UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 29, 1999
Commission File Number 1-7707
MEDTRONIC, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0793183
(State of incorporation) (I.R.S. Employer
Identification No.)
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
(Address of principal executive offices)
Telephone number: (612) 514-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Shares of common stock, $.10 par value, outstanding on November 23, 1999:
1,194,386,389
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------- -------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 1,160.5 $ 984.5 $ 2,265.4 $ 1,976.2
Costs and expenses:
Cost of products sold 301.8 259.6 577.2 508.1
Research and development
expense 115.8 106.3 228.5 206.2
Selling, general, and
administrative expense 365.2 296.4 716.6 586.1
Non-recurring charges -- 116.4 -- 124.4
Interest expense 3.5 7.9 6.6 10.8
Interest income (6.6) (13.5) (13.1) (22.8)
---------- ---------- ---------- ----------
Total costs and expenses 779.7 773.1 1,515.8 1,412.8
---------- ---------- ---------- ----------
Earnings before income taxes 380.8 211.4 749.6 563.4
Provision for income taxes 123.3 94.4 243.2 217.9
---------- ---------- ---------- ----------
Net earnings $ 257.5 $ 117.0 $ 506.4 $ 345.5
========== ========== ========== ==========
Earnings per share:
Basic $ 0.22 $ 0.10 $ 0.43 $ 0.30
========== ========== ========== ==========
Diluted $ 0.22 $ 0.10 $ 0.42 $ 0.30
========== ========== ========== ==========
Weighted average shares
Outstanding:
Basic 1,172.7 1,147.4 1,172.3 1,143.7
Diluted 1,196.2 1,175.3 1,197.1 1,170.9
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
October 29, April 30,
1999 1999
----------- ---------
(in millions)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 157.8 $ 222.1
Short-term investments 59.2 153.8
Accounts receivable, less allowance for
doubtful accounts of $34.6 and $32.3 1,153.4 1,004.6
Inventories:
Finished goods 371.0 301.7
Work-in-process 152.9 103.5
Raw materials 159.4 148.8
--------- ---------
Total inventories 683.3 554.0
Deferred income tax asset 230.8 256.0
Prepaid expenses and other current assets 239.2 204.7
--------- ---------
Total current assets 2,523.7 2,395.2
Property, plant, and equipment 1,529.6 1,408.0
Accumulated depreciation (705.2) (659.2)
--------- ---------
Net property, plant, and equipment 824.4 748.8
Goodwill and other intangible assets, net 1,351.0 1,326.0
Long-term investments 304.8 203.5
Other assets 173.1 196.8
--------- ---------
Total assets $ 5,177.0 $ 4,870.3
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 186.2 $ 239.2
Accounts payable 197.5 153.2
Accrued liabilities 719.9 597.9
--------- ---------
Total current liabilities 1,103.6 990.3
Long-term debt 18.1 17.6
Deferred income tax liability 37.7 30.8
Other long-term liabilities 152.2 177.0
--------- ---------
Total liabilities 1,311.6 1,215.7
Shareholders' equity:
Common stock--par value $.10 117.2 117.2
Retained earnings 3,871.1 3,657.0
Accumulated other non-owner changes in equity (101.5) (93.4)
--------- ---------
3,886.8 3,680.8
Receivable from Employee Stock Ownership Plan (21.4) (26.2)
--------- ---------
Total shareholders' equity 3,865.4 3,654.6
--------- ---------
Total liabilities and shareholders' equity $ 5,177.0 $ 4,870.3
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
-------------------------
October 29, October 30,
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 506.4 $ 345.5
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 141.3 91.0
Non-recurring charges -- 124.4
Deferred income taxes 29.4 (11.0)
Change in operating assets and liabilities:
Accounts receivable (173.9) (109.8)
Inventories (145.3) (108.3)
Accounts payable and accrued liabilities 201.3 183.9
Changes in other operating assets and
liabilities (72.6) (129.2)
--------- ---------
Net cash provided by operating activities 486.6 386.5
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (164.4) (119.2)
Acquisitions, net of cash acquired -- (840.5)
Purchases of marketable securities (125.0) (340.5)
Sales and maturities of marketable securities 158.0 56.0
Other investing activities, net (95.6) (71.5)
--------- ---------
Net cash used in investing activities (227.0) (1,315.7)
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net (29.0) 94.5
Increase (decrease) in long-term debt, net (1.1) 519.4
Dividends to shareholders (93.8) (62.1)
Repurchases of common stock (276.5) (106.8)
Issuance of common stock 78.0 725.4
--------- ---------
Net cash provided by (used in)
financing activities (322.4) 1,170.4
Effect of exchange rate changes on cash and
cash equivalents (1.5) .6
--------- ---------
Net change in cash and cash equivalents (64.3) 241.8
Cash and cash equivalents at beginning of period 222.1 519.5
--------- ---------
Cash and cash equivalents at end of period $ 157.8 $ 761.3
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of results of operations, financial position,
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the Company's results for the periods presented. Operating
results for interim periods are not necessarily indicative of results that may
be expected for the fiscal year as a whole. 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, liabilities, revenues, expenses, and related disclosures at the date of
the financial statements and during the reporting period. Actual results could
differ from these estimates. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended April 30, 1999.
Note 2 - Shareholders' Equity
- -----------------------------
On August 25, 1999, the Company's shareholders approved an amendment to
Medtronic's Restated Articles of Incorporation to increase the number of
authorized shares of common stock from 800 million to 1.6 billion. On the same
date the Board of Directors approved a two-for-one split of the Company's common
stock effective September 24, 1999, in the form of a 100 percent stock dividend
payable to shareholders of record at the close of business on September 10,
1999. The stock split resulted in the issuance of 587.4 million additional
shares and the reclassification of $58.7 million from retained earnings to
common stock, representing the par value of the shares issued. All references in
the financial statements to earnings per share and average number of shares
outstanding amounts have been restated to reflect the stock split for all
periods presented.
Note 3 - Other Non-Owner Changes in Equity
- ------------------------------------------
In addition to net earnings, other non-owner changes in equity include, as
applicable, unrealized gains and losses on available for sale securities,
foreign currency translation adjustments and minimum pension liability. For the
six-month period ended October 29, 1999 and October 30, 1998, the Company's
other non-owner changes in equity were $498.3 million and $290.9 million,
respectively.
<PAGE>
Note 4 - Non-Recurring Charges
- ------------------------------
Applications during the second quarter of fiscal 2000 against remaining accruals
were as follows: (amounts in millions)
Balance at Charges Balance at
July 30, 1999 Utilized October 29, 1999
- --------------------------------------------------------------------------------
Facility reductions $ 3.3 $ 1.5 $ 1.8
Severance and related costs 70.4 13.3 57.1
Noncancelable contractual
obligations and other 38.8 21.1 17.7
Litigation reserve 36.6 3.3 33.3
- --------------------------------------------------------------------------------
Total $149.1 $ 39.2 $109.9
The Company is implementing the major strategic actions related to these
initiatives and expects to have them substantially completed by the end of
fiscal 2000. Consequently, the remaining reserve balance at October 29, 1999 is
included in current liabilities. Of the 3,950 employees originally identified
for termination, approximately 3,100 have been terminated to date.
Note 5 - New Accounting Pronouncements
- --------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
This statement will require that companies recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS No. 133 is required to be adopted for years beginning after June 15, 1999.
In June 1999, Statement No. 137 effectively deferred the effective date of SFAS
No. 133 for one year. The Company is in the process of determining if earlier
application would be feasible and what effect the adoption of SFAS No. 133 will
have on the Company's results of operations, financial position and cash flows.
Note 6 - Segment and Geographic Information
- -------------------------------------------
The Company operates its business in one reportable segment - the manufacture
and sale of device-based medical therapies. Net sales by product line were as
follows (in millions):
Three months ended Three months ended
October 29, 1999 October 30, 1998
------------------ ------------------
Cardiac rhythm management $ 611.6 $ 498.1
Neurological and spinal 271.8 211.4
Vascular 164.3 180.0
Cardiac surgery 112.9 94.9
-------- -------
$1,160.5 $ 984.5
<PAGE>
Six months ended Six months ended
October 29, 1999 October 30, 1998
---------------- ----------------
Cardiac rhythm management $1,195.3 $ 986.7
Neurological and spinal 522.8 399.8
Vascular 321.7 398.2
Cardiac Surgery 225.7 191.5
-------- --------
$2,265.4 $1,976.2
Geographic information:
<TABLE>
<CAPTION>
Three months ended
United Asia Other Elimi- Consoli-
October 29, 1999 States Europe Pacific Foreign nations dated
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 749.8 $ 210.9 $ 108.1 $ 91.7 $ -- $1,160.5
Intergeographic sales 188.7 41.2 -- 3.8 (233.7) --
- -----------------------------------------------------------------------------------------------
Total sales $ 938.5 $ 252.1 $ 108.1 $ 95.5 $ (233.7) $1,160.5
- -----------------------------------------------------------------------------------------------
Long-lived assets $2,375.3 $ 217.6 $ 50.6 $ 9.8 $ -- $2,653.3
- -----------------------------------------------------------------------------------------------
October 30, 1998
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $ 655.0 $ 189.9 $ 75.8 $ 63.8 $ -- $ 984.5
Intergeographic sales 130.0 25.8 -- 2.4 (158.2) --
- -----------------------------------------------------------------------------------------------
Total sales $ 785.0 $ 215.7 $ 75.8 $ 66.2 $ (158.2) $ 984.5
- -----------------------------------------------------------------------------------------------
Long-lived assets $2,046.1 $ 225.2 $ 51.7 $ 11.7 $ -- $2,334.7
- -----------------------------------------------------------------------------------------------
Six months ended
October 29, 1999
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $1,467.2 $ 423.9 $ 198.9 $ 175.4 $ -- $2,265.4
Intergeographic sales 391.3 80.8 -- 7.6 (479.7) --
- -----------------------------------------------------------------------------------------------
Total sales $1,858.5 $ 504.7 $ 198.9 $ 183.0 $ (479.7) $2,265.4
- -----------------------------------------------------------------------------------------------
October 30, 1998
- -----------------------------------------------------------------------------------------------
Revenues from external
customers $1,320.5 $ 374.7 $ 158.5 $ 122.5 $ -- $1,976.2
Intergeographic sales 257.4 51.7 -- 5.4 (314.5) --
- -----------------------------------------------------------------------------------------------
Total sales $1,577.9 $ 426.4 $ 158.5 $ 127.9 $ (314.5) $1,976.2
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 7 - Subsequent Event
- -------------------------
On November 5, 1999, the Company issued approximately 21.4 million shares of its
common stock in exchange for all of the outstanding capital stock of Xomed
Surgical Products, Inc. (Xomed). The merger will be accounted for as a
pooling-of-interests. Xomed is a leading developer, manufacturer and marketer of
surgical products for use by ear, nose, and throat (ENT) physicians. Xomed
offers a broad line of products in its ENT market that include powered
tissue-removal systems, nerve monitoring systems, disposable fluid-control
products, image guided surgery systems and bioabsorbable products.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net Earnings
- ------------
Net earnings for the second quarter ended October 29, 1999 and October 30, 1998
were $257.5 million and $117.0 million, respectively. Diluted earnings per share
for the quarter were $0.22 compared to $0.10 per share for the same period last
year. Net earnings were $506.4 million or $0.42 per diluted share for the
six-month period ended October 29, 1999, compared to $345.5 million, or $0.30
per diluted share for the comparable period last year. Without the non-recurring
charges related to the merger of the Company and Physio-Control and the
acquisition of the coronary catheter lab business of C.R. Bard, Inc. by Arterial
Vascular Engineering, Inc. (AVE) in fiscal 1999, diluted earnings per share
would have been $0.18 and $0.38 for the three and six-month periods ended
October 30, 1998, respectively.
Sales
- -----
Sales for the quarter and six-month period ended October 29, 1999 increased 17.9
percent and 14.6 percent, respectively, compared to the same periods last year.
Sales growth in the quarter was positively impacted by $3.3 million of favorable
exchange rates of the value of the U.S. dollar versus major European currencies
and the Japanese yen. Exclusive of the effects of foreign currency translation,
sales for the quarter and six-month period ended October 29, 1999 increased 17.6
percent and 14.6 percent, respectively.
Net sales of cardiac rhythm management products, which consist primarily of
products for bradycardia pacing, tachyarrhythmia management, external
defibrillation, and ablation, increased 22.5 percent and 21.2 percent during the
quarter and six-month period ended October 29, 1999, after excluding the impact
of foreign exchange rate fluctuations, compared to the same periods a year ago.
This growth was led by a 57 percent gain in defibrillator sales during the
quarter. Revenue growth in the U.S. for defibrillators approximated 70 percent,
benefiting from the full market launch of the Gem(TM) II family, as well as
market share gains and the continued strong market adoption of dual chamber
devices. International tachyarrhythmia revenues grew by approximately 25
percent, while worldwide unit sales rose approximately 54 percent during the
period. Worldwide pacing revenues grew approximately 13 percent and unit sales
of bradycardia implantable pulse generators (IPG's) increased approximately 15
percent during the quarter. This growth was fueled by the breadth and depth of
the Company's bradycardia product line, across all price points. The
Medtronic.Kappa(R) 700 pacemaker continues to have strong market acceptance in
<PAGE>
the U.S. as does Vitatron(R) whose sales increased 40 percent in the first month
after commercial release in the U.S. market of Vitatron Collection II and Vita
family of pacemakers. Physio-Control provided solid contributions to the
quarter, led by continued acceptance of its LifePak(R) 12 and LifePak(R) 500
external defibrillators by police and security personnel and in other
non-traditional first-responder locations.
Net sales of neurological and spinal products, consisting primarily of
implantable neurostimulation devices, drug administration systems, spinal
products, neurosurgery products, and functional diagnostics, increased 28.2
percent and 30.5 percent for the quarter and six-month period ended October 29,
1999, after excluding the effects of foreign currency translation. Sales of
spinal and neurosurgery product lines (consisting of Sofamor Danek, Surgical
Navigation Technologies, PS Medical and Midas Rex) achieved revenue growth of
more than 40 percent for the quarter. Sofamor Danek, which merged with the
Company in January 1999, provided significant contributions during the quarter.
Continued market acceptance of Sofamor Danek's INTER FIX Threaded Spinal Fusion
Cage complemented the steady growth in sales of core plates and screw fixation
systems in the rapidly growing cervical and thoracolumbar market. Sales of core
neurological product lines (consisting of neurostimulation, drug administration
systems, and functional diagnostics) increased 13 percent from the prior year
comparative period. Sales growth was constrained as the Company awaited U.S.
clearance of the Synergy(R) dual-channel neurostimulator for chronic pain, which
was received subsequent to quarter end. During the quarter the Company began
selling in Europe and Canada its Kinetra(TM) neurostimulator for bilateral
stimulation in the treatment of Parkinson's disease or Essential Tremor
symptoms.
Net sales of vascular product lines, consisting of stents, balloon and guiding
catheters, and peripheral vascular, decreased 9.6 percent and 19.6 percent for
the second quarter and six-month period ended October 29, 1999 from the prior
year comparative period, but rose sequentially from the first quarter of this
year to $164.3 million. The decline is partly due to the strong second quarter
reported by AVE in fiscal 1999 in the absence of competitive stents which are
now available in the U.S. market. On November 16, 1999, the S670 with Discrete
Technology(TM) coronary stent, a market leading product in Europe, received U.S.
regulatory clearance and is now in full launch in the U.S. During the quarter,
the Company launched the AneuRx(TM) stent graft system for the treatment of
abdominal aortic aneurysms.
Net sales of cardiac surgery product lines, consisting of heart valves,
perfusion systems, cannulae, and surgical accessories, increased 19.2 percent
and 18.4 percent during the quarter and six months ended October 29, 1999,
respectively, after excluding the effects of foreign currency translation.
AVECOR Cardiovascular, Inc., which was acquired in March 1999, and which was
accounted for as a purchase, provided significant contributions during the
quarter. Sales were also led by continuing strength in the Octopus(R) 2 tissue
stabilization device, which continues to maintain a market leading position in
the rapidly growing market for off-pump minimally invasive cardiac surgery
procedures, and by the recent approval of the Hancock(R) II bioprosthetic heart
valve in the U.S.
Costs of Products Sold
- ----------------------
Cost of products sold as a percent of sales for the quarter and six-month period
ended October 29, 1999 was 26.0 percent and 25.5 percent compared to 26.4
percent and 25.7 percent for the same periods a year ago. The decrease in the
cost of products sold as a percent of sales resulted primarily from
<PAGE>
changes in product and geographic mixes and by the favorable impact of foreign
exchange rate fluctuations.
Research and Development Expense
- --------------------------------
The Company remains committed to spending aggressively on research and
development (R&D) to develop technological enhancements and new indications for
existing products, as well as to develop less invasive and new technologies to
address unmet patient needs and to help reduce patient care costs and length of
hospital stay. R&D expense was $115.8 million and $228.5 million for the quarter
and six months ended October 29, 1999 or 10.0 percent and 10.1 percent of net
sales, respectively. This compares to 10.8 percent and 10.4 percent for the same
periods a year ago.
Selling, General, and Administrative Expense (SG&A)
- ---------------------------------------------------
SG&A expense for the three and six-month periods ended October 29, 1999, was
$365.2 million, or 31.5 percent of net sales, and $716.6 million, or 31.6
percent of net sales, respectively. This compares to SG&A expense of 30.1
percent and 29.7 percent for the comparable periods last year. The increase in
SG&A as a percent of sales is primarily attributable to increased marketing and
distribution spending to support new product launches and by increased goodwill
and other intangibles amortization expense as a result of AVE's October 1998
acquisition of the coronary catheter lab business of C.R. Bard, Inc.
Non-recurring Charges
- ---------------------
Fiscal 1999's three and six-month results include a $116.4 million and $124.4
million, respectively, of pre-tax charges related primarily to transaction costs
for the merger of the Company with Physio-Control and purchased in-process
research and development expenses related to the acquisition of the coronary
catheter lab business of C.R. Bard by AVE.
Interest
- --------
Interest expense for the quarter was $3.5 million as compared to $7.9 million of
interest expense for the same period last year. This improvement is the result
of the Company immediately paying off debt of pooled entities. Interest income
during the quarter was $6.6 million compared to $13.5 million for the same
period last year. The decrease in interest income was the result of decreased
average investment balances. Average investment balances for the second quarter
of last year were significantly higher as a result of the September 1998
secondary stock offering.
Income Taxes
- ------------
The estimated effective tax rate for the Company's current fiscal year is 32.5
percent compared to an effective tax rate of 43.0 percent for the fiscal year
ended April 30, 1999, after restatement for the mergers with Physio-Control,
Sofamor Danek, and AVE. Excluding the effects of the $551.2 million
non-recurring charges, the effective income tax rate in fiscal 1999 would have
been 34.1 percent. The reduction in the fiscal 2000 effective tax rate is due to
tax planning initiatives including profits generated in low tax jurisdictions.
Liquidity and Capital Resources
- -------------------------------
Operating activities provided $486.6 million of cash and cash equivalents for
the six-month period ended October 29, 1999 compared to $386.5 million for the
<PAGE>
same period a year ago. Working capital was $1,420.1 million at October 29,
1999, a increase of $15.2 million over the $1,404.9 million at April 30, 1999.
The current ratio was 2.3:1 at October 29, 1999 compared to 2.4:1 at April 30,
1999. Account receivable balances have increased by approximately $149 million
since April 30, 1999 as a result of increased sales and a historical slowdown in
customer payments experienced toward the end of the calendar year. Inventories
have increased by approximately $129 million since April 30, 1999 as the Company
has built inventories in anticipation of product launches and plant closures.
Cash and cash equivalents decreased $64.3 million during the six-month period.
Other significant uses of cash during the period included purchases of property,
plant, and equipment, repurchases of common stock under the Company's systematic
stock repurchase plan, and dividends paid to shareholders.
Year 2000 Readiness Disclosure
- ------------------------------
The Company has had a formal program in place since 1996 with assigned Year 2000
staff to ensure that its critical areas, related to business information
systems, products, facilities, non-information systems with embedded technology
and key third party suppliers, will operate normally before, during and after
the Year 2000.
The Company has completed a review of its business information systems with
regard to Year 2000 compliance and has either replaced or corrected through
programming modifications, substantially all computer systems that were found to
have date-related deficiencies. Remaining items are expected to be completed
before calendar year-end. No significant information technology projects have
been deferred as a result of the Company's efforts on Year 2000. The Company has
reviewed the compliance status of its most recent merger, Xomed, and believes
that all modifications deemed necessary have either been made or will be made
before December 31, 1999.
The Company's products have been assessed and found to be Year 2000 compliant
with the exception of a few requiring minor software upgrades or manual date
changes. Delivery of therapy is not affected by the Year 2000 status of any of
these products. The Company's implantable devices, including pacemakers,
defibrillators, drug infusion systems, neurostimulators, heart valves, and
spinal products, are not affected by the Year 2000 issue because they do not
deliver therapy on the basis of a calendar date. These minor corrective actions,
which are limited to certain programmers, instruments, and software products,
are date-related and will not adversely affect patient health or other system
functions. The updated software for such items have been made available and
instructions have been provided to correct non-compliance.
The Company has also assessed facility and telecommunication systems and systems
used to support manufacturing processes to ensure that these will be Year 2000
ready. Of those requiring remediation, substantially all facilities and
telecommunication systems projects have been completed. Remaining items are
expected to be completed before calendar year-end.
The Company relies on third party providers for services such as raw materials
procurement, telecommunications, utilities, financial services, distribution
services, and other key services. Interruption of those services due to Year
2000 issues could affect the Company's operations. The Company has contacted its
major suppliers, both domestic and foreign, to determine their Year 2000
readiness and the Company's potential exposure to a supply or sales
interruption. Based upon representations from the Company's critical suppliers,
it does not appear that the Company will be materially impacted by
<PAGE>
its critical third party providers. However, there can be no guarantee that the
Company's critical suppliers will resolve all Year 2000 issues in a timely
manner, or that such failure will not have a material adverse effect on the
Company.
The Company estimates that it has incurred approximately $26 million to date in
external and internal costs on a pre-tax basis to address its Year 2000
readiness issues. The Company currently estimates that the total additional
costs for addressing its internal Year 2000 readiness will not exceed $3 million
on a pre-tax basis. Approximately $6.8 million of these costs have been
capitalized to date related to Sofamor Danek's worldwide installation of a
comprehensive software package. Remaining Year 2000 costs are being expensed as
they are incurred and are being funded through operating cash flows. The Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.
Throughout 1999, the Company has identified areas where contingency planning is
needed. The planning efforts include, but are not limited to, identification and
mitigation of potential serious business interruptions, adjustment of inventory
levels to meet customer needs, and establishing crisis response processes to
address unexpected problems.
The Company's statements regarding its Year 2000 readiness are forward-looking
statements and are therefore subject to change as a result of known and unknown
factors. Both the Company's cost estimates and completion time frames could be
influenced by the Company's ability to successfully identify all Year 2000
issues, the nature and amount of remediation required, the availability and cost
of trained personnel in this area and the Year 2000 success that key third
parties and customers attain. While these and other unforeseen factors could
have a material adverse impact on the Company's financial position, results of
operations or liquidity in future periods due to possible manufacturing delays
or business disruptions caused by a lack of third party Year 2000 readiness,
management believes that it has implemented an effective Year 2000 compliance
program that will minimize the possible negative consequences to the Company.
The Year 2000 readiness disclosure statement set forth above is a "Year 2000
Readiness Disclosure" under the federal Year 2000 Information and Readiness
Disclosure Act.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
Certain statements contained in this document and other written and oral
statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "should", "will," "forecast" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider
forward-looking statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed in the section entitled
"Government Regulation and Other Matters" and "Cautionary Factors That May
Affect Future Results" in the Company's Annual Report and Form 10-K.
Consequently, no forward-looking statement can be guaranteed and actual results
may vary materially.
<PAGE>
The Company undertakes no obligation to update any forward-looking statement,
but investors are advised to consult any further disclosures by the Company on
this subject in its filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K (if any), in which the Company discusses
in more detail various important factors that could cause actual results to
differ from expected or historic results. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1993, AcroMed Corporation commenced a patent infringement lawsuit against
Sofamor Danek in U.S. District Court in Cleveland, Ohio. Sofamor Danek obtained
summary judgment as to two of four patents and tried claims with respect to the
remaining two patents in May 1999. The jury found that certain Sofamor Danek
spinal fixation products infringe these two patents and rendered a damage
verdict against Sofamor Danek in the amount of $33 million. Although the final
judgment has not yet been rendered, it is expected to include additional
elements of damages and an injunction against the sale of products found to
infringe. The Company intends to appeal the final judgment to the Court of
Appeals for the Federal Circuit, Washington, D.C. and believes that meritorious
bases exist for reversing any finding of liability and damages. The litigation
focuses on a relatively minor portion of Sofamor Danek's products, many of which
have been superseded by newer designs, and will not have a material impact on
the Company's financial position, results of operations or liquidity.
The stent industry is currently characterized by extensive patent litigation and
the Company's newly acquired subsidiary, Medtronic AVE, Inc., is both a
plaintiff and a defendant in lawsuits with Johnson & Johnson, Guidant
Corporation, and Boston Scientific Corporation over their respective patents,
with plaintiffs in each case alleging patent infringement and seeking injunctive
relief and monetary damages. The Company has sued Guidant Corporation and Boston
Scientific Corporation in U.S. District Court in Minneapolis claiming that
Guidant's ACS RX Multi-Link(R) coronary stent and Boston Scientific's Nir(R)
stent infringe the Company's Wiktor(R) stent patent. Following an adverse patent
claims construction ruling, the Company's Wiktor(R) patent claims were dismissed
against Guidant. The Company will appeal this decision and continue to
aggressively enforce its patent rights. The Company has also sued Boston
Scientific in U.S. District Court in Minneapolis claiming that Boston
Scientific's Radius(R) stent infringes the Company's Jervis nitinol patents.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Medtronic Restated Articles of Incorporation, as amended
to date
27 - Financial Data Schedule (For SEC use only)
<PAGE>
(b) Reports on Form 8-K
During the quarter ended October 29, 1999, the Company filed
(i) a Report on form 8-K dated August 23, 1999 reporting under Item 5 the
announcement of financial results for the fiscal first quarter ended July 30,
1999, and(ii) a Report on form 8-K dated August 27, 1999 reporting under Item 5
the signing of a merger agreement to acquire Xomed Surgical Products, Inc.
Subsequent to the quarter ended October 29,1999, the Company filed (i) a Report
on Form 8-K dated November 3,1999 reporting under Item 5 the conversion ratio
for its proposed merger with Xomed Surgical Products, Inc., and (ii)a Report on
Form 8-K dated November 5, 1999 reporting under Item 2 the completion of the
previously announced transaction with Xomed Surgical Products, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Medtronic, Inc.
(Registrant)
Date: December 9, 1999 /S/ WILLIAM W. GEORGE
----------------------------------------
William W. George
Chairman
and Chief Executive Officer
Date: December 9, 1999 /S/ ROBERT L. RYAN
----------------------------------------
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
MEDTRONIC, INC.
(AS AMENDED THROUGH AUGUST 25, 1999)
ARTICLE 1 - NAME
----------------
1.1 The name of the corporation shall be Medtronic, Inc.
ARTICLE 2 - REGISTERED OFFICE
-----------------------------
2.1 The registered office of the corporation shall be located at 7000
Central Avenue, N.E., Minneapolis, Minnesota.
ARTICLE 3 - STOCK
-----------------
3.1 Authorized Shares; Establishment of Classes and Series. The aggregate
number of shares the corporation has authority to issue shall be
1,602,500,000 shares, which shall consist of 1,600,000,000 shares of
Common Stock with a par value of $.10 per share, and 2,500,000 shares
of Preferred Stock with a par value of $1.00 per share. The Board of
Directors is authorized to establish from the shares of Preferred
Stock, by resolution adopted and filed in the manner provided by law,
one or more classes or series of Preferred Stock, and to set forth the
designation of each such class or series and fix the relative rights
and preferences of each such class or series of Preferred Stock,
including, but not limited to, fixing the relative voting rights, if
any, of each class or series of Preferred Stock to the full extent
permitted by law. 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.
<PAGE>
ARTICLE 5 - DIRECTORS
---------------------
5.1 Written Action by Directors. 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.
5.2 Elimination of Director Liability in Certain Circumstances. No director
of the corporation shall be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a
director, provided, however that this Article 5, Section 5.2 shall not
eliminate or limit the liability of a director 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 section 302A.559 or 80A.23 of the
Minnesota Statutes, (iv) for any transaction from which the director
derived an improper personal benefit, or (v) for any act or omission
occurring prior to the effective date of this Article 5, Section 5.2.
No limiting amendment to or repeal of this Article 5, Section 5.2 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.
5.3 Classification of the Board of Directors. The business and affairs of
the corporation shall be managed by or under the direction of a Board
of Directors consisting of not less than three nor more than fifteen
persons, who need not be shareholders. The number of directors may be
increased by the shareholders or Board of Directors or decreased by the
shareholders from the number of directors on the Board of Directors
immediately prior to the effective date of this Section 5.3 provided,
however, that any change in the number of directors on the Board of
Directors (including, without limitation, changes at annual meetings of
shareholders) shall be approved by the affirmative vote of not less
than seventy-five percent (75%) of the votes entitled to be cast by the
holders of all then outstanding voting shares (as defined in Section
6.2 of Article 6), voting together as a single class, unless such
change shall have been approved by a majority of the entire Board of
Directors. If such change shall not have been so approved, the number
of directors shall remain the same. The directors shall be divided into
three classes, designated Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors.
At the 1989 annual meeting of shareholders, Class I directors shall be
elected for a one-year term, Class II directors for a two-year term and
Class III directors for a three-year term. At each succeeding annual
meeting of shareholders beginning in 1990, successors to the class of
directors whose term expires at that annual meeting shall be elected
for a three-year term. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to
maintain the
2
<PAGE>
number of directors in each class as nearly equal as possible, and any
additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class. In no case will a
decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the
year in which the director's term expires and until a successor shall
be elected and qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Removal of a
director from office (including a director named by the Board of
Directors to fill a vacancy or newly created directorship), with or
without cause, shall require the affirmative vote of not less than
seventy-five percent (75%) of the votes entitled to be cast by the
holders of all then outstanding voting shares, voting together as a
single class. Any vacancy on the Board of Directors that results from
an increase in the number of directors shall be filled by a majority of
the Board of Directors then in office, and any other vacancy occurring
in the Board of Directors shall be filled by a majority of the
directors then in office, although less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall have the
same remaining term as that of such director's predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes of preferred or preference stock issued by the corporation
shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of
such directorships shall be governed by or pursuant to the applicable
terms of the certificate of designation or other instrument creating
such class or series of preferred stock, and such directors so elected
shall not be divided into classes pursuant to this Section 5.3 unless
expressly provided by such terms.
Only persons who are nominated in accordance with the procedures set
forth in this Section 5.3 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of shareholders (a) by or at the
direction of the Board of Directors or (b) by any shareholder of the
corporation entitled to vote for the election of directors at the
meeting who complies with the notice procedures set forth in this
Section 5.3. Nominations by shareholders shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and
received at the principal executive offices of the corporation not less
than 50 days nor more than 90 days prior to the meeting, provided,
however, that in the event that less than 60 days' notice or prior
public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set
forth (a) as to each person whom the shareholder proposes to nominate
for election or re-election as a director, all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise
3
<PAGE>
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to
serving as a director if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the
corporation's books, of such shareholder and (ii) the class and number
of shares of the corporation which are beneficially owned by such
shareholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall
furnish to the Secretary of the corporation that information required
to be set forth in a shareholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a Director
of the corporation unless nominated in accordance with the procedures
set forth in this Section 5.3. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed in
this Section 5.3 and, if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
At any regular or special meeting of the shareholders, only such
business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board of Directors or (b) by
any shareholder of the corporation who complies with the notice
procedures set forth in this Section 5.3. For business to be properly
brought before any regular or special meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a shareholder's notice must
be delivered to or mailed and received at the principal executive
offices of the corporation not less than 50 days nor (except for
shareholder proposals subject to Rule 14a-8(a)(3)(i) of the Securities
Exchange Act of 1934, as amended) more than 90 days prior to the
meeting, provided, however, that in the event that 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 received not later than the close of business on the 10th day
following the day on which such notice of the date of the regular or
special meeting was mailed or such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter
the shareholder proposes to bring before the regular or special meeting
(a) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the corporation's
books, of the shareholder proposing such business, (c) the class and
number of shares of the corporation which are beneficially owned by the
shareholder and (d) any material interest of the shareholder in such
business. Notwithstanding anything in the corporation's Bylaws to the
contrary, no business shall be conducted at any regular or special
meeting except in accordance with the procedures set forth in this
Section 5.3. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of
this Section 5.3 and, if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the
meeting shall not be transacted.
4
<PAGE>
Notwithstanding any other provisions of these Articles of Incorporation
(and notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law or these Articles of Incorporation),
the affirmative vote of the holders of not less than seventy-five
percent (75%) of the votes entitled to be cast by the holders of all
then outstanding voting shares, voting together as a single class,
shall be required to amend or repeal, or adopt any provisions
inconsistent with, this Section 5.3.
ARTICLE 6 - RELATED PERSON BUSINESS TRANSACTIONS
------------------------------------------------
6.1 Whether or not a vote of shareholders is otherwise required, the
affirmative vote of the holders of not less than two-thirds of the
voting power of the outstanding "voting shares" (as hereinafter
defined) of the corporation shall be required for the approval or
authorization of any "Related Person Business Transaction" (as
hereinafter defined) involving the corporation or the approval or
authorization by the corporation in its capacity as a shareholder of
any Related Person Business Transaction involving a "Subsidiary" (as
hereinafter defined) which requires the approval or authorization of
the shareholders of the Subsidiary, provided, however, that such
two-thirds voting requirement shall not be applicable if:
(a) The "Continuing Directors" (as hereinafter defined) by a
majority vote have expressly approved the Related Person
Business Transaction; or
(b) The Related Person Business Transaction is a merger,
consolidation, exchange of shares or sale of all or
substantially all of the assets of the corporation, and the
cash or fair market value of the property, securities or other
consideration to be received per share by holders of Common
Stock of the corporation other than the "Related Person" (as
hereinafter defined) in the Related Person Business
Transaction is an amount at least equal to the "Highest
Purchase Price" (as hereinafter defined).
6.2 For the purposes of this Article 6:
(a) The term "Related Person Business Transaction" shall mean (i)
any merger or consolidation of the corporation or a Subsidiary
with or into a Related Person, (ii) any exchange of shares of
the corporation or a Subsidiary for shares of a Related Person
which, in the absence of this Article, would have required the
affirmative vote of at least a majority of the voting power of
the outstanding shares of the corporation entitled to vote or
the affirmative vote of the corporation, in its capacity as a
shareholder of the Subsidiary, (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" (as hereinafter defined) of the assets
either of the corporation or of a Subsidiary to or with a
Related Person, (iv) any sale, lease, transfer or other
disposition (in one transaction or a series of transactions)
of all or any Substantial Part of the assets of a
5
<PAGE>
Related Person to or with the corporation or a Subsidiary, (v)
the issuance, sale, transfer or other disposition to a Related
Person of any securities of the corporation (except pursuant
to stock dividends, stock splits, or similar transactions
which would not have the effect of increasing the
proportionate voting power of a Related Person) or of a
Subsidiary (except pursuant to a pro rata distribution to all
holders of Common Stock of the corporation), (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 in this definition of Related Person Business
Transaction.
(b) The term "Related Person" shall mean and include (i) any
person or entity which, together with its "Affiliates" and
"Associates" (both as hereinafter defined), "beneficially
owns" (as hereinafter defined) in the aggregate 15 percent or
more of the outstanding voting shares of the corporation, and
(ii) any Affiliate or Associate (other than the corporation or
a wholly-owned Subsidiary of the corporation) of any such
person or entity. Two or more persons or entities acting as a
syndicate or group, or otherwise, for the purpose of
acquiring, holding or disposing of voting shares of the
corporation shall be deemed to be a "person" or "entity," as
the case may be.
(c) The term "Affiliate," used to indicate a relationship with a
specified person or entity, shall mean a person or entity that
directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with,
the person or entity specified.
(d) The term "Associate," used to indicate a relationship with a
specified person or entity, shall mean (i) any entity of which
such specified person or entity is an officer or partner or
is, directly or indirectly, the beneficial owner of 10 percent
or more of any class of equity securities, (ii) any trust or
other estate in which such specified person or entity has a
substantial beneficial interest or as to which such specified
person or entity serves as trustee or in a similar fiduciary
capacity, (iii) any relative or spouse of such specified
person, or any relative of such spouse, who has the same home
as such specified person or who is a director or officer of
the corporation or any Subsidiary, and (iv) any person who is
a director or officer of such specified entity or any of its
parents or subsidiaries (other than the corporation or a
wholly-owned Subsidiary of the corporation).
(e) The term "Substantial Part" shall mean 30 percent or more of
the fair market value of the total assets of the person or
entity in question, as reflected on the most recent balance
sheet of such person or entity existing at the time the
shareholders of the corporation would be required to approve
or authorize the Related Person Business Transaction involving
the assets constituting any such Substantial Part.
6
<PAGE>
(f) The term "Subsidiary" shall mean any corporation, a majority
of the equity securities of any class of which are owned by
the corporation, by another Subsidiary, or in the aggregate by
the corporation and one or more of its Subsidiaries.
(g) The term "Continuing Director" shall mean (i) a director who
was a member of the Board of Directors of the corporation
either on June 22, 1983 or immediately prior to the time that
any Related Person involved in the Related Person Business
Transaction in question became a Related Person and (ii) any
person becoming a director whose election, or nomination for
election by the corporation's shareholders, was approved by a
vote of a majority of the Continuing Directors, provided,
however, that in no event shall a Related Person involved in
the Related Person Business Transaction in question be deemed
to be a Continuing Director.
(h) The term "voting shares" shall mean shares of capital stock of
a corporation entitled to vote generally in the election of
directors, considered for the purposes of this Article as one
class.
(i) The term "Highest Purchase Price" shall mean the highest
amount of cash or the fair market value of the property,
securities or other consideration paid by the Related Person
for a share of Common Stock of the corporation at any time
while such person or entity was a Related Person or in the
transaction which resulted in such person or entity becoming a
Related Person, provided, however, that the Highest Purchase
Price shall be appropriately adjusted to reflect the
occurrence of any reclassification, recapitalization, stock
split, reverse stock split or other readjustment in the number
of outstanding shares of Common Stock of the corporation, or
the declaration of a stock dividend thereon, between the last
date upon which the Related Person paid the Highest Purchase
Price and the effective date of the merger, consolidation or
exchange of shares or the date of distribution to shareholders
of the corporation of the proceeds from the sale of all or
substantially all of the assets of the corporation.
(j) (i) A person or entity "beneficially owns" voting shares
of the corporation if such person or entity, directly
or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or
shares (A) voting power which includes the power to
vote, or to direct the voting of, such voting shares
or (B) investment power which includes the power to
dispose, or to direct the disposition of, such voting
shares. Any person or entity which, directly or
indirectly, creates or uses a trust, proxy, power of
attorney, pooling arrangement or any other contract,
arrangement, or device with the purpose or effect of
divesting such person or entity of beneficial
ownership of voting shares of the corporation or
preventing the vesting of such beneficial ownership
as part of a plan or scheme to avoid becoming a
Related
7
<PAGE>
Person shall be deemed for purposes of this Article 6
to be the beneficial owner of such voting shares. All
voting shares of the corporation beneficially owned
by a person or entity, regardless of the form which
such beneficial ownership takes, shall be aggregated
in calculating the number of voting shares of the
corporation beneficially owned by such person or
entity. Any voting shares of the corporation that any
person or entity has the right to acquire pursuant to
any agreement, contract, arrangement or
understanding, or upon exercise of any conversion
right, warrant, or option, or pursuant to the
automatic termination of a trust, discretionary
account or similar arrangement, or otherwise shall be
deemed beneficially owned by such person or entity.
Any voting shares of the corporation not outstanding
which any person or entity has a right to acquire
shall be deemed to be outstanding for the purpose of
computing the percentage of outstanding voting shares
of the corporation beneficially owned by such person
or entity but shall not be deemed to be outstanding
for the purpose of computing the percentage of
outstanding voting shares of the corporation
beneficially owned by any other person or entity.
(ii) Notwithstanding the foregoing provisions of
subparagraph 6.2(j)(i) hereof:
(A) A member of a national securities exchange
shall not be deemed to be a beneficial owner
of voting shares of the corporation held
directly or indirectly by it on behalf of
another person or entity solely because such
member is the record holder of such voting
shares and, pursuant to the rules of such
exchange, may direct the vote of such voting
shares, without instruction, on other than
contested matters or matters that may affect
substantially the rights or privileges of
the holders of the voting shares of the
corporation to be voted, but is otherwise
precluded by the rules of such exchange from
voting without instruction;
(B) A commercial bank, broker or dealer or
insurance company which in the ordinary
course of business is a pledgee of voting
shares of the corporation under a written
pledge agreement shall not be deemed to be
the beneficial owner of such pledged voting
shares until the pledgee has taken all
formal steps necessary to declare a default
and determines that the power to vote or to
direct the vote or to dispose or to direct
the disposition of such pledged securities
will be exercised, provided that the pledge
agreement is bona fide and was not entered
into with the purpose nor with the effect of
changing or influencing the control of the
corporation nor in connection with
8
<PAGE>
any transaction having such purpose or
effect and, prior to default, does not grant
to the pledgee the power to vote or to
direct the vote of the pledged voting shares
of the corporation; and
(C) A person or entity engaged in business as an
underwriter of securities who acquires
voting shares of the corporation through its
participation in good faith in a firm
commitment underwriting registered under the
Securities Act of 1933, or comparable
successor law, rule or regulation, shall not
be deemed to be the beneficial owner of such
voting shares until the expiration of forty
days after the date of such acquisition.
6.3 For the purposes of this Article 6, the Continuing Directors by a
majority vote shall have the power to make a good faith determination,
on the basis of information known to them, of: (a) the number of voting
shares of the corporation that any person or entity "beneficially
owns," (b) whether a person or entity is an Affiliate or Associate of
another, (c) whether the assets subject to any Related Person Business
Transaction constitute a Substantial Part, (d) whether any business
transaction is one in which a Related Person has an interest, (e)
whether the cash or fair market value of the property, securities or
other consideration to be received per share by holders of Common Stock
of the corporation other than the Related Person in a Related Person
Business Transaction is an amount at least equal to the Highest
Purchase Price, and (f) such other matters with respect to which a
determination is required under this Article 6.
6.4 The provisions set forth in this Article 6, including this Section 6.4,
may not be repealed or amended in any respect unless such action is
approved by the affirmative vote of the holders of not less than
two-thirds of the voting power of the outstanding voting shares of the
corporation.
9
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<LEGEND>
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CONSOLIDATED STATEMENT OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEET FOR
THE QUARTERLY PERIOD ENDED OCTOBER 29, 1999 FILED WITH THE SEC ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<PERIOD-START> MAY-1-1999
<PERIOD-END> OCT-29-1999
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<RECEIVABLES> 1,153
<ALLOWANCES> (35)
<INVENTORY> 683
<CURRENT-ASSETS> 2,524
<PP&E> 1,530
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<TOTAL-ASSETS> 5,177
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<OTHER-SE> 3,770
<TOTAL-LIABILITY-AND-EQUITY> 5,177
<SALES> 2,265
<TOTAL-REVENUES> 2,265
<CGS> 577
<TOTAL-COSTS> 577
<OTHER-EXPENSES> 945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7)
<INCOME-PRETAX> 750
<INCOME-TAX> 243
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