SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997 Commission File Number 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 Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
(Address of principal executive offices)
(612) 483-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 ____
The number of shares of common stock, par value $.10 per share, outstanding at
August 1, 1997 was 91,823,448.
This Form 10-Q consists of 14 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 14.
<PAGE>
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 2 - ACQUISITIONS
Effective May 15, 1997, the Company acquired Ventritex, Inc., a Sunnyvale,
California based manufacturer of implantable cardioverter defibrillators and
related products.
Each share of Ventritex common stock was converted into .5 shares of St. Jude
Medical common stock. The Company issued 10,437,800 shares to Ventritex
shareholders. The transaction was accounted for as a pooling of interests. The
accompanying financial statements, for all periods presented, are presented on a
pooled basis.
The results of Ventritex's operations have been included in the condensed
consolidated results of operations as if the merger had occurred at the
beginning of 1996. These results are not necessarily indicative of the results
that would have occurred had the merger actually taken place at the beginning of
1996, or of the expected future results of operations.
On November 29, 1996, the Company acquired from Pacific Dunlop, Ltd.
substantially all of the worldwide cardiac rhythm management assets of
Telectronics Pacing Systems, Inc. ("Telectronics") for $135,000. The initial
price can be adjusted upward or downward based upon the change in net asset
value between June 30, 1996 and November 29, 1996. The Company and Pacific
Dunlop, Ltd. currently disagree about the final adjustment to the purchase price
and are following procedures in the purchase agreement to resolve their
differences. The Company expects that any adjustment to the purchase price would
be recorded in 1997. The acquisition was accounted for under the purchase
accounting method. Goodwill of approximately $76,000 including approximately
$43,000 of consolidation charges, is being amortized on a straight line basis
over 20 years. Telectronics operations have been included in the consolidated
results of operations from the date of acquisition.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
The following unaudited pro forma summary information presents the results of
operations of the Company and Telectronics for the six months ended June 30,
1996, as if the acquisition had occurred at the beginning of 1996.
Six Months
Ending June 30
1996
(Unaudited)
-------------------
Net sales $480,748
Net (loss) $ (18,568)
Primary (loss) per share $ (.20)
These pro forma results are not necessarily indicative of the results that would
have occurred had the acquisition actually taken place at the beginning of 1996,
or of the expected future results of the combined operations.
NOTE 3 - CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. In connection with
two pacemaker lead models, the Company may be subject to future uninsured
claims. The Company's products liability insurance carrier has denied coverage
for these models and has filed suit against the Company seeking rescission of
the policy covering Pacesetter business retroactive to the date the Company
acquired Pacesetter. The Company was a codefendant in a 1995 class action suit
with respect to these leads. This case was settled in November 1995. The
Company's share of the settlement is approximately $5,000. This case is more
fully described in Item I Part II of this Quarterly Report on Form 10-Q.
Additional claims could be filed by patients with these leads who were not class
members. Further, claims may be filed in the future relative to events currently
unknown to management. Management believes losses that might be sustained from
such actions would not have a material adverse effect on the Company's liquidity
or financial condition, but could potentially be material to the net income of a
particular future period if resolved unfavorably.
NOTE 4 - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted for all financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. The impact is expected to result in an increase in basic earnings
per share of $.01 per share for the second quarter and year-to-date for both
years presented.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
NOTE 5 - STATEMENT OF FINANCIAL STANDARDS NO. 130,
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income, which is required to be adopted for all
financial statements issued for periods beginning after December 15, 1997. At
that time the Company will be required to separately report the amounts (and the
related tax effect) classified as Other Comprehensive Income. Items recorded as
a separate component of equity such as foreign currency gains/losses and
unrealized gains/losses on certain investments in debt and equity securities are
included in Other Comprehensive Income.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
In January 1997, the SEC issued new rules related to disclosures about
derivative financial instruments. The new rules, effective for all financial
statements issued for periods ending after June 15, 1997, require enhanced
accounting policy disclosures regarding derivative financial instruments in the
financial statements and for periods ending after June 15, 1998, qualitative and
quantitative information about all financial instruments should be disclosed
outside the financial statements and related notes.
The Company has entered into readily marketable foreign exchange traded
contracts to manage its exposure to fluctuations in foreign currency exchange
rates. These contracts involve the exchange of foreign currencies for U.S.
dollars at specified rates at future dates. The changes in market value of such
contracts have a high correlation to the price changes in the currency of the
related hedged transaction. These contracts are recorded at fair value and gains
or losses are included in other income (expense).
NOTE 7 - SPECIAL CHARGE UPDATE
The Company's special charge accruals of $47,808 recorded in the fourth quarter
of 1996 have decreased by cash payments totalling $36,903 since the date
recorded.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $261,456 $220,498 $511,846 $432,327
Cost of sales 91,632 73,060 183,348 143,599
-------- -------- -------- --------
Gross profit 169,824 147,438 328,498 288,728
Selling, general & administrative 100,025 76,847 194,413 153,182
Research & development 27,595 26,692 57,885 51,831
Purchased research & development -- -- -- 5,000
Special charges 30,645 -- 30,645 --
-------- -------- -------- --------
Operating profit 11,559 43,899 45,555 78,715
Other income (expense) 2,366 2,493 3,313 12,280
-------- -------- -------- --------
Income before taxes 13,925 46,392 48,868 90,995
Income tax provision 5,160 16,472 17,226 31,017
-------- -------- -------- --------
Net income $ 8,765 $ 29,920 $ 31,642 $ 59,978
======== ======== ======== ========
Earnings per share:
Primary $ .09 $ .32 $ .34 $ .65
======== ======== ======== ========
Fully diluted $ .09 $ .32 $ .34 $ .65
======== ======== ======== ========
Shares outstanding
Primary 92,593 92,067 92,659 92,089
Fully diluted 93,066 92,067 93,049 92,089
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
(UNAUDITED) (SEE NOTE)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,330 $ 49,388
Marketable securities 133,036 186,007
Accounts receivable, less allowance
(1997 - $8,308, 1996 - $8,160) 249,249 216,813
Inventories
Finished goods 124,753 119,736
Work in process 42,130 30,227
Raw materials 63,933 67,698
----------- -----------
Total inventories 230,816 217,661
Other current assets 75,840 78,015
----------- -----------
Total current assets 717,271 747,884
Property, plant and equipment 431,863 397,674
Less accumulated depreciation (135,304) (108,400)
----------- -----------
Net property, plant and equipment 296,559 289,274
Other assets 423,931 435,336
----------- -----------
TOTAL ASSETS $ 1,437,761 $ 1,472,494
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 247,525 $ 320,933
Long-term debt 241,500 229,500
Contingencies
Shareholders' equity:
Preferred stock, par value $1.00 per share -
25,000,000 shares authorized; no shares issued
Common stock, par value $.10 per share -
250,000,000 shares authorized; issued and
outstanding 1997 - 91,621,896 shares; 1996 - 9,162 9,140
91,404,961 shares
Additional paid-in capital 234,615 228,111
Retained earnings 724,534 692,892
Cumulative translation adjustment (19,904) 386
Unrealized gain (loss) on available-for-sale securities 329 (8,028)
Receivable - stock issued -- (440)
----------- -----------
Total shareholders' equity 948,736 922,061
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,437,761 $ 1,472,494
=========== ===========
</TABLE>
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
<PAGE>
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income $ 31,642 $ 59,978
Depreciation and amortization 34,529 29,481
Purchased research and development -- 5,000
Special charges 19,104 --
Gain on sale of business -- (10,486)
Working capital change (158,495) (50,396)
--------- --------
Net cash provided by (used in) operating activities (73,220) 33,577
--------- --------
Investment Activities:
Purchases of property, plant and equipment (38,261) (38,811)
Sales of available-for-sale securities, net 71,591 26,114
Acquisition, net of cash acquired -- (606)
Proceeds from sale of business -- 24,204
Other investing activities 1,153 (2,457)
--------- --------
Net cash provided by investing activities 34,483 8,444
--------- --------
Financing Activities:
Proceeds from exercise of stock options 6,526 19,535
Proceeds from (repayment of) long-term debt, net 12,000 (71,000)
Proceeds from receivable for stock issued 440 --
--------- --------
Net cash provided by (used in) financing activities 18,966 (51,465)
--------- --------
Effect of currency exchange rate changes on cash (1,287) (93)
--------- --------
Decrease in cash and cash equivalents (21,058) (9,537)
Cash and cash equivalents at beginning of year 49,388 62,638
--------- --------
Cash and cash equivalents at end of period $ 28,330 $ 53,101
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS:
NET SALES. Net sales for the second quarter 1997 totaled $261,456, a $40,958 or
an 18.6% increase over the 1996 second quarter net sales. Excluding Telectronics
and Far East distribution of other products net sales of approximately $27,000,
second quarter 1997 net sales increased more than 6% over the prior year
comparable period. For the first six months of 1997, net sales totaled $511,846,
a $79,519, or an 18.4% increase over net sales in the first half of 1996.
Excluding Telectronics and Far East distribution of other products net sales of
approximately $55,500, the first half 1997 net sales increased almost 6% over
the first six months of 1996. Unfavorable foreign currency effects due the
stronger U.S. dollar reduced 1997 net sales compared to 1996 by approximately
$5,300 and $10,100 for the quarter and first six months, respectively.
The second quarter 1997 net sales and percentage increases from last year's
second quarter were as follows: heart valves; $75,000, a 9% increase, cardiac
rhythm management; $169,000, a 17% increase, interventional cardiology; $9,000,
an 11% increase and Far East distribution of other products net sales of $8,000
versus no net sales in 1996. On a year-to-date basis, 1997 net sales and
percentage increases from last year's comparative period were as follows: heart
valves; $144,000, a 4% increase, cardiac rhythm management; $332,000, a 20%
increase, interventional cardiology $18,000, an 8% increase and other net sales
of $17,000.
The heart valve second quarter and year-to-date net sales increases were
attributable to higher sales in emerging markets and increased tissue valve
sales resulting from new tissue valve products that were partially offset by the
unfavorable foreign currency effects of a stronger U.S. dollar and continued
pricing pressure in developed markets. The cardiac rhythm management second
quarter and year-to-date net sales increases were primarily due to Telectronics
net sales which totaled almost $19,000 for the quarter. In addition, domestic
net sales increased almost 2% while international net sales decreased less than
1% because of the unfavorable foreign currency impact.
GROSS PROFIT. Second quarter 1997 gross profit totaled $169,824, or 65.0% of net
sales, as compared to $147,438, or 66.9% of net sales for the second quarter of
1996. For the first six months of 1997 and 1996, gross profit was $328,498, or
64.2% of net sales and $288,728, or 66.8% of net sales, respectively. The
decrease in gross profit margin for both the quarter and year-to-date resulted
from the inclusion of Telectronics in the 1997 results and the unfavorable
foreign currency effect that were partially offset by a revised estimate to
Ventritex-related warranty reserve requirements.
SELLING, GENERAL & ADMINISTRATIVE. Selling general & administrative (SG&A)
expenses in the second quarter 1997 of $100,025 increased $23,178, or 30.2% from
the second quarter 1996. As a percentage of sales, 1997 SG&A increased to 38.3%
from 34.9% in 1996. On a year-to-date basis, 1997 SG&A expenses totaled
$194,413, a $41,231 or 26.9% increase over the 1996 comparable period. The
increases for the quarter and the first six months resulted mainly from the
inclusion of Telectronics in the 1997 results and expenses associated with
expanded sales and marketing organizations in the emerging markets of Latin
America, Asia Pacific and Canada and enhanced information technology and
communications systems.
<PAGE>
RESEARCH AND DEVELOPMENT. Research and Development (R&D) expenses in the second
quarter of 1997 totaled $27,595, a $903 or 3.4% increase over the second quarter
1996. For the first six months of 1997 and 1996 R&D expenses totaled $57,885 and
$51,831, respectively. The increases for both the quarter and the first half
were primarily attributable to the inclusion of Telectronics.
PURCHASED RESEARCH & DEVELOPMENT. The $5,000 non-cash 1996 charge related to
purchased R&D in connection with the acquisition of the Heart Valve Company.
This represents the appraised value of in-process R&D which must be expensed
under generally accepted accounting principles for purchase accounting.
SPECIAL CHARGES. In the second quarter 1997 the Company recorded $30,645 of
special charges related to the Ventritex merger which consisted of transaction
charges of $8,227, U.S. distribution reorganization charges of $9,433,
repositioning charges of $6,939 related to its tachycardia business and
integration charges of $6,046.
OTHER INCOME. Other income in the second quarter 1997 totaled $2,366 compared to
$2,493 in the second quarter 1996. For the first six months of 1997 other income
totaled $3,313 versus $12,280 in the comparable period of 1996.
Interest expense in the second quarter 1997 increased by approximately $2,800
over the second quarter of 1996. The increase was due to the higher debt level
associated with the Telectronics acquisition and the assumption of the Ventritex
convertible debenture which was issued in the third quarter of 1996. In the
second quarter 1997, gains on the sale of investments increased by almost $3,300
over the second quarter 1996.
On a year-to-date basis, several non-recurring 1996 transactions increased other
income/expense over 1997 levels, including a $10,486 gain on the sale of the
cardiac assist business, a $2,951 gain as a result of the successful completion
of litigation related to a termination fee in connection with the Electromedics'
acquisition less $5,500 of transaction costs associated with the Daig
acquisition.
INCOME TAX PROVISION. The Company's effective income tax rate was 37% in the
second quarter 1997 compared to 35.5% in the second quarter of 1996. The
year-to-date effective income tax rate was 35.25% in 1997 versus 34.1% in 1996.
The increases for the quarter and the year resulted from the non-deductibility
of certain transaction costs related to the Ventritex acquisition and changes to
the Internal Revenue Code (IRC) Section 936 regulations that were finalized
during the second quarter of 1996. These IRC regulations reduced the tax
benefits derived from the Company's Puerto Rican operations.
OUTLOOK. The Company expects that market demands, government regulation and
societal pressures will continue to change the healthcare industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to broaden its product offerings through
internal development or external diversification opportunities. For the balance
of 1997, however, management intends to concentrate its efforts on the
integration of Telectronics and Ventritex into its Cardiac Rhythm Management
business. In addition, the Company will participate with industry groups to
promote the introduction and use of advanced medical device technology within a
cost conscious environment. Finally, customer service in the form of
cost-effective clinical outcomes will continue to be a primary focus for the
Company.
<PAGE>
As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in any forward-looking
statements made in this document and elsewhere by or on behalf of the Company.
Net sales could be materially affected by legislative or administrative reforms
to the U.S. Medicare and Medicaid systems in a manner that would significantly
reduce reimbursement for procedures using the Company's medical devices, the
acquisition of key patents by competitors that would have the effect of
excluding the Company from new market segments, healthcare industry
consolidation resulting in customer demands for price concessions, products
introduced by competitors with advanced technology and better features and
benefits or lower prices, fewer procedures performed in a cost conscious
environment, and the lengthy approval time by the FDA to clear implantable
medical devices for commercial release. Cost of sales could be materially
affected by unfavorable developments in the area of products liability and price
increases from the Company's suppliers of critical components, a number of which
are sole sourced. Operations could be affected by the Company's ability to
execute its diversification strategy or to integrate acquired companies, a
serious earthquake affecting the Company's facilities in California, adverse
developments in the litigation arising from the acquisitions of Telectronics and
Ventritex, including litigation related to the Ventritex Cadence model V-110 ICD
device, unanticipated product failures and attempts by competitors to gain
market share through aggressive marketing programs.
The Company's 1997 effective income tax rate increased from 1996 due to a higher
ratio of Pacesetter and Daig income which is generally taxed at a higher rate
than the Company's heart valve income, non-deductible transaction costs related
to the Ventritex transaction, reduced Puerto Rican income as a percentage of
total income and a lower Puerto Rican tax benefit as IRC Section 936 tax
benefits are reduced by an additional 5% per year through 1998. Legislation was
also passed in 1996 to phase out the Section 936 tax benefit over a ten year
period which will further negatively impact the Company's effective tax rate. In
addition, the IRS issued a Notice of Deficiency of $16,353 in additional taxes
relating primarily to the Company's Puerto Rican operations in 1990 and 1991. It
is likely that similar assessments will be proposed for subsequent years. The
Company filed a petition in Tax Court in June 1997 contesting the full amount of
the deficiency.
FINANCIAL CONDITION:
The Company's financial condition at June 30, 1997, continues to remain strong.
Long-term debt increased to $241,500, a $12,000 increase during the first six
months. The ratio of current assets to current liabilities was 2.9 to 1 at June
30, 1997.
Total assets decreased $34,733 during the first six months of 1997. Accounts
receivable increased $32,436 due to a higher sales level particularly in
emerging markets which have extended credit terms. Inventories increased
$13,155 due to expanded product offerings. Cash and marketable securities
decreased $74,029 principally to fund the operations of Telectronics and
Ventritex and the reduction of several liabilities.
Shareholders' equity increased $26,675 during the first half of 1997. The
increase resulted from net income of $31,642, the exercise of stock options of
$6,526, a net unrealized gain on investments of $8,357, a foreign currency
translation adjustment of $20,290 and the repayment of a stock receivable
totaling $440.
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant),
Guidant Sales Corporation (a wholly owned subsidiary of CPI, "GSC"),
and Eli Lilly and Company (the former owner of CPI, "Lilly")
(collectively, the "Guidant Parties"), filed a lawsuit against St. Jude
Medical, Inc., Pacesetter Inc. ("Pacesetter"), Ventritex Inc.
("Ventritex") and certain members of the Telectronics Group in State
Superior Court in Marion County, Indiana (the "Telectronics Action").
The lawsuit alleges, among other things, that, pursuant to an agreement
entered into in 1993, CPI and Lilly granted Ventritex certain
intellectual property licenses relating to cardiac stimulation devices,
and that such licenses will terminate upon consummation of the merger
of Ventritex into Pacesetter (the "Merger"). The lawsuit further
alleges that, pursuant to an agreement entered into in 1994 (the
"Telectronics Agreement"), CPI and Lilly granted the Telectronics Group
certain intellectual property licenses relating to cardiac stimulation
devices (the "CPI/Telectronics License"). The lawsuit seeks declaratory
and injunctive relief, among other things, to prevent and invalidate
the transfer of the Telectronics Agreement to Pacesetter in connection
with Pacesetter's assets (the "Telectronics Acquisition") and the
application of license rights granted under the Telectronics Agreement
to the manufacture and sale by Pacesetter of Ventritex's products
following the consummation of the Merger. On December 17, 1996, St.
Jude Medical, Pacesetter, Ventritex and the Telectronics Group removed
the lawsuit to the United States District Court for the Southern
District of Indiana, and filed a motion to dismiss the complaint or, in
the alternative, to stay proceedings pending arbitration of the dispute
pursuant to the arbitration provisions of the Telectronics Agreement.
On January 16, 1997, the Guidant Parties filed a motion to remand the
lawsuit to state court which was granted in May 1997. St. Jude Medical,
Pacesetter and Ventrix filed a motion in state court to dimiss the
complaint or, in the alternative, to stay the proceedings pending
artbitration. This motion was denied by the court on July 21, 1997. St.
Jude Medical and Pacesetter are continuing to vigorously defend the
claims which the Guidant Parties have asserted in this action.
CPI, GSC and Lilly (collectively the "Guidant Parties") simultaneously
filed suit against St. Jude Medical, Pacesetter and Ventritex in the
United States District Court for the Southern District of Indiana
seeking (i) a declaratory judgment that the manufacture, use or sale of
cardiac stimulation devices of the type or similar to the type
currently manufactured and sold by Ventritex will, upon consummation of
the Merger, be unlicensed and constitute an infringement of patent
rights owned by CPI and Lilly, (ii) to enjoin the manufacture, use or
sale by St. Jude Medical, Pacesetter or Ventritex of cardiac
stimulation devices of the type currently manufactured by Ventritex and
(iii) certain damages and costs. On December 19, 1996, St. Jude
Medical, Pacesetter and Ventritex filed a motion to dismiss the
complaint or, in the alternative, to stay proceedings pending
resolution of the Telectronics Action or arbitration. The court denied
this motion. St. Jude Medical and Pacesetter are continuing to
vigorously defend against the claims which the Guidant Parties asserted
in this action.
<PAGE>
PART II OTHER INFORMATION (continued)
St. Jude Medical believes that the foregoing complaints contain a
number of significant factual inaccuracies concerning the Telectronics
Acquisition and the terms and effects of the various intellectual
property license agreements referred to in such complaints. St. Jude
Medical and Ventritex believe that the allegations set forth in the
complaints are without merit, and St. Jude Medical and Ventritex intend
to defend the actions vigorously. On December 24, 1996, the
Telectronics Group and Pacesetter filed a lawsuit and a motion against
the Guidant Parties in the United States District Court for the
District of Minnesota seeking (i) a declaratory judgment that the
Defendants' claims, as reflected in the Telectronics Action, are
subject to arbitration pursuant to the arbitration provisions of the
Telectronics Agreement, (ii) an order that the Defendants arbitrate
their claims against the Telectronics Group and Pacesetter in
accordance with the arbitration provisions of the Telectronics
Agreement, (iii) to enjoin the Defendants preliminarily and permanently
from litigating their dispute with the Telectronics Group and
Pacesetter in any other forum and (iv) certain costs. On February 27,
1997, the court entered an order denying the Telectronics Group's and
Pacesetter's motion and dismissing their complaint. On March 27, 1997,
the Telectronics Group and Pacesetter filed a Notice of Appeal from the
court's February 27, 1997 order.
OTHER LITIGATION AND PROCEEDINGS
From 1987 to 1991, Siemens AG, through its Pacesetter and other
affiliates, manufactured and sold approximately 32,000 model 1016T and
1026T pacemaker leads, of which approximately 25,000 were sold in the
United States. 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. Class
action status was granted by the court in September 1993. When St. Jude
Medical acquired Pacesetter from Siemens on September 30, 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 Medical would assume liability for other
product liability claims which arose after September 30, 1994.
Siemens and St. Jude Medical were named defendants in a class action
suit filed in March 1995 in federal district court 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 March 22, 1993 and who were
not members of the Wilson case class. Siemens and St. Jude Medical
settled the Wilson and Hann cases in November 1995. Management
currently estimates the Company's share of the settlement to be
approximately $5 million; however, 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.
<PAGE>
PART II OTHER INFORMATION (continued)
St. Jude Medical's products liability insurance carrier, Steadfast, a
wholly owned subsidiary of Zurich Insurance Company ("Zurich"), has
denied coverage for these cases and has filed suit against St. Jude
Medical in federal district court in Minneapolis, Minnesota seeking
rescission of the policy covering Pacesetter business retroactive to
the date St. Jude Medical acquired Pacesetter. Zurich alleges that St.
Jude Medical made material negligent misrepresentations to Zurich,
including failure to disclose the Wilson case in order to procure the
insurance policy. St. Jude Medical 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 Medical would be
entitled to $10 million in coverage for the 1016T and 1026T pacemaker
lead claims after payment by St. Jude Medical of a self insured
retention. In connection with these proceedings, St. Jude Medical has
filed suit against its former insurance broker, Johnson & Higgins.
Discovery has been completed and the case is ready for trial.
<PAGE>
PART II OTHER INFORMATION (continued)
Item 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
2 Not applicable
4 Rights Agreement dated as of July 16, 1997 between
the Company and American Stock Transfer and Trust
Company, as Rights Agent including the Certificate
of Designation, Preferences and Rights of Series B
Junior Preferred Stock is incorporated by
reference to Exhibit 1 of the Registrant's Form 8A
dated as of August 6, 1997.
10 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Form 8-K dated May 15, 1997.
Item 5. Other Events
Announcement of execution of Agreement and Plan of
Merger among St. Jude Medical, Inc., Pacesetter,
Inc. and Ventritex, Inc. dated October 23, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
August 12, 1997 /s/ TERRY L. SHEPHERD
- -------------------- -----------------------
DATE TERRY L. SHEPHERD
Vice President Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 28,330
<SECURITIES> 133,026
<RECEIVABLES> 257,557
<ALLOWANCES> 8,308
<INVENTORY> 230,816
<CURRENT-ASSETS> 717,271
<PP&E> 431,863
<DEPRECIATION> 135,304
<TOTAL-ASSETS> 1,437,761
<CURRENT-LIABILITIES> 247,525
<BONDS> 0
0
0
<COMMON> 9,162
<OTHER-SE> 939,574
<TOTAL-LIABILITY-AND-EQUITY> 1,437,761
<SALES> 511,846
<TOTAL-REVENUES> 511,846
<CGS> 183,348
<TOTAL-COSTS> 183,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (78)
<INTEREST-EXPENSE> 7,370
<INCOME-PRETAX> 48,868
<INCOME-TAX> 17,226
<INCOME-CONTINUING> 31,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,642
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
