-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBF6hiSx9BYGFRTvRivk6dxLOIpMUZoUXXIH+/ZXJYrp/+PSzxeIQq1ss/hnW8gF irWhdGmVzvToXQU3VA0Qxg== 0000897101-01-500449.txt : 20010727 0000897101-01-500449.hdr.sgml : 20010727 ACCESSION NUMBER: 0000897101-01-500449 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010427 FILED AS OF DATE: 20010726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTRONIC INC CENTRAL INDEX KEY: 0000064670 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 410793183 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07707 FILM NUMBER: 1689989 BUSINESS ADDRESS: STREET 1: 7000 CENTRAL AVE NE STREET 2: MS 316 CITY: MINNEAPOLIS STATE: MN ZIP: 55432 BUSINESS PHONE: 6125744000 10-K 1 medtronic012520_10k.txt MEDTRONIC, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED APRIL 27, 2001 COMMISSION FILE NO. 1-7707 ---------------------- [LOGO] MEDTRONIC MEDTRONIC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) MINNESOTA 41-0793183 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 710 MEDTRONIC PARKWAY MINNEAPOLIS, MINNESOTA 55432 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER: (763) 514-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE, INC. PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ---------------------- 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 _____ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] AGGREGATE MARKET VALUE OF VOTING STOCK OF MEDTRONIC, INC. HELD BY NONAFFILIATES OF THE REGISTRANT AS OF JULY 20, 2001, BASED ON THE CLOSING PRICE OF $48.58, AS REPORTED ON THE NEW YORK STOCK EXCHANGE: APPROXIMATELY $58.6 BILLION. SHARES OF COMMON STOCK OUTSTANDING ON JULY 20, 2001: 1,209,923,966 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF REGISTRANT'S 2001 ANNUAL REPORT ARE INCORPORATED BY REFERENCE INTO PARTS I, II AND IV; PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR ITS 2001 ANNUAL MEETING ARE INCORPORATED BY REFERENCE INTO PART III. TABLE OF CONTENTS ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business......................................................... 1 2. Properties....................................................... 14 3. Legal Proceedings................................................ 14 4. Submission of Matters to a Vote of Security-Holders.............. 16 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 16 6. Selected Financial Data.......................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 16 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 16 8. Financial Statements and Supplementary Data...................... 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 16 PART III 10. Directors and Executive Officers of the Registrant............... 16 11. Executive Compensation........................................... 16 12. Security Ownership of Certain Beneficial Owners and Management... 16 13. Certain Relationships and Related Transactions................... 16 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................................... 17 TRADEMARKS AND OTHER RIGHTS This Report contains trademarks, service marks and registered marks of Medtronic, Inc. and its subsidiaries, and other companies, as indicated. ANNUAL MEETING AND RECORD DATES Medtronic's Annual Meeting of Shareholders will be held on Thursday, August 30, 2001 at 10:30 a.m., Central Daylight Time at the Company's world headquarters. The record date for the Annual Meeting is now July 31, 2001 and all shareholders of record at the close of business on July 31, 2001 will be entitled to vote at the Annual Meeting. PART I ITEM 1. BUSINESS OVERVIEW. Medtronic, Inc., together with its subsidiaries ("Medtronic" or the "company"), is the world's leading medical technology company, providing lifelong solutions for people with chronic disease. The company is committed to offering market-leading therapies to restore patients worldwide to fuller, healthier lives. Medtronic's primary products are used for bradycardia pacing, tachyarrhythmia management, atrial fibrillation, heart failure, coronary and peripheral vascular disease, minimally invasive cardiac surgery, heart valve replacement, extracorporeal cardiac support, spinal and neurosurgery, malignant and non-malignant pain, movement disorders, neurodegenerative disorders, and ear, nose and throat (ENT) surgery. Medtronic's businesses operate in four business units that comprise one reportable segment, that of manufacturing and selling device-based medical therapies. The business units are Cardiac Rhythm Management; Vascular; Cardiac Surgery; and Neurological, Spinal and ENT. Medtronic was founded in 1949, incorporated in 1957 and today serves physicians, clinicians and patients in more than 120 countries worldwide. The company remains committed to a mission written by its founder over 40 years ago: "to contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health and extend life." Beginning with the development of the heart pacemaker in the 1950s, the company has assembled a broad portfolio of progressive technology expertise both through internal development of core technologies as well as acquisitions, establishing the company as a leader in new medical technologies. Since 1998, Medtronic has accelerated its growth through the acquisition of six major businesses and will continue to evaluate additional acquisition opportunities. Medtronic selects its acquisition candidates to expand its broad base of market leadership and leverage its technology portfolio to treat an increasing number of chronic diseases. Medtronic's success in leading global advances in medical technology is based upon an active collaboration with customers. The company's new therapies and products are often successful because the company works closely with physicians and patients to identify unmet needs in clinics, hospitals and surgical suites. This collaboration allows Medtronic to continually introduce new products offering improved solutions for medical practitioners and the patients they treat. These new products drive the company's financial results. During fiscal year 2001, about two-thirds of the company's revenues were generated from sales of products introduced within the last two years. By staying close to its market, the company believes it can direct its substantial technological resources to the development of solutions that hold the most promise for serving patients and creating successful products. In January 2000, Medtronic introduced Vision 2010, the company's strategic initiative to provide patients and the medical community with comprehensive, life-long solutions for the management of chronic disease. In the next decade, the company anticipates that the internet, technology advancements and increasing patient participation in treatment decisions will transform the nature of healthcare services. The convergence of these factors will result in better care at lower cost to the health care system and greater quality of life and convenience to the patient. The company has embraced these trends by forming innovative alliances with information industry leaders Microsoft Corporation, International Business Machines Corporation (IBM) and Healtheon/WebMD. Through these alliances, Medtronic intends to provide physicians better tools to collect and monitor patient data and provide health care information to the increasing number of patients who seek an active and informed role in their own health care decisions. RECENT ACQUISITIONS. The company continues to grow through a combination of acquisitions and internally generated technological advances. In fiscal 2001, Medtronic acquired PercuSurge, Inc. (PercuSurge"), a private company that develops and markets interventional embolic protection devices. In June 2001, PercuSurge commercially released in the United States its patented system to remove embolic material dislodged during the treatment of arteriosclerosis. This system has been commercially available in Europe since 1999 and has been used in more than 5,000 procedures. Shareholders of PercuSurge received 3.7 million shares of Medtronic Common 1 Stock in the merger in exchange for the outstanding stock of PercuSurge. The acquisition was accounted for as a pooling-of-interests, and Medtronic's consolidated financial statements for fiscal 2001 and prior years have been restated to include the results of operations, financial positions, and cash flows of PercuSurge. In May 2001, the company announced that it had signed an agreement to purchase MiniMed Inc., the world leader in the design, development, manufacture and marketing of advanced medical systems for the treatment of diabetes. MiniMed develops and sells glucose monitoring systems, external insulin pumps and related disposable products for use by patients with diabetes. Medtronic has also agreed to purchase Medical Research Group, Inc., a privately held corporation that designs and develops implantable devices used for the treatment of diabetes. MiniMed is a shareholder of Medical Research Group, Inc. MiniMed and Medical Research Group are currently developing an implantable insulin pump and long-term glucose sensor. In combination, these new implantable products would allow for more efficient regulation of blood glucose levels and may decrease the frequency and severity of diabetic complications. The Company expects to complete the transactions in the second quarter of fiscal 2002. CARDIAC RHYTHM MANAGEMENT. Cardiac Rhythm Management products consist primarily of products for bradycardia pacing, tachyarrhythmia management, atrial fibrillation and congestive heart failure. Bradycardia pacing systems, which treat patients with slow or irregular heartbeats, include pacemakers, leads and accessories. The pacemakers can be noninvasively programmed by the physician to adjust sensing, electrical pulse intensity, rate, duration and other characteristics, and can produce impulses to cause contractions in either the upper or lower heart chamber, or both, in relation to heart activity. The company's Model 9790 programmer can be used interchangeably with all of the company's bradycardia pacemakers as well as with its tachyarrhythmia management devices. The primary physician users for bradycardia products include electrophysiologists, implanting cardiologists and cardiovascular surgeons. The company's bradycardia pacemakers include the KAPPA(R), Sigma(TM), and Vitatron(R) families of products. The KAPPA series of pacemakers includes advanced products designed to adjust heart rates to match patient activity without requiring a hospital or clinic visit. The KAPPA products also provide physicians intuitive, easy-to-use diagnostic information and patient management tools. The Medtronic Sigma pacing line competes in the standard and basic pacing market segments by offering enhanced patient therapies and patient management tools not typically found in those segments. The Vitatron organization of Medtronic, located in the Netherlands, offers a broad range of pacing therapies. During fiscal 2001, sales of Vitatron pacing systems grew at a faster rate than any of the company's other pacemaker brands. In March 2001, Vitatron released its new Collection(TM)3 and Vita(TM)2 pacemaker series to the United States market, joining the advanced Vitatron Clarity(TM) line of pacemakers introduced in the United States in December 2000. Key features of the Vitatron systems include (i) Beat-to-Beat(TM) mode switching which prevents intermittent periods of fast heart rates in the upper chambers from disrupting the steady heart rhythm in the lower chambers; (ii) dual sensor rate response to enable the pacemaker to adapt its rate to meet the patient's metabolic needs; and (iii) in the Collection 3 series, collection of data that reports certain cardiac events and suggests solutions that the physician can use to adjust the pacemaker to the patient's needs. To further assist physicians, Vitatron also introduced its user-friendly AFdiscover(TM) software tool to the United States market. The new software is designed to be used with Vitatron's Selection(TM) AFm (Model 902) system, the first pacing system available in the United States with new capabilities intended to help physicians more effectively monitor atrial fibrillation. AFdiscover software is designed for installation on a physician's personal computer, where it can then be used to read and analyze patient data that is obtained from the patient's pacemaker via the 9790 programmer. The software produces the data in a user-friendly, easy-to-read, graphic format. Medtronic also markets the CapSureZ(R), CapSureFix(R) and the CapSure(R) Epi steroid-eluting leads, which deliver more concentrated levels of electrical energy that extend device life. The CapSureFix NOVUS(TM), a new pacing lead with smaller size for increased maneuverability during implant, is in clinical investigation. 2 Tachyarrhythmia management products include implantable devices and transvenous lead systems for treating ventricular tachyarrhythmias, which are abnormally fast, and sometimes fatal, heart rhythms. The systems offer a tiered therapy of pacing, cardioversion and defibrillation, and are implanted in the upper chest using endocardial leads, which reduces patient trauma, hospitalization time and costs. The primary physician users for tachyarrhythmia products are electrophysiologists. Because many patients exhibit multiple heart rhythm problems, Medtronic has developed products with the capability of addressing sometimes complex combinations of arrhythmias, including atrial fibrillation. In atrial fibrillation, the heart's upper chambers beat too rapidly, elevating the risk of stroke fivefold. Atrial fibrillation is the world's most common arrhythmia and affects 5 million people worldwide. Medtronic's Gem(R)family of implantable defibrillators is intended to meet the needs of patients with multiple heart rhythm problems. In December 2000, the FDA cleared for United States commercial release the Gem III(TM)DR(R)and the Gem III(TM)VR implantable cardioverter defibrillators (ICD), used with Sprint(TM) defibrillation leads and the 9790 programmer. These systems are designed to treat potentially lethal heart rhythms such as sudden cardiac arrest. While the single-chamber Gem III VR provides pacing to the lower chamber of the heart, the dual-chamber Gem III DR device is intended for patients with conditions requiring that sensing take place in the upper chamber of the heart as well as in the lower chamber to assure that the device circuitry correctly evaluates arrhythmias to prevent inappropriate therapeutic impulses. In February 2001, the FDA cleared the Gem III AT for commercial release in the United States. The Gem III AT ICD offers a comprehensive set of tools for managing both atrial and ventricular arrhythmias. The Gem III DR defibrillator includes enhanced PR (Pattern Recognition) Logic(TM)detection capability, a proprietary algorithm designed to discriminate between, and deliver appropriate pacing for, fast ventricular rhythms that are life threatening and fast atrial arrhythmias that are not. Gem III defibrillators also offer increased device longevity. In August 2000, the Company released for commercial sale in Europe and Canada its AT500(TM)pacing system, another tool for treating patients with multiple heart rhythm problems including atrial fibrillation. The AT500 is designed for bradycardia patients who are also at risk for atrial tachyarrhythmias. The Jewel AF(R)implantable cardioverter defibrillator shares with the Gem III the ability to provide rate responsive treatment of arrhythmias in both the atrium and the ventricle. The Jewel AF was cleared by the FDA for commercial use in the United States in June 2000. The Gem III AT, the AT500, and the Jewel AF each offer Medtronic's AT(TM) trio of atrial tachyarrythmia management capabilities consisting of (i) continuous monitoring and electrogram storage to guide atrial therapy; (ii) pacing to prevent or suppress atrial fibrillation; and (iii) pacing to terminate atrial tachyarrhythmias and restore a normal heartbeat. Medtronic markets a full line of active and passive steroid-eluting defibrillator leads. The entire line of tachyarrhythmia devices, like the bradycardia pacemakers, are programmed with the Model 9790 programmer. The company offers an implantable device, the Reveal(R) Plus Insertable Loop Recorder (ILR), to diagnose complex arrhythmias or other chronic perplexing heart problems. Once implanted, the Reveal Plus recorder continuously monitors the heart's electrical activity and records electrocardiogram information in up to a 42 minute loop. The monitor can be programmed to automatically capture the ECG when a heart rhythm problem occurs. The information is stored and can be non-invasively retrieved by the physician. The successor to the Reveal(R) ILR, the Reveal Plus ILR, was commercially released in the United States in February 2000 and in Europe in March 2000. Medtronic commercially markets two products that monitor and treat congestive heart failure, a seriously debilitating condition in which the heart does not pump enough blood to meet the body's demands. Heart failure is the leading cause of death in the United States, afflicting more than 22 million people worldwide with varying degrees of severity. In June 2001, Medtronic released for commercial sale in Europe, Canada and Middle Eastern markets, the InSync(R) III cardiac resynchronization system designed to assist heart failure patients by improving the contraction sequence of up to three chambers of the heart to optimize cardiac function and cardiovascular circulation. Like its predecessors, the InSync and InSync ICD(TM) cardiac resynchronization systems, the InSync III 3 system, uses a pacemaker-like device to stimulate both ventricles, in addition to the upper and lower chambers of the heart, to improve cardiac pumping capability for patients with advanced heart failure. The InSync, InSync ICD and InSync III systems are used with Medtronic's Attain(TM) Side-Wire lead system designed to provide lower left heart chamber pacing in varied patient anatomies. In fiscal 2001, the company commercially released, outside of the United States, another in its family of left-heart leads and delivery systems designed to provide effective options for physicians using cardiac resynchronization therapy to treat heart failure patients. The system is designed to facilitate rapid coronary sinus cannulation and cardiac vein selection in left-heart lead procedures. The company's InSync, InSync ICD, InSync III, and all Attain cardiac resynchronization devices and lead systems (except Model 4191) are currently under clinical investigation in the United States. In September 2000, the Company announced the first use of a new patient management system designed to help physicians manage patients with chronic cardiovascular disease. The system's first use is to capture critical physiologic information from a heart failure patient's implanted medical device from the patient's home and deliver it to the attending physician via the Internet. The new Chronicle(R) Patient Management System for heart failure patients employs the Medtronic Chronicle(R) device that is intended to continuously sense and collect unique and valuable information such as intracardiac pressures, heart rate and physical activity from a proprietary sensor placed directly in the heart's chamber. The patient periodically downloads this information to a home-based device that transmits this critical physiologic data securely over the Internet to the Medtronic Patient Management Network. Physicians can access the network via a Web site at any time and review screens that present summary information from the latest download, trend information and detailed records from specified times or problem episodes. The Chronicle Patient Management System is currently undergoing investigational trials in the United States and Europe, and is not yet approved for commercial sale. In fiscal 2001, the company commercially introduced in Europe, an innovative pen-like device designed to help surgeons quickly treat one of the world's most difficult cardiac arrhythmias at the same time they operate to replace a heart valve or perform a coronary artery bypass procedure. The Medtronic Cardioblate(TM) Surgical Ablation Pen, is a hand-held, single-use, irrigated radiofrequency ablation instrument used to create spot or linear lesions in the heart's upper chambers to block the errant electrical signals that cause atrial fibrillation. Because it allows the surgeon to "draw" lines that then form scar tissue - rather than the cutting and sewing of incisions used in the complex "Maze" operation - the Cardioblate pen significantly reduces the critical "cross-clamp" time required to complete the procedure. Medtronic also offers an integrated line of noninvasive emergency cardiac defibrillator and vital sign assessment devices, disposable electrodes and data management software. Sudden cardiac arrest (SCA) is unpredictable and can happen without warning. SCA contributes to 225,000 deaths a year in the United States alone. Two out of three of these deaths, on average, occur outside of the hospital. Medtronic Physio-Control's LIFEPAK(R)series of automated external defibrillators (AED's) can be used by individuals with minimal training, including airline and public safety personnel, in public places to save lives that might otherwise be lost due to SCA. For the highly trained hospital personnel and emergency responder market, the company offers the more comprehensive LIFEPACK(R)defibrillators and vital sign assessment devices with noninvasive pacing, shock advisory, 12 lead ECG diagnostic capability, trending capability, pulse oximetry, end-tidal CO2, invasive and noninvasive pressure monitoring. An increase in the adoption of the ADAPTIVE(TM) biphasic technology resulted from the wide range of energy settings with low peak current. These energy settings are consistent with the American Heart Association's Guidelines 2000 and easily adapt to current protocols. The CODE-STAT(TM) and CODE-STAT suite data management systems are Windows(R)based software programs that allow users to conduct post-event review and data analysis. The company's Cardiac Rhythm Management products accounted for 47.9% of Medtronic's net sales during the fiscal year ended April 27, 2001, 49.9% of Medtronic's net sales during fiscal 2000 and 50.1% of net sales in fiscal 1999. VASCULAR. The Vascular product line supports the interventional treatment of diseased coronary and peripheral blood vessels. Medtronic's primary involvement in the vascular area had historically been in coronary angioplasty. Medtronic's acquisition of Arterial Vascular Engineering, Inc. ("AVE") in January 1999 significantly 4 expanded the company's portfolio of coronary stent systems, balloon catheters, guidewires and guiding catheters. Customers for products treating coronary artery disease are primarily interventional cardiologists, while products treating peripheral artery disease may be used by interventional radiologists, vascular surgeons and interventional cardiologists. Vascular products include both modular and laser-cut stent systems to offer physicians a choice of products to suit their needs. In April 2001, the company received approval from the FDA for commercial release of its modular S7 with Discrete Technology(TM) Coronary Stent System. Discrete Technology(TM) refers to the precise alignment of the stent on the balloon, thereby ensuring complete stent expansion while minimizing balloon overhang and potentially reducing the likelihood of arterial damage. The S7 is not currently approved for direct stenting in the United States. The company launched the S7 in Europe and the United States during the fourth quarter of fiscal 2001. In May 2000, Medtronic also introduced, in the United States, the S660 With Discrete Technology(TM) Coronary Stent System specifically designed for smaller vessels. The S660 is one of the lowest profile stents available on the market. The BeStent(TM)2 with Discrete Technology(TM) Rapid Exchange Coronary Stent Delivery System was commercially released in Europe in May 2000. The company commercially released the United States versions in October and December of 2000. The BeStent(TM)2 offers customized scaffolding, a very low crossing profile and markers for precise placement. The company's coronary stents, together with the R2(R) and D2 balloon catheters released in June 2001, comprise complete therapeutic systems for treating cardiovascular disease. In June 2001, the company received FDA clearance to market in the United States its PercuSurge GuardWire Plus Temporary Occlusion and Aspiration System. The GuardWire Plus System is designed to allow cardiologists and other interventional specialists to capture embolic debris that might otherwise block downstream vessels and branches during interventional procedures and damage the heart. The system consists of a balloon-tipped guidewire, which is inflated briefly to occlude blood flow and capture any material dislodged from the wall of the vessel during placement of a stent upstream. Captured material is then withdrawn by using the PercuSurge Export aspiration catheter before the balloon of the GuardWire Plus is deflated and blood flow restored. Available outside the United States since 1999, the GuardWire Plus System is the first distal protection system available in the United States and is indicated for use in saphenous vein grafts. The company's line of coronary dilation catheters in the over-the-wire category includes the D114S(TM) balloon catheter in the United States and, in the rapid exchange segment of the market, the XIS(TM) balloon catheter in Europe and the LTX2(TM) catheter in Japan. The D114S(TM) and R1 balloon catheter, plus the D2 over-the-wire, minimally compliant balloon catheters released in June 2001, complete the company's comprehensive product line. The company also offers enhanced coronary guide catheters, including the Z2(TM) line, and the Fusion(TM) family of guidewires. Guide catheters are used towards the start of an interventional procedure to provide physicians with a path inside the patient's body that "guides" the stents, balloons, and other interventional devices directly to the lesion site. Guide catheters come in a wide range of sizes and curve styles to address a number of factors, such as the location of the lesion (right or left coronary system), the anatomy of the patient and the entry point for the intervention (femoral, brachial or radial). In May 2001, the company announced an exclusive licensing agreement with AVI BioPharma, Inc. ("AVI"). Under the license, Medtronic will be entitled to use several antisense compounds of AVI on certain medical devices, including stents, to assist in the prevention of restenosis. Restenosis is the reoccurrence of the narrowing or clogging of arteries following the placement of a stent or balloon angioplasty procedure. AVI's antisense compounds are designed to address the underlying genetic mechanism that leads to restenosis, and are currently in clinical trials. AVI and Medtronic will work together to evaluate the use of the antisense compounds on medical devices and to obtain regulatory approval for these new therapeutic treatment combinations. 5 The coronary vascular product line is complemented by a wide range of peripheral vascular products, including the AneuRx(R) and Talent(TM) stent grafts for minimally invasive abdominal aortic aneurysm repair therapy. These products are commercially available in Europe and the AneuRx stent graft system is available in the United States, having received FDA approval in September 1999. Available in select geographies outside the United States, the AneuRx(R) Descending Thoracic Aorta (DTA) Stent Graft System adapts the technologies of the AneuRx system for use in the endovascular treatment of aneurysms above the abdomen in the descending thoracic aorta. The company also offers balloon-expandable biliary stents in the U.S and balloon-expandable peripheral vascular stent systems in markets outside the United States. In September 2000, the company received clearance in Europe for commercial release of its INX(TM) Neurovascular Stent. The INX(TM) stent is the first of its kind and the only stent designed specifically for use in the brain. Indicated for the treatment of certain types of brain aneurysms, the INX(TM) stent provides an alternative treatment option for those patients who are considered high-risk surgical candidates. The INX(TM) stent is designed for use in combination with other embolic devices or materials to isolate aneurysms and reduce or eliminate the risk of aneurysm expansion and eventual bursting. The delivery system incorporates the company's unique sinusoidal pattern and a special balloon technology that provide a high degree of flexibility, enabling it to be more easily threaded through the tortuous arteries of the head and neck. The delivery system also incorporates the company's Discrete Technology. The company's Vascular products accounted for 16.7% of net sales in fiscal 2001, 15.8% of net sales in fiscal 2000 and 17.0% of net sales in fiscal 1999. CARDIAC SURGERY. Cardiac Surgery products consist of heart valves, perfusion systems, minimally invasive cardiac surgery products and surgical accessories. The company markets enabling technologies in beating heart bypass surgery, including the Medtronic Octopus(R) family of tissue stabilization systems: the Octopus(R), Octopus2(TM), the Octopus2+(TM) and the Octopus(R)3 tissue stabilizing systems. These systems are used to stabilize sites on the beating heart to enable the surgeon to complete bypass grafts. The Octopus 3 was launched commercially on a worldwide basis in May 2000. Accompanying the launch of the Octopus 3 were three other new cardiac surgery products: the ClearView(R) Intracoronary Shunt, the QuickFlow DPS(TM) Distal Perfusion System and the ClearView(R) Blower/Mister system. These new products are designed to provide surgeons with added flexibility, visibility and access to the surgical site. The heart valve product line includes tissue and mechanical valves and repair products for damaged or diseased heart valves. In August 2000, the company received FDA clearance for commercial release of its Mosaic(R) bioprosthetic heart valve in the US. Engineered from porcine tissue, the Mosaic valve is a reduced-profile valve that incorporates a proven flexible stent. The low profile and flexibility of the stent make it easier for the surgeon to implant the valve. The company also markets the Freestyle(R) stentless aortic tissue heart valve, featuring advanced tissue technology for improved blood flow and increased durability, and the Hancock(R) II tissue valve, available in both aortic and mitral models. Through a series of strategic acquisitions over the past decade, including the acquisition of AVECOR Cardiovascular, Inc. in March 1999, Medtronic now markets a complete line of blood-handling products that form the patient's extracorporeal life-support circuit for maintaining and monitoring blood circulation and coagulation status, oxygen supply and body temperature during open-heart surgery. The company's principal customers for its cardiac surgery products are cardiac surgeons. The company's Cardiac Surgery products accounted for 8.8% of Medtronic's net sales during fiscal 2001, 9.3% of net sales during fiscal 2000 and 9.3% of net sales in fiscal 1999. NEUROLOGICAL, SPINAL AND ENT. Neurological, Spinal and ENT products consist primarily of implantable neurostimulation devices, drug administration systems, spinal products, neurosurgery products, functional diagnostic systems and surgical products used by ENT physicians. 6 Medtronic produces devices, instruments, computer-assisted visualization products and biomaterials used by orthopedic surgeons and neurosurgeons in the treatment of disorders of the cranium and spine, including a wide range of sophisticated internal fixation devices, such as interbody fusion systems. The company's spinal business also pioneered and leads the industry in minimal access spine technologies, including the Med(R) MicroEndoscopic Discectomy System used for the endoscopic removal of vertebral discs, the Sextant Percutaneous Rod System used for fixation of the lumbar spine through small incisions, and the CD Horizon(R) Eclipse System which allows for the thoracoscopic treatment of scoliosis. In May 2000, Medtronic commercially released its INTER FIX(TM) RP (Reduced Profile) Threaded Spinal Fusion Device, designed to treat severe back pain caused by degenerative disc disease. In February 2001, Medtronic commercially released its LT-CAGE(TM)Lumbar Tapered Fusion Device, also designed to treat degenerative disc disease, which can be implanted laparascopically or through an open frontal incision, to fuse spinal bones. By avoiding incisions in the back muscles, the patient recovers more quickly and with less pain. In May 2001, the company announced that its application for FDA pre-market approval for a recombinant version of a naturally occurring bone morphogenetic protein has been accepted for filing, and the product, known as the InFUSE(TM) Bone Graft, is slated for expedited review by the FDA. The company seeks approval for use of the InFUSE(TM) Bone Graft with the LT-CAGE fusion device. In February 2001, the company entered into an agreement with Spinal Dynamics to distribute the Spinal Dynamics Bryan Cervical Disc System(TM) outside of the United States. The Bryan Cervical Disc System is designed to replace the need for intervertebral fusion procedures, which are currently the most common form of surgery for treating painful degenerative disc disease of the cervical, or neck, region of the spine. In such procedures, the damaged disc is removed and the vertebrae are fused together. The Bryan prosthesis duplicates the anatomic function of the natural disc, thus allowing preservation of normal motion. The prosthesis, which was approved for commercial release in Europe in September 2000, is the first device of its type to reach commercialization. The primary customers for the company's spinal products are orthopedic surgeons. The company also produces implantable systems for spinal cord and brain stimulation to treat pain and movement disorders. Neurostimulation products include the Itrel(R) 3 spinal cord stimulation system, which features a patient-operated control unit, the Mattrix(R) stimulator, which offers a dual stimulation mode for more effective pain management and the Synergy(TM) Neurostimulation System, the first and only totally implantable dual channel therapy designed to aid in the management of chronic intractable pain of the trunk or limbs. The Activa(R) provides therapy for essential tremor and tremor associated with Parkinson's disease. Activa Parkinson's Control Therapy for other major symptoms of Parkinson's disease was commercially released in Europe in fiscal 1998 and has received the FDA's advisory panel recommendation for approval of commercial release in the United States. The Activa system allows neurostimulation levels to be adjusted noninvasively after implant according to the needs of each patient. Medtronic began commercial sales of the Medtronic Kinetra(TM) neurostimulator throughout Europe and Canada in October 1999. The Medtronic Kinetra provides dual channel brain stimulation for bilateral symptoms of both Parkinson's disease and essential tremor through a single device. The Kinetra neurostimulator and its new hand-held Access(TM) Therapy Controller are used to deliver Activa Parkinson's Control Therapy and Tremor Control Therapy. The Kinetra neurostimulator and the Access Therapy Controller are awaiting FDA clearance in the United States. The primary customers for the company's neurostimulation products are neurosurgeons, neurologists and pain management specialists. In April 1999, Medtronic received FDA clearance for United States commercial introduction of the InterStim(R) Therapy for additional urinary control indications including urinary retention and symptoms of urgency/frequency. InterStim Therapy uses neurostimulation from a stopwatch-sized neurostimulator placed under the skin to send mild electrical pulses to the sacral nerves in the lower back that control bladder function. The Enterra(TM) Therapy was released in the United States in March 2000, under a Humanitarian Device Exemption. Enterra Therapy uses an Itrel III Neuro-Stimulator to deliver gastric stimulation in the treatment of chronic vomiting and nausea caused by gastroparesis. The primary customers for the company's InterStim and Enterra Therapies are urologists and gastroenterologists. The drug delivery product line consists primarily of implantable programmable and fixed rate drug delivery systems that are used in treating chronic intractable pain and cerebral and spinal spasticity, including the 7 SynchroMed(R) EL (Extended Life) and IsoMed(R) drug delivery systems. The SynchroMed EL drug delivery system is a small implantable drug pump that is placed in the abdominal region and a catheter that delivers medication to the fluid surrounding the spinal cord or other specific sites within the body. The system delivers precise doses of medication directly to the central nervous system. The SynchroMed EL offers extended battery life that increases the average time between replacement surgeries. The IsoMed pump is commercially available in Europe and the United States. The ISO Med(R) Constant-Flow Infusion System is used in the treatment of hepatic cancer and the delivery of morphine sulfate directly into the spinal fluid as a treatment for chronic malignant and non-malignant pain. The primary customers for the company's drug delivery product line are neurosurgeons, neurologists, pain management specialists and oncologists. With Midas Rex, Medtronic acquired 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. Medtronic's acquisition of Xomed, Inc. in November 1999 established Medtronic Xomed as the global leader in providing surgical products used by ENT surgeons, including powered tissue-removal systems, nerve monitoring systems and image guided surgery systems. The Neurological, Spinal and ENT products accounted for 26.6% of net sales for fiscal 2001, 25.0% of net sales for fiscal 2000 and 23.6% of net sales for fiscal 1999. 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. Government programs including Medicare and Medicaid, private health care insurance and managed care plans have attempted to control costs by limiting the amount of reimbursement such third party payors will pay to hospitals, other medical institutions and physicians for particular procedures or treatments. Such limitations may create an increasing level of price sensitivity among customers for the company's products. Some third party payors must also approve coverage for new or breakthrough therapies before they will reimburse health care providers using the products. Even though a new product may have been cleared for commercial release by the United States Food and Drug Administration (the "FDA") as described below, the company may find limited demand for a new or breakthrough therapy until obtaining reimbursement approval from private and governmental third party payors. 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 of these changes on future operating results. In the United States, the FDA, among other governmental agencies, is responsible for regulating the introduction of new medical devices, including the review of design and manufacturing practices, labeling and recordkeeping for medical devices, and review of manufacturers' required reports of adverse experience and other information 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. The FDA Modernization Act of 1997 was adopted with the intent of bringing better definition to the FDA's product clearance process. While FDA review times have improved since passage of the 1997 Act, there can 8 be no assurance that the FDA review process will not involve delays or that clearances will be granted on a timely basis. 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 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. 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 lead to pressure on product pricing and increased use of preferred vendors. 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 a number of patent infringement actions. With regard to patent applications, there can be no assurance that such applications will result in issued patents or that patents issued or licensed to the company will not be challenged or circumvented by competitors. 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 may 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. SALES, MARKETS AND DISTRIBUTION METHODS. The company's sales and marketing strategy is focused on rapid, cost-effective delivery of high quality products and services to a diverse group of customers worldwide. The primary markets for Medtronic's products are hospitals, other medical institutions and physicians. Medtronic sells most of its products and services directly through its staff of trained, full-time sales representatives in the United States and through 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. Large hospital and other purchasing groups are becoming increasingly important to the company's business. Medtronic has entered into supply agreements with these buying groups that in aggregate cover most of the company's product lines. While purchasing groups often seek price discounts, these agreements represent an opportunity for the company to build long-term supply relationships with a large number of purchasers. The company is not dependent on any single institution for more than 10% of its sales. In March 2000, Johnson & Johnson, GE Medical Systems, Baxter International, Inc., Medtronic and Abbott Laboratories announced the creation of an independent, internet-based global health care exchange company. Many other suppliers have since joined the exchange. This global health care exchange will help healthcare providers 9 make quicker, more efficient purchasing decisions and simplify business processes by providing a single source for ordering healthcare purchases. This will facilitate the exchange of information related to ordering medical equipment, devices and healthcare products and services worldwide, and also provide access to extensive clinical content. It will provide equal access to all healthcare manufacturers, suppliers, distributors, providers, group purchasing organizations and other healthcare trading partners. PRODUCTION AND RAW MATERIALS. Medtronic generally has vertically integrated manufacturing operations and makes its own microprocessors, lithium batteries, feedthroughs, integrated and hybrid circuits, and certain other components. Medtronic purchases many of the parts and materials used in manufacturing its components and products from external suppliers. Medtronic's single-and sole-sourced materials include materials such as adhesives, polymers, elastomers and resins; certain integrated circuits and other electrical/electronic/mechanical components; power sources, battery anodes, pyrolytic carbon discs, pharmaceutical preparations such as Lioresal(R) (baclofen, USP) Intrathecal (registered trademark of Novartis Pharmaceutical Corporation), and computer and other peripheral equipment. Certain of the raw materials and components used in Medtronic products are available only from a sole supplier. Materials are purchased from single sources for reasons of quality assurance, sole source availability or cost effectiveness. Medtronic works closely with its suppliers to assure continuity of supply while maintaining high quality and reliability. However, in an effort to reduce potential product liability exposure, certain suppliers have terminated or may terminate sales of certain materials and parts to companies that manufacture implantable medical devices. The United States Biomaterials Access Assurance Act was adopted in 1998 to help ensure availability of raw materials and component parts essential to the manufacture of medical devices. Management cannot estimate the impact of this law on supplier arrangements. PATENTS AND LICENSES. Medtronic owns patents on certain of its inventions, and obtains licenses from others as it deems necessary to its business. Medtronic's policy is to obtain patents on its inventions whenever practical. Technological advancement characteristically has been rapid in the medical device industry, and Medtronic does not consider its business to be materially dependent upon any individual patent. SEASONALITY. Worldwide sales do not reflect any significant degree of seasonality. COMPETITION AND INDUSTRY. Medtronic sells therapeutic and diagnostic medical devices in the United States and around the world. In the product lines in which Medtronic competes, the company faces a mixture of competitors ranging from large multi-line manufacturers to smaller manufacturers that offer a limited selection of products. In addition, the company faces competition from providers of alternative medical therapies such as pharmaceutical companies. Important factors to Medtronic's customers include product reliability and performance, product technology that provides for improved patient benefits, breadth of product lines and related product services provided by the manufacturer, and product price. Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry. In the current environment of managed care, economically motivated buyers, consolidation among health care providers, increased competition and declining reimbursement rates, Medtronic has been increasingly required to compete on the basis of price. Medtronic believes that its continued competitive success will depend upon its continued ability to create or acquire scientifically advanced technology, apply its technology cost-effectively across product lines and markets, develop or acquire proprietary products, attract and retain skilled development personnel, obtain regulatory approvals, and manufacture and successfully market its products. Medtronic is the leading manufacturer and supplier of implantable cardiac rhythm management devices in both the United States and non-United States markets. Worldwide, approximately eight manufacturers compete in the pacemaker industry. In the United States, Medtronic and two other manufacturers account for most pacemaker sales. Medtronic and four other manufacturers account for most of the non-United States pacemaker sales. Medtronic and two other manufacturers based in the United States account for most sales of implantable defibrillators within and outside the United States. At least four other companies have devices in various stages of development and clinical evaluation. Like Medtronic, the company's primary competitors offer a full range of cardiac rhythm management products, including pacemakers, defibrillators, leads and catheters. 10 In the vascular market, which includes implantable stents and integrated stent delivery systems, balloon and guiding catheters and guidewires, there are numerous competitors worldwide. Medtronic and four other manufacturers account for most coronary balloon and guiding catheter sales. In coronary stents, Medtronic and three other competitors account for most sales in the United States, while multiple competitors participate outside the United States. Several new competitors are emerging, particularly in newer markets such as stent grafts for abdominal aortic aneurysms and neurovascular devices. In neurological devices, Medtronic is the leading manufacturer and supplier of implantable neurostimulation and drug delivery systems. Medtronic and two competitors account for most sales worldwide. In spinal and neurosurgery devices, Medtronic is the leading manufacturer and supplier of instruments and biomaterials used in the treatment of spinal and cranial disorders. Medtronic and four competitors account for most sales worldwide. Medtronic and several other manufacturers account for a significant portion of the diagnostic testing market for urology, gastroenterology and neuromuscular disorders. In the minimally invasive cardiac surgery and extracorporeal circulation markets, there are approximately seven companies that account for a significant portion of the United States and non-United States markets. Medtronic is the market leader in the minimally invasive cardiac surgery and extracorporeal circulation makets. In the heart valve business, Medtronic is the third largest manufacturer and supplier of prosthetic heart valves (consisting of tissue and mechanical heart valves) within and outside the United States. These three companies are the major competitors in heart valves. RESEARCH AND DEVELOPMENT. Medtronic spent the following amounts on research and development: $577.6 million in fiscal 2001 (10.4% of sales), $488.2 million in fiscal 2000 (9.7% of sales), and $441.6 million in fiscal 1999 (10.4% of sales). These amounts have been applied toward improving existing products, expanding their applications, and developing new products. Medtronic's research and development projects span such areas as sensing and treatment of cardiovascular disorders (including bradycardia and tachyarrhythmia, fibrillation and sinus node abnormalities); improved heart valves, membrane oxygenators and centrifugal blood pump systems; products for the heart/lung bypass circuit; emergency defibrillation and vital sign assessment; implantable drug delivery systems for pain, spasticity and other neurological applications; muscle and neurological stimulators; spinal fusion products, biological products to induce bone growth, prosthetic discs and visualization technology to aid surgeons; therapeutic angioplasty catheters; coronary and peripheral stents and stented grafts, and treatments for restenosis; implantable physiologic sensors; treatments for heart failure; and materials and coatings to enhance the blood/device interface. Medtronic has not engaged in significant customer or government sponsored research. EMPLOYEES. On April 27, 2001, Medtronic and its subsidiaries employed 23,290 people on a regular, full-time basis and, including temporary and part-time employees, a total of 26,050 employees on a full-time equivalent basis. UNITED STATES AND NON-UNITED STATES OPERATIONS. Medtronic sells products in more than 120 countries. For financial reporting purposes, revenues and long-lived assets attributable to significant geographic areas are presented in Note 14 to the consolidated financial statements, incorporated herein by reference to Medtronic's 2001 Annual Report. Operation in countries outside the United States is accompanied by certain financial and other risks. Relationships with customers and effective terms of sale frequently vary by country, often with longer-term receivables than are typical in the United States. Inventory management is an important business concern due to the potential for rapidly changing business conditions and currency exposure. Currency exchange rate fluctuations can affect income from, and profitability of, non-United States operations. Medtronic attempts to hedge these exposures to reduce the effects of foreign currency fluctuations on net earnings. See the "Market Risk" section of Management's Discussion and Analysis of Results of Operations and Financial Condition and Note 4 to the consolidated financial statements, incorporated herein by reference to Medtronic's 2001 Annual Report. Certain countries also limit or regulate the repatriation of earnings to the United States. Non- 11 United States operations in general present complex tax and money management issues requiring sophisticated analysis to meet the company's financial objectives. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS. Certain statements contained in this Annual Report on Form 10-K 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," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will" 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. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. It is not possible to foresee or identify all factors affecting the company's forward-looking statements and investors therefore should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. The company undertakes no obligation to update any forward-looking statement. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the company's forward-looking statements, the factors include those noted in the preceding sections of this Annual Report on Form 10-K and in the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" incorporated herein by reference from the company's 2001 Annual Report, as well as (i) trends toward managed care, health care cost containment, and other changes in government and private sector initiatives, in the United States and other countries in which the company does business, that are placing increased emphasis on the delivery of more cost-effective medical therapies; (ii) the trend of consolidation in the medical device industry as well as among customers of medical device manufacturers, resulting in more significant, complex, and long-term contracts than in the past and potentially greater pricing pressures; (iii) the difficulties and uncertainties associated with the lengthy and costly new product development and regulatory clearance processes, which may result in lost market opportunities or preclude product commercialization; (iv) efficacy or safety concerns with respect to marketed products, whether scientifically justified or not, that may lead to product recalls, withdrawals, or declining sales; (v) changes in governmental laws, regulations, and accounting standards and the enforcement thereof that may be adverse to the company; (vi) increased public interest in recent years in product liability claims for implanted medical devices, including pacemakers, leads and spinal systems, and adverse developments in litigation involving the company; (vii) other legal factors including environmental concerns and patent disputes with competitors; (viii) agency or government actions or investigations affecting the industry in general or the company in particular; (ix) the development of new products or technologies by competitors, technological obsolescence, and other changes in competitive factors; (x) risks associated with maintaining and expanding international operations; (xi) business acquisitions, dispositions, discontinuations or restructurings by the company; (xii) the integration of businesses acquired by the company; (xiii) the price and volume fluctuations in the stock markets and their effect on the market prices of technology and health care companies; and (xiv) economic factors over which the company has no control, including changes in inflation, foreign currency rates, and interest rates. The company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. EXECUTIVE OFFICERS OF MEDTRONIC Set forth below are the names and ages of current executive officers of Medtronic, Inc., as well as information regarding their positions with Medtronic, Inc., their periods of service in these capacities, and their business experience for the past five or more years. Executive officers generally serve terms of office of approximately one year. There are no family relationships among any of the officers named, nor is there any arrangement or understanding pursuant to which any person was selected as an officer. ARTHUR D. COLLINS, JR., age 53, has been President and Chief Executive Officer since May 2001, was President and Chief Operating Officer from August 1996 to April 2001, was Chief Operating Officer from January 12 1994 to August 1996 and from June 1992 to January 1994 was Executive Vice President and President of Medtronic International. He has been a director since August 1994. Prior to joining the company, Mr. Collins was Corporate Vice President, Diagnostic Products, at Abbott Laboratories from October 1989 to May 1992 and Divisional Vice President, Diagnostic Products, from May 1984 to October 1989. During his 14 years with Abbott, Mr. Collins served in various general management positions both in the United States and Europe. GLEN D. NELSON, M.D., age 64, has been Vice Chairman since July 1988, and has been a director since 1980. From August 1986 to July 1988, he was Executive Vice President of the company. Dr. Nelson was Chairman and Chief Executive Officer of American MedCenters, Inc., an HMO management corporation, from July 1984 to August 1986. JEFFREY A. BALAGNA, age 40, has been Senior Vice President and Chief Information Officer of the company since March 2001. Prior to joining the company, Mr. Balagna held several management positions within General Electric Company from June 1997 to March, 2001 including, most recently, General Manager, Operations for GE Medical Systems Americas; he also served as Chief Information Officer, GE Medical Systems and Chief Information Officer, GE Consumer Motors and Controls. Prior to his tenure at General Electric, Mr. Balagna was Manager, Information Management at Ford Motor Company from October 1995 to June 1997. JANET S. FIOLA, age 59, has been Senior Vice President, Human Resources, since March 1994. She was Vice President, Human Resources, from February 1993 to March 1994, and was Vice President, Corporate Human Resources, from February 1988 to February 1993. ROBERT M. GUEZURAGA, age 52, has been Senior Vice President and President, Cardiac Surgery, since August 1999, and served as Vice President and General Manager of Medtronic Physio-Control International, Inc., from September 1998 to August 1999. Mr. Guezuraga joined the company after its acquisition of Physio-Control International, Inc. in September 1998, where he had served as President and Chief Operating Officer since August 1994. Prior to that, Mr. Guezuraga served as President and CEO of Positron Corporation from 1987 to 1994 and held various management positions within General Electric Corporation, including GE's Medical Systems division. STEPHEN H. MAHLE, age 55, has been Senior Vice President and President, Cardiac Rhythm Management, since January 1998. Prior to that, he was President, Brady Pacing, from May 1995 to December 1997 and Vice President and General Manager, Brady Pacing, from January 1990 to May 1995. Mr. Mahle has been with the company for 28 years and served in various general management positions prior to 1990. ANDREW P. RASDAL, age 43, has been Senior Vice President and President, Vascular since May 2000. Mr. Rasdal joined the company after its January 1999 acquisition of Arterial Vascular Engineering, Inc. ("AVE"), where he served as Vice President and General Manager, Coronary Vascular, since February 1999. Prior to that, he served as Vice President of Marketing for AVE since March 1998 and as Director of Marketing since February 1997. Prior to joining the company, Mr. Rasdal held sales and marketing positions for EP Technologies, a division of Boston Scientific Corporation, from March 1993 to February 1997. From 1990 to 1993, Mr. Rasdal served as a sales representative for SCIMED Lifesystems, Inc. and as a sales representative and a business analyst for ACS (now Guidant Corporation). ROBERT L. RYAN, age 58, has been Senior Vice President and Chief Financial Officer since April 1993. Prior to joining the company, Mr. Ryan was Vice President, Finance, and Chief Financial Officer of Union Texas Petroleum Corp. from May 1984 to April 1993, Controller from May 1983 to May 1984, and Treasurer from March 1982 to May 1983. DAVID J. SCOTT, age 48, has been Senior Vice President and General Counsel since joining the company in May 1999 and Secretary since January 2000. Prior to that, Mr. Scott was General Counsel of London-based United Distillers & Vintners from December 1997 to April 1999, General Counsel of London-based International Distillers & Vintners ("IDV") from April 1996 to November 1997, and Senior Vice President and General Counsel of IDV's operating companies in North and South America from January 1993 to March 1996. 13 KEITH E. WILLIAMS, age 48, has been Senior Vice President and President Neurological, Spinal, Neurologic Technologies and Ear, Nose and Throat (ENT)/Opthalmic since August 2000. Prior to that he served as Senior Vice President and President Asia/Pacific from May 1999 to August 2000. Mr. Williams joined the company in April 1997 as President, Asia/Pacific, and Chairman, Medtronic Japan. Prior to that he held various sales, marketing and general management positions with General Electric Medical Systems for 23 years, including President, GE Medical Systems China from 1993 to 1996. BARRY W. WILSON, age 57, has been Senior Vice President since September 1997 and was named President International in April 2001. He was President, Europe, Middle East and Africa since joining the company in April 1995 through March 2001. Prior to that, Mr. Wilson was President of the Lederle Division of American Cyanamid/American Home Products from 1993 to 1995 and President, Europe of Bristol-Myers Squibb from 1991 to 1993, where he also served internationally in various general management positions from 1980 to 1991. ITEM 2. PROPERTIES Medtronic's principal offices are owned by the company and located in the Minneapolis, Minnesota metropolitan area. Manufacturing or research facilities are located in Arizona, California, Colorado, Connecticut, Florida, Indiana, Massachusetts, Michigan, Minnesota, Tennessee, Utah, Washington, Puerto Rico, Canada, China, Denmark, France, Germany, India, Ireland, Japan, Mexico, the Netherlands, Sweden and Switzerland. The company's total manufacturing and research space is approximately 3.3 million square feet, of which approximately 75% is owned by the company and the balance is leased. Medtronic also maintains sales and administrative offices in the United States at approximately 110 locations in 30 states or jurisdictions and outside the United States at approximately 112 locations in 37 countries. Most of these locations are leased. Medtronic is utilizing substantially all of its currently available productive space to develop, manufacture and market its products. The company's facilities are in good operating condition, suitable for their respective uses and adequate for current needs. ITEM 3. LEGAL PROCEEDINGS In October 1997, Cordis Corporation ("Cordis"), a subsidiary of Johnson & Johnson, filed suit in federal court in the District Court of Delaware against Arterial Vascular Engineering, Inc., which was acquired by the company in January 1999 ("AVE"). The suit alleged 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. In November 2000, a Delaware jury rendered a verdict that the previously marketed MicroStent and GFX stents infringe valid claims of two patents. Thereafter the jury awarded damages to Cordis totaling approximately $270 million. In February 2001, the court heard evidence on the affirmative defense of inequitable conduct and will consider that evidence along with other post-trial motions. 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. 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 resolved through arbitration. The parties have agreed to arbitrate all claims against AVE. Litigation against Medtronic has been stayed pending the arbitration decision. Arbitration hearings were held in February but the arbitrators were unable to reach a decision. AVE has filed a new demand for arbitration. 14 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 and an order has been entered staying the proceedings until September 2002. In June 2000, Medtronic filed suit in United States District Court in Minnesota against Guidant Corporation seeking a declaration that Medtronic's Jewel AF device does not infringe certain patents held by Guidant and/or that such patents were invalid. Thereafter, Guidant filed a counterclaim alleging that the Jewel AF and the Gem III AT infringe certain patents relating to atrial fibrillation. The case is in the early stages of discovery. 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 may be material to the consolidated results of operations of any one period. In 1993, AcroMed Corporation commenced a patent infringement lawsuit against Sofamor Danek Group, Inc., which was acquired by the company in January 1999 ("Sofamor Danek"), in the United States 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 million. The company appealed the judgment to the Court of Appeals for the Federal Circuit, Washington, D.C., and in June 2001 that court affirmed the District Court decision. The amount of the judgment, with post-judgment interest, is now approximately $52 million. In March 2000, Boston Scientific Corporation ("BSX") 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 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 asserted that the license agreement requires disputes to be resolved through arbitration. The court issued an order that the dispute must be arbitrated under the terms of the license agreement. Arbitration hearings were held in April 2001 and, in July 2001, the arbitrators issued an award in favor of BSX, finding infringement, awarding approximately $169 million in damages plus legal fees and costs to BSX, and allowing for an injunction against future sales of certain rapid exchange perfusion delivery systems. In 1997 and 1999, the company sued Guidant Corporation and Boston Scientific Corp., respectively, in United States District Court in Minneapolis claiming that Guidant's ACS RX Multi-Link(R)coronary stent and Boston Scientific's Nir(R)stent infringed the company's Wiktor(R)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 filed an appeal with the Court of Appeals for the Federal Circuit ("CAFC") in Washington, D.C. In April 2001, the CAFC affirmed the judgment of the District Court. 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 alleged the plaintiffs were injured by spinal implants manufactured by Sofamor Danek and other manufacturers. All efforts to obtain class certification were 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 July 2001, virtually all of the suits have been dismissed or resolved in a manner favorable to the company. 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 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 scheduled to commence in October 2001. 15 Note 12 to the consolidated financial statements in Medtronic's 2001 Annual Report is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR MEDTRONIC'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information in the sections entitled "Price Range of Medtronic Stock" and "Investor Information" in Medtronic's 2001 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information for the fiscal years 1997 through 2001 in the section entitled "Selected Financial Data" in Medtronic's 2001 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information in the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Medtronic's 2001 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information in Management's Discussion and Analysis of Results of Operations and Financial Condition in the section entitled "Market Risk" and Note 4 to the consolidated financial statements in Medtronic's 2001 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and notes thereto, together with the report thereon of independent accountants contained in Medtronic's 2001 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MEDTRONIC The information on pages 3 through 6 of Medtronic's Proxy Statement for its 2001 Annual Shareholders' Meeting and the information entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in such Proxy Statement is incorporated herein by reference. See also "Executive Officers of Medtronic" on pages 12 through 14 hereof. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Proposal 1 -- Election of Directors -- Director Compensation and "Executive Compensation" in Medtronic's Proxy Statement for its 2001 Annual Shareholders' Meeting are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Share Ownership Information" in Medtronic's Proxy Statement for its 2001 Annual Shareholders' Meeting is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Proposal 1 -- Election of Directors -- Certain Transactions" in Medtronic's Proxy Statement for its 2001 Annual Shareholders' Meeting is incorporated herein by reference. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The sections entitled "Report of Independent Accountants" and "Statement of Consolidated Earnings" -- years ended April 27, 2001, April 30, 2000 and 1999 in Medtronic's 2001 Annual Report are incorporated herein by reference. The section entitled "Consolidated Balance Sheet" -- April 27, 2001 and April 30, 2000 in Medtronic's 2001 Annual Report is incorporated herein by reference. The section entitled "Statement of Consolidated Shareholders' Equity" -- years ended April 27, 2001, April 30, 2000 and 1999 in Medtronic's 2001 Annual Report is incorporated herein by reference. The section entitled "Statement of Consolidated Cash Flows" -- years ended April 27, 2001, April 30, 2000 and 1999 in Medtronic's 2001 Annual Report is incorporated herein by reference. The section entitled "Notes to Consolidated Financial Statements" in Medtronic's 2001 Annual Report is incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES Schedule II. Valuation and Qualifying Accounts - years ended April 27, 2001, April 30, 2000, and 1999 (set forth on page 21 of this report) All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. EXHIBITS 2.1 Amended and Restated Agreement and Plan of Merger, dated as of June 19, 2001, by and among Medtronic, Inc., MiniMed Inc. and MMI Merger Sub, Inc., including the Exhibits thereto.(a) 2.2 Agreement and Plan of Merger, dated October 19, 2000, by and among Medtronic Inc., PercuSurge, Inc. and Trojan Merger Corp., including the Exhibits thereto (Exhibit 2).(b) 3.1 Medtronic Restated Articles of Incorporation, as amended to date. 3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(c) 4 Rights Agreement, dated as of October 26, 2000, between Medtronic, Inc. and Wells Fargo Bank Minnesota, National Association, including as: Exhibit A thereto the form of Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Shares of Medtronic, Inc.; and Exhibit B the form of Preferred Stock Purchase Right Certificate. (Exhibit 4.1).(d) *10.1 1994 Stock Award Plan (Exhibit 10.1).(e) *10.2 Management Incentive Plan (Exhibit 10.2).(e) *10.3 1979 Restricted Stock and Performance Share Award Plan (Exhibit 10.3).(f) *10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(c) *10.5 Form of Employment Agreement for Medtronic executive officers. *10.6 Capital Accumulation Plan Deferral Program. *10.7 Executive Nonqualified Supplemental Benefit Plan (Restated May 1, 1997). (Exhibit 10.10).(g) *10.8 Stock Option Replacement Program. *10.9 1998 Outside Director Stock Compensation Plan (Exhibit 10.10).(e) *10.10 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock Option Plan (Exhibit 10.14).(f) 17 13 Those portions of Medtronic's 2001 Annual Report expressly incorporated by reference herein, which shall be deemed filed with the Commission. 21 List of Subsidiaries. 23 Consent and Report of Independent Accountants (set forth on page 20 of this report). 24 Powers of Attorney. - -------------------- (a) Incorporated herein by reference to Appendix A of the MiniMed Inc. Definitive Proxy Statement filed with the Commission on July 19, 2001. (b) Incorporated herein by reference to the cited exhibit in Medtronic's Registration Statement on Form S-4 (Registration No. 333- 49928) filed with the Commission on November 14, 2000. (c) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1996, filed with the Commission on July 24, 1996. (d) Incorporated herein by reference to the cited exhibit in Medtronic's Report on Form 8-A, including the exhibits thereto, filed with the Commission on November 3, 2000. (e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 2000, filed with the commission on July 21, 2000. (f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1998, filed with the Commission on July 21, 1998. (g) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1997, filed with the Commission on July 23, 1997. *Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K A report on Form 8-K, Item 8 was filed on February 12, 2001 respecting the Company's change in its fiscal year end from April 30 to a 52/53 week year ending on the last Friday in April annually, effective for the current fiscal year. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: July 25, 2001 BY: /s/ ARTHUR D. COLLINS, JR. ---------------------------------------- ARTHUR D. COLLINS, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: July 25, 2001 BY: /s/ ARTHUR D. COLLINS, JR. ---------------------------------------- ARTHUR D. COLLINS, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: July 25, 2001 BY: /s/ ROBERT L. RYAN ---------------------------------------- ROBERT L. RYAN SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) MICHAEL R. BONSIGNORE ) WILLIAM R. BRODY, M.D., PH.D. ) PAUL W. CHELLGREN ) ARTHUR D. COLLINS, JR. ) WILLIAM W. GEORGE ) ANTONIO M. GOTTO, JR., M.D., D.PHIL.) BERNADINE P. HEALY, M.D. ) GLEN D. NELSON, M.D. ) DIRECTORS DENISE M. O'LEARY ) JEAN-PIERRE ROSSO ) JACK W. SCHULER ) GORDON M. SPRENGER ) David J. Scott, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of the registrant pursuant to powers of attorney duly executed by such persons. Dated: July 25, 2001 BY: /s/ DAVID J. SCOTT ---------------------------------------- DAVID J. SCOTT ATTORNEY-IN-FACT 19 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Medtronic, Inc. Our audits of the consolidated financial statements referred to in our report dated May 22, 2001, except for Note 3 and Note 15, which are as of July 18, 2001 appearing in the 2001 Annual Report to Shareholders of Medtronic, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Minneapolis, Minnesota May 22, 2001 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each Registration Statement on Form S-8 (Registration Nos. 2-65157, 2-68408, 33-169, 33-36552, 2-65156, 33-24212, 33-37529, 33-44230, 33-55329, 33-63805, 33-64585, 333-04099, 333-07385, 333-65227, 333-71259, 333-71355, 333-74229, 333-75819, 333-90381, 333-52840 and 333-44766) of Medtronic, Inc. of our report dated May 22, 2001, except for Note 3 and Note 15, which are as of July 18, 2001 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated May 22, 2001 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Minneapolis, Minnesota July 25, 2001 20 MEDTRONIC, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS OF DOLLARS) CHARGES/ OTHER BALANCE AT (CREDITS) CHANGES BALANCE BEGINNING TO (DEBIT) AT END OF OF PERIOD EARNINGS CREDIT PERIOD - -------------------------------- ---------- -------- --------- --------- Allowance for doubtful accounts: Year ended 4/27/01 $30.2 $9.0 $(4.5)(a) $34.9 0.2 (b) Year ended 4/30/00............ 33.2 6.7 (10.4)(a) 30.2 0.7 (b) Year ended 4/30/99............ 24.9 13.4 (4.7)(a) 33.2 (0.4)(b) - ----------------------- (a) Uncollectible accounts written off, less recoveries. (b) Reflects primarily the effects of foreign currency fluctuations. 21 Commission File Number 1-7707 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ---------------- EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 27, 2001 ---------------- [LOGO] MEDTRONIC Medtronic, Inc. 710 Medtronic Parkway Minneapolis, Minnesota 55432 Telephone: 763/514-4000 =============================================================================== EXHIBITS INDEX 2.1 Amended and Restated Agreement and Plan of Merger, dated as of June 19, 2001, by and among Medtronic, Inc., MiniMed Inc. and MMI Merger Sub, Inc., including the Exhibits thereto.(a) 2.2 Agreement and Plan of Merger, dated October 19, 2000, by and among Medtronic Inc., PercuSurge, Inc. and Trojan Merger Corp., including the Exhibits thereto (Exhibit 2).(b) 3.1 Medtronic Restated Articles of Incorporation, as amended to date. 3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(c) 4 Rights Agreement, dated as of October 26, 2000, between Medtronic, Inc. and Wells Fargo Bank Minnesota, National Association, including as: Exhibit A thereto the form of Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Shares of Medtronic, Inc.; and Exhibit B the form of Preferred Stock Purchase Right Certificate. (Exhibit 4.1).(d) *10.1 1994 Stock Award Plan (Exhibit 10.1).(e) *10.2 Management Incentive Plan (Exhibit 10.2).(e) *10.3 1979 Restricted Stock and Performance Share Award Plan (Exhibit 10.3).(f) *10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(c) *10.5 Form of Employment Agreement for Medtronic executive officers. *10.6 Capital Accumulation Plan Deferral Program. *10.7 Executive Nonqualified Supplemental Benefit Plan (Restated May 1, 1997). (Exhibit 10.10).(g) *10.8 Stock Option Replacement Program. *10.9 1998 Outside Director Stock Compensation Plan (Exhibit 10.10).(e) *10.10 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock Option Plan (Exhibit 10.14).(f) 13 Those portions of Medtronic's 2001 Annual Report expressly incorporated by reference herein, which shall be deemed filed with the Commission. 21 List of Subsidiaries. 23 Consent and Report of Independent Accountants (set forth on page 20 of this report). 24 Powers of Attorney. - -------------------- (a) Incorporated herein by reference to Appendix A of the MiniMed Inc. Definitive Proxy Statement filed with the Commission on July 19, 2001. (b) Incorporated herein by reference to the cited exhibit in Medtronic's Registration Statement on Form S-4 (Registration No. 333- 49928) filed with the Commission on November 14, 2000. (c) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1996, filed with the Commission on July 24, 1996. (d) Incorporated herein by reference to the cited exhibit in Medtronic's Report on Form 8-A, including the exhibits thereto, filed with the Commission on November 3, 2000. (e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 2000, filed with the commission on July 21, 2000. (f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1998, filed with the Commission on July 21, 1998. (g) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1997, filed with the Commission on July 23, 1997. - -------------------- *Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. EX-3 2 medtronic012520_ex3-1.txt EXHIBIT 3.1 ARTICLES OF INCORPORATION EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF MEDTRONIC, INC. (AS AMENDED THROUGH FEBRUARY 27, 2001) ARTICLE 1 - NAME 1.1 The name of the corporation shall be Medtronic, Inc. ARTICLE 2 - REGISTERED OFFICE 2.1 The registered office of the corporation shall be located at 710 Medtronic Parkway, Minneapolis, Minnesota. ARTICLE 3 - STOCK 3.1 Authorized Shares; Establishment of Classes and Series. The aggregate number of shares the corporation has authority to issue shall be 1,602,500,000 shares, which shall consist of 1,600,000,000 shares of Common Stock with a par value of $.10 per share, and 2,500,000 shares of Preferred Stock with a par value of $1.00 per share. The Board of Directors is authorized to establish from the shares of Preferred Stock, by resolution adopted and filed in the manner provided by law, one or more classes or series of Preferred Stock, and to set forth the designation of each such class or series and fix the relative rights and preferences of each such class or series of Preferred Stock, including, but not limited to, fixing the relative voting rights, if any, of each class or series of Preferred Stock to the full extent permitted by law. Holders of Common Stock shall be entitled to one vote for each share of Common Stock held of record. 3.2 Issuance of Shares to Holders of Another Class or Series. The Board of Directors is authorized to issue shares of the corporation of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits. ARTICLE 4 - RIGHTS OF SHAREHOLDERS 4.1 No Preemptive Rights. No holder of any class of stock of the corporation shall be entitled to subscribe for or purchase such holder's proportionate share of stock of any class of the corporation, now or hereafter authorized or issued. 4.2 No Cumulative Voting Rights. No shareholder shall be entitled to cumulate votes for the election of directors and there shall be no cumulative voting for any purpose whatsoever. ARTICLE 5 - DIRECTORS 5.1 Written Action by Directors. Any action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors or, in cases where the action need not be approved by the shareholders, by written action signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. 5.2 Elimination of Director Liability in Certain Circumstances. No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided, however that this Article 5, Section 5.2 shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under section 302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the effective date of this Article 5, Section 5.2. No limiting amendment to or repeal of this Article 5, Section 5.2 shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 5.3 Classification of the Board of Directors. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than fifteen persons, who need not be shareholders. The number of directors may be increased by the shareholders or Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of this Section 5.3 provided, however, that any change in the number of directors on the Board of Directors (including, without limitation, changes at annual meetings of shareholders) shall be approved by the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding voting shares (as defined in Section 6.2 of Article 6), voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors. If such change shall not have been so approved, the number of directors shall remain the same. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1989 annual meeting of shareholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders beginning in 1990, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the 2 number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. In no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director's term expires and until a successor shall be elected and qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Removal of a director from office (including a director named by the Board of Directors to fill a vacancy or newly created directorship), with or without cause, shall require the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding voting shares, voting together as a single class. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of such director's predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes of preferred or preference stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by or pursuant to the applicable terms of the certificate of designation or other instrument creating such class or series of preferred stock, and such directors so elected shall not be divided into classes pursuant to this Section 5.3 unless expressly provided by such terms. Only persons who are nominated in accordance with the procedures set forth in this Section 5.3 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 5.3. Nominations by shareholders shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 50 days nor more than 90 days prior to the meeting, provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise 3 required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the corporation's books, of such shareholder and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this Section 5.3. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed in this Section 5.3 and, if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. At any regular or special meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation who complies with the notice procedures set forth in this Section 5.3. For business to be properly brought before any regular or special meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 50 days nor (except for shareholder proposals subject to Rule 14a-8(a)(3)(i) of the Securities Exchange Act of 1934, as amended) more than 90 days prior to the meeting, provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the regular or special meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the regular or special meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in the corporation's Bylaws to the contrary, no business shall be conducted at any regular or special meeting except in accordance with the procedures set forth in this Section 5.3. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 5.3 and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 4 Notwithstanding any other provisions of these Articles of Incorporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law or these Articles of Incorporation), the affirmative vote of the holders of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding voting shares, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Section 5.3. ARTICLE 6 - RELATED PERSON BUSINESS TRANSACTIONS 6.1 Whether or not a vote of shareholders is otherwise required, the affirmative vote of the holders of not less than two-thirds of the voting power of the outstanding "voting shares" (as hereinafter defined) of the corporation shall be required for the approval or authorization of any "Related Person Business Transaction" (as hereinafter defined) involving the corporation or the approval or authorization by the corporation in its capacity as a shareholder of any Related Person Business Transaction involving a "Subsidiary" (as hereinafter defined) which requires the approval or authorization of the shareholders of the Subsidiary, provided, however, that such two-thirds voting requirement shall not be applicable if: (a) The "Continuing Directors" (as hereinafter defined) by a majority vote have expressly approved the Related Person Business Transaction; or (b) The Related Person Business Transaction is a merger, consolidation, exchange of shares or sale of all or substantially all of the assets of the corporation, and the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the corporation other than the "Related Person" (as hereinafter defined) in the Related Person Business Transaction is an amount at least equal to the "Highest Purchase Price" (as hereinafter defined). 6.2 For the purposes of this Article 6: (a) The term "Related Person Business Transaction" shall mean (i) any merger or consolidation of the corporation or a Subsidiary with or into a Related Person, (ii) any exchange of shares of the corporation or a Subsidiary for shares of a Related Person which, in the absence of this Article, would have required the affirmative vote of at least a majority of the voting power of the outstanding shares of the corporation entitled to vote or the affirmative vote of the corporation, in its capacity as a shareholder of the Subsidiary, (iii) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of transactions), including without limitation a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the corporation or of a Subsidiary to or with a Related Person, (iv) any sale, lease, transfer or other disposition (in one transaction or a series of transactions) of all or any Substantial Part of the assets of a 5 Related Person to or with the corporation or a Subsidiary, (v) the issuance, sale, transfer or other disposition to a Related Person of any securities of the corporation (except pursuant to stock dividends, stock splits, or similar transactions which would not have the effect of increasing the proportionate voting power of a Related Person) or of a Subsidiary (except pursuant to a pro rata distribution to all holders of Common Stock of the corporation), (vi) any recapitalization or reclassification that would have the effect of increasing the proportionate voting power of a Related Person, and (vii) any agreement, contract, arrangement or understanding providing for any of the transactions described in this definition of Related Person Business Transaction. (b) The term "Related Person" shall mean and include (i) any person or entity which, together with its "Affiliates" and "Associates" (both as hereinafter defined), "beneficially owns" (as hereinafter defined) in the aggregate 15 percent or more of the outstanding voting shares of the corporation, and (ii) any Affiliate or Associate (other than the corporation or a wholly-owned Subsidiary of the corporation) of any such person or entity. Two or more persons or entities acting as a syndicate or group, or otherwise, for the purpose of acquiring, holding or disposing of voting shares of the corporation shall be deemed to be a "person" or "entity," as the case may be. (c) The term "Affiliate," used to indicate a relationship with a specified person or entity, shall mean a person or entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person or entity specified. (d) The term "Associate," used to indicate a relationship with a specified person or entity, shall mean (i) any entity of which such specified person or entity is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such specified person or entity has a substantial beneficial interest or as to which such specified person or entity serves as trustee or in a similar fiduciary capacity, (iii) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any Subsidiary, and (iv) any person who is a director or officer of such specified entity or any of its parents or subsidiaries (other than the corporation or a wholly-owned Subsidiary of the corporation). (e) The term "Substantial Part" shall mean 30 percent or more of the fair market value of the total assets of the person or entity in question, as reflected on the most recent balance sheet of such person or entity existing at the time the shareholders of the corporation would be required to approve or authorize the Related Person Business Transaction involving the assets constituting any such Substantial Part. 6 (f) The term "Subsidiary" shall mean any corporation, a majority of the equity securities of any class of which are owned by the corporation, by another Subsidiary, or in the aggregate by the corporation and one or more of its Subsidiaries. (g) The term "Continuing Director" shall mean (i) a director who was a member of the Board of Directors of the corporation either on June 22, 1983 or immediately prior to the time that any Related Person involved in the Related Person Business Transaction in question became a Related Person and (ii) any person becoming a director whose election, or nomination for election by the corporation's shareholders, was approved by a vote of a majority of the Continuing Directors, provided, however, that in no event shall a Related Person involved in the Related Person Business Transaction in question be deemed to be a Continuing Director. (h) The term "voting shares" shall mean shares of capital stock of a corporation entitled to vote generally in the election of directors, considered for the purposes of this Article as one class. (i) The term "Highest Purchase Price" shall mean the highest amount of cash or the fair market value of the property, securities or other consideration paid by the Related Person for a share of Common Stock of the corporation at any time while such person or entity was a Related Person or in the transaction which resulted in such person or entity becoming a Related Person, provided, however, that the Highest Purchase Price shall be appropriately adjusted to reflect the occurrence of any reclassification, recapitalization, stock split, reverse stock split or other readjustment in the number of outstanding shares of Common Stock of the corporation, or the declaration of a stock dividend thereon, between the last date upon which the Related Person paid the Highest Purchase Price and the effective date of the merger, consolidation or exchange of shares or the date of distribution to shareholders of the corporation of the proceeds from the sale of all or substantially all of the assets of the corporation. (j) (i) A person or entity "beneficially owns" voting shares of the corporation if such person or entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares (A) voting power which includes the power to vote, or to direct the voting of, such voting shares or (B) investment power which includes the power to dispose, or to direct the disposition of, such voting shares. Any person or entity which, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose or effect of divesting such person or entity of beneficial ownership of voting shares of the corporation or preventing the vesting of such beneficial ownership as part of a plan or scheme to avoid becoming a Related 7 Person shall be deemed for purposes of this Article 6 to be the beneficial owner of such voting shares. All voting shares of the corporation beneficially owned by a person or entity, regardless of the form which such beneficial ownership takes, shall be aggregated in calculating the number of voting shares of the corporation beneficially owned by such person or entity. Any voting shares of the corporation that any person or entity has the right to acquire pursuant to any agreement, contract, arrangement or understanding, or upon exercise of any conversion right, warrant, or option, or pursuant to the automatic termination of a trust, discretionary account or similar arrangement, or otherwise shall be deemed beneficially owned by such person or entity. Any voting shares of the corporation not outstanding which any person or entity has a right to acquire shall be deemed to be outstanding for the purpose of computing the percentage of outstanding voting shares of the corporation beneficially owned by such person or entity but shall not be deemed to be outstanding for the purpose of computing the percentage of outstanding voting shares of the corporation beneficially owned by any other person or entity. (ii) Notwithstanding the foregoing provisions of subparagraph 6.2(j)(i) hereof: (A) A member of a national securities exchange shall not be deemed to be a beneficial owner of voting shares of the corporation held directly or indirectly by it on behalf of another person or entity solely because such member is the record holder of such voting shares and, pursuant to the rules of such exchange, may direct the vote of such voting shares, without instruction, on other than contested matters or matters that may affect substantially the rights or privileges of the holders of the voting shares of the corporation to be voted, but is otherwise precluded by the rules of such exchange from voting without instruction; (B) A commercial bank, broker or dealer or insurance company which in the ordinary course of business is a pledgee of voting shares of the corporation under a written pledge agreement shall not be deemed to be the beneficial owner of such pledged voting shares until the pledgee has taken all formal steps necessary to declare a default and determines that the power to vote or to direct the vote or to dispose or to direct the disposition of such pledged securities will be exercised, provided that the pledge agreement is bona fide and was not entered into with the purpose nor with the effect of changing or influencing the control of the corporation nor in connection with 8 any transaction having such purpose or effect and, prior to default, does not grant to the pledgee the power to vote or to direct the vote of the pledged voting shares of the corporation; and (C) A person or entity engaged in business as an underwriter of securities who acquires voting shares of the corporation through its participation in good faith in a firm commitment underwriting registered under the Securities Act of 1933, or comparable successor law, rule or regulation, shall not be deemed to be the beneficial owner of such voting shares until the expiration of forty days after the date of such acquisition. 6.3 For the purposes of this Article 6, the Continuing Directors by a majority vote shall have the power to make a good faith determination, on the basis of information known to them, of: (a) the number of voting shares of the corporation that any person or entity "beneficially owns," (b) whether a person or entity is an Affiliate or Associate of another, (c) whether the assets subject to any Related Person Business Transaction constitute a Substantial Part, (d) whether any business transaction is one in which a Related Person has an interest, (e) whether the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the corporation other than the Related Person in a Related Person Business Transaction is an amount at least equal to the Highest Purchase Price, and (f) such other matters with respect to which a determination is required under this Article 6. 6.4 The provisions set forth in this Article 6, including this Section 6.4, may not be repealed or amended in any respect unless such action is approved by the affirmative vote of the holders of not less than two-thirds of the voting power of the outstanding voting shares of the corporation. 9 EX-10 3 medtronic012520_ex10-5.txt EXHIBIT 10.5 EMPLOYMENT AGREEMENT EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between Medtronic, Inc., a Minnesota corporation (the "Company") and ____________________________ (the "Executive"), dated as of the ______ day of ____________________. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section l (b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated or the Executive ceases to be an officer of the Company prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of such date; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give written notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 2(a), the following acquisitions shall not constitute a Change of Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition pursuant to a transaction that complies with clauses (i), (ii) and (iii) of Section 2(c); or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity (a "Business Combination"), in each case, unless, immediately following such Business Combination, (i) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the total voting power of (A) the corporation resulting from such Business Combination (the "Surviving Corporation") or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the outstanding shares of common stock and the total voting power of the outstanding voting 2 securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing provisions of this Section 2, a Change of Control shall not be deemed to occur with respect to the Executive if the acquisition of the 30% or greater interest referred to in Section 2(a) is by a group, acting in concert, that includes the Executive or if at least 40% of the then outstanding common stock or combined voting power of the then outstanding voting securities (or voting equity interests) of the Surviving Corporation or, if applicable, the Parent Corporation shall be beneficially owned, directly or indirectly, immediately after a Business Combination by a group, acting in concert, that includes the Executive. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"), provided that nothing stated in this Agreement shall restrict the right of the Company or the Executive at any time to terminate the Executive's employment with the Company, subject to the obligations of the Company provided for in this Agreement in the event of such terminations. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) Except as otherwise expressly provided in this Agreement, during the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking 3 engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") which Annual Base Salary shall be paid at a monthly rate, at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, whether in a deferred compensation program, by means of exchange into stock options, or otherwise, to the Executive by the Company and the affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Incentive Payments. (A) In addition to Annual Base Salary, the Executive shall be paid, for each fiscal year ending during the Employment Period, an annual bonus ("Annual Bonus") in cash at least equal to the Executive's average annual or annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company for less than 12 full months) award earned by the Executive, including any award earned but deferred, whether in a deferred compensation program, by means of exchange into stock options, or otherwise, under the Company's Management Incentive Plan, as amended from time to time prior to the Effective Date (or under any successor or replacement annual incentive plan of the Company or any of the affiliated companies), for the last three fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Three-Year Average Bonus"). (B) For each PSP Award (as defined below) of the Executive outstanding as of the Effective Date, a pro rata payout shall be made to the Executive as of the Effective Date, in shares or cash (at the election of the Company) equal to the number of shares covered by the PSP Award multiplied by the performance-based accrual percentage pertaining to such PSP Award as of the Effective Date, multiplied by a fraction the numerator of which is the number of months elapsed from the date the PSP Award was granted through the Effective Date and the denominator of which is the number of months from the date the PSP Award was granted through the PSP Award's scheduled maturity date. For purposes of this Agreement, a PSP 4 Award is "granted" at the time that the Executive is notified that such award has been reserved for him or her, and "distributed" at the time that it is paid out to the Executive (e.g., under the Company's current plan, which has a three-year performance cycle, a PSP Award granted in 2001 will be distributed in 2004). (C) For each fiscal year during the Employment Period in which the Company does not grant a PSP Award as part of a program complying with Section 4(b)(iii) of this Agreement, the Executive shall also be provided an annual incentive payment (the "Annual Performance Share Equivalent") in cash at least equal to the average annual or annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company for less than 12 full months) dollar value of awards distributed to Executive (each such award, a "PSP Award"), including any such distributions that were earned but deferred, whether in a deferred compensation program, by means of exchange into stock options, or otherwise, for the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs, pursuant to the terms of the Company's performance share or restricted share plans or programs (or under any successor or replacement plan or program of the Company or any of the affiliated companies), as amended from time to time prior to the Effective Date (such three-year average, the "Three-Year Average PSP Award"); PROVIDED, HOWEVER, that for each such prior year for which a PSP Award was not distributed to the Executive, the calculation of the Three-Year Average PSP Award shall include an amount that represents what the Executive's PSP Award would have been in that year (or, if no PSP Awards were distributed in such year, in the last preceding year in which PSP Awards were distributed) had such award had a dollar value equal to the average dollar value of the PSP Awards distributed to peer executives employed by the Company (who received PSP Awards pursuant to the same category of benefit applicable to Executive) in that year. (The Annual Bonus and the Annual Performance Share Equivalent are herein referred to collectively as the "Annual Incentive Payments".) The Annual Incentive Payments shall be paid to Executive, unless the Executive shall elect to defer the receipt of such Annual Incentive Payments, no later than the end of the third month of the fiscal year following the year for which the Annual Incentive Payments are paid. (iii) Stock Programs, Savings Plans and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all plans, practices, policies and programs ("Plans") applicable generally to peer executives of the Company and the affiliated companies, including, without limitation, all such Plans providing for the receipt of common stock, restricted stock, or stock options, and all such incentive, savings and retirement Plans; provided, however, that in no event shall such Plans provide the Executive with savings opportunities, retirement benefit opportunities, or incentive or stock opportunities (measured with respect to both regular and special incentive or stock opportunities, to the extent, if any, that such distinction is applicable) in each case, that are less favorable, in the aggregate, than the most favorable of those provided by the Company and the affiliated companies for the Executive under such Plans as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in 5 and shall receive all benefits under welfare benefit Plans provided by the Company and the affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance Plans) to the extent applicable generally to other peer executives of the Company and the affiliated companies, but in no event shall such Plans provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such Plans in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (vi) Business Allowance. During the Employment Period, the Executive shall be entitled to a business allowance in accordance with the most favorable Plans of the Company and the affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacations in accordance with the most favorable Plans of the Company and the affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to 6 terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. (i) The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (A) repeated violations by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which are demonstrably willful and deliberate on the Executive's part, which are committed in bad faith or without the belief on the part of the Executive that such violations are in the best interests of the Company and which are not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violations or (B) the conviction of the Executive of a felony involving moral turpitude. (ii) For purposes of Section 5(b)(i)(A) of this Agreement, no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company ceasing to be a publicly traded entity or becoming a subsidiary), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; 7 (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to be based at a location other than the principal executive offices of the Company (if the Executive were employed at such location immediately preceding the Effective Date) or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive during the 30-day period immediately following the first anniversary of the Effective Date (the "Window Period") which would not otherwise constitute Good Reason shall be deemed to be a termination by the Executive for Good Reason for all purposes of this Agreement. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (i) through (v) shall not affect the Executive's ability to terminate employment for Good Reason. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause, respectively, shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination (which date shall not be more than 30 days after the giving of such notice), as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability or death, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 8 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason, in lieu of further payments pursuant to Section 4(b) with respect to periods following the Date of Termination: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts (such aggregate shall be hereinafter referred to as the "Special Termination Amount"): (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the sum of the Three-Year Average Bonus (or, if higher, the Annual Bonus paid or payable, including any portion thereof that has been earned but deferred, whether in a deferred compensation program, by means of exchange into stock options, or otherwise (and annualized for any fiscal year consisting of less than 12 full months or for which the Executive has been employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any), and, unless a PSP Award has previously been granted to the Executive for the fiscal year in which the Date of Termination occurs, the Annual Performance Share Equivalent, and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, in lieu of any amounts otherwise payable pursuant to an Annual Bonus or Annual Performance Share Equivalent, in each case solely with respect to the year in which the Date of Termination occurs, (3) for each PSP Award outstanding as of the Date of Termination, if any, a pro rata payout, in shares or cash (at the election of the Company) equal to the number of shares covered by the PSP Award multiplied by the performance-based accrual percentage pertaining to such PSP Award as of the Date of Termination, multiplied by a fraction the numerator of which is the number of months elapsed from the date the PSP Award was granted through the Date of Termination and the denominator of which is the number of months from the date the PSP Award was granted through the PSP Award's scheduled maturity date, (4) any accrued vacation pay, in each case, to the extent not theretofore paid, and (5) the amount of any compensation previously deferred by the Executive, whether in a deferred compensation program, by means of exchange into stock options, or otherwise (the sum of the amounts described in subclauses (1), (2), (3), (4) and (5), the "Accrued Obligations"); and (B) the amount equal to the product of (1) three (two, in the case of a voluntary termination by the Executive during the Window Period pursuant to the penultimate sentence of Section 5(c)), and (2) the sum of (x) the Executive's Annual Base Salary, and (y) the higher of (I) the Three-Year Average Bonus and (II) the Annual Bonus paid or payable to the Executive for the most recently completed fiscal year during the Employment Period prior to the Date of Termination; (C) for the remainder of the Employment Period (or for the lesser of two years or the remainder of the Employment Period, in the case of a voluntary termination by the Executive during the Window Period pursuant to the penultimate sentence of Section 5(c)), or such longer period as any plan, program, practice or policy may provide, the 9 Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the Plans described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated, in accordance with the most favorable Plans of the Company and the affiliated companies applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies and their families, in either case upon the same terms and conditions (including any applicable required employee contributions); provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical, disability or other welfare benefits under another employer-provided plan, the medical, disability or other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. Following the end of the period during which medical benefits are provided pursuant to this Section 6(a)(ii), the Executive shall be eligible for continued health coverage as required by Section 4980B of the Code or other applicable law, as if the Executive's employment with the Company had terminated as of the end of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such Plans, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (ii) Except as otherwise set forth in the last sentence of Section 7, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits that the Executive is otherwise entitled to receive under any other plan, program, practice, policy, contract, arrangement or agreement of the Company or the affiliated companies (such other amounts and benefits, the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, the Company shall provide the Executive's estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as used in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the affiliated companies to the estates and beneficiaries of peer executives of the Company and the affiliated companies under such Plans relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be 10 paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as used in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the affiliated companies to disabled executives and/or their families in accordance with such Plans relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other disabled peer executives of the Company and the affiliated companies and their families. (d) Cause; Other Than for Good Reason. If the Executive's employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (i) the Executive's Annual Base Salary through the Date of Termination, (ii) the amount of any compensation previously deferred by the Executive, whether in a deferred compensation program, by means of exchange into stock options, or otherwise, and (iii) the Other Benefits, in each case to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all of the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of the affiliated companies (other than participation in any severance plan upon the Executive's termination of employment during the Employment Period) and for which the Executive may qualify, nor, subject to Section 12(f) of this Agreement, shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of the affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of the affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. If the Executive receives payments and benefits pursuant to Section 6(a) of this Agreement, the Executive shall not be entitled to any other severance pay or benefits under any severance plan, program or policy of the Company or the affiliated companies, unless expressly provided therein in a specific reference to this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as 11 incurred (within 30 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company's obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive's termination of employment. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PricewaterhouseCoopers or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the "Accounting Firm" hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is 12 possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and the Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to effectively contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or 13 income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall comply with any and all confidentiality agreements with the Company to which the Executive is, or shall be, a party. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 11(c) of this Agreement, this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This 14 Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------- If to the Company: ------------------ Medtronic, Inc. [LEGAL DEPT. LC300 710 MEDTRONIC PARKWAY MINNEAPOLIS, MN 55432-5604] Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 5(c)(i) through 5(c)(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company may be terminated by either the Executive or the Company at any time prior to the Effective Date or, subject to the obligations of the Company provided for in this Agreement in the event of a termination after the Effective Date, at any time on or after the Effective Date. Moreover, if prior to the Effective Date, (i) the Executive's employment with the Company terminates or (ii) the Executive ceases to be an officer of the Company, then the Executive shall have no further rights under this Agreement. From and after the Effective Date, except with respect to the agreements described in Section 10 hereof, this 15 Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including, without limitation, the Management Agreement, if any, between the Company and the Executive in effect immediately prior to the execution of this Agreement. 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. _________________________________ MEDTRONIC, INC. By _____________________________ 17 EX-10 4 medtronic012520_ex10-6.txt EXHIBIT 10.6 CAPITAL ACCUM PLAN DEFERRAL PROGRAM EXHIBIT 10.6 MEDTRONIC, INC. CAPITAL ACCUMULATION PLAN DEFERREL PROGRAM AS RESTATED EFFECTIVE NOVEMBER 1, 1998 TABLE OF CONTENTS ARTICLE 1. DEFERRED COMPENSATION ACCOUNT.......................................1 Section 1.1. Establishment of Account.......................................1 Section 1.2. Property of Committee..........................................1 ARTICLE 2. DEFINITIONS, GENDER, AND NUMBER.....................................1 Section 2.1. Definitions....................................................1 Section 2.2. Gender and Number..............................................7 ARTICLE 3. PARTICIPATION.......................................................8 Section 3.1. Who May Participate............................................8 Section 3.2. Time and Conditions of Participation...........................8 Section 3.3. Termination of Participation...................................8 Section 3.4. Missing Persons................................................9 Section 3.5. Relationship to Other Plans....................................9 ARTICLE 4. ENTRIES TO THE ACCOUNT..............................................9 Section 4.1. Contributions..................................................9 Section 4.2. Crediting Rate................................................10 ARTICLE 5. DEFERRAL OF RECEIPT OF COMMON STOCK UNDER STOCK OPTION AGREEMENTS..10 Section 5.1. Purpose of Article............................................10 Section 5.2. Deferral Election.............................................10 Section 5.3. Accounting for Deferrals......................................11 Section 5.4 Distributions.................................................11 Section 5.5. Change in Control or Plan Termination.........................13 Section 5.6. Hardship Withdrawals..........................................13 Section 5.7. Effect on Other Provisions....................................13 Section 5.8. Adjustment to Deferred Stock Unit Accounts....................13 ARTICLE 6. DISTRIBUTION OF BENEFITS...........................................14 Section 6.1. Distributions Pursuant to Deferral Election...................14 Section 6.2. Distribution of Benefits Upon Termination of Employment.......14 Section 6.3. Death Benefits................................................15 Section 6.4. Minimum Amount and Frequency of Payments......................17 Section 6.5. Acceleration of Distributions.................................17 Section 6.6. Withdrawals...................................................17 Section 6.7. Distributions on Plan Termination.............................18 Section 6.8. Claims Procedure..............................................18 ARTICLE 7. FUNDING............................................................19 Section 7.1. Source of Benefits............................................19 Section 7.2 No Claim on Specific Assets...................................19 ARTICLE 8. ADMINISTRATION AND FINANCES........................................20 Section 8.1. Administration................................................20 Section 8.2. Powers of Committee...........................................20 Section 8.3. Actions of the Committee......................................20 Section 8.4. Delegation....................................................20 Section 8.5. Reports and Records...........................................21 ARTICLE 9. AMENDMENTS AND TERMINATION.........................................21 Section 9.1. Amendments....................................................21 ii Section 9.2. Termination...................................................21 ARTICLE 10. TRANSFERS.........................................................22 ARTICLE 11. CHANGE IN CONTROL PROVISIONS......................................22 Section 11.1. Application of Article 11....................................22 Section 11.2. Payments to and by the Trust.................................22 Section 11.3. Legal Fees and Expenses......................................23 Section 11.4. No Reduction in Crediting Rate...............................23 Section 11.5. Late Payment and Additional Payment Provisions...............23 ARTICLE 12. MISCELLANEOUS....................................................25 Section 12.1. No Guarantee of Employment...................................25 Section 12.2. Release......................................................25 Section 12.3. Notices......................................................25 Section 12.4. Nonalienation................................................25 Section 12.5. Tax Liability................................................25 Section 12.6. Captions.....................................................26 Section 12.7. Applicable Law...............................................26 Section 12.8. Invalidity of Certain Provisions.............................26 Section 12.9. No Other Agreements..........................................26 Section 12.10. Incapacity..................................................26 iii MEDTRONIC, INC. CAPITAL ACCUMULATION PLAN DEFERRAL PROGRAM As Restated Effective November 1, 1998 Medtronic, Inc. (the "Company") established, effective January 1, 1989, a non-qualified deferred compensation plan for the benefit of Executives of the Company and of certain of the Company's Affiliates. This plan is known as the Medtronic, Inc. Capital Accumulation Plan Deferral Program (the "Plan"). The Plan has been amended and restated from time to time. The most recent restatement was effective January 1, 1994. The Company hereby again restates the Plan, effective November 1, 1998, as set forth herein. Except as otherwise specifically provided herein, this restatement shall apply to Permissible Deferrals first effective on or after November 1, 1998. The provisions of the Plan, as in effect prior to this restatement, shall apply to Permissible Deferrals first effective prior to November 1, 1998. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). ARTICLE 1. DEFERRED COMPENSATION ACCOUNT. Section 1.1. Establishment of Account. The Company shall establish an account ("Account") for each Participant which shall be utilized solely as a device to measure and determine the amount of deferred compensation to be paid under the Plan. Section 1.2. Property of Company. Any amounts so set aside for benefits payable under the Plan are the property of the Company, except, and to the extent, provided in the Trust. ARTICLE 2. DEFINITIONS, GENDER, AND NUMBER. Section 2.1. Definitions. Whenever used in the Plan, the following words and phrases shall have the meanings set forth below unless the context plainly requires a different meaning, and when a defined meaning is intended, the term is capitalized. 1 2.1.1. "Account" means the device used to measure and determine the amount of deferred compensation to be paid to a Participant or Beneficiary under the Plan, and may refer to the separate Accounts that represent amounts deferred by a Participant under separate Permissible Deferral elections pursuant to Section 4.1.1, by the Company pursuant to Section 4.1.2, or as a transfer from the Medtronic, Inc. Compensation Deferral Plan for Officers and Key Employees pursuant to Article 9. 2.1.2. "Affiliates" or "Affiliate" means a group of entities, including the Company, which constitutes a controlled group of corporations (as defined in section 414(b) of the Code), a group of trades or businesses (whether or not incorporated) under common control (as defined in section 414(c) of the Code), and members of an affiliated service group (within the meaning of section 414(m) of the Code.) 2.1.3. "Age" of a Participant means the number of whole calendar years that have elapsed since the date of the Participant's birth. 2.1.4. "Base Salary" of a Participant for any Plan Year means the total annual salary and wages paid by all Affiliates to such individual for such Plan Year, including any amount which would be included in the definition of Base Salary, but for the individual's election to defer some of his or her salary pursuant to this Plan or some other deferred compensation plan established by an Affiliate; but excluding any other remuneration paid by Affiliates, such as overtime, incentive compensation, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses, and automobile allowances), and fringe benefits whether payable in cash or in a form other than cash. In the case of an individual who is a participant in a plan sponsored by an Affiliate which is described in Section 401(k) or 125 of the Code, the term Base Salary shall include any amount which would be included in the definition of Base Salary but for the individual's election to reduce his salary and have the amount of the reduction contributed to or used to purchase benefits under such plan. 2 2.1.5. "Beneficiary" or "Beneficiaries" means the persons or trusts designated by a Participant in writing pursuant to Section 6.3.4 of the Plan as being entitled to receive any benefit payable under the Plan by reason of the death of a Participant, or, in the absence of such designation, the persons specified in Section 6.3.5 of the Plan. 2.1.6. "Board" means the Board of Directors of the Company as constituted at the relevant time. 2.1.7. "Code" means the Internal Revenue Code of 1986, as amended from time to time and any successor statute. References to a Code section shall be deemed to be to that section or to any successor to that section. 2.1.8. "Committee" means the Committee or individual appointed by the Company's Board (or any person or entity designated by the Committee) to administer the Plan pursuant to Section 8.4. Until and unless changed by the Board, the Vice-President, Compensation and Benefits, shall serve as the Committee. 2.1.9. "Common Stock" means the Company's common stock $.10 par value per share (as such par value may be adjusted from time to time). 2.1.10. "Company" means Medtronic, Inc. 2.1.11. "Compensation" with respect to a Participant for any period means the sum of such Participant's Base Salary and Incentive Compensation for such period. 2.1.12. "Crediting Rate" with respect to any Plan Year means the rate set forth on Schedule B, hereto, which schedule may be revised from time to time by the Company's Chief Executive Officer, in his discretion. In general, the Crediting Rate in effect with respect to a Plan Year shall apply to all deferrals made in such Plan Year; however, if the Chief Executive Officer subsequently makes other rates ("alternative rates") available, a Participant may elect to have an alternate rate apply to such deferrals in accordance with rules established by the Company. 3 2.1.13. "Deferred Stock Unit Account" means the notational account established pursuant to Article 5 to record the Net Shares deferred by the Participant and the dividend equivalents with respect to such Net Shares. 2.1.14. "Disabled" or "Disability" with respect to a Participant shall have the same definition as in the Company's then existing long term group disability insurance program. 2.1.15. "Early Retirement Date" of a Participant means the last day of the calendar month in which the Participant has (a) reached Age 55 while in the employ of an Affiliate and has completed at least ten (10) Years of Service, or (b) reached the Age of 62 while in the employ of an Affiliate. 2.1.16. "Effective Date" means the date on which this Plan became effective, i.e., January 1, 1989. 2.1.17. "Executive" means any United States employee who is (a) an Officer or a Vice President of the Company, (b) a member of the Sales Force of a Participating Affiliate whose Compensation for the Participating Affiliate's fiscal year ending immediately prior to the date on which he first enters into a Permissible Deferral election equals or exceeds the dollar amount set forth on Schedule A, hereto, which schedule may be revised from time to time by the Company's Chief Executive Officer in his discretion, or (c) any individual designated as eligible to participate in the Plan by the Company's Chief Executive Officer. 2.1.18. "Incentive Compensation" of a Participant for any Plan Year means the total remuneration paid under the various incentive compensation programs maintained by Affiliates to such individual for that Plan Year including any amount which would be included in the definition of Incentive Compensation, but for the individual's election to defer some or all of his or her Incentive Compensation pursuant to this Plan or some other deferred compensation plan established by an Affiliate; but excluding long-term incentive awards (other than the cash portion of the 4 Performance Share Plan) and any other remuneration paid by Affiliates, such as Base Salary, overtime, net commissions, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses, and automobile allowances), and fringe benefits whether payable in cash or in a form other than cash. 2.1.19. "Maximum Annual Deferral" with respect to a Participant for a Plan Year means the sum of (a) 50% of such Participant's Base Salary and (b) 100% of the cash portion of such Participant's Incentive Compensation for such Plan Year. Initially, Participants described in Section 2.1.17(b) may defer from Incentive Compensation only. The Committee may, in its discretion, adopt a policy to permit such Participants to also defer from Base Salary. 2.1.20. "Net Shares" with respect to an election made pursuant to Section 5.3, means the difference between the number of shares of Common Stock subject to the stock option exercise and the number of shares of Common Stock delivered to satisfy the stock option exercise price, less any shares used to satisfy FICA or any other taxes due upon the option exercise (as may be designated by the Company pursuant to Section 5.3). 2.1.21. "Normal Retirement Date" of a Participant means the last day of the calendar month in which the Participant has reached the Age of 65 while in the employ of an Affiliate. 2.1.22. "Officer or Vice President" means an employee who is either elected by the Board or appointed by the Company's Chief Executive Officer to such position. 2.1.23. "Participant" means an individual who is eligible to participate in the Plan and has elected to participate in the Plan. 2.1.24. "Participating Affiliate" or "Participating Affiliates" means the Company and such Affiliates as may be designated by the Chief Executive Officer of the Company, or his designee, from time to time. 5 2.1.25. "Performance Share Plan" means the Medtronic, Inc. 1994 Stock Award Plan, as may be amended from time to time. 2.1.26. "Permissible Deferral" means one of the following options as selected by the Participant: (a) A deferral from Base Salary for one (1) Plan Year which is not less than $3,000 nor more than the Maximum Annual Deferral. (b) A deferral from Incentive Compensation for one (1) Plan Year which is not less than $3,000 nor more than the Maximum Annual Deferral. Initially, Participants described in Section 2.1.17(b) may make deferrals pursuant to paragraph (b) of this Section only. The Committee may, in its discretion, adopt a policy to permit such Participants to also make deferrals pursuant to paragraph (a) of this Section. Participants other than those described in Section 2.1.17(b) may make deferrals pursuant to paragraph (a) or (b) of this Section, or a combination of both, but in no event may any deferrals exceed the Maximum Annual Deferral for any Plan Year. Elections to defer from Base Salary or Incentive Compensation shall be made annually at a date to be determined by the Committee, but no later than December 30th of the calendar year immediately preceding the Plan Year during which the Base Salary or Incentive Compensation would otherwise have been paid to the Participant. All deferral elections must specify either the percentages (stated as integers) or dollar amounts, or combination of percentages and dollar amounts, as determined by the Committee in its discretion, of the deferrals that are intended to be deducted from Base Salary or Incentive Compensation, respectively. Each installment of a deferral shall be rounded to the nearest whole dollar amount. Only the cash portion of an award under the Performance Share Plan may be deferred. 6 No Permissible Deferral election for a deferral from Incentive Compensation payable under the Performance Share Plan or the Medtronic, Inc. Management Incentive Plan shall be effective for any Plan Year unless the cash amount payable to the Participant under such plan for the Plan Year (but for the election) is sufficient to satisfy such election. Deferrals from Incentive Compensation for Participants described in Section 2.1.17(b) shall be made in periodic installments, as determined by the Committee in its discretion. All deferrals must be completed by the end of the Plan Year in which the Participant attains Age 70. 2.1.27. "Plan" means the "Medtronic, Inc. Capital Accumulation Plan Deferral Program" as set forth herein and as amended or restated from time to time. 2.1.28. "Plan Year" means January 1 through December 31. 2.1.29. "Premature Distribution" means a distribution to a Participant at his or her request prior to the time otherwise permitted under the Plan, subject to certain penalties, as described in Section 6.6.2. 2.1.30. "Sales Force" means employees of Participating Affiliates whose primary employment responsibilities involve selling the products manufactured by Participating Affiliates. 2.1.31. "Stock Unit" means a notational unit representing the right to receive a share of Common Stock. 2.1.32. "Trust" means the Medtronic, Inc. Compensation Trust Agreement Number Two, as may be amended from time to time. Section 2.2. Gender and Number. Except as otherwise indicated by context, masculine terminology used herein also includes the feminine and neuter, and terms used in the singular may also include the plural. 7 ARTICLE 3. PARTICIPATION. Section 3.1. Who May Participate. Participation in the Plan is limited to Executives. Section 3.2. Time and Conditions of Participation. An eligible Executive shall become a Participant only upon (a) the individual's completion of a Permissible Deferral election form for the succeeding Plan Year, and (b) compliance with such terms and conditions as the Committee may from time to time establish for the implementation of the Plan, including, but not limited to, any condition the Committee may deem necessary or appropriate for the Company to meet its obligations under the Plan. To enable the Company to meet its financial commitment under the Plan, the Company may purchase insurance on the lives of each Participant. Consequently, participation in the Plan is contingent upon an individual's insurability. The Committee may, in its sole discretion, accept or reject for participation in the Plan individuals who are rated as uninsurable. If the Committee accepts such an individual for participation in the Plan, such individual's Account under the Plan may be credited with interest at a lesser rate than provided in Section 4.2. An individual may make a Permissible Deferral election for any Plan Year provided that the Participant's remaining Compensation, after all deferrals, is sufficient to enable the Company to withhold from the Participant's Compensation (a) any amounts necessary to satisfy withholding requirements under applicable tax law; and (b) the amount of any contributions which the employee may be required to make or may have elected to make under the Company's various benefit plans. Section 3.3. Termination of Participation. Once an individual has become a Participant in the Plan, participation shall continue until the first to occur of (a) payment in full of all benefits to which the Participant or Beneficiary is entitled under the Plan, or (b) the occurrence of an event specified in Section 3.4 which results in loss of benefits. Except as otherwise specified in the Plan, the Company may not terminate an individual's participation in the Plan; provided, however, that if the Committee, in its discretion, determines that it is likely that a Participant would not be considered to be a member of a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, for any period, the 8 Committee may require that no contributions be made to the Plan by or on behalf of such Participant during such period. Section 3.4. Missing Persons. If the Company is unable to locate the Participant or his Beneficiary for purposes of making a distribution, the amount of a Participant's benefits under the Plan that would otherwise be considered as nonforfeitable shall be forfeited effective four (4) years after (a) the last date a payment of said benefit was made, if at least one such payment was made, or (b) the first date a payment of said benefit was directed to be made by the Company pursuant to the terms of the Plan, if no payments have been made. If such person is located after the date of such forfeiture, the benefits for such Participant or Beneficiary shall not be reinstated hereunder. Section 3.5. Relationship to Other Plans. Participation in the Plan shall not preclude participation of the Participant in any other fringe benefit program or plan sponsored by an Affiliate for which such Participant would otherwise be eligible. ARTICLE 4. ENTRIES TO THE ACCOUNT. Section 4.1. Contributions. Section 4.1.1. Deferrals. During each Plan Year, the Company shall post to the Account of each Participant the amount of Base Salary and Incentive Compensation to be deferred as designated by the Participant's Permissible Deferral election in effect for that Plan Year. Section 4.1.2. Company Contributions. The Company may, in its discretion, make contributions to the Plan from time to time on behalf of a Participant equal to all or a portion of amounts which would have been contributed on behalf of the Participant under other benefit plans of the Company if the Participant had not made a Permissible Deferral election under the Plan. Section 4.1.3. Disability. If a Participant becomes Disabled, deferrals and Company contributions shall continue to be posted as described in Sections 4.1.1 and 4.1.2 during the period in which the Participant is entitled to receive Base Salary from 9 the Company. If a Participant continues to be Disabled after such period, deferrals and Company contributions will cease. Section 4.2. Crediting Rate. Except as otherwise provided in Sections 3.2, 6.2.2 and 9.2, a Participant's Account will be credited with interest at the Crediting Rate as described in Section 2.1.12. ARTICLE 5. DEFERRAL OF RECEIPT OF COMMON STOCK UNDER STOCK OPTION AGREEMENTS Section 5.1. Purpose of Article This Article establishes special procedures for deferring the delivery and receipt of Common Stock which a Participant identified in Section 5.3 may receive from the exercise of a nonqualified stock option granted to the Participant by the Company. The stock options are governed by the stock option plan under which they are granted. No stock options or shares of Common Stock are authorized to be issued under the Plan. Participants who elect to defer receipt of Common Stock issuable upon the exercise of stock options will have no rights as stock-holders of the Company with respect to allocations made to their Deferred Stock Unit Accounts except the right to receive dividend equivalent allocations as hereafter described. Section 5.2. Deferral Election. A Participant at the level of Vice President or above (or any other Participant designated by the Senior Vice President of Human Resources) may elect to defer receipt of Net Shares of Common Stock resulting from a stock-for-stock exercise of an exercisable stock option issued to the Participant by completing and submitting to the Company an irrevocable stock option deferral election by a date which is at least twelve (12) months in advance of the date of exercise of the stock option and in the calendar year prior to the date of the exercise of the stock option. The stock option exercise must occur on or prior to the expiration date of the stock option and must be accomplished by delivering by the attestation method, on or prior to the exercise date, shares of Common Stock which have been personally owned by the Participant for at least six (6) months prior to the exercise date and have not been used in a stock swap in the prior six (6) months. 10 At the time of the deferral election, Medtronic may, in its discretion, designate that some of the shares subject to the stock option shall be used to satisfy FICA or any other taxes due upon the stock option exercise. A Participant's deferral election shall not be effective if the stock option as to which the Participant has made the deferral election terminates prior to the exercise date selected by the Participant. If the Participant dies or fails to deliver shares of Common Stock which have been personally owned by the Participant at least six (6) months prior to the exercise date (and have not been used in a stock swap in the prior six (6) months) in payment of the exercise price, then the deferral election shall not be effective. Only whole Net Shares may be deferred pursuant to this Section 5.2. Section 5.3. Accounting for Deferrals. A Deferred Stock Unit Account will be established for each Participant with respect to each deferral election made pursuant to this Article 5. For each Net Share deferred, a Stock Unit will be credited as of the date of the stock option exercise to the Deferred Stock Unit Account so established. The Committee shall adjust the Deferred Stock Unit Account of each Participant to reflect dividends payable with respect to the Company's Common Stock from time to time. The Committee shall determine the manner in which any such adjustment shall be made. Each Participant will receive a periodic statement of the number of whole and fractional units in his or her Deferred Stock Unit Account. Section 5.4. Distributions. At the time of the Participant's deferral election, a Participant must also elect: (a) Whether distributions of the Deferred Stock Unit Account established pursuant to the election will commence at (i) the Participant's retirement, or (ii) a specified distribution date, which must be at least two (2) years after the exercise date of the stock option to which the deferral election applies and may not be later than the date on which the Participant reaches age seventy (70); and 11 (b) Whether distributions will be made in the form of a lump sum or substantially equal annual installments. If the Participant elects to receive distributions in the form of annual installments, the Participant shall also elect the period over which those installments will be made, which may be no less than five (5) years and no greater than fifteen (15) years. Notwithstanding the Participant's election, if the Participant terminates employment with all Affiliates for reasons other than death before his or her Early Retirement Date and before distributions pursuant to his or her deferral election have commenced, distribution of the Deferred Stock Unit Account will be made in the form of a lump sum within an administratively practicable period of time following the date on which the Participant terminates employment. In the event a Participant dies after benefits have commenced pursuant to this Section 5.4, the Participant's remaining benefits, if any, shall be paid to the Participant's Beneficiary in the same manner as such benefits would had been paid to the Participant had the Participant survived. In the event a Participant dies before benefits have commenced pursuant to this Section 5.4, the Participant's Deferred Stock Unit Account shall be paid to the Participant's Beneficiary in a lump sum within an administratively practicable period of time following the Participant's death. All distributions shall be made in either a lump sum or in annual installments, as described in paragraph (b), above. All distributions shall be in the form of Common Stock. The Participant shall receive a distribution equivalent to the Stock Units, rounded up to the nearest whole number, credited to the Participant's Deferred Stock Unit Account. In the case of any installment delivery, the precise number of shares delivered in each installment shall be determined in such a manner as to cause each installment to be essentially equal based on the Stock Units credited to the Participant's Deferred Stock Unit Account as of the date of the first installment, including dividend equivalents credited prior to that date. Dividend equivalents credited to a Participant's Deferred Stock Unit Account after the date of the first installment will be distributed as part of the final installment. Installment 12 distributions shall be in whole shares of Common Stock. Any fractional Stock Units remaining at the time of the final installment distribution shall be rounded up to the nearest full Stock Unit. Section 5.5. Change in Control or Plan Termination. . Notwithstanding anything in Section 5.4 to the contrary, all of a Participant's Deferred Stock Units shall be distributed to the Participant or the Participant's Beneficiary (in the event of the Participant's death) as soon as administratively practicable following: (a) the occurrence of an Event (I.E., an event of change in control), as referenced in Article 11, or (b) the termination of the Plan. Section 5.6. Hardship Withdrawals. A Participant shall be entitled to make withdrawals from his or her Deferred Stock Unit Accounts in accordance with Section 6.6 of the Plan. Distributions pursuant to such withdrawals shall be in the form of Common Stock. Section 5.7. Effect on Other Provisions. The provisions of Article 6 shall not apply to amounts deferred pursuant to this Article 5, except for the withdrawal provisions referenced in Section 5.6, above, the provisions applicable to the marital deduction and designating a Beneficiary at Sections 6.3.3, 6.3.4 and 6.3.5, the acceleration provision at Section 6.5 and the claims procedure at Section 6.8. Likewise the second paragraph of Section 9.2 shall not apply to amounts deferred pursuant to this Article 5. Section 5.8. Adjustment to Deferred Stock Unit Accounts. In the event that the Compensation Committee of the Company's Board of Directors determines that any recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transactions or event affects the Common Stock, an appropriate adjustment to the Participant's Deferred Stock Units shall be made to prevent reduction or enlargement of the Participants' benefits under the Plan. 13 ARTICLE 6. DISTRIBUTION OF BENEFITS. Section 6.1. Distributions Pursuant to Deferral Election. The Participant shall, as part of his or her Permissible Deferral election, elect to begin receiving distributions with respect to a Permissible Deferral at either (a) the Participant's retirement; or (b) a date specified by the Participant in the election, which is at least five (5) years after the Plan Year to which the Permissible Deferral applies. If the Participant elects to defer distribution pursuant to (a), above, the timing and manner of distribution shall be determined in accordance with Sections 6.2 and 6.3. If a Participant elects to defer distributions pursuant to (b), above, distributions shall commence at the time designated by the Participant in his or her election and shall be made in the form of a lump sum (unless the Participant terminates employment or dies before such date, in which case Section 6.2 or 6.3, as the case may be, shall apply). Section 6.2. Distribution of Benefits Upon Termination of Employment. If a Participant terminates employment for any reason, except death, prior to distribution of the Participant's Account, the Participant's Account balance, determined as of the first day of the first month following the date of such termination, shall be distributed at the time and in the manner set forth in this Section 6.2. 6.2.1. Benefits Upon Retirement. If a Participant terminates employment with all Affiliates on or after Early Retirement Date or Normal Retirement Date, the Participant shall receive the balance in his Account in monthly installments over a period of fifteen (15) years. The monthly benefit amount shall be a level amount for each twelve-month period calculated using the balance in the Account at the beginning of the twelve-month period and dividing it by the total periods remaining in the entire payment period. The benefit payment shall be adjusted each subsequent twelve-month period to reflect the Account as of that time. The Participant's Account shall be credited during the payment period with interest at the Crediting Rate. 14 Payments pursuant to this Section 6.2.1 shall commence within an administratively practicable period of time following the date on which the Participant terminates employment. 6.2.2. Benefits Upon Resignation or Discharge. If a Participant terminates employment with all Affiliates before Early Retirement Date or Normal Retirement Date for reasons other than death, the Participant shall receive the balance in his Account in the form of monthly installments over a five-year period. The monthly benefit amount shall be a level amount for each twelve-month period calculated using the balance in the Account at the beginning of the twelve-month period and dividing it by the total periods remaining in the entire payment period. The benefit payment shall be adjusted each subsequent twelve-month period to reflect the Account as of that time. The rate at which the Account has been credited with interest shall be reduced retroactively to 90% of the Crediting Rate. The Account shall continue to be credited with interest at this reduced rate during the payment period. Payments pursuant to this Section 6.2.2 shall commence within an administratively practicable period of time following the date on which the Participant terminates employment. Section 6.3. Death Benefits. 6.3.1. Death After Benefit Commencement. In the event a Participant dies after benefits have commenced pursuant to Section 6.2.1 or 6.2.2, the Participant's remaining benefits, if any, shall be paid to the Participant's Beneficiary in the same manner such benefits would have been paid to the Participant had the Participant survived. 6.3.2. Death Prior to Benefit Commencement. In the event a Participant dies prior to the date on which benefits commence pursuant to Sections 6.2.1 or 6.2.2, the Participant's Account balance shall be paid to the Participant's Beneficiary in a lump sum within an administratively practicable time following the Participant's death. 15 Notwithstanding anything in the Plan to the contrary, the provisions of this Section 6.3.2 shall apply to the Participant's entire Account balance as of the date of his or her death, including any portion of the Participant's Account which may be attributable to Permissible Deferral elections first effective for Plan Years prior to 1994. 6.3.3. Marital Deduction. If any benefits are payable under the Plan to the surviving spouse of deceased Participant, the estate of the Participant's spouse shall be entitled to all remaining benefits, if any, at his or her death, unless specifically directed to the contrary by an effective beneficiary designation. 6.3.4. Designation by Participant. Each Participant has the right to designate primary and contingent Beneficiaries for death benefits payable under the Plan. Such Beneficiaries may be individuals or trusts for the benefit of individuals. A Beneficiary designation by a Participant shall be in writing on a form acceptable to the Committee and shall only be effective upon delivery to the Company. A Beneficiary designation may be revoked by a Participant at any time by delivering to the Company either written notice of revocation or a new Beneficiary designation form. The Beneficiary designation form last delivered to the Company prior to the death of a Participant shall control. 6.3.5. Failure to Designate Beneficiary. In the event there is no Beneficiary designation on file with the Company, or all Beneficiaries designated by a Participant have predeceased the Participant, the benefits payable by reason of the death of the Participant shall be paid to the Participant's spouse, if living; if the Participant does not leave a surviving spouse, to the Participant's issue by right of representation; or, if there are no such issue then living, to the Participant's estate. In the event there are benefits remaining unpaid at the death of a sole Beneficiary and no successor Beneficiary has been designated, the remaining balance of such benefit shall be paid to the deceased Beneficiary's estate. If there are benefits remaining unpaid at the death 16 of a Beneficiary who is one of multiple concurrent Beneficiaries, such remaining benefits shall be paid proportionally to the surviving Beneficiaries. Section 6.4. Minimum Amount and Frequency of Payments. The Committee may adjust the length of the distribution period under this Article 6 in order to assure that each monthly installment in not less than $1,000. The Committee may also, if it so elects, distribute benefits in installments on a basis which is more or less frequently than monthly. Section 6.5. Acceleration of Distributions. The Committee may, in its discretion, accelerate the distribution of, or alter the method of payment of, benefits payable to a Participant under the Plan. In addition, the Chief Executive Officer of the Company may direct that distributions be accelerated in the event a Participant is not a resident of the United States, or a United States citizen is permanently reassigned to a position outside the United States and its territories. If the Internal Revenue Service determines that a Participant or Beneficiary has received an economic benefit or is in constructive receipt of a benefit under the Plan and has made a final assessment of an income tax deficiency with respect to such benefit or if a final judicial determination has been entered that an income tax deficiency exists, the Committee shall distribute to such Participant an amount equal to the taxable income recognized. Section 6.6. Withdrawals. 6.6.1. Hardship Withdrawal. Upon the application of any Participant, the Committee, in accordance with its uniform, nondiscriminatory policy, may permit such Participant to terminate future deferrals or to withdraw some or all of his or her Account. A Participant must give a written petition of the termination of his or her deferral election at least thirty (30) days (or such shorter period of time as permitted by the Committee in its discretion) prior to the next deferral. A Participant must give a written petition of the intent to withdraw from his or her Account at least sixty (60) days (or such shorter time as permitted by the Committee in its discretion) prior to the date of withdrawal. No termination or withdrawal shall be made under the provisions of this Section except for the purpose of enabling a Participant to meet immediate 17 needs created by a financial hardship for which the Participant does not have other reasonably available sources of funds as determined by the Committee in accordance with uniform rules. The term "financial hardship" shall include the need for funds to: meet uninsured medical expenses for the Participant or his dependents, meet a significant uninsured casualty loss for the Participant or his dependents, and meet other catastrophes of a "sudden and serious nature." If a withdrawal is permitted, the amount of the withdrawal shall be distributed to the Participant in a single sum as soon as is administratively practicable. If a termination of deferrals or a withdrawal is made under this Section 6.6, the Participant may not enter into a new deferral election for two (2) complete Plan Years from the date of the termination or withdrawal. 6.6.2 Premature Distributions. Upon the application of any Participant, the Committee shall permit such Participant to receive a distribution of his or her entire Account prior to the time otherwise specified in the Plan for reasons other than financial hardship. A Participant must give a written petition of his or her intent to receive such a distribution at lease sixty (60) days (or such shorter time as permitted by the Committee in its discretion) prior to the date of the distribution. If a Participant elects to receive such a distribution: (a) a penalty shall be imposed such that the value of the Participant's Account, determined immediately prior to the distribution, shall be reduced by 10%; and (b) the Participant may not enter into a new deferral election for two (2) complete Plan Years following the date of the distribution. Section 6.7. Distributions on Plan Termination Notwithstanding anything in this Article 5 to the contrary, if the Plan is terminated, distributions shall be made in accordance with Section 9.2. Section 6.8. Claims Procedure Except as otherwise provided in Section 5.4(c) of the Trust, the following shall apply with respect to the claims of Participants for benefits under the Plan. The Committee shall notify a Participant in writing within ninety (90) days of the Participant's written application for benefits of his eligibility or noneligibility for benefits under the Plan. If the Committee determines that a Participant is not eligible for benefits or full benefits, the notice shall set forth (a) the specific reasons for such denial, (b) a specific reference to the provision of the Plan 18 on which the denial is based, (c) a description of any additional information or material necessary for the claimant to perfect his claim, and a description of why it is needed, and (d) an explanation of the Plan's claims review procedure and other appropriate information as to the steps to be taken if the Participant wishes to have his claim reviewed. If the Committee determines that there are special circumstances requiring additional time to make a decision, the Committee shall notify the Participant of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional 90-day period. If a Participant is determined by the Committee to be not eligible for benefits, or if the Participant believes that he is entitled to greater or different benefits, he shall have the opportunity to have his claim reviewed by the Committee by filing a petition for review with the Committee within sixty (60) days after receipt by him of the notice issued by the Committee. Said petition shall state the specific reasons the Participant believes he is entitled to benefits or greater or different benefits. Within sixty (60) days after receipt by the Committee of said petition, the Committee shall afford the Participant (and his counsel, if any) an opportunity to present his position to the Committee orally or in writing, and said Participant (or his counsel) shall have the right to review the pertinent documents, and the Committee shall notify the Participant of its decision in writing within said sixty (60) day period, stating specifically the basis of said decision written in a manner calculated to be understood by the Participant and the specific provisions of the Plan on which the decision is based. If, because of the need for a hearing, the sixty (60) day period is not sufficient, the decision may be deferred for up to another sixty (60) day period at the election of the Committee, but notice of this deferral shall be given to the Participant. ARTICLE 7. FUNDING Section 7.1. Source of Benefits. All benefits under the Plan shall be paid when due by the Company out of its assets or from the Trust. Section 7.2. No Claim on Specific Assets. No Participant shall be deemed to have, by virtue of being a Participant in the Plan, any claim on any specific assets of the Company such that the Participant would be subject to income taxation on his or her benefits under the Plan prior to 19 distribution and the rights of Participants and Beneficiaries to benefits to which they are otherwise entitled under the Plan shall be those of an unsecured general creditor of the Company. ARTICLE 8. ADMINISTRATION AND FINANCES Section 8.1. Administration. The Plan shall be administered by the Committee. The Company shall bear all administrative costs of the Plan other than those specifically charged to a Participant or Beneficiary. Section 8.2. Powers of Company. In addition to the other powers granted under the Plan, the Committee shall have all powers necessary to administer the Plan, including, without limitation, powers: (a) to interpret the provisions of the Plan; (b) to establish and revise the method of accounting for the Plan and to maintain the Accounts; and (c) to establish rules for the administration of the Plan and to prescribe any forms required to administer the Plan. Section 8.3. Actions of the Committee. Except as modified by the Board, the Committee (including any person or entity to whom the Committee has delegated duties, responsibilities or authority, to the extent of such delegation) has total and complete discretionary authority to determine conclusively for all parties all questions arising in the administration of the Plan, to interpret and construe the terms of the Plan, and to determine all questions of eligibility and status of employees, Participants and Beneficiaries under the Plan and their respective interests. Subject to the claims procedures of Section 6.8, all determinations, interpretations, rules and decisions of the Committee (including those made or established by any person or entity to whom the Committee has delegated duties, responsibilities or authority, if made or established pursuant to such delegation) are conclusive and binding upon all persons having or claiming to have any interest or right under the Plan. Section 8.4. Delegation. The Committee, or any officer designated by the Committee, shall have the power to delegate specific duties and responsibilities to officers or other employees of the 20 Company or other individuals or entities. Any delegation may be rescinded by the Committee at any time. Each person or entity to whom a duty or responsibility has been delegated shall be responsible for the exercise of such duty or responsibility and shall not be responsible for any act or failure to act of any other person or entity. Section 8.5. Reports and Records. The Committee, and those to whom the Committee has delegated duties under the Plan, shall keep records of all their proceedings and actions and shall maintain books of account, records, and other data as shall be necessary for the proper administration of the Plan and for compliance with applicable law. ARTICLE 9. AMENDMENTS AND TERMINATION Section 9.1. Amendments. The Company, by action of the Compensation Committee of the Board, or the Chief Executive Officer of the Company, to the extent authorized by the Compensation Committee of the Board, may amend the Plan, in whole or in part, at any time and from time to time. Any such amendment shall be filed with the Plan documents. No amendment, however, may be effective to eliminate or reduce the benefits of any retired Participant or the Beneficiary of any deceased Participant then eligible for benefits or the benefits in any active Participant's Account immediately before the date of such amendment. Section 9.2. Termination. The Company expects the Plan to be permanent, but necessarily must, and hereby does, reserve the right to terminate the Plan at any time by action of the Board. Upon termination of the Plan, all deferrals, transfers and Company contributions will cease and no future deferrals, transfers or Company contributions will be made. Termination of the Plan shall not operate to eliminate or reduce benefits of any retired Participant or the Beneficiary of any deceased Participant then eligible for benefits or the benefits in any active Participant's Account. If the Plan is terminated, payments from the Accounts of all Participants and Beneficiaries shall be made as soon as administratively convenient in the form of monthly payments over a three-year period, credited with interest at 90% of the Crediting Rate during the payment period; however, the Committee in its sole discretion may pay benefits in a lump sum. 21 ARTICLE 10. TRANSFERS. A Participant may transfer to the Plan amounts credited to the Participant under the Medtronic, Inc. Compensation Deferral Plan for Officers and Key Employees. Any such transfer shall be in accordance with procedures established by the Committee. Amounts transferred to the Plan pursuant to this Article 10 shall be credited with interest in accordance with Section 4.2. Distributions from the Account established pursuant to this Article 10 shall be made at the time and in the manner specified in Sections 6.2 through 6.8. ARTICLE 11. CHANGE IN CONTROL PROVISIONS Section 11.1. Application of Article 11. To the extent applicable, the provisions of this Article 11 relating to an Event of change in control of the Company shall control, notwithstanding any other provisions of the Plan to the contrary, and shall supersede any other provisions of the Plan to the extent inconsistent with the provisions of this Article 11. For purposes of this Article 11, an "Event" refers to an event of change in control of the Company as described in Section 3.1(b)(1) through (3) of the Trust. Section 11.2. Payments to and by the Trust. If the Company determines that it is probable that an Event may occur within the six-month period immediately following the date of determination, or if an Event in fact occurs in those situations where the Company has not otherwise made such a determination, the Company shall make a contribution to the Trust (if in existence at the date of determination or the date of the Event, as the case may be) in accordance with the provisions of the Trust. Solely for purposes of determining the amount of such contribution (but in no way in limitation of the Company's liability under the Plan as determined under other provisions of the Plan), the Company's total liability under the Plan shall be equal to the value of the current credit balances under all Accounts established under the Plan, including any interest credited to such Accounts under the terms of the Plan, which remain unpaid by the Company as of the date of determination or the date of the Event, as the case may be, whether or not amounts are otherwise currently payable to Participants or Beneficiaries under the Plan. All such contributions shall be made as soon as possible after the date of determination or of the Event, as the case may be, and shall be made in cash or property valued at fair market value. Further, the Company may, in its 22 discretion, make other contributions to the Trust from time to time for purposes of providing benefits hereunder, whether or not an Event has occurred or may occur. Notwithstanding the foregoing, any contributions to the Trust, as well as any income or gains thereon, shall be at all times subject to the provisions of the Trust, including but not limited to the provisions permitting a return of such contributions and income or gains thereon to the Company in certain circumstances. Payments of amounts credited to Accounts under the Plan with respect to those Participants and their Beneficiaries for whom Trust contributions are made shall be made first from the Trust in accordance with the terms of the Trust, but, to the extent not paid by the Trust, shall be paid by the Company. Section 11.3. Legal Fees and Expenses. The Company shall reimburse any Participant or his or her Beneficiary for all reasonable legal fees and expenses incurred by such Participant or Beneficiary after the date of any Event in seeking to obtain any right or benefit provided by the Plan. Section 11.4. No Reduction in Crediting Rate. If the Company determines that it is probable that an Event may occur within the six-month period immediately following the date of determination, or if an Event in fact occurs in those situations where the Company has not otherwise made such a determination, the Company shall not from and after the date of the determination or the date of the Event, as the case may be, amend the Plan to cause a reduction in the crediting rate applicable to a Participant's Account under the Plan. Section 11.5. Late Payment and Additional Payment Provisions. If, after the date of an Event, there is a delay in the payment of any amounts credited to an Account under the Plan beyond the final date for payment under the Plan, the amounts otherwise payable to any Participant or Beneficiary shall be increased by an amount equal to the stated interest which shall be credited to such amounts from the final date for payment of such amounts through the date that payment of such amounts (plus such credited interest) is actually made to the Participant or Beneficiary, compounded quarterly on a calendar year basis. The amount of stated interest to be so credited shall be equal to 23 the lesser of (i) the prime rate plus five (5) percentage points, or (ii) the prime rate multiplied by two. For purposes hereof, the prime rate shall be the prime rate of interest quoted by Wells Fargo Bank Minnesota, N.A., as its prime rate, determined each calendar quarter as the average of the daily prime rates in effect throughout such calendar quarter, averaged for the number of days for which the prime rates are quoted during such calendar quarter. In the event that stated interest is to be credited for some period less than a full calendar quarter, however, the stated interest shall be determined and compounded for the fractional quarter, with the prime rate determined as the average of the daily prime rates in effect throughout such fractional calendar quarter averaged for the number of days during such fractional calendar quarter for which prime rates are quoted. The increase in amounts otherwise payable under the Plan by the crediting of such stated interest represents a late payment penalty for the delay in payment. For purposes hereof, the final date for payment under the Plan shall be determined with reference to the otherwise applicable provisions of the Plan, provided, however, that the final date for commencement of benefit payments pursuant to Sections 6.2 and 6.3 shall be a date which is not later than forty-five (45) days after the earliest to occur of the Participant's retirement, resignation, discharge or death. In the event that payment of benefits has commenced to a Participant or Beneficiary prior to the date of an Event, then the final date for payment shall be determined with reference to the payment provision which was in effect prior to the date of the Event. No adjustment may be made to any payment form which was in effect prior to the date of an Event with respect to any Account which would have the effect of delaying payments otherwise to be made under the payment form or otherwise increasing the period of time over which payments are to be made. Any payment of benefits by the Company after the final date for payment of benefits as hereinabove determined shall be applied first against the first due of such payment of benefits (with application first against any applicable late payment penalty and next against the benefit amount itself) until fully paid, and next against the next due of such payments in the same manner, and so forth, for purposes of calculating the late payment penalties hereunder. 24 Participants and their Beneficiaries shall be entitled to the payment of amounts credited to their Accounts plus the late payment penalty referred to hereinabove first from the Trust and secondarily from the Company, as otherwise provided in Section 11.2. ARTICLE 12. MISCELLANEOUS Section 12.1. No Guarantee of Employment. Neither the adoption and maintenance of the Plan nor the execution by the Company of a Permissible Deferral agreement with any Participant shall be deemed to be a contract of employment between an Affiliate and any Participant. Nothing contained herein shall give any Participant the right to be retained in the employ of an Affiliate or to interfere with the right of an Affiliate to discharge any Participant at any time, nor shall it give an Affiliate the right to require any Participant to remain in its employ or to interfere with the Participant's right to terminate his employment at any time. Section 12.2. Release. Any payment of benefits to or for the benefit of a Participant or a Participant's Beneficiaries that is made in good faith by the Company in accordance with the Company's interpretation of its obligations hereunder, shall be in full satisfaction of all claims against the Company for benefits under this Plan to the extent of such payment. Section 12.3. Notices. Any notice permitted or required under the Plan shall be in writing and shall be hand delivered or sent, postage prepaid, by first class mail, or by certified or registered mail with return receipt requested, to the principal office of the Company, if to the Company, or to the address last shown on the records of the Company, if to a Participant or Beneficiary. Any such notice shall be effective as of the date of hand delivery or mailing. Section 12.4. Nonalienation. No benefit payable at any time under this Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, levy, attachment, or encumbrance of any kind by any Participant or Beneficiary. Section 12.5. Tax Liability. The Company may withhold or direct the trustee of the Trust to withhold from any payment of benefits such amounts as the Company determines are reasonably necessary to pay any taxes (and interest thereon) required to be withheld or for which the trustee of the Trust may become liable under applicable law. The Company may also forward or direct the 25 trustee of the Trust to forward to the appropriate taxing authority any amounts required to be paid by the Company or the Trust under the preceding sentence. Section 12.6. Captions. Article and section headings and captions are provided for purposes of reference and convenience only and shall not be relied upon in any way to construe, define, modify, limit, or extend the scope of any provision of the Plan. Section 12.7. Applicable Law. The Plan and all rights hereunder shall be governed by and construed according to the laws of the State of Minnesota, except to the extent such laws are preempted by the laws of the United States of America. Section 12.8. Invalidity of Certain Provisions. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of the Plan and the Plan shall be construed and enforced as if such provision had not been included. Section 12.9. No Other Agreements. The terms and conditions set forth herein constitute the entire understanding of the Company and the Participants with respect to the matters addressed herein. Section 12.10. Incapacity. In the event that any Participant is unable to care for his or her affairs because of illness or accident, any payment due may be paid to the Participant's spouse, parent, brother, sister or other person deemed by the Committee to have incurred expenses for the care of such Participant, unless a duly qualified guardian or other legal representative has been appointed. Dated: _______________ MEDTRONIC, INC. By ___________________________ Its Chief Executive Officer 26 EX-10 5 medtronic012520_ex10-8.txt EXHIBIT 10.8 STOCK OPTION REPLACEMENT PROGRAM EXHIBIT 10.8 STOCK OPTION REPLACEMENT PROGRAM -------------------------------- In keeping with the company's philosophy of encouraging stock ownership by officers and employees, the company offers several programs which allow officers and key employees to elect to receive stock options in lieu of some or all of the compensation earned under certain incentive plans or as sales commissions. By foregoing such compensation for stock options, the variable "at risk" component of each officer's or employee's compensation package is increased, motivating them to perform to enhance shareholder value over the long term. Under the program, the amount of the stock option grants are determined by the Compensation Committee of the Board of Directors and to date have primarily been on the basis of $4 in fair market value of stock options for each $1 of compensation foregone. EX-13 6 medtronic012520_ex13.txt EXH 13 PORTIONS OF MEDTRONIC'S 2001 ANNUAL REPORT 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, tachyarrhythmia management, atrial fibrillation, heart failure, 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. In fiscal 2001 Medtronic continued to benefit from the major acquisitions it made during fiscal years 2000 and 1999. These acquisitions have effectively diversified and strengthened the growth profile of the Company. During 2001 the Company also launched major new products in every business unit and built a strong pipeline for future product introductions. In December 2000, the Company merged with PercuSurge, Inc. (PercuSurge), a leading developer of interventional embolic protection devices. PercuSurge currently markets a patented system outside the United States that helps remove embolic material that is often dislodged during the treatment of arteriosclerosis, and has recently received approval from the United States Food and Drug Administration (FDA) to market the system in the United States. The merger with PercuSurge was accounted for as a pooling of interests, and accordingly, all previously reported results have been restated to include PercuSurge results. Subsequent to year-end, Medtronic announced an agreement to acquire MiniMed Inc. (MiniMed), the world leader in the design, development, manufacture and marketing of advanced medical systems for the treatment of diabetes, and Medical Research Group, Inc. (MRG), a company that designs and develops technologies related to implantable pumps and sensors used in the treatment of diabetes. Medtronic expects to complete these two acquisitions, valued at approximately $3.7 billion, during the second quarter of fiscal 2002. Fiscal 2001 revenue grew for the 16th consecutive year to $5,551.8 million, a 10.7% increase over the $5,016.3 million reported in fiscal 2000. Foreign exchange rate fluctuations had an unfavorable year-to-year impact on international revenues of $149.2 million in 2001, $33.5 million in 2000, and $11.7 million in 1999. After excluding the effect of foreign currency translation, revenues increased 13.7% and 19.3% in fiscal years 2001 and 2000, respectively. Revenue growth during 2001 was balanced and diversified across all of Medtronic's businesses, the result of strategic decisions made over the last several years to add new growth platforms to the Company through mergers and acquisitions, combined with solid internal growth driven by new product introductions. Net earnings and diluted earnings per share were $1,046.0 million and $0.85, $1,084.2 million and $0.89, and $466.7 million and $0.39 in fiscal years 2001, 2000 and 1999, respectively. In these years, the Company recorded the following non-recurring charges: 1 * Fiscal 2001: net pre-tax charges totaling $347.2 million for litigation and related asset write downs, contributions to the Medtronic Foundation, transaction costs related to the merger with PercuSurge and restructuring initiatives aimed at further streamlining operations. * Fiscal 2000: pre-tax charges of $38.7 million for transaction costs related to the merger with Xomed Surgical Products, Inc. (Xomed), a litigation settlement and restructuring initiatives. In connection with the substantial completion of the 1999 restructuring initiatives, the Company identified and reversed $24.9 million of previously recorded reserves no longer considered necessary, resulting in a net pre-tax charge for fiscal 2000 of $13.8 million. * Fiscal 1999: pre-tax charges totaling $554.1 million related to the acquisition and integration of Physio-Control International Corporation (Physio-Control), Sofamor Danek Group (Sofamor Danek), Arterial Vascular Engineering Inc. (AVE) and AVECOR Cardiovascular, Inc. (AVECOR). Excluding the effects of these non-recurring charges, diluted earnings per share in fiscal years 2001, 2000 and 1999 would have been $1.05, $0.90 and $0.75, respectively, a growth of 16.7% in 2001 and 20.0% in 2000. NET SALES Sales in the United States increased 13.0% and 19.2% in fiscal years 2001 and 2000. Sales outside the United States increased 15.2% in fiscal 2001 and 19.5% in fiscal 2000 on a constant currency basis. Foreign exchange rate movements had an unfavorable year-to-year impact on international net sales. 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 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 Management; Neurological, Spinal and ENT; Vascular; and Cardiac Surgery. Net sales by business unit were as follows (in millions): APRIL 27, April 30, April 30, Year ended: 2001 2000 1999 - -------------------------------------------------------------------------------- Cardiac Rhythm Management $ 2,656.8 $ 2,504.7 $ 2,121.6 Neurological, Spinal and ENT 1,478.9 1,252.4 998.0 Vascular 928.6 792.5 718.9 Cardiac Surgery 487.5 466.7 394.0 - -------------------------------------------------------------------------------- $ 5,551.8 $ 5,016.3 $ 4,232.5 ================================================================================ 2 Cardiac Rhythm Management sales grew 9.3% in fiscal 2001 and 19.0% in fiscal 2000, after removing the impact of foreign exchange rate fluctuations. Cardiac Rhythm Management products consist primarily of pacemakers, implantable and external defibrillators, leads and ablation products. Sales of pacing products grew in the high single digits for the year, continuing to exceed market growth. The Medtronic Kappa and Sigma pacemakers continued to lead the global pacing industry, while the Medtronic Vitatron brand continued to be the fastest growing pacemaker brand worldwide. Sales growth of implantable defibrillators declined to the mid teens for the year, following a similar deceleration in the growth of the tachyarrhythmia market. The Company expects the long-term growth rate for this highly under-penetrated market to be in the mid teens. Major products launched in the past year include the Medtronic Jewel AF, the world's first implantable cardioverter defibrillator for treating multiple and rapid rhythm problems, the GEM III, and the GEM III AT for the treatment of atrial and ventricular fibrillation. In the yet untapped market for heart failure, the Medtronic Attain over-the-wire, steroid eluting left-heart lead and InSync III, the first triple chamber stimulator, entered clinical evaluations, and the Medtronic InSync and InSync implantable cardioverter defibrillator designed to provide cardiac resynchronization therapy were submitted to the FDA for pre-market approval. Neurological, Spinal, and ENT sales increased 20.4% in fiscal 2001 and 26.0% in fiscal 2000, exclusive of the effects of foreign exchange rate fluctuations. Neurological, Spinal and ENT products consist primarily of implantable neurostimulation devices, drug administration systems, spinal products, neurosurgery products, functional diagnostics equipment and surgical products used by ENT physicians. Sales of spinal and neurosurgery products increased over 20% from the prior year, benefiting from the breadth of the product line, including engineered bone dowels, bone wedges and spinal cages. During the year, the Company announced the launch of the StealthStation TREON Treatment Guidance System to further improve accuracy and precision during brain and spinal surgery and the LT-CAGE Lumbar Tapered Fusion Device for use in spinal fusion surgery. Sales of core neurological product lines (consisting of neurostimulation devices, drug administration systems, and functional diagnostics equipment) grew in the high teens from the prior year benefiting from the 2001 launch of the Medtronic Synergy neurostimulation device for pain and the Medtronic IsoMed Constant-Flow Infusion System used in the treatment of chronic pain and colorectal cancer. The significant growth in fiscal 2000 was driven by the introduction of several major new products. The Company is awaiting FDA approval of its Activa Parkinson's Disease deep brain stimulation therapy and of its recombinant version of naturally occurring bone morphogenetic protein (rh-BMP2), known as InFUSE Bone Graft. Net sales of Vascular products increased 20.7% and 10.8% in fiscal years 2001 and 2000, after excluding the effects of foreign exchange rate fluctuations. Vascular products consist of stents, balloon and guiding catheters and peripheral vascular products. Revenue growth was driven by strong acceptance of the full-featured S660 and S670 coronary stents, as well as the BeStent 2 coronary stent. In the last quarter of the year the 3 Company announced the commercial release of the S7 coronary stent system, in both over-the-wire and rapid exchange perfusion versions. In fiscal 2001 the Company merged with PercuSurge and subsequent to year-end, it received FDA approval for the Medtronic PercuSurge Guardwire Plus temporary occlusion and aspiration system for distal protection. Subsequent to year end, an arbitration panel determined that certain rapid exchange perfusion delivery systems marketed by the Company infringed a patent held by Boston Scientific Corporation (Boston Scientific), and allowed for an injunction on future U.S. sales of these delivery systems. The Company believes that these actions will not materially affect future worldwide revenues, as they only impact sales of these products in the United States where the Company markets stents on alternative delivery systems, which are not subject to the arbitration decision. In addition, the Company offers the only distal protection system approved for the U.S. market. Peripheral vascular revenues increased modestly from last year, as the Company temporarily suspended manufacturing of the Medtronic AneurRx stent graft for the treatment of abdominal aortic aneurysms during fiscal 2001 to implement manufacturing improvements. The Company has resumed full production of this product, the industry leader in the U.S. market. Cardiac Surgery net sales increased 8.0% and 19.8% in 2001 and 2000, respectively, after excluding the effects of foreign exchange rate fluctuations. Cardiac Surgery products include heart valves, perfusion systems, minimally invasive cardiac surgery products and surgical accessories. The growth in fiscal 2001 is the result of the growth in tissue valve sales and in sales of minimally invasive cardiac surgery products, which facilitate precision suturing on a beating heart. Perfusion systems revenues remained level with last year, reflecting the continued industry shift toward beating-heart procedures. The March 1999 purchase of AVECOR, which was accounted for as a purchase, accounted for a portion of the growth during fiscal 2000. During fiscal 2001, the Company received FDA clearance to market its Mosaic tissue heart valve, which is expected to be fully released during fiscal 2002. COSTS AND EXPENSES The following is a summary of major costs and expenses as a percentage of net sales: APRIL 27, April 30, April 30, Year Ended: 2001 2000 1999 - -------------------------------------------------------------------------------- Cost of products sold 25.4% 25.2% 26.1% Research & development 10.4 9.7 10.4 Selling, general & administrative 30.4 31.5 31.3 Non-recurring charges 6.1 0.3 12.4 Other (income) expense 1.2 1.4 0.8 Interest (income) expense (1.3) (0.3) (0.5) ================================================================================ Cost of Products Sold: Fiscal 2001 cost of products sold included an $8.4 million charge for excess inventory related to the July 2001 arbitration ruling, which allows Boston Scientific to enjoin the Company from selling certain rapid exchange perfusion delivery 4 systems found to be in violation of a patent held by Boston Scientific. Without this charge, cost of products sold as a percentage of net sales in fiscal 2001 would have been 25.3%, consistent with fiscal 2000 levels. Fiscal 1999 cost of products sold included $29.0 million of charges related to inventory obsolescence in the vascular and cardiac surgery product lines following the merger with AVE, and the acquisitions of the coronary catheter lab of C.R. Bard, Inc. (Bard cath lab) and AVECOR. Without this charge, cost of products sold as a percentage of net sales in fiscal 1999 would have been 25.4%. 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. Royalty expense and intellectual property amortization expense, previously included in cost of products sold, have been reclassified to Other Income/Expense for all periods presented. Research and Development: During fiscal 2001, Medtronic continued to invest heavily in the future by spending aggressively on research and development (R&D) efforts. The Company is committed to develop technological enhancements and new indications for existing products, to develop less invasive and new technologies to address unmet patient needs and to help reduce patient care costs and length of hospital stay. Selling, General & Administrative: The decrease in selling, general, and administrative expense (SG&A), as a percent of sales in fiscal 2001 from prior years' levels is attributable primarily to continued cost control measures, partially offset by increased field sales coverage expenses. Royalty income, foreign currency hedging gains and losses, minority investment gains and losses and goodwill amortization, previously included in SG&A have been reclassified to Other Income/Expense for all periods presented. Non-Recurring Charges: As previously mentioned and as further discussed in Note 3 to the consolidated financial statements, the Company recorded pre-tax charges totaling $347.2 million, $13.8 million and $554.1 million during fiscal years 2001, 2000 and 1999, respectively. In fiscal 2001 the Company recorded net charges for litigation, contributions to the Medtronic Foundation and transaction costs related to the merger with PercuSurge. During the fourth quarter of the year, the Company announced restructuring initiatives totaling $47.0 to $52.0 million aimed at further streamlining operations. These initiatives are focused on restructuring certain neurological sales organizations, reducing and consolidating certain manufacturing operations, and streamlining and reorganizing European sales organizations to further integrate prior acquisitions. These initiatives will result in the termination of approximately 650 employees, a net reduction of 450 positions, and in annualized savings of approximately $35.0 to $40.0 million. The Company recognized $14.5 million of the total estimated charges in the current fiscal year, and intends to complete all activities necessary to recognize the remaining charges in the first quarter of fiscal 2002. 5 Subsequent to year-end, the Company received two adverse patent infringement decisions. In June 2001, an appeals court affirmed an earlier judgment against the Company in a patent infringement lawsuit commenced by AcroMed Corporation. The amount of the judgment plus interest totaled $52.1 million and was reflected in fiscal 2001 results. In July 2001, an arbitration panel determined that certain Medtronic rapid exchange perfusion delivery systems infringed a patent held by Boston Scientific, and awarded damages of approximately $169.0 million, plus legal costs. The Company had asserted that it had acquired the right to use these patents as part of the Bard cath lab acquisition in 1998. In connection with this arbitration award, the Company wrote off $21.0 million of intangible assets specifically related to the rapid exchange perfusion technology, and $37.2 million of the goodwill recorded for the Bard cath lab acquisition. The goodwill impairment amount was determined on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangibles acquired from C.R. Bard, Inc. The arbitration panel also allowed for an injunction on future U.S. sales of these delivery systems, and accordingly, the Company wrote off $8.4 million of excess rapid exchange perfusion inventory. These charges have been reflected in fiscal 2001 results. In fiscal 2000 the Company recorded charges for transaction costs in connection with the merger with Xomed, a litigation settlement, the termination of a distribution relationship and the conversion of certain direct sales operations in Latin America to distributor arrangements. These restructuring efforts were substantially completed during fiscal 2001. During fiscal 1999, the Company recorded charges for transaction costs incurred in connection with the mergers with Physio-Control, Sofamor Danek, and AVE. These charges included $152.0 million for purchased in-process research and development costs. 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 fiscal 1999, 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 resulting in 2,450 net positions reduced. Of the employees identified for termination, 2,585 were in manufacturing positions. The Company estimated that these actions would result in annual cost savings in excess of $70.0 million. The Company has completed these initiatives and has achieved the cost savings originally estimated. As the Company had substantially completed these initiatives in the fourth quarter of fiscal 2000, it identified and reversed $24.9 million of reserves no longer considered necessary. During fiscal 1999 AVE acquired World Medical Manufacturing Corporation (World Medical) and expensed $45.8 million of the purchase price for purchased in-process research and development that had not yet reached technological feasibility and had no alternative future use, including the Talent System and two smaller programs. The Talent System is an endovascular stent graft used to repair abdominal aortic aneurysms. At the 6 time of the World Medical acquisition, AVE did not have an endovascular stent graft product offering and the Talent project was expected to enable AVE to enter this high-potential new market. At the acquisition date, the clinical trials and the receipt of regulatory approvals in the U.S. remained to be completed in order to commercialize the product. At the present time the Talent system is being sold in Europe and has completed U.S. clinical trials. The expected costs associated with completing these tasks were $4.6 million in fiscal 2001, $3.6 million in fiscal 2000, and $0.9 million in fiscal 1999. The total remaining expected costs to commercialization are $3.4 million. These costs are being funded by internally generated cash flows. Also in fiscal 1999, AVE acquired Bard cath lab and expensed $95.3 million of the purchase price for purchased in-process research and development that had not yet reached technological feasibility and had no alternative use, including a rapid exchange perfusion catheter, a stent development program and eight other minor product categories. At the time of the Bard cath lab acquisition, AVE did not have a rapid exchange perfusion catheter product offering and the rapid exchange perfusion project was expected to enable AVE to better compete in this market. The stent program was expected to result in significant improvements to existing technology. In fiscal 1999, most of the Bard cath lab projects were in the design stage, with clinical trials and regulatory approval remaining to be completed in order to commercialize the products. In fiscal 2000, the Company introduced its S670 rapid exchange perfusion coronary stent system in the U.S, and in fiscal 2001 it launched the S660 with discrete technology rapid exchange perfusion coronary stent system for smaller vessels and the BeStent 2 rapid exchange perfusion coronary stent delivery system using technology from the acquisition of Bard cath lab. In April 2001, the S7 with discrete technology rapid exchange perfusion coronary stent system received FDA approval. Subsequent to year end, an arbitration panel determined that certain Medtronic rapid exchange perfusion delivery systems infringed a patent held by Boston Scientific, as further discussed in Note 15 to the consolidated financial statements. The expected costs associated with completing these tasks were $7.2 million in fiscal 2001, $4.6 million in fiscal 2000, and $0.8 million in fiscal 1999. The total remaining expected costs to commercialization are $1.0 million. These costs are being funded by internally generated cash flows. In April 1999, the Company acquired certain advanced catheter delivery technology from Micro Motion and expensed $9.8 million for the purchase of in-process research and development. In addition, during fiscal 1999 Xomed wrote off approximately $1.1 million of the purchase price it paid for the acquisition of Etalissements Boutmy, S.A. for purchased in-process research and development. The values assigned to purchased in-process research and development were determined by estimating the future after-tax net cash flows attributable to the projects and discounting these cash flows back to their present value. Discount rates included a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process research and development. The values assigned to the World Medical and Bard cath lab purchased in-process research and development were based on 7 valuations prepared by independent third-party appraisers and were determined by identifying research projects in areas for which technological feasibility had not been established. 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. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing and conducting clinical trials necessary to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain regulatory approvals to conduct clinical trials, delay or failure to obtain required market clearances, and patent litigation. If commercial viability were not achieved, the Company would look to other alternatives to provide these solutions. The 1999 charges also included a $29.0 million charge for obsolete inventories in the vascular and cardiac surgery product lines, following the acquisitions of Bard cath lab and AVECOR. In conjunction with the integration efforts, and in order to streamline production and improve operating efficiency, management identified several duplicate product lines, which were to be discontinued over a period of six months. Inventories associated with the product lines to be discontinued, including finished goods, work in process, and dedicated raw materials, were specifically identified by operating personnel. In the case of vascular product lines, an estimate was made as to the amount of inventory that would be required for sales through the stated date of discontinuation. In the case of cardiac surgery product lines, an estimate was made as to the amount of inventory that would be needed to service units in the field. In both cases, the estimates were based on recent results, including actual monthly product sales and historical warranty repairs. Inventories in excess of requirements were written off in full, as the excess products had no alternative use or salvage value. Other Income/Expense: Other income/expense includes goodwill and intellectual property amortization expense, royalty income and expense, minority investment gains and losses and foreign currency hedging gains and losses. The increase in other expense, net in 2001 and 2000 compared to 1999 levels is primarily the result of goodwill amortization stemming from the acquisitions of Bard cath lab and AVECOR during fiscal 1999, partially offset by gains from foreign currency hedging activities. Interest Income/Expense: Net interest income was $74.2 million, $15.7 million and $23.0 million in fiscal years 2001, 2000 and 1999, respectively. Interest income increased during fiscal 2001 as a result of higher cash balances attributable to larger inflows from operations and the discontinuation of the Company's systematic share repurchase program during the fourth quarter of fiscal 2000. Interest income was higher in fiscal 1999 than in 2000 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. 8 Subsequent to year-end, the Company announced its intention to acquire MiniMed for cash consideration of approximately $3.3 billion and MRG for cash and stock consideration of approximately $420.0 million. The Company is evaluating alternatives to finance these acquisitions, some of which may have a significant impact on interest income/expense in fiscal 2002. INCOME TAXES The Company's effective income tax rate was 32.5%, 32.9% and 43.4% for fiscal years 2001, 2000 and 1999, respectively. Excluding non-recurring charges, the effective income tax rate would have been 32.4%, 32.7% and 34.3%, respectively. The reduction in the fiscal 2001 and 2000 effective income tax rate is due to tax planning initiatives including proportionally higher profits generated in low tax jurisdictions. The Company expects to further reduce its effective income tax rate in fiscal 2002 as it pursues additional tax savings opportunities. LIQUIDITY AND CAPITAL RESOURCES SUMMARY The Company maintained its strong financial position in fiscal 2001. At April 27, 2001, working capital, the excess of current assets over current liabilities, totaled $2,397.5 million compared to $2,041.9 million at April 30, 2000. The current ratio at April 27, 2001 and April 30, 2000, was 2.8:1 and 3.1:1, respectively. 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 $1,073.0 million at April 27, 2001, compared to $245.4 million at April 30, 2000. In addition, at April 27, 2001 the Company had approximately $415.0 million of available-for-sale debt securities included in long-term investments. 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 27, 2001, and April 30, 2000, the Company had sold approximately $60.0 million and $64.0 million, respectively, 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. Subsequent to year-end the Company announced an agreement to acquire MiniMed and MRG for consideration of approximately $3.7 billion. The Company is evaluating alternatives to finance these transactions. CASH FLOW Cash provided by operating activities was $1,831.5 million in fiscal 2001, $1,026.4 million in fiscal 2000 and $455.8 million in fiscal 1999. The increase in operating cash flows in fiscal 2001 over fiscal 2000 is the result of growth in earnings before non-recurring charges and significant decreases in prepaid expenses, primarily income taxes, coupled with effective asset management initiatives. Fiscal 2000 operating cash flows 9 increased over fiscal 1999 as a result of earnings growth, a high level of transaction costs related to the 1999 mergers as well as restructuring spending in fiscal 1999. The Company invested $1,025.5 million, $377.0 million and $1,342.4 million of its cash in purchases of marketable securities, acquisitions, and additions to property, plant and equipment in fiscal years 2001, 2000 and 1999, 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. Repurchases of common stock totaled $497.4 million in fiscal 2000, and $377.2 million in fiscal 1999. There were no repurchases of common stock in fiscal 2001 as the Company discontinued its systematic share repurchase program in the fourth quarter of fiscal 2000. Dividends paid to shareholders totaled $240.7 million, $189.5 million and $131.9 million in fiscal years 2001, 2000 and 1999, 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. In June 2001, the Company adopted a new share repurchase program to purchase from time to time up to 25 million shares of its common stock for general corporate purposes. DEBT AND CAPITAL The Company's capital structure consists of equity and interest-bearing debt. Interest-bearing debt as a percent of total capital was 2.8% at April 27, 2001 and 6.8% at April 30, 2000. The Company has existing lines of credit totaling $850.0 million with various banks, of which approximately $707.0 million was available at April 27, 2001. 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. ROE was 20.9%, 26.1% and 14.3% in fiscal years 2001, 2000 and 1999, respectively. Excluding the effects of the $347.2 million, $13.8 million and $554.1 million pre-tax charges taken in fiscal years 2001, 2000, and 1999, ROE would have been 25.0%, 25.0% and 25.5%, respectively. In each of the preceding thirteen years, ROE exceeded 20%. 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 and 11.2 million shares at an average price of $33.80 per share during fiscal 1999. 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. OPERATIONS OUTSIDE OF THE UNITED STATES Sales outside the United States during fiscal years 2001, 2000 and 1999 accounted for 33.3%, 34.6% and 35.0% of total sales, respectively. International sales have grown at a 10 slower rate than overall Company sales as a result of foreign exchange rate fluctuations. Sales outside the United States are accompanied by certain financial risks, such as collection of receivables, which typically have longer payment terms. Outstanding receivables from customers located outside of the United States totaled $527.6 million at April 27, 2001 or 41.8% of total outstanding receivables, and $544.6 million or 43.9% of total receivables outstanding at April 30, 2000. Operations outside the United States could be negatively impacted by unfavorable changes in political, labor or economic conditions, unexpected changes in regulatory requirements or potential adverse foreign tax consequences, among other factors. MARKET RISK Due to the global nature of its operations, the Company is subject to the exposures that arise from foreign exchange rate fluctuations. The Company manages these exposures using operational and economic hedges as well as derivative financial instruments. Main currencies hedged are the Yen and the Euro. 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, net investments, and probable commitments. 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 2001 were successful in minimizing the net earnings and cash flow impact of currency fluctuations despite volatile market conditions. The Company had forward exchange contracts outstanding in notional amounts of $382.3 million and $537.2 million at April 27, 2001 and April 30, 2000, respectively. The fair value of all foreign currency derivative contracts outstanding at April 27, 2001 was $18.3 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 27, 2001 indicates that, if the U.S. dollar uniformly weakened by 10% against all currencies, the fair value of these contracts would decrease by $35.1 million. Conversely, if the U.S. dollar uniformly strengthened by 10% against all major currencies, the fair value of these contracts would increase by $31.4 million. Any gains and losses on the fair value of derivative contracts would be largely offset by losses and gains on the underlying 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. A sensitivity analysis of the impact on the Company's interest rate sensitive financial instruments of a hypothetical 10% decrease in short-term interest rates compared to interest rates at April 27, 2001 indicates that the fair 11 value of these instruments would increase by $4.2 million. Conversely, a 10% increase would decrease the value of these instruments by $4.1 million. 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. Government programs including Medicare and Medicaid, private health care insurance and managed care plans have attempted to control costs by limiting the amount of reimbursement such third party payors will pay to hospitals, other medical institutions and physicians for particular procedures or treatments. Such limitations may create an increasing level of price sensitivity among customers for the Company's products. Some third party payors must also approve coverage for new or breakthrough therapies before they will reimburse health care providers using the products. Even though a new product may have been cleared for commercial release by the FDA as described below, the Company may find limited demand for a new or breakthrough therapy until obtaining reimbursement approval from private and governmental third party payors. 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 of these changes on future operating results. In the United States, the FDA, among other governmental agencies, is responsible for regulating the introduction of new medical devices, including the review of design and manufacturing practices, labeling and recordkeeping for medical devices, and review of manufacturers' required reports of adverse experience and other information 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. 12 The FDA Modernization Act of 1997 was adopted with the intent of bringing better definition to the FDA's product 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. 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 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. 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 lead to pressure on product pricing and increased use of preferred vendors. 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 a number of patent infringement actions. With regard to patent applications, there can be no assurance that such applications will result in issued patents or that patents issued or licensed to the Company will not be challenged or circumvented by competitors. 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 may 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 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 13 that such compliance will not have a material 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. 14 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. Arthur D. Collins, Jr. President and Chief Executive Officer Robert L. Ryan Senior Vice President and Chief Financial Officer 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Medtronic, Inc. In our opinion, the accompanying consolidated balance sheets 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 27, 2001 and April 30, 2000, and the results of their operations and their cash flows for each of the three years in the period ended April 27, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 of America 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 our opinion. PricewaterhouseCoopers LLP Minneapolis, Minnesota May 22, 2001, except for Note 3 and Note 15, which are as of July 18, 2001 16
STATEMENT OF CONSOLIDATED EARNINGS (in millions, except per share data) Medtronic, Inc. - ------------------------------------------------------------------------------------------------- Year ended APRIL 27, April 30, April 30, 2001 2000 1999 - ------------------------------------------------------------------------------------------------- NET SALES $ 5,551.8 $ 5,016.3 $ 4,232.5 COSTS AND EXPENSES: Cost of products sold 1,410.6 1,265.8 1,105.3 Research and development expense 577.6 488.2 441.6 Selling, general, and administrative expense 1,685.2 1,578.8 1,325.2 Non-recurring charges 338.8 13.8 525.1 Other (income)/expense 64.4 70.6 33.2 Interest (income)/expense (74.2) (15.7) (23.0) - ------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 4,002.4 3,401.5 3,407.4 EARNINGS BEFORE INCOME TAXES 1,549.4 1,614.8 825.1 PROVISION FOR INCOME TAXES 503.4 530.6 358.4 - ------------------------------------------------------------------------------------------------- NET EARNINGS $ 1,046.0 $ 1,084.2 $ 466.7 ================================================================================================= EARNINGS PER SHARE BASIC $ 0.87 $ 0.91 $ 0.40 - ------------------------------------------------------------------------------------------------- DILUTED $ 0.85 $ 0.89 $ 0.39 ================================================================================================= Weighted average shares outstanding Basic 1,203.0 1,194.7 1,177.3 - ------------------------------------------------------------------------------------------------- Diluted 1,226.0 1,223.4 1,209.6 =================================================================================================
See accompanying notes to consolidated financial statements. 17
CONSOLIDATED BALANCE SHEET (in millions of dollars, except per share data) Medtronic, Inc. - ----------------------------------------------------------------------------------------------- APRIL 27, April 30, 2001 2000 - ----------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,030.3 $ 467.8 Short-term investments 201.4 109.7 Accounts receivable, less allowance for doubtful accounts of $34.9 and $30.2 1,226.1 1,210.6 Inventories 729.5 691.7 Deferred tax assets 281.5 160.5 Prepaid expenses and other current assets 288.0 396.0 - ----------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 3,756.8 3,036.3 PROPERTY, PLANT, AND EQUIPMENT, NET 1,176.5 948.0 GOODWILL AND OTHER INTANGIBLE ASSETS, NET 1,235.3 1,361.4 LONG-TERM INVESTMENTS 683.2 210.1 OTHER ASSETS 187.1 138.3 - ----------------------------------------------------------------------------------------------- TOTAL ASSETS $ 7,038.9 $ 5,694.1 =============================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 145.4 $ 317.2 Accounts payable 205.9 201.1 Accrued compensation 248.2 236.6 Accrued income taxes 204.1 - Other accrued expenses 555.7 239.5 - ----------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,359.3 994.4 LONG-TERM DEBT 13.3 14.9 DEFERRED TAX LIABILITIES - 15.2 LONG-TERM ACCRUED COMPENSATION 88.3 95.7 OTHER LONG-TERM LIABILITIES 68.5 61.4 - ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,529.4 1,181.6 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY: Preferred stock--par value $1.00; 2,500,000 shares authorized, - - none outstanding Common stock--par value $0.10; 1.6 billion shares authorized, 1,209,514,816 and 1,198,357,035 shares issued and outstanding 121.0 119.8 Retained earnings 5,576.3 4,564.1 Accumulated other non-owner changes in equity (168.8) (151.9) - ----------------------------------------------------------------------------------------------- 5,528.5 4,532.0 Receivable from Employee Stock Ownership Plan (19.0) (19.5) - ----------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 5,509.5 4,512.5 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,038.9 $ 5,694.1 ===============================================================================================
See accompanying notes to consolidated financial statements. 18
STATEMENT OF CONSOLIDATED SHAREHOLDER'S EQUITY (in millions of dollars) Medtronic, Inc. - ------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Non- Receivable Total Common Retained Owner Changes from Shareholders' Stock Earnings in Equity ESOP Equity ---------------------------------------------------------------- BALANCE APRIL 30, 1998 $ 116.1 $2,712.9 $ (54.9) $ (27.9) $2,746.2 Net earnings - 466.7 - - 466.7 OTHER NON-OWNER CHANGES IN EQUITY Change in unrealized gain (loss) on investments, 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 - - - - 426.5 -------- Adjustment for poolings of interest - 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 Issuance of common stock by pooled entities - 20.7 - - 20.7 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 $3,791.4 $ (95.1) $ (26.2) $3,789.2 Net earnings - 1,084.2 - - 1,084.2 OTHER NON-OWNER CHANGES IN EQUITY Change in unrealized gain (loss) on investments, 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 - - - - 1,027.4 -------- Adjustment for poolings 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 Issuance of common stock by pooled entities - 16.9 - - 16.9 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 $4,564.1 $ (151.9) $ (19.5) $4,512.5 Net earnings - 1,046.0 - - 1,046.0 OTHER NON-OWNER CHANGES IN EQUITY Change in unrealized gain (loss) on investments, net of $10.6 tax expense - - 19.4 - 19.4 Translation adjustment - - (39.2) - (39.2) Minimum pension liability - - 2.9 - 2.9 -------- Total comprehensive income - - - - 1,029.1 -------- Adjustment for poolings of interests - (1.4) - - (1.4) Dividends paid - (240.7) - - (240.7) Issuance of common stock under employee benefits and incentive plans 1.2 147.5 - - 148.7 Income tax benefit from restricted stock and nonstatutory stock options - 60.8 - - 60.8 Repayments from ESOP - - - 0.5 0.5 - --------------------------------------------------------------------------------------------------------------------------- BALANCE APRIL 27, 2001 $ 121.0 $5,576.3 $ (168.8) $ (19.0) $5,509.5 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 19
STATEMENT OF CONSOLIDATED CASH FLOWS (in millions of dollars) Medtronic, Inc. - -------------------------------------------------------------------------------------------------------- Year ended APRIL 27, April 30, April 30, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $1,046.0 $1,084.2 $ 466.7 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 297.3 243.9 219.1 Non-recurring charges, net 317.1 8.5 179.6 Deferred income taxes (152.2) 71.1 (35.5) Changes in operating assets and liabilities: Accounts receivable (44.1) (193.2) (184.4) Inventories (44.5) (120.0) (91.3) Prepaid expenses and other assets 45.6 (118.6) (128.0) Accounts payable and accrued liabilities 31.8 249.0 82.3 Income tax receivable/payable 333.4 (178.8) (56.0) Other long-term liabilities 1.1 (19.7) 3.3 - ------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,831.5 1,026.4 455.8 INVESTING ACTIVITIES Additions to property, plant, and equipment (439.7) (342.5) (236.2) Acquisitions, net of cash acquired - - (1,017.4) Sales and maturities of marketable securities 923.0 268.9 659.0 Purchases of marketable securities (1,390.0) (258.4) (701.6) Other investing activities (118.8) (45.0) (46.2) - ------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,025.5) (377.0) (1,342.4) FINANCING ACTIVITIES Increase (decrease) in short-term borrowings (152.2) 59.1 113.6 Payments on long-term debt (10.2) (9.7) (615.2) Issuance of long-term debt 8.7 .6 572.7 Dividends to shareholders (240.7) (189.5) (131.9) Repurchases of common stock - (497.4) (377.2) Issuance of common stock 148.7 210.9 1,042.8 - ------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (245.7) (426.0) 604.8 Effect of exchange rate changes on cash and cash equivalents 2.2 (3.0) (1.9) NET CHANGE IN CASH AND CASH EQUIVALENTS 562.5 220.4 (283.7) Cash and cash equivalents at beginning of year 467.8 247.4 531.1 - ------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $1,030.3 $ 467.8 $ 247.4 ======================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 338.1 $ 401.8 $ 376.2 Interest 17.0 14.0 29.2 - ------------------------------------------------------------------------------------------------------- 20 Supplemental Non-cash Investing and Financing Activities Issuance of common stock for acquisition of subsidiary, net of cash acquired $ - $ - $ 164.3 - -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Medtronic, Inc. (dollar amounts in millions, except per share data) NOTE 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. Operations are focused primarily on providing therapeutic, diagnostic, and monitoring systems for the cardiac rhythm management, cardiovascular, neurological, spinal and ear, nose and throat (ENT) markets. The Company is headquartered in Minneapolis, Minnesota, and 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 AND FISCAL YEAR END The consolidated financial statements include the accounts of Medtronic, Inc., and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated. During fiscal 2001 the Company changed its fiscal year end from April 30th to the last Friday in April. This change to a 52/53-week fiscal year did not have a material effect on the Company's consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform to the current year presentation. 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 22 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 and debt instruments 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. 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. 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 27, April 30, 2001 2000 - -------------------------------------------------------------------------------- Finished goods $400.7 $374.6 Work in process 131.5 129.9 Raw materials 197.3 187.2 - -------------------------------------------------------------------------------- Total $729.5 $691.7 - --------------------------------------------------------------------------------
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 27, April 30, 2001 2000 Lives - ------------------------------------------------------------------------------------------ Land and land improvements $ 57.7 $ 57.7 20 years Buildings and leasehold improvements 510.1 393.4 up to 40 years Equipment 1,215.4 1,047.8 3-7 years Construction in progress 274.1 181.8 - - ------------------------------------------------------------------------------------------ 2,057.3 1,680.7 Less: Accumulated depreciation (880.8) (732.7) ========================================================================================== Property, Plant and Equipment, net $ 1,176.5 $ 948.0 ==========================================================================================
INTANGIBLE ASSETS Goodwill represents the excess of the cost over the fair value of net assets of acquired businesses while other intangible assets consist primarily of purchased technology and patents. Intangible assets are being amortized using the straight-line method over their estimated useful lives, ranging from 3 to 35 years. The Company periodically reviews its goodwill and other intangible assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets 23 may not be recoverable, based on an undiscounted cash flow analysis. Balances of intangible assets were as follows:
APRIL 27, April 30, 2001 2000 - -------------------------------------------------------------------------------- Goodwill $1,258.9 $1,274.3 Less: Accumulated amortization (263.0) (205.3) - ------------------------------------------------------------------------------- 995.9 1,069.0 - ------------------------------------------------------------------------------- Other intangible assets 380.9 404.7 Less: Accumulated amortization (141.5) (112.3) - ------------------------------------------------------------------------------- 239.4 292.4 - ------------------------------------------------------------------------------- Goodwill and other intangible assets, net $1,235.3 $1,361.4 - -------------------------------------------------------------------------------
REVENUE RECOGNITION A significant portion of the Company's revenue is generated from consigned inventory maintained at hospitals or with field representatives. For these products, revenue is recognized at the time the Company is notified that the product has been used or implanted. For all other transactions, the Company recognizes revenue when title to the goods transfers to customers and there are no remaining obligations that will affect the customer's final acceptance of the sale. The Company records estimated sales returns, discounts and rebates as a reduction of net sales in the same period revenue is recognized. Medtronic sells its products primarily through a direct sales force. In cases where the Company utilizes distributors, it recognizes revenue upon shipment provided that all revenue recognition criteria have been met. The Company has entered into certain agreements with buying organizations to sell Medtronic's products to participating hospitals at pre-negotiated prices. Revenue generated under these agreements is recognized following the same revenue recognition criteria discussed above. RESEARCH AND DEVELOPMENT Research and development costs are expensed when incurred. OTHER INCOME/EXPENSE Other income/expense includes primarily goodwill and intellectual property amortization expense, royalty income and expense, minority investment gains and losses and foreign currency hedging gains and losses. 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. 24 FOREIGN CURRENCY TRANSLATION 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 other income/expense. Gains and losses arising from the translation of net assets located outside the United States are recorded as a component of accumulated 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, net investments 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. 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. 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 December 1999, the Securities and Exchange Commission issued Staff Accounting Bulleting (SAB) 101, "Revenue Recognition in Financial Statements," which was later amended by SAB 101A and SAB 101B. The Company adopted SAB 101, as amended, in the fourth quarter of fiscal 2001. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended, requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to measure the instruments at fair value through income unless the derivative qualifies as a hedge. 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 25 recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company adopted SFAS 133 during the first quarter of fiscal 2002 and recorded, upon adoption, a cumulative pre-tax unrealized gain of approximately $55.0 in accumulated other non-owner changes in equity. In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets," (collectively, "the Statements.") The Statements eliminate the pooling-of-interests method of accounting for business combinations and the systematic amortization of goodwill. The Company intends to adopt the Statements during the first quarter of fiscal 2002 and estimates that the adoption of the Statements will reduce fiscal 2002 amortization expense, on a pre-tax basis, by approximately $45.0 to $55.0. NOTE 2--ACQUISITIONS POOLING-OF-INTERESTS METHOD On December 21, 2000, the Company issued approximately 3.7 million shares of its common stock in exchange for all of the outstanding capital stock of PercuSurge, Inc. (PercuSurge) in a transaction valued at approximately $231.0. PercuSurge is a leading developer of interventional embolic protection devices and currently markets a patented system that helps remove embolic material that is often dislodged during the treatment of arteriosclerosis. 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. 26 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. These acquisitions have been accounted for as poolings-of-interests, and, accordingly, the Company's historical results have been restated to include the results of these acquisitions. The Company's consolidated financial results for fiscal 2000 and fiscal 1999 have been restated as follows:
YEAR ENDED APRIL 30, 2000 NET SALES NET EARNINGS - -------------------------------------------------------------------------------- Medtronic (as previously reported) $5,014.6 $1,098.5 PercuSurge 1.7 (14.3) - -------------------------------------------------------------------------------- Combined $5,016.3 $1,084.2 - -------------------------------------------------------------------------------- YEAR ENDED APRIL 30, 1999 NET SALES NET EARNINGS - -------------------------------------------------------------------------------- Medtronic (as previously reported) $4,134.1 $468.4 Xomed 98.3 7.9 PercuSurge .1 (9.6) - -------------------------------------------------------------------------------- Combined $4,232.5 $466.7 - --------------------------------------------------------------------------------
The combined results for the fiscal year ended April 30, 2000 represent the previously reported results of Medtronic for that fiscal year combined with the historical results of PercuSurge for the twelve months ended March 31, 2000. Effective May 1, 2000, PercuSurge's year-end has been changed from December 31 to the last Friday in April to conform to the Company's fiscal year-end. Accordingly, PercuSurge's results for the one-month period ended April 30, 2000 has been excluded from the Company's combined results and have been reported as an adjustment to May 1, 2000 retained earnings. PercuSurge's net sales and net loss for the one-month period ended April 30, 2000 were $0.1 and $1.4, respectively. The combined results for the fiscal year ended April 30, 1999 represent the previously reported results of Medtronic for that fiscal year combined with the historical results of Xomed and PercuSurge for the twelve months ended March 31, 1999. Effective May 1, 1999, Xomed's fiscal year-end was 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. 27 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. (Midas Rex), 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 15 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 ========= 28 Pro forma information has not been included, as these acquisitions did not have a material impact on the Company's results of operations. NOTE 3--NON-RECURRING CHARGES FISCAL 2001 INITIATIVES In fiscal year 2001, the Company recorded transaction and integration charges in connection with its merger with PercuSurge and charges related to litigation. Also, during 2001, the Company announced that it would contribute $20.4 of proceeds from litigation settlements to the Medtronic Foundation. During the fourth quarter of the year, the Company announced restructuring activities totaling $47.0 to $52.0, primarily aimed at streamlining operations. The Company recognized $14.5 of these charges in fiscal 2001 and intends to complete all activities necessary to recognize the remaining charges in the first quarter of fiscal 2002. These activities will be focused on restructuring the sales organization of certain neurological product lines, reducing and consolidating certain manufacturing operations, and streamlining and reorganizing European sales organizations to further integrate prior acquisitions. In connection with these activities the Company will terminate approximately 650 employees, and will eliminate 450 positions. Of the employees identified for termination, approximately 280 are in manufacturing positions. Subsequent to year end, and as further described in Note 15, two adverse patent infringement decisions were rendered against the Company. In June 2001, an appeals court affirmed an earlier judgment against the Company in a lawsuit commenced by AcroMed Corporation. The amount of the judgment plus interest totaled $52.1 and has been reflected in fiscal 2001 results. In July 2001, an arbitration panel found that certain Medtronic rapid exchange perfusion delivery systems infringed a patent held by Boston Scientific Corporation (Boston Scientific), and awarded damages of approximately $169.0, plus legal costs. In connection with this finding, the Company wrote off $21.0 of intangible assets specifically related to the rapid exchange perfusion technology, and $37.2 of the goodwill recorded for the Bard cath lab acquisition. The goodwill impairment amount was determined on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangibles acquired from C.R. Bard, Inc. The arbitration panel also allowed for an injunction on future U.S. sales of these delivery systems, and accordingly, the Company wrote off $8.4 of excess rapid exchange perfusion inventory. These charges have been reflected in fiscal 2001 results. 29 Fiscal 2001 initiatives are summarized as follows:
FISCAL 2001 UTILIZED BALANCE AT CHARGES IN 2001 APRIL 27, 2001 ---------------------------- Facility reductions $ 1.3 $ - $ 1.3 Severance and related costs 10.8 (1.5) 9.3 Contractual obligations 10.9 - 10.9 ---------------------------- TOTAL RESTRUCTURING-RELATED ACCRUALS 23.0 (1.5) 21.5 Transaction related costs 4.2 (4.2) - Asset write downs 68.3 (68.3) - Litigation 251.7 (24.5) 227.2 ---------------------------- TOTAL $347.2 $ (98.5) $248.7 ----------------------------
FISCAL 2000 INITIATIVES In fiscal 2000, the Company recorded transaction charges in connection with its merger with Xomed, a litigation settlement, the termination of a distribution relationship and the closure of certain direct sales operations in Latin America. In connection with these activities, the Company announced the termination of 78 employees, mostly in administrative positions. All identified actions were substantially completed as of the end of fiscal 2001. Fiscal 2000 initiatives are summarized as follows:
FISCAL UTILIZED BALANCE AT UTILIZED BALANCE AT 2000 CHARGES IN 2000 APRIL 30, IN 2001 APRIL 27, 2000 2001 --------------------------------------------- Facility reductions $ 0.9 $ - $ 0.9 $(0.2) $ 0.7 Severance and related costs 1.4 - 1.4 (1.1) 0.3 --------------------------------------------- TOTAL RESTRUCTURING-RELATED ACCRUALS 2.3 - 2.3 (1.3) 1.0 Transaction related costs 14.7 (14.7) - - - Asset write downs 6.2 (6.2) - - - Litigation 15.5 (15.5) - - - --------------------------------------------- $38.7 $(36.4) $ 2.3 $(1.3) $ 1.0 TOTAL ---------------------------------------------
FISCAL 1999 INITIATIVES During fiscal 1999, the Company recorded transaction-related charges in connection with the mergers with Physio-Control, Sofamor Danek, and AVE. The Company also 30 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, the termination of 2,950 employees and a net reduction of 2,450 positions. Of the employees identified for termination, 2,585 were in manufacturing positions. As the Company substantially completed these initiatives, it identified and reversed $24.9 of reserves no longer considered necessary during the fourth quarter of fiscal 2000. Fiscal 1999 initiatives are summarized as follows:
FISCAL UTILIZED BALANCE AT CHANGE UTILIZED BALANCE AT UTILIZED BALANCE AT 1999 IN CHARGES IN 1999 APRIL 30, ESTIMATE IN 2000 APRIL 30, IN 2001 APRIL 27, 1999 2000 2001 ------------------------------------------------------------------------------- Facility reductions $ 10.9 $ (1.8) $ 9.1 $ 3.8 $ (9.1) $ 3.8 $ (3.8) $ - Severance and related costs 68.6 (8.1) 60.5 (21.2) (28.6) 10.7 (10.7) - Contractual obligations 51.2 (10.5) 40.7 (0.2) (33.8) 6.7 (6.7) - ------------------------------------------------------------------------------- TOTAL RESTRUCTURING-RELATED ACCRUALS 130.7 (20.4) 110.3 (17.6) (71.5) 21.2 (21.2) - Transaction related costs 149.3 (136.5) 12.8 - (12.8) - - - Asset write downs 92.1 (92.1) - (7.3) 7.3 - - - Purchased in-process R&D 152.0 (152.0) - - - - - - ------------------------------------------------------------------------------- TOTAL $524.1 $(401.0) $123.1 $(24.9) $(77.0) $ 21.2 $(21.2) $ - -------------------------------------------------------------------------------
During fiscal 1999 AVE acquired World Medical for consideration of $70.8 and expensed $45.8 of the purchase price for purchased in-process research and development that had not yet reached technological feasibility and had no alternative future use, including the Talent System and two smaller programs. The Talent System is currently sold in Europe and has completed U.S. clinical trials. Also during fiscal 1999, AVE acquired Bard cath lab for $610.7 and expensed $95.3 of the purchase price for purchased in-process research and development that had not yet reached technological feasibility and had no alternative use, including a rapid exchange perfusion catheter, a stent development program and eight other minor product categories. In fiscal 2000, the Company introduced its S670 rapid exchange perfusion coronary stent system in the U.S and in fiscal 2001, it launched the S660 with discrete technology coronary stent system for smaller vessels and the BeStent 2 coronary stent delivery system using technology from the acquisition of Bard cath lab. In April 2001, the S7 with discrete technology rapid exchange perfusion coronary stent system received approval from the Food and Drug Administration (FDA). Subsequent to year end, an arbitration panel determined that certain Medtronic rapid exchange perfusion delivery systems infringed a patent held by Boston Scientific, as further discussed in Note 15 to the consolidated financial statements. 31 In April 1999, the Company acquired certain advanced catheter delivery technology from Micro Motion Sciences and 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. The values assigned to purchased in-process research and development were determined by estimating the future after-tax net cash flows attributable to the projects and discounting these cash flows back to their present value. Discount rates included a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process research and development. The values assigned to the World Medical and Bard cath lab purchased in-process research and development were based on valuations prepared by independent third party appraisers and were determined by identifying research projects in areas for which technological feasibility had not been established. 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. Facility reduction costs related to the ten facilities identified for closure were higher than originally estimated due to an inability to sub-lease two facilities as originally planned. Asset write down charges included $29.0 of charges to cost of sales for discontinued product lines in the vascular and cardiac surgery business. Estimated asset write downs were favorably impacted by higher than planned sales proceeds. During the fourth quarter of 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 also included $41.4 for non-cancelable contractual commitments and other non-recurring expenses, $8.0 related to payments made by Sofamor Danek under two strategic development and licensing agreements and $1.8 related to certain restructuring initiatives of Xomed. PRE 1999 INITIATIVES During fiscal 1997, Sofamor Danek recorded a product liability litigation charge of $50.0 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, $12.4 in fiscal 2000 and $0.9 in fiscal 2001. 32 SUMMARY OF INITIATIVES A summary of all initiatives is as follows:
BALANCE FISCAL UTILIZED BALANCE FISCAL CHANGES UTILIZED AT 1999 AT 2000 IN APRIL 30, CHARGES IN 1999 APRIL 30, CHARGES ESTIMATES IN 2000 1998 1999 ----------------------------------------------------------------------------- Facility reductions $ 4.0 $ 10.9 $ (5.2) $ 9.7 $ 0.9 $ 3.8 $ (9.7) Severance and related costs 44.8 73.6 (44.8) 73.6 1.4 (21.2) (41.7) Contractual obligations 40.0 51.2 (50.5) 40.7 - (0.2) (33.8) ---------------------------------------------------------------------------- TOTAL RESTRUCTURING-RELATED ACCRUALS 88.8 135.7 (100.5) 124.0 2.3 (17.6) (85.2) Transaction related costs - 149.3 (136.5) 12.8 14.7 - (27.5) Asset write downs - 92.1 (92.1) - 6.2 (7.3) 1.1 Purchased in-process R&D - 152.0 (152.0) - - - - Litigation 37.2 25.0 (21.7) 40.5 15.5 - (27.9) ---------------------------------------------------------------------------- TOTAL $ 126.0 $ 554.1 $ (502.8) $ 177.3 $ 38.7 $ (24.9) $ (139.5) ----------------------------------------------------------------------------
[wide table continued from above]
BALANCE FISCAL UTILIZED BALANCE AT 2001 AT APRIL 30, CHARGES IN 2001 APRIL 27, 2000 2001 ------------------------------------------- Facility reductions $ 4.7 $ 1.3 $ (4.0) $ 2.0 Severance and related costs 12.1 10.8 (13.3) 9.6 Contractual obligations 6.7 10.9 (6.7) 10.9 ------------------------------------------ TOTAL RESTRUCTURING-RELATED ACCRUALS 23.5 23.0 (24.0) 22.5 Transaction related costs - 4.2 (4.2) - Asset write downs - 68.3 (68.3) - Purchased in-process R&D - - - - Litigation 28.1 251.7 (25.4) 254.4 ------------------------------------------ TOTAL $ 51.6 $ 347.2 $ (121.9) $ 276.9 ------------------------------------------
Reserve balances at April 27, 2001 include amounts necessary to complete the initiatives announced during the fourth quarter of fiscal 2001, the Boston Scientific and AcroMed litigation decisions, as well as amounts necessary to conclude cases related to the Company's spinal system for pedicle fixation, as described in Note 12. NOTE 4--FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents and short-term debt approximate fair value due to their short maturities. In addition, the carrying amount of short-term investments, foreign currency derivative instruments, long- term investments and long-term debt approximated fair value at April 27, 2001 and April 30, 2000. The fair value of certain short-term and long-term investments was estimated 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 derivative instruments was estimated based on quoted 33 market prices at April 27, 2001 and April 30, 2000. The fair value of long-term debt was based on the current rates offered to the Company for debt of similar maturities. Information regarding the Company's available-for-sale instruments is as follows:
Year ended: APRIL 27, April 30, April 30, 2001 2000 1999 - ------------------------------------------------------------------------------- Cost $700.6 $144.0 $ 84.9 Gross unrealized gains 31.1 6.2 33.2 Gross unrealized losses (12.1) (16.3) (19.4) - ------------------------------------------------------------------------------- Fair value $719.6 $133.9 $ 98.7 - ------------------------------------------------------------------------------- Proceeds from sales $ 49.2 $ 70.4 $ 38.4 - ------------------------------------------------------------------------------- Net gains realized $ 21.0 $ 22.4 $ 36.7 - ------------------------------------------------------------------------------- Impairment losses recognized $ 15.5 $ - $ - - -------------------------------------------------------------------------------
Net realized gains and proceeds from sales of available-for-sale instruments exclude amounts related to available-for-sale debt investments. Gains recognized upon sale of these instruments are recorded as interest income. Gains or losses from the sale of available-for-sale equity instruments are recorded as other income/expense in the accompanying statements of consolidated earnings, and are calculated based on the specific identification method. Held-to-maturity investments were recorded at amortized cost of $165.0 and $185.9 at April 27, 2001 and April 30, 2000, 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 and changes in the value of specific assets, liabilities or net investments. Foreign currency transactions, primarily export intercompany sales, occur throughout the year and are probable but not firmly committed. Principal currencies hedged are the Yen and the Euro. Notional amounts of contracts outstanding at April 27, 2001 and April 30, 2000 were $382.3 and $537.2, respectively. Aggregate foreign currency transaction gains and (losses) were $44.3, $30.8 and $(2.5) in fiscal years 2001, 2000 and 1999, respectively. These gains and losses, which were offset by the gains and losses on related assets, liabilities and transactions being hedged, were recorded in other income/expense in the accompanying consolidated financial statements. 34 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. NOTE 5--FINANCING ARRANGEMENTS Debt consisted of the following:
Average Maturity APRIL 27, April 30, Short-Term Borrowings Interest Rate Date 2001 2000 - ------------------------------------------------------------------------------------------------------- Bank borrowings 1.6% - $142.7 $314.1 Current portion of long-term debt 4.3% - 2.7 3.1 - ------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM BORROWINGS $145.4 $317.2 - ------------------------------------------------------------------------------------------------------- Long-Term Debt - ------------------------------------------------------------------------------------------------------- Various notes 1.2% 2001-2004 $6.4 $7.6 Subordinated convertible note 5.5% 2004 4.5 4.5 Capitalized lease obligations 8.5% 2001-2009 2.4 2.8 - ------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $13.3 $14.9 - -------------------------------------------------------------------------------------------------------
Short-term borrowings consisted primarily of borrowings from non-U.S. banks at interest rates considered favorable by management and where natural hedges can be gained for foreign exchange purposes. The Company has existing lines of credit of approximately $850.0 with various banks, of which approximately $707.0 was available at April 27, 2001. During fiscal 2000, the Company entered into an agreement expiring in 2003 to sell, at its discretion, specific pools of its Japanese trade receivables. The Company had sold approximately $60.0 and $64.0 of its trade receivables to a financial institution as of April 27, 2001 and April 30, 2000, respectively. The discount cost related to the sale was immaterial and was recorded as interest expense in the accompanying consolidated financial statements. 35 Maturities of long-term debt for the next five fiscal years are as follows: 2002, $2.7; 2003, $4.5; 2004, $7.7; 2005, $0.2; 2006, $0.2; thereafter, $0.7. NOTE 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 percent stock dividend payable to shareholders of record at the close of business on September 10, 1999. The stock split resulted in the issuance of 587.4 million additional shares and the reclassification of $58.7 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. SHAREHOLDER RIGHTS PLAN Under a Shareholder Rights Plan adopted by the Company's Board of Directors in October 2000, all shareholders receive along with each common share owned a preferred stock purchase right entitling them to purchase from the Company one 1/5000 of a share of Series A Junior Participating Preferred Stock at an exercise price of $400 per share. The rights are not exercisable or transferable apart from the common stock until 15 days after the public announcement that a person or group (the Acquiring Person) has acquired 15% or more of the Company's common stock or 15 business days after the announcement of a tender offer which would increase the Acquiring Person's beneficial ownership to 15% or more of the Company's common stock. After any person or group has become an Acquiring Person, each right entitles the holder (other than the Acquiring Person), to purchase, at the exercise price, common stock of the Company 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, at the exercise price, common stock of the acquiring company or an affiliate having a market price of two times the exercise price of the right. The Board of Directors may redeem the rights for $0.005 per right at any time before any person or group becomes an Acquiring Person. The Board may also reduce the threshold at which a person or group becomes an Acquiring Person from 15% to no less than 10% of the outstanding common stock. The rights expire on October 26, 2010. NOTE 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, 36 offset by dividends received. Compensation and interest expense recognized were as follows:
Year ended April 27, April 30, April 30, 2001 2000 1999 - --------------------------------------------------------------------------------- Interest expense $ 1.7 $ 2.0 $ 2.4 Dividends paid (3.3) (2.8) (2.4) - --------------------------------------------------------------------------------- Net interest expense (1.6) (0.8) - Compensation expense 3.4 6.7 1.7 - --------------------------------------------------------------------------------- Total expense $ 1.8 $ 5.9 $ 1.7 =================================================================================
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 2.50%, 2.70%, and 2.59% of qualified compensation were made to plan participants' accounts in fiscal years 2001, 2000 and 1999, respectively. During fiscal 2000, and in connection with the Company's 50th Anniversary, the Company made a special allocation to participant accounts of approximately 1.2 million shares. 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 and the expense to the Company related to this match is included in the table above. At April 27, 2001 and April 30, 2000, cumulative allocated shares remaining in the trust were 9,625,388 and 9,325,427 and unallocated shares were 7,235,074 and 8,239,154, respectively. Of the remaining unallocated shares at April 27, 2001 and April 30, 2000, 1,223,508 and 1,004,076, 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 payable 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. NOTE 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, and other stock-based awards. There were 54.3 million shares available under this plan for future grants at April 27, 2001. Under the provisions of the 1994 stock award plan, nonqualified stock options and other stock awards are granted to officers and key employees at prices not less than fair market value at the date of grant. 37 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 27, 2001 had 2.7 million shares available for future grants. A summary of nonqualified option transactions is as follows:
2001 2000 1999 -------------------------------- --------------------------------- ----------------------------- Wtd.Avg. Wtd.Avg. Wtd.Avg. Options Exercise Options Exercise Options Exercise (in thousands) Price (in thousands) Price (in thousands) Price - -------------------------------------------------------------------------------------------------------------------------------- Beginning balance 33,917 $24.77 24,150 $19.91 21,678 $13.97 Granted 12,291 52.17 14,425 31.42 7,331 22.20 Exercised 2,789 15.09 3,278 9.88 4,134 7.45 Canceled 1,152 32.45 1,380 8.29 725 7.83 - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at year-end 42,267 $33.11 33,917 $24.77 24,150 $19.91 - -------------------------------------------------------------------------------------------------------------------------------- Exercisable at year-end 22,238 $26.69 17,195 $18.83 14,569 $17.93 - --------------------------------------------------------------------------------------------------------------------------------
Stock options assumed as a result of acquisition transactions in fiscal years 1996 through 2001 remain outstanding, although no additional grants have been made under these plans since the date of acquisition. A summary of stock options assumed as a result of the acquisitions is as follows for fiscal 2001:
Options Wtd. Avg. (in thousands) Exercise Price - -------------------------------------------------------------------------------- Outstanding at May 1, 2000 11,726 $15.49 Additional shares assumed 446 15.49 Exercised 3,767 14.15 Canceled 319 19.43 - -------------------------------------------------------------------------------- Outstanding at April 27, 2001 8,086 $15.94 - -------------------------------------------------------------------------------- Exercisable at April 27, 2001 6,930 $14.76 - --------------------------------------------------------------------------------
38 A summary of stock options as of April 27, 2001, including options assumed as a result of acquisitions, is as follows:
Options Outstanding Options Exercisable ------------------------------------------------- --------------------------------- Wtd. Avg. Wtd. Avg. Remaining Wtd. Avg. Range of Options Exercise Contractual Options Exercise Exercise Prices (in thousands) Price Life (in years) (in thousands) Price - ----------------------------------------------------------------------------------------------------------------- $ 0.01 $ 2.50 269 $ 0.47 1.67 266 $ 0.46 2.51 5.00 2,856 4.47 2.24 2,854 4.47 5.01 7.50 3,472 6.37 3.16 3,307 6.36 7.51 10.00 838 9.00 4.65 771 9.03 10.01 20.00 6,420 15.57 5.54 6,063 15.54 20.01 30.00 7,951 23.83 6.55 5,235 24.46 30.01 40.00 16,029 33.67 7.79 7,159 34.02 40.01 50.00 1,430 47.26 9.31 98 46.12 50.01 60.38 11,088 52.70 9.06 3,415 54.37 - ----------------------------------------------------------------------------------------------------------------- $ 0.01 $ 60.38 50,353 $ 30.26 6.91 29,168 $23.88 - -----------------------------------------------------------------------------------------------------------------
Nonqualified options are normally exercisable beginning one year from the date of grant in cumulative yearly amounts of 25% 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 five years. Total expense recognized for restricted stock, performance share and other stock awards was $14.2, $5.2 and $8.2 in fiscal years 2001, 2000 and 1999, respectively. 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:
April 27, April 30, April 30, Year ended 2001 2000 1999 - ---------------------------------------------------------------------------------------------- Net Earnings As reported $1,046.0 $1,084.2 $ 466.7 Pro forma 926.4 1,009.1 427.9 39 - ---------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE As reported $ 0.87 $ 0.91 $ 0.40 Pro forma 0.77 0.84 0.36 - ---------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE As reported $ 0.85 $ 0.89 $ 0.39 Pro forma 0.76 0.82 0.35 - ----------------------------------------------------------------------------------------------
The fair value of options granted, $25.34, $16.58 and $11.72 for fiscal years 2001 and 2000 and 1999, respectively, was estimated using the Black-Scholes option-pricing model using the following weighted-average assumptions:
Assumptions 2001 2000 1999 - -------------------------------------------------------------------------------------- Risk-free interest rate 5.85% 6.09% 5.06% Expected dividend yield 0.38% 0.47% 0.43% Expected volatility factor 37.8% 38.1% 27.1% Expected option term 7 years 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 1,607,773 shares at $30.23 per share in fiscal 2001. As of April 27, 2001, plan participants have had approximately $31.4 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, 2001, whichever is less. NOTE 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 27, April 30, April 30, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------- U.S. $1,062.2 $1,033.0 $681.2 International operations, including Puerto Rico 487.2 581.8 143.9 - ---------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES $1,549.4 $1,614.8 $825.1 - ----------------------------------------------------------------------------------------------------
40 The provision for income taxes consisted of:
APRIL 27, April 30, April 30, Year ended: 2001 2000 1999 ------------------------------------------------------ Taxes currently payable: U.S. federal $ 432.2 $ 102.9 $ 267.0 U.S. state and other 17.6 22.9 16.0 International operations, including Puerto Rico 144.6 163.0 45.3 - ---------------------------------------------------------------------------------------------------- Total currently payable 594.4 288.8 328.3 Deferred tax (benefit) expense: U.S. federal (150.3) 94.9 (39.4) International operations, including Puerto Rico (3.3) (16.8) 7.0 - ---------------------------------------------------------------------------------------------------- Net deferred tax (benefit) expense (153.6) 78.1 (32.4) Tax expense directly in shareholders' equity 62.6 163.7 62.5 - ---------------------------------------------------------------------------------------------------- TOTAL PROVISION $ 503.4 $ 530.6 $ 358.4 - ----------------------------------------------------------------------------------------------------
Deferred tax assets (liabilities) were comprised of the following:
APRIL 27, April 30, 2001 2000 - -------------------------------------------------------------------------------------- Deferred tax assets: Inventory (Intercompany profit in inventory and excess of tax over book valuation) $121.0 $108.3 Accrued liabilities 159.9 72.4 Other 98.3 61.8 - -------------------------------------------------------------------------------------- Total deferred tax assets 379.2 242.5 Deferred tax liabilities: Intangible assets (31.6) (19.3) Accumulated depreciation (17.1) (15.4) Unrealized (gain) loss on investments (7.1) 3.5 Other (27.9) (66.0) - -------------------------------------------------------------------------------------- Total deferred tax liabilities (83.7) (97.2) - -------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $295.5 $145.3 - --------------------------------------------------------------------------------------
The Company's effective income tax rate varied from the U.S. federal statutory tax rate as follows:
Year ended: APRIL 27, April 30, April 30, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------- 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 1.1 1.4 1.9 R&D credit (1.7) (1.1) (1.3) 41 International operations, including Puerto Rico (1.9) (3.5) 0.2 Non-recurring Charges 0.7 (0.1) 7.7 Other, net (0.7) 1.2 (0.1) - ---------------------------------------------------------------------------------------------------- EFFECTIVE TAX RATE 32.5% 32.9% 43.4% - ----------------------------------------------------------------------------------------------------
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 27, 2001, earnings permanently reinvested in subsidiaries outside the United States were $249.9. At April 27, 2001, approximately $39.0 of non-U.S. tax losses were available for carryforward. These carryforwards are subject to valuation allowances and generally expire within a period of one to five years. NOTE 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 $31.3 in fiscal 2001, $32.4 in fiscal 2000, and $23.1 in fiscal 1999. 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.
Pension Benefits Other Benefits ------------------------------------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $238.0 $233.6 $49.2 $45.0 Service cost 21.4 21.8 4.6 5.1 Interest cost 17.9 15.4 3.6 3.2 Actuarial (gain) loss 36.4 (21.6) 5.1 (3.6) Curtailment gain (See Note 3) - (4.4) - - Benefits paid (7.3) (6.8) (0.8) (0.5) ------------------------------------------------------------ Benefit obligation at end of year $306.4 $238.0 $61.7 $49.2 42 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $291.2 $271.5 $26.6 $25.1 Actual return on plan assets 45.1 25.6 2.4 2.5 Employer contributions 62.5 0.1 14.6 - Benefits paid (6.9) (6.0) (2.7) (1.0) ------------------------------------------------------------ FAIR VALUE OF PLAN ASSETS AT END OF YEAR $391.9 $291.2 $40.9 $26.6 Funded status $ 85.5 $ 53.2 ($20.8) ($22.6) Unrecognized net actuarial (gain) loss (20.4) (40.2) 7.2 - Unrecognized prior service cost 5.0 (3.5) - - ------------------------------------------------------------ PREPAID (ACCRUED) BENEFIT COST $70.1 $9.5 ($13.6) ($22.6) ============================================================
Net periodic benefit cost of plans included the following components:
Pension Benefits Other Benefits --------------------------------------------------------------------------------------- Year ended April 27, April 30, April 30, April 27, April 30, April 30 --------- --------- --------- --------- --------- --------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Service cost $21.4 $21.8 $16.5 $4.6 $5.1 $0.9 Interest cost 17.9 15.4 12.7 3.6 3.2 2.5 Expected return on plan assets (26.4) (21.8) (15.6) (2.6) (2.4) (1.6) Amortization of prior service cost (1.4) 0.3 0.2 - - - --------------------------------------------------------------------------------------- NET PERIODIC BENEFIT COST $11.5 $15.7 $13.8 $5.6 $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 $56.6 and $66.5 at April 27, 2001 and April 30, 2000, 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. 43 The actuarial assumptions were as follows:
Pension Benefits Other Benefits ---------------------------------------------------------------- April 27, April 30, April 27, April 30, --------- --------- --------- --------- WEIGHTED-AVERAGE ASSUMPTIONS 2001 2000 2001 2000 ---- ---- ---- ---- Discount rate 2.5% - 7.75% 3.5% - 7.75% 7.50% 7.75% Expected return on plan assets 6.3% - 9.5% 4.0% - 9.5% 9.50% 9.50% Rate of compensation increase 2.5% - 6.5% 3.0% - 6.5% N/A N/A Health care cost trend rate N/A N/A 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 non-qualified plans. The net periodic cost of non-qualified pension plans was $5.4, $4.2 and $2.7 in fiscal 2001, 2000 and 1999, respectively. The unfunded accrued pension cost related to these non-qualified plans totaled $25.7 and $24.3 at April 27, 2001 and April 30, 2000, respectively. 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 $1.0 ($0.8) Effect on postretirement benefit obligation 4.8 (4.0)
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. 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. Expense under these plans was $3.8 in fiscal 2001, $3.4 in fiscal 2000, and $3.2 in fiscal 1999. 44 NOTE 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 27, 2001 were:
Capitalized Operating Leases Leases - -------------------------------------------------------------------------------- 2002 $ 1.6 $ 28.6 2003 1.2 21.5 2004 0.4 17.2 2005 0.3 11.9 2006 0.3 9.8 2007 and thereafter 0.6 6.4 - -------------------------------------------------------------------------------- Total minimum lease payments $ 4.4 $ 95.4 Less amounts representing interest (0.7) - -------------------------------------------------------------------------------- Present value of net minimum lease payments $ 3.7 - --------------------------------------------------------------------------------
Rent expense for all operating leases was $51.8, $49.8, and $47.3 in fiscal years 2001, 2000 and 1999, respectively. NOTE 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 2001, the Company made a commitment to contribute $20.4 to the Foundation. This commitment is expected to fund the Foundation through fiscal year 2002. In fiscal 2001, the Company partially funded this commitment through the donation of equity securities with a fair value of $8.1. Commitments to the Foundation are expensed when authorized. In October 1997, Cordis Corporation ("Cordis"), a subsidiary of Johnson & Johnson, filed suit in federal court in the District of Delaware against AVE, which was acquired by the Company in January 1999. The suit alledged 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. In November 2000, a Delaware jury rendered a verdict that the previously marketed MicroStent and GFX stents infringe valid claims of two patents. Thereafter the jury 45 awarded damages to Cordis totaling approximately $270.0. In February 2001, the court heard evidence on the affirmative defense of inequitable conduct and will consider that evidence along with other post-trial motions. The jury verdict does not address products that are currently marketed by 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. In December 1999, Advanced Cardiovascular Systems, Inc. ("ACS"), a subsidiary of Guidant Corporation (Guidant), 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 resolved through arbitration. The parties have agreed to arbitrate all claims against AVE. Litigation against Medtronic has been stayed pending the arbitration decision. Arbitration hearings were held in February, but the arbitrators were unable to reach a decision. AVE has filed a new demand for arbitration. 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 and an order has been entered staying the proceedings until September 2002. In June 2000, Medtronic filed suit in U.S. District Court in Minnesota against Guidant seeking a declaration that Medtronic's Jewel AF device does not infringe certain patents held by Guidant and/or that such patents were invalid. Thereafter Guidant filed a counterclaim alleging that the Jewel AF and the GEM III AT infringe certain patents relating to atrial fibrillation. The case is in the early stages of discovery. 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 may 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-Link(R) coronary stent and Boston Scientific's Nir(R) stent infringed the Company's 46 Wiktor(R) 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 filed an appeal with the Court of Appeals for the Federal Circuit ("CAFC") in Washington, D.C. In April 2001, the CAFC affirmed the judgment of the District Court. 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 alleged the plaintiffs were injured by spinal implants manufactured by Sofamor Danek and other manufacturers. All efforts to obtain class certification were 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 July 2001, virtually all of the suits have been dismissed or resolved in favor of the Company. 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 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 scheduled to commence in October 2001. NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED, IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year - --------------------------------------------------------------------------------------------------------------- NET SALES 2001 $ 1,310.4 $ 1,361.9 $ 1,361.6 $ 1,517.9 $ 5,551.8 2000 1,133.5 1,190.6 1,259.3 1,432.9 5,016.3 GROSS PROFIT 2001 993.8 1,010.7 1,016.2 1,120.5 4,141.2 2000 859.7 889.3 934.5 1,067.0 3,750.5 NET EARNINGS 2001 - Before charges 295.5 309.1 313.9 363.6 1,282.1 - After charges 284.1 309.1 302.8 150.0 1,046.0 2000 - Before charges 249.7 257.4 271.6 317.0 1,095.7 - After charges 249.7 257.4 259.5 317.6 1,084.2 47 DILUTED EARNINGS PER SHARE 2001 - Before charges 0.24 0.25 0.26 0.30 1.05 - After charges 0.23 0.25 0.25 0.12 0.85 2000 - Before charges 0.20 0.21 0.22 0.26 0.90 - After charges 0.20 0.21 0.21 0.26 0.89
NOTE 14--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 technology-based medical therapies. Each of the Company's operating segments has similar economic characteristics, technology, manufacturing processes, customers, distribution and marketing strategies, regulatory environments and shared infrastructures. Net sales by operating segment were as follows:
Year ended APRIL 27, April 30, April 30, 2001 2000 1999 - -------------------------------------------------------------------------------- Cardiac Rhythm Management 2,656.8 $2,504.7 $ 2,121.6 Neurological, Spinal and ENT 1,478.9 1,252.4 998.0 Vascular 928.6 792.5 718.9 Cardiac Surgery 487.5 466.7 394.0 - -------------------------------------------------------------------------------- $5,551.8 $5,016.3 $4,232.5 ================================================================================
GEOGRAPHIC INFORMATION Net sales and long-lived assets by major geographical area are summarized below:
UNITED ASIA OTHER ELIMI- CONSOLI- STATES EUROPE PACIFIC FOREIGN NATIONS DATED - ------------------------------------------------------------------------------------------------ 2001 Revenues from external customers $3,704.9 $1,055.9 $ 617.9 $ 173.1 $ - $5,551.8 Intergeographic sales 784.6 225.1 .1 45.3 (1,055.1) - - ------------------------------------------------------------------------------------------------ Total sales $4,489.5 $1,281.0 $ 618.0 $ 218.4 $(1,055.1) $5,551.8 - ------------------------------------------------------------------------------------------------ Long-lived assets $3,021.9 $ 195.0 $ 48.2 $ 17.0 $ - $3,282.1 - ------------------------------------------------------------------------------------------------ 2000 Revenues from external customers $3,278.4 $1,051.9 $ 521.2 $ 164.8 $ - $5,016.3 Intergeographic sales 736.8 159.1 .1 17.4 (913.4) - - ------------------------------------------------------------------------------------------------ Total sales $4,015.2 $1,211.0 $ 521.3 $ 182.2 $ (913.4) $5,016.3 - ------------------------------------------------------------------------------------------------ Long-lived assets $2,387.7 $ 206.2 $ 46.8 $ 17.1 $ - $2,657.8 - ------------------------------------------------------------------------------------------------ 48 1999 Revenues from external customers $2,750.0 $ 940.1 $ 408.3 $ 134.1 $ - $4,232.5 Intergeographic sales 511.8 96.7 - 11.4 (619.9) - - ------------------------------------------------------------------------------------------------ Total sales $3,261.8 $1,036.8 $ 408.3 $ 145.5 $ (619.9) $4,232.5 - ------------------------------------------------------------------------------------------------ Long-lived assets $2,280.7 $ 220.1 $ 45.5 $ 19.9 $ - $2,566.2 - ------------------------------------------------------------------------------------------------
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. NOTE 15--SUBSEQUENT EVENTS On May 30, 2001, the Company announced that it had signed an agreement to acquire MiniMed, Inc., the market leader in the design, development, manufacture and marketing of advanced medical systems for the treatment of diabetes. Medtronic also announced that it would acquire Medical Research Group, Inc., a company that designs and develops technologies related to implantable pumps and sensors used in the treatment of diabetes. These acquisitions, valued at approximately $3,700.0, are expected to be completed during the second quarter of fiscal 2002. 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 appealed the judgment to the Court of Appeals for the Federal Circuit, Washington, D.C., and in June 2001 that court affirmed the District Court decision. The amount of the judgment, with post-judgment interest, is $52.1. This amount has been reflected in the Company's fiscal 2001 results. In March 2000, Boston Scientific sued AVE in federal court in the Northern District of California alleging that certain rapid exchange perfusion delivery systems infringed a patent held by Boston Scientific. The complaint sought injunctive relief and monetary damages. AVE 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, Inc. in 1998 and asserted that the license agreement required disputes to be resolved through arbitration. The court issued an order to arbitrate the dispute under the terms of the license agreement. In July 2001, an arbitration panel found in favor of Boston Scientific and awarded approximately $169.0 in damages, plus legal costs. The arbitration panel also allowed for an injunction on future U.S. sales of these delivery systems. In connection with this award, the Company wrote off $8.4 of excess rapid exchange perfusion inventory and $58.2 of goodwill and other intangible assets. These charges have been reflected in fiscal 2001 results. 49
SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------------------------------------------------------- (in millions of dollars, except per share and employee data) - --------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------- OPERATING RESULTS FOR THE YEAR: Net sales $ 5,551.8 $ 5,016.3 $ 4,232.5 $ 3,423.1 $ 3,010.3 Cost of products sold 1,410.6 1,265.8 1,105.3 873.2 762.6 Gross margin percentage 74.6% 74.8% 73.9% 74.5% 74.7% Research and development expense 577.6 488.2 441.6 378.3 329.2 Selling, general and administrative expense 2,024.0* 1,592.6* 1,850.3* 1,299.0* 1,066.7* Other (income)/expense 64.4 70.6 33.2 (19.5) (13.4) Interest (income)/expense (74.2) (15.7) (23.0) (12.4) (21.2) ---------------------------------------------------------------------------- Earnings before income taxes 1,549.4 1,614.8 825.1 904.5 886.4 Provision for income taxes 503.4 530.6 358.4 316.8 304.4 ---------------------------------------------------------------------------- Net earnings $ 1,046.0 $ 1,084.2 $ 466.7 587.7 $ 582.0 ---------------------------------------------------------------------------- Per share of common stock: Basic earnings per share 0.87 0.91 0.40 0.51 0.50 Diluted earnings per share 0.85 0.89 0.39 0.50 0.49 Cash dividends declared 0.20 0.16 0.13 0.11 0.10 ---------------------------------------------------------------------------- FINANCIAL POSITION AT END OF FISCAL YEAR: Working capital $ 2,397.5 $ 2,041.9 $ 1,456.3 $ 1,408.0 $ 939.9 Current ratio 2.8:1 3.1:1 2.4:1 2.8:1 2.4:1 Total assets 7,038.9 5,694.1 5,030.3 3,754.4 3,082.1 Long-term debt 13.3 14.9 25.3 62.0 51.4 Shareholders' equity 5,509.5 4,512.5 3,789.2 2,746.5 2,167.0 Shareholders' equity per common share 4.56 3.77 3.18 2.36 1.88 ADDITIONAL INFORMATION: Full-time employees at year-end 23,290 21,585 20,133 17,050 14,729 Full-time equivalent employees at year-end 26,050 24,985 22,593 18,538 16,726 ----------------------------------------------------------------------------
*Certain costs separately disclosed on the statement of consolidated earnings are included in selling, general and administrative expense. Note: Results include the impact of $347.2, $13.8, $554.1, $205.3 and $55.5 million pre-tax non-recurring charges taken during fiscal 2001, 2000, 1999, 1998 and 1997 (See Note 3). 50 PRICE RANGE OF MEDTRONIC STOCK - -------------------------------------------------------------------------------- Fiscal Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. - -------------------------------------------------------------------------------- 2001 High $57.00 $56.25 $61.00 $54.60 2001 Low 47.00 47.50 48.00 40.71 2000 High 39.41 40.72 46.25 57.19 2000 Low 31.31 32.25 33.56 45.00 Prices are closing quotations. On July 20, 2001 there were approximately 45,500 holders of record of the Company's common stock. The regular quarterly cash dividend was 5.0 cents per share for fiscal 2001 and 4.0 cents per share for fiscal 2000. 51 EX-21 7 medtronic012520_ex21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 MEDTRONIC, INC. AND SUBSIDIARIES -------------------------------- NAME OF COMPANY JURISDICTION OF - --------------- --------------- INCORPORATION ------------- Arterial Vascular Engineering B.V. Netherlands Arterial Vascular Engineering Canada, Inc. Canada Arterial Vascular Engineering Espana, S.L. Spain Arterial Vascular Engineering GmbH Germany Arterial Vascular Engineering Italia, S.r.l. Italy Arterial Vascular Engineering Netherlands Holding B.V. Netherlands Arterial Vascular Engineering Portugal S.A. Portugal Arterial Vascular Engineering UK Limited United Kingdom AVE Connaught Ireland AVE Galway Ltd. Ireland AVE Ireland Holdings ULC Ireland AVE Ireland Limited Ireland AVE Manufacturing, Inc. California AVECOR Cardiovascular Limited United Kingdom Bakken Research Center, B.V. Netherlands Bard Japan Limited Japan B.V. Medtronic FSC Netherlands Cardiotron Medizintechnik G.m.b.H. Germany Danek Capital Corporation Delaware Danek Medical, Inc. Tennessee Dantec Elettronica Srl Italy India Biomedical Investment Limited Minnesota India Medtronic Private Limited India INFIN (International Finance) C.V. Netherlands InStent Europe B.V. Netherlands IntellX, L.L.C. Delaware Kobayashi Sofamor Danek K.K. Japan Medical Education K.K. Japan Med Rel, Inc. Minnesota Medtronic AB Sweden Medtronic (Africa) (Proprietary) Limited South Africa Medtronic Asia, Ltd. Minnesota Medtronic Asset Managment, Inc. Minnesota Medtronic Australasia Pty. Limited Australia Medtronic AVE, Inc. Delaware Medtronic AVECOR Cardiovascular, Inc. Minnesota Medtronic B.V. Netherlands Medtronic Belgium, S.A. Belgium Medtronic Bio-Medicus, Inc. Minnesota Medtronic of Canada, Ltd. Canada Medtronic China, Ltd. Minnesota Medtronic Comercial Ltda. Brazil Medtronic de Venezuela S.A. Venezuela Medtronic Dominicana, C. por A. Dominican Republic Medtronic Europe Capital Corp. Cayman Islands Medtronic Europe N.V. Belgium Medtronic Europe S.A. Switzerland Medtronic Foundation (non-profit corporation) Minnesota Medtronic France S.A.S. France Medtronic Functional Diagnostics A/S Denmark Medtronic Functional Diagnostics Asia Limited Hong Kong Medtronic Functional Diagnostics SA/NV Belgium Medtronic Functional Diagnostics Zinetics, Inc. Utah Medtronic Functional Diagnostics, Inc. New Jersey Medtronic G.m.b.H. Germany Medtronic Hellas Medical Device Commercial S.A. Greece Medtronic Iberica, S.A. Spain Medtronic InStent (Israel) Ltd. Israel Medtronic International, Ltd. Delaware Medtronic International Technology, Inc. Minnesota Medtronic Interventional Vascular, Inc. Massachusetts Medtronic Ireland Limited Ireland Medtronic Ireland Manufacturing Limited Ireland Medtronic Italia S.p.A. Italy Medtronic Japan Capital Corp. Cayman Islands Medtronic Japan Co., Ltd. Japan Medtronic Korea Co., Ltd. Korea Medtronic Latin America, Inc. Minnesota Medtronic Limited United Kingdom Medtronic Medical Appliance Technology and Service (Shanghai) Ltd. China Medtronic Mediterranean SAL Lebanon Medtronic Mexico S. de. R.L. de C.V. Mexico Medtronic Micro Interventional Systems, Inc. Minnesota Medtronic Micro Motion Sciences, Inc. Delaware Medtronic Oesterreich Ges.m.b.H. Austria Medtronic OY Finland Medtronic PercuSurge, Inc. Delaware Medtronic Physio-Control B.V. Netherlands Medtronic Physio-Control Corp. Washington Medtronic Physio-Control International, Inc. Washington Medtronic Physio-Control Limited United Kingdom Medtronic Physio-Control Manufacturing Corp. Washington Medtronic Portugal - Comercio e Distribuiacao de Aparelhos Medicos Lda Portugal Medtronic PS Medical, Inc. California Medtronic Puerto Rico, Inc. Minnesota Medtronic S. de R.L. de C.V. Mexico Medtronic S.A.I.C. Argentina Medtronic (Schweiz) A.G. Switzerland Medtronic (Shanghai) Ltd. China Medtronic Sofamor Danek Deggendorf GmbH Germany Medtronic Sofamor Danek France SAS France Medtronic Sofamor Danek GmbH Germany Medtronic Sofamor Danek, Inc. Indiana Medtronic Sofamor Danek USA, Inc. Tennessee Medtronic Synectics A.B. Sweden Medtronic Technologies Holland, B.V. Netherlands Medtronic Technologies, Inc. Minnesota Medtronic (Thailand) Limited Thailand Medtronic Treasury International, Inc. Minnesota Medtronic Treasury Management, Inc. Minnesota Medtronic U.K. Capital Corp. Cayman Islands Medtronic USA, Inc. Minnesota Medtronic PS Medical, Inc. California Medtronic World Trade Corporation (Israel) Minnesota Medtronic Xomed France SAS France Medtronic Xomed, Inc. Delaware Medtronic Xomed U.K. Ltd. England Medtronic-Mediland (Taiwan) Ltd. Taiwan Medtronic-Vicare AS Denmark Medtronic-Vingmed AS Norway Milu S.A. Luxembourg PercuSurge, S.A. France Physio-Control GmbH Germany Physio-Control Hungaria Kereskedelmi Kft. Hungary Physio-Control Italia s.r.l. Italy Physio-Control Medizintechnik Austria Physio-Control Poland Sp. zo.o Poland Proprietary Extrusion Technologies, Inc. California QRS Limited United Kingdom SDGI Holdings, Inc. Delaware Sofamor Danek (UK) Limited England Sofamor Danek Asia Pacific Limited Hong Kong Sofamor Danek Australia Pty. Ltd. Australia Sofamor Danek China Limited China Sofamor Danek Holdings, Inc. Delaware Sofamor Danek Iberica S.A. Spain Sofamor Danek Italia S.r.l. Italy Sofamor Danek N.V. Belgium Sofamor Danek Nederland B.V. Netherlands Sofamor Danek Properties, Inc. Delaware Sofamor Danek Singapore PTE, Ltd. Singapore Sofamor Danek South Africa (Proprietary) Limited South Africa Sofamor S.N.C. France Surgical Navigation Technologies, Inc. Delaware Synectics Medical Ltd United Kingdom Synectics Medical Poland Spolka z.oo. Poland Telecardiocontrol, C.A. Venezuela Vitafin N.V. Netherlands Vitatron AG Switzerland Vitatron Beheersmaatschappij B.V. Netherlands Vitatron Belgium N.V. Belgium Vitatron Denmark A/S Denmark Vitatron GmbH Austria Vitatron GmbH Germany Vitatron (Israel) Limited Israel Vitatron Japan Co., Ltd. Japan Vitatron Medical B.V. Netherlands Vitatron Medical Espana S.A. Spain Vitatron Medical Italia S.r.l. Italy Vitatron Nederland B.V. Netherlands Vitatron N.V. Netherlands Vitatron S.A.R.L. France Vitatron Sweden Aktiebolag Sweden Vitatron U.K. Limited United Kingdom Warsaw Orthopedic, Inc. Indiana World Medical Manufacturing Corporation Florida X-Trode S.r.l. Italy Xomed France Holdings I, LLC Delaware Xomed France Holdings II, LLC Delaware Xomed France Holdings, SNC France EX-24 8 medtronic012520_ex24.txt EXHIBIT 24 POWER OF ATTORNEY EXHIBIT 24 POWERS OF ATTORNEY Each of the undersigned directors of Medtronic, Inc., a Minnesota corporation, hereby constitute and appoint each of ARTHUR D. COLLINS, JR. and DAVID J. SCOTT, acting individually or jointly, their true and lawful attorney-in-fact and agent, with full power to act for them and in their name, place and stead, in any and all capacities, to do any and all acts and things and execute any and all instruments which either said attorney and agent may deem necessary or desirable to enable Medtronic, Inc. to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing with said Commission of its annual report on Form 10-K for the fiscal year ended April 27, 2001, including specifically, but without limiting the generality of the foregoing, power and authority to sign the names of the undersigned directors to the Form 10-K and to any instruments and documents filed as part of or in connection with said Form 10-K or amendments thereto; and the undersigned hereby ratify and confirm all that each said attorney and agent shall do or cause to be done by virtue hereof. The undersigned have set their hands this 19th day of June, 2001. /s/ Michael R. Bonsignore /s/ Bernadine P. Healy ------------------------- ---------------------------- Michael R. Bonsignore Bernadine P. Healy, M.D. /s/ William R. Brody /s/ Glen D. Nelson --------------------------------- ------------------------ William R. Brody, M.D., Ph.D. Glen D. Nelson, M.D. /s/ Paul W. Chellgren /s/ Denise M. O'Leary --------------------- --------------------- Paul W. Chellgren Denise M. O'Leary /s/ Arthur D. Collins, Jr. /s/ Jean-Pierre Rosso -------------------------- --------------------- Arthur D. Collins, Jr. Jean-Pierre Rosso /s/ Jack W. Schuler ----------------------------- ------------------- Frank L. Douglas, M.D., Ph.D. Jack W. Schuler /s/ Antonio M. Gotto /s/ Gordon M. Sprenger ----------------------------------------- ---------------------- Antonio M. Gotto, Jr., M.D., D. Phil. Gordon M. Sprenger /s/ William W. George --------------------- William W. George -----END PRIVACY-ENHANCED MESSAGE-----