Medtronic 2008 Annual Report Download - page 64

under SFAS No. 133; and how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and
cash flows. Certain disclosures will also be required with respect to
derivative features that are credit risk-related. SFAS No. 161 is effective
for the Company beginning in the fourth quarter of fiscal year 2009 but
only requires the revised disclosures on a prospective basis. Since
SFAS No. 161 requires only additional disclosures about the Company’s
derivatives and hedging activities, the adoption of SFAS No. 161 will not
affect the Company’s consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires
the proceeds from the issuance of such convertible debt instruments
to be allocated between a liability component (issued at a discount)
and an equity component. The resulting debt discount is amortized
over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. The change in accounting
treatment is effective for the Company beginning in fiscal 2010, and will
be applied retrospectively to prior periods. FSP APB 14-1 changes the
accounting treatment for the Company’s $2,200 of 1.500 percent and
$2,200 of 1.625 percent Senior Convertible Notes due in 2011 and 2013,
respectively, which were issued in April 2006 and the $93 remaining
balance of the Company’s Contingent Convertible Debentures due
2021. The Company is currently evaluating the impact of this new
accounting treatment, which will result in an increase to non-cash
interest expense reported in its historical financial statements. Based on
a preliminary review, the Company believes historical diluted EPS would
be impacted in the range of $0.06 to $0.10 per fiscal year.
2. Special and Certain Litigation Charges
Special Charges
In fiscal year 2008, the Company recorded a special charge of $78
related to the impairment of intangible assets associated with its benign
prostatic hyperplasia, or enlarged prostate, product line purchased in
fiscal year 2002. The development of the market, relative to the
Company’s original assumptions, has changed as a result of the broad
acceptance of a new line of drugs to treat the symptoms of an enlarged
prostate. After analyzing the estimated future cash flows utilizing this
technology, based on the market development, the Company
determined that the carrying value of these intangible assets was
impaired and a write-down was necessary.
In fiscal year 2007, the Company concluded two intangible assets
were fully impaired due to inadequate clinical results and the resulting
delays in product development. As a result, the Company recorded a
$98 special charge related to the impairments of intangible assets
stemming from the July 1, 2005 acquisition of Transneuronix, Inc. (TNI)
and the November 1, 2004 acquisition of Angiolink Corporation
(Angiolink). TNI focused on the development of an implantable gastric
stimulator to treat obesity. Angiolink focused on the development of
wound closure devices for vascular procedures.
In fiscal year 2006, the Company recorded a $100 charitable donation
to The Medtronic Foundation, which is a related party non-profit
organization. The donation to The Medtronic Foundation was paid in
the second quarter of fiscal year 2006.
Certain Litigation Charges
The Company classifies material litigation reserves recognized as certain
litigation charges. In fiscal year 2008, the Company incurred certain
litigation charges of $366. Of that amount, $123 relates to the settlement
of certain lawsuits relating to the Marquis line of implantable cardioverter
defibrillators (ICDs) and cardiac resynchronization therapy-defibrillators
(CRT-Ds) that were subject to a field action announced on February 10,
2005. The remainder of the charge, $243, relates to an estimated reserve
established for litigation with Cordis Corporation (Cordis), a subsidiary
of Johnson & Johnson (J&J). The Cordis litigation originated in October
1997 and pertains to a patent infringement claim on a previous
generation of bare metal stents that are no longer on the market. See
Note 15 for further discussion of these certain litigation charges. In May
2008, the Company paid substantially all of the settlement for certain
lawsuits relating to the Marquis line of ICDs and CRT-Ds.
In fiscal year 2007, the Company reached a settlement agreement
with the U.S. Department of Justice which requires the government to
obtain dismissal of the two qui tam civil suits and is conditioned upon
such dismissal being obtained. To resolve the matter, Medtronic has
entered into a five-year corporate integrity agreement effective upon
dismissal of the two suits that further strengthens its employee training
and compliance systems surrounding sales and marketing practices.
The settlement agreement also reflects Medtronic’s assertion that the
Company and its current employees have not engaged in any
wrongdoing or illegal activity. Medtronic also agreed to pay $40
pending dismissal of the related lawsuits.
There were no certain litigation charges in fiscal year 2006.
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
60 Medtronic, Inc.