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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K ANNUAL REPORT
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NO. 0-8672
ST. JUDE MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE LILLEHEI PLAZA
ST. PAUL, MINNESOTA 55117
(Address of principal executive office)
(612) 483-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS
(Title of class) (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, or will not be contained, to the
best of the Registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
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; and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $2.8 billion at March 8, 1996, when the
closing sale price of such stock, as reported on the NASDAQ National Market
System, was $40.75.
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of March 8, 1996, was 70,299,660 shares.
Portions of the Annual Report to Shareholders for the year ended December
31, 1995, are incorporated by reference in Parts I, II and IV. Portions of the
Proxy Statement dated March 27, 1996, are incorporated by reference in Part III.
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The exhibit index is set forth on pages 11 and 12. This Form 10-K
consists of 69 pages, consecutively numbered 1 through 69.
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ST. JUDE MEDICAL, INC.
1995 10-K
PART I
ITEM 1. BUSINESS
GENERAL
St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures
and markets medical devices and provides services for the cardiovascular segment
of the medical device industry. The Company's products are distributed in more
than 70 countries worldwide through a combination of direct sales personnel,
independent manufacturers' representatives and distribution organizations. The
main markets for the Company's products are the United States, Western Europe
and Japan.
Effective September 30, 1994, St. Jude acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the Company's
product offerings and provided a platform for potential further diversification
of its business.
The Company currently operates through three business units. The St. Jude
Medical Division is responsible for the Company's heart valve disease management
products including mechanical and tissue heart valves and annuloplasty rings.
The Pacesetter Division is responsible for the Company's cardiac rhythm
management products including bradycardia pulse generators, leads and
programmers. The International Division is responsible for marketing, sales and
distribution of the Company's and third party products in Europe, Africa and the
Middle East.
Typically, the Company's net sales are somewhat stronger in the first and
second quarters and weaker in the third quarter. This results from patient
tendency to defer, if possible, cardiac procedures during the summer months and
from the seasonality of the domestic and Western European markets where summer
vacation schedules normally result in fewer surgical procedures. Manufacturers'
representatives randomly place large orders which can distort the net sales
pattern noted above. In addition, new product introductions and regulatory
approvals can modify the expected net sales pattern.
In 1995 almost 63% of net sales were derived from pacemaker products,
approximately 36% from heart valve products and the balance from cardiac assist
products. In prior years the majority of net sales were derived from heart valve
products.
CARDIAC RHYTHM MANAGEMENT
The Pacesetter Division is headquartered in Sylmar, California and has
manufacturing facilities in Sylmar, Sweden and Scotland. Pacesetter pulse
generators and leads treat patients with hearts that beat too slowly or
irregularly; a condition known as bradycardia. Various models of bradycardia
pulse generators and leads are produced by Pacesetter. Pulse generators can
sense and produce impulses in both the upper and lower chambers of the heart,
adapt to changes in heart rate and can be non-invasively programmed by the
physician to adjust sensing, electrical pulse intensity, duration, rate and
other characteristics.
The pulse generator, generally referred to as a pacemaker, contains a
lithium battery power source and electronic circuitry. It generates pacing
pulses and monitors the heart's activity to sense abnormalities requiring
correction. It is most often implanted pectorally just below the collarbone. The
leads are insulated wires that carry the pulses to the heart and information
from the heart back to the pacemaker. A pacemaker uses electrical currents
equivalent to those in a healthy heart.
In 1995 Pacesetter introduced a new platform of pacing systems called the
Trilogy-TM- series. The series was an outgrowth of the highly successful
Synchrony-Registered Trademark- platform circuitry and was designed with the
philosophy of cardiac optimization. Trilogy-TM- has an ovoid shape, doubles
memory, adds new diagnostic capabilities and in some versions has an
automaticity feature.
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Microny-TM-, a single chamber pacemaker, which was the first pacemaker in
the world to incorporate AutoCapture-TM-, was introduced in 1995 in
international markets. The AutoCapture-TM- algorithm is capable of adjusting the
pacemaker's output to provide the minimal amount of electrical impulse necessary
to stimulate the heart and has an appropriate safety margin test on a beat by
beat basis. Microny-TM- is the world's smallest pacemaker weighing only about 13
grams. The sensor is an accelerometer, a "ball in a cage" sensor which has
excellent sensitivity to the intensity of the patient's body movement in
determining the proper pacing rate.
The Regency-TM- family of single chamber pacemakers, introduced in 1995,
incorporates the AutoCapture-TM- feature and several advanced diagnostic
capabilities. Pacesetter expects to release the Regency-TM- pacemaker in all
international markets and to commence U.S. clinical trials in 1996.
HEART VALVES
The St. Jude Medical Division is headquartered in St. Paul, Minnesota and
has manufacturing facilities in St. Paul, Puerto Rico, Canada and California.
Heart valve replacement or repair may be necessary because the natural heart
valve has deteriorated due to congenital defects or disease. Heart valves
facilitate the one-way flow of blood in the heart and prevent significant
backflow of blood into the heart and between the heart's chambers.
St. Jude offers both mechanical and tissue replacement heart valves and
valve repair products. In 1996, the Company executed an agreement to provide
services relating to allografts, cryopreserved human heart valves. The St. Jude
Medical-Registered Trademark- mechanical heart valve is the most widely
implanted valve in the world with over 650,000 valves implanted to date. In
1995, the Company introduced the SJM-Registered Trademark- Masters Series
rotatable version of the mechanical heart valve which eases implantation in
certain circumstances. The United States Food and Drug Administration ("FDA")
approved the Masters Series for U.S. implantation in November 1995. In addition,
the Company internationally markets the Toronto SPV-Registered Trademark-
stentless tissue valve, the world's leading stentless tissue valve, and the SJM
X-Cell-TM- bioprosthesis, a stented tissue valve. The Toronto
SPV-Registered Trademark- is in domestic clinical trials.
The Company executed an agreement in 1995 with Heartport, Inc. ("Heartport")
to pursue less invasive heart valve surgery to repair or replace diseased heart
valves. Under the agreement, St. Jude's heart valve prostheses will be used in
combination with Heartport's proprietary Port-Access-TM- technology to perform
less invasive heart valve surgery. In early 1996, Heartport received FDA
authorization to commence U.S. clinical trials of its Port-Access-TM- mitral
valve repair and replacement system.
Annuloplasty rings are prosthetic devices used to repair diseased or damaged
mitral heart valves. In 1995, the Company executed a license agreement with
Professor Jacques Seguin to manufacture and market an advanced semi-rigid
annuloplasty ring. This SJM-Registered Trademark- Sguin annuloplasty ring can be
used with conventional surgery and Heartport's Port-AccessTM technology.
SUPPLIERS
Until 1986 all pyrolytic carbon components for the mechanical heart valve
were purchased from CarboMedics, Inc. ("CMI"). In 1986, the Company began
selling mechanical heart valves internationally utilizing self-manufactured
pyrolytic carbon coated components. In May 1991, the Company received FDA
approval to domestically market the St. Jude Medical-Registered Trademark-
mechanical heart valve as assembled with self-manufactured pyrolytic carbon
coated components.
Under an agreement with CMI, which covers the supply of pyrolytic carbon
heart valve components for the mechanical heart valve, the Company must purchase
a minimum of 20% of its needs through 1998 at negotiated prices. If CMI is
unable or fails to perform under the agreement, the license permits the Company
to self-manufacture its component requirements during the supply interruption.
The agreement can be extended for additional one year terms after 1998 at the
Company's option and prices the Company would pay in 1999 and beyond would be
adjusted annually by a producer price index based formula established in the
agreement.
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The Company purchases raw materials and other items from numerous suppliers
for use in its products. The Company maintains sizeable inventories of up to
three years of its projected requirements for certain materials, some of which
are available only from a single vendor. The Company has been advised from time
to time that certain of these vendors may terminate sales of products to
customers that manufacture implantable medical devices in an effort to reduce
their potential products liability exposure. Some of these vendors have modified
their positions and have indicated a willingness to either temporarily continue
to provide product until such time as an alternative vendor or product can be
qualified or to reconsider the supply relationship. While the Company believes
that alternative sources of raw materials are available and that there is
sufficient lead time in which to qualify such other sources, any supply
interruption could have a material adverse effect on the Company's ability to
manufacture its products.
COMPETITION
Within the medical device industry, competitors range from small start-up
companies to companies with significant resources. The Company's customers
consider many factors when choosing supplier partners including product
reliability, clinical outcomes, product availability, inventory consignment,
price and product services provided by the manufacturer. Market share can shift
as a result of technological innovation, product recalls and product safety
alerts. This emphasizes the need for the highest quality products and services.
St. Jude expects the competition to continue to increase by using tactics such
as consigned inventory, bundled product sales and reduced pricing.
The Company is the world's leading manufacturer and supplier of mechanical
heart valves. There are two other principal and several other smaller mechanical
heart valve manufacturers. St. Jude has numerous competitors which sell
significantly more tissue heart valves than the Company.
Pacesetter is a technological leader in the bradycardia pacemaker market.
Worldwide there are seven primary manufacturers and suppliers of bradycardia
pacemakers, including the Company. One other company and Pacesetter account for
well over half of the worldwide bradycardia pacemaker net sales. The Company has
strong market share positions in all major developed markets.
The cardiovascular segment of the medical device market is a dynamic market
currently undergoing significant change due to cost of care considerations,
regulatory reform, industry consolidation and customer consolidation. The
ability to provide cost effective clinical outcomes is becoming increasingly
more important for medical device manufacturers.
MARKETING
The Company sells its products directly to hospitals and distributor based
organizations in the United States and throughout the world. No distributor
organization or single customer accounted for more than 10% of 1995 net sales.
In the United States, St. Jude sells directly to hospitals through an
employee based sales organization for its heart valve products and a combination
of independent manufacturers' representatives and an employee based sales
organization for its pacemaker products. In Western Europe, the Company has an
employee based sales organization selling in thirteen countries. Throughout the
rest of the world the Company uses distributor based sales organizations.
Payment terms worldwide are consistent with local practice. Orders are
shipped as they are received and, therefore, no material back orders exist.
RESEARCH AND DEVELOPMENT
The Company is focused on the development of new products and improvements
to existing products. In addition, research and development expense reflects the
Company's efforts to obtain FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses were $68,970,000 (9.5% of net sales),
$21,008,000 (5.8%) and $10,972,000 (4.3%) in 1995, 1994 and 1993, respectively.
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GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in some instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which requires the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's
mechanical and tissue heart valves and certain pacemakers and leads are subject
to this level of approval or as a supplement to a PMA approval. Other pacemakers
and leads and the annuloplasty ring products are currently marketed under the
510(k) pre-market notification procedure of the Act.
The FDA also regulates record keeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA authorized devices. Aggressive regulatory action may
be taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company has been unaware of
significant domestic price resistance directly as a result of DRG reimbursement
policies, changes in current DRG reimbursement levels could have an adverse
effect on its domestic pricing flexibility.
In response to the U.S. government budget deficit and rising Medicare and
Medicaid costs, several legislative proposals have been advanced which would
restrict future funding increases for these programs. While it is impossible to
predict the outcome of the policy debate, St. Jude believes it will increase the
downward pricing pressure on health care products including the Company's
products.
St. Jude business outside the United States is subject to medical device
laws in individual foreign countries. These laws range from extensive device
approval requirements in some countries for all or some of the Company's
products to requests for data or certifications in other countries. Generally,
regulatory requirements are increasing in these countries. In the European
Economic Union, efforts are underway to harmonize the regulatory systems.
The Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services ("HHS") is currently conducting an
investigation regarding possible hospital submissions of improper claims to
Medicare/Medicaid programs for reimbursement for procedures using cardiovascular
medical devices that were not approved for marketing by the FDA at the time of
use. Beginning in June 1994, approximately 130 hospitals received subpoenas from
HHS seeking information with respect to reimbursement for procedures using
cardiovascular medical devices (including certain products manufactured by the
Company) that were subject to investigational exemptions or that may not have
been approved for marketing by the FDA at the time of use. The subpoenas also
sought information regarding various types of remuneration, including payments,
gifts, stock and stock options, received by the hospital or its employees from
manufacturers of medical devices. Civil and criminal sanctions may be imposed
against any person participating in an improper claim for reimbursement under
Medicare/Medicaid. The OIG's investigation and any related change in
reimbursement practices may discourage hospitals from participating in clinical
trials or from including Medicare and Medicaid patients in clinical trials,
which could lead to increased costs in the development of new products. St. Jude
believes it is too early to predict the possible outcome of this matter or when
it will be resolved. There can be no assurance that the OIG's investigation or
any changes in third-party payors' reimbursement practices will not materially
adversely affect the medical device
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industry in general or the Company in particular. In 1995, HCFA, part of HHS,
issued a regulation clarifying that certain medical devices subject to
investigational requirements under the Act may qualify for reimbursement.
In 1994 the predecessor organization to Pacesetter entered a consent decree
which settled a lawsuit brought by the United States in U.S. District Court for
the District of New Jersey. The consent decree which remains in effect
indefinitely requires that Pacesetter comply with the FDA's Good Manufacturing
Practice regulations and identifies several specific provisions of those
regulations. The consent decree provides for FDA inspections and that Pacesetter
is obligated to pay certain costs of the inspections.
In 1994 a state prosecutor in Germany began an investigation of allegations
of corruption in connection with the sale of heart valves. As part of that
investigation, the prosecutor seized documents from St. Jude's offices in
Germany as well as documents from certain competitors' offices. In December
1995, the state prosecutor announced that the investigation is continuing and
has been broadened to include other medical devices. Subsequently, the United
States Securities and Exchange Commission issued a formal order of private
investigation covering sales practices of St. Jude and other manufacturers in
Germany.
PATENTS AND LICENSES
The Company's policy is to protect the intellectual property rights in its
work on medical devices. Where appropriate, St. Jude applies for United States
and foreign patents. In those instances where the Company has acquired
technology from third parties, it has sought to obtain rights of ownership to
the technology through the acquisition of underlying patents or licenses.
While the Company believes design, development, regulatory and marketing
aspects of the medical device business represent the principal barriers to entry
into such business, it also recognizes that its patents and license rights may
make it more difficult for its competitors to market products similar to those
produced by the Company. St. Jude can give no assurance that any of its patent
rights, whether issued, subject to license or in process, will not be
circumvented or invalidated. Further, there are numerous existing and pending
patents on medical products and biomaterials. There can be no assurance that the
Company's existing or planned products do not or will not infringe such rights
or that others will not claim such infringement. The Company's principal patent
covering its mechanical heart valve will expire in the United States in July
1998. No assurance can be given that the Company will be able to prevent
competitors from challenging the Company's patents or entering markets currently
served by the Company.
INSURANCE
The medical device industry has historically been subject to significant
products liability claims. Such claims could be asserted against the Company in
the future for events not known to management at this time. Management has
adopted risk management practices, including products liability insurance
coverage, which management believes are prudent.
The Company's former products liability insurance carrier is currently
seeking to rescind its coverage of Pacesetter products for the period October 1,
1994, through December 31, 1995. Should the carrier prevail, the Company would
be self-insured for Pacesetter products liability claims made during that
period. St. Jude cannot predict the outcome of the dispute. See Item 3 "Legal
Proceedings".
California earthquake insurance is currently difficult to procure, extremely
costly, and restrictive in terms of coverage. The Company's earthquake and
related business interruption insurance for its operations located in Los
Angeles County, California does provide for limited coverage. While the Company
is unable to predict the potential impact of any uninsured loss that might be
sustained from an earthquake, it is the opinion of management that any such loss
would not have a material adverse effect on the Company's financial condition.
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EMPLOYEES
As of December 31, 1995, the Company had 2,315 full-time employees. It has
never experienced a work stoppage as a result of labor disputes and none of its
employees are represented by a labor organization, with the exception of the
Company's Swedish employees.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical products and service industry is the single industry segment in
which the Company operates. The Company's domestic and foreign net sales,
operating profit and identifiable assets, and its export sales to unaffiliated
third parties are described in Note 8 to the Consolidated Financial Statements
on page 36 of the 1995 Annual Report to Shareholders and are incorporated herein
by reference.
The Company's foreign business is subject to such special risks as exchange
controls, currency devaluation, dividend restrictions, the imposition or
increase of import or export duties and surtaxes, and international credit or
financial problems. Since its international operations require the Company to
hold assets in foreign countries denominated in local currencies, many assets
are dependent for their U.S. dollar valuation on the values of a number of
foreign currencies in relation to the U.S. dollar. The Company may from time to
time enter into purchase and sales contracts in the forward markets for various
foreign currencies with the objective of protecting U.S. dollar values of assets
and commitments denominated in foreign currencies.
ITEM 2. PROPERTIES
St. Jude Medical's principal executive offices are owned and are located in
St. Paul, Minnesota. Manufacturing facilities are located in California,
Minnesota, Canada, Puerto Rico, Scotland and Sweden. Approximately 53%, or
221,000 square feet, of the total manufacturing space is owned by the Company
and the balance is leased.
The Company also maintains sales and administrative offices inside the
United States at 16 locations in 6 states and outside the United States at 17
locations in 15 countries. All of these locations are leased.
In management's opinion, all building and machinery and equipment are in
good condition and suitable for their purposes and are maintained on a basis
consistent with sound operations.
ITEM 3. LEGAL PROCEEDINGS
From 1987 to 1991, Siemens AG through its Pacesetter and other Affiliates
("Siemens") manufactured and sold approximately 32,000 model 1016T and 1026T
pacemaker leads of which approximately 25,000 were sold in the U.S. In 1991
Siemens ceased selling these products and issued a safety alert to physicians
explaining that these pacemaker leads had a higher than expected failure rate
due to an inner insulation problem. The safety alert recommended monitoring
steps to minimize any risk posed by the devices. The FDA treated this notice as
a Class I recall.
In March 1993 Siemens was sued in federal district court in Cincinnati, Ohio
("the Wilson case"). The suit alleged that the model 1016T leads were
negligently designed and manufactured. The suit sought class action status for
patients whose 1016T leads had malfunctioned up to that time. The class status
was granted by the court in September 1993.
When St. Jude acquired from Siemens substantially all of its worldwide
cardiac rhythm management business ("Pacesetter") on October 1, 1994, the
purchase agreement specifically provided that Siemens retain all liability for
the Wilson case as well as all other litigation that was pending or threatened
before October 1, 1994. The purchase agreement also provided that St. Jude would
assume liability for other products liability claims which arose after September
30, 1994.
Siemens and St. Jude were named defendants in a class action suit filed in
March 1995 in Houston, Texas for alleged defects in models 1016T and 1026T
pacing leads (the "Hann case"). The suit sought class action status for patients
who had inner insulation failures of these leads after
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March 22, 1993 and who were not members of the Wilson class. Siemens and St.
Jude settled the Wilson and Hann cases in November 1995. St. Jude's anticipated
financial responsibility for the settlement is approximately $7 million. The
precise number of class members, and the corresponding financial liability,
could increase or decrease as the process for filing claims is completed. The
settlement agreement has an "opt out" provision for class members. Apart from
this class action settlement, additional claims could be made or lawsuits
brought by patients with these leads whose leads fail at a later date or whose
leads fail for reasons outside the class definition.
St. Jude's products liability insurance carrier, Steadfast, a wholly owned
subsidiary of Zurich Insurance Company ("Zurich"), has denied coverage for this
case and has filed suit against St. Jude in federal district court in
Minneapolis seeking rescission of the policy covering Pacesetter business
retroactive to the date St. Jude acquired Pacesetter. Zurich alleges that St.
Jude made material negligent misrepresentations to Zurich including failure to
disclose the Wilson case in order to procure the insurance policy. St. Jude has
filed an answer denying Zurich's claim and has alleged that Zurich specifically
had knowledge of the Wilson case.
The terms of the products liability insurance policy which Zurich is seeking
to rescind provide that St. Jude would be entitled to $10 million in coverage
for the 1016T and 1026T pacemaker lead claims after payment by St. Jude of a
self insured retention. St. Jude is investigating whether it may have claims
against any entities, in addition to Zurich, arising from this situation.
The Company is unaware of any other pending legal proceedings which it
regards as likely to have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION*
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<S> <C> <C>
Ronald A. Matricaria 53 Chairman (1995), President and Chief
Executive Officer (1993)
Eric W. Sivertson 45 President, Pacesetter (1994)
John P. Berdusco 59 Vice President, Administration (1993)
Terry L. Shepherd 43 President, St. Jude Medical Division (1994)
Stephen L. Wilson 43 Vice President, Finance and Chief Financial
Officer (1990)
</TABLE>
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* Dates in brackets indicate period during which the named executive officers
began serving in such capacity. Executive officers serve at the pleasure of
the Board of Directors and are elected annually for one year terms.
Mr. Matricaria's business experience is set forth in the Company's
definitive Proxy Statement dated March 27, 1996 under the Section "Election of
Directors." The information is incorporated herein by reference.
Mr. Sivertson joined the Company in 1985 as Director of Marketing. In 1986,
he became Director of International Sales and was appointed Vice President,
Sales and Marketing in 1988, President of the International Division in 1990,
and President of the St. Jude Medical Division in 1992. Mr. Sivertson was
appointed President of the Pacesetter Division in October 1994. Prior to joining
the Company, Mr. Sivertson spent eight years with American Hospital Supply
Corporation in various management positions, including Vice President of
Marketing for the Converters Division. Mr. Sivertson resigned from the Company
effective January 19, 1996.
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Mr. Berdusco joined the Company in 1993 as Vice President, Administration.
Prior to joining the Company, he was Executive Director Corporate Facilities
Planning, Manufacturing Strategy Development and Sourcing for Eli Lilly &
Company. From 1962 to 1993, Mr. Berdusco held various management positions with
Eli Lilly & Company in both domestic and international operations.
Mr. Shepherd joined the Company in 1994 as President of the St. Jude Medical
Division. Prior to joining St. Jude, Mr. Shepherd was President and CEO of
Hybritech, Inc. where he had been employed for 3 years. Prior to that, Mr.
Shepherd held various management positions at Cardiac Pacemakers, Inc. (CPI)
where he worked for 15 years. Hybritech and CPI were both wholly owned
subsidiaries of Eli Lilly & Company.
Mr. Wilson joined the Company in 1990 as Vice President, Finance and Chief
Financial Officer. Prior to joining the Company, Mr. Wilson was Vice President
and Controller of the Foxboro Company, a process automation company, where he
had been employed for five years. Prior to that, Mr. Wilson was the Controller
of Brown & Sharpe Manufacturing Company, a metrology products and machine tools
company, and previously was with Coopers & Lybrand.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information set forth under the captions "Supplemental Market Price
Data" and "Dividends" on page 21 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Ten Year Summary of Selected
Financial Data" on pages 38 and 39 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 22 through
26 of the Company's 1995 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and Report of
Independent Auditors set forth on pages 27 through 37 of the Company's 1995
Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income -- Years ended December 31, 1995, 1994 and
1993
Consolidated Balance Sheets -- December 31, 1995 and 1994
Consolidated Statements of Shareholders' Equity -- Years ended December 31,
1995, 1994, and 1993
Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1994
and 1993
Notes to Consolidated Financial Statements
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement dated March 27, 1996, is incorporated
herein by reference. Information on executive officers is set forth in Part I,
Item 4A hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Information" and "Election of Directors" in the Company's definitive Proxy
Statement dated March 27, 1996, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the Company's
definitive Proxy Statement dated March 27, 1996, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement dated March 27, 1996, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and Report of
Independent Auditors as set forth on pages 27 through 37 of the Company's 1995
Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income -- Years ended December 31, 1995, 1994
and 1993
Consolidated Balance Sheets -- December 31, 1995 and 1994
Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows -- Years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed as part of this Form
10-K Annual Report:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION PAGE NUMBER
- --------- ----------------------------------------- ------------
<C> <S> <C>
II Valuation and Qualifying Accounts 22
</TABLE>
The report of the Company's Independent Auditors with respect to the
above-listed financial statements and financial statement schedule appears on
page 21 of this Report.
All other financial statements and schedules not listed have been omitted
because the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable.
10
<PAGE>
(3) EXHIBITS
<TABLE>
<CAPTION>
PAGE
EXHIBIT INDEX NUMBER
--------------------------------------------------------------------------- ------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated January 29, 1996 related to the Daig --
acquisition is incorporated by reference to Schedule 13D filed February 13,
1996.
3.1 Articles of Incorporation are incorporated by reference to Exhibit 3(a) of --
the Company's Form 8 filed on August 20, 1987, amending the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1987.
3.2 Bylaws are incorporated by reference to Exhibit 3B of the Company's Form --
S-3 Registration Statement dated September 25, 1986 (Commission File No.
33-8308).
4.1 Amended and Restated Rights Agreement dated as of June 26, 1990, between --
the Company and Norwest Bank Minneapolis, N.A., as Rights Agent including
the Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock is incorporated by reference to Exhibit 1 of
the Company's Form 8 Amendment 2 to Form 8-A dated July 6, 1990.
10.1 Employment letter dated as of March 9, 1993, between the Company and Ronald --
A. Matricaria is incorporated by reference to Exhibit 10.1 of the Company's
Form 10-K Annual Report for the year ended December 31, 1993.*
10.2 Supplemental Executive Retirement Plan and Trust agreement dated April 12, --
1993, between the Company and Ronald A. Matricaria is incorporated by
reference to Exhibit 10.2 of the Company's Form 10-K Annual Report for the
year ended December 31, 1993.*
10.3 Supply Contract dated April 17, 1990, between the Company and CarboMedics, --
Inc. (portions of this exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to Rule 24b-2) is
incorporated by reference to the Company's Form 8 filed on April 17, 1990
amending the Company's Form 10-K Annual Report for the year ended December
31, 1989.
10.4 Form of Indemnification Agreement that the Company has entered into with --
officers and directors. Such agreement recites the provisions of Minnesota
Statutes Section 302A.521 and the Company's Bylaw provisions (which are
substantially identical to the Statute) and is incorporated by reference to
Exhibit 10(d) of the Company's Form 10-K Annual Report for the year ended
December 31, 1986.*
10.5 Form of Employment Agreement that the Company has entered into with --
officers relating to severance matters in connection with a change in
control is incorporated by reference to Exhibit 10(f) of the Company's Form
10-K Annual Report for the year ended December 31, 1987.*
10.6 Retirement Plan for members of the Board of Directors as amended on March --
15, 1995, is incorporated by reference to Exhibit 10.6 of the Company's
Form 10-K Annual Report for the year ended December 31, 1994.*
10.7 Management Savings Plan dated February 1, 1995, is incorporated by --
reference to Exhibit 10.7 of the Company's Form 10-K Annual Report for the
year ended December 31, 1994.*
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT INDEX NUMBER
--------------------------------------------------------------------------- ------
<S> <C> <C>
10.8 Supplemental Executive Retirement Plan agreement dated September 30, 1988, --
and as restated on April 9, 1993, between the Company and Lawrence A.
Lehmkuhl is incorporated by reference to Exhibit 10.8 of the Company's Form
10-K Annual Report for the year ended December 31, 1993.*
10.9 1989 Restricted Stock Plan is incorporated by reference to the Company's --
Form S-8 Registration Statement dated June 6, 1989 (Commission File No.
33-29085).*
10.10 The St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference to --
the Company's Form S-8 Registration Statement dated June 28, 1991
(Commission File No. 33-41459).*
10.11 The St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by --
reference to the Company's Form S-8 Registration Statement dated July 1,
1994 (Commission File No. 33-54435).*
10.12 The Management Incentive Compensation Plan is incorporated by reference to --
Appendix A of the Company's definitive Proxy Statement dated March 27,
1995.*
11 Computation of Earnings Per Share 23
13 1995 Annual Report to Shareholders. Except for those portions of such 24
report expressly incorporated by reference in this Form 10-K Annual Report,
the Annual Report to Shareholders is not deemed to be "filed" with the
Securities and Exchange Commission.
21 Subsidiaries of the Company 68
23 Consent of Independent Auditors 69
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1995
No reports on Form 8-K were filed by the Company during the fourth quarter
1995.
(c) EXHIBITS: Reference is made to Item 14 (a) (3).
(d) SCHEDULES: Reference is made to Item 14 (a) (2).
For the purposes of complying with the amendments to the rules governing
Form S-8 under the Securities Act of 1933, the undersigned Company hereby
undertakes as follows, which undertaking shall be incorporated by reference into
the Company's Registration Statements on Form S-8 Nos. 33-9262 (filed October 3,
1986), 33-29085 (filed June 6, 1989), 33-41459 (filed June 28, 1991), 33-48502
(filed June 10, 1992) and 33-54435 (filed July 1, 1994):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 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.
ST. JUDE MEDICAL, INC.
Date: March 27, 1996 By /s/ RONALD A. MATRICARIA
--------------------------------------
Ronald A. Matricaria
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
By /s/ STEPHEN L. WILSON
--------------------------------------
Stephen L. Wilson
VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<C> <S> <C>
/s/ RONALD A. MATRICARIA
- ------------------------------------------- Chairman of the Board of March 27, 1996
Ronald A. Matricaria Directors
/s/ THOMAS H. GARRETT III
- ------------------------------------------- Director March 27, 1996
Thomas H. Garrett III
/s/ KENNETH G. LANGONE
- ------------------------------------------- Director March 27, 1996
Kenneth G. Langone
/s/ LAWRENCE A. LEHMKUHL
- ------------------------------------------- Director March 27, 1996
Lawrence A. Lehmkuhl
/s/ WILLIAM R. MILLER
- ------------------------------------------- Director March 27, 1996
William R. Miller
/s/ CHARLES V. OWENS, JR.
- ------------------------------------------- Director March 27, 1996
Charles V. Owens, Jr.
/s/ WALTER L. SEMBROWICH
- ------------------------------------------- Director March 27, 1996
Walter L. Sembrowich
/s/ ROGER G. STOLL
- ------------------------------------------- Director March 27, 1996
Roger G. Stoll
/s/ GAIL R. WILENSKY
- ------------------------------------------- Director March 27, 1996
Gail R. Wilensky
</TABLE>
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of St. Jude Medical,
Inc. as of December 31, 1995 and 1994, and for each of the three years in the
period ended December 31, 1995, and have issued our report thereon dated
February 5, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
February 5, 1996
/s/ ERNST & YOUNG LLP
- --------------------------------
Ernst & Young LLP
14
<PAGE>
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------- ----------- ---------------------- ------------ -----------
BALANCE AT ADDITIONS CHARGED TO BALANCE AT
BEGINNING ---------------------- END OF
DESCRIPTION OF PERIOD EXPENSE OTHER DEDUCTIONS PERIOD
- ------------------------------------------- ----------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts (3)...... $ 5,760 $ 2,510 $ 1,256(5) $ 198(1) $ 9,328
Products liability claims reserve (4).... 1,500 -- 8,000(5) 942(2) 8,558
Year ended December 31, 1994
Allowance for doubtful accounts (3)...... 1,856 715 3,675(5) 486(1) 5,760
Products liability claims reserve (4).... 401 1,181 -- 82(2) 1,500
Year ended December 31, 1993
Allowance for doubtful accounts (3)...... 1,413 583 -- 140(1) 1,856
Products liability claims reserve (4).... 601 -- -- 200(2) 401
</TABLE>
- ------------------------
(1) Reserve or uncollectible accounts written off, net of recoveries.
(2) Settlements paid.
(3) Deducted from accounts receivable on the balance sheet.
(4) Included in other accrued expenses on the balance sheet.
(5) Balance assumed in the Pacesetter acquisition.
15
<PAGE>
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 69,869,028 69,700,987 70,444,737
Net effect of dilutive stock options, based on the
treasury stock method using average market price 1,197,510 467,894 388,792
------------ ----------- ------------
TOTAL 71,066,538 70,168,881 70,833,529
============ =========== ============
Net Income $129,417,849 $79,234,001 $109,643,072
============ =========== ============
Earnings Per Share $1.82 $1.13 $1.55
===== ===== =====
FULLY DILUTED
Average shares outstanding 69,869,028 69,700,987 70,444,737
Net effect of dilutive stock options, based on the
treasury stock method using year-end market price,
if higher than average market price 1,674,162 814,628 417,785
------------ ----------- ------------
TOTAL 71,543,190 70,515,615 70,862,522
============ =========== ============
Net Income $129,417,849 $79,234,001 $109,643,072
============ =========== ============
Earnings Per Share $1.81 $1.12 $1.55
===== ===== =====
</TABLE>
<PAGE>
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
ST. JUDE MEDICAL, INC.:
Pacesetter, Inc. (Delaware)
St. Jude Medical, Inc., Cardiac Assist Division (Delaware)
St. Jude Medical S.C., Inc. (Minnesota)
St. Jude Medical Europe, Inc. (Delaware)
St. Jude Medical International, Inc. (Delaware)
St. Jude Medical Sales Corporation (Barbados)
St. Jude Medical Puerto Rico, Inc. (Delaware)
151703 Canada Inc. (Canada)
Pacesetter Netherland Distribution AB (Sweden)
Pacesetter AB (Sweden)
St. Jude Medical Sweden AB (Sweden)
St. Jude Medical Italia S.p.a. (Italy)
Pacesetter France SA (France)
St. Jude Medical Danmark A/s (Denmark)
St. Jude Medical Finland O/y (Finland)
St. Jude Medical AG (Switzerland)
St. Jude Medical GmbH (Germany)
St. Jude Medical Medizintechnik Ges.m.b.H. (Austria)
N.V. St. Jude Medical Belgium, S.A. (Belgium)
St. Jude Medical France S.A. (France)
St. Jude Medical Espagna S.A. (Spain)
St. Jude Medical UK Limited (United Kingdom)
Pacesetter Medical Products Limited (United Kingdom)
Partner Acquisition Corp. (Minnesota)
St. Jude Medical Nederland B.V. (Netherlands)
St. Jude Medical, Canada Inc. (Canada)
St. Jude Medical Pacesetter Sales AB (Sweden)
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of St. Jude Medical, Inc. of our report dated February 5, 1996, included in the
1995 Annual Report to Shareholders of St. Jude Medical, Inc.
We also consent to the incorporation by reference in Registration Statement
No. 33-9262; Registration Statement No. 33-29085; Registration Statement
No. 33-41459; Registration Statement No. 33-48502 and Registration Statement
No. 33-54435 on Form S-8 of our reports dated February 5, 1996, with respect to
the consolidated financial statements and schedule of St. Jude Medical, Inc.
included in or incorporated by reference in this Annual Report (Form 10-K)
for the year ended December 31, 1995.
/s/ Ernst & Young
- ------------------------------
Ernst & Young
Minneapolis, Minnesota
March 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 13,438
<SECURITIES> 152,615
<RECEIVABLES> 173,820
<ALLOWANCES> 9,328
<INVENTORY> 158,411
<CURRENT-ASSETS> 520,154
<PP&E> 204,422
<DEPRECIATION> 48,174
<TOTAL-ASSETS> 1,015,934
<CURRENT-LIABILITIES> 192,628
<BONDS> 0
0
0
<COMMON> 6,999
<OTHER-SE> 696,307
<TOTAL-LIABILITY-AND-EQUITY> 1,015,934
<SALES> 723,513
<TOTAL-REVENUES> 723,513
<CGS> 222,796
<TOTAL-COSTS> 222,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,510
<INTEREST-EXPENSE> 12,936
<INCOME-PRETAX> 187,563
<INCOME-TAX> 58,145
<INCOME-CONTINUING> 129,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,418
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.81
</TABLE>
