-----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, FoqP/jq1uFO2q8AuZLi7d8OAl0jptQY06/fb1HiViZOYAeYjvsDYSMwfx3/8Dy+5 GV2yqLLSfD9jHumYRVomwQ== 0000897101-98-000729.txt : 19980723 0000897101-98-000729.hdr.sgml : 19980723 ACCESSION NUMBER: 0000897101-98-000729 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980721 SROS: NYSE 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: 98669347 BUSINESS ADDRESS: STREET 1: 7000 CENTRAL AVE NE STREET 2: MS 316 CITY: MINNEAPOLIS STATE: MN ZIP: 55432 BUSINESS PHONE: 6125744000 10-K 1 ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED APRIL 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________ TO ___________ COMMISSION FILE NO. 1-7707 MEDTRONIC [LOGO] MEDTRONIC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) MINNESOTA 41-0793183 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 7000 CENTRAL AVENUE N.E. MINNEAPOLIS, MINNESOTA 55432 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER: (612) 514-4000 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 2, 1998, BASED ON THE CLOSING PRICE OF $66.875 AS REPORTED ON THE NEW YORK STOCK EXCHANGE: $30.94 BILLION. SHARES OF COMMON STOCK OUTSTANDING ON JULY 2, 1998: 469,350,541 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF REGISTRANT'S 1998 ANNUAL REPORT ARE INCORPORATED BY REFERENCE INTO PARTS I, II AND IV; PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING ARE INCORPORATED BY REFERENCE INTO PART III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS. Medtronic, Inc. (together with its subsidiaries, "Medtronic" or the "company") was incorporated as a Minnesota corporation in 1957. Medtronic is the world's leading medical technology company specializing in implantable and interventional therapies. Primary products include those for bradycardia pacing, tachyarrhythmia management, atrial fibrillation management, heart failure management, coronary and peripheral vascular disease, heart valve replacement, extracorporeal cardiac support, minimally invasive cardiac surgery, malignant and non-malignant pain, movement disorders, neurosurgery and neurodegenerative disorders. Medtronic operates in a single industry segment, that of providing medical products and services. Its revenues, operating profits and assets for the past three fiscal years (1996-1998) have been attributable to this single industry segment. The company does business in more than 120 countries and reports on three primary product line platforms -- Cardiac Rhythm Management, Other Cardiovascular and Neurological and Other -- and three geographic areas -- the Americas, Europe/Middle East/Africa (Europe), and Asia/Pacific. On June 29, 1998, Medtronic, Inc. and Physio-Control International Corporation announced the signing of a definitive merger agreement. The agreement calls for each Physio-Control shareholder to receive $27.50 in the form of Medtronic common stock for each share of Physio-Control they now hold. 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. Further information on the merger is provided in Note 15 to the consolidated financial statements, which is incorporated herein by reference to Medtronic's 1998 Annual Report -- Financial Review on page 17. On July 13, 1998, Medtronic, Inc. and AVECOR Cardiovascular Inc. announced the signing of an agreement under which Medtronic will acquire AVECOR in a transaction valued at approximately $91 million. The transaction calls for AVECOR shareholders to receive $11.125 in Medtronic common stock for each share of AVECOR they now hold. AVECOR develops, manufactures and markets specialty medical devices for heart/lung bypass surgery and long-term respiratory support. The company's current products include membrane oxygenators, blood reservoirs, blood filters, blood pumps, cardioplegia systems and custom tubing packs. BUSINESS DESCRIPTION. Cardiac Rhythm Management products consist primarily of Bradycardia Pacing, which produces products for treating patients with slow or irregular heartbeats and Tachyarrhythmia Management, which develops products to treat abnormally fast heart rhythms. The bradycardia pacing systems 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 appropriate 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 Jewel(R), Micro Jewel(R) and Gem(TM) lines of tachyarrhythmia management devices. Advances in bradycardia pacing in fiscal 1998 include the commercial release of the new Medtronic.Kappa(TM) 700 series of pacemakers in Europe and Canada, which features a highly automated adaptive pacing system that provides customized therapy while streamlining clinical care, and the Medtronic.Kappa(TM) 400 series in the U.S., which offers dual sensor automated rate responsive pacing and data collection for enhanced diagnostic capabilities. In general, the Kappa(R) pacemakers are designed to adjust heart rate to match patient activity without requiring a hospital or clinic visit. Medtronic also markets the CapSure(R) Z and CapSureFix(R) steroid-eluting leads, which deliver more concentrated levels of electrical energy that extend device life. Nearly half of Medtronic's revenues are generated from the sale of implantable cardiac pacemaker systems for treatment of bradycardia. Tachyarrhythmia Management produces 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 may be implanted 1 pectorally, which reduces patient trauma and hospitalization time and costs. In June 1998, the Gem(TM) DR defibrillator system was commercially released in Europe and certain markets outside the U.S. The Gem(TM) DR is the company's first commercially available device from its new generation of Gem(TM) products intended to meet the needs of patients with multiple heart rhythm problems. The Gem(TM) DR features an advanced dual chamber rate responsive pacing capability as well as advanced diagnostic tools. The Gem(TM) DR is currently in clinical trials in the U.S. The Gem(TM) single chamber defibrillator, currently in clinical trials in the U.S. and Europe, is designed to provide rate responsive pacing in the lower chamber of the heart. The company also markets the Jewel(R) line of devices, including the Micro Jewel(R) II implantable defibrillator, which offers expanded diagnostic capabilities in a small size device. The Jewel(R) AF for treatment of atrial arrhythmias is currently in clinical trials in the U.S. and Europe. The company also 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's Cardiac Rhythm Management products accounted for 64.2% of Medtronic's net sales during the fiscal year ended April 30, 1998 ("fiscal 1998"), 65.6% of net sales in fiscal 1997 and 67.9% of net sales in fiscal 1996. Other Cardiovascular products consist of heart valves, perfusion and blood management systems, cannulae, surgical accessories, balloon and guiding catheters and stents. Heart Valves produces tissue and mechanical valves and repair products for damaged or diseased heart valves. In November 1997, the Freestyle(R) stentless aortic tissue heart valve was commercially released in the U.S., featuring advanced tissue technology for improved blood flow and increased durability. Through a series of strategic acquisitions over the past decade, Medtronic now markets through Cardiopulmonary, Blood Management and DLP Cannulae a complete line of blood-handling products that form the extracorporeal life-support circuit by maintaining and monitoring blood circulation and coagulation status, oxygen supply and body temperature while the patient is undergoing emergency treatment or open-heart surgery. The company is also pursuing enabling technologies in minimally invasive cardiac surgery, such as the commercially available Octopus(R) tissue stabilizing system, which is used to stabilize sites on the beating heart to enable the surgeon to complete bypass grafts. The Vascular product line supports the treatment of disease and damage to coronary and peripheral blood vessels. Medtronic's primary involvement in the vascular area has been in coronary angioplasty. The company offers coronary angioplasty balloon and guide catheters worldwide. In late April 1998, the company commercially released in Europe and certain markets outside the U.S. the Presario(TM) single-operator exchange catheter, the first in a new series of angioplasty catheters which are also intended for use as stent delivery systems. The company's family of Wiktor(R) stents is designed for coronary applications and includes the Wiktor(R) Prime(TM) coronary stent system, commercially released in the U.S. in fiscal 1998, and the Wiktor(R) Rival(TM) coronary stent system, commercially released in the U.S. in June 1998. The AneuRx stent graft for minimally invasive abdominal aortic aneurysm repair therapy is commercially available in Europe and certain markets outside the U.S. and is in clinical trials in the U.S. The company is also developing a line of self-expanding and balloon expandable peripheral vascular stents, currently in clinical trials, to be used in several of the body's fluid passageways. The market for balloon catheters and stents has become increasingly competitive, and disappointing sales of these products necessitated management initiatives during the third quarter of fiscal 1998 to restructure the vascular organization to reduce costs and focus on new products. See Note 3 to the consolidated financial statements on page 11 of the company's 1998 Annual Report -- Financial Review, which is incorporated herein by reference. The company's Other Cardiovascular products accounted for 21.0% of net sales in fiscal 1998, 22.0% of net sales in fiscal 1997 and 23.6% of net sales in fiscal 1996. Neurological and Other products consists primarily of implantable neurostimulation devices, drug administration systems, neurosurgery products and diagnostic systems. The company produces implantable systems for spinal cord and brain stimulation to treat pain and tremor. Neurostimulation products include the Itrel(R) 3 spinal cord stimulation system, which features a patient-operated control unit, and the Mattrix(R) stimulator, which offers a dual stimulation mode for more effective pain management. The 2 new Activa(TM) therapy for essential tremor and tremor associated with Parkinson's disease was commercially released in the U.S. in fiscal 1998. Activa(TM) Parkinson's Control Therapy for other major symptoms of Parkinson's disease was commercially released in Europe in fiscal 1998 and is in clinical trials in the U.S. The Activa(TM) system allows stimulation levels to be adjusted according to the needs of each patient. The Drug Delivery product line consists of implantable programmable drug delivery systems that are used in treating chronic intractable pain, tremor and spasticity, including the SynchroMed(R) drug delivery system. The company is collaborating with several biotechnology companies to develop therapies for neurodegenerative disorders such as Alzheimer's disease, Parkinson's disease, Huntington's disease and amyotrophic lateral sclerosis or Lou Gehrig's disease. Compounds for treating these diseases, called neurotrophic factors, are still in development by these companies. Once they are proven to be safe and effective, Medtronic believes its drug delivery technology could be effective in administering these agents directly to their site of action in precise doses. The company also manufactures and distributes cerebrospinal fluid shunts and neurosurgical implants, and is a world leader in computer-supported systems to diagnose urological and digestive disorders and sleep apnea. The Neurological and Other products accounted for 14.8% of net sales for fiscal 1998, 12.4% of net sales for fiscal 1997 and 8.5% of net sales for fiscal 1996. GOVERNMENT REGULATION AND OTHER MATTERS. Government and private sector initiatives to limit the growth of health care costs, including price regulation and competitive pricing, are continuing in many countries where the company does business, including the United States. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical therapies. Although the company believes it is well positioned to respond to changes resulting from this worldwide trend toward cost containment, the uncertainty as to the outcome of any proposed legislation or changes in the marketplace precludes the company from predicting the impact these changes may have on future operating results. In keeping with the increased emphasis on cost effectiveness in health care delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The medical device industry has also been consolidating rapidly, partly in order to offer a broader range of products to large purchasers. As a result, transactions with customers are more significant, more complex and tend to involve more long-term contracts than in the past. This enhanced purchasing power may also increase the pressure on product pricing, although management is unable to estimate the potential impact at this time. In the United States, the Food and Drug Administration (the "FDA"), among other governmental agencies, is responsible for regulating the introduction of new medical devices, including laboratory and manufacturing practices, labeling and recordkeeping for medical devices, and review of manufacturers' required reports of adverse experience to identify potential problems with marketed medical devices. The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement, or refund of such devices, and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations. Moreover, the FDA administers certain controls over the export of such devices from the United States. Many of the devices that Medtronic develops and markets are in a category for which the FDA has implemented stringent clinical investigation and pre-market clearance requirements. Any delay or acceleration experienced by the company in obtaining regulatory approvals to conduct clinical trials or in obtaining required market clearances (especially with respect to significant products in the regulatory process that have been discussed in the company's announcements) may affect the company's operations or the market's expectations for the timing of such events and, consequently, the market price for the company's common stock. 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. 3 In the early 1990's the review time by the FDA to clear medical devices for commercial release lengthened and the number of clearances, both of 510(k) submissions and pre-market approval applications ("PMA's"), decreased. In response to public and congressional concern, the FDA Modernization Act of 1997 was adopted with the intent of bringing better definition to the clearance process. Although it is expected that the 1997 Act will result in improved cycle times for product clearance, there can be no assurance that the FDA review process will not involve delays or that clearances will be granted on a timely basis. Medtronic 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. The company 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 and leads. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class, and the company has experienced an increase in such claims. During the past year, United States District Courts in California, Florida, Kentucky and Ohio have refused to certify class actions in cases brought against the company. This is consistent with the trend in class action law as it applies to the medical device industry generally. 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. In 1994, governmental authorities in Germany began an investigation into certain business and accounting practices by heart valve manufacturers. As part of this investigation, documents were seized from the company and certain other manufacturers. Subsequently, the United States Securities and Exchange Commission (the "SEC") also began an inquiry into this matter. In August 1996, the SEC issued a formal non-public order of investigation to the company, as it had to at least one other manufacturer. Based upon currently available information, the company does not expect these investigations to have a materially adverse impact on the company's financial position, results of operations or liquidity. The company has completed a review of its computer systems with regard to year 2000 compliance and will either replace or correct through programming modifications those computer systems that have been found to have date-related deficiencies. In addition, the company is assessing the readiness of third parties (e.g., vendors and customers) that interact with the company's systems. Also being assessed are facility and telecommunication systems, as well as systems used to support manufacturing processes, to ensure that these will be year 2000 ready. The company's products have been assessed and found to be year 2000 compliant with the exception of a few requiring minor corrective actions. External and internal costs specifically associated with modifying internal use software for year 2000 compliance are expensed as incurred. To date, those costs have not been material. Based upon currently available information, the company does not expect the costs of addressing potential year 2000 problems to have a material adverse impact on the company's financial position, results of operations or liquidity in future periods. The company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. SALES, MARKETS AND DISTRIBUTION METHODS. The primary markets for Medtronic's products are hospitals, other medical institutions and physicians in the United States and other countries around the world. Medtronic sells most of its products and services directly through its staff of trained, full-time sales representatives. Sales by these representatives accounted for approximately 93% of Medtronic's U.S. sales and approximately 63% of its sales from other countries in fiscal 1998. The remaining sales were made through independent distributors. 4 RAW MATERIALS AND PRODUCTION. 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 are planning to terminate sales of certain materials and parts to companies that manufacture implantable medical devices. 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. 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-national industrial manufacturers to national or regional 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, product price, and breadth of product lines and related product services provided by the manufacturer. Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance and risks of product quality in the medical device industry. Medtronic is the leading manufacturer and supplier of cardiac rhythm management devices in both the U.S. and non-U.S. markets. Worldwide, approximately nine manufacturers compete in the pacemaker industry. In the U.S., Medtronic and three other manufacturers account for a significant portion of pacemaker sales. Medtronic and five other manufacturers account for most of the non-U.S. pacemaker sales. Medtronic and two other manufacturers based in the U.S. account for most sales of implantable defibrillators within and outside the U.S. At least four other companies have devices in various stages of development and clinical evaluation. In the vascular market, which includes balloon and guiding catheters, guidewires, implantable stents and grafts, and integrated stent delivery systems, there are numerous competitors worldwide. Medtronic and four other manufacturers account for most coronary balloon and guiding catheter sales. In coronary stents, Medtronic and several competitors account for most sales worldwide, with several new competitors emerging. Medtronic is the third largest manufacturer and supplier of both tissue and mechanical heart valves within and outside the U.S. A large manufacturer and distributor of hospital products and services is the major competitor in tissue heart valves and two other companies are major competitors in mechanical heart valves. These two companies and Medtronic are the primary manufacturers and suppliers of heart valves within the U.S. These three companies plus a few other competitors account for most of the worldwide heart valve sales. In the extracorporeal circulation market, there are approximately seven companies that account for a significant portion of the U.S. and non-U.S. markets. Medtronic is the market leader in cannulae products. Medtronic and three competitors account for a significant portion of cannulae sales in the U.S. Medtronic and three competitors account for a significant portion of autotransfusion sales in both U.S. and non-U.S. markets. 5 In neurological devices, Medtronic is the leading manufacturer and supplier of implantable neurostimulation and drug delivery systems, and of shunts for the treatment of hydrocephalus. Medtronic and two 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. Market complexity continues to intensify in the medical device industry. Factors such as buyer groups, government reimbursement systems for health care costs, relative patent portfolios, government regulation (including the regulatory approval process for medical devices), a more rigorous enforcement climate at the FDA, health care reform, product liability litigation and the rapid rate of technological change are increasingly important considerations for existing medical device manufacturers and any potential entrants to the industry. RESEARCH AND DEVELOPMENT. Medtronic spent $297.2 million on research and development (11.4% of sales) in fiscal 1998, $280.2 million (11.5% of sales) in fiscal 1997 and $243.8 million (11.2% of net sales) in fiscal 1996. 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; implantable drug delivery systems for pain, spasticity and other neurological applications; muscle and neurological stimulators; 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 30, 1998, Medtronic and its subsidiaries employed 12,466 people on a regular, full-time basis and, including temporary and part-time employees, a total of 13,954 employees on a full-time equivalent basis. U.S. AND NON-U.S. OPERATIONS AND EXPORT SALES. Medtronic sells products in more than 120 countries in three geographic areas: the Americas, Europe/Middle East/Africa (Europe), and Asia/Pacific. For financial reporting purposes, revenues, profitability and identifiable assets attributable to significant geographic areas are presented in Note 14 to the consolidated financial statements, incorporated herein by reference to Medtronic's 1998 Annual Report - -- Financial Review on page 17. U.S. export sales to unaffiliated customers comprised less than two percent of Medtronic's consolidated sales in each of fiscal 1998, 1997 and 1996. Operation in countries outside the U.S. 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 U.S. 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-U.S. 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, incorporated herein by reference to Medtronic's 1998 Annual Report -- Financial Review on page 3. Certain countries also limit or regulate the repatriation of earnings to the United States. Non-U.S. 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," "estimate," "expect," "intend," "may," "could," "possible," "plan," "project," "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- 6 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, such factors include, among others, (i) trends toward managed care, healthcare cost containment and other changes in government and private sector initiatives, in the U.S. 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 foreign and domestic regulatory approval processes, such as delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or FDA marketing clearances, which may result in lost market opportunities or postpone 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 and leads; (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; and (xiii) economic factors over which the company has no control, including changes in inflation, foreign currency rates and interest rates. More detailed discussions of many of these factors are including in the preceding sections. 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. WILLIAM W. GEORGE, age 55, has been Chairman and Chief Executive Officer since August 1996, was President and Chief Executive Officer from May 1991 to August 1996, and was President and Chief Operating Officer from March 1989 to April 1991. He has been a director since March 1989. Prior to joining the company, Mr. George was President, Space and Aviation Systems Business, at Honeywell Inc. from December 1987 to March 1989. During his 11 years with Honeywell, Mr. George served in several other executive positions including President, Industrial Automation and Control, from May 1987 to December 1987, and Executive Vice President of that business from January 1983 to May 1987. GLEN D. NELSON, M.D., age 61, 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. ARTHUR D. COLLINS, JR., age 50, has been President and Chief Operating Officer since August 1996, was Chief Operating Officer from January 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 7 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. BOBBY I. GRIFFIN, age 61, has been Executive Vice President since July 1988, and was President, Cardiac Rhythm Management (formerly Pacing), from March 1991 to December 1997. From September 1985 to July 1988, Mr. Griffin was Vice President, Cardiac Rhythm Management. Mr. Griffin will retire in August 1998. BILL K. ERICKSON, age 54, has been Senior Vice President and President, Americas, since January 1994. From May 1992 to January 1994, Mr. Erickson was Senior Vice President and President, U.S. Cardiovascular Sales and Marketing Division. Mr. Erickson was Senior Vice President, U.S. Cardiovascular Division, from January 1990 to May 1992 and was Vice President, U.S. Cardiovascular Distribution, from January 1982 to December 1989. JANET S. FIOLA, age 56, 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. B. KRISTINE JOHNSON, age 46, has been Senior Vice President and Chief Administrative Officer since October 1997. She was Senior Vice President and President, Vascular from May 1996 to September 1997. Prior to that she was Vice President and President, Tachyarrhythmia Management from May 1995 to April 1996, and Vice President and General Manager, Tachyarrhythmia Management from January 1990 to April 1995. She served in various general management positions at the company from April 1982 to December 1989. Prior to joining the company, Ms. Johnson served in several management positions at Cargill, Inc. from 1973 to 1982. PHILIP M. LAUGHLIN, age 51, joined the company as Senior Vice President and President, Cardiac Surgery, in July 1995. Prior to that he served with Clintec Nutrition company (worldwide joint venture of Baxter International and Nestle S.A. in the field of clinical nutrition) as President, North America, from 1994 through July 1995 and as President, United States, from 1989 to 1993. From 1976 to 1989, he held numerous general management positions at Baxter International in Europe and the Far East, and was most recently Vice President, Operations, Global Business Group. RONALD E. LUND, age 63, has been Senior Vice President and General Counsel since November 1990, and Secretary since July 1992, and was Vice President and General Counsel from February 1989 to November 1990. Prior to joining the company, Mr. Lund served as Vice President and Associate General Counsel of The Pillsbury Company from 1984 to February 1989. STEPHEN H. MAHLE, age 52, has been Senior Vice President and President of Cardiac Rhythm Management (formerly Pacing) 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 26 years and served in various general management positions prior to 1990. JOHN A. MESLOW, age 59, has been Senior Vice President and President, Neurological Business, since March 1994. He was Vice President and President, Neurological Business, from March 1991 to March 1994, and was Vice President, Neurological Division, from March 1985 to March 1991. ROBERT L. RYAN, age 55, 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. BARRY W. WILSON, age 54, has been Senior Vice President since September 1997 and President, Europe, Middle East and Africa since joining the company in April 1995. Prior to that, Mr. Wilson was President of the Lederle Division of American Cyanamid/American Home Products from 1991 to March 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. 8 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, Massachusetts, Michigan, Minnesota, Utah, Puerto Rico, Canada, China, France, Denmark, Germany, India, Israel, Italy, the Netherlands, Sweden, Switzerland and Japan. The company's total manufacturing and research space is approximately 1.9 million square feet, of which approximately 76% is owned by the company and the balance is leased. Medtronic also maintains sales and administrative offices in the United States at 92 locations in 28 states or jurisdictions and outside the United States at 98 locations in 30 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 Note 12 to the consolidated financial statements appearing on page 16 of Medtronic's 1998 Annual Report -- Financial Review 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" on page 23 of Medtronic's 1998 Annual Report -- Company Overview is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information for the fiscal years 1988 through 1998 on page 18 of Medtronic's 1998 Annual Report -- Financial Review is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information on pages 1 through 4 of Medtronic's 1998 Annual Report -- Financial Review is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information on page 3 of Medtronic's 1998 Annual Report -- Financial Review is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of independent accountants dated May 26, 1998 appearing on pages 5 through 17 of Medtronic's 1998 Annual Report -- Financial Review, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MEDTRONIC The information on pages 1 through 7 of Medtronic's Proxy Statement for its 1998 Annual Shareholders' Meeting and on page 9 of such Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. See also "Executive Officers of Medtronic" on pages 7 and 8 hereof. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Election of Directors -- Director Compensation" and "Executive Compensation" on pages 7 and 8, and 14 through 19, respectively, of Medtronic's Proxy Statement for its 1998 Annual Shareholders' Meeting are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Shareholdings of Certain Owners and Management" on page 9 of Medtronic's Proxy Statement for its 1998 Annual Shareholders' Meeting is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on page 8 of Medtronic's Proxy Statement for its 1998 Annual Shareholders' Meeting concerning services provided to the company by directors and executive officers in fiscal 1998 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS Report of Independent Accountants (incorporated herein by reference to page 5 of Medtronic's 1998 Annual Report -- Financial Review) Statement of Consolidated Earnings -- years ended April 30, 1998, 1997, and 1996 (incorporated herein by reference to page 6 of Medtronic's 1998 Annual Report -- Financial Review) Consolidated Balance Sheet -- April 30, 1998 and 1997 (incorporated herein by reference to page 7 of Medtronic's 1998 Annual Report -- Financial Review) Statement of Consolidated Shareholders' Equity -- years ended April 30, 1998, 1997, and 1996 (incorporated herein by reference to page 8 of Medtronic's 1998 Annual Report -- Financial Review) Statement of Consolidated Cash Flows -- years ended April 30, 1998, 1997, and 1996 (incorporated herein by reference to page 9 of Medtronic's 1998 Annual Report -- Financial Review) Notes to Consolidated Financial Statements (incorporated herein by reference to pages 10 through 17 of Medtronic's 1998 Annual Report -- Financial Review) 2. FINANCIAL STATEMENT SCHEDULES Schedule II. Valuation and Qualifying Accounts -- years ended April 30, 1998, 1997, and 1996 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 10 3. EXHIBITS 3.1 Medtronic Restated Articles of Incorporation, as amended to date (Exhibit 3.1).(a) 3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(b) 4 Form of Rights Agreement dated as of June 27, 1991 between Medtronic and Norwest Bank Minnesota, National Association, including as Exhibit A thereto the form of Preferred Stock Purchase Right Certificate. (Exhibit 4).(c) *10.1 1994 Stock Award Plan, as amended. *10.2 Management Incentive Plan (Appendix B).(d) *10.3 1979 Restricted Stock and Performance Share Award Plan, as amended to date. *10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(b) *10.5 Form of Employment Agreement for Medtronic executive officers (Exhibit 10.5).(e) *10.6 1991 Restricted Stock Plan for Non-Employee Directors (Exhibit 10.6).(b) *10.7 Capital Accumulation Plan Deferral Program (Exhibit 10.7).(b) *10.8 Postretirement Survivor Benefit Plan. *10.9 Amendment effective October 1, 1993 to the Directors' Retirement Plan (Exhibit 10.9).(f) *10.10 Executive Nonqualified Supplemental Benefit Plan (Restated May 1, 1997). (Exhibit 10.10).(c) *10.11 Stock Option Replacement Program. *10.12 1998 Outside Director Stock Compensation Plan. *10.13 Agreement with Officer (Exhibit 10).(g) *10.14 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock Option Plan. 13 Those portions of Medtronic's 1998 Annual Shareholders Report expressly incorporated by reference herein, which shall be deemed filed with the Commission. 21 List of Subsidiaries. 23 Consent and Report of PricewaterhouseCoopers LLP (set forth on page 13 of this report). 24 Powers of Attorney. 27 Financial Data Schedule. 99.1 Agreement and Plan of Merger dated June 27, 1998 by and among Medtronic, Inc., PC Merger Corp. and Physio-Control Corporation, incorporated by reference to Exhibit C to Schedule 13D filed by the Registrant relating to ownership of shares of Physio-Control Corporation (SEC File No. 0-27242). 99.2 Agreement and Plan of Merger dated July 12, 1998 by and among Medtronic, Inc., AC Merger Corp. and AVECOR Cardiovascular, Inc., incorporated by reference to Exhibit D to Schedule 13D filed by the Registrant relating to ownership of shares of AVECOR Cardiovascular, Inc. (SEC File No. 0-21330). - ------------------ (a) Incorporated herein by reference to the cited exhibit in Medtronic's Quarterly Report on Form 10-Q for the quarter ended July 28, 1995, filed with the Commission on September 8, 1995. (b) 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. (c) 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. (d) Incorporated herein by reference to the cited appendix in Medtronic's Proxy Statement for its 1994 Annual Meeting of Shareholders, filed with the Commission on July 27, 1994. (e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1995, filed with the Commission on July 25, 1995. (f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1994, filed with the Commission on July 27, 1994. (g) Incorporated herein by reference to the cited exhibit in Medtronic's Quarterly Report on Form 10-Q for the quarter ended January 30, 1998, filed with the Commission on March 13, 1998. *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 No reports on Form 8-K were filed by Medtronic during the quarter ended April 30, 1998. 11 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 21, 1998 BY: /S/ William W. George ---------------------------------------- WILLIAM W. GEORGE CHAIRMAN 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 21, 1998 BY: /S/ William W. George ---------------------------------------- WILLIAM W. GEORGE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Dated: July 21, 1998 BY: /s/ Robert L. Ryan ---------------------------------------- ROBERT L. RYAN SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) WILLIAM R. BRODY, M.D., PH.D. PAUL W. CHELLGREN ARTHUR D. COLLINS, JR. WILLIAM W. GEORGE ANTONIO M. GOTTO, JR., M.D. BERNADINE P. HEALY, M.D. THOMAS E. HOLLORAN DIRECTORS GLEN D. NELSON, M.D. RICHARD L. SCHALL JACK W. SCHULER GERALD W. SIMONSON GORDON M. SPRENGER RICHARD A. SWALIN, PH.D. Ronald E. Lund, 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 21, 1998 BY: /s/ Ronald E. Lund ---------------------------------------- RONALD E. LUND ATTORNEY-IN-FACT 12 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 26, 1998 appearing on page 5 of the Medtronic, Inc. 1998 Annual Report -- Financial Review (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. Price Waterhouse LLP Minneapolis, Minnesota May 26, 1998 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 and 333-07385) of Medtronic, Inc. of our report dated May 26, 1998 appearing on page 5 of the 1998 Annual Report -- Financial Review which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule as shown above. PricewaterhouseCoopers LLP Minneapolis, Minnesota July 21, 1998 13 MEDTRONIC, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
OTHER BALANCE AT CHARGES/ CHANGES BALANCE BEGINNING (CREDITS) TO (DEBIT) AT END OF OF PERIOD EARNINGS CREDIT PERIOD - -------------------------------------------------------------------------------------------- Allowance for doubtful accounts: Year ended 4/30/98 ............ $13,673 $ 2,490 $(1,426)(a) $14,469 (268)(b) Year ended 4/30/97 ............ 18,094 (1,952) (1,448)(a) 13,673 (1,021)(b) Year ended 4/30/96 ............ 22,416 (189) (1,371)(a) 18,094 (857)(b) (1,905)(c)
- ------------------ (a) Uncollectible accounts written off, less recoveries. (b) Reflects primarily the effects of foreign currency fluctuations. (c) Uncollectible accounts written off related to 1993 divestiture. 14 Commission File Number 1-7707 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT 0F 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1998
METHOD OF EXHIBITS INDEX FILING 3.1 Medtronic Restated Articles of Incorporation, as amended to date -- (Exhibit 3.1).(a) 3.2 Medtronic Bylaws, as amended to date (Exhibit 3.2).(b) -- 4 Form of Rights Agreement dated as of June 27, 1991 between -- Medtronic and Norwest Bank Minnesota, National Association, including as Exhibit A thereto the form of Preferred Stock Purchase Right Certificate. (Exhibit 4).(c) *10.1 1994 Stock Award Plan, as amended. E *10.2 Management Incentive Plan (Appendix B).(d) -- *10.3 1979 Restricted Stock and Performance Share Award Plan, as amended E to date. *10.4 1979 Nonqualified Stock Option Plan, as amended (Exhibit 10.4).(b) -- *10.5 Form of Employment Agreement for Medtronic executive officers -- (Exhibit 10.5).(e) *10.6 1991 Restricted Stock Plan for Non-Employee Directors (Exhibit -- 10.6).(b) *10.7 Capital Accumulation Plan Deferral Program (Exhibit 10.7).(b) -- *10.8 Postretirement Survivor Benefit Plan. E *10.9 Amendment effective October 1, 1993 to the Directors' Retirement -- Plan (Exhibit 10.9).(f) *10.10 Executive Nonqualified Supplemental Benefit Plan (Restated May 1, -- 1997). (Exhibit 10.10).(c) *10.11 Stock Option Replacement Program. E *10.12 1998 Outside Director Stock Compensation Plan. E *10.13 Agreement with Officer (Exhibit 10).(g) -- *10.14 Amendment effective March 5, 1998 to the 1979 Nonqualified Stock E Option Plan. 13 Those portions of Medtronic's 1998 Annual Shareholders Report E expressly incorporated by reference herein, which shall be deemed filed with the Commission. 21 List of Subsidiaries. E 23 Consent and Report of PricewaterhouseCoopers LLP (set forth on page -- 13 of this report). 24 Powers of Attorney. E 27 Financial Data Schedule. E 99.1 Agreement and Plan of Merger dated June 27, 1998 by and among -- Medtronic, Inc., PC Merger Corp. and Physio-Control Corporation, incorporated by reference to Exhibit C to Schedule 13D filed by the Registrant relating to ownership of shares of Physio-Control Corporation (SEC File No. 0-27242). 99.2 Agreement and Plan of Merger dated July 12, 1998 by and among -- Medtronic, Inc., AC Merger Corp. and AVECOR Cardiovascular, Inc., incorporated by reference to Exhibit D to Schedule 13D filed by the Registrant relating to ownership of shares of AVECOR Cardiovascular, Inc. (SEC File No. 0-21330). - ------------------ (a) Incorporated herein by reference to the cited exhibit in Medtronic's Quarterly Report on Form 10-Q for the quarter ended July 28, 1995, filed with the Commission on September 8, 1995. (b) 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. (c) 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. (d) Incorporated herein by reference to the cited appendix in Medtronic's Proxy Statement for its 1994 Annual Meeting of Shareholders, filed with the Commission on July 27, 1994. (e) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1995, filed with the Commission on July 25, 1995. (f) Incorporated herein by reference to the cited exhibit in Medtronic's Annual Report on Form 10-K for the year ended April 30, 1994, filed with the Commission on July 27, 1994. (g) Incorporated herein by reference to the cited exhibit in Medtronic's Quarterly Report on Form 10-Q for the quarter ended January 30, 1998, filed with the Commission on March 13, 1998.
EX-10.1 2 1994 STOCK AWARD PLAN EXHIBIT 10.1 1994 STOCK AWARD PLAN (EFFECTIVE APRIL 29, 1994) (AMENDED AND RESTATED AS OF JUNE 25, 1998) THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING MEDTRONIC COMMON STOCK THAT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. 1. PURPOSE. The purpose of this 1994 Stock Award Plan (the "Plan") is to motivate key personnel, including non-employee directors, to produce a superior return to the shareholders of Medtronic, Inc. (the "Company") and its Affiliates by offering such individuals an opportunity to realize Stock appreciation, by facilitating Stock ownership, and by rewarding them for achieving a high level of corporate performance. This Plan is also intended to facilitate recruiting and retaining key personnel of outstanding ability. 2. DEFINITIONS. The capitalized terms used in this Plan have the meanings set forth below. (a) "Affiliate" means any corporation that is a "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, or any successor provision, and, for purposes other than the grant of Incentive Stock Options, any joint venture in which the Company or any such "parent corporation" or "subsidiary corporation" owns an equity interest. (b) "Agreement" means a written contract entered into between the Company or an Affiliate and a Participant containing the terms and conditions of an Award in such form (not inconsistent with this Plan) as the Committee approves from time to time, together with all amendments thereof, which amendments may be unilaterally made by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially adverse to the Participant and are not required as a matter of law. (c) "Annual Retainer" means the fixed annual fee of a Non-Employee Director in effect on the first day of the year for which such Annual Retainer is payable for services to be rendered as a Non-Employee Director of the Company. The Annual Retainer does not include meeting or chairmanship fees. (d) "Award" means a grant made under this Plan in the form of Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or any Other Stock-Based Award. (e) "Board" means the Board of Directors of the Company. (f) "Change in Control" means: (i) acquisition by 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")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A) the then outstanding Shares of Stock (the "Outstanding Company Common Stock") or (B) 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 the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company or any Subsidiary, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary or (D) any acquisition by any corporation with respect to which, following such acquisition, more than 55% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (ii) individuals who, as of the effective date of this Plan provided in Section 14(a) of this Plan, constitute the Board (the "Incumbent Board") 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 directors then comprising the Incumbent Board 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 (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or (iii) approval by the shareholders of the Company of a reorganization, merger, consolidation or statutory exchange of Outstanding Company Voting Securities, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, consolidation or exchange do not, following such reorganization, merger, consolidation or exchange, beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which, following such sale or other disposition, more than 55% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. Notwithstanding the foregoing provisions of this definition, a Change of Control shall not be deemed to occur with respect to a Participant if the acquisition of the 30% or greater interest referred to in subparagraph (i) of this definition is by a group, acting in concert, that includes the Participant 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 of any corporation (or other entity) acquiring all or substantially all of the assets of the Company shall be beneficially owned, directly or indirectly, immediately after a reorganization, merger, consolidation, statutory share exchange or disposition of assets referred to in subparagraph (iii) or (iv) of this definition by a group, acting in concert, that includes that Participant. (g) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute. (h) "Committee" means three or more Disinterested Persons designated by the Board to administer this Plan under Section 3 hereof and constituted so as to permit this Plan to comply with Exchange Act Rule 16b-3. (i) "Company" means Medtronic, Inc., a Minnesota corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise. (j) "Disability" means the disability of a Participant such that the Participant is (or in the case of a Non-Employee Director, would, if an employee, be) considered disabled under any retirement plan of the Company which is qualified under Section 401 of the Code, or, except as this term is used in Sections 12 and 13 hereof, as otherwise determined by the Committee. (k) "Disinterested Person" means a member of the Board who is considered a disinterested person within the meaning of Exchange Act Rule 16b-3. (l) "Employee" means any full-time or part-time employee (including an officer or director who is also an employee) of the Company or an Affiliate. Except with respect to grants of Incentive Stock Options, "Employee" shall also include other individuals and entities who are not "employees" of the Company or an Affiliate but who provide services to the Company or an Affiliate in the capacity of an independent contractor. References in this Plan to "employment" and related terms shall include the providing of services in any such capacity. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended; "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act as in effect with respect to the Company or any successor regulation. (n) "Fair Market Value" as of any date means, unless otherwise expressly provided in this Plan: (i) the closing sale price of a Share (A) on the composite tape for New York Stock Exchange ("NYSE") listed shares, or (B) if the Shares are not quoted on the NYSE composite tape, on the principal United States securities exchange registered under the Exchange Act on which the Shares are listed, or (C) if the Shares are not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System, in any case on the date immediately preceding that date, or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, or (ii) if clause (i) is not applicable, what the Committee determines in good faith to be 100% of the fair market value of a Share on that date. However, if the applicable securities exchange or system has closed for the day at the time the event occurs that triggers a determination of Fair Market Value, all references in this paragraph to the "date immediately preceding that date" shall be deemed to be references to "that date." In the case of an Incentive Stock Option, if such determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury, Fair Market Value shall be determined in accordance with said regulations. The determination of Fair Market Value shall be subject to adjustment as provided in Section 14(f) hereof. (o) "Fundamental Change" means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company. (p) "Incentive Stock Option" means any Option designated as such and granted in accordance with the requirements of Section 422 of the Code or any successor to such section. (q) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any Affiliate. (r) "Non-Qualified Stock Option" means an Option other than an Incentive Stock Option. (s) "Other Stock-Based Award" means an Award of Stock or an Award based on Stock other than Options, Stock Appreciation Rights, Restricted Stock or Performance Shares. (t) "Option" means a right to purchase Stock, including both Non-Qualified Stock Options and Incentive Stock Options. (u) "Participant" means an Employee or a Non-Employee Director to whom an Award is made. (v) "Performance Period" means the period of time as specified in an Agreement over which Performance Shares are to be earned. (w) "Performance Shares" means a contingent award of a specified number of Performance Shares, with each Performance Share equivalent to one Share, a variable percentage of which may vest depending upon the extent of achievement of specified performance objectives during the applicable Performance Period. (x) "Plan" means this 1994 Stock Award Plan, as amended and in effect from time to time. (y) "Restricted Stock" means Stock granted under Section 10 or 13 hereof so long as such Stock remains subject to one or more restrictions. (z) "Retirement" means retirement of an Employee as defined under any retirement plan of the Company which is qualified under Section 401 of the Code (which currently provides for retirement on or after age 55, provided the Employee has been employed by the Company and/or one or more Affiliates for at least ten years, or retirement on or after age 62), or under any retirement plan of the Company or any Affiliate applicable to the Employee due to employment by a non-U.S. Affiliate or employment in a non-U.S. location, or as otherwise determined by the Committee. (aa) "Share" means a share of Stock. (bb) "Stock" means the common stock, $.10 par value per share (as such par value may be adjusted from time to time), of the Company. (cc) "Stock Appreciation Right" means a right, the value of which is determined relative to appreciation in value of Shares pursuant to an Award granted under Section 8 hereof. (dd) "Subsidiary" means a "subsidiary corporation," as that term is defined in Section 424(f) of the Code, or any successor provision. (ee) "Successor" with respect to a Participant means the legal representative of an incompetent Participant and, if the Participant is deceased, the legal representative of the estate of the Participant or the person or persons who may, by bequest or inheritance, or under the terms of an Award or of forms submitted by the Participant to the Committee under Section 14(i) hereof, acquire the right to exercise an Option or Stock Appreciation Right or receive cash and/or Shares issuable in satisfaction of an Award in the event of a Participant's death. (ff) "Term" means the period during which an Option or Stock Appreciation Right may be exercised or the period during which the restrictions placed on Restricted Stock or any other Award are in effect. Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural. 3. ADMINISTRATION. (a) AUTHORITY OF COMMITTEE. The Committee shall administer this Plan. The Committee shall have exclusive power to make Awards and to determine when and to whom Awards will be granted, and the form, amount and other terms and conditions of each Award, subject to the provisions of this Plan. The Committee may determine whether, to what extent and under what circumstances Awards may be settled, paid or exercised in cash, Shares or other Awards or other property, or cancelled, forfeited or suspended. The Committee shall have the authority to interpret this Plan and any Award or Agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, to determine the terms and provisions of any Agreements entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive. (b) DELEGATION OF AUTHORITY. The Committee may delegate all or any part of its authority under this Plan to persons who are not Disinterested Persons for purposes of determining and administering Awards solely to Employees who are not then subject to the reporting requirements of Section 16 of the Exchange Act. (c) AWARDS TO NON-EMPLOYEE DIRECTORS. Notwithstanding any contrary provisions of this Plan, the granting, terms, conditions and eligibility requirements of Awards granted to Non-Employee Directors under Sections 12 and 13 of this Plan are governed solely by the provisions of this Plan pertaining thereto, and the Committee shall have no discretion with respect to the granting of such Awards or to alter or amend any terms, conditions or eligibility requirements of such Awards to Non-Employee Directors. (d) RULE 16B-3 COMPLIANCE. It is the intent that this Plan and all Awards granted pursuant to it shall be administered by the Committee so as to permit this Plan and Awards to comply with Exchange Act Rule 16b-3. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 3(d), that provision to the extent possible shall be interpreted and deemed amended in the manner determined by the Committee so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with such intent, the provision shall be deemed void as applicable to Participants who are then subject to the reporting requirements of Section 16 of the Exchange Act to the extent permitted by law and in the manner deemed advisable by the Committee. (e) INDEMNIFICATION. To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damage, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan. 4. SHARES AVAILABLE; MAXIMUM PAYOUTS. (a) Shares Available. The number of Shares available for distribution under this Plan is 2,800,000 (subject to adjustment under Section 14(f) hereof). (b) SHARES AGAIN AVAILABLE. Any Shares subject to the terms and conditions of an Award under this Plan which are not used because the terms and conditions of the Award are not met may again be used for an Award under this Plan. However, Shares with respect to which a Stock Appreciation Right has been exercised, whether paid in cash and/or in Shares, and Shares of Restricted Stock which have been granted with dividend or voting rights during the Term of the Restricted Stock may not again be awarded under this Plan. (c) UNEXERCISED AWARDS. Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award or any Award settled in cash in lieu of Shares (except as provided in Section 4(b) hereof) shall be available for further Awards. (d) NO FRACTIONAL SHARES. No fractional Shares may be issued under this Plan; fractional Shares will be rounded to the nearest whole Share. (e) MAXIMUM PAYOUTS. No more than 35% of all Shares subject to this Plan may be granted in the aggregate pursuant to Restricted Stock, Performance Share and Other Stock-Based Awards. 5. ELIGIBILITY. Awards may be granted under this Plan to any Employee at the discretion of the Committee. Non-Employee Directors are eligible for certain Awards under this Plan, as provided in Sections 12 and 13 hereof and subject to the restrictions in Section 3(c) hereof. 6. General Terms of Awards. (a) AWARDS. Awards under this Plan may consist of Options (either Incentive Stock Options or Non-Qualified Stock Options), Stock Appreciation Rights, Performance Shares, Restricted Stock and Other Stock-Based Awards. Awards of Restricted Stock may, in the discretion of the Committee, provide the Participant with dividends or dividend equivalents and voting rights prior to vesting (whether vesting is based on a period of time or based on attainment of specified performance conditions). (b) AMOUNT OF AWARDS. Each Agreement shall set forth the number of Shares of Restricted Stock, Stock or Performance Shares subject to such Agreement, or the number of Shares to which the Option applies or with respect to which payment upon the exercise of the Stock Appreciation Right is to be determined, as the case may be, together with such other terms and conditions applicable to the Award (not inconsistent with this Plan) as determined by the Committee in its sole discretion. (c) TERM. Each Agreement, other than those relating solely to Awards of Stock without restrictions, shall set forth the Term of the Award and any applicable Performance Period for Performance Shares, as the case may be, but in no event shall the Term of an Award (other than Awards granted in lieu of cash compensation pursuant to Section 13 hereof or the Company's Management Incentive Plan as amended from time to time) or the Performance Period be longer than ten years after the date of grant. An Agreement with a Participant may permit acceleration of vesting requirements and of the expiration of the applicable Term upon such terms and conditions as shall be set forth in the Agreement, which may, but need not, include, without limitation, acceleration resulting from the occurrence of a Change in Control, a Fundamental Change, or the Participant's death, Disability or Retirement. Acceleration of the Performance Period of Performance Shares shall be subject to Section 9(b) hereof. (d) AGREEMENTS. Each Award under this Plan shall be evidenced by an Agreement setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award, in addition to the terms and conditions specified in this Plan. (e) TRANSFERABILITY. During the lifetime of a Participant to whom an Award is granted, only such Participant (or such Participant's legal representative or, if so provided in the applicable Agreement in the case of a Non-Qualified Stock Option, a permitted transferee as hereafter described) may exercise an Option or Stock Appreciation Right or receive payment with respect to Performance Shares or any other Award. No Award of Restricted Stock (prior to the expiration of the restrictions), Options, Stock Appreciation Rights, Performance Shares or other Award (other than an award of Stock without restrictions) may be sold, assigned, transferred, exchanged, or otherwise encumbered, and any attempt to do so shall be of no effect. Notwithstanding the immediately preceding sentence, (i) an Agreement may provide that an Award shall be transferable to a Successor in the event of a Participant's death and (ii) an Agreement may provide that a Non-Qualified Stock Option shall be transferable to any member of a Participant's "immediate family" (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act, or any successor rule or regulation) or to one or more trusts whose beneficiaries are members of such Participant's "immediate family" or partnerships in which such family members are the only partners; provided, however, that (1) the Participant receives no consideration for the transfer and (2) such transferred Non-Qualified Stock Option shall continue to be subject to the same terms and conditions as were applicable to such Non-Qualified Stock Option immediately prior to its transfer. (f) TERMINATION OF EMPLOYMENT. Except as otherwise determined by the Committee or provided by the Committee in an applicable Agreement, in case of termination of employment, the following provisions shall apply: (1) OPTIONS AND STOCK APPRECIATION RIGHTS. (i) DEATH. If a Participant who has been granted an Option or Stock Appreciation Rights shall die before such Option or Stock Appreciation Rights have expired, the Option or Stock Appreciation Rights shall become exercisable in full, and may be exercised by the Participant's Successor at any time, or from time to time, within three years after the date of the Participant's death. (ii) DISABILITY OR RETIREMENT. If a Participant's employment terminates because of Disability or Retirement, the Option or Stock Appreciation Rights shall become exercisable in full, and the Participant may exercise his or her Options or Stock Appreciation Rights at any time, or from time to time, within three years after the date of such termination. (iii) REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. If a Participant's employment terminates for any reason other than death, Disability or Retirement, the unvested or unexercised portion of any Award held by such Participant shall terminate at the date of termination of employment. (iv) EXPIRATION OF TERM. Notwithstanding the foregoing paragraphs (i)-(iii), in no event shall an Option or a Stock Appreciation Right be exercisable after expiration of the Term of such Award. (2) PERFORMANCE SHARES. If a Participant's employment with the Company or any of its Affiliates terminates during a Performance Period because of death, Disability or Retirement, or under other circumstances provided by the Committee in its discretion in the applicable Agreement, the Participant shall be entitled to a payment of Performance Shares at the end of the Performance Period based upon the extent to which achievement of performance targets was satisfied at the end of such period (as determined at the end of the Performance Period) and prorated for the portion of the Performance Period during which the Participant was employed by the Company or any Affiliate. Except as provided in this Section 6(f)(2) or in the applicable Agreement, if a Participant's employment terminates with the Company or any of its Affiliates during a Performance Period, then such Participant shall not be entitled to any payment with respect to that Performance Period. (3) RESTRICTED STOCK. In case of a Participant's death, Disability or Retirement, the Participant shall be entitled to receive that number of shares of Restricted Stock under outstanding Awards which has been pro rated for the portion of the Term of the Awards during which the Participant was employed by the Company or any Affiliate, and with respect to such Shares all restrictions shall lapse. Upon termination of employment for any reason other than death, Disability or Retirement, any shares of Restricted Stock whose restrictions have not lapsed will automatically be forfeited in full and cancelled by the Company upon such termination of employment. (g) RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a shareholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record. 7. STOCK OPTIONS. (a) TERMS OF ALL OPTIONS. Each Option shall be granted pursuant to an Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. Only Non-Qualified Stock Options may be granted to Employees who are not employees of the Company or an Affiliate. The purchase price of each Share subject to an Option shall be determined by the Committee and set forth in the Agreement, but shall not be less than 100% of the Fair Market Value of a Share as of the date the Option is granted. The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise, provided that, to the extent permitted by law, Participants may simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The purchase price may be paid in cash, or through a reduction of the number of Shares delivered to the Participant upon exercise of the Option or by delivery to the Company of Shares held by such Participant (in each case, such Shares having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the Shares being purchased pursuant to the Option), or a combination thereof, unless otherwise provided in the Agreement. Each Option shall be exercisable in whole or in part on the terms provided in the Agreement. In no event shall any Option be exercisable at any time after its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated. No Participant may receive any combination of Options to purchase and Stock Appreciation Rights relating to more than 500,000 Shares in the aggregate (which amount includes up to 350,000 Shares pursuant to Awards and up to 150,000 Shares received in lieu of cash compensation at the Participant's election as permitted by the Compensation Committee) pursuant to Awards over a five-year period under this Plan. (b) Incentive Stock Options. In addition to the other terms and conditions applicable to all Options: (i) the aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options held by an individual first become exercisable in any calendar year (under this Plan and all other incentive stock option plans of the Company and its Affiliates) shall not exceed $100,000 (or such other limit as may be required by the Code), if such limitation is necessary to qualify the Option as an Incentive Stock Option, and to the extent an Option or Options granted to a Participant exceed such limit, such Option or Options shall be treated as a Non-Qualified Stock Option; (ii) an Incentive Stock Option shall not be exercisable and the Term of the Award shall not be more than ten years after the date of grant (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option; (iii) the Agreement covering an Incentive Stock Option shall contain such other terms and provisions which the Committee determines necessary to qualify such Option as an Incentive Stock Option; and (iv) notwithstanding any other provision of this Plan to the contrary, no Participant may receive an Incentive Stock Option under this Plan if, at the time the Award is granted, the Participant owns (after application of the rules contained in Section 424(d) of the Code, or its successor provision) Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its subsidiaries, unless (A) the option price for such Incentive Stock Option is at least 110% of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of grant and (B) such Option is not exercisable after the date five years from the date such Incentive Stock Option is granted. 8. STOCK APPRECIATION RIGHTS. An Award of a Stock Appreciation Right shall entitle the Participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the Stock Appreciation Right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares as of the date of exercise of the Stock Appreciation Right over (ii) a specified price which shall not be less than 100% of the Fair Market Value of such Shares as of the date of grant of the Stock Appreciation Right. A Stock Appreciation Right may be granted in connection with a previously or contemporaneously granted Option, or independent of any Option. If issued in connection with an Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels the Option with which it is connected and exercise of the connected Option cancels the Stock Appreciation Right. Each Stock Appreciation Right may be exercisable in whole or in part on the terms provided in the Agreement. Notwithstanding anything to the contrary stated in this Plan, no Stock Appreciation Right shall be exercisable prior to six months from the date of grant except in the event of the death or Disability of the Participant. No Stock Appreciation Right shall be exercisable at any time after its Term. When a Stock Appreciation Right is no longer exercisable, it shall be deemed to have lapsed or terminated. Except as otherwise provided in the applicable Agreement, upon exercise of a Stock Appreciation Right, payment to the Participant (or to his or her Successor) shall be made in the form of cash, Stock or a combination of cash and Stock as promptly as practicable after such exercise. The Agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or Stock) may be made in the event of the exercise of a Stock Appreciation Right. As specified in Section 7(a) hereof, no Participant may receive any combination of Options to purchase and Stock Appreciation Rights relating to more than 500,000 Shares in the aggregate pursuant to Awards over a five-year period under this Plan. 9. PERFORMANCE SHARES. (a) INITIAL AWARD. An Award of Performance Shares shall entitle a Participant (or a Successor) to future payments based upon the achievement of performance targets established in writing by the Committee. Payment shall be made in Stock, or a combination of cash and Stock, as determined by the Committee, provided that at least 25% of the value of the vested Performance Shares shall be distributed in the form of Stock. With respect to those Participants who are "covered employees" within the meaning of Section 162(m) of the Code and the regulations thereunder, such performance targets shall consist of one or any combination of two or more of revenue, revenue per employee, earnings before income tax (profit before taxes), earnings before interest and income tax, net earnings (profits after tax), earnings per employee, tangible, controllable or total asset turnover, earnings per share, operating income, total shareholder return, market share, return on equity, before- or after-tax return on net assets, distribution expense, inventory turnover, or economic value added, and any such targets may relate to one or any combination of two or more of corporate, group, unit, division, Affiliate or individual performance. The Agreement may establish that a portion of the maximum amount of a Participant's Award will be paid for performance which exceeds the minimum target but falls below the maximum target applicable to such Award. The Agreement shall also provide for the timing of such payment. Following the conclusion or acceleration of each Performance Period, the Committee shall determine the extent to which (i) performance targets have been attained, (ii) any other terms and conditions with respect to an Award relating to such Performance Period have been satisfied, and (iii) payment is due with respect to a Performance Share Award. No Participant may receive Performance Shares relating to more than 85,000 Shares pursuant to Awards over a five-year period under this Plan. (b) ACCELERATION AND ADJUSTMENT. The Agreement may permit an acceleration of the Performance Period and an adjustment of performance targets and payments with respect to some or all of the Performance Shares awarded to a Participant, upon such terms and conditions as shall be set forth in the Agreement, upon the occurrence of certain events, which may, but need not, include without limitation a Change in Control, a Fundamental Change, the Participant's death, Disability or Retirement, a change in accounting practices of the Company or its Affiliates, or, with respect to payments in Stock for Performance Share Awards, a reclassification, stock dividend, stock split or stock combination as provided in Section 14(f) hereof. (c) VALUATION. Each Performance Share earned after conclusion of a Performance Period shall have a value equal to the average of the Fair Market Values of a Share for the 20 consecutive business days ending on and including the last day of such Performance Period. 10. RESTRICTED STOCK. Restricted Stock may be granted in the form of Shares registered in the name of the Participant but held by the Company until the end of the Term of the Award. Any employment conditions, performance conditions and the Term of the Award shall be established by the Committee in its discretion and included in the applicable Agreement. The Committee may provide in the applicable Agreement for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine. No Award of Restricted Stock may vest earlier than one year from the date of grant, except as provided in the applicable Agreement. 11. OTHER STOCK-BASED AWARDS. The Committee may from time to time grant Awards of Stock, and other Awards under this Plan (collectively herein defined as "Other Stock-Based Awards"), including without limitation those Awards pursuant to which Shares may be acquired in the future, such as Awards denominated in Stock units, securities convertible into Stock and phantom securities. The Committee, in its sole discretion, shall determine the terms and conditions of such Awards provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. The Committee may, in its sole discretion, direct the Company to issue Shares subject to restrictive legends and/or stop transfer instructions which are consistent with the terms and conditions of the Award to which such Shares relate. 12. AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS. (a) INITIAL OPTION GRANTS. Each Non-Employee Director first elected or appointed to the Board on or after the date of the 1994 Annual Meeting of Shareholders of the Company shall, without any Committee action, automatically be granted, on the date such director first becomes a director, a Non-Qualified Stock Option to purchase that number of Shares determined by dividing (i) an amount equal to $152,000 plus a percentage increase in such $152,000 amount which is equal to the percentage increase from the $19,000 Annual Retainer in effect at the time of the 1994 Annual Meeting of Shareholders of the Company to the Annual Retainer in effect at the date such director first becomes a director by (ii) the Fair Market Value of a Share on the date of grant. No increase in the Annual Retainer of the Non-Employee Directors after a person becomes a Non-Employee Director shall increase the number of Shares for which the Non-Qualified Stock Option granted under this Section 12(a) to such Non-Employee Director may be exercised. An employee of the Company or an Affiliate who terminates such employment and thereafter becomes a Non-Employee Director is not entitled to receive a Non-Qualified Stock Option under this Section 12(a), but will be entitled to receive Non-Qualified Stock Options under Section 12(b) hereof. A Non-Employee Director is not entitled to receive more than one Non-Qualified Stock Option under this Section 12(a) during his or her lifetime. (b) ANNUAL OPTION GRANTS. Each year on the date of the Annual Meeting of Shareholders of the Company, each Non-Employee Director who is a director of the Company immediately following such Annual Meeting shall, without any Committee action, automatically be granted a Non-Qualified Stock Option to purchase that number of Shares equal to the sum of (i) the Annual Retainer for Non-Employee Directors in effect when the grant is made, (ii) the aggregate meeting fees in effect when the grant is made for the total number of regular Board meetings held in the previous fiscal year and the median number of regular Board committee meetings directors were scheduled to attend during the previous fiscal year, and (iii) one annual committee chairmanship fee in effect when the grant is made, divided by the Fair Market Value of a Share on the date of the grant. No increase in the Annual Retainer, Board or Board committee meeting fee or committee chairmanship fee for Non-Employee Directors of the Company following the annual Non-Qualified Stock Option grant shall increase the number of Shares for which such Non-Qualified Stock Option may be exercised. (c) AGREEMENTS. Each such Non-Qualified Stock Option shall be evidenced by and subject to the provisions of an agreement setting forth the terms of the Non-Qualified Stock Option. It is intended that the provisions of this Section 12 shall not cause the Non-Employee Directors to cease to be considered Disinterested Persons and, as a result, the provisions of this Section 12 shall be interpreted to be consistent with the foregoing intent. Non-Employee Directors may not be granted Options under this Plan other than pursuant to the provisions of this Section 12. (d) PURCHASE PRICE; TERM AND EXERCISABILITY OF OPTIONS. The purchase price of each Share subject to a Non-Qualified Stock Option granted under this Section 12 shall be the Fair Market Value of a Share as of the date the Non-Qualified Stock Option is granted. Notwithstanding anything to the contrary stated in this Plan, for purposes of this Section 12 and the definition of Fair Market Value in Section 2(n) hereof, each Non-Qualified Stock Option granted pursuant to this Section 12 shall be deemed conclusively to have been granted prior to the close of the applicable securities exchange or system on the date of grant. Non-Qualified Stock Options granted to a Non-Employee Director shall vest and become exercisable in full one year after the date of grant, provided, however, that in no event shall a Non-Employee Director initially appointed by the Board be entitled to exercise a Non-Qualified Stock Option unless, and until such time as, such director shall have been elected to the Board by the shareholders of the Company. Notwithstanding the foregoing, vesting of a Non-Qualified Stock Option granted to a Non-Employee Director who shall have been elected by the shareholders of the Company shall accelerate and the Non-Qualified Stock Option shall become immediately exercisable in full upon the occurrence of a Change in Control or in the event that the Non-Employee Director ceases to serve as a director of the Company due to death, Disability or retirement under the policies of the Company then in effect providing for retirement of directors from the Board. Non-Qualified Stock Options granted to a Non-Employee Director shall expire at the earlier of (i) the ten-year anniversary date of the Non-Qualified Stock Option's grant, or (ii) the five-year anniversary date of the earlier of (A) termination as a director due to such death, Disability or retirement or (B) the date the Non-Employee Director otherwise ceases to be a director of the Company, provided that the Non-Qualified Stock Option granted to a Non-Employee Director initially appointed by the Board shall expire on the date such director ceases to be a director of the Company unless such director shall have been elected by the shareholders subsequent to the grant of the Non-Qualified Stock Option to such director. (e) PAYMENT OF OPTION PRICE. A Non-Employee Director may exercise a Non-Qualified Stock Option granted pursuant to this Section 12 using as payment any form of consideration provided for in Section 7(a) hereof, which form of payment shall be within the sole discretion of the Non-Employee Director, notwithstanding anything stated in Section 7(a) hereof. (f) LIMITED RIGHTS. (i) In conjunction with the grant of any Non-Qualified Stock Option pursuant to this Section 12 (a "Related Option"), the Non-Employee Director receiving such grant shall simultaneously be granted a limited Stock Appreciation Right ("Limited Rights") with respect to all of the Shares covered by such Related Option. Each Limited Right shall be evidenced by a written limited right certificate signed by an officer of the Company. (ii) Limited Rights shall be exercisable at any time within the thirty-day period after a Change in Control, whether or not the Related Option is exercisable and regardless of whether the Participant is a Non-Employee Director at the time of exercise, so long as the holder of the Related Option is a Non-Employee Director immediately preceding the Change in Control (provided that in no event shall a Non-Employee Director initially appointed by the Board be entitled to exercise the Limited Rights granted to such director under this Plan unless, and until such time as, such director shall have been elected to the Board by the shareholders of the Company). (iii) Notwithstanding the provisions of paragraph (ii) above, no Limited Right shall be exercised within a period of six months after the date of grant of the Limited Right. (iv) If Limited Rights are exercised, the Related Option shall no longer be exercisable to the extent of the number of Shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of a Related Option, Limited Rights granted with respect thereto shall terminate to the extent of the number of Shares as to which the Related Option was exercised or terminated. (v) A person entitled to exercise a Limited Right may, subject to its terms and conditions and the terms and conditions of this Plan, exercise such Limited Right in whole or in part by giving written notice to the Company of an election to exercise such Limited Right. The date the Company receives the notice is the exercise date. Upon exercise of Limited Rights, the holder shall promptly be paid an amount in cash for each Share with respect to which the Limited Rights are exercised equal to the difference between the exercise price per Share covered by the Related Option and the Fair Market Value per Share covered by the Related Option as of the date of exercise of the Limited Right. (vi) A Limited Right may not be assigned and shall be transferable only if and to the extent that the Related Option is transferable. (g) Transferability. During the lifetime of a Non-Employee Director who has been granted a Non-Qualified Stock Option pursuant to this Section 12, only the Non-Employee Director (or such Non-Employee Director's legal representative or, if transfers to members of the Non-Employee Director's "immediate family" or to family trusts or partnerships become permitted as hereinafter provided, a permitted transferee) may exercise the Non-Qualified Stock Option. No such Non-Qualified Stock Option may be sold, assigned, transferred, exchanged, or otherwise encumbered, and any attempt to do so shall be of no effect. The foregoing sentence notwithstanding, from and after the earlier of (i) the time that Exchange Act Rule 16b-3 no longer prohibits such transfers as a condition to application of such Rule or (ii) the time that the Non-Employee Director retires from the Board and is no longer subject to the reporting requirements of Section 16 of the Exchange Act, such Non-Employee Director may transfer a Non-Qualified Stock Option granted pursuant to this Section 12 to any member of such Non-Employee Director's "immediate family" (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act, or any successor rule or regulation) or to one or more trusts whose beneficiaries are members of such Non-Employee Director's "immediate family" or partnerships in which such family members are the only partners; provided, however, that (i) the transferor receives no consideration for the transfer and (ii) such transferred Non-Qualified Stock Option shall continue to be subject to the same terms and conditions as were applicable to such Non-Qualified Stock Option immediately prior to its transfer. Unless a Non-Qualified Stock Option granted pursuant to this Section 12 shall have expired, in the event of a Non-Employee Director's death, a Non-Qualified Stock Option granted to such Non-Employee Director pursuant to this Section 12 shall be transferable to the beneficiary, if any, designated by the Non-Employee Director in writing to the Company prior to the Non-Employee Director's death and such beneficiary shall succeed to the rights of the Non-Employee Director to the extent permitted by law. If no such designation of a beneficiary has been made, the Non-Employee Director's legal representative shall succeed to such Non-Qualified Stock Option, which shall be transferable by will or pursuant to the laws of descent and distribution. (h) PRIOR PLAN. In the event that this Plan is approved and ratified by the shareholders of the Company as provided by Section 14(a) hereof, all Non-Employee Director Non-Qualified Stock Options granted from and after such approval shall be deemed to have been granted pursuant to this Plan and not pursuant to any prior plan of the Company or otherwise. 13. ELECTIVE GRANTS TO NON-EMPLOYEE DIRECTORS IN LIEU OF COMPENSATION. (a) ISSUANCE OF RESTRICTED STOCK. Each Non-Employee Director may irrevocably elect to receive all or any portion of the Annual Retainer, plus any applicable fixed annual chairmanship fee payable to such Non-Employee Director, in the form of Restricted Stock to be issued as of the first day of the year for which such Annual Retainer is payable (currently October 1) (which issuances of Restricted Stock shall be prorated for fractional years for those Non-Employee Directors scheduled to retire, in accordance with the policies of the Company then in effect, prior to the annual meeting following such date). Each irrevocable election shall be made by the Non-Employee Director on a form provided by the Company and returned to the officer or other employee of the Company designated on such form at least six months before the date the Restricted Stock will be issued (currently April 1). In the event of such an election, a number of shares of Restricted Stock equal to the portion of the Annual Retainer and such chairmanship fees as to which the election is made, divided by the Fair Market Value of a Share as of the first business day of the month in which the Restricted Stock is issued, shall be issued in the name of the Non-Employee Director as of such date. The remainder of the Annual Retainer and such chairmanship fees shall be paid in cash to the Non-Employee Director at such time or times as payments thereof are customarily made by the Company to Non-Employee Directors who receive such payments in cash, except that each such payment shall be prorated based upon the total percentage of the Annual Retainer and such chairmanship fees with respect to which the Non-Employee Director has not elected to receive Restricted Stock. (b) LAPSE OF RESTRICTIONS. The Shares of Restricted Stock issued under this Section 13 may not be assigned, sold, pledged, hypothecated or otherwise transferred or disposed of (including, without limitation, transfer by gift or donation) except that such restrictions shall lapse upon the first to occur of the following events: (i) death, or resignation or removal of the Non-Employee Director from the Board as a result of the Disability of the Non-Employee Director; (ii) retirement of the Non-Employee Director from the Board in accordance with the policies of the Company then in effect providing for retirement of Non-Employee Directors; (iii) acceptance by the Board of the offer of the Non-Employee Director to resign from the Board in accordance with the policies of the Company then in effect after a material change in such Non-Employee Director's full-time position or responsibilities; (iv) termination of service as a director with the consent of a majority of the members of the Board other than the terminating Non-Employee Director; or (v) a Change in Control. The Shares of Restricted Stock shall be held by the Company until the lapse of the restrictions pursuant to this Section 13 (at which time they shall be delivered to the Non-Employee Director without any legend on the Share certificates referencing this Plan); provided, however, that unless and until the Shares of Restricted Stock are forfeited pursuant to the last sentence of this paragraph, the Non-Employee Director shall be entitled to all voting, dividend and distribution rights with respect to such Shares (except that dividends in Stock and Shares issued upon stock splits shall be deemed to constitute additional Restricted Stock to be held by the Company pursuant to this Plan). If the Non-Employee Director ceases to be a director of the Company before the restrictions on the Restricted Stock lapse pursuant to this Section 13, the Restricted Stock issued to the Non-Employee Director shall be forfeited and revert to the Company. (c) PRIOR PLAN. In the event that this Plan is approved and ratified by the shareholders of the Company as provided by Section 14(a) hereof, all Shares of Restricted Stock granted to Non-Employee Directors from and after such approval shall be deemed to have been granted pursuant to this Plan and not pursuant to any prior plan of the Company or otherwise. 14. GENERAL PROVISIONS. (a) EFFECTIVE DATE OF THIS PLAN. This Plan shall become effective as of April 29, 1994, provided that this Plan is approved and ratified by the affirmative vote of the holders of a majority of the outstanding Shares of Stock present or represented and entitled to vote in person or by proxy at a meeting of the shareholders of the Company no later than August 31, 1994. (b) DURATION OF THIS PLAN. This Plan shall remain in effect until all Stock subject to it shall be distributed or all Awards have expired or lapsed, whichever is latest to occur, or this Plan is terminated pursuant to Section 14(e) hereof. No Award of an Incentive Stock Option shall be made more than ten years after the effective date provided in Section 14(a) hereof (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option. Except with respect to Awards granted pursuant to Sections 12 and 13 hereof, the date and time of approval by the Committee of the granting of an Award shall be considered the date and time at which such Award is made or granted, notwithstanding the date of any Agreement with respect to such Award; provided, however, that the Committee may grant Awards other than Incentive Stock Options to be effective and deemed to be granted on the occurrence of certain specified contingencies. (c) RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any Agreement shall confer upon any Participant who is an Employee the right to continue in the employment of the Company or any Affiliate or affect any right which the Company or any Affiliate may have to terminate or modify the employment of the Participant with or without cause. (d) TAX WITHHOLDING. The Company may withhold from any payment of cash or Stock to a Participant or other person under this Plan an amount sufficient to cover any required withholding taxes, including the Participant's social security and medicare taxes (FICA) and federal, state and local income tax with respect to income arising from payment of the Award. The Company shall have the right to require the payment of any such taxes before issuing any Stock pursuant to the Award. In lieu of all or any part of a cash payment from a person receiving Stock under this Plan, the individual may elect to cover all or any part of the required withholdings, and to cover any additional withholdings up to the amount needed to cover the individual's full FICA and federal, state and local income tax with respect to income arising from payment of the Award, through a reduction of the number of Shares delivered to such individual or a subsequent return to the Company of Shares held by the Participant or other person, in each case valued in the same manner as used in computing the withholding taxes under the applicable laws; provided, however, that if at any time withholding shall be required with respect to Non-Employee Directors, the Committee is required to permit a Non-Employee Director to make such an election, subject to the limitations of the following sentence. Such elections are subject to the following limitations if, and to the extent, such limitations are necessary to comply with Exchange Act Rule 16b-3 or any successor provision: (1) Except as set forth in clause (iii) below, any such election by a Participant who is then subject to the reporting requirements of Section 16 of the Exchange Act or any successor provision ("Section 16") or a Successor of such a Participant may be made only if the conditions set forth in clauses (i) and (ii) below are satisfied: (i) (A) the election may be made during the period beginning on the third business day following the date of public release of the Company's quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date, or (B) the election may be made at least six months prior to the date the Award is paid to the Participant; (ii) an election may not be made within six months of the date of grant of the Award to which the payment relates; provided, however, that such restriction does not apply in the event death or Disability of the Participant occurs prior to such election and during that six-month period; (iii) notwithstanding the foregoing, a Participant who tenders previously owned Shares to the Company in payment of the purchase price of Shares in connection with exercise of an Option may also tender previously owned Shares to the Company in satisfaction of any tax withholding obligations in connection with such Option exercise without regard to the time periods set forth in clauses (i) and (ii) above. The foregoing restrictions do not apply to any Participant who is not subject to the reporting requirements of Section 16 at the time of the election. (2) Any such election by a Participant who is subject to the reporting requirements of Section 16 at the time is irrevocable and is subject to approval by the Committee. The Committee's approval may be granted in advance but is subject to revocation by the Committee at any time. (e) AMENDMENT, MODIFICATION AND TERMINATION OF THIS PLAN. Except as provided in this Section 14(e), the Board may at any time amend, modify, terminate or suspend this Plan. Except as provided in this Section 14(e), the Committee may at any time alter or amend any or all Agreements under this Plan to the extent permitted by law. Amendments are subject to approval of the shareholders of the Company only if such approval is necessary to maintain this Plan in compliance with the requirements of Exchange Act Rule 16b-3, Section 422 of the Code, their successor provisions, or any other applicable law or regulation. Without the approval of the shareholders of the Company, no amendment, modification, termination or suspension of this Plan may alter the provisions of this Plan so as to change the terms, conditions or eligibility requirements of Awards granted or, subject to the right of the Board to discontinue this Plan, to be granted to Non-Employee Directors pursuant to Section 12 or 13 hereof. In no event shall the provisions of this Plan as they relate to Options, Limited Rights or Shares of Restricted Stock granted pursuant to Section 12 or 13 hereof be amended more than once every six months other than to comply with changes in the Code. No termination, suspension or modification of this Plan may materially and adversely affect any right acquired by any Participant (or a Participant's legal representative) or any Successor under an Award granted before the date of termination, suspension or modification, unless otherwise agreed by the Participant in the Agreement or otherwise or required as a matter of law. It is conclusively presumed that any adjustment for changes in capitalization provided for in Section 9(b) or 14(f) hereof does not adversely affect any right of a Participant under an Award. (f) ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments in the aggregate number and type of Shares available for Awards under this Plan, in the limitations on the number and type of Shares that may be issued to an individual Participant, in the number and type of Shares and amount of cash subject to Awards then outstanding, in the Option exercise price as to any outstanding Options and, subject to Section 9(b) hereof, in outstanding Performance Shares and payments with respect to outstanding Performance Shares may be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a Fundamental Change (subject to Section 14(g) hereof), recapitalization, reclassification, stock dividend, stock split, stock combination, or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share. (g) FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change: (a) involving a merger, consolidation or statutory share exchange, unless appropriate provision shall be made (which the Committee may, but shall not be obligated to, make) for the protection of the outstanding Options and Stock Appreciation Rights by the substitution of options, stock appreciation rights and appropriate voting common stock of the corporation surviving any such merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, to be issuable upon the exercise of options or used to calculate payments upon the exercise of stock appreciation rights in lieu of Options, Stock Appreciation Rights and capital stock of the Company, or (b) involving the dissolution or liquidation of the Company, the Committee may, but shall not be obligated to, declare, at least twenty days prior to the occurrence of the Fundamental Change, and provide written notice to each holder of an Option or Stock Appreciation Right of the declaration, that each outstanding Option and Stock Appreciation Right, whether or not then exercisable, shall be cancelled at the time of, or immediately prior to the occurrence of, the Fundamental Change in exchange for payment to each holder of an Option or Stock Appreciation Right, within 20 days after the Fundamental Change, of cash equal to (i) for each Share covered by the cancelled Option, the amount, if any, by which the Fair Market Value (as defined in this Section 14(g)) per Share exceeds the exercise price per Share covered by such Option or (ii) for each Stock Appreciation Right, the price determined pursuant to Section 8 hereof, except that Fair Market Value of the Shares as of the date of exercise of the Stock Appreciation Right, as used in clause (i) of Section 8, shall be deemed to mean Fair Market Value for each Share with respect to which the Stock Appreciation Right is calculated determined in the manner hereinafter referred to in this Section 14(g). At the time of the declaration provided for in the immediately preceding sentence, each Stock Appreciation Right that has been outstanding for at least six months and each Option shall immediately become exercisable in full and each person holding an Option or a Stock Appreciation Right shall have the right, during the period preceding the time of cancellation of the Option or Stock Appreciation Right, to exercise the Option as to all or any part of the Shares covered thereby or the Stock Appreciation Right in whole or in part, as the case may be. In the event of a declaration pursuant to this Section 14(g), each outstanding Option and Stock Appreciation Right that shall not have been exercised prior to the Fundamental Change shall be cancelled at the time of, or immediately prior to, the Fundamental Change, as provided in the declaration. Notwithstanding the foregoing, no person holding an Option or Stock Appreciation Right shall be entitled to the payment provided for in this Section 14(g) if such Option or Stock Appreciation Right shall have expired pursuant to an Agreement. For purposes of this Section 14(g) only, "Fair Market Value" per Share means the cash plus the fair market value, as determined in good faith by the Committee, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Fundamental Change, notwithstanding anything to the contrary provided in this Plan. (h) OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits received by a Participant under an Award shall not be deemed a part of a Participant's regular, recurring compensation for purposes of any termination, indemnity or severance pay laws and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate, unless expressly so provided by such other plan, contract or arrangement or the Committee determines that an Award or portion of an Award should be included to reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation. (i) BENEFICIARY UPON PARTICIPANT'S DEATH. To the extent that the transfer of a Participant's Award at death is permitted by this Plan or under an Agreement, (i) a Participant's Award shall be transferable to the beneficiary, if any, designated on forms prescribed by and filed with the Committee and (ii) upon the death of the Participant, such beneficiary shall succeed to the rights of the Participant to the extent permitted by law and this Plan. If no such designation of a beneficiary has been made, the Participant's legal representative shall succeed to the Awards, which shall be transferable by will or pursuant to laws of descent and distribution to the extent permitted by this Plan or under an Agreement. (j) FORFEITURES. In the event an Employee has received or been entitled to payment of cash, delivery of Stock or a combination thereof pursuant to an Award within six months prior to the Employee's termination of employment with the Company and its Affiliates, the Committee, in its sole discretion, may require the Employee to return or forfeit the cash and/or Stock received with respect to the Award (or its economic value as of (i) the date of the exercise of Options or Stock Appreciation Rights, (ii) the date of, and immediately following, the lapse of restrictions on Restricted Stock or the receipt of Stock without restrictions, or (iii) the date on which the right of the Employee to payment with respect to Performance Shares vests, as the case may be) in the event of any of the following occurrences: competition with the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies or business policies of the Company or any Affiliate, or any other occurrence specified in the related Agreement. The Committee's right to require forfeiture must be exercised within 90 days after discovery of such an occurrence but in no event later than 15 months after the Employee's termination of employment with the Company and its Affiliates. (k) UNFUNDED PLAN. This Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under this Plan. Neither the Company, its Affiliates, the Committee, nor the Board shall be deemed to be a trustee of any amounts to be paid under this Plan nor shall anything contained in this Plan or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between the Company and/or its Affiliates, and a Participant or Successor. To the extent any person acquires a right to receive an Award under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. (l) LIMITS OF LIABILITY. (i) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and the Agreement. (ii) Except as may be required by law, neither the Company nor any member or former member of the Board or of the Committee, nor any other person participating (including participation pursuant to a delegation of authority under Section 3(b) hereof) in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken, or not taken, in good faith under this Plan. (m) COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS. No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company's Shares may, at the time, be listed. (n) DEFERRALS AND SETTLEMENTS. The Committee may require or permit Participants to elect to defer the issuance of Shares or the settlement of Awards in cash under such rules and procedures as it may establish under this Plan. It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts. Participants who are eligible to participate in the Medtronic, Inc. Capital Accumulation Plan Deferral Program ("CAP") shall be entitled to defer some or all of the cash portion of any Performance Shares granted to them hereunder in accordance with the terms of the CAP. 15. GOVERNING LAW. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken pursuant to this Plan shall be governed by the laws of Minnesota and construed accordingly. 16. SEVERABILITY. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17. TERMINATION OF PRIOR PLANS. Effective upon the approval of this Plan by the Company's shareholders as provided by Section 14(a) hereof, no further grants of options, performance shares or restricted stock or any other awards shall be made under the Company's 1979 Restricted Stock and Performance Share Award Plan, 1979 Nonqualified Stock Option Plan, 1989 Phantom Stock Award Plan or 1991 Restricted Stock Plan for Non-Employee Directors (the "Prior Plans"). Thereafter, all grants and awards made under the Prior Plans prior to such approval by the shareholders shall continue in accordance with the terms of the Prior Plans. EX-10.3 3 RESTRICTED STOCK AND PERFORMANCE SHARE AWARD PLAN EXHIBIT 10.3 MEDTRONIC, INC. 1979 RESTRICTED STOCK AND PERFORMANCE SHARE AWARD PLAN 1. Purposes -------- The purposes of the Medtronic, Inc. 1979 Restricted Stock and Performance Share Award Plan (the "Plan") are to provide long-term incentives and rewards to those employees of Medtronic, Inc. and its subsidiaries (the "Company") who are largely responsible for the success and growth of the Company, to assist the Company in attracting and retaining executives with experience and ability on a basis competitive with industry practices, and to associate the interests of such employees with those of the Company's shareholders. 2. Definitions ----------- Whenever used herein, the following terms shall have the meanings indicated below: a. "Approved Retirement" means retirement on or after age 62 with the approval of the Committee. b. "Board of Directors" or "Board" means the Board of Directors of Medtronic, Inc. as constituted from time to time. c. "Committee" means the Committee of three or more members of the Board who shall be appointed by and serve at the pleasure of the Board. Each of the members of the Committee shall be a "disinterested person" within the meaning of Rule 16b-3, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. As of June 1, 1992, a "disinterested person" under Rule 16b-3 means a person who is not, during the one year prior to service as a member of the Committee, or during such service, granted or awarded equity securities pursuant to this plan or any other plan of the Company or any of its affiliates. d. "Common Stock" means the common stock, $.10 par value, of Medtronic, Inc. e. "Company" means Medtronic, Inc. and its subsidiaries. f. "Disability" means the disability of a Recipient such that he or she is considered disabled under any retirement plan of the Company which is qualified under Section 401 of the Internal Revenue Code of 1954, as amended, or as otherwise determined by the Committee. g. "Performance Share Award" means a contingent award of a specified number of Performance Shares, each Performance Share equivalent to one share of Common Stock, a variable percentage of which may vest depending upon the extent of achievement of specified performance objectives during the applicable performance period. h. "Recipient" means an eligible employee who has been granted either a Restricted Stock or Performance Share Award or Awards under the Plan. The term "Recipient" shall be used herein with reference to the particular Award being described by the particular Plan provision. i. "Restricted Stock Award" means an award of shares of Common Stock which is subject to the terms, restrictions, conditions, and limitations described in the Plan or otherwise developed by the Committee. j. "Subsidiary" means a corporation of which Medtronic, Inc. owns or controls directly or indirectly 50 percent or more of the voting power, including any subsidiaries which become such after adoption of the Plan. 3. Effective Date and Term of Plan ------------------------------- This Plan and the grant of any Restricted Stock or Performance Share Awards hereunder are conditioned upon obtaining approval of the Plan by the holders of a majority of the voting stock of Medtronic, Inc. Upon such shareholder approval, the Plan shall be effective as of May 1, 1979 and the Plan shall continue until the earlier of (a) the grant of the maximum number of Restricted Stock and Performance Share Awards which may be granted hereunder as a result of the application of the limitations set forth in Section 10 hereof, and (b) termination of the Plan upon written resolution of the Board of Directors. No termination of the Plan shall, without the consent of the Recipient, adversely affect any previously granted Restricted Stock or Performance Share Award which has not been forfeited and is still outstanding as of the date of termination. 4. Plan Administration ------------------- The Plan shall be administered by the Committee which shall have all of the powers vested in it under the provisions of the Plan, including but not limited to exclusive authority (where applicable and within the limitations described herein) to select the employees to be granted Awards under the Plan, determine the type, size, and terms of Awards to be granted to each employee selected, determine the time when Awards will be granted and paid, establish objectives and conditions for vesting in and earning Awards, determine terms and conditions for the lapse of restrictions applicable to such Awards, and determine whether Awards will be paid. The Committee shall have full power and authority to administer and interpret the Plan and to adopt such rules, regulations, agreements, guidelines, and instruments for the administration of the Plan and for the conduct of its business as the Committee deems necessary or advisable. The Committee's interpretations of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on all parties concerned, including the Company, its shareholders, and any employee of the Company. No member of the Committee shall be liable for any action taken or determination made in good faith in connection with the administration of the Plan. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote of such Committee members or pursuant to the written consent of all Committee members. 5. Participating Employees ----------------------- Individuals eligible to participate in the Plan shall be employees of the Company who are officers, directors, or key employees. While all such employees are eligible to be considered for receipt of Awards under the Plan, it is contemplated that only those eligible employees who perform services of special importance to the Company in the overall management, growth, and success of its business will be selected as Recipients. An employee may be granted more than one Award under the Plan. 6. Grants of Restricted Stock or Performance Share Awards ------------------------------------------------------ Medtronic, Inc.'s Chief Executive Officer ("CEO") may from time to time nominate in writing to the Committee those eligible employees recommended for participation in the Plan and the type of Award and number of shares recommended for award to each such employee. Such recommendation shall be based upon guidelines developed by the Committee in conjunction with the CEO from time to time, including but not limited to one or more of the following: the Recipient's responsibility level, past performance, potential, cash compensation level, other incentive compensation awards, or such other considerations as the Committee deems appropriate. The Committee may then grant Awards to eligible employees (including, if appropriate, the CEO) in such amounts as it shall determine in its sold discretion, and may require any Recipient prior to the grant to enter into a written agreement evidencing the Award and containing such other provisions as the Committee determines necessary or desirable. 7. Provisions Relating to Performance Share Awards ----------------------------------------------- a. Terms of Awards The performance objectives applicable to each recipient, the performance period over which such performance will be measured, and the range of applicable percentages which will be used to determine vesting of the Award shall be established in writing by the Committee on or prior to the date of grant of the Award. The committee may confer and consult with the CEO in selecting such objectives, performance periods, and vesting percentages, but the Committee has the sole and final discretion within the limitations described herein in establishing such standards. The performance objectives may be based upon one or more measurements, including but not limited to those relating to growth in the Company's assets, return on net assets, and growth in its nonpacing earnings, as such terms are defined and expanded upon from time to time by the Committee. The Committee may select a performance period which commences prior to the date of grant of the Award, but in no event shall it select a performance period of less than six months' duration as measured from the date of grant of the Award. The Committee may select a range of applicable vesting percentages which includes percentages in excess of one hundred percent. The Committee shall determine in its sole discretion both the timing of the performance periods and the frequency of grant of Awards. The applicable performance objectives, performance period, and vesting percentages may vary from Award to Award and from Recipient to Recipient. The CEO shall cause each Recipient to be notified in writing of the applicable performance objectives, the performance period, and the applicable vesting percentages on or prior to grant of the Award. The Committee shall determine whether and to what extent the performance objectives have been met during the applicable performance period. b. Vesting and Distribution of Performance Shares (i) As of the last day of the applicable performance period, the Recipient may earn and become vested in a specific percentage of the Performance Shares covered by the Award depending upon the extent to which the performance objectives are met as of such date. In the event a Recipient's employment with the Company terminates for any reason prior to the completion of such performance period, such Recipient shall forfeit any right or entitlement to or in such Performance Shares; provided, however, that if the Recipient's employment with the Company terminates six months or more after the date of grant of the Award but prior to the last day of the applicable performance period upon the occurrence of the Recipient's death, approved retirement, or disability, the Recipient may become vested in a percentage of Performance Shares hereunder, the percentage being determined as follows: A. First, the number of Performance Shares which would have vested in the Recipient as of the last day of the performance period had the Recipient remained employed throughout such period shall be calculated based upon the extent to which the performance objectives for the performance period have actually been met as of such date. B. Next, the result obtained in Clause (A) of this Paragraph (i) shall be multiplied by a fraction, the numerator of which is the number of months of such Recipient's continuous employment within the performance period prior to termination of employment, and the denominator of which is the number of months within the entire performance period. (ii) Distribution of a Recipient's vested Performance Share Award as determined in Paragraph (i) hereof shall be made as soon as practicable following the expiration of the performance period to which the award relates. Distribution shall be made in the form of Common Stock or a combination of Common Stock and cash; provided, however, that at least twenty-five percent of the value of the vested Performance Shares shall be distributed in the form of Common Stock. The final determination of the form of payment shall rest solely with the Committee. For purposes hereof, and with respect only to Awards having a performance period ending on or before April 30, 1990, the "value" of the vested Award is equal to the number of Performance Shares earned and vested, multiplied by the fair market value per share of Common Stock as of the date of distribution. Further for purposes hereof, and with respect to Awards having a performance period ending after April 30, 1990, the "value" of the vested Award shall be equal to the number of Performance Shares earned and vested, multiplied by the average fair market value per share of Common Stock. The "average fair market value" shall be determined by totalling the per share fair market value of the Common Stock on each of the last 20 business days including and immediately preceding the date on which the Award has vested, and dividing such total by the number 20, with the resulting figure being the average fair market value. The "fair market value" of the Common Stock, as such term is used herein, is the highest closing price of such Stock on the New York Stock Exchange (or other established stock exchange, where applicable) on the applicable date(s) or, if no sale of such Stock has occurred on such exchange on an applicable date, on the next preceding date on which there was such a sale. In the event the Stock is not listed on the New York Stock Exchange (or any other established stock exchange) as of an applicable date for valuation, the "fair market value" is the mean between the "bid" and "asked" prices quoted by a recognized market maker in such Stock on such date. (iii) Notwithstanding the contrary provision of the first sentence of the immediately preceding Clause (ii), any Eligible Employee who is the holder of a Performance Share Award may irrevocably elect to defer (referred to herein as a "Deferral Election"), the Company's payment of all or any part of the cash portion of the Performance Share Award determined under this Section 7b, such deferral to be available and made only to the extent and in the manner now and hereafter permitted under the terms and provisions of the Company's Compensation Deferral Plan for Officers and Key Employees (the "Compensation Deferral Plan"). For the purposes of this Clause (iii), "Eligible Employee" shall have the meaning set forth in Section 2.01(f) of the Compensation Deferral Plan ("Eligible Employee" is presently defined in such Section 2.01(f) as an elected or appointed officer of the Company, or any other key employee of the Company or an Affiliate as designated by the CEO). A Deferral Election by an Eligible Employee shall in no way affect the timing or other aspects of the determination of the value of the vested Performance Share Award as provided for in Section 7b(ii) above. c. Waiver of Requirements Notwithstanding any provisions hereof to the contrary, the requirements for vesting in and distribution of a Performance Share Award may be waived, in whole or part, with respect to any recipient if it is determined unanimously by the Committee and by two-thirds vote of the members of the Board that imposition of such requirements would be in the best interest of the Company. 8. Provisions Relating to Restricted Stock Awards ---------------------------------------------- a. Restricted Stock Period The Committee shall establish in writing on or prior to the date of the grant of a Restricted Stock Award the Restricted stock period applicable to such Award. For purposes of this Plan, such Restricted Stock Period shall be a period as established by the Committee during which the Common Stock covered by the Award is subject to the restrictions, conditions, and limitations set forth in Subsections b, c, e, and g hereof. The Committee may confer and consult with the CEO in selecting the Restricted Stock Period but the Committee has sole and final discretion in establishing such Period. On or prior to the date of grant of the Award, the CEO shall cause each Recipient to be notified in writing of the applicable Restricted Stock Period and any restrictions, conditions, or limitations which may be imposed or applicable to such Award pursuant to this Section 8. The Restricted Stock Period as well as such restrictions, conditions, and limitations may vary from Award to Award and from Recipient to Recipient and the Committee shall have full discretion, within the limitations described in this Section 8, to develop and define such restrictions, conditions, and limitations. b. Nontransferability The Recipient shall not assign, sell, transfer, pledge, hypothecate, or otherwise dispose of any shares of Common Stock covered by a Restricted Stock Award (including any share issued by reason of a stock dividend, stock split, or similar event described in Section 11 hereof) during the Restricted Stock Period. Any attempt by the Recipient to sell, assign, transfer, pledge, hypothecate, or otherwise dispose of any shares of Common Stock covered by such a Restricted Stock Award during the Restricted Stock Period shall be considered null and void and of no force or effect. In the event of any such attempt by the Recipient, the Committee may also take any other action, including the forfeiture of such Restricted Stock Award, as it in its sole discretion shall determine. c. Forfeiture of Award In the event a Recipient remains continuously employed by the Company throughout the applicable Restricted Stock Period, all restrictions, conditions, and limitations imposed upon the shares of Common Stock covered by the Award pursuant to this Section 8 shall lapse as of the last day of the Restricted Stock Period. If the Recipient's continuous employment with the Company terminates prior to the last day of the applicable Restricted Stock Period for any reason except as provided in Subsection d hereof, all shares of Common Stock awarded to such Recipient pursuant to the Restricted Stock Award shall be returned to the Company forthwith, and all rights of the Recipient to such shares shall immediately terminate and be forfeited without any payment or consideration by the Company. The Recipient shall return the Common Stock hereunder by delivering or causing to be delivered to Medtronic, Inc. the certificates for such shares of Common Stock, accompanied by such endorsements and/or instruments of transfer as may be required or deemed advisable by Medtronic, Inc., the Committee, or its counsel. d. Termination of Employment by Reason of Death, Disability, or Approved Retirement If the Recipient's continuous employment with the Company is terminated during a Restricted Stock Period by reason of the Recipient's death, disability, or approved retirement, the restrictions, conditions, and limitations set forth in this Section 8 shall lapse as of the date of such termination of employment with respect to that number of shares of Common Stock covered by such Award which is equal to the product of the following: (i) The full number of shares covered by such Award; (ii) Multiplied by the fraction, the numerator of which is the number of months of such Recipient's continuous employment within such Restricted Stock Period prior to termination of employment, and the denominator of which is the number of months within the entire Restricted Stock Period. All other shares of Common Stock covered by such Award shall be forfeited and returned to the Company pursuant to Section 8c hereof. e. Other Conditions The Committee may from time to time impose restrictions, conditions, or limitations on shares of Common Stock covered by a Restricted Stock Award other than or in addition to the requirements set forth in Subsection c hereof. Any such restrictions, conditions, or limitations shall apply throughout the applicable Restricted Stock Period and the Recipient shall forfeit, under the provisions of Subsection c hereof except as otherwise provided in Subsection d hereof, any interest in or right to such shares if the Recipient fails to meet or otherwise comply with such restrictions, conditions, or limitations at any time during the Restricted Stock Period. Any such additional or alternative restriction, condition, or limitation shall be considered for all purposes of the Plan as a restriction, condition, or limitation imposed by the Plan. f. Waiver of Restrictions Notwithstanding any provisions hereof to the contrary, the restrictions and forfeiture provisions of this Section 8 may be waived in whole or in part with respect to any Recipient if it is determined unanimously by the Committee and by two-thirds vote of the members of the Board that the imposition of such restrictions and forfeitures would not be in the best interests of the Company. In such event, the restrictions, conditions, and limitations imposed on shares of Common Stock covered by the Restricted Stock Award shall lapse, in whole or in part, as of the date of such waiver. g. Restrictive Legends and Certificates Held in Custody Each certificate evidencing shares of Common Stock granted pursuant to a Restricted Stock Award shall bear an appropriate legend during the applicable Restricted Stock Period referring to the terms, restrictions, conditions, and limitations applicable to such shares. The Committee may provide that the certificate or certificates evidencing such shares be held in custody by a bank or other institution or by the Company until the restrictions thereon have lapsed. 9. Dividends --------- The dividend or dividends payable with respect to each share of Common Stock covered by a Restricted Stock Award shall be payable to the Recipient of such Award if on the record date for payment of such dividend the Award has not been forfeited. 10. Available Common Stock ---------------------- Subject to any adjustment referred to in Section 11 hereof, the maximum number of shares of Common Stock which may be distributed under the Plan is 300,000* (subject to shareholders' approval of 100,000 share increase above previously authorized 200,000 shares at the Company's 1988 Annual Meeting of Shareholders) which may be either authorized but unissued or treasury shares. If shares of Common Stock covered by a Restricted Stock Award are forfeited in accordance with the Plan or if the maximum possible shares of Common Stock which are covered by a Performance Share Award are not paid out in Common Stock at the end of a Performance Period, then the number of shares so forfeited or not paid, as the case may be, shall be considered available for grants of other Awards under the Plan. *Adjusted to 1,200,000 shares to reflect the 1989 and 1991 two-for-one stock splits. 11. Recapitalization ---------------- In the event of any increase or decrease in the total number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of consideration by Medtronic, Inc., the maximum number of shares of Common Stock which may be distributed under the Plan, the number of Restricted Stock or Performance Share Awards granted under the Plan, and the number of shares of Common Stock covered by each outstanding Restricted Stock or Performance Share Award shall be adjusted proportionately. In the event of any other changes in the Common Stock by reason of recapitalizations, mergers, combinations, exchanges of shares, or the like, the Committee shall have full power to make such adjustments as described above with respect to the number of shares of Common Stock and the number of Restricted Stock and Performance Share Awards as the Committee shall determine in its sole discretion. Any shares so credited as a result of any outstanding Restricted Stock or Performance Share Award shall be subject to the same restrictions or performance objectives, as the case may be, as the shares originally covered under the Award. 12. Amendments ---------- The Board of Directors may at any time alter, amend, revise, suspend, or discontinue the Plan; provided, that such action shall not adversely affect Awards previously granted under the Plan without the consent of the Recipient; and provided, further, that no such action of the Board of Directors may, without the approval of the shareholders of Medtronic, Inc., alter the provisions of the Plan so as to (a) increase the total number of shares of Common Stock which may be issued under the Plan except as provided in Section 11 hereof, (b) materially increase the benefits accruing to Recipients under the Plan, or (c) materially change the basis for eligibility for participation in the Plan. 13. Beneficiary Designation ----------------------- A recipient may designate in writing on forms prescribed by and filed with the Committee, a beneficiary or beneficiaries to receive any benefits payable after his or her death, and may at any time amend or revoke such designation. If no beneficiary designation is in effect at the time of the Recipient's death, payments under the Plan, if any, shall be made to his or her legal representatives. 14. Compliance with Laws and Regulations, Registration, and Listing --------------------------------------------------------------- No shares of Common Stock shall be issued or transferred pursuant to the Plan unless or until there has been compliance, in the opinion of the Company's counsel, with all applicable legal requirements, including without limitation those relating to securities laws and stock exchange listing. The Company shall not be deemed by reason of granting any Restricted Stock or Performance Share Award hereunder to have any obligation to register the shares subject thereto under the Securities Act of 1933, as amended, or to maintain in effect any registration of such shares, or to list such shares on any exchange. As a condition to the issuance or transfer of Common Stock to the Recipient or his or her beneficiary or legal representatives, the Committee may require the Recipient or beneficiary to (a) represent that the shares of Stock are taken for investment and not resale and to make such other representations as the Committee shall deem necessary to qualify the issuance of the shares as exempt from the Securities Act of 1933 and any other applicable securities laws. The Company reserves the right to place a legend on any stock certificate issued pursuant to the Plan to assure compliance with this Section 14. 15. Withholding of Tax ------------------ Each Recipient, as a condition precedent to receipt of any benefits provided hereunder, shall make arrangements with the Company for payment to the Company or withholding by the Company of the amount of any tax required by any government authority to be withheld and paid over by the Company to such government authority for the account of the person entitled to such distribution. The Committee may permit a Recipient to elect to satisfy social security and federal and state income tax withholding obligations relating to the lapse of restrictions, conditions and limitations on Common Stock covered by a Restricted Stock Award by having the Company withhold shares of Common Stock subject to the Restricted Stock Award in satisfaction of the obligations. Any such election by a Recipient must be made on or before the date that the amount of tax to be withheld is determined (the "Tax Date"). Any shares of Common Stock so withheld by the Company shall be valued at their per share "fair market value," which shall mean for the purposes of this paragraph the closing composite transactions listing on the Tax Date (or such other meaning as the committee may hereafter adopt). The use and availability of the election to have Common Stock subject to the Restricted Stock Award withheld to satisfy social security and federal and state income tax withholding requirements is subject in general, and in particular instances, to the Committee's complete discretion and such rules and procedures as the Committee may adopt. 16. Miscellaneous ------------- a. Employment No Recipient shall have any right to be retained in the employ of the Company by virtue of his or her participation in the Plan and such participation shall not interfere in any way with the right of the Company to reduce his or her compensation or to change the nature of his or her employment responsibilities. b. Shareholder Rights No Recipient of a Performance Share Award shall have any rights as a shareholder with respect to any shares of Common Stock which may be covered by such Award until such shares have been issued and transferred to him or her. Except as provided in Section 8 b, c, e, and g, with respect to nontransferability, forfeiture, other conditions, and custody, a Recipient of a Restricted Stock Award shall have all rights as a shareholder of the shares of Common Stock covered by such Award upon the issuance of certificates representing such shares, including the right to receive dividends on and vote such shares. No interest in or under the Plan shall be assignable or transferable or subject to encumbrance or charge of any nature otherwise than by designation of a beneficiary pursuant to Section 13 hereof to receive any amounts which may become payable after the Recipient's death. c. Expenses The costs and expenses of administering the Plan shall be paid by the Company and not charge to any Award or to any Recipient hereunder. d. Unfunded The portion of the Plan relating to Performance Share Awards is unfunded and the Company shall not be required to establish any special or separate fund or make any other segregation of assets to assure payment of any such Award. The designation and crediting of Performance Shares to any Recipient hereunder shall be solely for accounting purposes. e. Governing Law This Plan shall be administered and the provisions of this Plan shall be interpreted in accordance with and under the laws of the State of Minnesota. 17. Change in Control ----------------- Anything herein to the contrary notwithstanding, but subject to Subsection d below, in the event of a "Change in Control" (as defined below) of the Company: a. Restrictions Lapse All restrictions, conditions, and limitations on shares of Common Stock then outstanding under Restricted Stock Awards shall immediately lapse and the Restricted Stock Period shall be deemed to have expired. b. Vesting and Distribution of Performance Shares All Performance Shares shall vest and be distributed on the following bases and subject to the following conditions: (i) If a Change in Control occurs prior to the last day of the applicable performance period, a Recipient shall become vested in a percentage of Performance Shares hereunder determined as follows: A. First, the Recipient or the Company, as applicable, shall be deemed to have achieved the greater of (i) the performance objectives required to vest in such Recipient 100% of the Performance Shares covered by the Award or (ii) if the Change in Control occurs after the first quarter of the performance period, the performance most recently projected by the Company prior to the Change in Control for such performance period with respect to the measurements established by the Committee on or prior to the date of grant of the Award for purposes of determining whether the Performance Shares shall become vested for such Recipient (adjusted to exclude (A) all legal, accounting, investment banking and other costs and expenses incurred or projected by the Company in connection with, or in opposition to, the events resulting in the Change in Control and (B) the projected effect of the Change in Control upon such measurements). The Company shall compute such projections for the performance period at or about the end of each quarter, except the last quarter, of each performance period. B. Next, the result obtained in Clause (A) of this Paragraph (i) is multiplied by a fraction, the numerator of which is the number of months of such Recipient's continuous employment within the performance period prior to the Change in Control and the denominator of which is the number of months within the entire performance period. (ii) Distribution of a Recipient's vested Performance Share Award as determined in Paragraph (i) hereof shall be made as soon as practicable after the first occurrence of a Change in Control. Such distribution shall be in Common Stock and cash in the manner provided by Section 7 b(ii) hereof and shall be valued as provided in Section 7 b(ii) hereof. Upon the making of any such distribution, the Award as to which it relates shall be deemed canceled and of no further force and effect. c. "Change in Control" means: (i) a majority of the directors of the Company shall be persons other than persons A. for whose election proxies shall have been solicited by the Board of Directors of the Company, or B. who are then serving as directors appointed by the Board of Directors to fill vacancies on the Board of Directors caused by death or resignation (but not by removal) or to fill newly-created directorships, (ii) 30% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule thereto) by any person (other than the Company, a Subsidiary of the Company, or the Recipient) or group of persons, not including the Recipient, acting in concert, or (iii) the stockholders of the Company approve a definitive agreement or plan to A. merge or consolidate the Company with or into another corporation (other than (1) a merger or consolidation with a Subsidiary of the Company or (2) a merger in which the Company is the surviving corporation and either (a) no outstanding voting stock of the Company (other than fractional shares) held by stockholders immediately prior to the merger is converted into cash, securities, or other property or (b) all holders of outstanding voting stock of the Company (other than fractional shares) immediately prior to the merger have substantially the same proportionate ownership of the voting stock of the Company or its parent corporation immediately after the merger), B. exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by stockholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for shares of another corporation, C. sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions) or D. liquidate or dissolve the Company, unless a majority of the voting stock (or the voting equity interest) of the surviving corporation or of any corporation (or other entity) acquiring all or substantially all of the assets of the Company (in the case of a merger, consolidation, or disposition of assets) or the Company or its parent corporation (in the case of a statutory share exchange) is, immediately following the merger, consolidation, statutory share exchange, or disposition of assets, beneficially owned by the Recipient or a group of persons, including the Recipient, acting in concert. d. Parachute Payments (i) Notwithstanding the provisions of Subsections a and b above, if any Award hereunder, either alone or together with other payments in the nature of compensation to a Recipient which are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company or otherwise, would result in any portion thereof being subject to an excise tax imposed under section 4999 of the Internal Revenue Code of 1954, as amended (the "Code") or would not be deductible in whole or in part by the Company, an affiliate of the Company (as defined in section 1504 of the Code), or other person making such payments as a result of section 280G of the Code, such Award and/or such other benefits and payments shall be reduced (but not below zero) to the largest aggregate amount as will result in no portion thereof being subject to an excise tax or being not deductible. (ii) For purposes hereof, (A) no portion of payments the receipt or enjoyment of which a Recipient shall have effectively waived in writing prior to the date of distribution of an Award hereunder shall be taken into account; (B) no portion of such Award, benefits, and other payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and acceptable to the Recipient does not constitute a "parachute payment" within the meaning of Section 280G(b) (2) of the Code; and (C) the value of any non-cash benefit or any deferred payment or benefit included in such payment shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d) (3) and (4) of the Code. (iii) Any Award not paid as a result of this Subsection d, or reduced to zero as a result of the limitations imposed hereby, shall remain outstanding in full force and effect in accordance with the other terms and provisions of this Plan. Revised October 25, 1991 EX-10.8 4 POSTRETIREMENT SURVIVOR BENEFIT PLAN EXHIBIT 10.8 MEDTRONIC, INC. POSTRETIREMENT SURVIVOR BENEFIT PLAN I. RECITALS -------- 1.01 Name and Dates. On June 24, 1987, the Board of Directors of Medtronic, Inc. (the "Company") approved and adopted the Medtronic, Inc. Postretirement Survivor Benefit Plan as subsequently revised as authorized by the Board (the "Plan"), effective as of such date, and as hereinafter set forth. 1.02 Purpose. The purpose of the Plan is to provide survivor benefits to certain eligible retired officers of the Company. 1.03 Description. The Plan is intended to be (and shall be construed and administered as) an employee benefit pension plan under the provisions of the Employee Retirement Income Security Act of 1974, as amended, which is unfunded and maintained by the Company for the purpose of providing deferred compensation for a select group of management or highly-compensated employees in the form of postretirement survivor benefits. The obligation of the Company to make payments under this Plan constitutes an unsecured (but legally enforceable) promise of the Company, and no person shall have any lien, prior claim or other security interest in any property of the Company as a result of this Plan. The limitations set forth in this paragraph are subject to the provisions of Article V, however. II. DEFINITIONS ----------- 2.01 Definitions. As used in this Plan, the following terms have the meanings indicated below: (a) "Beneficiary" means the beneficiary or beneficiaries designated by a retired officer to receive survivor benefits hereunder in such proportions as designated by the retired officer. Any such designation shall be on a form provided by the Company and filed with the Company before the retired officer's death. The retired officer may change such designation from time to time and the last written designation filed with the Company prior to the retired officer's death will control. If the retired officer fails to specifically designate a beneficiary, if no designated beneficiary survives the retired officer, or if all designated beneficiaries who survive the retired officer die before complete payment of benefits is made, any remaining benefit shall be paid to the retired officer's surviving spouse, or if there is no surviving spouse, to the retired officer's issue, taking by right of representation from such retired officer's natural and adoptive children, or if there is no surviving issue, to the legal representatives of the retired officer's estate. (b) "Committee" means the Compensation Committee of the Board of Directors of the Company or any successor committee appointed by the Board of Directors to perform substantially similar functions. (c) "Company" means Medtronic, Inc. and its successors and assigns, by merger, purchase or otherwise. (d) "Event" means an event of change in control of the Company as defined in Section 3.l(b)(l) through (3) of the Trust. (e) "Officer" means an individual who is elected as an officer of the Company by the Board of Directors of the Company or an individual who is appointed as an officer of the Company by the Chief Executive Officer of the Company. (f) "Prime Rate" means the prime rate of interest which is quoted by Norwest Bank Minneapolis, 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 such prime rates are quoted during such calendar quarter. The prime rate for any fractional calendar quarter shall be determined as the average of the daily prime rates in effect throughout such fractional quarter, averaged for the number of days during such fractional quarter for which such prime rates are quoted. (g) "Preretirement Salary" means the individual's annualized salary from the Company, based upon the individual's rate of salary in effect immediately prior to retirement. (h) "Retired Officer" means an officer who terminates employment with the Company under circumstances constituting retirement. (i) "Retirement" means a voluntary or involuntary termination of employment with the Company (other than an involuntary termination for any act or acts constituting a felony and substantially detrimental to the Company or its reputation) after attaining age 62 or after attaining age 55 and completing ten years of service with the Company. (j) "Trust" means the Medtronic, Inc. Compensation Trust Agreement, as amended from time to time. III. ELIGIBILITY FOR BENEFITS ------------------------ 3.01 Eligibility for Benefits. Each officer of the Company who terminates employment with the Company under circumstances constituting retirement shall be eligible for survivor benefits under the Plan as a retired officer. IV. SURVIVOR BENEFITS ----------------- 4.01 Amount of Benefit. Survivor benefits shall be paid upon the death of each retired officer in an amount equal to one times the retired officer's preretirement salary. 4.02 Payment of Benefit. The Company shall pay the survivor benefit referred to in Section 4.01 to the retired officer's beneficiary in the form of a single sum distribution as soon as reasonably practicable following the death of the retired officer, but in no event later than 45 days after the date of death. 4.03 Source of Benefits. Except as provided in Article V, the Company's obligation to pay the survivor benefits referred to in Section 4.01 shall constitute an unfunded obligation, and the position of any officer, retired officer or his or her beneficiary with respect to the payment of survivor benefits is that of a general unsecured creditor of the Company. Nothing contained in the Plan and no action taken under this Plan shall require or be construed to require the establishment of a trust of any kind (except as provided in Article V) or the purchase of life insurance for the payment of survivor benefits hereunder. V. EVENTS OF CHANGE IN CONTROL ---------------------------- 5.01 Plan Subject to this Article. The provisions of this Article, to the extent applicable, shall control notwithstanding any other provisions of this Plan to the contrary. 5.02 Obligation to Fund Trust and Payments From 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 an 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 this Plan shall be equal to the dollar amount of survivor benefits payable or which may become payable with respect to all individuals who are officers or retired officers of the Company as of the date of such determination or the date of the Event, as the case may be, whether or not any such individual has actually retired or has met the applicable age and service requirements for retirement at such date plus the dollar amount of any survivor benefits under the Plan which have not yet been paid with respect to any retired officer who died prior to the date of determination or the date of the Event, as the case may be. All such contributions shall be made as soon as possible after such determination or the date of the Event, as the case may be, and shall be in cash or property valued at fair market value. The value of the survivor benefit with respect to an officer who has not yet retired as of the date of determination or the date of the Event, as the case may be, shall be determined with reference to the officer's annualized salary from the Company, based upon the individual's rate of salary in effect immediately prior to the date of determination or the date of the Event, as the case may be. Further, the Company may, in its 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 to the Company of such contributions and income and gains thereon in certain circumstances. Payment of survivor benefits under the Plan with respect to those officers, retired officers and their beneficiaries for whom contributions to the Trust have been made shall be paid 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. 5.03 Legal Fees and Expenses. The Company shall reimburse a retired officer, an officer who has not yet terminated employment with the Company but who otherwise meets the conditions for retirement, and a retired officer's beneficiary for all reasonable legal fees and expenses incurred after the date of any Event in seeking to obtain or preserve any right or benefit provided by the Plan. 5.04 Late Payment and Additional Payment Provisions. If after the date of an Event there is a delay in the payment of survivor benefits under the Plan beyond the final date for payment provided in Section 4.02, the survivor benefits otherwise payable to the retired officer's beneficiary shall be increased by an amount equal to the stated interest which shall be credited to such survivor benefits from the final date for payment provided in Section 4.02 through the date that payment of such survivor benefits (plus such credited interest) is actually made to the retired officer's beneficiary, compounded quarterly on a calendar year basis. The amount of stated interest to be so credited shall be equal to the lesser of (a) the prime rate plus five percentage points, or (b) the prime rate multiplied by two. In the event that stated interest is to be credited for some period less than a full calendar quarter, the stated interest shall be determined and compounded for the fractional quarter. The increase in survivor benefits payable by the crediting of such stated interest represents a late payment penalty for the delay in payment. Any payment of benefits by the Company after the final date for payment provided in Section 4.02 shall be applied first against any applicable late payment penalty and next against the benefit amount itself. The beneficiary of the retired officer shall be entitled to the payment of survivor benefits plus the late payment penalty referred to hereinabove first from the Trust and secondarily from the Company, as otherwise provided in Section 5.02. VI. MISCELLANEOUS ------------- 6.01 Administration of Plan. The Committee has full power and authority to administer the Plan and to establish rules and procedures for the operation of the Plan. The Committee may delegate to one or more committees or individuals any of its authority, power to exercise discretion, duties or responsibilities under the Plan other than its power to amend or terminate the Plan under Section 6.02. The Committee shall be considered the named fiduciary of the Plan for purposes of Section 402(a)(2) of the Employee Retirement Income Security Act of 1974, as amended. 6.02 Amendment and Termination. The Committee has power to amend or terminate the Plan in any respect, including, but not by way of limitation, the power to reduce or terminate survivor benefits with respect to any individual otherwise covered under the Plan. Provided, however, that the Committee may not amend or terminate the Plan in any manner so as to reduce, eliminate or otherwise impair the survivor benefits with respect to any individual who has terminated under circumstances constituting retirement or who is actively employed by the Company but who otherwise meets the conditions for retirement on or prior to the date the Plan is so amended or terminated. Further, the Committee may not amend or terminate the Plan after the date of an Event of change in control of the Company in any manner so as to reduce, eliminate or otherwise impair survivor benefits under the Plan with respect to any individual who is an officer or retired officer immediately prior to the date of an Event of change in control, whether or not such individual has retired or qualified for retirement prior to the date of such amendment or termination. 6.03 No Assignment. No person shall have the power to transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder or any of the payments provided for herein, nor shall any interest in amounts payable hereunder or in any payments be subject to seizure for payment of any debts, judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency, or otherwise. 6.04 Successors and Assigns. The provisions of this Plan are binding upon and inure to the benefit of the Company, its successors and assigns, by merger, purchase or otherwise, and the officers and retired officers and their beneficiaries, heirs and personal representatives. 6.05. Claims Procedure. The Committee or its delegate shall provide adequate notice in writing to any officer or retired officer or his or her beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial. The Committee or its delegate shall afford a reasonable opportunity to any such individual whose claim for benefits has been denied for a full review by the Committee or its delegate of the decision denying the claim. 6.06. Governing Law. This Plan shall be subject to and construed in accordance with the laws of the State of Minnesota to the extent not preempted by the provisions of the Employee Retirement Income Security Act of 1974, as amended. EX-10.11 5 STOCK OPTION REPLACEMENT PROGRAM EXHIBIT 10.11 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 employees to elect to receive stock options in lieu of some or all of the compensation earned as sales commissions or under certain incentive plans. 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-10.12 6 1998 OUTSIDE DIRECTOR STOCK COMPENSATION PLAN EXHIBIT 10.12 MEDTRONIC, INC. 1998 OUTSIDE DIRECTOR STOCK COMPENSATION PLAN (EFFECTIVE MARCH 5, 1998) 1. PURPOSE. The purpose of this Plan is to facilitate recruiting and retaining non-employee directors of outstanding ability. 2. DEFINITIONS. The capitalized terms used in this Plan have the meanings set forth below. (a) "Account" means a bookkeeping account maintained for a Participant to which Deferred Stock Units are credited pursuant to Section 6. (b) "Affiliate" means any corporation that is a "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, or any successor provision, and any joint venture in which the Company or any such "parent corporation" or "subsidiary corporation" owns an equity interest. (c) "Agreement" means a written contract entered into between the Company or an Affiliate and a Participant containing the terms and conditions of an Option granted hereunder (not inconsistent with this Plan). (d) "Annual Option" means an Option granted pursuant to Section 5(c) of this Plan. (e) "Annual Retainer" of a Participant means the fixed annual fee for such Participant in effect on the first day of the year for which such Annual Retainer is payable for services to be rendered as a Non-Employee Director of the Company, including any committee chair fee. (f) "Award" means an Option granted pursuant to Section 5 of this Plan or a credit of Deferred Stock Units pursuant to Section 6 of this Plan. (g) "Board" means the Board of Directors of the Company. (h) "Change in Control" means: (i) acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A) the then outstanding Shares of Stock (the "Outstanding Company Common Stock") or (B) 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 the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company or any Subsidiary, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary or (D) any acquisition by any corporation with respect to which, following such acquisition, more than 55% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (ii) individuals who, as of the effective date of this Plan provided in Section 7(a) of this Plan, constitute the Board (the "Incumbent Board") 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 directors then comprising the Incumbent Board 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 (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or (iii) approval by the shareholders of the Company of a reorganization, merger, consolidation or statutory exchange of Outstanding Company Voting Securities, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, consolidation or exchange do not, following such reorganization, merger, consolidation or exchange, beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which, following such sale or other disposition, more than 55% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. Notwithstanding the foregoing provisions of this definition, a Change of Control shall not be deemed to occur with respect to a Participant if the acquisition of the 30% or greater interest referred to in subparagraph (i) of this definition is by a group, acting in concert, that includes the Participant 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 of any corporation (or other entity) acquiring all or substantially all of the assets of the Company shall be beneficially owned, directly or indirectly, immediately after a reorganization, merger, consolidation, statutory share exchange or disposition of assets referred to in subparagraph (iii) or (iv) of this definition by a group, acting in concert, that includes that Participant. (i) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute. (j) "Committee" means any committee of the Board designated by the Board to administer this Plan under Section 3 hereof, of which shall be composed of not less than two members, each of whom shall be a "non-employee director" as defined in Exchange Act Rule 16b-3. (k) "Company" means Medtronic, Inc., a Minnesota corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise. (l) "Deferred Stock Unit" means the right to receive one Share pursuant to Section 6 of this Plan. (m) "Disability" means the disability of a Participant such that the Participant would, if an employee, be considered disabled under any retirement plan of the Company which is qualified under Section 401 of the Code. (n) "Discretionary Option" means an Option granted pursuant to Section 5(f). (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended; "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act as in effect with respect to the Company or any successor regulation. (p) "Fair Market Value" as of any date means, unless otherwise expressly provided in this Plan: (i) the closing sale price of a Share (A) on the composite tape for New York Stock Exchange ("NYSE") listed shares, or (B) if the Shares are not quoted on the NYSE composite tape, on the principal United States securities exchange registered under the Exchange Act on which the Shares are listed, or (C) if the Shares are not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System, in any case on the date immediately preceding that date, or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, or (ii) if clause (i) is not applicable, what the Committee determines in good faith to be 100% of the fair market value of a Share on that date. However, if the applicable securities exchange or system has closed for the day at the time the event occurs that triggers a determination of Fair Market Value, all references in this paragraph to the "date immediately preceding that date" shall be deemed to be references to "that date." The determination of Fair Market Value shall be subject to adjustment as provided in Section 7(e) hereof. For purposes of this definition, each Option granted and each Deferred Stock Unit credited pursuant to this Plan shall be deemed conclusively to have been granted or credited, as applicable, prior to the close of the applicable securities exchange or system on the date of grant or credit, as applicable. (q) "Fundamental Change" means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company. (r) "Initial Option" means an Option granted pursuant to Section 5(b). (s) "Initial Plan Year" means the period from March 5, 1998 through August 31, 1998. (t) "Meeting" means a regular or special meeting of the Board or of a committee of the Board on which a particular Participant serves that is actually held. (u) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any Affiliate. (v) "Option" means a right to purchase Stock. (w) "Participant" means any Non-employee Director to whom an Award is made. (x) "Plan" means this 1998 Outside Director Stock Compensation Plan, as amended and in effect from time to time. (y) "Plan Year" means the Initial Plan Year, or the period from September 1 of 1998 or any subsequent year, through the following August 31. (z) "Pro-Ration Factor" means: (A) in the case of a Participant who is a Non-Employee Director for the entire Plan Year in question and attends at least 75 percent of the Meetings that occur during such Plan Year (such Meetings, the "Plan Year Meetings"), 100 percent; (B) in the case of a Participant who is a Non-Employee Director for only a portion of a Plan Year and attends at least 75 percent of the Meetings that occur during that portion of a Plan Year (such meetings, the "Applicable Meetings"), a percentage determined by dividing the number of Applicable Meetings by the total number of Plan Year Meetings for that Plan Year; and (C) in the case of a Non-Employee Director who fails to satisfy the Meeting attendance requirement of clause (A) or (B), as applicable, 75 percent of the percentage specified in clause (A) or (B), as applicable. (aa) "Replacement Factor" is defined in Section 5(d)(ii). (bb) "Replacement Option" means an Option granted pursuant to Section 5(d) of this Plan. (cc) "Retirement Option" means an Option granted pursuant to Section 5(e) of this Plan. (dd) "Share" means a share of Stock. (ee) "Stock" means the common stock, $.10 par value per share (as such par value may be adjusted from time to time), of the Company. (ff) "Subsidiary" means a "subsidiary corporation," as that term is defined in Section 424(f) of the Code, or any successor provision. (gg) "Successor" with respect to a Participant means the legal representative of an incompetent Participant and, if the Participant is deceased, the legal representative of the estate of the Participant or the person or persons who may, by bequest or inheritance, or pursuant to a transfer permitted under Section 5(i) of this Plan, acquire the right to exercise an Option or receive Shares issuable in satisfaction of Deferred Stock Units in the event of the Participant's death. (hh) "Term" means the period during which an Option may be exercised. Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural. 3. ADMINISTRATION. (a) AUTHORITY OF COMMITTEE. The Committee or its delegee shall administer this Plan. The Committee shall have the authority to interpret this Plan and any Award or Agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan (including without limitation the manner in which Participants shall make elections provided for herein), to determine the terms and provisions of any Agreements entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive. (b) INDEMNIFICATION. To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damage, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan. 4. IN GENERAL. (a) SHARES AVAILABLE. The number of Shares available for distribution under this Plan is 1,500,000 (subject to adjustment under Section 7(e) hereof). Any Shares subject to the terms and conditions of an Award under this Plan which are not used because the terms and conditions of the Award are not met may again be used for an Award under this Plan. Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award or any Award settled in cash in lieu of Shares shall be available for further Awards. (b) NO FRACTIONAL SHARES. No fractional Shares may be issued under this Plan; fractional Shares will be rounded to the nearest whole Share. (c) RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a shareholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record. 5. OPTIONS. (a) AGREEMENTS. Each Option granted under this Plan shall be evidenced by an Agreement setting forth the terms and conditions thereof. (b) INITIAL OPTION GRANTS. Each Non-Employee Director first elected or appointed to the Board on or after January 15, 1998 shall automatically be granted, on the later of (i) the date such director first becomes a director and (ii) March 5, 1998, an Option (an "Initial Option") to purchase that number of Shares determined by dividing (i) two times the amount of the Annual Retainer as in effect immediately following such election or appointment by (ii) the Fair Market Value of a Share on the date of grant. No increase in the Annual Retainer of the Non-Employee Directors after a person becomes a Non-Employee Director shall increase the number of Shares subject to the Initial Option granted to such Non-Employee Director. An employee of the Company or an Affiliate who terminates such employment and thereafter becomes a Non-Employee Director is not entitled to receive an Initial Option but will be entitled to receive Annual Options and Replacement Options. A Non-Employee Director is not entitled to receive more than one Initial Option during his or her lifetime. (c) ANNUAL OPTION GRANTS. On the first day of each Plan Year other than the Initial Plan Year, each Non-employee Director shall automatically be granted an Option (the "Annual Option") to purchase that number of Shares equal to (i) the amount of the Annual Retainer in effect as of such day, divided by (ii) the Fair Market Value of a Share on the date of the grant. No increase in the Annual Retainer for Non-employee Directors of the Company following the grant of an Annual Option shall increase the number of Shares subject to such Annual Option. (d) REPLACEMENT OPTION GRANT. (i) Each Non-Employee Director shall be provided with the opportunity to elect, in advance of the first day of each Plan Year (or upon becoming a Non-Employee Director, if later), to receive the Annual Retainer for such Plan Year in the form of a grant of an Option (a "Replacement Option") under this Section 5(d) rather than in cash. Each Non-Employee Director who makes such an election who remains a member of the Board on the last day of the relevant Plan Year shall automatically be granted on such day an Option (the "Replacement Option") to purchase that number of Shares equal to (A) the Replacement Factor (as defined below) times the Eligible Retainer Amount (as defined below) for the Participant for the Plan Year times the Pro-Ration Factor, divided by (B) the Fair Market Value of a Share on the date of grant. A Non-Employee Director who elects to receive a Replacement Option for a Plan Year but is no longer a member of the Board on the last day of such Plan Year shall receive his or her Annual Retainer for that Plan Year in cash upon ceasing to be a member of the Board. (ii) The "Replacement Factor" means four, or such other number as the Board may designate before the beginning of any Plan Year. (iii) The "Eligible Retainer Amount" means the amount of the Annual Retainer for the Participant as in effect as of the beginning of the Plan Year, less, in the case of the Initial Plan Year only, any portion thereof earned by the Participant before March 5, 1998. (e) RETIREMENT OPTIONS. Each Participant who has elected, in connection with the termination of the [NAME OF DIRECTOR RETIREMENT PLAN] (the "Retirement Plan"), to receive Options pursuant to this Section 5(e) shall be granted as of March 5, 1998, an Option (a "Retirement Option") to purchase that number of Shares equal to (i) four times the amount of such Participant's accrued benefit under the Retirement Plan as of March 5, 1998, divided by (ii) the Fair Market Value of a Share on the date of grant. (f) DISCRETIONARY OPTIONS. The Board or the Committee may, in its discretion, at any time or from time to time grant to any Non-Employee Director additional Options ("Discretionary Options") to purchase such number of Shares, on such terms and conditions, as it shall determine. (g) PURCHASE PRICE; TERM AND EXERCISABILITY OF OPTIONS. The purchase price of each Share subject to an Option shall be the Fair Market Value of a Share as of the date the Option is granted. Options granted to a Non-Employee Director under this Section 5 shall vest and be exercisable in full on the date of grant, except to the extent the Board provides otherwise with respect to Discretionary Options; provided, however, that in no event shall a Non-Employee Director initially appointed by the Board be entitled to exercise an Option unless, and until such time as, such director shall have been elected to the Board by the shareholders of the Company. Notwithstanding the foregoing, except as otherwise provided by the Board with respect to Discretionary Options, vesting of an Option granted to a Non-Employee Director who shall have been elected by the shareholders of the Company shall accelerate and the Option shall become immediately exercisable in full upon the occurrence of a Change in Control or in the event that the Non-Employee Director ceases to serve as a director of the Company due to death, Disability, resignation or retirement under the policies of the Company then in effect. Options shall expire on the ten-year anniversary date of the Option's grant; provided, that Initial Options and Annual Options (but not Replacement Options or Retirement Options) shall expire on the five-year anniversary date of the date the Non-Employee Director ceases to be a director of the Company for any reason, if earlier than the ten-year anniversary date of the Option's grant; and provided, further, that the Initial Option granted to a Non-Employee Director initially appointed by the Board shall expire on the date such director ceases to be a director of the Company unless such director shall have been elected by the shareholders subsequent to the grant of the Initial Option to such director. (h) PAYMENT OF OPTION PRICE. The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise; provided, that to the extent permitted by law, Participants may simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The purchase price may also be paid in cash, or through a reduction of the number of Shares delivered to the Participant upon exercise of the Option or by delivery to the Company of Shares held by such Participant for at least six months before such exercise (in each case, such Shares having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the Shares being purchased pursuant to the Option), or a combination thereof, in the discretion of the Participant. In no event shall any Option be exercisable at any time after its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated. (i) TRANSFERABILITY. A Non-Employee Director may transfer an Option granted pursuant to this Section 5 to any member of such Non-Employee Director's "immediate family" (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act, or any successor rule or regulation) or to one or more trusts whose beneficiaries are members of such Non-Employee Director's "immediate family" or partnerships in which such family members are the only partners; provided, that (i) the transferor receives no consideration for the transfer and (ii) such transferred Option shall continue to be subject to the same terms and conditions as were applicable to such Option immediately prior to its transfer. Unless an Option granted pursuant to this Section 5 shall have expired, in the event of a Non-Employee Director's death, an Option granted to such Non-Employee Director pursuant to this Section 5 shall be transferable to the beneficiary, if any, designated by the Non-Employee Director in writing to the Company prior to the Non-Employee Director's death and such beneficiary shall succeed to the rights of the Non-Employee Director to the extent permitted by law. If no such designation of a beneficiary has been made, the Non-Employee Director's legal representative shall succeed to such Option, which shall be transferable by will or pursuant to the laws of descent and distribution. 6. DEFERRED STOCK UNITS. (a) ANNUAL CREDIT. As of the last day of each Plan Year, there shall be credited to the Account of each Participant who is a Non-Employee Director on such day a number of Deferred Stock Units (each representing the right to receive a Share) equal to (i) one-half of the Annual Retainer in effect as of such day, times the Pro-Ration Factor, divided by (ii) the average of the Fair Market Value of a Share on each of the last 20 trading days during such Plan Year determined in accordance with clause (i) of Section 2(p) or, if clause (i) of Section 2(p) is inapplicable, the Fair Market Value of a Share as of the last day of such Plan Year determined in accordance with clause (ii) of Section 2(p). (b) RETIREMENT PLAN CREDIT. The Account of each Participant who has elected, in connection with the termination of the Retirement Plan, to be credited with Deferred Stock Units pursuant to this Section 6(b) shall be credited, as of March 5, 1998, with a number of Deferred Stock Units (each representing the right to receive a Share) equal to (i) the amount of such Participant's accrued benefit under the Retirement Plan as of March 5, 1998, divided by (ii) the average of the Fair Market Value of a Share on each of the last 20 trading days ending with March 5, 1998 determined in accordance with clause (i) of Section 2(p) or, if clause (i) of Section 2(p) is inapplicable, the Fair Market Value of a Share as of the last day of such Plan Year determined in accordance with clause (ii) of Section 2(p). (c) DISCRETIONARY CREDITS. The Board or the Committee may, in its discretion, at any time and from time to time, cause additional Deferred Stock Units (each representing the right to receive a Share) to be credited to the account of any Non-Employee Director. (d) CREDITS OF DIVIDEND EQUIVALENTS; MAINTENANCE OF ACCOUNTS. The Company shall maintain an Account for each Participant to which the credits provided for in Sections 6(a), (b) and (c) above shall be made. Each Participant's Account shall be credited from time to time with additional Deferred Stock Units to reflect deemed reinvestment of any amounts that would have been paid as cash dividends with respect to the Deferred Stock Units held in such Account if they were Shares. Subject to the provisions of Section 6(e) regarding delivery of Shares, Accounts may be credited with fractional Deferred Stock Units pursuant to this Section 6(d) and Sections 6(a), (b) and (c). (e) DELIVERY OF SHARES FROM ACCOUNTS. (i) Each Participant shall be provided the opportunity to elect, in accordance with procedures established by the Committee, whether to receive the balance in his or her account in a single lump sum or in five annual installments. Once made, such an election may be changed, but no such changed election shall take effect until six months after the date the election is made, and in any event such changed election shall not take effect unless it is (A) made at least six months before deliveries pursuant to Section 6(e)(ii) begin and (B) approved by the Board or a committee of the Board if the Committee determines that such approval is necessary or appropriate in light of Exchange Act Rule 16b-3. (ii) The balance in a Participant's Account shall be delivered to the Participant or the Participant's Successor in the form of Shares as soon as practicable after, or beginning as soon as practicable after, the date on which the Participant ceases for any reason to be a member of the Board (the "Termination Date"). If a Participant has elected a lump sum delivery, or if a Participant dies while a member of the Board, the Participant or the Participant's Successor, as applicable, shall receive a number of Shares equal to the total number of Deferred Stock Units in the Participant's Account as of the Termination Date in full satisfaction of all of the Participant's interest in the Account; provided, that any fractional Deferred Stock Units shall be rounded to the nearest higher whole number of Shares. If a Participant has elected installment delivery and ceases to be a member of the Board for any reason other than the death of the Participant, then the Participant shall receive the balance in such Participant's Account in the form of five annual deliveries of Shares (and if a Participant dies after ceasing to be a Board member, any remaining annual deliveries shall be made to the Participant's Successor). The precise number of shares delivered in each installment shall be determined in such a manner as to cause each such delivery to represent approximately one-fifth of the Deferred Stock Units held in such Account as of the Termination Date together with any dividend equivalents credited thereon. Notwithstanding the foregoing, no such installment shall be delivered unless and until the Board or the Committee shall have approved the delivery (unless such approval is not necessary under Exchange Act Rule 16b-3). (iii) Notwithstanding the foregoing, the balance in all Participants' Accounts shall be delivered to the Participants in a single lump sum delivery of Shares upon the occurrence of a Change of Control. 7. GENERAL PROVISIONS. (a) EFFECTIVE DATE OF THIS PLAN. This Plan shall become effective as of March 5, 1998. (b) DURATION OF THIS PLAN. This Plan shall remain in effect until it is terminated pursuant to Section 7(d) hereof. (c) NO RIGHT TO BOARD MEMBERSHIP. Nothing in this Plan or in any Agreement shall confer upon any Participant the right to continue as a member of the Board. (d) AMENDMENT, MODIFICATION AND TERMINATION OF THIS PLAN. Except as provided in this Section 7(d), the Board may at any time amend, modify, terminate or suspend this Plan or any or all Agreements under this Plan to the extent permitted by law. No termination, suspension or modification of this Plan may materially and adversely affect any right acquired by any Participant (or a Participant's legal representative) or any Successor under an Award granted before the date of termination, suspension or modification, unless otherwise agreed by the Participant in the Agreement or otherwise or required as a matter of law. It is conclusively presumed that any adjustment for changes in capitalization provided for in Section 7(e) hereof does not adversely affect any right of a Participant under an Award. (e) ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments in the aggregate number and type of Shares available for Awards under this Plan, in the number and type of Shares subject to Awards then outstanding and in the Option exercise price as to any outstanding Options and in the number of Defined Stock Units in the Accounts, may be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a Fundamental Change, recapitalization, reclassification, stock dividend, stock split, stock combination, or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share. (f) FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change: (a) involving a merger, consolidation or statutory share exchange, unless appropriate provision shall be made (which the Board may, but shall not be obligated to, make) for the protection of the outstanding Options by the substitution of appropriate voting common stock of the corporation surviving any such merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, to be issuable upon the exercise of Options, or (b) involving the dissolution or liquidation of the Company, the Board may, but shall not be obligated to, declare, at least twenty days prior to the occurrence of the Fundamental Change, and provide written notice to each holder of an Option of the declaration, that each outstanding Option, whether or not then exercisable, shall be canceled at the time of, or immediately prior to the occurrence of, the Fundamental Change in exchange for payment to each holder of an Option, within 20 days after the Fundamental Change, of cash for each Share covered by the canceled Option equal to the amount, if any, by which the Fair Market Value (as defined in this Section 7(f)) per Share exceeds the exercise price per Share covered by such Option. At the time of the declaration provided for in the immediately preceding sentence, each Option shall immediately become exercisable in full and each person holding an Option shall have the right, during the period preceding the time of cancellation of the Option, to exercise the Option as to all or any part of the Shares covered thereby. In the event of a declaration pursuant to this Section 7(f), each outstanding Option that shall not have been exercised prior to the Fundamental Change shall be canceled at the time of, or immediately prior to, the Fundamental Change, as provided in the declaration. Notwithstanding the foregoing, no person holding an Option shall be entitled to the payment provided for in this Section 7(f) if such Option shall have previously expired. For purposes of this Section 7(f) only, "Fair Market Value" per Share means the cash plus the fair market value, as determined in good faith by the Board, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Fundamental Change, notwithstanding anything to the contrary provided in this Plan. (g) LIMITS OF LIABILITY. (i) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and the Agreement. (ii) Except as may be required by law, neither the Company nor any member or former member of the Board or of the Committee, nor any other person participating (including participation pursuant to a delegation of authority under Section 3(a) hereof) in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken, or not taken, in good faith under this Plan. (h) COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS. No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company's Shares may, at the time, be listed. (i) REMOVAL FOR CAUSE. Notwithstanding any other provision of this Plan, this Section 7(i) shall apply in the event a Participant is removed from the Board for cause before a Change of Control. In such event: (i) all of the Participant's Options shall immediately expire and be forfeited, and (ii) unless the Board or the Committee specifically determines otherwise in connection with or after such removal, the balance in such Participant's Account shall be delivered to the Participant in a single lump sum delivery of Shares after the expiration of six months from the date of such removal. In addition, if the Participant has received or been entitled to delivery of Shares pursuant to the exercise of an Option within six months before such removal, the Board or the Committee, in its sole discretion, may require the Participant to return or forfeit all or a portion of such Shares and receive back the exercise price (if any) paid therefor, or may require the Participant to pay to the Company the economic value of such Shares less such exercise price, determined as of the date of the exercise of Options in the event of any of the following occurrences (whether before or after such removal): competition with the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies or business policies of the Company or any Affiliate, or any other action or event that the Board may determine warrants such a requirement. The Board's or Committee's right to require such return or forfeiture must be exercised within 90 days after the later of the date of such removal or the discovery of such an occurrence, but in no event later than 15 months after such removal. 8. GOVERNING LAW. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken pursuant to this Plan shall be governed by the laws of Minnesota and construed accordingly. 9. SEVERABILITY. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 10. EFFECT OF PRIOR PLAN. From and after the Effective Date of this Plan, no further awards shall be made to Non-Employee Directors under the Company's 1994 Stock Award Plan (the "Prior Plan"). Thereafter, all grants and awards made under the Prior Plan prior to such Effective Date shall continue in accordance with the terms of the Prior Plan. EX-10.14 7 AMENDMENT TO 1979 NONQUALIFIED STOCK OPTION PLAN EXHIBIT 10.14 AMENDMENT TO 1979 NONQUALIFIED STOCK OPTION PLAN ------------------------------------------------ Paragraph (d) of Section XII of the 1979 Plan was amended by the Board of Directors of Medtronic, Inc., effective March 5, 1998, to add the language below at the end of the existing Paragraph (d): Notwithstanding the foregoing, any stock option granted hereunder that is held by an individual who is an executive officer or director subject to Section 16 of the Securities Exchange Act of 1934, as amended (a "Section 16 Person"), shall be transferable (unless the Committee in its discretion determines otherwise) to any member of the 'immediate family' (as such term is defined in Rule 16a-1(e) promulgated under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation) of the original grantee of such option, or to one or more trusts whose beneficiaries are members of such 'immediate family' or partnerships in which such family members are the only partners; provided that no consideration may be received for such transfer. Any stock option held by any such transferee shall continue to be subject to the same terms and conditions that were applicable to such option immediately prior to its transfer and may be exercised by such transferee as and to the extent that such option has become exercisable and has not terminated in accordance with the provisions of the Plan and the applicable option agreement. For purposes of any provision of the Plan relating to notice to an Optionee or to vesting or termination of an option upon the death, Disability or termination of employment of an Optionee, the references to 'Optionee' shall mean the original grantee of an option and not any transferee. EX-13 8 1998 ANNUAL REPORT EXHIBIT 13 PARTNERS IN MEDICAL INNOVATION [PHOTOS] 1998 ANNUAL REPORT FINANCIAL REVIEW MEDTRONIC [LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- SUMMARY Medtronic is the world's leading medical technology company specializing in implantable and interventional therapies. Primary products include those for bradycardia pacing, tachyarrhythmia management, atrial fibrillation management, heart failure management, coronary and peripheral vascular disease, heart valves replacement, extracorporeal cardiac support, minimally invasive cardiac surgery, malignant and non-malignant pain, movement disorders, neurosurgery, and neurodegenerative disorders. Fiscal 1998 was a solid year for the company, as evidenced by the 13th consecutive year of increases in revenues. Net sales of $2.60 billion represent a 6.8% increase over the $2.44 billion in fiscal 1997. Net sales excluding the effects of foreign currency translation increased 11.1% compared to increases of 15.2% in fiscal 1997 and 23.5% in fiscal 1996. The growth during fiscal 1998 was led by the performance of core product lines, particularly Cardiac Rhythm Management and Neurological. The decrease in the growth rates from year to year is primarily the result of the timing of new product introductions during fiscal years 1996, 1997, and 1998 as well as declining growth rates in certain markets. Fiscal 1998 marked a year in which the company announced significant management initiatives to reduce manufacturing and administrative costs throughout the company. These initiatives include restructuring the vascular organization and reducing global infrastructure by streamlining certain manufacturing and administrative operations within the United States, Europe, and Japan. The company believes these actions will significantly strengthen the company's competitive position in the global health care market, which itself is under increasing cost pressures. Net earnings and earnings per share (diluted) for fiscal 1998 were $457.4 million and $0.96, respectively, compared to $530.0 million and $1.09, respectively, for fiscal 1997. Excluding the effects of the $205.3 million pre-tax non-recurring charges taken in the third quarter, fiscal 1998 earnings per share would have been $1.25 (diluted), representing an increase of 14.7%. NET SALES The increase in net sales from fiscal 1997 to fiscal 1998 was primarily the result of continued unit volume increases. With the exception of angioplasty catheters, selling prices for the company's products during fiscal 1998 remained relatively stable overall, although certain products experienced low single-digit declines in selling prices as a result of the medical market's continued focus on cost controls and competitive pricing. Sales in the United States in fiscal 1998 increased 12.8% over the prior year, compared to 14.6% in fiscal 1997. Sales outside the United States increased 8.7% on a constant currency basis compared to 16.0% in fiscal 1997. Sales in non-U.S. markets accounted for 38.6% of worldwide net sales, compared with 41.8% in fiscal 1997 and 43.0% in fiscal 1996. Foreign exchange rate movements had an unfavorable year-to-year impact on international net sales of $103.2 million and $64.4 million in fiscal 1998 and fiscal 1997, respectively, and a favorable year-to-year impact of $21.3 million in fiscal 1996. These exchange rate movements are caused primarily by the impact of the stronger U.S. dollar in fiscal 1998 and 1997 and the relatively weaker U.S. dollar in fiscal 1996 versus major European currencies and the Japanese yen. The impact of foreign currency fluctuations on net sales is not necessarily indicative of the impact on net earnings due to the offsetting foreign currency impact on operating costs and expenses and the company's hedging activities (see also Market Risk and Note 4 to the consolidated financial statements for further details on foreign currency instruments and the company's risk management strategies with respect thereto). As reflected in Note 4, realized gains and losses on the company's hedging activities were offset by the transactions being hedged and are therefore consistent with the company's risk management strategies. The following is a summary of sales by product line as a percentage of total net sales: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- Cardiac Rhythm Management 64.2% 65.6% 67.9% Other Cardiovascular 21.0 22.0 23.6 Neurological & Other 14.8 12.4 8.5 ================================================================================ Net sales of Cardiac Rhythm Management products, which consist primarily of products for bradycardia pacing and tachyarrhythmia management, increased 8.7% in fiscal 1998 after removing the impact of foreign exchange rate fluctuations, versus growth of 11.5% in fiscal 1997. This growth was led by strong contributions from Tachyarrhythmia Management's Micro Jewel II implantable cardioverter defibrillator, which continues to hold a strong market share position in the highly competitive defibrillator marketplace. The company has applied for U.S. Food and Drug Administration (FDA) regulatory clearance for the Gem and Gem DR, part of the next generation Gem family of defibrillators. In June 1998, the company launched the Gem DR in Europe and certain markets outside the U.S. Unit sales of bradycardia implantable pulse generators (IPGs) achieved more than 8.0% growth in fiscal 1998. Bradycardia unit sales continued to reflect strong growth in both U.S. and non-U.S. markets, primarily on the strength of the new Medtronic.Kappa 400 series pacemakers, which were released in Europe in January 1997 and which received FDA clearance in late January 1998. In addition, the Medtronic.Kappa 700 series, a full family of pacemakers to replace the Thera (i-SERIES), was launched in Europe in early April 1998. U.S. VS. INTERNATIONAL SALES In Millions of Dollars [STACKED BAR GRAPH] 1998 1997 1996 -------- -------- -------- U.S. $1,598.5 $1,403.2 $1,241.0 International 1,006.3 1,035.0 931.1 -------- -------- -------- $2,604.8 $2,438.2 $2,172.1 ======== ======== ======== NET SALES BY PRODUCT LINE In Millions of Dollars [STACKED BAR GRAPH] 1998 1997 1996 -------- -------- -------- Cardiac Rhythm Management $1,673.6 $1,600.1 $1,474.2 Other Cardiovascular 546.0 537.4 512.8 Neurological & Other 385.2 300.7 185.1 -------- -------- -------- $2,604.8 $2,438.2 $2,172.1 ======== ======== ======== 1 Sales within the Other Cardiovascular product line, consisting of heart valves, perfusion and blood management systems, cannulae, surgical accessories, balloon and guiding catheters and stents, increased 6.6% and 8.4% in fiscal 1998 and fiscal 1997, respectively, after excluding the effects of foreign currency translation. The fiscal 1998 growth is attributable in significant part to sales of the Wiktor Prime coronary stent in the first half of fiscal 1998 and by strong growth in sales of tissue values and surgical cannulae products. The Medtronic Freestyle stentless aortic tissue heart valve, which received FDA clearance in November 1997, also contributed to accelerated sales growth of tissue valves. However, balloon catheter sales decreased significantly from the prior year as significant competition for balloon catheters continued, resulting in declining unit sales and continued declining average selling prices. The stent market has also become increasingly competitive, particularly in the United States. As a result of recent launches of competitive stents, the last two quarters of fiscal 1998 marked sequential declines in stent sales. These disappointing sales results for balloon catheters and stents necessitated management initiatives during the third quarter of fiscal 1998 to reduce costs in the vascular organization and focus on new products as discussed in Note 3 to the consolidated financial statements. The first of several new coronary vascular products, the Presario single-operator exchange balloon catheter, was released internationally late in the fourth quarter of fiscal 1998. The endovascular stent-graft system, launched outside the United States in the second quarter of fiscal 1998, continues to gain rapid medical acceptance for minimally-invasive treatment of abdominal aortic aneurysms. Sales of cardiac perfusion and blood management systems were relatively flat as compared to the prior fiscal year. Net sales of Neurological and Other products, consisting primarily of implantable neurostimulation devices, drug administration systems, neurosurgery products, and diagnostic systems, continued to experience significant growth. Exclusive of the effects of foreign currency translation, net sales grew 31.4% over the previous year compared to growth of 63.4% in fiscal 1997. Particularly strong sales growth during fiscal 1998 was achieved in the drug delivery product line as a result of continued increased demand for the SynchroMed drug infusion system for delivery of morphine for chronic pain and for delivery of Lioresal (baclofen, USP) Intrathecal for treatment of cerebral and spinal spasticity. Another strong growth factor was the continued rapid sales growth in Europe of Medtronic Activa neurostimulation therapy for control of essential tremor and tremor associated with Parkinson's disease. This therapy received U.S. FDA clearance in August 1997. Significant progress was made during the latter part of fiscal 1998 in training physicians and gaining reimbursement for this therapy in the majority of states. In September 1997, the company received FDA clearance to market its InterStim continence control therapy. The company is currently training centers to develop this market. In addition, neurosurgical shunts for hydrocephalus contributed to the strong growth. The November 1995 and April 1996 acquisitions of PS Medical and Synectics, respectively, contributed significantly to the fiscal 1997 growth rate. COSTS AND EXPENSES The following is a summary of major costs and expenses as a percentage of net sales: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- Cost of Products Sold 25.7% 25.0% 27.2% Research & Development 11.4 11.5 11.2 Selling, General & Administrative 29.1 31.3 32.3 Non-recurring Charges 7.4 -- -- ================================================================================ Cost of products sold as a percentage of net sales increased slightly in fiscal 1998 as compared to fiscal 1997. This increase was primarily the result of a $12.9 million charge included within the third quarter restructuring charge for obsolescence on certain vascular inventories. Without the $12.9 million obsolescence charge, cost of products sold as a percentage of net sales would have been 25.2%. The decrease in cost of products sold as a percentage of net sales from fiscal 1996 to fiscal 1997 resulted from the impact of favorable product and geographic mixes combined with increased volumes, and the favorable impact of foreign exchange rate fluctuations between the time products were shipped and sold. Improvements were partially offset by pricing pressures on certain products and costs related to new product introductions. Future gross margins will continue to be impacted by competitive pricing pressures, new product introductions, the mix of products both within and among businesses and geographies, and the effects of foreign currency fluctuations. The company remains committed to spending aggressively on research and development (R&D) to develop technological enhancements and new indications for existing products, as well as to develop less invasive and new technologies to address unmet patient needs and to help reduce procedural costs and length of hospital stay. R&D expense was $297.2 million in fiscal 1998 compared to $280.2 million in fiscal 1997. Selling, general, and administrative expense (SG&A) as a percent of sales decreased in both fiscal 1998 and 1997. The decrease in fiscal 1998 is primarily attributable to continued emphasis on achieving overall cost efficiencies in response to the weaker than anticipated revenue trends for certain products. The fiscal 1998 and 1997 decreases were also impacted by gains recognized from the sale of certain available-for-sale equity securities and increased royalty income offset in part by increased legal costs, additional investments in information technology, and marketing initiatives. In addition, the decrease in fiscal 1998 was impacted by an increase in the dollar amount of gains recognized from hedging activities as compared to the prior year. As discussed in Note 3 to the consolidated financial statements, the company recorded pre-tax charges totaling $205.3 million during the third quarter of fiscal 1998. These charges included $156.4 million for management initiatives to restructure the vascular organization and reduce global infrastructure, $12.9 million for obsolescence on certain vascular inventories (included in cost of products sold in the above table) and a $36.0 million commitment to the Medtronic Foundation. Management believes these initiatives will eventually result in annualized pre-tax cost savings in excess of $50.0 million. INCOME TAXES The company's effective income tax rate in fiscal 1998 was 34.8% compared to an effective rate of 34.5% in fiscal 1997 and 35.0% in fiscal 1996, after restatement for the acquisitions of AneuRx and InStent. Excluding the effect of the non-recurring charges discussed in Note 3 to the consolidated financial statements, the effective income tax rate in fiscal 1998 would have been 34.5%. Despite tax legislation that reduces U.S. tax benefits derived from the company's operations in Puerto Rico, management believes that other tax planning initiatives should contribute to a reduction of up to one percentage point in the effective tax rate for fiscal 1999. R&D EXPENSE In Millions of Dollars [BAR GRAPH] 1998 $297.2 1997 280.2 1996 243.8 DIVIDENDS TO SHAREHOLDERS In Millions of Dollars [BAR GRAPH] 1998 $102.9 1997 90.7 1996 60.4 2 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES SUMMARY The company continued to strengthen its financial position during fiscal 1998. At April 30, 1998, working capital, the excess of current assets over current liabilities, totaled $979.6 million compared to $719.2 million at April 30, 1997. The current ratio at April 30, 1998, was 2.7:1 compared with 2.4:1 and 2.6:1 at April 30, 1997 and 1996, 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 $316.3 million at April 30, 1998, compared to $130.2 million at April 30, 1997, and $430.8 million at April 30, 1996. The decrease in the company's current ratio and net cash position between fiscal 1996 and fiscal 1997 was primarily due to the repurchase of $476.6 million of stock during fiscal 1997. CASH FLOW Cash provided by operating activities was $590.1 million in fiscal 1998 compared to $463.6 million in fiscal 1997 and $500.9 million in fiscal 1996. Fiscal 1998 operating cash flows were more than sufficient to fund the company's stock repurchases, capital expenditures, and dividends paid to shareholders. Repurchases of common stock totaled $168.2 million in fiscal 1998, compared to $476.6 million and $33.6 million in fiscal 1997 and fiscal 1996, respectively. The significant stock repurchases during fiscal 1997 were supported by the company's existing strong cash position. Additions to property, plant and equipment totaled $148.2 million in fiscal 1998, compared to $171.3 million and $165.1 million in fiscal 1997, and 1996, respectively. The company expects future growth in capital spending to support increased manufacturing capacity and operational requirements. This spending will be financed primarily by funds from operations. Dividends paid to shareholders totaled $102.9 million, $90.7 million, and $60.4 million for fiscal 1998, 1997, and 1996, 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 addition, significant items affecting cash flows during fiscal 1997 included net sales and maturities of marketable securities of $367.3 million and other investing activities of $99.1 million. Significant items affecting cash flows during fiscal 1996 included the cash purchase price paid for the acquisition of Synectics of approximately $56.0 million and net purchases of marketable securities totaling $190.3 million. DEBT AND CAPITAL At April 30, 1998, the total number of shares of common stock authorized by the Board of Directors for repurchase was approximately 21.9 million shares. During fiscal 1998, approximately 3.5 million shares were repurchased at an average price of $47.90. During fiscal 1997, approximately 14.8 million shares were repurchased at an average price of $32.18. The company repurchased shares in fiscal 1998 and 1997 to offset dilution resulting from shares issued in conjunction with purchased acquisitions in fiscal 1996 and fiscal 1997, the issuance of stock under employee stock purchase and award plans and to take advantage of market conditions. Future repurchases of common stock will depend upon the company's systematic stock repurchase plan, market conditions, restrictions related to pooling transactions, and other factors. The company's capital structure consists of equity and interest-bearing debt. Interest-bearing debt as a percent of total capital was 5.1% at April 30, 1998, compared with 6.4% and 4.0% at April 30, 1997, and 1996, respectively. One of the company's key financial objectives is achieving an annual return on equity (ROE) of at least 20%. ROE compares net earnings to average shareholders' equity and is a key measure of management's ability to utilize the shareholders' investment in the company effectively. In fiscal 1998, ROE was 24.1% as compared to 29.6% in fiscal 1997. Excluding the effects of the $205.3 million pre-tax charges taken in the third quarter, fiscal 1998 ROE would have been 30.3%. In fiscal 1996, ROE was 27.0% and in each of the preceding eight years, ROE exceeded 20%. MARKET RISK Due to the global nature of its operations, the company is subject to the exposures that arise from foreign exchange rate fluctuations. Such exposures arise from transactions denominated in foreign currencies, primarily from translation of results of operations from outside the United States, intercompany loans, and intercompany purchases of inventory. The company is also exposed to interest rate changes. 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 utilizes a variety of simple derivative financial instruments, including foreign currency forward and option contracts, as hedges to meet these objectives. The principal currencies hedged are the Japanese yen and the German mark. 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 hedging 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 1998 were successful in reducing the net earnings impact of currency fluctuations to an immaterial level despite adverse market conditions. The fair value of all foreign currency derivative contracts outstanding at April 30, 1998 was $6.8 million, which does not represent the company's annual exposure. An analysis was prepared to estimate the sensitivity of the fair value of all derivative foreign exchange contracts to hypothetical 10% favorable and unfavorable changes in spot exchange rates at April 30, 1998. Premiums paid for purchased options are included in the fair value. The results of this estimation, which may vary from actual results, are as follows (in millions): Fair Value of Derivatives ------------------------- 10% adverse rate movement $(1.0) At April 30, 1998 rates 6.8 10% favorable rate movement 17.7 Any gains and losses on the fair value of derivative contracts would be largely offset by losses and gains on the underlying transactions or anticipated transactions. These offsetting gains and losses are not reflected in the above analysis. An analysis of the impact on the company's interest rate sensitive financial instruments of a hypothetical 10% change in short-term interest rates compared to interest rates at April 30, 1998 shows no significant impact on expected fiscal 1999 earnings. GOVERNMENT REGULATION AND OTHER MATTERS Government and private sector initiatives to limit the growth of health care costs, including price regulation and competitive pricing, are continuing in many countries where the company does business, including the United States. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical therapies. Although the company believes it is well positioned to respond to changes resulting from this worldwide trend toward cost containment, the uncertainty as to the outcome of any proposed legislation or changes in the marketplace precludes the company from predicting the impact these changes may have on future operating results. 3 In keeping with the increased emphasis on cost effectiveness in health care delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The medical device industry has also been consolidating rapidly, partly in order to offer a broader range of products to large purchasers. As a result, transactions with customers are more significant, more complex and tend to involve more long-term contracts than in the past. This enhanced purchasing power may also increase the pressure on product pricing, although management is unable to estimate the potential impact at this time. In the United States, the Food and Drug Administration (FDA), among other governmental agencies, is responsible for regulating the introduction of new medical devices, including laboratory and manufacturing practices, labeling and record keeping for medical devices, and review of manufacturers' required reports of adverse experience to identify potential problems with marketed medical devices. The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement, or refund of such devices, and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations. Moreover, the FDA administers certain controls over the export of such devices from the United States. Many of the devices that Medtronic develops and markets are in a category for which the FDA has implemented stringent clinical investigation and pre-market clearance requirements. Any delay or acceleration experienced by the company in obtaining regulatory approvals to conduct clinical trials or in obtaining required market clearances (especially with respect to significant products in the regulatory process that have been discussed in the company's announcements) may affect the company's operations or the market's expectations for the timing of such events and, consequently, the market price for the company's common stock. Medical device laws are also in effect in many of the countries in which Medtronic does business outside the United States. These range from comprehensive device approval requirements for some or all of Medtronic's medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. In the early 1990s, the review time by the FDA to clear medical devices for commercial release lengthened and the number of clearances, both of 510(k) submissions and pre-market approval applications (PMAs), decreased. In response to public and congressional concern, the FDA Modernization Act of 1997 was adopted with the intent of bringing better definition to the clearance process. Although it is expected that the 1997 Act will result in improved cycle times for product clearance, there can be no assurance that the FDA review process will not involve delays or that clearances will be granted on a timely basis. Medtronic 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. The company 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 and leads. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class, and the company has experienced an increase in such claims. During the past several years, United States District Courts in California, Florida, Kentucky, and Ohio have refused to certify class actions in cases brought against the company. This is consistent with the trend in class action law as it applies to the medical device industry generally. In addition, product liability claims may be asserted against the company in the future related 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. In 1994, governmental authorities in Germany began an investigation into certain business and accounting practices by heart valve manufacturers. As part of this investigation, documents were seized from the company and certain other manufacturers. Subsequently, the United States Securities and Exchange Commission (SEC) also began an inquiry into this matter. In August 1996, the SEC issued a formal, non-public order of investigation to the company, as it did to at least one other manufacturer. Based upon currently available information, the company does not expect these investigations to have a materially adverse impact on the company's financial position, results of operations, or liquidity. The company has completed a review of its computer systems with regard to year 2000 compliance and will either replace or correct through programming modifications those computer systems that have been found to have date-related deficiencies. In addition, the company is assessing the readiness of third parties (e.g., vendors and customers) that interact with the company's systems. Also being assessed are facility and telecommunication systems, as well as systems used to support manufacturing processes, to ensure that these will be year 2000 ready. The company's products have been assessed and found to be year 2000 compliant with the exception of a few requiring minor corrective actions. External and internal costs specifically associated with modifying internal use software for year 2000 compliance are expensed as incurred. To date, those costs have not been material. Based upon currently available information, the company does not expect the costs of addressing potential year 2000 problems to have a material adverse impact on the company's financial position, results of operations or liquidity in future periods. The company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. 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," "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 titled, "Government Regulation and Other Matters." 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. 4 REPORT OF MANAGEMENT - -------------------------------------------------------------------------------- The management of Medtronic, Inc., is responsible for the integrity of the financial information presented in the Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Where necessary, they reflect estimates based on management's judgment. Management relies upon established accounting procedures and related systems of internal control for meeting its responsibilities to maintain reliable financial records. These systems are designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's intentions. Internal auditors periodically review the accounting and control systems, and these systems are revised if and when weaknesses or deficiencies are found. The Audit Committee of the Board of Directors, composed of directors from outside the company, meets regularly with management, the company's internal auditors, and its independent accountants to discuss audit scope and results, internal control evaluations, and other accounting, reporting, and financial matters. The independent accountants and internal auditors have access to the Audit Committee without management's presence. /s/ William W. George William W. George Chairman and Chief Executive Officer /s/ Arthur D. Collins, Jr. Arthur D. Collins, Jr. President and Chief Operating Officer /s/ Robert L. Ryan Robert L. Ryan Senior Vice President and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Medtronic, Inc. In our opinion, the accompanying consolidated balance sheet and the related statements of consolidated earnings, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Medtronic, Inc., and its subsidiaries at April 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP Minneapolis, Minnesota May 26, 1998 5 STATEMENT OF CONSOLIDATED EARNINGS
- ------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - ------------------------------------------------------------------------------------------- Year ended April 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------- NET SALES $ 2,604,819 $ 2,438,224 $ 2,172,100 COSTS AND EXPENSES: Cost of products sold 670,360 610,190 591,433 Research and development expense 297,177 280,214 243,829 Selling, general, and administrative expense 757,647 763,347 700,876 Non-recurring charges 156,400 -- -- Foundation commitment 36,000 -- -- Interest expense 8,161 9,375 8,089 Interest income (22,927) (34,045) (31,124) - ------------------------------------------------------------------------------------------- Total costs and expenses 1,902,818 1,629,081 1,513,103 - ------------------------------------------------------------------------------------------- Earnings before income taxes 702,001 809,143 658,997 Provision for income taxes 244,619 279,155 230,691 - ------------------------------------------------------------------------------------------- Net earnings $ 457,382 $ 529,988 $ 428,306 =========================================================================================== Weighted average shares outstanding 468,936 477,386 474,872 Basic earnings per share $ 0.98 $ 1.11 $ 0.90 =========================================================================================== Earnings per share assuming dilution $ 0.96 $ 1.09 $ 0.89 =========================================================================================== Weighted average shares outstanding assuming dilution 475,584 485,536 483,792 ===========================================================================================
See accompanying notes to consolidated financial statements. 6 CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------- (in thousands of dollars) Medtronic, Inc. - ---------------------------------------------------------------------------------------------------------- April 30, 1998 1997 - ---------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 382,734 $ 197,388 Short-term investments 43,148 53,181 Accounts receivable, less allowance for doubtful accounts of $14,469 and $13,673 566,056 516,984 Inventories: Finished goods 147,689 123,282 Work in process 73,350 68,034 Raw materials 110,094 91,235 - ---------------------------------------------------------------------------------------------------------- Total Inventories 331,133 282,551 Deferred tax assets 146,429 121,087 Prepaid expenses and other current assets 82,110 66,718 - ---------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,551,610 1,237,909 PROPERTY, PLANT, AND EQUIPMENT: Land and land improvements 26,540 25,449 Buildings and leasehold improvements 239,011 223,398 Equipment 687,943 655,719 Construction in progress 69,909 60,436 - ---------------------------------------------------------------------------------------------------------- 1,023,403 965,002 Accumulated depreciation (514,616) (477,786) - ---------------------------------------------------------------------------------------------------------- Net Property, Plant, and Equipment 508,787 487,216 GOODWILL, net of accumulated amortization of $93,197 and $71,700 368,768 394,238 OTHER INTANGIBLE ASSETS, net of accumulated amortization of $54,505 and $53,325 97,791 96,730 LONG-TERM INVESTMENTS 137,706 125,847 OTHER ASSETS 110,065 67,270 - ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,774,727 $ 2,409,210 ========================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 93,346 $ 106,375 Accounts payable 89,149 110,337 Accrued compensation 173,141 124,603 Accrued income taxes 72,471 68,814 Other accrued expenses 143,935 108,562 - ---------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 572,042 518,691 LONG-TERM DEBT 16,227 13,980 DEFERRED TAX LIABILITIES 13,409 2,163 OTHER LONG-TERM LIABILITIES 128,859 128,155 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 730,537 662,989 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock--par value $1.00; 2,500,000 shares authorized, none outstanding Common stock--par value $.10; 800,000,000 shares authorized, 469,045,244 and 467,627,010 shares issued and outstanding 46,905 46,762 Retained earnings 2,092,296 1,784,319 Cumulative translation adjustments and other (67,111) (56,960) - ---------------------------------------------------------------------------------------------------------- 2,072,090 1,774,121 Receivable from Employee Stock Ownership Plan (27,900) (27,900) - ---------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2,044,190 1,746,221 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,774,727 $ 2,409,210 ==========================================================================================================
See accompanying notes to consolidated financial statements. 7 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) Medtronic, Inc. - ----------------------------------------------------------------------------------------------------------------------- Cumulative Translation Receivable Common Retained Adjustments from Stock Earnings and Other ESOP - ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 30, 1995 $ 11,551 $ 1,325,837 $ 23,848 $ (29,980) Net earnings 428,306 Dividends paid (60,427) Two-for-one stock split 11,560 (11,560) Issuance of common stock under employee benefit and incentive plans 126 24,720 Issuance of common stock in acquisition of subsidiaries 261 80,666 Repurchases of common stock (66) (33,508) Change in unrealized gain (loss) on investments, net of tax 27,187 Income tax benefit from restricted stock and nonstatutory stock options 6,501 Translation adjustments (26,523) Repayment from ESOP 1,308 Adjustment for pooling of interests 499 55,985 - ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 30, 1996 $ 23,931 $ 1,843,707 $ (2,675) $ (28,672) Net earnings 529,988 Dividends paid (90,716) Issuance of common stock under employee benefit and incentive plans 190 44,048 Repurchases of common stock (740) (475,825) Change in unrealized gain (loss) on investments, net of tax (57,864) Income tax benefit from restricted stock and nonstatutory stock options 14,362 Translation adjustments (54,285) Repayment from ESOP 772 - ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 30, 1997 $ 23,381 $ 1,807,700 $ (56,960) $ (27,900) Net earnings 457,382 Dividends paid (102,939) Two-for-one stock split 23,451 (23,451) Issuance of common stock under employee benefit and incentive plans 424 53,830 Repurchases of common stock (351) (167,872) Change in unrealized gain (loss) on investments, net of tax 21,848 Income tax benefit from restricted stock and nonstatutory stock options 45,798 Translation adjustments (8,961) Minimum pension liability (1,190) - ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 30, 1998 $ 46,905 $ 2,092,296 $ (67,111) $ (27,900) =======================================================================================================================
See accompanying notes to consolidated financial statements. 8 STATEMENT OF CONSOLIDATED CASH FLOWS
- ---------------------------------------------------------------------------------------------------------- (in thousands of dollars) Medtronic, Inc. - ---------------------------------------------------------------------------------------------------------- Year ended April 30, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 457,382 $ 529,988 $ 428,306 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 137,558 116,893 112,003 Non-recurring charges, net 88,771 -- -- Deferred income taxes 21,546 2,043 (33,106) Changes in operating assets and liabilities: Increase in accounts receivable (53,173) (52,176) (46,873) Increase in inventories (59,750) (16,904) (30,439) (Increase) decrease in prepaid expenses and other assets (57,718) (30,626) 18,922 (Decrease) increase in accounts payable and accrued liabilities 52,446 (42,996) 34,809 (Decrease) increase in accrued income taxes 3,629 (41,791) (5,174) (Decrease) increase in deferred income 79 (1,621) 1,230 (Decrease) increase in postretirement benefit accrual (467) 1,337 2,272 (Decrease) increase in other long-term liabilities (236) (530) 18,909 - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 590,067 463,617 500,859 INVESTING ACTIVITIES Additions to property, plant, and equipment (148,152) (171,329) (165,066) Acquisitions, net of cash acquired -- (18,873) (55,958) Sales and maturities of marketable securities 103,131 866,911 465,215 Purchases of marketable securities (86,400) (499,640) (655,510) Other investing activities (42,371) (99,069) (19,896) - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (173,792) 78,000 (431,215) FINANCING ACTIVITIES (Decrease) increase in short-term borrowings (14,153) 33,404 14,330 Payments on long-term debt (7,082) (3,064) (4,062) Issuance of long-term debt 9,529 1,601 681 Proceeds from stock offering of acquired subsidiary -- -- 41,538 Dividends to shareholders (102,939) (90,716) (60,427) Repurchases of common stock (168,223) (476,565) (33,574) Issuance of common stock 54,254 44,238 24,846 - ---------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (228,614) (491,102) (16,668) Effect of exchange rate changes on cash and cash equivalents (2,315) (4,177) (218) - ---------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 185,346 46,338 52,758 Cash and cash equivalents at beginning of year 197,388 151,050 98,292 - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 382,734 $ 197,388 $ 151,050 ========================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 218,635 $ 309,659 $ 258,795 Interest 8,085 9,263 8,134 - ---------------------------------------------------------------------------------------------------------- SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for acquisition of subsidiary, net of cash acquired $ -- $ -- $ 73,951 ==========================================================================================================
See accompanying notes to consolidated financial statements. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Medtronic operates in a single industry segment as the world's leading medical technology company specializing in implantable and interventional therapies. Medtronic creates innovative solutions for the health care needs of medical professionals and their patients and does business in more than 120 countries. The company is headquartered in Minneapolis, Minnesota, with worldwide operations that provide therapeutic, diagnostic, and monitoring products for the cardiac rhythm management, other cardiovascular, and neurological markets. The company generally markets its products through a direct sales force in the United States and a combination of direct sales representatives and independent distributors in international markets. The main markets for products are the United States, Western Europe, and Japan. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Medtronic, Inc., and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are valued at cost, which approximates fair value. REVENUE RECOGNITION The company recognizes revenue from product sales when the goods are shipped to its customers. For certain products, the company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the company is notified that the device has been used by the customer. INVENTORIES Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is stated at cost. Additions and improvements extending asset lives 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. GOODWILL, OTHER INTANGIBLE ASSETS, AND LONG LIVED ASSETS Goodwill represents the excess of cost over net assets of businesses acquired, while other intangible assets consist primarily of purchased technology and patents. Goodwill and other intangible assets are being amortized using the straight-line method over their estimated useful lives, of which periods up to 28 and 16 years remain, respectively. The company periodically reviews its goodwill and other long-lived assets for indicators of impairment in accordance with SFAS No. 121. RESEARCH AND DEVELOPMENT Research and development costs are expensed when incurred. STOCK-BASED COMPENSATION In fiscal 1997, the company adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation", which disclosures are presented in Note 8 "Stock Purchase and Award Plans." Accordingly, the company continues to account for stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. FOREIGN CURRENCY TRANSLATION Essentially all assets and liabilities are translated to U.S. dollars at year-end exchange rates, while elements of the income statement are translated at average exchange rates in effect during the year. Foreign currency transaction gains and losses are included in the statement of consolidated earnings as selling, general, and administrative expense. Adjustments arising from the translation of most net assets located outside the United States (gains and losses) are recorded as a component of shareholders' equity. RISK MANAGEMENT CONTRACTS In the normal course of business, the company utilizes a variety of derivative financial instruments, including foreign currency forward and option contracts, to manage its exposure to fluctuations in foreign currency exchange rates. The company designates and assigns the financial instruments as hedges for specific assets, liabilities or anticipated transactions. When hedged assets or liabilities are sold or extinguished or the anticipated transactions being hedged are no longer expected to occur, the company recognizes the gain or loss on the designated hedging financial instruments. The company classifies its derivative financial instruments as held or issued for purposes other than trading. Prepaid option premiums and unrealized losses on forward contracts are recorded in the balance sheet as other assets. Unrealized gains on forward contracts are included in other accrued liabilities. Gains and losses from hedges of firm commitments are classified in the income statement consistent with the accounting treatment of the items being hedged. ROYALTY INCOME Income earned from royalty and license agreements is recorded as a reduction of selling, general, and administrative expense. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic earnings per share and diluted 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 potential dilutive common shares been issued. Potential 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. The following table sets forth the computation of earnings per share: Year ended April 30, 1998 1997 1996 - ------------------------------------------------------------------ Net earnings $ 457,382 $ 529,988 $ 428,306 ================================================================== Weighted average shares outstanding for basic earnings per share 468,936 477,386 474,872 Dilutive effect of potential shares 6,648 8,150 8,920 Adjusted weighted- average shares outstanding for diluted earnings per share 475,584 485,536 483,792 ================================================================== Basic earnings per share $ 0.98 $ 1.11 $ 0.90 Earnings per share assuming dilution $ 0.96 $ 1.09 $ 0.89 ================================================================== 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income." SFAS No. 130 must be adopted by the company in the first quarter of fiscal 1999. Under this statement, the company will report in its statement of consolidated shareholders' equity, in addition to net earnings, comprehensive income and its components including, as applicable, unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, and minimum pension liability. Implementation of this disclosure standard will not affect the company's results of operations, cash flows or financial position. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 "Disclosure about Segments of an Enterprise and Related Information." This statement, which must be adopted by the company for the fiscal year ending April 30, 1999, establishes new standards for reporting information about operating segments in annual and interim financial statements. Under SFAS No. 131, operating segments are determined consistent with the way management organizes and evaluates financial information internally for making decisions and assessing performance. SFAS No. 131 also requires related disclosures about products, geographic areas, and major customers. Implementation of this disclosure standard will not affect the company's results of operations, cash flows or financial position. NOTE 2--ACQUISITIONS In August 1996, the company acquired substantially all of the assets and liabilities of Avalon Laboratories, Inc. (Avalon) for approximately $19.0 million in cash. Avalon develops, manufactures, and sells cannulae and other surgical products. In June 1996, the company issued approximately 7,704,000 shares of its common stock for all of the outstanding capital stock of InStent Inc. (InStent). InStent develops, manufactures, and markets a variety of self-expanding and balloon-expandable stents used in a broad range of medical indications. In May 1996, the company issued approximately 2,308,000 shares of its common stock for all of the outstanding capital stock of AneuRx, Inc. (AneuRx), which provides a minimally invasive endovascular stented graft and delivery system used to repair life-threatening abdominal aortic aneurysms. In April 1996, the company acquired the remaining outstanding stock of Synectics Medical AB (Synectics) at a cost of approximately $59.3 million in cash. The company had previously purchased approximately 8% of the outstanding stock of Synectics. Synectics, of Stockholm, Sweden, is a world leader in the development and marketing of computer-supported systems used to diagnose disorders of the urological and digestive systems and sleep apnea. In November 1995, the company acquired all of the outstanding capital stock of Pudenz-Schulte Medical Corporation (PS Medical) for approximately 2,524,000 shares of the company's common stock. In March 1996, upon the achievement of a specified milestone, the company made an additional payment of approximately 192,000 shares of the company's common stock. In addition, the company may pay additional future payments of the company's common stock contingent upon achieving specified milestones. These contingent payments, if any, will be reflected as acquisition costs when the contingencies are resolved. PS Medical manufactures and distributes cerebrospinal fluid shunts and neurosurgical implants such as catheters, reservoirs, and fluid drainage systems. In November 1995, the company issued approximately 2,492,000 shares of the company's common stock for all of the outstanding common stock of Micro Interventional Systems, Inc. (MIS), a developer of products for the minimally invasive treatment of stroke and other diseases. During fiscal 1998, the company announced plans to close MIS as a result of identifying evidence of improper submissions to the U.S. Food and Drug Administration (FDA) for product clearances prior to Medtronic's acquisition of MIS in 1995. The company has begun legal action on this matter and costs related to closing MIS were included in the $205.3 million of non-recurring charges taken during the third quarter of fiscal 1998 (See Note 3). The acquisitions of AneuRx, InStent and MIS have been accounted for as poolings-of-interests, and, accordingly, the company's consolidated financial statements for fiscal year 1996 have been restated to include the results of AneuRx, InStent, and MIS. Activity for years prior to fiscal year 1996 has not been restated as the impact of these acquisitions in such years is not considered material, and restatement is therefore not required. Net sales and net results for the individual entities are not presented as the activity is not deemed to be material. The acquisitions of Avalon, PS Medical, and Synectics 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 8 to 30 years. NOTE 3--NON-RECURRING CHARGES AND FOUNDATION COMMITMENT The company recorded pre-tax charges totaling $205.3 million during the third quarter of fiscal 1998. $156.4 million of this pre-tax charge pertained to management initiatives to restructure the vascular organization and reduce global infrastructure by streamlining certain manufacturing and administrative operations within the United States, Europe, and Japan. These actions include the closing of several manufacturing facilities and will result in the elimination of approximately 1,000 positions and a net reduction of about 600 in the company's worldwide workforce. Since the inception of this restructuring program, approximately 400 positions have been eliminated. The company is in the process of implementing the major strategic actions associated with this restructuring program, which are expected to be completed by the end of fiscal 1999. In connection with this initiative, included in the $205.3 million pre-tax charge was a $12.9 million obsolescence charge to cost of products sold as a result of identified obsolescence on certain vascular inventories. Also included in the $205.3 million pre-tax charge was a commitment made by the company during the third quarter to contribute $36.0 million to the Medtronic Foundation (See Note 12). This commitment is included within the "Other" category below. Cash and non-cash applications against the initial charges are as follows: Noncancelable Contractual Facility Severance and Asset Obligations Reductions Related Costs Write-downs and Other Total - -------------------------------------------------------------------------------- Initial charge $ 7,659 $ 58,364 $ 81,700 $ 57,577 $ 205,300 Utilization: Cash (3,621) (13,608) -- (7,100) (24,329) Noncash -- -- (81,700) (10,500) (92,200) - -------------------------------------------------------------------------------- Balance at April 30, 1998 $ 4,038 $ 44,756 -- $ 39,977 $ 88,771 ================================================================================ The April 30, 1998 reserve balance consisted of $44,756 included in accrued compensation and $44,015 included in other accrued expenses. NOTE 4--FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, receivables, and short-term debt approximate their carrying value due to their short maturities. The carrying amounts and estimated fair values of the company's other significant financial instruments were as follows: - ------------------------------------------------------------------------------- April 30, 1998 1997 CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------- ASSETS Short-term investments $43,148 $43,148 $53,181 $53,181 Long-term investments 137,706 137,706 125,847 125,847 Net purchased currency options 779 779 4,698 4,698 Forward exchange contracts 6,053 6,053 5,721 5,721 LIABILITIES Short-term debt 93,346 93,346 106,375 106,375 Long-term debt 16,227 17,053 13,980 15,588 =============================================================================== 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- The fair value of certain short-term and long-term investments are based on quoted market prices for those or similar investments. For long-term investments which 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 long-term debt is based on the current rates offered to the company for debt of similar maturities. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The fair value of foreign currency instruments was estimated based on quoted market prices at April 30, 1998 and 1997. Investments in debt and equity securities that have readily determinable fair values are classified and accounted for in one of two categories: held-to-maturity, or available-for-sale. Held-to-maturity securities are recorded at amortized cost in short-term and long-term investments. Available-for-sale securities are recorded at fair value in short-term or long-term investments with the change in fair value during the period excluded from earnings and recorded net of tax as a component of shareholders' 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. At April 30, 1998 and 1997, available-for-sale investments included only equity securities. The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities at April 30, 1998 and 1997 were as follows: Gross Gross Unrealized Unrealized Holding Holding Cost Gains Losses Fair Value - -------------------------------------------------------------------------------- APRIL 30, 1998 $66,932 $32,666 $ (2,030) $97,568 April 30, 1997 61,314 15,058 (18,035) 58,337 ================================================================================ At April 30, 1998 and 1997, the net unrealized gain (loss) associated with available-for-sale securities of $19,913 and $(1,935) respectively, net of tax expense (benefit) of $10,723 and $(1,042), was included in retained earnings. Proceeds from the sale of available-for-sale securities during fiscal 1998 and 1997 were $37,193 and $45,965, respectively. Net gains included in income in fiscal 1998 and 1997 were $25,466 and $32,275, respectively. In addition, during fiscal 1998 and 1997 the company donated equity securities with fair values of $10,500 and $13,400, respectively, to fund commitments to the Medtronic Foundation (See Note 12). Held-to-maturity investments at April 30, 1998 consisted primarily of U.S. government and corporate debt securities, all of which mature within three years. Debt securities are classified as held-to-maturity when the company has the positive intent and ability to hold the securities to maturity. These securities were carried at amortized cost of $413,217 and have a fair value of $413,217. During the fourth quarter of fiscal 1997, the company sold previously categorized held-to-maturity investments with an amortized cost of $316,075 to fund repurchases of company common stock, resulting in a loss that was not material. Election of this funding option does not affect the classification of the April 30, 1998 balance of the securities in the held-to-maturity portfolio as the company retains the intent and ability to hold those securities until they mature. FOREIGN EXCHANGE RISK MANAGEMENT Due to the global nature of its operations, the company is subject to the exposures that arise from foreign exchange rate fluctuations. The company's objective in managing its exposure to foreign currency fluctuations is to minimize net earnings and cash flow volatility associated with foreign exchange rate changes. In order to reduce the uncertainty of foreign exchange rate movements, the company enters into derivative financial instruments in the form of forward exchange and option contracts with major international financial institutions. These forward and option contracts, which typically expire within one year, are designed to hedge anticipated foreign currency transactions. Such transactions, primarily export intercompany sales, occur throughout the year and are probable but not firmly committed. The principal currencies hedged are the Japanese yen and the German mark. The company had contracts, all of which expire within one year, to exchange foreign currencies for U.S. dollars in the following notional amounts: April 30, 1998 1997 - -------------------------------------------------------------------------------- Forward exchange contracts $146,574 $150,635 - -------------------------------------------------------------------------------- Put options 779 4,841 Call options -- (143) - -------------------------------------------------------------------------------- Net purchased currency options $ 779 $ 4,698 ================================================================================ The company had aggregate foreign currency transaction gains (losses), primarily related to purchased currency options and forward contracts, of $17,462, $1,926, and $(20,789), in fiscal 1998, 1997, and 1996, respectively. Realized gains (losses) on these contracts were offset by the (losses) gains on assets, liabilities, and transactions being hedged. Forward contracts and net premium on option contracts in existence at the balance sheet date are recorded at their fair value. Gains and losses on forward and option contracts are recorded in selling, general, and administrative expense. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the company to significant concentrations of credit risk, consist principally of interest-bearing investments, foreign currency exchange contracts, and trade accounts receivable. The company maintains cash and cash equivalents, investments, and certain other financial instruments with various major financial institutions. The company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic areas. The company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. However, a significant amount of trade receivables are with national health care systems in many countries. Although the company does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of those countries' national economies. NOTE 5--DEBT DEBT CONSISTED OF THE FOLLOWING AT APRIL 30: Average Short-Term Debt Interest Rate 1998 1997 - ------------------------------------------------------------------------------- Bank borrowings 2.2% $ 90,846 $ 99,716 Current portion of long-term debt 6.3% 2,500 6,659 - ------------------------------------------------------------------------------- Total Short-Term Debt $ 93,346 $106,375 ================================================================================ Average Maturity Long-Term Debt Interest Rate Date 1998 1997 - ------------------------------------------------------------------------------- Various notes 2.1% 1999-2007 $ 13,568 $ 10,387 Capitalized lease obligations 9.8% 1999-2008 2,659 3,593 - ------------------------------------------------------------------------------- Total Long-Term Debt $ 16,227 $ 13,980 ================================================================================ Short-term borrowings consisted primarily of borrowings from non-U.S. banks at favorable interest rates and where natural hedges can be gained for foreign exchange purposes. The company has existing committed lines of credit of $229 million with various banks, of which $138 million was unused at April 30, 1998. Maturities of long-term debt for the next five fiscal years are as follows: 1999, $2,500; 2000, $3,248; 2001, $1,786; 2002, $1,730; 2003, $7,091, thereafter, $2,372. NOTE 6--SHAREHOLDERS' EQUITY At April 30, 1998, Board of Directors' authorization existed to repurchase approximately 21.9 million shares of the company's common stock. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- On July 10, 1997, the Board of Directors approved a two-for-one common stock split, effected September 12, 1997 in the form of a 100 percent stock dividend to shareholders of record at the close of business on August 29, 1997. The stock split resulted in the issuance of 234.5 million additional shares and the reclass of $23,451 from retained earnings to common stock, representing the par value of the shares issued. On August 30, 1995, the Board of Directors approved a two-for-one common stock split, effected September 29, 1995 in the form of a 100 percent stock dividend to shareholders of record at the close of business on September 14, 1995. The stock split resulted in the issuance of 115.6 million additional shares and the reclass of $11,560 from retained earnings to common stock, representing the par value of the shares issued. All references in the consolidated financial statements and notes to consolidated financial statements to per share information, number of shares, except shares authorized, and related share prices have been restated to reflect these stock splits. A shareholder rights plan exists which provides for a dividend distribution of one right to be attached to each share of common stock. The rights are currently not exercisable or transferable apart from the common stock. The basic right entitles the holder to purchase one sixteen-hundredth of a share of a new series of participating preferred stock, which is substantially equivalent to one share of common stock, at an exercise price of $37.50 per share. These rights would become exercisable if a person or group acquires 15% or more of the company's common stock or announces a tender offer which would increase the person's or group's beneficial ownership to 15% or more of the company's common stock, subject to certain exceptions. After the rights become exercisable, each right entitles the holder (other than the 15% holder), instead, to purchase common stock having a market price of two times the exercise price. If the company is acquired in a merger or other business combination transaction, each exercisable right entitles the holder to purchase common stock of the acquiring company or an affiliate having a market price of two times the exercise price of the right. In certain events the Board of Directors may exchange rights for common stock or equivalent securities having a market price equal to the exercise price of the rights. Each right is redeemable at $.000625 any time before a person or group triggers the 15% ownership threshold. The rights expire on July 10, 2001. 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 $40,000 from the company and used the proceeds to purchase 9,466,464 shares of the company's common stock. The company makes contributions to the plan which are used, in part, by the ESOP to make loan and interest payments. Expenses related to the ESOP are based on debt service requirements less any dividends received by the ESOP on the company's common stock. This amount is further adjusted by any additional company contribution necessary to meet an annual targeted benefit level. Compensation and interest expense recognized were as follows: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- Interest expense $2,511 $2,580 $2,698 Dividends paid 1,957 1,798 1,310 - -------------------------------------------------------------------------------- Net interest expense 554 782 1,388 Compensation expense 1 779 1,316 - -------------------------------------------------------------------------------- Total expense $ 555 $1,561 $2,704 ================================================================================ 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 2.5%, 3.0%, and 4.0% of qualified compensation were made to plan participants' accounts in fiscal 1998, 1997, and 1996, respectively. At April 30, 1998 and 1997, cumulative allocated shares remaining in the trust were 3,870,704 and 3,663,724, respectively, and unallocated shares were 5,396,014 and 5,788,440, respectively, of which, 228,297 and 392,426, respectively, were committed-to-be allocated. Unallocated shares are released based on the ratio of current debt service to total remaining principal and interest. The loan from the company to the ESOP is repayable over 20 years, ending on April 30, 2010. Interest is payable annually at a rate of 9.0%. The receivable from the ESOP is recorded as a reduction of the company's shareholders' equity and allocated and unallocated shares of the ESOP are treated as outstanding common stock in the computation of earnings per share. 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 13,403,965 shares available under this plan for future grants at April 30, 1998. 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. In addition, awards granted under the previous nonqualified stock option and stock award plans as well as stock options assumed as a result of acquisition transactions remain outstanding though no additional awards will be made under these plans. In fiscal 1998, the company adopted a new stock compensation plan for outside directors which replaces the provisions in the 1994 stock award plan relating to awards to outside directors. The table below includes awards granted under the new plan, which at April 30, 1998 had 1,402,806 shares available for future grants. A summary of nonqualified option transactions is as follows: Option Price Range Per Number of Expiration Share Shares Date - -------------------------------------------------------------------------------- Outstanding at April 30, 1996 $ 2.44 - 29.63 13,060,740 1997 - 2006 Granted 24.88 - 34.57 1,583,550 2002 - 2007 Exercised 2.44 - 29.63 2,390,146 1997 - 2007 Canceled 3.77 - 34.25 177,044 2002 - 2007 - -------------------------------------------------------------------------------- Outstanding at April 30, 1997 $ 2.44 - 34.57 12,077,100 1998 - 2007 Granted 27.06 - 53.31 2,564,633 2003 - 2008 Exercised 2.44 - 48.44 3,612,002 1998 - 2008 Canceled 9.39 - 53.31 190,666 2003 - 2008 - -------------------------------------------------------------------------------- Outstanding at April 30, 1998 $ 2.55 - 53.31 10,839,065 1999 - 2008 ================================================================================ Exercisable at April 30, 1997 $ 2.44 - 34.19 8,221,452 1998 - 2007 April 30, 1998 2.55 - 53.31 6,721,822 1999 - 2008 ================================================================================ In addition, stock options outstanding at April 30, 1998 assumed as part of certain fiscal 1997 and 1996 acquisitions were 198,863 and 14,453, respectively. Stock options exercisable under these plans were 172,164 and 1,032 at April 30, 1998. These options have a price range per share of $0.28 - $28.58 at April 30, 1998 and expire 1999-2007. No additional awards will be made under these plans. A summary of stock options as of April 30, 1998, including options assumed as a result of acquisitions, is as follows: Options Outstanding Options Exercisable - -------------------------------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Remaining Years Average Average Exercise of Contractual Exercise Exercise Prices Outstanding Life Price Exercisable Price - -------------------------------------------------------- ---------------------- $ 0.28 - 15.00 6,000,928 3.9 $ 8.62 5,656,540 $ 8.26 15.01 - 30.00 1,664,084 7.3 25.06 1,104,641 24.37 30.01 - 45.00 2,182,655 8.6 38.73 33,839 43.13 45.01 - 53.31 1,204,714 9.2 47.45 99,998 51.49 - -------------------------------------------------------- --------------------- 11,052,381 5.9 $ 21.27 6,895,018 $ 11.83 ======================================================== ===================== 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- Nonqualified options are normally exercisable beginning one year from the date of grant in cumulative yearly amounts of 25 percent of the shares under option and generally have a contractual option term of 10 years. However, certain nonqualified options granted are exercisable immediately. Restricted stock and performance share awards are dependent upon continued employment and, in the case of performance shares, achievement of certain performance objectives. In fiscal 1998, 399,640 restricted shares were issued and 193,088 shares of common stock were issued pursuant to previous performance share grants. At April 30, 1998, total restricted shares outstanding under both the 1994 stock award plan and the previous restricted stock and performance share award plans were 1,677,501. Performance share awards for up to 407,365 shares, assuming maximum performance payout, were outstanding under the two plans at April 30, 1998. The actual number of performance shares awarded may vary depending on the degree to which the performance objectives are met. The cost of the restricted stock is generally expensed over five years from the date of issuance ($5,815, $4,761, and $4,375 in fiscal 1998, 1997, and 1996, respectively). The estimated cost of the performance shares is expensed over three years from the date of grant ($9,793, $7,582, and $10,313 in fiscal 1998, 1997, and 1996, respectively). In fiscal 1997, the company adopted Statement of Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based Compensation" which encourages, but does not require companies to recognize compensation cost for stock-based compensation plans over the vesting period based upon the fair value of awards on the date of grant. However, the statement allows the alternative of the continued use of the intrinsic value method as prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Therefore, as permitted, the company continues to apply APB No. 25, and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized by the company for its nonqualified stock options and its stock purchase plan. Had compensation expense for the company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the company's net earnings and basic earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 - -------------------------------------------------------------------------------- Net Earnings As reported $457,382 $529,988 Pro forma 436,529 517,470 Basic Earnings Per Share As reported $ 0.98 $ 1.11 Pro forma 0.93 1.08 ================================================================================ Pro forma net earnings reflects only options and other stock-based awards granted in fiscal 1998, 1997, and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented because compensation cost is reflected over the options' vesting period, which is normally four years, and compensation cost for options granted prior to fiscal year 1996 is not considered. The weighted-average fair value per option at the date of grant for options granted in fiscal 1998 and 1997 was $17.75 and $13.06, respectively. The fair value was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 1998 and 1997: 1998 1997 - -------------------------------------------------------------------------------- Risk-free interest rate 6.04% 6.26% Expected dividend yield 0.49% 0.61% Expected volatility factor 25.7% 28.9% Expected option term 7 years 7 years ================================================================================ STOCK PURCHASE PLAN The stock purchase plan enables employees to contribute up to 10% of their wages toward purchase of the company's common stock at 85% of the market value. Employees purchased 939,971 shares at $27.20 per share in fiscal 1998. As of April 30, 1998, plan participants have had approximately $15,427 withheld to purchase shares at a price of $36.98 per share, or 85% of the market value of the company's common stock at October 31, 1998, whichever is less. NOTE 9--INCOME TAXES The company provides for income taxes in accordance with Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. The provision for income taxes is based on earnings before income taxes reported for financial statement purposes. The components of earnings before income taxes were: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- United States $672,041 $773,287 $532,297 Non-U.S. 29,960 35,856 126,700 - -------------------------------------------------------------------------------- Earnings before income taxes $702,001 $809,143 $658,997 ================================================================================ The provision for income taxes consisted of: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. federal $154,960 $186,599 $154,941 U.S. state and other 35,049 55,638 35,696 Non-U.S. 32,596 28,443 62,750 - -------------------------------------------------------------------------------- Total currently payable 222,605 270,680 253,387 Deferred tax (benefit) expense: U.S. federal (29,093) (4,581) (34,232) U.S. state and other 1,837 (8,047) (2,526) Non-U.S. 2,024 962 3,495 - -------------------------------------------------------------------------------- Net deferred tax benefit (25,232) (11,666) (33,263) Tax expense credited directly to shareholders' equity 47,246 20,141 10,567 - -------------------------------------------------------------------------------- Total provision $244,619 $279,155 $230,691 ================================================================================ Deferred tax assets (liabilities) were comprised of the following: Year ended April 30, 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Inventory (intercompany profit in inventory and excess of tax over book valuation $ 75,370 $ 98,333 Accrued liabilities 99,297 42,167 Other 24,375 17,881 - -------------------------------------------------------------------------------- Total deferred tax assets 199,042 158,381 - -------------------------------------------------------------------------------- Deferred tax liabilities: Intangible assets (5,568) (6,458) Undistributed earnings of subsidiaries (1,625) (7,048) Accumulated depreciation (14,641) (12,340) Unrealized (gain) loss on investments (10,723) 1,042 Other (33,465) (14,653) - -------------------------------------------------------------------------------- Total deferred tax liabilities (66,022) (39,457) - -------------------------------------------------------------------------------- Net deferred tax assets $133,020 $118,924 ================================================================================ 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- The company's effective income tax rate varied from the U.S. federal statutory tax rate as follows: Year ended April 30, 1998 1997 1996 - -------------------------------------------------------------------------------- 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 1.9 2.3 2.3 Tax benefits from operations in Puerto Rico (2.5) (2.3) (3.4) Non-U.S. taxes 2.7 0.6 1.6 Other, net (2.3) (1.1) (0.5) - -------------------------------------------------------------------------------- Effective tax rate 34.8% 34.5% 35.0% ================================================================================ 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 10% in the event of repatriation of earnings prior to liquidation. The company has provided for the anticipated tax attributable to earnings intended for dividend repatriation. At April 30, 1998, earnings permanently reinvested in subsidiaries outside the United States were $114,620. At April 30, 1998, approximately $9,016 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 In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 does not change the measurement or recognition of those plans, but revises disclosures about pensions and other postretirement benefit plans. The company adopted SFAS No. 132 in fiscal 1998. Restatement of disclosures for the prior year has been made for comparative purposes. 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 $36,999 in fiscal 1998, $36,525 in fiscal 1997, and $36,598 in fiscal 1996. 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 ---------------- -------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of $143,279 $137,538 $ 32,714 $ 30,529 fiscal year Service cost 14,475 13,097 2,421 1,982 Interest cost 10,899 9,758 2,470 2,209 Actuarial (gain) loss 9,843 (14,931) 373 (1,656) Benefits paid (3,332) (2,183) (565) (350) - -------------------------------------------------------------------------------- Benefit obligation at April 30 $175,164 $143,279 $ 37,413 $ 32,714 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $152,364 $127,521 $ 12,080 $ 5,926 Actual return on plan assets 30,841 17,399 3,014 858 Employer contributions 12,312 9,392 3,447 5,646 Benefits paid (3,098) (1,948) (565) (350) - -------------------------------------------------------------------------------- Fair value of plan assets at April 30 $192,419 $152,364 $ 17,976 $ 12,080 Pension Benefits Other Benefits ---------------- -------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Funded status $ 17,255 $ 9,085 $(19,437) $(20,634) Unrecognized net actuarial (loss) gain (832) 4,544 324 1,803 Unrecognized prior service cost (356) (416) -- -- - -------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 16,067 $ 13,213 $(19,113) $(18,831) ================================================================================ Net periodic benefit cost of plans included the following components: Pension Benefits Other Benefits ---------------- -------------- YEAR ENDED APRIL 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Service cost $ 14,475 $ 13,097 $ 2,421 $ 1,982 Interest cost 10,899 9,758 2,470 2,209 Expected return on plan assets (12,681) (10,525) (1,164) (632) Amortization of prior service cost 593 573 -- 40 - -------------------------------------------------------------------------------- Net periodic benefit cost $ 13,286 $ 12,903 $ 3,727 $ 3,599 ================================================================================ 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 $33,920 and $22,160 at April 30, 1998 and 1997, respectively. Outside the U.S., the funding of pension plans is not a common practice in certain countries as funding provides no economic benefit. Consequently, the company has certain non-U.S. plans that are unfunded. It is the company's policy to fund retirement costs within the limits of allowable tax deductions. The actuarial assumptions were as follows: Pension Benefits Other Benefits ---------------- -------------- YEAR ENDED APRIL 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Discount rate 3.5% - 7.3% 4.0% - 8.5% 7.25% 7.75% Expected return on plan assets 7.0% - 9.0% 8.5% - 9.0% 9.0% 9.0% Rate of compensation increase 3.0% - 5.0% 3.0% - 6.0% N/A N/A Health care cost trend rate N/A N/A 8.0% 8.0% ================================================================================ 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 $2,633 and $1,770 in fiscal 1998 and 1997, respectively. The unfunded accrued pension cost related to these non-qualified plans totaled $11,840 at April 30, 1998. 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-Point One-Percentage-Point Increase Decrease - -------------------------------------------------------------------------------- Effect on postretirement benefit cost $ 611 $ (507) Effect on postretirement benefit obligation 3,776 (3,134) ================================================================================ 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- 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. Company contributions to the plans are based on employee contributions and company performance. Fiscal expense under these plans was $15,658 in 1998, $16,402 in 1997, and $17,786 in 1996. NOTE 11--LEASES The company leases offices, 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 noncancelable operating leases at April 30, 1998, were: Capitalized Operating Leases Leases - -------------------------------------------------------------------------------- 1999 $ 823 $ 20,035 2000 668 14,514 2001 490 10,842 2002 415 8,905 2003 415 7,467 2004 and thereafter 1,891 3,905 - -------------------------------------------------------------------------------- Total minimum lease payments 4,702 $ 65,668 ======== Less amounts representing interest (1,275) - ---------------------------------------------------------- Present value of net minimum lease payments $ 3,427 ========================================================== Rent expense for all operating leases was $32,573, $32,832, and $27,406 in fiscal 1998, 1997, and 1996, respectively. NOTE 12--COMMITMENTS AND CONTINGENCIES The company is involved in litigation and disputes which are normal to its business. Management believes losses that might eventually be sustained from such litigation and disputes would not be material to future years. Further, product liability claims may be asserted 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 Medtronic Foundation (Foundation), funded entirely by the company, was established to maintain good corporate citizenship in its communities. During fiscal 1997, the company donated equity securities with a fair value of $13,400 to fund commitments to the Foundation. In fiscal 1998, the company made a commitment to contribute $36,000. This commitment is expected to fund the Foundation through the end of fiscal 2001. In April 1998, the company funded the initial portion of this commitment through the donation of equity securities with a fair value of $10,500. Commitments to the Foundation are expensed when authorized and approved by the company's Board of Directors. 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 1998 $646.3 $642.1 $631.4 $685.1 $2,604.8 1997 600.9 598.2 598.7 640.5 2,438.2 Gross Profit 1998 486.1 483.2 460.6 504.5 1,934.5 1997 445.3 447.1 446.4 489.2 1,828.0 Net Earnings 1998 146.5 143.5 7.3 160.1 457.4 1997 127.4 128.3 128.7 145.5 530.0 Basic Earnings per Share: 1998 .31 .31 .02 .34 .98 1997 .27 .27 .27 .31 1.11 Earnings per Share Assuming Dilution: 1998 .31 .30 .02 .34 .96 1997 .26 .26 .26 .30 1.09 ================================================================================ Quarterly and annual earnings per share are calculated independently based on the weighted-average number of shares outstanding during the period. As discussed in Note 3, the company recorded pre-tax non-recurring charges totaling $205.3 million during the third quarter of fiscal 1998. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) Medtronic, Inc. - -------------------------------------------------------------------------------- NOTE 14--SEGMENT REPORTING The company operates in a single industry segment -- providing medical products and services. For management purposes, the company is segmented into three geographic areas -- the Americas, Europe/Middle East/Africa (Europe), and Asia/Pacific markets. The geographic areas are, to a significant degree, interdependent with respect to research, product supply, and business expertise. Sales between geographic areas are made at prices which would approximate transfers to unaffiliated distributors. In the presentation below, the profit derived from such transfers is attributed to the area in which the sale to the unaffiliated customer is eventually made. Because of the interdependence of the geographic areas, the operating profit as presented may not be representative of the geographic distribution which would occur if the areas were not interdependent. In addition, comparison of operating results between geographic areas and between years may be significantly impacted by foreign currency fluctuations. GEOGRAPHIC AREA INFORMATION United Asia Other Elimi- Consoli- States Europe Pacific Americas nations dated - -------------------------------------------------------------------------------- 1998 Sales to unaffiliated customers $1,598,516 $653,517 $272,898 $79,888 $ -- $2,604,819 Intergeographic sales 296,366 131,872 10 10,858 (439,106) -- - -------------------------------------------------------------------------------- Total sales 1,894,882 785,389 272,908 90,746 (439,106) 2,604,819 - -------------------------------------------------------------------------------- Operating profit 460,752 83,953 89,452 15,672 -- 649,829 Nonoperating income 52,172 - -------------------------------------------------------------------------------- Earnings before income taxes 702,001 - -------------------------------------------------------------------------------- Identifiable assets 1,640,271 523,284 134,307 53,115 (145,845) 2,205,132 Corporate assets 569,595 - -------------------------------------------------------------------------------- Total assets $2,774,727 ================================================================================ 1997 Sales to unaffiliated customers $1,403,162 $701,255 $268,360 $65,447 $ -- $2,438,224 Intergeographic sales 216,773 68,936 20 4,182 (289,911) -- - -------------------------------------------------------------------------------- Total sales 1,619,935 770,191 268,380 69,629 (289,911) 2,438,224 - -------------------------------------------------------------------------------- Operating profit 504,660 156,950 102,759 10,733 -- 775,102 Nonoperating income 34,041 - -------------------------------------------------------------------------------- Earnings before income taxes 809,143 - -------------------------------------------------------------------------------- Identifiable assets 1,548,821 449,991 185,498 43,489 (160,224) 2,067,575 Corporate assets 341,635 - -------------------------------------------------------------------------------- Total assets $2,409,210 ================================================================================ United Asia Other Elimi- Consoli- States Europe Pacific Americas nations dated - -------------------------------------------------------------------------------- 1996 Sales to unaffiliated customer $1,240,975 $617,554 $257,018 $56,553 $ -- $2,172,100 Intergeographic sales 148,515 87,187 -- 5,061 (240,763) -- - -------------------------------------------------------------------------------- Total sales 1,389,490 704,741 257,018 61,614 (240,763) 2,172,100 - -------------------------------------------------------------------------------- Operating profit 405,707 158,983 108,805 8,223 -- 681,718 Nonoperating expense (22,721) - -------------------------------------------------------------------------------- Earnings before income taxes 658,997 - -------------------------------------------------------------------------------- Identifiable assets 1,371,170 424,415 179,595 35,785 (161,047) 1,849,918 Corporate assets 704,782 - -------------------------------------------------------------------------------- Total assets $2,554,700 ================================================================================ Fiscal 1998 operating profit includes the impact of the $205.3 million non-recurring charges (See Note 3). Nonoperating income and expenses consist principally of non-allocable corporate activities. Intergeographic sales and the intergeographic profit remaining in ending inventories are the principal items reflected as eliminations. NOTE 15--SUBSEQUENT EVENT On June 29, 1998, Medtronic, Inc. and Physio-Control International Corporation announced the signing of a definitive merger agreement. The agreement calls for each Physio-Control shareholder to receive $27.50 in the form of Medtronic common stock for each share of Physio-Control they now hold. Physio-Control has approximately 21 million shares outstanding on a diluted basis. It is anticipated that the transaction will close in the second quarter of fiscal 1999 and be accounted for as a pooling of interests. In order to be eligible for pooling of interests, Medtronic intends to issue approximately 12 million shares of common stock to the public prior to the closing of the transaction. 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. Unaudited pro forma information related to this merger is not included as the impact of the merger is not deemed to be material. 17 SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------- (in millions of dollars, except per share data) Medtronic, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS FOR THE YEAR: Net sales $2,604.8 $2,438.2 $2,172.1 $1,742.4 $1,390.9 $1,328.2 $1,176.9 $1,021.4 $865.9 $765.8 $669.9 Cost of products sold 670.4 610.2 591.4 540.1 431.7 420.1 381.8 331.7 281.7 248.5 217.4 Research and development expense 297.2 280.2 243.8 191.4 156.3 133.0 109.2 89.5 81.5 67.7 55.1 Selling, general, and administrative expense 950.0* 763.3 700.9 574.6 456.3* 460.0* 439.9 399.9* 331.3* 291.9* 267.2 Interest expense 8.2 9.4 8.1 9.0 8.2 10.4 13.4 13.8 10.1 8.4 5.9 Interest income (22.9) (34.0) (31.1) (14.8) (8.4) (8.8) (10.3) (9.7) (6.2) (5.6) (7.1) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 702.0 809.1 659.0 442.1 346.8 313.5 242.9 196.2 167.5 155.0 131.4 Provision for income taxes 244.6 279.2 230.7 148.1 114.4 101.9 81.4 62.9 54.6 54.7 44.8 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 457.4 530.0 428.3 294.0 232.4 211.6 161.5 133.4 112.9 100.3 86.6 Cumulative effect of accounting changes (net) -- -- -- -- -- (14.4) -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings $457.4 $530.0 $428.3 $294.0 $232.4 $197.2 $161.5 $133.4 $112.9 $100.3 $86.6 =================================================================================================================================== Net earnings as a percent of net sales 17.6% 21.7% 19.7% 16.9% 16.7% 14.8% 13.7% 13.1% 13.0% 13.1% 12.9% Net earnings as a percent of average shareholders' equity 24.1% 29.6% 27.0% 24.6% 24.5% 24.1% 21.8% 21.4% 21.3% 22.2% 21.2% - ----------------------------------------------------------------------------------------------------------------------------------- Per share of common stock: Earnings from continuing operations before cumulative effects of accounting changes $0.98 $1.11 $0.90 $0.64 $0.51 $0.45 $0.34 $0.28 $0.24 $0.22 $0.18 Basic earnings per share 0.98 1.11 0.90 0.64 0.51 0.41 0.34 0.28 0.24 0.22 0.18 Earnings per share assuming dilution 0.96 1.09 0.89 0.63 0.50 0.41 0.33 0.27 0.23 0.22 0.18 Cash dividends declared 0.220 0.190 0.130 0.103 0.085 0.070 0.060 0.053 0.045 0.035 .030 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin percentage 74.3% 75.0% 72.8% 69.0% 69.0% 68.4% 67.6% 67.5% 67.5% 67.6% 67.5% Financial Position at April 30: Working capital $979.6 $719.2 $862.1 $647.8 $406.4 $426.6 $387.3 $320.1 $240.4 $206.1 $244.6 Current ratio 2.7:1 2.4:1 2.6:1 2.4:1 1.9:1 2.2:1 2.3:1 2.1:1 1.9:1 1.9:1 2.3:1 Property, plant, and equipment, net 508.8 487.2 416.9 331.1 301.8 282.8 256.8 217.2 183.6 157.2 134.6 Total assets 2,774.7 2,409.2 2,554.7 1,946.7 1,623.3 1,292.5 1,163.5 1,024.1 885.3 783.0 661.3 Long-term debt 16.2 14.0 15.3 14.2 20.2 10.9 8.6 7.9 8.0 8.2 11.1 Long-term debt as a percent of shareholders' equity 0.8% 0.8% 0.8% 1.1% 1.9% 1.3% 1.1% 1.2% 1.4% 1.7% 2.7% Shareholders' equity 2,044.2 1,746.2 1,836.3 1,335.0 1,053.5 841.5 796.5 683.2 565.2 492.7 412.0 Shareholders' equity per common share 4.36 3.74 3.84 2.89 2.27 1.82 1.68 1.44 1.20 1.06 0.86 Additional Information: Additions to property, plant, and equipment $148.2 $171.3 $165.1 $96.9 $60.8 $77.1 $77.2 $65.8 $56.1 $52.0 $35.4 Full-time employees at year-end 12,466 11,722 10,666 8,896 8,709 8,334 8,314 7,560 7,030 6,529 5,939 Full-time equivalent employees at year-end 13,954 13,719 12,499 10,313 9,856 9,247 9,392 8,470 7,717 7,152 6,471 ===================================================================================================================================
*Certain costs and income separately disclosed on the statement of consolidated earnings are included in selling, general, and administrative expense. Note: Fiscal 1998 results include the impact of $205.3 million pre-tax non-recurring charges taken in the third quarter (See Note 3). 18 EX-21 9 MEDTRONIC, INC. AND SUBSIDIARIES EXHIBIT 21 MEDTRONIC, INC. AND SUBSIDIARIES -------------------------------- NAME OF COMPANY JURISDICTION OF - --------------- --------------- INCORPORATION ------------- Medtronic, Inc. (Parent company) Minnesota The Medtronic Foundation (non-profit corporation) Minnesota ABS Synectics Sarl France Bakken Research Center, B.V. Netherlands Biotec International S.r.l. Italy Cardiotron Medizintechnik G.m.b.H. Germany CTD Synectics Ltd. Hong Kong Dantec Electronique S.A. Belgium Dantec Electronique S.A. France Dantec Elettronica Srl Italy Dantec Medical, Inc. California Dantec Medizinelektronik GmbH Germany India Biomedical Investment, Ltd. Minnesota India Medtronic Private Limited India InStent Europe B.V. Netherlands Interamerica Medtronic, Inc. Illinois Interbank Leasing Colorado International Finance C.V. (INFIN C.V.) Netherlands International Medical Education Corporation Colorado Med Rel, Inc. Minnesota Medtronic (Africa) (Proprietary) Limited South Africa Medtronic AneuRx, Inc. Minnesota Medtronic Asia, Ltd. Minnesota Medtronic Asset Managment, Inc. Minnesota Medtronic Australasia Pty. Limited Austraila Medtronic Avalon, Inc. Delaware Medtronic B.V. Netherlands Medtronic Belgium, S.A. Belgium Medtronic Bio-Medicus, Inc. Minnesota Medtronic do Brasil Ltda. Brazil Medtronic of Canada, Ltd. Canada Medtronic Carbon Implants, Inc. Delaware Medtronic CardioRhythm California Medtronic China, Ltd. Minnesota Medtronic Commercial Ltda. Brazil Medtronic Dominicana C. por A. Dominican Republic Medtronic Electromedics, Inc. Minnesota Medtronic Export, Inc. Delaware Medtronic Europe, N.V. Belgium Medtronic Europe S.A. Switzerland Medtronic FSC B.V. Netherlands Medtronic France S.A. France Medtronic G.m.b.H. Germany Medtronic Heart Valves, Inc. Minnesota Medtronic HemoTec, Inc. Colorado Medtronic Iberica, S.A. Spain Medtronic InStent, Inc. Minnesota Medtronic InStent (Israel), Inc. Israel Medtronic International, Ltd. Delaware Medtronic International Technology, Inc. Minnesota Medtronic Interventional Vascular, Inc. Delaware Medtronic Interventional Vascular, Inc. Massachussetts Medtronic Italia S.p.A. Italy NAME OF COMPANY JURISDICTION OF - --------------- --------------- INCORPORATION ------------- Medtronic Japan Co., Ltd. Japan Medtronic Latin America, Inc. Minnesota Medtronic Limited United Kingdom Medtronic Medical Device Hellas S.A. Greece Medtronic Mediterranean SAL Lebanon Medtronic Micro Interventional Systems, Inc. Minnesota Medtronic Osterreich Ges.m.b.H. Austria Medtronic Overseas, Inc. Delaware 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 (Shanghai) Ltd. China Medtronic (Schweiz) A.G. Switzerland Medtronic (S) Pte., Ltd. Singapore Medtronic Synectics A.B. Sweden Medtronic Treasury International, Inc. Minnesota Medtronic Treasury Management, Inc. Minnesota Medtronic USA, Inc. Minnesota Medtronic de Venezuela S.A. Venezuela Medtronic-Vicare AS Denmark Medtronic-Vingmed AS Norway Medtronic World Trade Corporation Minnesota Medtronic Zinetics Medical, Inc. Utah Omikcron Ltd. Hungary OSMED, Inc. Michigan Sentron Europe BV Netherlands Sentron Incorporated Washington Synectics-Dantec Finland OY Finland Synectics-Dantec France S.A. France Synectics GmbH Germany Synectics IR SA Luxembourg Synectics Medical B.V. Netherlands Synectics Medical bvba Belgium Synectics Medical Co., Ltd. South Korea Synectics Medical Inc. New Jersey Synectics Medical Limited United Kingdom Synectics Medical Poland Spolka Z.O.O. (Ltd.) Poland Synectics Medical Srl Italy Telecardiocontrol, C.A. Venezuela Vitafin N.V. Netherlands Vitatron Austria GmbH Austria Vitatron Beheersmaatschappij B.V. Netherlands Vitatron Belgium N.V. Belgium Vitatron G.m.b.H. Germany Vitatron, Incorporated Delaware Vitatron Japan Co., Ltd. Japan Vitatron Medical B.V. Netherlands Vitatron Medical Espana S.A. Spain Vitatron Nederland B.V. Netherlands Vitatron N.V. Netherlands Vitatron S.A.R.L. France Vitatron Scientific B.V. Netherlands Vitatron Sweden A.B. Sweden Vitatron U.K. Limited United Kingdom EX-24 10 POWERS OF ATTORNEY EXHIBIT 24 POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of Medtronic, Inc., a Minnesota corporation, hereby constitute and appoint each of William W. George and Ronald E. Lund, 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 30, 1998, 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. IN WITNESS WHEREOF, the undersigned have set their hands this 25th day of June, 1998. /s/ William R. Brody, M.D., Ph.D. /s/ Glen D. Nelson, M.D. --------------------------------- ------------------------ William R. Brody, M.D., Ph.D. Glen D. Nelson, M.D. /s/ Paul W. Chellgren /s/ Richard L. Schall --------------------- --------------------- Paul W. Chellgren Richard L. Schall s/ Arthur D. Collins, Jr. /s/ Jack W. Schuler ------------------------- ------------------- Arthur D. Collins, Jr. Jack W. Schuler /s/ William W. George /s/ Gerald W. Simonson --------------------- ---------------------- William W. George Gerald W. Simonson /s/ Antonio M. Gotto, Jr., M.D. /s/ Gordon M. Sprenger ------------------------------- ---------------------- Antonio M. Gotto, Jr., M.D. Gordon M. Sprenger /s/ Bernadine P. Healy, M.D. /s/ Richard A. Swalin, Ph.D. ---------------------------- ---------------------------- Bernadine P. Healy, M.D. Richard A. Swalin, Ph.D. /s/ Thomas E. Holloran ---------------------- Thomas E. Holloran EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED EARNINGS AND CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED APRIL 30, 1998 FILED WITH THE SEC ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR APR-30-1998 MAY-1-1997 APR-30-1998 382,734 43,148 580,525 (14,469) 331,133 1,551,610 1,023,403 (514,616) 2,774,727 572,042 0 0 0 46,905 1,997,285 2,774,727 2,604,819 2,604,819 670,360 670,360 1,224,297 0 8,161 702,001 244,619 457,382 0 0 0 457,382 .98 .96
-----END PRIVACY-ENHANCED MESSAGE-----