UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 27, 2000
Commission File Number 1-7707
MEDTRONIC, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0793183
(State of incorporation (I.R.S. Employer
Identification No.)
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
(Address of principal executive offices)
Telephone number: (612) 514-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Shares of common stock, $.10 par value, outstanding on November 24, 2000:
1,201,480,368
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MEDTRONIC, INC.
STATEMENT OF CONSOLIDATED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------- -------------------------
Oct. 27, Oct. 29, Oct. 27, Oct. 29,
2000 1999 2000 1999
----------- ----------- ----------- -----------
( in millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 1,361.4 $ 1,190.3 $ 2,671.3 $ 2,323.5
Costs and expenses:
Cost of products sold 366.8 313.3 697.3 599.7
Research and development
expense 143.1 117.2 279.0 231.2
Selling, general, and
administrative expense 400.8 377.6 810.9 739.9
Litigation judgment -- -- 16.9 --
Interest expense 4.3 3.6 7.6 6.8
Interest income (18.4) (6.7) (32.8) (13.3)
----------- ----------- ----------- -----------
Total costs and expenses 896.6 805.0 1,778.9 1,564.3
----------- ----------- ----------- -----------
Earnings before income taxes 464.8 385.3 892.4 759.2
Provision for income taxes 150.7 124.7 289.3 246.2
----------- ----------- ----------- -----------
Net earnings $ 314.1 $ 260.6 $ 603.1 $ 513.0
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.26 $ 0.22 $ 0.50 $ 0.43
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.21 $ 0.49 $ 0.42
=========== =========== =========== ===========
Weighted average shares
Outstanding:
Basic 1,199.7 1,194.1 1,199.0 1,193.8
Diluted 1,225.6 1,219.5 1,225.3 1,220.2
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Oct. 27, April 30,
2000 2000
---------- ----------
ASSETS (in millions)
------
Current assets:
Cash and cash equivalents $ 587.5 $ 448.4
Short-term investments 236.1 109.7
Accounts receivable, less allowance for
doubtful accounts of $30.0 and $30.2 1,163.8 1,210.1
Inventories 754.8 690.6
Deferred tax assets, net 158.8 160.5
Prepaid expenses and other current assets 311.3 394.1
---------- ----------
Total current assets 3,212.3 3,013.4
Property, Plant, and Equipment 1,818.8 1,677.6
Accumulated depreciation (799.3) (731.1)
---------- ----------
Net Property, Plant, and Equipment 1,019.5 946.5
Goodwill and other intangible assets, net 1,301.0 1,361.4
Long-term investments 483.6 210.1
Other assets 155.1 138.0
---------- ----------
Total assets $ 6,171.5 $ 5,669.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 214.8 $ 316.3
Accounts payable 210.7 200.0
Accrued expenses 594.8 475.2
---------- ----------
Total current liabilities 1,020.3 991.5
Long-term debt 15.0 14.1
Deferred tax liabilities, net 15.4 15.2
Other long-term liabilities 156.7 157.1
---------- ----------
Total liabilities 1,207.4 1,177.9
Shareholders' equity:
Common stock--par value $.10 120.0 119.8
Retained earnings 5,050.6 4,543.1
Accumulated other non-owner changes in equity (187.5) (151.9)
---------- ----------
4,983.1 4,511.0
Receivable from Employee Stock Ownership Plan (19.0) (19.5)
---------- ----------
Total shareholders' equity 4,964.1 4,491.5
---------- ----------
Total liabilities and shareholders' equity $ 6,171.5 $ 5,669.4
========== ==========
See accompanying notes to condensed consolidated financial statements
<PAGE>
MEDTRONIC, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six months ended
-------------------
Oct. 27, Oct. 29,
2000 1999
-------- --------
(in millions)
OPERATING ACTIVITIES
Net earnings $ 603.1 $ 513.0
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 142.9 143.0
Deferred income taxes .4 29.5
Change in operating assets and liabilities:
Accounts receivable 9.8 (173.6)
Inventories (57.6) (144.3)
Accounts payable and accrued liabilities 154.2 202.3
Changes in other operating assets and
liabilities 61.9 (71.7)
-------- --------
Net cash provided by operating activities 914.7 498.2
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (181.3) (169.5)
Purchases of marketable securities (475.0) (125.0)
Sales and maturities of marketable securities 118.0 143.1
Other investing activities, net (51.9) (86.5)
-------- --------
Net cash used in investing activities (590.2) (237.9)
FINANCING ACTIVITIES:
Decrease in short-term borrowings, net (96.3) (34.7)
Increase (decrease)in long-term debt, net 1.6 (1.1)
Dividends to shareholders (119.9) (93.8)
Issuance of common stock 24.5 98.2
Repurchases of common stock -- (296.6)
Repayment of loan to ESOP 0.5 --
-------- --------
Net cash used in financing activities (189.6) (328.0)
Effect of exchange rate changes on cash and 4.2 (1.9)
cash equivalents -------- --------
Net change in cash and cash equivalents 139.1 (69.6)
Cash and cash equivalents at beginning of period 448.4 228.5
-------- --------
Cash and cash equivalents at end of period $ 587.5 $ 158.9
-------- --------
See accompanying notes to condensed consolidated financial statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of results of operations, financial position,
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the Company's results for the periods presented.
Operating results for interim periods are not necessarily indicative of results
that may be expected for the fiscal year as a whole. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures at
the date of the financial statements and during the reporting period. Actual
results could differ from these estimates. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended April 30, 2000.
Note 2 - Acquisitions
---------------------
On October 19, 2000, Medtronic, Inc. and PercuSurge Inc. (PercuSurge) announced
the signing of an agreement under which the Company will acquire PercuSurge in a
transaction valued at approximately $225 million. The transaction calls for
PercuSurge shareholders to receive approximately $4.42 in Medtronic, Inc. common
stock for each share of PercuSurge they now hold. PercuSurge has approximately
52 million shares outstanding on a diluted basis. It is anticipated that the
transaction will close in the third quarter of the current fiscal year and will
be accounted for as a pooling of interests. PercuSurge is a leading developer of
interventional embolic protection devices and currently markets a patented
system outside the United States that helps remove embolic material that often
is dislodged during the treatment of arteriosclerosis.
Note 3 - Other Non-Owner Changes in Equity
------------------------------------------
In addition to net earnings, other non-owner changes in equity include, as
applicable, unrealized gains and losses on available for sale securities,
foreign currency translation adjustments and minimum pension liability. For the
six-month periods ended October 27, 2000 and October 29, 1999, the Company's
other non-owner changes in equity were $567.5 million and $504.9 million,
respectively.
Note 4 - Inventories
--------------------
Inventories consisted of the following (amounts in millions):
<PAGE>
October 27, 2000 April 30, 2000
---------------- --------------
Finished goods $ 411.9 $ 374.4
Work in process 142.1 129.5
Raw Materials 200.8 186.7
------- -------
Total $ 754.8 $ 690.6
------- -------
Note 5 - Non-Recurring Charges
------------------------------
In the first quarter of fiscal 2001, the Company recorded a $16.9 million
pre-tax expense related to a litigation judgment. The judgment is protected by a
confidentiality agreement, is non-recurring, non-product related and pertains to
business matters that occurred in 1997 and 1998.
The Company announced initiatives to restructure its Latin America operations in
the fourth quarter of fiscal 2000 and its vascular, spinal surgery and cardiac
surgery operations in the third and fourth quarter of fiscal 1999. The
restructuring of the Latin America operations is expected to be completed in
fiscal 2001. Of the 78 employees identified for termination, substantially all
had been terminated as of October 27, 2000. The restructuring of the vascular,
spinal surgery and cardiac surgery operations was complete as of the end of the
first quarter of fiscal 2001.
Applications during the second quarter of fiscal 2001 against remaining accruals
were as follows (amounts in millions):
Balance at New Charges Balance at
Jul. 28, 2000 Charges Utilized Oct. 27, 2000
--------------------------------------------------------------------------------
Facility reductions $ 4.3 $ - $(3.0) $ 1.3
Severance and related costs 7.0 - (2.8) 4.2
Contractual obligations 5.2 - (0.9) 4.3
--------------------------------------------------------------------------------
Total restructuring-related
accruals 16.5 - (6.7) 9.8
Litigation 27.0 - (1.1) 25.9
--------------------------------------------------------------------------------
Total $ 43.5 $ - $(7.8) $ 35.7
In the area of facilities there are two minor items remaining related to the
restructuring of the cardiac surgery and vascular organizations: the sale of a
manufacturing facility and the cancellation of lease commitments for one
additional facility. In addition, the Company continues to pay severance costs
to terminated employees, primarily in Europe, in accordance with local statutory
requirements.
The Company also continues to incur costs to conclude cases related to the
Company's spinal system for pedicle fixation.
Note 6 - New Accounting Pronouncements
--------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was later
amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" and by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133" (collectively, SFAS
No. 133 or the Standard). The Standard will require that companies recognize all
derivatives on the balance sheet at fair value.
<PAGE>
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 will adopt the Standard on May
1, 2001 and is in the process of determining what effect the adoption of SFAS
No. 133 will have on the Company's results of operations, financial position or
cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which was
later amended by SAB No. 101A and SAB No. 101B. These SABs will be adopted by
the Company in the fourth quarter of the current fiscal year. The Company is in
the process of determining the effect of adoption of these SABs on its
consolidated financial statements and believes they will not have a material
impact on its results of operations, financial position or cash flows.
Note 7 - Segment and Geographic Information
-------------------------------------------
The Company operates its business in four operating segments, which are
aggregated into one reportable segment - the manufacture and sale of
device-based medical therapies. Each of the Company's operating segments has
similar economic characteristics, technology, manufacturing processes,
customers, distribution and marketing strategies, a similar regulatory
environment, and shared infrastructures. Net sales by operating segment were as
follows (in millions):
Three months ended Three months ended
October 27, 2000 October 29, 1999
------------------- ------------------
Cardiac Rhythm Management $ 669.8 $ 611.6
Neurological, Spinal and ENT 360.2 301.5
Vascular 215.4 164.3
Cardiac Surgery 116.0 112.9
-------- --------
$1,361.4 $1,190.3
Six months ended Six months ended
October 27, 2000 October 29, 1999
----------------- ------------------
Cardiac Rhythm Management $1,296.8 $1,195.3
Neurological, Spinal and ENT 698.7 580.8
Vascular 440.5 321.7
Cardiac Surgery 235.3 225.7
-------- --------
$2,671.3 $2,323.5
Geographic information:
<TABLE>
<CAPTION>
Three months ended
United Asia Other Elimi- Consoli-
October 27, 2000 States Europe Pacific Foreign nations dated
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 915.8 $ 224.1 $ 155.2 $ 66.3 $ -- $ 1,361.4
Intergeographic sales 173.0 65.9 -- 6.7 (245.6) --
---------------------------------------------------------------------------------------------------
Total sales $ 1,088.8 $ 290.0 $ 155.2 $ 73.0 $ (245.6) $ 1,361.4
---------------------------------------------------------------------------------------------------
Long-lived assets $ 2,706.3 $ 187.7 $ 49.8 $ 15.4 $ -- $ 2,959.2
---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Asia Other Elimi- Consoli-
October 29, 1999 States Europe Pacific Foreign nations dated
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 771.1 $ 226.4 $ 128.5 $ 64.3 $ -- $ 1,190.3
Intergeographic sales 188.7 35.2 -- 3.8 (227.7) --
---------------------------------------------------------------------------------------------------
Total sales $ 959.8 $ 261.6 $ 128.5 $ 68.1 $ (227.7) $ 1,190.3
---------------------------------------------------------------------------------------------------
Long-lived assets $ 2,458.1 $ 228.0 $ 50.7 $ 17.1 $ -- $ 2,753.9
---------------------------------------------------------------------------------------------------
<CAPTION>
Six months ended
United Asia Other Elimi- Consoli-
October 27, 2000 States Europe Pacific Foreign nations dated
---------------------------------------------------------------------------------------------------
Revenues from external
customers $ 1,777.2 $ 455.3 $ 309.0 $ 129.8 $ -- $ 2,671.3
Intergeographic sales 361.2 126.7 .1 10.8 (498.8) --
---------------------------------------------------------------------------------------------------
Total sales $ 2,138.4 $ 582.0 $ 309.1 $ 140.6 $ (498.8) $ 2,671.3
---------------------------------------------------------------------------------------------------
<CAPTION>
United Asia Other Elimi- Consoli-
October 29, 1999 States Europe Pacific Foreign nations dated
---------------------------------------------------------------------------------------------------
Revenues from external
customers $ 1,507.6 $ 454.6 $ 238.5 $ 122.8 $ -- $ 2,323.5
Intergeographic sales 391.3 73.3 -- 7.6 (472.2) --
---------------------------------------------------------------------------------------------------
Total sales $ 1,898.9 $ 527.9 $ 238.5 $ 130.4 $ (472.2) $ 2,323.5
---------------------------------------------------------------------------------------------------
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
---------------------
Net Earnings
------------
Net earnings for the three months ended October 27, 2000 were $314.1 million, or
$0.26 per diluted share, as compared to net earnings of $260.6, or $0.21 per
diluted share for the quarter ended October 29, 1999, representing an increase
of 20.5 percent and 23.8 percent, respectively over the same period a year ago.
Net earnings for the first six months of fiscal year 2001 were 603.1 million or
$0.49 per diluted share as compared to net earnings of $513.0 million, or $0.42
per diluted share for the same period a year ago. In the first quarter of fiscal
2001, the Company recorded a $16.9 million pre-tax ($11.4 million after tax)
expense for a non-recurring, non-product related litigation judgment for
business matters that occurred in 1997 and 1998. Without this litigation charge,
net earnings would have been $614.5 million, or $0.50 per diluted share, an
increase of 19.8 percent and 19.0 percent, respectively, over the same period a
year ago.
Sales
-----
Sales for the three and six-month periods ended October 27, 2000 increased 14.4
and 15.0 percent, respectively, compared to the same periods of fiscal
<PAGE>
year 2000. Sales growth in the quarter and six-month period was negatively
impacted by $34.1 million and $53.8 million, respectively, of unfavorable
exchange rate changes of the value of the U.S. dollar versus the Euro and the
Japanese Yen. Excluding the effects of foreign currency translation, sales for
the quarter and the first half of fiscal year 2001 increased 17.4 percent each
over the same periods a year ago.
Net sales of cardiac rhythm management products, which consist primarily of
products for bradycardia pacing, tachyarrhythmia management, external
defibrillation, and ablation, increased 12.7 percent and 11.0 percent during the
three and six-month periods ended October 27, 2000, after excluding the impact
of foreign exchange rate fluctuations, compared to the same periods a year ago.
Worldwide bradycardia pacing revenues grew approximately 9 percent in the
quarter on a 10 percent increase in unit sales. Bradycardia pacing revenue
growth continues to benefit from the Company's strategy of offering the
industry's broadest product line, including the Medtronic Kappa(R), Sigma(TM)
and Vitatron Collection II pacemaker families. Sales of implantable
defibrillators grew 22 percent worldwide on unit sales that rose 24 percent.
This growth was led by the strength of the GEM(R) and GEM II family of
defibrillators and the continuing acceptance of the PR (Pattern Recognition)
Logic(TM) arrhythmia detection algorithms designed to reduce the inappropriate
delivery of therapy. The Company announced the Food and Drug Administration's
approval of the GEM III on December 7, 2000. The GEM III offers enhanced
detection algorithms, improved patient safety features, and increased longevity.
External defibrillator sales increased almost 4 percent in the quarter as a
slowdown in sales to hospitals, which comprise a significant portion of external
defibrillator sales, offset a nearly 10 percent growth in unit sales of
automated external defibrillators.
Net sales of neurological; spinal; and ear, nose and throat (ENT) products,
consisting primarily of implantable neurostimulation devices, implantable drug
administration systems, spinal products, neurosurgery products, functional
diagnostics and surgical products used by ENT physicians, increased 21.7 percent
and 22.1 percent for the three and six-month periods ended October 27, 2000,
after excluding the effects of foreign currency translation, compared to the
same periods a year ago. Sales of spinal and neurosurgery product lines
(consisting of Sofamor Danek, Surgical Navigation Technologies, P.S. Medical and
Midas Rex) achieved revenue growth of 22 percent, led by the strength of core
plates and screw fixation systems for cervical and thorocolumbar applications
and interbody products. ENT product sales grew by 15 percent, as it continues to
benefit from the acquisition of the ophthalmology business of Mentor Corporation
in October of 1999. Core neurological product sales (consisting of
neurostimulation, drug administration systems, and functional diagnostics),
increased almost 24 percent from the same period a year ago, highlighted by the
new Medtronic Synergy(TM) neurostimulation device for pain. The Company expects
to commercially release in the United States its Activa(R) Parkinson's Control
deep brain stimulation therapy by the end of next quarter.
Net sales of vascular product lines, consisting of stents, balloons and guiding
catheters, and peripheral vascular products, increased 34.9 percent and 40.0
percent for the three and six-month periods ended October 27, 2000, after
excluding the effects of foreign currency translation, compared to the same
periods a year ago. The growth was driven by coronary stent unit sales that rose
more than 50 percent, led by the strength of the full-featured S660 and S670
coronary stents. The Company expects a solid market penetration of the Medtronic
BeStent(TM) tubular stent released in the United States late in the quarter, and
expects to launch the S7, successor to the S670 model, outside of the United
States during the third quarter of fiscal 2001.
<PAGE>
Peripheral vascular revenues declined about 5 percent from the same period a
year ago as the Company temporarily suspended manufacturing of the Medtronic
AneuRx(TM) stent graft for treatment of abdominal aortic aneurysms during the
first quarter of the current fiscal year to implement manufacturing
improvements. The Company expects revenue growth to accelerate within the next
few months as production resumes.
Net sales of cardiac surgery product lines, consisting of heart valves,
perfusion systems, cannulae and surgical accessories increased 6.2 percent and
7.2 percent for the three and six-month periods ended October 27, 2000, after
excluding the effects of foreign currency translation, compared to the same
periods a year ago. The growth was primarily due to an increase in sales of
minimally invasive surgery products of 59 percent and an increase in heart valve
revenues of 25 percent, partially offset by a 5 percent decline in perfusion
revenues. The Company earlier announced the Food and Drug Administration (FDA)
clearance of its Mosaic tissue valve, which the Company expects to launch at the
beginning of calendar year 2001.
Cost of Products Sold
---------------------
Cost of products sold as a percentage of sales was 26.9 percent and 26.1 percent
for the three and six month periods ended October 27, 2000, compared to 26.3
percent and 25.8 percent for the same periods a year ago. Cost of products sold
as a percentage of sales has increased over last year as a result of the
negative impact of currency exchange rates and unfavorable manufacturing
variances and obsolescence resulting from the temporary suspension of production
of the Medtronic AneuRx(TM) stent graft.
Research and Development Expense
--------------------------------
The Company remains committed to spending aggressively on research and
development (R&D) to develop technological enhancements and new indications for
existing products, as well as to develop less invasive and new technologies to
address unmet patient needs and to help reduce patient care costs and length of
hospital stay. R&D expense for the second quarter and first half of fiscal year
2001 was 10.5 percent and 10.4 percent of sales, respectively, compared to 9.8
percent and 10.0 percent of sales, respectively, for the same periods a year
ago.
Selling, General and Administrative Expense (SG&A)
--------------------------------------------------
SG&A expense for the three and six-month periods ended October 27, 2000 was 29.4
percent and 30.4 percent of sales, respectively, compared to 31.7 percent and
31.8 percent of sales, respectively for the same periods a year ago. The
decrease in SG&A expense as a percentage of sales is the result of foreign
currency gains and continued cost control measures, partially offset by
increased field sales coverage expenses.
Non-Recurring Charges
---------------------
In the first quarter of fiscal 2001, the Company recorded a $16.9 million pre-
tax expense related to a litigation judgment. The judgment is protected by a
confidentiality agreement, is non-recurring, non-product related and pertains to
business matters that occurred in 1997 and 1998.
Interest
--------
Interest income during the second quarter and first half of fiscal year 2001 was
$18.4 million and $32.8 million, respectively, compared to $6.7 million
<PAGE>
and $13.3 million, respectively, for the same periods a year ago. The increase
in interest income is the result of higher cash balances attributable to larger
cash inflows from operations and the discontinuation of the Company's systematic
share repurchase program during the fourth quarter of fiscal year 2000.
Income Taxes
------------
The Company's effective income tax rate for fiscal 2001 is approximately 32.5
percent. The effective income tax rate for fiscal 2000 was 32.6 percent, or 32.4
percent excluding the effects of non-recurring charges.
Liquidity and Capital Resources
-------------------------------
Operating activities provided $914.7 million of cash and cash equivalents for
the six-month period ended October 27, 2000 compared to $498.2 million for the
same period a year ago. Working capital was $2,192.0 million at October 27,
2000, a increase of $170.1 million over the $2,021.9 million at April 30, 2000.
The current ratio was 3.2:1 at October 27, 2000 as compared to 3.0:1 at April
30, 2000. Cash and cash equivalents and short term investments have increased by
$265.5 million since year end as a result of cash flow from operations.
Significant uses of cash included investments in marketable securities,
purchases of property, plant and equipment and payment of dividends to
shareholders.
The Company's capital structure consists of equity and interest-bearing debt.
Interest-bearing debt as a percent of total capital was 4.4 percent as of
October 27, 2000, compared to 6.9 percent at April 30, 2000. The Company has
existing lines of credit totaling $887 million with various banks, of which $657
million was unused at October 27, 2000.
Operations Outside of the United States
---------------------------------------
Sales to customers located outside of the United States accounted for 32.7
percent and 33.5 percent of total sales for the second quarter and first half of
fiscal 2001, respectively. Sales outside of the United States are accompanied by
certain financial risks, such as collection of receivables which typically have
longer payment terms. Outstanding receivables for these sales totaled $536.0
million at October 27, 2000, or 44.9 percent of total outstanding receivables,
compared to $538.7 million or 43.4 percent of total receivables outstanding at
April 30, 2000.
Cautionary Factors That May Affect Future Results
-------------------------------------------------
Certain statements contained in this document and other written and oral
statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "should", "will," "forecast" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider
forward-looking statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed in the section entitled
"Government Regulation and Other Matters" and "Cautionary Factors That May
Affect Future Results" in the Company's Annual Report and Form 10-K for the
<PAGE>
year ended April 30, 2000. Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
The Company undertakes no obligation to update any forward-looking statement,
but investors are advised to consult any further disclosures by the Company on
this subject in its filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K (if any), in which the Company discusses
in more detail various important factors that could cause actual results to
differ from expected or historic results. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1997, Cordis Corporation ("Cordis"), a subsidiary of Johnson &
Johnson, filed suit against Arterial Vascular Engineering, Inc., which was
acquired by the Company in January 1999 ("AVE"), in federal court in the
District Court of Delaware alleging that AVE's modular stents infringe certain
patents now owned by Cordis. Boston Scientific Corporation is also a defendant
in this suit. The complaint seeks injunctive relief and damages from all
defendants. On November 21, 2000, a Delaware jury rendered a verdict that the
previously marketed MicroStent and GFX stents infringe valid claims of two
patents. The trial on damages is scheduled to begin December 18, 2000. The jury
verdict does not address products that are currently marketed by Medtronic AVE.
In September 2000, Cordis filed an additional suit against AVE in the District
Court of Delaware alleging that AVE's S670, S660 and S540 stents infringe the
patents asserted in the above case. No further activity has been undertaken.
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. The court has issued an order that the dispute must be arbitrated
under the terms of the license agreement. Boston Scientific has filed a Demand
for Arbitration, and an arbitration decision is expected in 2001.
In December 1997, Advanced Cardiovascular Systems, Inc. (ACS), a subsidiary of
Guidant Corporation, 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 and an order has been entered staying the proceedings
until September 2002.
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. A trial is
presently scheduled to commence sometime in 2001.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
During the quarter ended October 27, 2000, the Company filed a
Report on Form 8-K dated October 26, 2000 reporting under Item
5 the declaration of a dividend of one preferred share
purchase right for each outstanding share of common stock.
Subsequent to the quarter ended October 27, 2000, the Company
filed a Report on Form 8-K dated November 20, 2000 reporting
under Item 5 the announcement of financial results for the
quarter ended October 27, 2000 and the ruling in a patent
infringement case.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Medtronic, Inc.
(Registrant)
Date: December 7, 2000 /s/ William W. George
---------------------------
William W. George
Chairman
and Chief Executive Officer
Date: December 7, 2000 /s/ Robert L. Ryan
---------------------------
Robert L. Ryan
Senior Vice President
and Chief Financial Officer
