other occurrences that would not prevent or
delay consummation of any of the transactions contemplated by the Merger
Agreement in any material respect, or otherwise prevent Parent from performing
its obligations under the Merger Agreement in any material respect, and would
not have a Parent Material Adverse Effect.
Exhibit 5
FREDRIKSON & BYRON, P.A.
Attorneys At Law
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
(612) 347-7000
FAX: (612) 347-7077
August 26, 1998
Medtronic, Inc.
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
Re: Registration Statement on Form S-4
Ladies/Gentlemen:
We are acting as counsel for Medtronic, Inc. (the "Company"), a
Minnesota corporation, in connection with the registration by the Company of
1,557,020 shares of the Company's Common Stock, par value $.10 (the "Shares"),
each of which shares includes the Preferred Stock Purchase Rights attached
thereto (the "Rights"), pursuant to the Company's Registration Statement on Form
S-4 being filed with the Securities and Commission (the "Registration
Statement"). The Shares and the Rights are to be issued in connection with the
merger of AC Merger Corp. ("Merger Subsidiary"), a wholly-owned subsidiary of
the Company, with and into AVECOR Cardiovascular Inc. ("AVECOR"), pursuant to
the Agreement and Plan of Merger dated as of July 12, 1998 by and among the
Company, Merger Subsidiary, and AVECOR (the "Merger Agreement").
In connection with rendering this opinion, we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, agreements and other instruments, certificates of
officers, certificates of public officials and other documents as we have deemed
necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination, we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of all natural persons and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Based on, and subject to, the foregoing, it is our opinion that:
1. The Company has the corporate authority to issue the Shares and the
Rights in the manner and under the terms set forth in the Registration
Statement.
2. The Shares have been duly authorized and, when issued and delivered
to holders of AVECOR common stock in accordance with the Merger Agreement, will
be validly issued, fully paid and nonassessable.
3. The Rights have been duly authorized and, when issued and delivered
in accordance with the Shareholder Rights Plan referred to in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement, to its use as a part of the Registration Statement and
to the use of our name under the caption "Legal Matters" in the Proxy
Statement/Prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ Fredrikson & Byron, P.A.
FREDRIKSON & BYRON, P.A.
Exhibit 8
OPINION AND CONSENT OF OPPENHEIMER WOLFF & DONNELLY LLP
_____________, 1998
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, Minnesota 55428
Ladies and Gentlemen:
We are acting as your counsel in connection with the proposed acquisition by
Medtronic, Inc. ("Medtronic") of AVECOR Cardiovascular Inc. ("AVECOR") pursuant
to the proposed merger (the "Merger") of AC Merger Corp., a wholly-owned
subsidiary of Medtronic ("Merger Subsidiary"), into AVECOR, with AVECOR
surviving the Merger. The Merger will be consummated pursuant to the Agreement
and Plan of Merger by and among Medtronic, Merger Subsidiary and AVECOR dated
July 12, 1998 (the "Merger Agreement").
Medtronic has filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), a registration statement on
Form S-4 (the "Registration Statement") with respect to the common stock of
Medtronic to be issued to the holders of shares of common stock of AVECOR in
connection with the Merger. In addition, Medtronic has prepared, and we have
reviewed, a Proxy Statement/Prospectus which is contained in and made a part of
the Registration Statement (the "Proxy Statement"), and the Appendices and
Exhibits thereto, including the Merger Agreement. In rendering the opinion set
forth below, we have relied upon the facts stated in the Proxy Statement and
upon such other documents as we have deemed appropriate, including the
representations of Medtronic and AVECOR referred to in the Proxy Statement and
set forth in certain tax representation letters from Medtronic and AVECOR.
We have assumed that all parties to the Merger Agreement have acted, and will
act, in accordance with the terms of such Merger Agreement and that the Merger
Agreement will be consummated at the effective time pursuant to the terms and
conditions set forth in the Merger Agreement without the waiver or modification
of any such terms and conditions.
Based upon and subject to the foregoing, and to the qualifications, limitations,
representations and assumptions contained in the portion of the Proxy Statement
captioned "The Merger--Certain Federal Income Tax Consequences," and in certain
tax representation letters from Medtronic and AVECOR, it is our opinion that the
portion of the Proxy Statement captioned "The Merger--Certain Federal Income Tax
Consequences" describes the principal federal income tax consequences of the
Merger to Medtronic, Merger Subsidiary, AVECOR and the holders of outstanding
AVECOR common stock. No opinion is expressed on any matters other than those
specifically referred to herein.
This opinion is furnished to you for use in connection with the Registration
Statement and may not be used for any other purpose without our prior express
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name in that portion of the
Proxy Statement captioned "The Merger--Certain Federal Income Tax Consequences."
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the 1933 Act.
Very truly yours,
Exhibit 23.3
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus constituting part of this Registration Statement on Form
S-4 of Medtronic, Inc. of our report dated May 26, 1998, which appears on page 5
of Medtronic's 1998 Annual Report--Financial Review, which is incorporated by
reference in its Annual Report on Form 10-K for the year ended April 30, 1998.
We also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 13 of such Annual Report on Form 10-K.
We also consent to the reference to us under the heading "Experts" in the Proxy
Statement/Prospectus.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
August 24, 1998
Exhibit 23.4
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the inclusion or incorporation by reference in this
Registration Statement on Form S-4 of Medtronic, Inc. of our reports dated March
16, 1998 on our audits of the consolidated financial statements and related
financial statement schedule of AVECOR Cardiovascular Inc. We also consent to
the references to our firm under the caption "Experts" in this Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
August 24, 1998
Exhibit 23.5
CONSENT OF PIPER JAFFRAY INC.
We hereby consent to inclusion of our opinion as Appendix D to the Proxy
Statement/Prospectus of AVECOR Cardiovascular Inc. and Registration on Form S-4
of Medtronic, Inc., and further consent to reference therein to such opinion
under the headings "The Merger--Opinion of AVECOR's Financial Advisor" and
"Summary" and in the AVECOR letter to shareholders regarding the proposed
Merger. In giving such consent, we do not admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 and the rules and regulations thereunder.
/s/ Piper Jaffray Inc.
PIPER JAFFRAY INC.
Minneapolis, Minnesota
August 26, 1998
Exhibit 24
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each of the undersigned directors and
officers of Medtronic, Inc., a Minnesota corporation ("Medtronic"), hereby
constitutes and appoints WILLIAM W. GEORGE and RONALD E. LUND, or either of
them, their true and lawful attorneys-in-fact and agents, each with full power
and authority to act as such without the other, with full power of substitution
and resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all capacities, to do any and all acts and things and to
execute any and all instruments that any of said attorneys and agents may deem
necessary or advisable in connection with Medtronic's acquisition of AVECOR
Cardiovascular, Inc., to enable Medtronic to comply with the Securities Act of
1933, as amended, with any regulations, rules or requirements of the Securities
and Exchange Commission thereunder, and with any state Blue Sky laws or
regulations in connection therewith, including specifically, but without
limiting the generality of the foregoing, power and authority to sign the names
of the undersigned to the Registration Statement on Form S-4, to any amendment
to such Registration Statement, and to any other registration statement,
prospectus, instrument or document filed with said Commission as a part of or in
connection with such Registration Statement or any amendment thereto; and the
undersigned hereby ratify and confirm all that said attorneys and agents, or
their substitutes or resubstitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents
effective as of the 21st day of August, 1998.
/s/ William R. Brody, M.D., Ph.D. /s/ Glen D. Nelson, M.D.
William R. Brody, M.D., Ph.D. Glen D. Nelson, M.D.
/s/ Paul W. Chellgren /s/ Robert L. Ryan
Paul W. Chellgren Robert L. Ryan
/s/ Arthur D. Collins, Jr. /s/ Richard L. Schall
Arthur D. Collins, Jr. Richard L. Schall
/s/ William W. George /s/ Jack W. Schuler
William W. George Jack W. Schuler
/s/ Antonio M. Gotto, Jr., M.D. /s/ Gerald W. Simonson
Antonio M. Gotto, Jr., M.D. Gerald W. Simonson
/s/ Bernadine P. Healy, M.D. /s/ Gordon M. Sprenger
Bernadine P. Healy, M.D. Gordon M. Sprenger
/s/ Thomas E. Holloran /s/ Richard A. Swalin, Ph.D.
Thomas E. Holloran Richard A. Swalin, Ph.D.
Exhibit 99.1
AVECOR CARDIOVASCULAR INC.
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned shareholder hereby appoints Anthony Badolato and
Gregory J. Melsen and each of them, as proxies, each with full power of
substitution, and hereby authorizes each of them to represent and to vote, as
designated below, all shares of common stock of AVECOR Cardiovascular Inc. held
of record by the undersigned as of __________, 1998, at the Special Meeting of
Shareholders to be held on ___________, 1998, at 9:00 a.m., local time, at 7611
Northland Drive, Minneapolis, Minnesota, and at any adjournment or adjournments
thereof, upon the following proposal:
To approve the Plan of Merger and the Agreement and Plan of Merger
providing for the merger of AC Merger Corp. into AVECOR Cardiovascular Inc.,
with AVECOR Cardiovascular Inc. to be the surviving corporation and a
wholly-owned subsidiary of Medtronic, Inc., copies of which Plan of Merger and
Agreement and Plan of Merger are attached as Appendices A and B to the Proxy
Statement/Prospectus for the Special Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy when properly executed, will be voted as specified by the
shareholder, but if no choice is specified, this proxy will be voted FOR
approval of the Plan of Merger and the Agreement and Plan of Merger.
(Continued and to be signed and dated on the other side)
IMPORTANT: Please sign exactly as name or names appear on this Proxy.
Joint owners should each sign personally. When signing as attorney, executor,
administrator, trustee or guardian, please give your full title as such. When
signing as a corporation, partnership or other entity, please sign in the name
of the entity by an authorized person.
Dated: ________________ ______________________________________________
(Please sign name exactly as it appears hereon)
______________________________________________
(Signature of joint owner, if any)
PLEASE MARK, DATE, SIGN AND RETURN THIS
PROXY IN THE ENCLOSED PROXY RETURN ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF AN ENVELOPE IS NOT
ENCLOSED OR HAS BEEN MISPLACED, PLEASE
RETURN THIS COMPLETED PROXY TO
-------------------.
