EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SUMMARY
Medtronic is the world's leading medical technology company,
providing lifelong solutions for people with chronic disease. Primary products
include those for bradycardia pacing, tachy arrhythmia 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, spinal and neurosurgery, neurodegenerative disorders and ear, nose
and throat (ENT) surgery.
Fiscal 2000 marked the 15th consecutive year of revenue growth. Net sales of
$5,014.6 million represent an 18.5% increase over the $4,232.4 million in fiscal
1999 after restatement to reflect the fiscal 2000 merger with Xomed Surgical
Products, Inc. (Xomed). Net sales excluding the effects of foreign currency
translation increased 19.3% compared to increases of 24.0% in fiscal 1999 and
17.6% in fiscal 1998. The growth during fiscal 2000 was led by strong and
balanced results across all businesses, highlighting the successful outcome of
the mergers and acquisitions completed in fiscal years 1999 and 2000.
Fiscal 2000 was a year of significant accomplishments for Medtronic. The Company
successfully integrated the fiscal 1999 mergers and acquisitions and launched
major new products in all businesses. The Company has also substantially
completed all restructuring initiatives announced in fiscal 1999 and has
strengthened its competitive position in the global health care market. In
November of 1999 the Company merged with Xomed, a leading developer,
manufacturer and marketer of products for use by ENT physicians. The merger with
Xomed was accounted for as a pooling of interests.
Net earnings and diluted earnings per share for fiscal 2000 were $1,098.5
million and $0.90, compared to $476.3 million and $0.39 for fiscal 1999 and
$594.6 million and $0.51 in fiscal 1998. In connection with the merger with
Xomed and the settlement of certain litigation and other restructuring
initiatives during fiscal 2000, the Company recorded $38.7 million of pre-tax
non recurring charges. In connection with the substantial completion of all
initiatives related to the restructuring of its vascular, spinal surgery and
cardiac surgery organizations, the Company identified and reversed $24.9 million
of previously recorded restructuring reserves no longer considered necessary.
Excluding the effects of the pre-tax non-recurring charges and credits in fiscal
2000, the $554.1 million charge related to the mergers in fiscal 1999 and the
$205.3 million pre-tax non-recurring charges in fiscal 1998, diluted earnings
per share would have been $0.91, $0.76 and $0.62, respectively, representing an
increase of 19.7% in fiscal 2000 and 22.6% in fiscal 1999.
NET SALES
Sales in the United States in fiscal 2000 increased 19.2% over the prior year,
compared to 30.0% in fiscal 1999. Sales outside the United States increased
19.4% in fiscal 2000 on a constant currency basis compared to 14.5% in fiscal
1999. Fiscal 2000 sales in non-U.S. markets accounted for 34.6% of worldwide net
sales, compared with 35.3% in fiscal 1999 and 38.4% in fiscal 1998. Foreign
exchange rate movements had an unfavorable year-to-year impact on international
net sales of $33.5 million, $11.7 million, and $119.7 million in fiscal years
2000, 1999 and 1998, respectively. These exchange rate movements are caused
primarily by fluctuations in the value of the U.S. dollar versus major European
currencies and the Japanese yen. The impact of foreign currency fluctuations on
net sales is not necessarily indicative of the impact on net earnings due to the
offsetting foreign currency impact on operating costs and expenses and the
Company's hedging activities (see also Market Risk and Note 4 to the
consolidated financial statements for further details on foreign currency
instruments and the Company's risk management strategies with respect thereto).
The Company's business units include Cardiac Rhythm Manage ment; Neurological,
Spinal and ENT; Vascular; and Cardiac Surgery. Net sales by business unit were
as follows (in millions):
--------------------------------------------------
Year ended April 30, 2000 1999 1998
--------------------------------------------------------------------------------
Cardiac Rhythm Management $2,504.7 $2,121.6 $1,881.4
Neurological, Spinal and ENT 1,252.4 998.0 760.4
Vascular 790.8 718.8 403.0
Cardiac Surgery 466.7 394.0 378.3
--------------------------------------------------------------------------------
$5,014.6 $4,232.4 $3,423.1
--------------------------------------------------------------------------------
Net sales of Cardiac Rhythm Management products, which consist primarily of
products for bradycardia pacing, tachyarrhythmia management, external
defibrillation, and ablation, increased 19.0% in fiscal 2000 versus 13.1% in
fiscal 1999, after removing the impact of foreign exchange rate fluctuations.
This growth was led by strong worldwide market share gains in tachyarrhythmia
management, above market growth in bradycardia pacing sales, and solid growth in
external defibrillators. Tachyarrhythmia management revenues, led by sales of
the Gem and Gem II families of implantable cardioverter defibrillators, grew by
38.4% as physicians continued to recognize the superior detection capabilities
of the PR Logic algorithm and the advanced diagnostics included in all Gem
products. Sales of bradycardia products achieved a 9.8% growth during fiscal
2000. Bradycardia sales reflect accelerating growth in both U.S. and non-U.S.
markets and market share gains resulting from the Company offering best-in-class
products with unique feature sets and multiple price points. External
defibrillator sales grew 20.9% over the comparable period last year reflecting
the benefit of a surge in sales of automatic external defibrillators.
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Net sales of Neurological, Spinal and ENT products, consisting primarily of
implantable neurostimulation devices, drug administration systems, spinal
products, neurosurgery products, functional diagnostics and surgical products
used by ENT physicians, continued to experience significant growth. Exclusive of
the effects of foreign currency translation, net sales grew 26.0% over the
previous year compared to growth of 32.8% in fiscal 1999. Sales of neurosurgery
and spinal product lines increased 28.8% from the prior year, benefiting from
the breadth of the product line, including engineered bone dowels, bone wedges
and spinal cages. Sales of core neurological product lines (consisting of
neurostimulation, drug administration systems, and functional diagnostics)
increased 20.4% from the prior year comparative period. During fiscal 2000 the
Company launched the SynchroMed EL pump and Synergy dual channel stimulation
device in the United States and the Medtronic Kinetra stimulator for treatment
of symptoms of advanced Parkinson's disease outside the United States. The
Medtronic Kinetra is currently awaiting clearance by the Food and Drug Adminis
tration (FDA) in the U.S. ENT product sales increased 33.5% over the prior year,
benefiting from the acquisition of certain ophthalmology product lines and solid
performance across all product offerings. The acquisition of Midas Rex in
October 1998, which was accounted for as a purchase, contributed to the sales
growth in fiscal 1999.
Net sales of Vascular products, consisting of stents, balloon and guiding
catheters and peripheral vascular products, increased 10.6% and 78.3% in fiscal
2000 and fiscal 1999, respectively, after excluding the effects of foreign
currency translation. The stent market continues to be very competitive and the
Company's vascular revenues declined during the first and second quarter of
fiscal 2000 primarily as a result of launches of competitor stents. The Company
received U.S. regulatory clearance of its S670 coronary stent during the third
quarter of the fiscal year, propelling a dramatic growth rate during the fourth
quarter of the fiscal year, when revenues rose nearly 70% over the prior year
comparative period. In May of 2000, the Company announced the launch of the
BeStent 2 in Europe and the worldwide introduction of the S660 for small
diameter vessels. During fiscal 2000 the Company also launched in the United
States the AneuRx endovascular stent-graft system for minimally invasive
treatment of abdominal aortic aneurysms.
Net sales of Cardiac Surgery product lines, consisting of heart valves,
perfusion systems, cannulae, and surgical accessories, increased 19.8% and 4.6%
in fiscal 2000 and fiscal 1999, respectively, after excluding the effects of
foreign currency translation. The March 1999 purchase of AVECOR Cardiovascular,
Inc. (AVECOR), which was accounted for as a purchase, accounted for a
significant portion of the growth during fiscal 2000. The strong performance of
the Hancock II tissue valve and the Octopus 2+ tissue stabilization system, both
released during the second and third quarters of the fiscal year, also
contributed to the growth. Continuous improvements to the Octopus tissue
stabilization system, which facilitates precision suturing on a beating heart
during bypass procedures, has sustained market leadership in the technology that
the Company pioneered to support minimally invasive procedures.
COSTS AND EXPENSES
The following is a summary of major costs and expenses as a percentage of net
sales:
----------------------------------------
Year ended April 30, 2000 1999 1998
--------------------------------------------------------------------------------
Cost of Products Sold 26.3% 27.0% 26.5%
Research & Development 9.6 10.3 10.9
Selling, General & Administrative 31.7 31.2 30.7
Non-recurring Charges 0.3 12.4 5.6
--------------------------------------------------------------------------------
Cost of products sold as a percentage of net sales decreased in
fiscal 2000 as compared to fiscal 1999 as a result of $29.0 million of charges
included in fiscal 1999 related primarily to inventory rationalization in the
vascular and cardiac surgery product lines following the acquisitions of
Arterial Vascular Engineering Inc. (AVE) and AVECOR. Without this charge, cost
of products sold as a percentage of net sales in fiscal 1999 would have been
26.3%. Fiscal 1998 cost of sales percentage includes a $12.9 million charge for
obsolescence on certain vascular inventories. Without this charge, cost of
products sold as a percentage of net sales would have been 26.1%. Future gross
margins will continue to be impacted by competitive pricing pressures, new
product introductions, the mix of products both within and among product lines
and geographies, and the effects of foreign currency fluctuations.
The Company remains committed to spending aggressively on research and
development (R&D) to develop technological enhancements and new indications for
existing products, as well as to develop less invasive and new technologies to
address unmet patient needs and to help reduce patient care costs and length of
hospital stay. R&D expense was $479.7 million in fiscal 2000, $434.2 million in
fiscal 1999 and $372.2 million in fiscal 1998. The decline in R&D expense as a
percentage of sales in fiscal 2000 is attributable to efficiencies achieved from
the fiscal 1999 mergers and acquisitions, primarily in the Vascular business.
The increase in selling, general, and administrative expense (SG&A) as a percent
of sales from fiscal 1999 to fiscal 2000 was primarily attributable to higher
sales and marketing expenses associated with increased field sales coverage, new
product launches and litigation expenses, partially offset by foreign currency
gains. The increase from fiscal 1998 to fiscal 1999 was primarily attributable
to increased marketing and distribution spending to support new product launches
and by a decrease in the dollar amount of gains from hedging activities
recognized in fiscal 1999 as compared to fiscal 1998, partially offset by an
increase in gains recognized from the sale of certain available-for-sale equity
securities.
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As discussed in Note 3 to the consolidated financial statements, the Company
recorded pre-tax charges totaling $38.7 million, $554.1 million and $205.3
million during fiscal years 2000, 1999 and 1998, respectively. During fiscal
2000, and in connection with the completion of certain restructuring activities,
the Company reversed $24.9 million of previously recorded reserves. The charges
taken in 1999 include $152.0 million of purchased in-process research and
development costs primarily related to the AVE acquisitions of World Medical
Manufacturing Corporation and the coronary catheter lab of C.R. Bard. AVE merged
with the Company in January 1999.
Interest expense for the year was $13.6 million as compared to $29.1 million and
$15.5 million for fiscal years 1999 and 1998. The decrease in fiscal year 2000
is the result of the Company immediately paying off debt of pooled entities.
Interest income for fiscal 2000 was $29.0 million as compared to $51.9 million
and $27.6 million for fiscal 1999 and 1998. Interest income increased in fiscal
1999 as the result of higher average investment balances resulting from the
September 1998 secondary stock offering. The proceeds of the secondary stock
offering were used to pay off debt of pooled entities and to fund purchase
business combinations.
INCOME TAXES
The Company's effective income tax rate was 32.6%, 42.9% and 34.8% for fiscal
years 2000, 1999 and 1998, respectively. Excluding non-recurring charges in
fiscal years 2000, 1999 and 1998, the effective income tax rate would have been
32.4%, 34.1% and 34.5%, respectively. The reduction in the fiscal 2000 effective
income tax rate is the result of proportionally higher profits generated in low
tax jurisdictions and tax planning initiatives.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The Company continued to strengthen its financial position in fiscal 2000. At
April 30, 2000, working capital, the excess of current assets over current
liabilities, totaled $2,021.9 million compared to $1,438.6 million at April 30,
1999. The current ratio at April 30, 2000, was 3.0:1 compared with 2.4:1 at
April 30, 1999. The Company's net cash position, defined as the sum of cash,
cash equivalents, and short-term investments less short-term borrowings and
long-term debt was $227.7 million at April 30, 2000, compared to $119.7 million
at April 30, 1999.
During fiscal 2000, the Company entered into an agreement that expires in 2003,
to sell, at its discretion, specific pools of its Japanese trade receivables. At
April 30, 2000, the Company had sold approximately $64.0 million of its trade
receivables to a financial institution. The discount cost related to the sale
was immaterial and was recorded as interest expense in the accompanying
consolidated financial statements.
CASH FLOW
Cash provided by operating activities was $1,042.0 million in fiscal 2000
compared to $465.2 million in fiscal 1999 and $693.1 million in fiscal 1998.
Fiscal 2000 operating cash flows increased significantly over fiscal 1999 as a
result of earnings growth and a high level of transaction costs related to the
mergers as well as restructuring spending in fiscal 1999. Repurchases of common
stock totaled $497.4 million in fiscal 2000, compared to $377.2 million and
$168.2 million in fiscal 1999 and fiscal 1998, respectively. The increase in
amounts spent on repurchases of common stock under the Company's systematic
share repurchase program is the result of higher share prices and increased
repurchase levels to offset the dilutive effect of employee stock award
programs. The systematic share repurchase program was discontinued in the fourth
quarter of fiscal 2000. Additions to property, plant, and equipment totaled
$342.1 million in fiscal 2000, compared to $234.9 million and $204.7 million in
fiscal 1999 and 1998, respectively. The Company expects future growth in capital
spending to support increased manufacturing capacity and operational
requirements. This spending will be financed primarily by funds from operations.
Dividends paid to shareholders totaled $189.5 million, $131.9 million and $102.9
million for fiscal years 2000, 1999 and 1998, respectively. Consistent with the
Company's financial objectives, the Company expects to continue paying dividends
at a rate of approximately 20% of the previous year's net earnings.
Significant uses of cash during fiscal 2000 included purchases of property,
plant, and equipment, purchases of marketable securities, repurchases of common
stock under the Company's systematic stock repurchase plan, and dividends paid
to shareholders.
DEBT AND CAPITAL
The Company had a systematic stock repurchase program that was discontinued
during the fourth quarter of fiscal 2000. Shares repurchased and average price
per share were as follows: 13.0 million shares at an average price of $38.39 per
share during fiscal 2000, 11.2 million shares at an average price of $33.80 per
share during fiscal 1999 and 7.0 million shares at an average price of $23.95
per share during fiscal 1998. In addition to the repurchase of shares to offset
dilution resulting from the issuance of stock under the employee stock purchase
and award plans, the Company repurchased shares issued in conjunction with the
AVECOR purchase in fiscal 1999.
The Company's capital structure consists of equity and interest-bearing debt.
Interest-bearing debt as a percent of total capital was 6.9% at April 30, 2000
compared to 6.5% at April 30, 1999.
One of the Company's key financial objectives is achieving an annual return on
equity (ROE) of at least 20%. ROE compares net earnings to average shareholders'
equity and is a key measure of management's ability to utilize the shareholders'
investment in the Company effectively. In fiscal 2000 ROE was 26.6% compared to
14.6% in fiscal 1999 and 24.2% in fiscal 1998. Excluding the
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effects of the $13.8 million, $554.1 million and $205.3 million pre-tax charges
taken in fiscal 2000, fiscal 1999 and fiscal 1998, ROE would have been 25.5%,
25.8% and 28.8%, respectively. In each of the preceding twelve years, ROE has
exceeded 20%.
MARKET RISK
Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory.
The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into various contracts,
principally forward contracts that change in value as foreign exchange rates
change, to protect the value of its existing foreign currency assets,
liabilities, commitments, and anticipated foreign currency operating results.
The principal currencies hedged are the Japanese yen and major European
currencies. The gains and losses on these contracts offset changes in the value
of the related exposures. It is the Company's policy to enter into foreign
currency transactions only to the extent true exposures exist. The Company does
not enter into foreign currency transactions for speculative purposes. The
Company's risk management activities for fiscal 2000 were successful in
minimizing the net earnings impact of currency fluctuations despite volatile
market conditions.
The Company had forward exchange contracts outstanding in the notional amounts
of $537.2 and $361.0 million at April 30, 2000 and 1999, respectively. The fair
value of all foreign currency derivative contracts outstanding at April 30, 2000
was $71.5 million, which does not represent the Company's annual exposure. A
sensitivity analysis of changes of the fair value of all derivative foreign
exchange contracts outstanding at April 30, 2000 indicates that, if the U.S.
dollar uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $41.1 million. Conversely, if the U.S. dollar
uniformly strengthened by 10% against all major currencies, the fair value of
these contracts would increase by $44.2 million. Any gains and losses on the
fair value of derivative contracts would be largely offset by losses and gains
on the underlying transactions or anticipated transactions. These offsetting
gains and losses are not reflected in the above analysis.
The Company is also exposed to interest rate changes affecting principally its
investments in interest rate sensitive instruments. An analysis of the impact on
the Company's interest rate sensitive financial instruments of a hypothetical
10% change in short-term interest rates compared to interest rates at April 30,
2000 indicates that it would not have a significant impact on expected fiscal
2001 earnings.
GOVERNMENT REGULATION AND OTHER MATTERS
Government and private sector initiatives to limit the growth of health care
costs, including price regulation, competitive pricing, coverage and payment
policies and managed-care arrangements, are continuing in many countries where
the Company does business, including the United States. These changes are
causing the marketplace to put increased emphasis on the delivery of more
cost-effective medical therapies. Although the Company believes it is well
positioned to respond to changes resulting from this worldwide trend toward cost
containment, the uncertainty as to the outcome of any proposed legislation or
changes in the marketplace precludes the Company from predicting the impact
these changes may have on future operating results.
In keeping with the increased emphasis on cost-effectiveness in health care
delivery, the current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing groups to enhance
purchasing power. The medical device industry has also experienced some
consolidation, partly in order to offer a broader range of products to large
purchasers. As a result, transactions with customers are more significant, more
complex and tend to involve more long-term contracts than in the past. This
enhanced purchasing power may also increase the pressure on product pricing,
although management is unable to estimate the potential impact at this time.
In the United States, the Food and Drug Administration (the "FDA"), among other
governmental agencies, is responsible for regulating the introduction of new
medical devices, including laboratory and manufacturing practices, labeling and
recordkeeping for medical devices, and review of manufacturers' required reports
of adverse experience to identify potential problems with marketed medical
devices. The FDA can ban certain medical devices, detain or seize adulterated or
misbranded medical devices, order repair, replacement, or refund of such
devices, and require notification of health professionals and others with regard
to medical devices that present unreasonable risks of substantial harm to the
public health. The FDA may also enjoin and restrain certain violations of the
Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to
medical devices, or initiate action for criminal prosecution of such violations.
Moreover, the FDA administers certain controls over the export of such devices
from the United States. Many of the devices that Medtronic develops and markets
are in a category for which the FDA has implemented stringent clinical
investigation and pre-market clearance requirements. Any delay or acceleration
experienced by the Company in obtaining regulatory approvals to conduct clinical
trials or in obtaining required market clearances (especially with respect to
significant products in the regulatory process that have been discussed in the
Company's announcements) may affect the Company's operations or the market's
expectations for the timing of such events and, consequently, the market price
for the Company's common stock.
25
<PAGE>
Medical device laws are also in effect in many of the countries in which
Medtronic does business outside the United States. These range from
comprehensive device approval requirements for some or all of Medtronic's
medical device products to requests for product data or certifications. The
number and scope of these requirements are increasing.
In the early 1990's the review time by the FDA to clear medical devices for
commercial release lengthened and the number of clearances, both of 510(k)
submissions and pre-market approval applications, decreased. In response to
public and congressional concern, the FDA Modernization Act of 1997 was adopted
with the intent of bringing better definition to the clearance process. While
FDA review times have improved since passage of the 1997 Act, there can be no
assurance that the FDA review process will not involve delays or that clearances
will be granted on a timely basis.
The Company operates in an industry characterized by extensive patent
litigation. Patent litigation can result in significant damage awards and
injunctions that could prevent the manufacture and sale of affected products or
result in significant royalty payments in order to continue producing the
products. At any given time, the Company is generally involved as both a
plaintiff and a defendant in several patent infringement actions. While the
Company believes that the patent litigation incident to its business will
generally not have a material adverse impact on the Company's financial position
or liquidity, it could possibly be material to the consolidated results of
operations of any one period.
The Company also operates in an industry susceptible to significant product
liability claims. In recent years, there has been an increased public interest
in product liability claims for implanted medical devices, including pacemakers,
leads and spinal systems. These claims may be brought by individuals seeking
relief for themselves or, increasingly, by groups seeking to represent a class.
In addition, product liability claims may be asserted against the Company in the
future relative to events not known to management at the present time.
Management believes that the Company's risk management practices, including
insurance coverage, are reasonably adequate to protect against potential product
liability losses.
The Company is also subject to various environmental laws and regulations both
within and outside the United States. The operations of the Company, like those
of other medical device companies, involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization processes.
While it is difficult to quantify the potential impact of compliance with
environmental protection laws, management believes that such compliance will not
have a material impact on the Company's financial position, results of
operations or liquidity.
In 1994, governmental authorities in Germany began an investigation into certain
business and accounting practices by medical device manufacturers. As part of
this investigation, documents were seized from the Company and certain other
manufacturers. Subsequently, the United States Securities and Exchange
Commission (the "SEC") also began an inquiry into this matter. In August 1996,
the SEC issued a formal non-public order of investigation to the Company, as it
did to at least one other manufacturer. Based upon currently available
information, the Company does not expect these investigations to have a
materially adverse impact on the Company's financial position, results of
operations or liquidity.
CAUTIONARY FACTORS THAT MAY AFFECT
FUTURE RESULTS
Certain statements contained in this Annual Report and other written and oral
statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "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 previous section
entitled "Government Regulation and Other Matters" and in Item 1 of the
Company's Annual Report on Form 10-K under the heading "Cautionary Factors That
May Affect Future Results." Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
The Company undertakes no obligation to update any forward-looking statement,
but investors are advised to consult any further disclosures by the Company on
this subject in its filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q, and 8-K (if any), in which the Company discusses
in more detail various important factors that could cause actual results to
differ from expected or historic results. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
26
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REPORT OF MANAGEMENT
The management of Medtronic, Inc., is responsible for the integrity of the
financial information presented in this Annual Report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. Where necessary, they reflect estimates based on
management's judgment.
Management relies upon established accounting procedures and related systems of
internal control for meeting its responsibilities to maintain reliable financial
records. These systems are designed to provide reasonable assurance that assets
are safeguarded and that transactions are properly recorded and executed in
accordance with management's intentions. Internal auditors periodically review
the accounting and control systems, and these systems are revised if and when
weaknesses or deficiencies are found.
The Audit Committee of the Board of Directors, composed of directors from
outside the Company, meets regularly with management, the Company's internal
auditors, and its independent accountants to discuss audit scope and results,
internal control evaluations, and other accounting, reporting, and financial
matters. The independent accountants and internal auditors have access to the
Audit Committee without management's presence.
/s/ Bill George
William W. George
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Arthur D. Collins, Jr.
Arthur D. Collins, Jr.
PRESIDENT AND CHIEF OPERATING OFFICER
/s/ Robert L. Ryan
Robert L. Ryan
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of Medtronic, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
statements of consolidated earnings, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Medtronic, Inc., and
its subsidiaries at April 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2000, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 24, 2000
27
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MEDTRONIC, INC.
STATEMENT OF CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
---------------------------------------------
Year ended April 30, 2000 1999 1998
=================================================================================================================
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 5,014.6 $ 4,232.4 $ 3,423.1
COSTS AND EXPENSES:
Cost of products sold 1,319.6 1,140.8 906.8
Research and development expense 479.7 434.2 372.2
Selling, general, and administrative expense 1,587.9 1,320.4 1,052.4
Non-recurring charges 13.8 373.1 156.4
Purchased in-process research and development -- 152.0 --
Foundation commitment -- -- 36.0
Interest expense 13.6 29.1 15.5
Interest income (29.0) (51.9) (27.6)
-----------------------------------------------------------------------------------------------------------------
Total costs and expenses 3,385.6 3,397.7 2,511.7
-----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,629.0 834.7 911.4
Provision for income taxes 530.5 358.4 316.8
-----------------------------------------------------------------------------------------------------------------
Net earnings $ 1,098.5 $ 476.3 $ 594.6
=================================================================================================================
EARNINGS PER SHARE
Basic $ 0.92 $ 0.40 $ 0.52
-----------------------------------------------------------------------------------------------------------------
Diluted $ 0.90 $ 0.39 $ 0.51
=================================================================================================================
Weighted average shares outstanding
Basic 1,194.7 1,177.1 1,150.2
-----------------------------------------------------------------------------------------------------------------
Diluted 1,220.8 1,207.6 1,177.1
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
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MEDTRONIC, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------
April 30, 2000 1999
---------------------------------------------------------------------------------------------------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 448.4 $ 228.5
Short-term investments 109.7 153.8
Accounts receivable, less allowance for doubtful accounts of $30.2 and $33.2 1,210.1 1,024.8
Inventories 690.6 575.3
Deferred tax assets 160.5 256.0
Prepaid expenses and other current assets 394.1 206.4
---------------------------------------------------------------------------------------------------------------
Total Current Assets 3,013.4 2,444.8
Property, Plant, and Equipment, net 946.5 772.3
Goodwill and Other Intangible Assets, net 1,361.4 1,374.2
Long-Term Investments 210.1 212.7
Other Assets 138.0 204.4
---------------------------------------------------------------------------------------------------------------
Total Assets $5,669.4 $5,008.4
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 316.3 $ 239.2
Accounts payable 200.0 158.8
Accrued compensation 236.2 183.9
Accrued income taxes -- 49.5
Other accrued expenses 239.0 374.8
---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 991.5 1,006.2
Long-Term Debt 14.1 23.4
Deferred Tax Liabilities 15.2 30.8
Other Long-Term Liabilities 157.1 177.2
---------------------------------------------------------------------------------------------------------------
Total Liabilities 1,177.9 1,237.6
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Preferred stock--par value $1.00; 2,500,000 shares authorized, -- --
None outstanding
Common Stock--par value $.10; 1.6 billion shares authorized,
1,197,698,035 and 1,191,896,614 shares issued and outstanding 119.8 119.1
Retained earnings 4,543.1 3,773.0
Accumulated other non-owner changes in equity (151.9) (95.1)
---------------------------------------------------------------------------------------------------------------
4,511.0 3,797.0
Receivable from Employee Stock Ownership Plan (19.5) (26.2)
---------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 4,491.5 3,770.8
Total Liabilities and Shareholders' Equity $5,669.4 $5,008.4
===============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
MEDTRONIC, INC.
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Non- Receivable Total
Common Retained Owner Changes from Shareholders'
(IN MILLIONS OF DOLLARS) Stock Earnings in Equity ESOP Equity
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance April 30, 1997 $ 115.1 $2,140.9 $ (61.1) $ (27.9) $2,167.0
Net earnings -- 594.6 -- -- 594.6
Other non-owner changes in equity:
Change in unrealized gain on investment,
net of $11.8 tax expense -- -- 21.8 -- 21.8
Translation adjustment -- -- (14.4) -- (14.4)
Minimum pension liability -- -- (1.2) -- (1.2)
--------
Total comprehensive income -- -- -- -- $ 600.8
--------
Dividends paid -- (102.9) -- -- (102.9)
Issuance of common stock of acquired subsidiary 0.2 3.9 -- -- 4.1
Issuance of common stock under employee benefits and
incentive plans 1.6 178.9 -- -- 180.5
Repurchases of common stock (0.8) (167.4) -- -- (168.2)
Income tax benefit from restricted stock and nonstatutory
stock options -- 57.6 -- -- 57.6
Repayments from ESOP -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1998 $ 116.1 $2,705.6 $ (54.9) $ (27.9) $2,738.9
Net earnings -- 476.3 -- -- 476.3
Other non-owner changes in equity:
Change in unrealized loss on investment,
net of $5.9 tax benefit -- -- (10.9) -- (10.9)
Translation adjustment -- -- (26.2) -- (26.2)
Minimum pension liability -- -- (3.1) -- (3.1)
--------
Total comprehensive income -- -- -- -- $ 436.1
--------
Adjustment for poolings of interests -- 19.4 -- -- 19.4
Dividends paid -- (131.9) -- -- (131.9)
Issuance of common stock from secondary offering 2.2 710.4 -- -- 712.6
Issuance of common stock under employee benefits and
incentive plans 0.2 56.0 -- -- 56.2
Issuance of common stock for acquisition of subsidiaries 1.8 251.5 -- -- 253.3
Repurchases of common stock (1.2) (376.0) -- -- (377.2)
Income tax benefit from restricted stock and nonstatutory
stock options -- 61.7 -- -- 61.7
Repayments from ESOP -- -- -- 1.7 1.7
------------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1999 $ 119.1 $3,773.0 $ (95.1) $ (26.2) $3,770.8
Net earnings -- 1,098.5 -- -- 1,098.5
Other non-owner changes in equity:
Change in unrealized loss on investment,
net of $8.3 tax benefit -- -- (15.6) -- (15.6)
Translation adjustment -- -- (38.7) -- (38.7)
Minimum pension liability -- -- (2.5) -- (2.5)
--------
Total comprehensive income -- -- -- -- $1,041.7
--------
Adjustment for pooling of interests -- 0.6 -- -- 0.6
Dividends paid -- (189.5) -- -- (189.5)
Issuance of common stock under employee benefits and
incentive plans 2.0 192.0 -- -- 194.0
Repurchases of common stock (1.3) (496.1) -- -- (497.4)
Income tax benefit from restricted stock and nonstatutory
stock options -- 164.6 -- -- 164.6
Repayments from ESOP -- -- -- 6.7 6.7
------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 $ 119.8 $4,543.1 $ (151.9) $ (19.5) $4,491.5
==============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
<PAGE>
MEDTRONIC, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------
Year ended April 30, 2000 1999 1998
====================================================================================================================
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $1,098.5 $ 476.3 $ 594.6
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 243.3 218.3 166.5
Non-recurring charges, net 8.5 179.6 125.5
Deferred income taxes 71.1 (35.5) 19.0
Changes in operating assets and liabilities:
Accounts receivable (192.7) (184.4) (150.8)
Inventories (119.1) (91.1) (79.4)
Prepaid expenses and other assets (117.5) (127.4) (71.5)
Accounts payable and accrued liabilities 248.4 82.1 46.6
Accrued income taxes (178.8) (56.0) 43.3
Other long-term liabilities (19.7) 3.3 (.7)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,042.0 465.2 693.1
INVESTING ACTIVITIES
Additions to property, plant, and equipment (342.1) (234.9) (204.7)
Acquisitions, net of cash acquired -- (1,017.4) (3.4)
Sales and maturities of marketable securities 268.9 659.0 84.8
Purchases of marketable securities (258.4) (701.6) (86.7)
Other investing activities (45.0) (46.2) (65.4)
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (376.6) (1,341.1) (275.4)
FINANCING ACTIVITIES
Increase in short-term borrowings 58.4 113.5 30.9
Payments on long-term debt (8.6) (615.2) (163.7)
Issuance of long-term debt 0.6 571.6 93.6
Proceeds from stock offering of acquired subsidiary -- -- 4.1
Dividends to shareholders (189.5) (131.9) (102.9)
Repurchases of common stock (497.4) (377.2) (168.2)
Issuance of common stock 194.0 1,022.1 180.5
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (442.5) 582.9 (125.7)
Effect of exchange rate changes on cash and cash equivalents (3.0) (1.9) 1.3
Net Change in Cash and Cash Equivalents 219.9 (294.9) 293.3
Cash and cash equivalents at beginning of year 228.5 523.4 230.1
--------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 448.4 228.5 $ 523.4
====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 401.8 $ 376.2 $ 265.4
Interest 13.8 29.0 16.0
--------------------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and Financing Activities
Issuance of common stock for acquisition of subsidiary,
net of cash acquired $ -- $ 164.3 $ --
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
MEDTRONIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Medtronic is the world's leading medical technology
company, providing lifelong solutions for people with chronic disease. The
Company provides innovative products and therapies for the health care needs of
medical professionals and their patients. Headquartered in Minneapolis,
Minnesota, operations are primarily focused on providing therapeutic,
diagnostic, and monitoring systems for the cardiac rhythm management,
cardiovascular, neurological, spinal, and ear, nose and throat (ENT) markets.
The Company generally markets its products through a direct sales force in the
United States and a combination of direct sales representatives and independent
distributors in international markets. The main markets for products are the
United States, Western Europe, and Japan.
Principles of Consolidation. The consolidated financial statements include the
accounts of Medtronic, Inc., and all of its subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents. The Company considers highly liquid investments with
maturities of three months or less from the date of purchase to be cash
equivalents. These investments are valued at cost, which approximates fair
value.
Investments. Investments in debt and equity securities that have readily
determinable fair values are classified and accounted for as available-for-sale
or held-to-maturity. Held-to-maturity investments consist principally of U.S.
government and corporate debt securities that the Company has the positive
intent and ability to hold until maturity. These securities are recorded at
amortized cost in short- and long-term investments. Available-for-sale
securities consist of equity securities that are recorded at fair value in
short- and long-term investments, with the change in fair value recorded, net of
taxes, as a component of accumulated other non-owner changes in equity. Realized
gains and losses are recorded as a component of selling, general, and
administrative expense, and are calculated based on the specific identification
method. Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date.
Revenue Recognition. The Company recognizes revenue from product sales when the
goods are shipped to its customers. For certain products, the Company maintains
consigned inventory at customer locations. For these products, revenue is
recognized at the time the Company is notified that the device has been used by
the customer.
Inventories. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis. Inventory balances were as follows:
------------------------------
April 30, 2000 1999
--------------------------------------------------------------------------------
Finished goods $374.4 $314.6
Work in process 129.5 105.6
Raw materials 186.7 155.1
--------------------------------------------------------------------------------
Total $690.6 $575.3
================================================================================
Property, Plant, and Equipment. Property, plant, and equipment is stated at
cost. Additions and improvements that extend the lives of the assets are
capitalized while expenditures for repairs and maintenance are expensed as
incurred. Depreciation is provided using the straight-line method over the
estimated useful lives of the various assets. Property, plant and equipment
balances and corresponding lives were as follows:
-----------------------------------------------
April 30, 2000 1999 Lives
================================================================================
Land and land
improvements $ 57.7 $ 48.2 20 years
Buildings and leasehold
improvements 393.4 372.3 up to 40 years
Equipment 1,044.7 895.0 3-7 years
Construction in progress 181.8 129.0 --
--------------------------------------------------------------------------------
1,677.6 1,444.5
Less: Accumulated
depreciation (731.1) (672.2)
================================================================================
Property, Plant, and
Equipment, net $ 946.5 $ 772.3
================================================================================
Goodwill, Other Intangible Assets, and Long-Lived Assets. Good will represents
the excess of cost over net assets of businesses acquired, while other
intangible assets consist primarily of purchased technology and patents.
Goodwill and other intangible assets are being amortized using the straight-line
method over their estimated useful lives, ranging from 5 to 35 years. The
Company periodically reviews its goodwill and other long-lived assets for
impairment and assesses whether significant events or changes in business
circumstances indicate that the carrying value of the assets may not be
recoverable. Balances were as follows:
---------------------------
April 30, 2000 1999
================================================================================
Goodwill $ 1,250.3 $ 1,258.9
Less: Accumulated amortization (200.5) (147.9)
--------------------------------------------------------------------------------
1,049.8 1,111.0
--------------------------------------------------------------------------------
Other intangible assets 428.7 355.9
Less: Accumulated amortization (117.1) (92.7)
--------------------------------------------------------------------------------
311.6 263.2
================================================================================
Goodwill and other intangible assets, net $ 1,361.4 $ 1,374.2
================================================================================
Research and Development. Research and development costs are expensed when
incurred.
32
<PAGE>
Stock-Based Compensation. The Company accounts for stock-based compensation
using the intrinsic value method as prescribed under Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations.
Foreign Currency Translation. Essentially all assets and liabilities are
translated to U.S. dollars at year-end exchange rates, while elements of the
income statement are translated at average exchange rates in effect during the
year. Foreign currency transaction gains and losses are included in the
statement of consolidated earnings as selling, general, and administrative
expense. Gains and losses arising from the translation of net assets located
outside the United States are recorded as a component of other non-owner changes
in equity.
Foreign Exchange Contracts. The Company manages its exposure to fluctuations in
foreign currency exchange rates by entering into various contracts that change
in value as foreign exchange rates change. The Company designates and assigns
certain financial instruments as hedges for specific assets, liabilities or
anticipated transactions. When hedged assets or liabilities are sold or
extinguished or the anticipated transactions being hedged are no longer expected
to occur, the Company recognizes the gain or loss on the designated hedging
financial instruments. The Company classifies its derivative financial
instruments as held or issued for purposes other than trading. Gains and losses
from hedges of firm commitments are classified in the income statement
consistent with the accounting treatment of the items being hedged. Unrealized
gains on forward contracts are recorded in the balance sheet as other assets
while unrealized losses on forward contracts are included in accrued
liabilities.
Royalty Income. Income earned from royalty and license agreements is recorded as
a reduction of selling, general, and administrative expense.
Earnings Per Share. Basic earnings per share is computed based
on the weighted average number of common shares outstanding, while diluted
earnings per share is computed based on the weighted average number of common
shares outstanding adjusted by the number of additional shares that would have
been outstanding had the potentially dilutive common shares been issued.
Potentially dilutive shares of common stock include stock options and other
stock-based awards granted under stock-based compensation plans and shares
committed to be purchased under the employee stock purchase plan.
New Accounting Standards. In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted for fiscal years beginning after
June 15, 2000, although earlier application is permitted as of the beginning of
any fiscal quarter. This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company is in the process of determining what effect
the adoption of SFAS No. 133 will have on the Company's results of operations,
cash flows, or financial position.
2 ACQUISITIONS
Pooling-of-Interests Method. 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) in a
transaction valued at approximately $850.0, including $25.0 of assumed debt.
Xomed is a leading developer, manufacturer and marketer of surgical products for
use by ear, nose and throat physicians. Xomed offers a broad line of products
that include powered tissue-removal systems, nerve monitoring systems,
disposable fluid-control products, image guided surgery systems, and
bioabsorbable products.
On January 28, 1999, the Company issued approximately 101.2 million shares of
its common stock for all of the outstanding capital stock of Arterial Vascular
Engineering, Inc. (AVE) in a transaction valued at approximately $4,200.0
including $550.0 of assumed debt. AVE designs and manufactures minimally
invasive solutions for the treatment of coronary artery and peripheral vascular
disease. AVE's product offerings include coronary stents, balloon catheters,
guidewires, and guiding catheters.
On January 27, 1999, the Company issued approximately 90.0 million shares of its
common stock for all of the outstanding capital stock of Sofamor Danek Group,
Inc. (Sofamor Danek) in a transaction valued at approximately $3,300.0. Sofamor
Danek is primarily involved in developing, manufacturing, and marketing devices,
instruments, computer-assisted visualization products, and biomaterials used in
the treatment of spinal and cranial disorders.
On September 30, 1998, the Company issued approximately 17.2 million shares of
its common stock for all of the outstanding capital stock of Physio-Control
International Corporation (Physio-Control) in a transaction valued at
approximately $550.0. Physio-Control designs, manufactures, markets, and
services an integrated line of noninvasive emergency cardiac defibrillator and
vital sign assessment devices, disposable electrodes, and data management
software.
33
<PAGE>
The acquisitions of Xomed, AVE, Sofamor Danek, and Physio-Control have been
accounted for as poolings-of-interests, and, accordingly, the Company's
consolidated financial statements for 1999 and 1998 have been restated to
include the results of Xomed, AVE, Sofamor Danek, and Physio-Control. Net sales
and net earnings for the individual entities were as follows:
-------------------------------------------
Year ended April 30, 1999 Net Sales Net Earnings
================================================================================
Medtronic (as previously reported) $4,134.1 $468.4
Xomed 98.3 7.9
--------------------------------------------------------------------------------
Combined $4,232.4 $476.3
================================================================================
-------------------------------------------
Year ended April 30, 1998 Net Sales Net Earnings
================================================================================
Medtronic (as previously reported) $2,604.8 $457.4
AVE 228.0 60.4
Sofamor Danek 331.6 60.5
Physio-Control 178.6 9.5
Xomed 80.1 6.8
--------------------------------------------------------------------------------
Combined $3,423.1 $594.6
================================================================================
The combined results for the fiscal year ended April 30, 1999 represent the
previously reported results of Medtronic for the fiscal year ended April 30,
1999 combined with the historical results of Xomed for the twelve months ended
March 31, 1999. Effective May 1, 1999, Xomed's fiscal year end has been changed
from December 31 to April 30 to conform to the Company's fiscal year end.
Accordingly, Xomed's results for the one-month period ended April 30, 1999 have
been excluded from the Company's combined results and have been reported as an
adjustment to May 1, 1999 retained earnings. Xomed's net sales and net earnings
for the one-month period ended April 30, 1999 were $8.3 and $0.6, respectively.
The combined results for the fiscal year ended April 30, 1998 represent the
historical results of Medtronic for the fiscal year ended April 30, 1998
combined with the historical results of Xomed, AVE, Sofamor Danek and
Physio-Control for the twelve months ended March 31, 1998. Effective May 1,
1998, Physio-Control's, Sofamor Danek's and AVE's fiscal year end has been
changed from December 31 for Physio-Control and Sofamor Danek and June 30 for
AVE, to April 30 to conform to the Company's fiscal year end. Accordingly,
Physio-Control's, Sofamor Danek's, and AVE's results for the one-month period
ended April 30, 1998 have been excluded from the Company's combined results and
have been reported as an adjustment to May 1, 1998 retained earnings. AVE's,
Sofamor Danek's, and Physio-Control's net sales and net earnings for the
one-month period ended April 30, 1998 were $174.0 and $19.4, respectively.
Purchase Method. On April 30, 1999, the Company acquired all of the outstanding
capital stock of Micro Motion Sciences (Micro Motion) for $9.8. Micro Motion
develops advanced lead and catheter placement technology.
On March 8, 1999, the Company acquired all of the outstanding capital stock of
AVECOR Cardiovascular Inc. (AVECOR) for approximately $96.1 in Medtronic common
stock and other consideration. AVECOR develops, manufactures, and markets
specialty medical devices for heart/lung bypass surgery and long-term
respiratory support. In March 1999, subsequent to the closing of this
transaction, the Company repurchased in the open market the equivalent number of
shares issued in the AVECOR acquisition.
Prior to the merger with the Company, AVE acquired all of the outstanding
capital stock of World Medical Manufacturing Corporation (World Medical) on
December 14, 1998 in exchange for approximately $70.8 in AVE common stock and
other consideration. World Medical develops, manufactures, and markets an
endovascular stented graft and delivery system for the treatment of abdominal
aortic aneurysms. In addition, on October 1, 1998, AVE acquired the coronary
catheter lab business of C.R. Bard, Inc. ("Bard cath lab") for a purchase price
of approximately $610.7. The Bard cath lab business includes a broad range of
catheter-based technologies including balloon catheters, guidewires, and
coronary stents.
On October 16, 1998, the Company acquired all of the assets and certain
liabilities of Midas Rex, L.P., of Fort Worth, Texas, for approximately $230.0
in cash. Midas Rex is the market leader in high-speed neurological powered
instruments, including pneumatic instrumentation for surgical dissection of
bones, biometals, bioceramics, and bioplastics. Other instruments manufactured
by Midas Rex assist in orthopedic, otolaryngological, maxillofacial, and
craniofacial procedures, as well as plastic surgery.
The acquisitions of Micro Motion, AVECOR, Midas Rex, World Medical and Bard cath
lab were accounted for as purchases. Accordingly, the results of operations of
the acquired entities have been included in the Company's consolidated financial
statements since the respective dates of acquisition. Acquired goodwill,
patents, trademarks, and other intangible assets associated with these
acquisitions are being amortized using the straight-line method over periods
ranging from 3 to 12 years for intangibles and up to 25 years for goodwill.
The purchase price allocation was as follows:
--------------------------------------------------------------------------------
Net assets acquired $ 53.0
Goodwill 685.2
In-process R&D 150.9
Other intangibles 128.3
--------------------------------------------------------------------------------
$1,017.4
================================================================================
Pro forma information has not been included as these acquisitions did not have a
material impact on the Company's results of operations.
34
<PAGE>
3 NON-RECURRING CHARGES
Fiscal 2000 Initiatives. In fiscal 2000, the Company recorded transaction
charges in connection with its merger with Xomed, charges related to a
litigation settlement, the conversion of certain direct sales operations in
Latin America to distributor arrangements and the termination of a distribution
relationship. In connection with these activities, the Company will terminate 78
employees, mostly in administrative positions. The Company expects to complete
all identified actions in fiscal 2001. Charges are summarized as follows:
------------------------------------------------------
Fiscal 2000 Utilized in Balance at
Charges Fiscal 2000 April 30, 2000
================================================================================
Transaction-
related costs $14.7 $(14.7) $ --
Facility reductions 0.9 -- 0.9
Severance and
related costs 1.4 -- 1.4
Asset write-downs 6.2 (6.2) --
Litigation 15.5 (15.5) --
--------------------------------------------------------------------------------
$38.7 $(36.4) $2.3
================================================================================
Fiscal 1999 Initiatives. During fiscal 1999, the Company recorded pre-tax
transaction-related charges in connection with the Physio-Control, Sofamor
Danek, and AVE mergers. The Company also purchased AVECOR during the fourth
quarter of fiscal 1999. In connection with these transactions, management
identified areas where duplicate manufacturing, sales, and administrative
capacity existed and identified opportunities to leverage existing
infrastructure and achieve better economies of scale. During the third and
fourth quarter of the fiscal year, management announced certain initiatives to
restructure its new vascular, cardiac surgery, and spinal surgery organizations
and announced the closure of ten manufacturing facilities and the termination of
2,950 employees, 2,585 of which were in manufacturing positions. The Company
estimated that these actions would result in annual cost savings in excess of
$70.0. The Company has substantially completed these initiatives during fiscal
2000 and has achieved the cost savings originally estimated. As the Company
substantially completed these initiatives in the fourth quarter of fiscal 2000,
it identified and reversed $24.9 of reserves no longer considered necessary.
--------------------------------------------------------------------------------
Fiscal 1999 charges are summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Fiscal 1999 Utilized in Balance at Utilized in Change in Balance at
Charges Fiscal 1999 April 30, 1999 Fiscal 2000 Estimate April 30, 2000
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Transaction-related costs $149.3 $(136.5) $ 12.8 $(12.8) $ -- $ --
Purchased in-process R&D 152.0 (152.0) -- -- -- --
Facility reductions 10.9 (1.8) 9.1 (9.1) 3.8 3.8
Severance and related costs 68.6 (8.1) 60.5 (28.6) (21.2) 10.7
Asset write-downs 92.1 (92.1) -- 7.3 (7.3) --
Contractual obligations 51.2 (10.5) 40.7 (33.8) (0.2) 6.7
------------------------------------------------------------------------------------------------------------------
$524.1 $(401.0) $123.1 $(77.0) $(24.9) $ 21.2
==================================================================================================================
</TABLE>
During fiscal 1999 AVE acquired World Medical for consideration of $70.8 and
immediately expensed $45.8 of the purchase price upon consummation of the
acquisition for purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use. The value assigned
to purchased in-process technology was based on a valuation prepared by an
independent third-party appraisal company and was determined by identifying
research projects in areas for which technological feasibility had not been
established, including the Talent System and two smaller programs. The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products and estimating the resulting net
cash flows back to their present value. The discount rate included a factor that
takes into account the uncertainty surrounding the successful development of the
purchased in-process technology. The Talent System is currently sold in Europe
and it is in U.S. clinical trials.
In October of 1998, AVE acquired Bard cath lab for $610.7 and immediately
expensed $95.3 of the purchase price upon consummation of the acquisition for
purchased in-process technology that had not yet reached technological
feasibility and had no alternative use. The value assigned to purchased
in-process technology was based on a valuation prepared by an independent
third-party appraisal company and was determined by identifying research
projects in areas for which technological feasibility had not been established,
including a rapid exchange perfusion catheter, a stent development program and
eight other minor product categories. The value was determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows back to their present value.
The discount rate included a factor that takes into account the uncertainty
surrounding the successful development of the purchased in-process technology.
In November 1999, the Company
35
<PAGE>
introduced its S670 rapid exchange perfusion coronary stent system in the U.S
and in May 2000, the Company launched the S660 With Discrete Technology coronary
stent system for smaller vessels using technology from the acquisition of Bard
cath lab. In May 2000, the Company launched the BeStent 2 coronary stent
delivery system in Europe, utilizing some of the technology acquired from Bard
cath lab. The BeStent 2 is in U.S. clinical trials awaiting approval from the
Food and Drug Administration (FDA).
In April 1999, the Company acquired certain advanced catheter delivery
technology from Micro Motion and immediately expensed $9.8 for the purchase of
in-process research and development. In addition, during fiscal 1999 Xomed wrote
off approximately $1.1 of the $13.0 purchase price it paid for the acquisition
of Etalissements Boutmy, S.A. for purchased in-process research and development
technology. The Company anticipates that other products developed from the
acquired in-process research and development related to the acquisitions of
World Medical, Bard cath lab and Micro Motion will be released in fiscal 2001 or
2002.
The Company expects that all the acquired in-process research and development
will reach technological feasibility, but there can be no assurance that the
commercial viability of these products will actually be achieved. If commercial
viability were not achieved, the Company would look to other alternatives to
provide these solutions.
Facility reduction and asset write-down charges were estimated as the difference
between the carrying value of the asset and its fair value less cost to sell and
including estimated subleasing proceeds. Asset write-down charges included $29.0
of charges to cost of sales for discontinued product lines in the vascular and
cardiac surgery business. Nine of the ten facilities identified for closure have
been closed and the remaining facility was closed in June 2000. Facility
reductions costs were higher than originally estimated due to an inability to
sub-lease two facilities as originally planned. Estimated asset write-downs were
favorably impacted by higher than planned sales proceeds.
As part of these initiatives, the Company will terminate 2,950 employees, of
which 2,685 had been terminated at April 30, 2000. In addition, the Company
continues to pay severance to terminated employees, particularly in Europe.
During the fourth quarter fiscal 2000 as the restructuring initiatives had been
substantially completed, the Company identified and reversed $21.2 of
severance-related charges no longer deemed necessary, including a one-time
pension curtailment gain of $4.4 (see Note 10). Original estimates were
favorably impacted by foreign exchange rate fluctuations and voluntary
departures.
Fiscal 1999 charges included $41.4 for non-cancelable contractual commitments
and other non-recurring expenses, $8.0 related to payments made by Sofamor Danek
under two devel opment and licensing agreements and $1.8 related to certain
restructuring initiatives of Xomed.
Fiscal 1998 Initiatives. The Company recorded pre-tax charges totaling $205.3 in
fiscal 1998 related to management's initiatives to reduce global infrastructure
by streamlining certain manufacturing and administrative operations within the
United States, Europe, and Japan. These actions, which were substantially
completed by the end of fiscal 1999, included the closure of seven facilities,
the elimination of 1,000 employees, and the rationalization of certain vascular
inventories totaling $12.9 which were charged to cost of sales. Included in the
fiscal 1998 charges was a commitment made by the Company to contribute $36.0 to
the Medtronic Foundation (see Note 12). In fiscal 1999, the Company revised its
severance charge estimates by $5.0 as a result of higher than anticipated
termination costs in Europe.
--------------------------------------------------------------------------------
A summary of fiscal 1998 charges is follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Fiscal 1998 Utilized in Balance at Fiscal 1999 Utilized in Balance at Utilized in Balance at
Charges Fiscal 1998 April 30, 1998 Charges Fiscal 1999 April 30, 1999 Fiscal 2000 April 30, 2000
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facility
reductions $ 7.6 $ (3.6) $ 4.0 $ -- $ (3.4) $ 0.6 $ (0.6) $ --
Severance and
related costs 58.4 (13.6) 44.8 5.0 (36.7) 13.1 (13.1) --
Asset
write-downs 81.7 (81.7) -- -- -- -- -- --
Contractual
obligations 57.6 (17.6) 40.0 -- (40.0) -- -- --
------------------------------------------------------------------------------------------------------------------------------------
$205.3 $(116.5) $ 88.8 $ 5.0 $(80.1) $ 13.7 $(13.7) $ --
====================================================================================================================================
</TABLE>
36
<PAGE>
Pre-1998 Initiatives. During fiscal 1997, Sofamor Danek recorded a special
product liability litigation charge of $50.0. This charge was recorded in order
to recognize the anticipated costs associated with the defense and conclusion of
certain product liability cases in which Sofamor Danek is named a defendant (see
Note 12). During fiscal 1999, the Company recorded an additional $25.0 reserve
necessary to conclude outstanding litigation. The Company utilized $1.2 of these
charges in fiscal 1997, $11.6 in fiscal 1998, $21.7 in fiscal 1999 and $12.4 in
fiscal 2000.
In addition, during fiscal 1997, Xomed announced initiatives to combine certain
operations in connection with its acquisition of TreBay Medical Corporation and
recorded charges of $2.5 for termination benefits and $0.6 for other exit costs.
Xomed utilized $2.1 of these charges in fiscal 1997 and the remaining $1.0 in
fiscal 1998.
--------------------------------------------------------------------------------
A summary of all initiatives is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Balance at Fiscal Utilized Balance at Fiscal Utilized Balance at
April 30, 1998 in Fiscal April 30, 1999 in Fiscal April 30,
1997 Charges 1998 1998 Charges 1999 1999
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Transaction-
related costs $ -- $ -- $ -- $ -- $149.3 $(136.5) $ 12.8
Purchased
in-process R&D -- -- -- -- 152.0 (152.0) --
Facility reductions -- 7.6 (3.6) 4.0 10.9 (5.2) 9.7
Severance and
related costs 1.0 58.4 (14.6) 44.8 73.6 (44.8) 73.6
Asset write-downs -- 81.7 (81.7) -- 92.1 (92.1) --
Contractual
obligations -- 57.6 (17.6) 40.0 51.2 (50.5) 40.7
Litigation 48.8 -- (11.6) 37.2 25.0 (21.7) 40.5
------------------------------------------------------------------------------------------------------------------------------------
$ 49.8 $205.3 $(129.1) $126.0 $554.1 $(502.8) $177.3
====================================================================================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
------------------------------------------------------
Fiscal Utilized Changes Balance at
2000 in fiscal in April 30,
Charges 2000 Estimates 2000
================================================================================
<S> <C> <C> <C> <C>
Transaction-
related costs $ 14.7 $(27.5) $ -- $ --
Purchased
in-process R&D -- -- -- --
Facility reductions 0.9 (9.7) 3.8 4.7
Severance and
related costs 1.4 (41.7) (21.2) 12.1
Asset write-downs 6.2 1.1 (7.3) --
Contractual
obligations -- (33.8) (0.2) 6.7
Litigation 15.5 (27.9) -- 28.1
--------------------------------------------------------------------------------
$ 38.7 $(139.5) $(24.9) $ 51.6
================================================================================
</TABLE>
Reserve balances at April 30, 2000, include amounts necessary for remaining
severance payouts, the closure of one additional manufacturing facility and the
conversion of certain direct sales operations in Latin America to distributor
arrangements, as well as amounts necessary to conclude cases related to the
Company's spinal system for pedicle fixation, as described in Note 12.
4 FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, receivables, and short-term debt
approximate their carrying value due to their short maturities. The carrying
amounts and estimated fair values of the Company's other financial instruments
were as follows:
---------------------------------------------------------
April 30, 2000 1999
================================================================================
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------
ASSETS
Short-term investments $109.7 $109.7 $153.8 $153.8
Long-term investments 210.1 210.1 212.7 212.7
Forward exchange
contracts 71.5 71.5 -- --
LIABILITIES
Forward exchange
contracts -- -- 0.4 0.4
Long-term debt 14.1 14.3 23.4 23.8
================================================================================
The fair value of certain short-term and long-term investments was based on
their quoted market prices or those of similar investments. For long-term
investments that have no quoted market prices and are accounted for on a cost
basis, a reasonable estimate of fair value was made using available market and
financial information. The fair value of foreign currency instruments was
estimated based on quoted market prices at April 30, 2000 and 1999. The fair
value of long-term debt was based on the current rates offered to the Company
for debt of similar maturities. The estimates presented on long-term financial
instruments are not necessarily indicative of the amounts that would be realized
in a current market exchange.
Information regarding the Company's available-for-sale investments is as
follows:
-------------------------------------
April 30, 2000 1999 1998
================================================================================
Cost $144.0 $ 84.9 $66.9
Gross unrealized gains 6.2 33.2 32.7
Gross unrealized losses (16.3) (19.4) (2.0)
--------------------------------------------------------------------------------
Fair value $133.9 $ 98.7 $97.6
--------------------------------------------------------------------------------
Year ended April 30, 2000 1999 1998
================================================================================
Proceeds from sales $ 70.4 $ 38.4 $37.2
--------------------------------------------------------------------------------
Net realized gains $ 22.4 $ 36.7 $25.5
================================================================================
37
<PAGE>
Held-to-maturity investments were recorded at amortized cost of $185.9 and
$200.2 at April 30, 2000 and 1999, respectively, which approximated fair value.
Foreign Exchange Risk Management. The Company uses operational and economic
hedges as well as derivative financial instruments to manage the impact of
foreign exchange rate changes on earnings and cash flows. In order to reduce the
uncertainty of foreign exchange rate movements, the Company enters into various
contracts with major international financial institutions that change in value
as foreign exchange rates change. These contracts, which typically expire within
two years, are designed to hedge anticipated foreign currency transactions. Such
transactions, primarily export intercompany sales, occur throughout the year and
are probable but not firmly committed. The principal currencies hedged are the
Japanese yen and major European currencies.
Notional amounts of contracts outstanding at April 30, 2000 and 1999 were $537.2
and $361.0, respectively. Aggregate foreign currency transaction gains and
(losses) were $30.8, $(2.5) and $17.1 in fiscal years 2000, 1999 and 1998,
respectively. These gains and losses, which were offset by the gains and losses
on related assets, liabilities, and transactions being hedged, were recorded in
selling, general, and administrative expense.
Concentrations of Credit Risk. Financial instruments, which potentially subject
the Company to significant concentrations of credit risk, consist principally of
interest-bearing investments, foreign currency exchange contracts, and trade
accounts receivable.
The Company maintains cash and cash equivalents, investments, and certain other
financial instruments with various major financial institutions. The Company
performs periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across many
geographic areas. The Company monitors the creditworthiness of its customers to
which it grants credit terms in the normal course of business. However, a
significant amount of trade receivables are with national health care systems in
many countries. Although the Company does not currently foresee a credit risk
associated with these receivables, repayment is dependent upon the financial
stability of those countries' national economies.
5 FINANCING ARRANGEMENTS
Debt consisted of the following at April 30:
Average
Interest
Short-Term Debt Rate 2000 1999
================================================================================
Bank borrowings 3.0% $314.1 $193.8
Current portion of
long-term debt 2.8% 2.2 45.4
--------------------------------------------------------------------------------
Total short-term debt $316.3 $239.2
================================================================================
Average
Interest Maturity
Long-Term Debt Rate Date 2000 1999
================================================================================
Various notes 1.2% 2001-2004 $ 7.6 $ 16.3
Subordinated
convertible note 5.5% 2004 4.5 4.5
Capitalized lease
obligations 9.9% 2000-2009 2.0 2.6
--------------------------------------------------------------------------------
Total long-term debt $ 14.1 $ 23.4
================================================================================
The Company borrows funds on a short-term basis primarily as a hedge against
foreign currency rate fluctuations, and in connection with certain tax
initiatives. The Company has existing lines of credit of $876.1 with various
banks, of which $562.0 was unused at April 30, 2000. During fiscal 2000, the
Company entered into an agreement, which expires in 2003, to sell, at its
discretion, specific pools of its Japanese trade receivables. At April 30, the
Company had sold approximately $64.0 of its trade receivables to a financial
institution. The discount cost related to the sale was immaterial and was
recorded as interest expense in the accompanying consolidated financial
statements.
Maturities of long-term debt for the next five fiscal years are as follows:
2001, $2.2; 2002, $1.5; 2003, $3.8; 2004, $7.6; 2005, $0.3; thereafter, $0.9.
6 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% 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 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.
38
<PAGE>
A shareholder rights plan exists which provides for a dividend distribution of
one right to be attached to each share of common stock. The rights are currently
not exercisable or transferable apart from the common stock. The basic right
entitles the holder to purchase one thirty-two hundredth of a share of a new
series of participating preferred stock, which is substantially equivalent to
one share of common stock, at an exercise price of $18.75 per share. These
rights would become exercisable if a person or group acquires 15% or more of the
Company's common stock or announces a tender offer which would increase the
person's or group's beneficial ownership to 15% or more of the Company's common
stock, subject to certain exceptions. After the rights become exercisable, each
right entitles the holder (other than the 15% holder), instead, to purchase
common stock having a market price of two times the exercise price. If the
Company is acquired in a merger or other business combination transaction, each
exercisable right entitles the holder to purchase common stock of the acquiring
company or an affiliate having a market price of two times the exercise price of
the right. In certain events the Board of Directors may exchange rights for
common stock or equivalent securities having a market price equal to the
exercise price of the rights. Each right is redeemable at $0.0003125 any time
before a person or group triggers the 15% ownership threshold. The rights expire
on July 10, 2001.
7 EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (ESOP) for eligible U.S.
employees. In December 1989, the ESOP borrowed $40.0 from the Company and used
the proceeds to purchase 18,932,928 shares of the Company's common stock. The
Company makes contributions to the plan that are used, in part, by the ESOP to
make loan and interest payments. ESOP expense is determined by debt service
requirements, offset by dividends received. Compensation and interest expense
recognized were as follows:
------------------------------------
Year ended April 30, 2000 1999 1998
================================================================================
Interest expense $ 2.0 $ 2.4 $ 2.5
Dividends paid (2.8) (2.4) (2.0)
--------------------------------------------------------------------------------
Net interest expense (0.8) -- 0.5
Compensation expense 6.7 1.7 0.1
--------------------------------------------------------------------------------
Total expense $ 5.9 $ 1.7 $ 0.6
================================================================================
Shares of common stock acquired by the plan are allocated to each employee in
amounts based on Company performance and the employee's annual compensation.
Allocations of 2.70%, 2.59% and 2.50% of qualified compensation were made to
plan participants' accounts in fiscal years 2000, 1999 and 1998, respectively.
During fiscal 2000, and in connection with the Company's 50th Anniversary, the
Company made a special allocation to participant's accounts of approximately 1.2
million shares. Beginning in fiscal 1999, the Company match on the supplemental
retirement plan is made in the form of an annual allocation of Medtronic stock
to the participants' employee stock ownership plan account. The expense to the
Company related to this Company match is included in the table above.
At April 30, 2000 and 1999, cumulative allocated shares remaining in the trust
were 9,325,427 and 7,791,328, respectively, and unallocated shares were
8,239,154 and 10,335,434, respectively, of which 1,004,076 and 1,068,410,
respectively, were committed-to-be allocated. Unallocated shares are released
based on the ratio of current debt service to total remaining principal and
interest. The loan from the Company to the ESOP is repayable over 20 years,
ending on April 30, 2010. Interest is payable annually at a rate of 9.0%. The
receivable from the ESOP is recorded as a reduction of the Company's
shareholders' equity, and allocated and unallocated shares of the ESOP are
treated as outstanding common stock in the computation of earnings per share.
8 STOCK PURCHASE AND AWARD PLANS
1994 Stock Award Plan. The 1994 stock award plan provides for the grant of
nonqualified and incentive stock options, stock appreciation rights, performance
shares, restricted stock and other stock-based awards. There were 7.6 million
shares available under this plan for future grants at April 30, 2000. A proposal
has been submitted to the Company's shareholders to authorize in August 2000 an
additional 58 million shares under this plan.
Under the provisions of the 1994 stock award plan, nonqualified stock options
and other stock awards are granted to officers and employees at prices not less
than fair market value at the date of grant.
In fiscal 1998, the Company adopted a new stock compensation plan for outside
directors which replaces the provisions in the 1994 stock award plan relating to
awards to outside directors. The table below includes awards granted under the
new plan, which at April 30, 2000 had 2.7 million shares available for future
grants.
39
<PAGE>
A summary of nonqualified option transactions is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
2000 1999 1998
=======================================================================================================
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 24,149,624 $19.91 21,678,130 $13.97 24,154,200 $ 9.25
Granted 14,425,433 31.42 7,331,168 22.20 5,129,266 16.81
Exercised 3,278,166 9.88 4,134,732 7.45 7,224,004 5.53
Canceled 1,379,624 8.29 724,942 7.83 381,332 5.92
-------------------------------------------------------------------------------------------------------
Outstanding at April 30 33,917,267 $24.77 24,149,624 $19.91 21,678,130 $13.97
-------------------------------------------------------------------------------------------------------
Exercisable at April 30 17,194,774 $18.83 14,568,708 $17.93 13,443,644 $10.65
=======================================================================================================
</TABLE>
Stock options assumed as a result of mergers and acquisitions in fiscal years
1996, 1997, 1999 and 2000 remain outstanding, although no additional grants will
be made under these plans. A summary of fiscal 2000 transactions for stock
options assumed as a result of the mergers and acquisitions is as follows:
-----------------------------
Wtd. Avg.
Options Exercise Price
================================================================================
Outstanding at May 1, 1999 25,052,890 $14.73
Additional shares assumed 2,956,384 11.95
Exercised 15,414,684 10.23
Canceled 868,430 16.83
--------------------------------------------------------------------------------
Outstanding at April 30, 2000 11,726,160 $15.49
--------------------------------------------------------------------------------
Exercisable at April 30, 2000 9,281,399 $15.80
================================================================================
A summary of stock options outstanding as of April 30, 2000, including options
assumed as a result of acquisitions, is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------
Wtd. Avg.
Remaining
Range of Wtd. Avg. Contractual Wtd. Avg.
Exercise Prices Options Exercise Price Life(in years) Options Exercise Price
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01-10.00 10,141,825 $ 5.52 4.72 9,095,065 $ 5.56
10.01-20.00 8,297,910 15.52 6.86 7,239,665 15.42
20.01-30.00 9,166,003 24.09 7.78 5,391,680 24.47
30.01-40.00 17,631,672 33.80 8.29 4,711,356 34.30
40.01-52.69 406,017 47.53 9.00 38,407 48.73
------------------------------------------------------------------------------------------
$ 0.01-52.69 45,643,427 $22.37 6.63 26,476,173 $17.29
==========================================================================================
</TABLE>
Nonqualified options are normally exercisable beginning one year from the date
of grant in cumulative yearly amounts of 25 percent of the shares under option
and generally have a contractual option term of 10 years. However, certain
nonqualified options granted are exercisable immediately.
Restricted stock, performance shares and other stock awards are dependent upon
continued employment and, in the case of performance shares, achievement of
certain performance objectives. These awards are expensed over their vesting
period, ranging from three to eight years. Total expense recognized for
restricted stock, performance share and other stock awards was $5.2, $8.2 and
$12.3 in fiscal years 2000, 1999 and 1998, respectively.
40
<PAGE>
If the Company had elected to recognize compensation expense for its stock-based
compensation plans based on the fair values at the grant dates consistent with
the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," net income and earnings per share would have been reported as the
following pro forma amounts:
-------------------------------
Year ended April 30, 2000 1999 1998
================================================================================
Net Earnings As reported $1,098.5 $ 476.3 $ 594.6
Pro forma 1,023.4 437.5 555.5
--------------------------------------------------------------------------------
Basic Earnings Per Share As reported $ 0.92 $ 0.40 $ 0.52
Pro forma 0.86 0.37 0.48
================================================================================
The fair value of options granted, $16.58 and $11.72 for fiscal years 2000 and
1999, respectively, was estimated using the Black-Scholes option-pricing model
using the following weighted average assumptions:
Assumptions 2000 1999
================================================================================
Risk-free interest rate 6.09% 5.06%
Expected dividend yield 0.47% 0.43%
Expected volatility factor 38.1% 27.1%
Expected option term 7 years 7 years
================================================================================
Stock Purchase Plan. The stock purchase plan enables employees to contribute up
to 10% of their wages toward purchase of the Company's common stock at 85% of
the market value. Employees purchased 1,370,143 shares at $27.63 per share in
fiscal 2000. As of April 30, 2000, plan participants have had approximately
$28.3 withheld to purchase shares at a price which is 85% of the market value of
the Company's common stock on the first or last day of the plan year ending
October 31, 2000, whichever is less.
9 INCOME TAXES
The provision for income taxes is based on earnings before income taxes reported
for financial statement purposes. The components of earnings before income taxes
were:
---------------------------------------
Year ended April 30, 2000 1999 1998
================================================================================
United States $1,436.0 $ 945.4 $855.1
Non-U.S. 193.0 (110.7) 56.3
--------------------------------------------------------------------------------
Earnings before income taxes $1,629.0 $ 834.7 $911.4
================================================================================
The provision for income taxes consisted of:
---------------------------------------
Year ended April 30, 2000 1999 1998
================================================================================
Taxes currently payable:
U.S. federal $188.9 $243.3 $201.4
U.S. state and other 39.1 39.7 41.7
Non-U.S. 60.7 45.3 43.1
--------------------------------------------------------------------------------
Total currently payable 288.7 328.3 286.2
Deferred tax (benefit) expense:
U.S. federal 94.7 (42.0) (26.3)
U.S. state and other (2.5) 2.6 3.0
Non-U.S. (14.1) 7.0 1.2
--------------------------------------------------------------------------------
Net deferred tax (benefit) expense 78.1 (32.4) (22.1)
Tax expense credited directly to
shareholders' equity 163.7 62.5 52.7
--------------------------------------------------------------------------------
Total provision $530.5 $358.4 $316.8
================================================================================
Deferred tax assets (liabilities) were comprised of the following:
--------------------------------
Year ended April 30, 2000 1999
================================================================================
Deferred tax assets:
Inventory (Intercompany profit in inventory
and excess of tax over book valuation) $108.3 $ 87.6
Accrued liabilities 72.4 141.8
Other 61.8 68.2
--------------------------------------------------------------------------------
Total deferred tax assets 242.5 297.6
Deferred tax liabilities:
Intangible assets (19.3) (9.2)
Undistributed earnings of subsidiaries (2.0) (3.4)
Accumulated depreciation (15.4) (17.1)
Unrealized losses on investments 3.5 (4.8)
Other (64.0) (37.9)
--------------------------------------------------------------------------------
Total deferred tax liabilities (97.2) (72.4)
--------------------------------------------------------------------------------
Net deferred tax assets $145.3 225.2
================================================================================
The Company's effective income tax rate varied from the U.S.
federal statutory tax rate as follows:
Year ended April 30, 2000 1999 1998
================================================================================
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
U.S. state taxes, net of federal
tax benefit 1.4 1.9 1.9
Tax benefits from operations in
Puerto Rico (1.1) (2.4) (1.9)
Non-U.S. taxes (1.6) 5.5 2.3
Non-recurring charges (0.1) 7.7 --
Other, net (1.0) (4.8) (2.5)
--------------------------------------------------------------------------------
Effective tax rate 32.6% 42.9% 34.8%
================================================================================
41
<PAGE>
Taxes are not provided on undistributed earnings of non-U.S. subsidiaries
because such earnings are either permanently reinvested or do not exceed
available foreign tax credits. Current U.S. tax regulations provide that
earnings of the Company's manufacturing subsidiaries in Puerto Rico may be
repatriated tax free; however, the Commonwealth of Puerto Rico will assess a tax
of up to 7% in the event of repatriation of earnings prior to liquidation. The
Company has provided for the anticipated tax attributable to earnings intended
for dividend repatriation. At April 30, 2000, earnings permanently reinvested in
subsidiaries outside the United States were $159.1.
At April 30, 2000, approximately $42.3 of non-U.S. tax losses were available for
carryforward. These carryforwards are subject to full valuation allowances and
generally expire within a period of one to five years.
10 RETIREMENT BENEFIT PLANS
The Company has various retirement benefit plans covering substantially all U.S.
employees and many employees outside the United States. The cost of these plans
was $32.4 in fiscal 2000, $23.1 in fiscal 1999 and $36.3 in fiscal 1998.
In the United States, the Company maintains a qualified pension plan designed to
provide guaranteed minimum retirement benefits to substantially all U.S.
employees. Pension coverage for non-U.S. employees of the Company is provided,
to the extent deemed appropriate, through separate plans. In addition, U.S. and
non-U.S. employees of the Company are also eligible to receive specified Company
paid health care and life insurance benefits.
The following table sets forth the change in benefit obligation and change in
plan assets for the Company's defined benefit retirement plans and other
post-retirement plans:
----------------------------------------------
Pension Benefits Other Benefits
================================================================================
2000 1999 2000 1999
--------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of fiscal year $ 233.6 $ 189.2 $ 45.0 $ 37.4
Service cost 21.8 16.5 5.1 0.9
Interest cost 15.4 12.7 3.2 2.5
Actuarial (gain) loss (21.6) 21.1 (3.6) 4.7
Curtailment gain (see Note 3) (4.4) -- -- --
Benefits paid (6.8) (5.9) (0.5) (0.5)
--------------------------------------------------------------------------------
Benefit obligation at April 30 $ 238.0 $ 233.6 $ 49.2 $ 45.0
================================================================================
-------------------------------------------
Pension Benefits Other Benefits
================================================================================
2000 1999 2000 1999
-------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $ 271.5 $ 214.1 $ 25.1 $ 18.0
Actual return on plan assets 25.6 49.6 2.5 3.3
Employer contributions 0.1 13.3 -- 4.1
Benefits paid (6.0) (5.5) (1.0) (0.3)
-------------------------------------------------------------------------------
Fair value of plan assets at
April 30 $ 291.2 $ 271.5 $ 26.6 $ 25.1
-------------------------------------------------------------------------------
Funded status $ 53.2 $ 37.9 $ (22.6) $ (19.9)
Unrecognized net actuarial
(loss) gain (40.2) (19.7) -- 3.2
Unrecognized prior
service cost (3.5) (0.3) -- --
-------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 9.5 $ 17.9 $ (22.6) $ (16.7)
===============================================================================
Net periodic benefit cost of plans included the following components:
-------------------------------------------
Pension Benefits Other Benefits
===============================================================================
Year ended April 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------
Service cost $ 21.8 $ 16.5 $ 5.1 $ 0.9
Interest cost 15.4 12.7 3.2 2.5
Expected return on
plan assets (21.8) (15.6) (2.4) (1.6)
Amortization of prior
service cost 0.3 0.2 -- --
-------------------------------------------------------------------------------
Net periodic benefit cost $ 15.7 $ 13.8 $ 5.9 $ 1.8
===============================================================================
Plan assets for the U.S. plan consist of a diversified portfolio of fixed-income
investments, debt and equity securities, and cash equivalents. Plan assets
include investments in the Company's common stock of $66.5 and $46.0 at April
30, 2000 and 1999, respectively.
Outside the U.S., the funding of pension plans is not a common practice in
certain countries as funding provides no economic benefit. Consequently, the
Company has certain non-U.S. plans that are unfunded. It is the Company's policy
to fund retirement costs within the limits of allowable tax deductions.
The actuarial assumptions were as follows:
------------------------------------------
Pension Benefits
================================================================================
April 30, 2000 1999
--------------------------------------------------------------------------------
Discount rate 3.5%-7.75% 3.5%-7.0%
Expected return on plan assets 4.0%-9.50% 7.0%-9.25%
Rate of compensation increase 3.0%-6.5% 3.0%-6.5%
Health care cost trend rate N/A N/A
================================================================================
42
<PAGE>
------------------------------------------
Other Benefits
================================================================================
April 30, 2000 1999
--------------------------------------------------------------------------------
Discount rate 7.75% 7.00%
Expected return on plan assets 9.50% 9.25%
Rate of compensation increase N/A N/A
Health care cost trend rate 8.00% 8.00%
================================================================================
In addition to the benefits provided under the qualified pension plan,
retirement benefits associated with wages in excess of the IRS allowable wages
are provided to certain employees under nonqualified plans. The net periodic
cost of nonqualified pension plans was $4.2 and $2.7 in fiscal 2000 and 1999,
respectively. The unfunded accrued pension cost related to these nonqualified
plans totaled $24.3 at April 30, 2000.
The health care cost trend rate is assumed to decrease gradually to 6% by fiscal
2002. Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
----------------------------------------------------
One-Percentage- One-Percentage-
Point Increase Point Decrease
--------------------------------------------------------------------------------
Effect on postretirement
benefit cost in fiscal 2000 $1.1 $(0.9)
Effect on postretirement
benefit obligation as of
April 30, 2000 5.1 (4.3)
--------------------------------------------------------------------------------
Defined Contribution Plans. The Company has defined contribution savings plans
that cover substantially all U.S. employees and certain non-U.S. employees. The
general purpose of these plans is to provide additional financial security
during retirement by providing employees with an incentive to make regular
savings. Beginning in fiscal 1999, the Company match on the supplemental
retirement plan for U.S. employees is made in the form of an annual allocation
of Medtronic stock to the participants ESOP account (see Note 7). Company
contributions to the plans are based on employee contributions and Company
performance. Fiscal expense under these plans was $3.4 in fiscal 2000, $3.2 in
fiscal 1999 and $16.9 in fiscal 1998.
11 LEASES
The Company leases office, manufacturing and research facilities, and
warehouses, as well as transportation, data processing, and other equipment
under capital and operating leases. A substantial number of these leases contain
options that allow the Company to renew at the then fair rental value.
Future minimum payments under capitalized leases and non-cancelable operating
leases at April 30, 2000 were:
----------------------------------------
Capitalized Operating
Leases Leases
--------------------------------------------------------------------------------
2001 $ 0.6 $30.5
2002 0.5 23.4
2003 0.4 16.5
2004 0.3 11.1
2005 0.3 8.4
2006 and thereafter 1.0 4.3
--------------------------------------------------------------------------------
Total minimum lease payments $ 3.1 $94.2
Less amounts representing interest (0.7)
--------------------------------------------------------------------------------
Present value of net minimum
lease payments $ 2.4
--------------------------------------------------------------------------------
Rent expense for all operating leases was $49.3, $47.1 and $40.6 in fiscal years
2000, 1999 and 1998, respectively.
12 COMMITMENTS AND CONTINGENCIES
The Medtronic Foundation (Foundation), funded entirely by the Company, was
established to maintain good corporate citizenship in its communities. In fiscal
1998, the Company made a commitment to contribute $36.0. This commitment is
expected to fund the Foundation through the end of fiscal 2001. In fiscal years
1999 and 1998, the Company funded this commitment through the donation of equity
securities with fair values of $25.5 and $10.5, respectively. Commitments to the
Foundation are expensed when authorized and approved by the Company's Board of
Directors.
In October 1997, Cordis Corporation ("Cordis"), a subsidiary of Johnson &
Johnson, filed suit against AVE, which was acquired by the Company in January
1999, in federal court in the District Court of Delaware alleging that AVE's
modular stents infringe certain patents for which Cordis claims to be the
exclusive licensee. Boston Scientific Corporation is also a defendant in this
suit. The complaint seeks injunctive relief and damages from all defendants. The
trial is currently scheduled to begin in November 2000.
In December 1999, Advanced Cardiovascular Systems, Inc. ("ACS"), a subsidiary of
Guidant Corporation, sued Medtronic and AVE in federal court in the Northern
District Court of California alleging that the S670 rapid exchange perfusion
stent delivery system infringes a patent held by ACS. The complaint seeks
injunctive relief and monetary damages. ACS filed a demand for arbitration with
the American Arbitration Association in Chicago simultaneously with the lawsuit.
AVE has filed a counterclaim denying infringement based on its license to the
patent for perfusion catheters as part of the assets acquired from C.R. Bard in
1998 and has asserted that the license agreement requires disputes to be
43
<PAGE>
resolved through arbitration. The parties have agreed to arbitrate all claims
against AVE. Litigation against Medtronic has been stayed pending the
arbitration decision. Discovery is proceeding and a decision is expected in the
first half of 2001.
In March 2000, Boston Scientific Corporation sued AVE in federal court in the
Northern District of California alleging that the S670 rapid exchange perfusion
stent delivery system infringes a patent held by Boston Scientific. The
complaint seeks injunctive relief and monetary damages. AVE has filed a
counterclaim denying infringement based on its license to the patent for
perfusion catheters as part of the assets acquired from C.R. Bard in 1998 and
has asserted that the license agreement requires disputes to be resolved through
arbitration. A hearing on the motion to compel arbitration is scheduled for July
2000.
In December 1997, ACS sued AVE in federal court in the Northern District of
California alleging that AVE's modular stents infringe certain patents held by
ACS and is seeking injunctive relief and monetary damages. AVE denied
infringement and in February 1998 AVE sued ACS in federal court in the District
Court of Delaware alleging infringement of certain of its stent patents, for
which AVE is seeking injunctive relief and monetary damages. The cases have been
consolidated in Delaware with a trial date set for April 2001.
In 1993, AcroMed Corporation commenced a patent infringement lawsuit against
Sofamor Danek, which was acquired by the Company in January 1999, in the 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
infringed these two patents and an injunction was issued by the court in
December 1999. The court also imposed damages, including pre-judgment interest,
in the amount of $48.0. The Company has appealed the judgment to the Court of
Appeals for the Federal Circuit, Washington, D.C. and believes that meritorious
bases exist for its reversal. 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 Company believes that it has meritorious defenses against the above
infringement claims and intends to vigorously contest them. While it is not
possible to predict the outcome of these actions, the Company believes that
costs associated with them will not have a material adverse impact on the
Company's financial position or liquidity, but could possibly be material to the
consolidated results of operations of any one period.
In 1997 and 1999, the Company sued Guidant Corporation and Boston Scientific
Corp., respectively, in U.S. District Court in Minneapolis claiming that
Guidant's ACS RX Multi-Linkt coronary stent and Boston Scientific's Nirt stent
infringed the Company's Wiktort stent patent. Following a patent claims
construction ruling in late 1999 in favor of Guidant and Boston Scientific, the
Company consented to entry of judgment and has filed an appeal with the Court of
Appeals for the Federal Circuit in Washington, D.C.
Beginning in 1994, Sofamor Danek was named as a defendant in approximately 3,200
product liability lawsuits brought in various federal and state courts around
the country. The lawsuits allege the plaintiffs were injured by spinal implants
manufactured by Sofamor Danek and other manufacturers. All efforts to obtain
class certification have been denied or subsequently withdrawn. In essence, the
plaintiffs claim that they have suffered a variety of injuries resulting from
use of a spinal system for pedicle fixation and that the Company and other
manufacturers have conspired to promote such implant systems in violation of
law. As of April 30, 2000, a substantial number of the suits have been dismissed
or resolved in favor of the Company. The remaining cases are in discovery,
subject to motions for summary judgment or progressing to trial. The Company
believes these claims are without merit and will continue to defend against them
vigorously.
In 1996, two former shareholders of Endovascular Support Systems, Inc. ("ESS")
filed a lawsuit in Dallas District Court for the State of Texas against AVE and
several former officers, directors, and shareholders of AVE. The lawsuit alleges
that AVE's acquisition of ESS assets was based on fraud and breach of fiduciary
duty and that plaintiffs were given insufficient value when they exchanged their
stock in ESS for AVE stock in several transactions that occurred from 1993 to
1995. AVE has asserted counterclaims including breach of contract, breach of
covenant of good faith and fair dealing, business disparagement and fraud, and
has agreed to indemnify the individual defendants. The Court has ruled that the
individual defendants owed a fiduciary duty to plaintiffs. The Company believes
the defendants have meritorious defenses and counterclaims against the
plaintiffs and will continue to defend the actions vigorously.
44
<PAGE>
13 QUARTERLY FINANCIAL DATA
(UNAUDITED, IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
===================================================================================================================
<S> <C> <C> <C> <C> <C>
NET SALES
2000 $1,133.2 $1,190.3 $1,258.8 $1,432.3 $5,014.6
1999 1,014.6 1,006.4 1,064.8 1,146.6 4,232.4
GROSS PROFIT
2000 846.8 877.0 921.2 1,050.0 3,695.0
1999--Before charges 757.2 738.4 777.8 847.2 3,120.6
--After charges 757.2 738.4 760.0 836.0 3,091.6
NET EARNINGS (LOSS)
2000--Before charges 252.4 260.6 275.3 321.7 1,110.0
--After charges 252.4 260.6 263.2 322.3 1,098.5
1999--Before charges 235.9 217.1 215.9 246.2 915.1
--After charges 230.6 119.2 (34.1) 160.6 476.3
DILUTED EARNINGS (LOSS) PER SHARE
2000--Before charges 0.21 0.21 0.23 0.26 0.91
--After charges 0.21 0.21 0.22 0.26 0.90
1999--Before charges 0.20 0.18 0.18 0.20 0.76
--After charges 0.19 0.10 (0.03) 0.13 0.39
===================================================================================================================
</TABLE>
Quarterly and annual earnings per share are calculated independently based on
the weighted average number of shares outstanding during the period. As
discussed in Note 3, the Company recorded pre-tax non-recurring charges totaling
$13.8 and $554.1 during fiscal 2000 and 1999, respectively.
14 SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates its business in four operating business units, which are
aggregated into one reportable segment--the manufacture and sale of device-based
medical therapies. Each of the Company's businesses has similar economic
characteristics, technology, manufacturing processes, customers, distribution
and marketing strategies, a similar regulatory environment, and shared
infrastructures. Net sales by business were as follows:
-----------------------------
Year ended April 30, 2000 1999 1998
================================================================================
Cardiac Rhythm Management $2,504.7 $2,121.6 $1,881.4
Neurological, Spinal and ENT 1,252.4 998.0 760.4
Vascular 790.8 718.8 403.0
Cardiac Surgery 466.7 394.0 378.3
--------------------------------------------------------------------------------
$5,014.6 $4,232.4 $3,423.1
================================================================================
Geographic Information. Net sales and long-lived assets by major geographical
area are summarized below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
United States Europe Asia Pacific Other Foreign Eliminations Consolidated
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues from external customers $3,278.4 $1,050.2 $521.2 $164.8 $ -- $5,014.6
Intergeographic sales 736.8 159.1 -- 17.4 (913.3) --
------------------------------------------------------------------------------------------------------------------
Total sales $4,015.2 $1,209.3 $521.2 $182.2 $(913.3) $5,014.6
------------------------------------------------------------------------------------------------------------------
Long-lived assets $2,385.9 $ 206.2 $ 46.8 $ 17.1 $ -- $2,656.0
==================================================================================================================
1999
Revenues from external customers $2,750.0 $ 940.0 $408.3 $134.1 $ -- $4,232.4
Intergeographic sales 511.8 96.7 -- 11.4 (619.9) --
------------------------------------------------------------------------------------------------------------------
Total sales $3,261.8 $1,036.7 $408.3 $145.5 $(619.9) $4,232.4
------------------------------------------------------------------------------------------------------------------
Long-lived assets $2,278.1 $ 220.1 $ 45.5 $ 19.9 $ -- $2,563.6
------------------------------------------------------------------------------------------------------------------
1998
Revenues from external customers $2,153.9 $ 796.4 $367.1 $105.7 $ -- $3,423.1
Intergeographic sales 308.4 146.0 -- 13.8 (468.2) --
------------------------------------------------------------------------------------------------------------------
Total sales $2,462.3 $ 942.4 $367.1 $119.5 $(468.2) $3,423.1
------------------------------------------------------------------------------------------------------------------
Long-lived assets $1,331.5 $ 189.2 $ 30.1 $ 19.4 $ -- $1,570.2
==================================================================================================================
</TABLE>
Sales between geographic areas are made at prices that would approximate
transfers to unaffiliated distributors. No single customer represents over 10%
of the Company's consolidated sales.
45
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
----------------------------------------------------------------------
2000 1999 1998 1997 1996
===================================================================================================================================
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS FOR THE YEAR:
Net sales $ 5,014.6 $ 4,232.4 $ 3,423.1 $ 3,010.3 $ 2,570.0
Cost of products sold 1,319.6 1,140.8 906.8 786.7 715.2
Gross margin percentage 73.7% 73.0% 73.5% 73.9% 72.2%
Research and development expense 479.7 434.2 372.2 329.2 283.6
Selling, general, and administrative expense 1,601.7* 1,845.5* 1,244.8* 1,029.2* 846.9
Interest expense 13.6 29.1 15.5 17.6 13.9
Interest income (29.0) (51.9) (27.6) (38.8) (31.6)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,629.0 834.7 911.4 886.4 742.0
Provision for income taxes 530.5 358.4 316.8 304.4 254.0
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,098.5 $ 476.3 $ 594.6 $ 582.0 $ 488.0
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings as a percent of net sales 21.9% 11.3% 17.4% 19.3% 19.0%
Net earnings as a percent of average shareholders' equity 26.6% 14.6% 24.2% 27.8% 27.7%
-----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:
Basic earnings per share $ 0.92 $ 0.40 $ 0.52 $ 0.50 $ 0.47
Earnings per share assuming dilution 0.90 0.39 0.51 0.49 0.46
Cash dividends declared 0.16 0.13 0.11 0.10 0.07
FINANCIAL POSITION AT APRIL 30:
Working capital $ 2,021.9 $ 1,438.6 $ 1,400.9 $ 939.9 $ 1,000.8
Current ratio 3.0:1 2.4:1 2.8:1 2.4:1 2.6:1
Property, plant, and equipment, net 946.5 772.3 642.4 574.4 449.7
Total assets 5,669.4 5,008.4 3,745.0 3,082.1 2,881.1
Long-term debt 14.1 23.4 61.2 51.4 68.4
Long-term debt as a percent of shareholders' equity 0.3% 0.6% 2.2% 2.4% 3.4%
Shareholders' equity 4,491.5 3,770.8 2,738.9 2,167.0 2,026.0
Shareholders' equity per common share 3.75 3.16 2.35 1.88 3.55
ADDITIONAL INFORMATION:
Additions to property, plant, and equipment $ 342.1 $ 234.9 $ 204.7 $ 207.9 $ 190.5
Full-time employees at year-end 21,490 20,058 17,015 14,709 13,119
Full-time equivalent employees at year-end 24,890 22,518 18,503 16,706 14,952
===================================================================================================================================
</TABLE>
*CERTAIN COSTS AND INCOME SEPARATELY DISCLOSED ON THE STATEMENT OF CONSOLIDATED
EARNINGS ARE INCLUDED IN SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE.
Note: Results include the impact of $13.8, $554.1, $205.3 and $55.5 pre-tax
non-recurring charges taken during fiscal 2000, 1999, 1998 and 1997
(see Note 3).
PRICE RANGE OF MEDTRONIC STOCK
-------------------------------------------------------------------
Fiscal Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------------------------------------------------------------------
2000 High $39.41 $40.72 $46.25 $57.19
2000 Low 31.31 32.25 33.56 45.00
1999 High 34.91 33.07 39.85 44.07
1999 Low 24.44 25.19 31.75 33.10
Prices are closing quotations. On July 7, 2000 there were 42,500 holders of
record of the Company's common stock. The regular quarterly cash dividend was
4.0 cents per share for 2000 and 3.25 cents per share for 1999.
46
