On October 17, 2007, in
connection with the pending merger (the “Merger”) of Kyphon Inc. (“Kyphon”) with and into Jets Acquisition Corporation (“Merger Sub”), a Delaware corporation and a wholly owned subsidiary of Medtronic, Inc., a Minnesota
corporation (“Medtronic”), pursuant to the Agreement and Plan of Merger, dated as of July 26, 2007 (the “Merger Agreement”), among Kyphon, Medtronic and Merger Sub, Kyphon delivered a notice to the holders of its 1.00%
Convertible Senior Notes due 2012 (CUSIP No. 501577AA8) (the “2012 Notes”) and 1.25% Convertible Senior Notes due 2014 (CUSIP No. 501577AB6) (the “2014 Notes” and, together with the 2012 Notes, the “Notes”),
each governed by the Indenture, dated as of February 6, 2007 (the “Indenture”), between Kyphon and U.S. Bank National Association, as trustee, that an anticipated Fundamental Change (as defined in the Indenture) would occur upon the
consummation of the Merger.
A description of the Notes is included in Kyphon’s Form 8-K filed with the SEC on February 12, 2007,
and incorporated herein by reference. A copy of the Indenture is included as Exhibit 4.1 to the same Form 8-K, and incorporated herein by reference. As of the date hereof, $200 million aggregate principal amount of the 2012 Notes and $200 million
aggregate principal amount of the 2014 Notes are outstanding.
As more fully
described in the notice being delivered to the holders of the Notes, which is attached to this report as Exhibit 99.1 and incorporated herein by reference, in accordance with Section 12.01(a)(iv)(B) of the Indenture, holders may surrender their
Notes for conversion at any time during the period (the “Convertibility Period”) that (i) begins on, and includes, October 17, 2007, the date of the notice and (ii) ends on the date that is 35 calendar days after the actual
effective date of the Merger (or the related Fundamental Change Purchase Date (as defined in the Indenture), which Kyphon will announce on or before the 20
th
calendar day after the effective date of the Merger).
Notes that are surrendered for conversion will be converted into
the right to receive cash, less any applicable withholding taxes, and, if applicable, shares of common stock of Kyphon in accordance with the Indenture (the “Settlement Amount”). The Conversion Rate (as defined in the Indenture) in effect
on the date hereof is 17.1951 shares of Common Stock per $1,000 principal amount of Notes. Holders that convert their Notes during the Convertibility Period may in some circumstances be entitled to an increased Conversion Rate. The following
hypotheticals illustrate the potential amount of the increase:
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if the Merger were consummated on November 1, 2007, the increase in the Conversion Rate applicable to Notes surrendered during the Convertibility Period would
be (i) 1.4237 shares of Common Stock per $1,000 principal amount of Notes, with respect to the 2012 Notes, to yield a Conversion Rate equal to 18.6188, and (ii) 1.5551 shares of Common Stock per $1,000 principal amount of Notes, with
respect to the 2014 Notes, to yield a Conversion Rate equal to 18.7502;
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if the Merger were consummated on November 15, 2007, the increase in the Conversion Rate applicable to Notes surrendered during the Convertibility Period would
be (i) 1.4206 shares of Common Stock per $1,000 principal amount of Notes, with respect to the 2012 Notes, to yield a Conversion Rate equal to 18.6157, and (ii) 1.5540 shares of Common Stock per $1,000 principal amount of Notes, with
respect to the 2014 Notes, to yield a Conversion Rate equal to 18.7491;
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if the Merger were consummated on December 1, 2007, the increase in the Conversion Rate applicable to Notes surrendered during the Convertibility Period would
be (i) 1.4171 shares of Common Stock per $1,000 principal amount of Notes, with respect to the 2012 Notes, to yield a Conversion Rate equal to 18.6122, and (ii) 1.5527 shares of Common Stock per $1,000 principal amount of Notes, with
respect to the 2014 Notes, to yield a Conversion Rate equal to 18.7478; and
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if the Merger were consummated on December 15, 2007, the increase in the Conversion Rate applicable to Notes surrendered during the Convertibility Period would
be (i) 1.4140 shares of Common Stock per $1,000 principal amount of Notes, with respect to the 2012 Notes, to yield a Conversion Rate equal to 18.6091, and (ii) 1.5516 shares of Common Stock per $1,000 principal amount of Notes, with
respect to the 2014 Notes, to yield a Conversion Rate equal to 18.7467.
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Holders of notes that are converted during the Convertibility Period, however, will be entitled to the increase in
Conversion Rate only if the Merger is actually consummated.
Completion of the Merger remains subject to customary closing conditions,
including clearance from antitrust authorities. Kyphon and Medtronic intend to complete the Merger reasonably promptly following the receipt of the required antitrust clearances and the satisfaction of the other customary closing conditions
contained in the Merger Agreement, but in no event prior to November 1, 2007.
As described in the notice, Kyphon will also offer to
purchase outstanding Notes after consummation of the Merger in accordance with Article XI of the Indenture.
In connection with the sale of
the Notes, Kyphon entered into convertible note hedge transactions with respect to its Common Stock with J.P. Morgan Securities Inc., Goldman, Sachs & Co. and Banc of America Securities LLC or their affiliates (the “Hedge
Participants”) providing for a call option requiring the Hedge Participants, upon exercise of the call option, to deliver to Kyphon cash and/or stock in the event of conversion of the Notes by holders thereof. In connection with the Merger,
Kyphon will unwind the hedge transactions which will result in a payment to Kyphon becoming due.
Kyphon also entered into warrant
transactions with the Hedge Participants. The warrants issued to the Hedge Participants entitle the Hedge Participants to purchase a number of shares of Common Stock equal to the number of such shares initially issuable under the Notes. The Merger
will result in cancellation and payment of the warrants which will result in Kyphon being obligated to deliver a payment to the Hedge Participants.
The call options and warrants are separate contracts entered into by Kyphon, are not part of the terms of the Notes and will not affect the holders’ rights under the Notes. A description of the call option and the warrant transaction
is included in Kyphon’s Form 8-K filed with the SEC on February 12, 2007, and incorporated herein by reference.
The description
of the notice in this report is a summary of the actual notice and the description and summaries in this report are qualified in their entirety by reference to the notice.