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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, 1998
COMMISSION FILE NO. 0-8672
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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)
(651) 483-2000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS
(Title of class) (Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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. ____
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 aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $2.0 billion at March 11, 1999, when the
closing sale price of such stock, as reported on the New York Stock Exchange,
was $24.06.
The number of shares outstanding of the Registrant's Common Stock, $.10
par value, as of March 11, 1999, was 84,246,363 shares.
Portions of the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated by reference in Parts I, II and IV. Portions
of the Proxy Statement dated March 26, 1999, are incorporated by reference in
Part III.
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The exhibit index is set forth on pages 13 and 14. This Form 10-K
consists of 69 pages, consecutively numbered 1 through 69.
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ST. JUDE MEDICAL, INC.
1998 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 100 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 and Western Europe.
Effective May 15, 1997, St. Jude acquired Ventritex, Inc.,
("Ventritex") a California-based manufacturer of implantable cardioverter
defibrillators (ICDs) and related products. ICDs are used to treat hearts that
beat inappropriately fast.
Effective November 29, 1996, St. Jude Medical's Pacesetter subsidiary
acquired substantially all of the assets of Telectronics Pacing Systems, Inc.
("Telectronics"), a pacemaker company, and Medtel, a distribution company in the
Asia-Pacific region. In addition to state-of-the-art pacing technologies,
Telectronics enhanced the Company's cardiac rhythm management division
operations by adding important intellectual property assets.
Effective September 23, 1996, the Company acquired Newcor Industrial
S.A. which owned most of the assets of Biocor(R) Industria E Pesquisas Ltd., a
Brazilian manufacturer of tissue heart valves.
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"),
a Minnesota based manufacturer of specialized cardiovascular catheters and
related products for the electrophysiology and interventional cardiology
markets.
St. Jude provides products and services for two industry segments:
cardiac rhythm management and heart valve disease management. Substantially all
of its operations and assets are attributable to cardiovascular medical devices.
The Cardiac Rhythm Management Division (CRMD) is responsible for the Company's
cardiac rhythm management products including bradycardia pulse generators
(pacemakers), leads (insulated wires) and programmers and tachycardia
implantable cardioverter defibrillators, leads and programmers. CRMD also
provides a broad array of catheter product offerings for interventional
cardiology, and electrophysiology catheters for diagnostic mapping of the heart,
ablation of malfunctioning heart tissue and temporary cardiac pacing catheters.
The Heart Valve Division is responsible for the Company's heart valve disease
management products including mechanical and tissue heart valves and
annuloplasty rings. In addition, the Company maintains geographically based
sales and marketing organizations which are responsible for marketing, sales and
distribution of the Company's and third party products in Europe, Africa, the
Middle East, Japan, Canada, Latin America and the Asia-Pacific region.
Typically, the Company's net sales are somewhat higher in the first and
second quarters and lower in the third and fourth quarters. 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
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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,
acquisitions, and regulatory approvals can modify the expected net sales
pattern.
In 1998, approximately 72% of net sales were derived from cardiac
rhythm management products, and approximately 28% from heart valve disease
management products. Approximately 59% of the Company's 1998 net sales were in
the U.S. market, which was consistent with 1997 results.
CARDIAC RHYTHM MANAGEMENT
The Cardiac Rhythm Management Division is headquartered in Sylmar,
California and has manufacturing facilities in California, Arizona, Minnesota,
South Carolina and Sweden. Pacesetter(R) pacemakers and related systems treat
patients with hearts that beat inappropriately slow, a condition known as
bradycardia. Ventritex(R) ICDs and related systems treat patients with hearts
that beat inappropriately fast, a condition known as tachycardia. Daig(R)
specialized disposable cardiovascular catheters and related devices are used in
the electrophysiology and interventional cardiology markets.
Typically implanted pectorally, just below the collarbone, pacemakers
monitor the heart's rate and, when necessary, deliver low-level electrical
impulses that stimulate an appropriate heartbeat. The pacemaker is connected to
the heart by one or two leads that carry the electrical impulses to the heart
and information from the heart back to the pacemaker. An external programmer
enables the physician to retrieve diagnostic information from the pacemaker and
reprogram the device in accordance with the patient's changing needs.
Single-chamber pacemakers stimulate only one chamber of the heart (atrium or
ventricle), while dual-chamber devices can sense and pace in both the upper and
lower chambers.
CRMD's current Pacesetter(R) pacing products include the January 1999
FDA approved Affinity(R) and the Trilogy(R) family of pacemakers, containing the
proven Omnisense(TM) activity-based sensor, and the Tempo(TM) pacemaker family,
which uses fifth-generation Minute Ventilation sensor technology. These
pacemaker families are highly automatic and contain many advanced features and
diagnostic capabilities to optimize cardiac therapy. All are small and
physiologic in shape to enhance patient comfort.
Outside the United States, CRMD also offers the world's smallest
single-chamber pacemaker, the Microny(TM) SR+, and the Regency(TM) pacemaker
families, which are in clinical trials in the United States. The Affinity(R) and
Regency(TM) families of pacemakers, as well as the Microny(TM) SR+, all offer
the unique feature of AutoCapture(TM) pacing system. The AutoCapture(TM) pacing
system is a proprietary technology that enables the pacemaker to monitor every
paced beat for heart capture, deliver a back-up pulse in the event of
noncapture, continuously measure threshold, and make adjustments in energy
output to match changing patient needs.
CRMD's current pacing leads include the active-fixation Tendril(R) DX
family and the passive-fixation Passive Plus(R) DX family which are available
worldwide, and the passive-fixation Membrane(TM) EX family which is currently
available outside the United States. All three lead families feature steroid
elution, which helps suppress the body's inflammatory response to a foreign
object, are designed to maximize energy efficiency and promote pacing system
longevity.
CRMD offers two pacemaker programmers, the APS(TM) III patient
management system, and the highly portable APS(TM)(mu) (micro), which allow the
physician to efficiently utilize the extensive diagnostic and therapeutic
capabilities of CRMD's pacemakers.
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CRMD's Ventritex(R) ICDs monitor the heartbeat and deliver higher
energy electrical impulses, or "shocks," to terminate ventricular tachycardia
(VT) and ventricular fibrillation (VF). In ventricular tachycardia, the lower
chambers of the heart contract at an abnormally rapid rate and typically deliver
less blood to the body's tissues and organs. VT can progress to VF, in which the
heart beats so rapidly and erratically that it can no longer pump blood. Like
pacemakers, defibrillators are typically implanted pectorally, connected to the
heart by leads, and programmed non-invasively. The current Ventritex offerings
include the Angstrom(TM) MD, Contour(R) MD and Profile(TM) MD ICDs.
These ICDs are used with the dual electrode Ventritex(R) SPL(R) and
single electrode Ventritex(R) TVL(R) transvenous leads, which have superior
handling characteristics and performance. Ventritex ICDs are currently
programmed with the recently introduced PR-3500 and PR-1500 programmers.
Specialized disposable cardiovascular devices, sold under the Daig
name, include percutaneous (through the skin) catheter introducers, diagnostic
guidewires, electrophysiology catheters and bipolar temporary pacing catheters
(used with external pacemakers). Percutaneous catheter introducers are used to
create passageways for cardiovascular catheters from outside the human body
through the skin into a vein, artery or other location inside the body. Daig's
percutaneous catheter introducer products consist primarily of peel-away
sheaths, sheaths with and without hemostasis valves, dilators, guidewires,
repositioning sleeves, obturators and needles. All of these products are offered
in a variety of sizes and packaging configurations. Diagnostic guidewires are
used in conjunction with percutaneous catheter introducers to aid in the
introduction of intravascular catheters. Daig's diagnostic guidewires are
available in multiple lengths and incorporate a surface finish for lasting
lubricity.
Electrophysiology catheters are placed into the human body
percutaneously to aid in the diagnosis and treatment of cardiac arrhythmias
(abnormal heart rhythms). Between two and five electrophysiology catheters are
generally used in each electrophysiology procedure. Daig's electrophysiology
catheters are available in multiple configurations. Bipolar temporary pacing
catheters are inserted percutaneously for temporary use (less than one hour to a
maximum of one week) with external pacemakers to provide patient stabilization
prior to implantation of a permanent pacemaker, following a heart attack, or
during surgical procedures. Daig produces and markets several designs of bipolar
temporary pacing catheters.
HEART VALVE DISEASE MANAGEMENT
The Heart Valve Division (HVD) is headquartered in St. Paul, Minnesota
and has manufacturing facilities in St. Paul, Puerto Rico, Canada and Brazil.
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.
HVD offers both mechanical and tissue replacement heart valves and
valve repair products. The St. Jude Medical(R) mechanical heart valve has been
implanted in over 900,000 patients to date. The Company markets the Toronto
SPV(R) stentless tissue valve, the world's leading stentless tissue valve and
the SJM(R) Biocor(TM) tissue valves. The Company received FDA approval for the
U.S. market release of the Toronto SPV(R) in November 1997 at which time the
product was launched and physician training commenced. The SJM Epic(TM) tissue
heart valve received European regulatory approval in late 1998 and is expected
to be launched in Europe in 1999.
Annuloplasty rings are prosthetic devices used to repair diseased or
damaged mitral heart valves. The Company has executed a license agreement with
Professor Jacques Seguin to manufacture and market an advanced semi-rigid
annuloplasty ring. The SJM(R) Seguin annuloplasty ring was cleared by the FDA
for
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U.S. release during first quarter 1997. The SJM Tailor(TM) annuloplasty ring
received worldwide regulatory approvals in late 1998 and is expected to be
launched worldwide in early 1999.
HVD has also entered into other relationships to provide additional
products and services for heart valve disease management, including:
1) An agreement with LifeNet Transplant Services which enables HVD to
assist in the marketing of human donated allograft heart valves.
2) An alliance with Boehringer Mannheim Corporation which provides valve
patients the opportunity to use a home test kit for measuring
anticoagulation levels.
3) A worldwide license agreement with Spire Corporation to utilize their
proprietary anti-bacterial silver coating (Silzone(TM)) on the sewing
cuffs of heart valves and related products.
SUPPLIERS
The Company purchases raw materials and other items from numerous
suppliers for use in its products. The Company maintains sizable 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 to provide 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.
CRMD has traditionally been a technological leader in the bradycardia
pacemaker market. Two other companies and CRMD account for well over eighty
percent of the worldwide bradycardia pacemaker net sales. The Company has strong
market share positions in all major developed markets.
There are three principal manufacturers and suppliers of ICDs. This is
a rapidly growing and highly competitive market. Two of the competitors account
for more than 80% of the worldwide ICD sales. These two competitors are larger
than the Company and have invested substantial amounts in ICD research and
development. The market areas Daig focuses on are the cardiac catherization
laboratories and the electrophysiology laboratories throughout the world. These
are growing markets with numerous competitors.
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. The Company competes against two principal
and a large number of other smaller tissue heart valve manufacturers.
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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's products are sold in over 100 countries throughout the
world. No distributor organization or single customer accounted for more than
10% of 1998 net sales.
In the United States, St. Jude sells directly to hospitals through a
combination of independent manufacturers' representatives and an employee based
sales organization for its pacemaker products and through employee based sales
organizations for its heart valve and catheter products. In Western Europe, the
Company has an employee based sales organization selling in 14 countries.
Throughout the rest of the world the Company uses a combination of independent
distributor and direct 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, exclusive of purchased research
and development, were $99,756,000 (9.8% of net sales), $104,693,000 (10.5%) and
$107,644,000 (12.3%) in 1998, 1997 and 1996, respectively.
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, implantable cardioverter defibrillators,
certain pacemakers and leads and certain electrophysiology catheter applications
are subject to this level of approval or as a supplement to a PMA approval.
Other pacemakers and leads, annuloplasty ring products and other
electrophysiology and interventional cardiology products are currently marketed
under the 510(k) pre-market notification procedure of the Act.
In addition, the FDA may require testing and surveillance programs to
monitor the effect of approved products which have been commercialized and it
has the power to prevent or limit further marketing of a product based on the
results of these post-marketing programs. The FDA also conducts inspections
prior to approval of a PMA to determine compliance with the quality system
regulations which covers manufacturing and design and may, at any time after
approval of a PMA or granting of a 510(K), conduct periodic inspections to
determine compliance with both good manufacturing practice regulations and/or
current medical device reporting regulations. If the FDA were to conclude that
St. Jude was not in
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compliance with applicable laws or regulations, it could institute proceedings
to detain or seize products, issue a recall, impose operating restrictions,
assess civil penalties and recommend criminal prosecution to the Department of
Justice. Furthermore, the FDA could proceed to ban, or request recall, repair,
replacement or refund of the cost of, any device manufactured or distributed.
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.
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. In response to rising Medicare and Medicaid
costs, several legislative proposals have been advanced which would restrict
future funding increases for these programs. 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.
St. Jude Medical's 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 Community ("EEC"), the regulatory systems have been harmonized
and approval to market in EEC countries (the CE Mark) can be obtained through
one agency. In addition, government funding of medical procedures is limited and
in certain instances being reduced.
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 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 April 1996, a Federal District Court in
California declared the HCFA's governmental guidelines, denying reimbursement
for investigational devices, to be invalid. After an appeal, the district court
has again found the regulation invalid and the government has appealed again.
There can be no assurance that the OIG's investigation or any resulting or
related changes in third-party payors' reimbursement practices will not
materially adversely affect the medical device industry in general
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or St. Jude Medical in particular.
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 May 1995 Telectronics and its President entered into a consent
decree with the FDA. The consent decree provided that Telectronics would not
manufacture or ship products for distribution in the United States until
Telectronics established to the satisfaction of the FDA that its manufacturing
facility in Florida operates in conformity with the FDA's good manufacturing
practice regulations. Telectronics has satisfied its obligations in this regard
and was released from these restrictions of the consent decree in June 1996. The
consent decree which remains in effect indefinitely requires that Telectronics
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 Telectronics 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. 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 in
Europe of St. Jude and other manufacturers.
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 expired 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.
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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 Sylmar
and Sunnyvale, California does provide for limited coverage above a significant
self-insured retention. There are several factors that preclude the Company from
determining the effect an earthquake may have on its business. These factors
include, but are not limited to, the severity and location of the earthquake,
the extent of any damage to the Company's manufacturing facilities, the impact
of such an earthquake on the Company's California workforce and the
infrastructure of the surrounding communities, and the extent, if any, of damage
to the Company's inventory and work in process. While the Company's exposure to
significant losses occasioned by a California earthquake would be partially
mitigated by its ability to manufacture certain of the Pacesetter products at
its Swedish manufacturing facility, any such losses could have a material
adverse effect on the Company, the duration of which cannot be reasonably
predicted. The Company has expanded the manufacturing capabilities at its
Swedish facility and has constructed a pacemaker component manufacturing
facility in Arizona. In addition, the Company has moved significant finished
goods inventory to locations outside California. These facilities and inventory
transfers would further mitigate the adverse impact of a California earthquake.
EMPLOYEES
As of December 31, 1998, the Company had 3,984 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 and certain employees in France.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
St. Jude Medical provides products and services for two industry
segments: cardiac rhythm management and heart valve disease management. The
Company's domestic and foreign net sales, operating profit and identifiable
assets are described in Note 9 to the Consolidated Financial Statements on pages
44 and 45 of the 1998 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, 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, Arizona, South Carolina, Canada, Brazil, Puerto Rico and
Sweden. Approximately 69%, or 352,000 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 14 locations in 6 states and outside the United States at 40
locations in 22 countries. With the exception of one location, all of these
locations are leased.
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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
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 would terminate upon the 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 acquisition of Telectronic'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 Indiana
state court which was granted in May 1997. St. Jude Medical, Pacesetter and
Ventritex then filed a motion in Indiana state court to dismiss the complaint
or, in the alternative, to stay the proceedings pending arbitration. This motion
was denied by the Indiana state court on July 21, 1997.
CPI, GSC and Lilly (collectively the "Federal Court Guidant Parties")
also filed suit against St. Jude Medical, Pacesetter and Ventritex on November
26, 1996 in the United States District Court for the Southern District of
Indiana seeking (i) a declaratory judgment that Pacesetter's manufacture, use or
sale of cardiac stimulation devices of the type or similar to the type which
Ventritex manufactured and sold at the time the Federal Court Guidant Parties
filed their complaint would 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 which Ventritex manufactured at the
time the Federal Court Guidant Parties filed their complaint 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 believe that the foregoing state and
federal court 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. For
these
9
<PAGE>
reasons and others, St. Jude Medical and Pacesetter believe that the allegations
set forth in the complaints are without merit, and they have vigorously defended
their interests, and will continue to do so.
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
Guidant Parties' 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 motion brought by the Telectronics Group and
Pacesetter 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.
In response to the appeal by the Telectronics Group and Pacesetter, the
Court of Appeals issued a decision on May 4, 1998 reversing the district court
and vacating the district court's dismissal of the Minnesota federal district
court lawsuit which the Telectronics Group and Pacesetter brought against the
Guidant Parties. As part of this decision, the Court of Appeals remanded the
case to the district court in Minnesota and instructed the district court to
permit the arbitration requested by the Telectronics Group and Pacesetter to
proceed. The Court of Appeals also asked the district court in Minnesota to
reconsider the motion for an injunction previously brought by the Telectronics
Group and Pacesetter which sought to preliminarily and permanently enjoin the
Guidant Parties from litigating their dispute with the Telectronics Group and
Pacesetter in any forum outside the arbitration proceeding.
The Guidant Parties filed a request for re-hearing of the Eighth
Circuit Court of Appeals' May 4, 1998 decision and a suggestion that the matter
be considered by the court en banc. The Court of Appeals denied Guidant's
requests in this regard by order dated June 9, 1998.
As a result of Eighth Circuit Court of Appeals' decision in favor of
Pacesetter and the Telectronics Group, the United States District Court for the
Southern District of Indiana issued an order on June 8, 1998 staying the case
which the Federal Court Guidant Parties had brought against St. Jude Medical and
Pacesetter. In addition, the State Superior Court in Marion County, Indiana also
issued an order on June 18, 1998 staying the Telectronics Action. Finally, the
United States District Court for the District of Minnesota issued an order on
July 8, 1998 directing the arbitration requested by the Telectronics Group and
Pacesetter to proceed. That court's order also requires Guidant to provide the
Telectronics Group and Pacesetter with advance notice if it seeks to lift either
of the stays that have been granted in the above cases.
An arbitrator for the arbitration has been selected by the parties. The
arbitrator has issued some interim rulings and the parties are presently waiting
for the arbitrator's further instructions to proceed with the arbitration.
On December 23, 1998, the Guidant Parties gave the Telectronics Group
and Pacesetter notice of their intent to seek to lift the stay of proceedings
which had been issued in the federal court action in Indiana. On January 11,
1999, the Federal Court Guidant Parties served a copy of their motion to lift
stay upon the Telectronics Group and Pacesetter. All parties have provided
written briefs on this matter to the federal court in Indiana and are awaiting a
ruling from the court.
10
<PAGE>
St. Jude Medical and Pacesetter will continue to vigorously defend
their interests against the claims asserted by Guidant and associated entities
in the arbitration.
IRS LITIGATION
The Internal Revenue Service ("IRS") completed an audit examination of
the Company's 1990-1991 corporate income tax returns and issued deficiency
notices in early 1997 for taxes of $16.4 million. In addition, the IRS completed
an audit examination of the Company's 1992-1994 income tax returns in early 1998
and has proposed an adjustment of $41.8 million in taxes. Both adjustments
relate primarily to the Company's Puerto Rican operations. The deficiency
amounts do not include interest, state taxes, or offsetting Puerto Rico tax
refunds, the net effect of which is not material. It is likely that a similar
additional adjustment will be proposed for 1995. The Company is vigorously
contesting this adjustment. The Company is refuting the IRS deficiency for
1990-1991 and asserting the Company is in fact owed a refund in a petition filed
in Tax Court on June 24, 1997. The Company expects that the ultimate resolution
will not have material adverse effect on its financial position or liquidity,
but could potentially be material to the net income of a particular future
period if resolved unfavorably.
OTHER LITIGATION AND PROCEEDINGS
On December 16, 1998, the Company began a lawsuit in federal court in
Los Angeles seeking a declaration that it was permitted to hire certain sales
representatives who previously had worked for Intermedics, which was acquired by
Guidant. The Company's CRMD unit has hired 14 such representatives as of March
16, 1999, six of whom had no written agreement with Intermedics or Guidant.
Guidant has filed a counterclaim in the lawsuit seeking damages from the Company
for the hiring of these representatives and for their activities as sales
representatives of CRMD. The Company intends to vigorously assert its position
in this litigation.
The Company is unaware of any other pending legal proceedings which it
regards as likely to have a material adverse effect on its business.
11
<PAGE>
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*
- -------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Ronald A. Matricaria 56 Chairman (1995) and Chief Executive Officer (1993)
Fred B. Parks 51 President and Chief Operating Officer (1998)
Daniel J. Starks 44 Chief Executive Officer, Cardiac Rhythm Management Division (1997)
and Daig (1996)
Terry L. Shepherd 46 President, Heart Valve Division (1994)
Patrick P. Fourteau 51 President, International (1998)
Michael J. Coyle 36 President Daig (1997)
John P. Berdusco 62 Vice President, Administration (1993)
Peter L. Gove 51 Vice President, Corporate Relations (1994)
John C. Heinmiller 44 Vice President, Finance and Chief Financial Officer (1998)
Kevin T. O'Malley, Esq. 47 Vice President and General Counsel (1994)
Robert Cohen 41 Vice President Business and Technology Development (1998)
</TABLE>
- -----------------------
*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.
Mr. Matricaria's business experience is set forth in the Company's
definitive Proxy Statement dated March 25, 1999 under the Section "Election of
Directors." The information is incorporated herein by reference.
Dr. Parks' resigned from the Company effective March 31, 1999.
Mr. Stark's business experience is set forth in the Company's
definitive Proxy Statement dated March 25, 1999 under the section "Election of
Directors." The information is incorporated herein by reference.
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) and
Eli Lilly & Company where he worked for 15 years. Hybritech and CPI were both
wholly owned subsidiaries of Eli Lilly & Company. Effective May 5, 1999, Mr.
Shepherd has been appointed as the President and Chief Executive Officer of St.
Jude Medical, Inc.
12
<PAGE>
Mr. Fourteau joined the Company in 1995 as President of St. Jude
Medical Europe. He was appointed President of the Pacesetter Division in May
1996. Mr. Fourteau was appointed as President of the International Division in
1998. Prior to joining the Company, he was employed by Eli Lilly & Company for
19 years in various positions including his last position of vice president of
pharmaceutical operations for Lilly International.
Mr. Coyle joined St. Jude Medical in 1994 as Director, Business
Development and was appointed as the President and Chief Operating Officer of
Daig in 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly &
Company in a variety of technical and business management roles in both its
Pharmaceutical and Medical Device Divisions.
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. Gove joined the Company in 1994 as Vice President, Corporate
Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing
and Communications of Control Data Systems, Inc., a computer services company,
from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions
with Control Data Corporation. From 1970 to 1981, Mr. Gove held various
management positions with the State of Minnesota and the U.S. Government.
Mr. O'Malley joined the Company in 1994 as Vice President and General
Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly &
Company for 15 years in various positions including his last position of General
Counsel of the Medical Device and Diagnostics Division.
Mr. Heinmiller joined the Company in 1998 as Vice President of
Corporate Business Development. In September 1998 he was appointed Vice
President, Finance and Chief Financial Officer. Prior to joining the Company,
Mr. Heinmiller was president of F3 Corporation, a privately held asset
management company, and was vice president of finance and administration for
Daig Corporation. Mr. Heinmiller is also a former audit partner in the
Minneapolis office of Grant Thornton, a national public accounting firm, where
he managed the firm's relationship with a number of clients. Mr. Heinmiller is a
director of Lifecore Biomedical, Inc., Arctic Cat, Inc. and former director of
Daig Corporation.
Mr. Cohen joined the Company in 1998 as Vice President, Business and
Technology Development. Prior to joining the Company, he was employed by Sulzer
Medica. During his 16-year career in the medical device industry, Mr. Cohen has
been associated with Pfizer Inc. and GCI Medical, an investment firm focused on
the medical technology industry.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The information set forth under the captions "Dividends" and "Stock
Exchange Listing" on pages 30 and 48 of the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five Year Summary of
Selected Financial Data" on page 47 of the Company's 1998 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 25
through 32 of the Company's 1998 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under the caption "Market Risk Sensitive
Instruments" one page 29 of the Company's 1998 Annual Report to shareholders is
incorporated 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 33 through 46 of the Company's
1998 Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1998, 1997
and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 26, 1999, is incorporated
herein by reference. Information on executive officers is set forth in Part I,
Item 4A hereto.
14
<PAGE>
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 26, 1999, 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 26, 1999, 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 26, 1999, 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 33 through 46
of the Company's 1998 Annual Report to Shareholders are
incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996
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:
15
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
- ---------------- ------------------------------------------------------------------- ------------
<S> <C>
II Valuation and Qualifying Accounts 16
</TABLE>
The report of the Company's Independent Auditors with respect to the
above-listed financial statements is set forth in the Company's 1998 Annual
Report to Shareholders and is incorporated herein by reference and with respect
to the financial statement schedule is incorporated by reference to Exhibit 23
attached hereto.
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.
(3) EXHIBITS
<TABLE>
<CAPTION>
PAGE
EXHIBIT EXHIBIT INDEX NUMBER
- ---------------- ------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Articles of Incorporation as amended on September 5, 1996, are ---
incorporated by reference to Exhibit 3.2 of the Company's Form
10-K filed on March 27, 1997.
3.2 Bylaws are incorporated by reference to Exhibit 3(ii) of the ---
Company's Form 10-Q filed on November 10, 1997.
4.1 Rights Agreement dated as of June 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 4 of the Company's Form 10-Q dated August 12, 1997.
4.2 Indenture dated as of August 21, 1996, between the Company and ---
State Street Bank and Trust Company, as Trustee is incorporated
by reference to Ventritex's Form S-3/A (no. 333-07651) filed on
August 2, 1996.
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 Employment letter dated as of November 8, 1996, between the 17
Company to Ronald A. Matricaria.*
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT EXHIBIT INDEX NUMBER
- ---------------- ------------------------------------------------------------------- ------------
<S> <C> <C>
10.3 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.*
10.4 Form of Employment Agreement that the Company has entered into 21
with officers relating to severance matters in connection with a
change in control.*
10.5 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.*
10.6 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.*
10.7 The St. Jude Medical, Inc. 1992 Employee Stock Purchase Savings ---
Plan is incorporated by reference to the Company's Form S-8
Registration Statement dated June 10, 1992, (Commission File No.
33-48502).
10.8 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).*
10.9 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).*
10.10 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).*
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT EXHIBIT INDEX NUMBER
- ---------------- ------------------------------------------------------------------- ------------
<S> <C> <C>
10.11 The St. Jude Medical Inc. 1997 Stock Option Plan is incorporated ---
by reference to the Company's Form S-8 Registration Statement
dated December 22, 1997 (Commission File No. 333-42945).*
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.*
10.13 Employment letter dated as of February 23, 1999, between the 31
Company and Ronald A. Matricaria.*
10.14 Letter of understanding dated as of March 1, 1999, between the 34
Company and Fred B. Parks.*
10.15 Employment Agreement effective as of May 5, 1999 between the 38
Company and Terry L. Shepherd.*
13 Portions of the 1998 Annual Report to Shareholders are 43
incorporated by reference in this Form 10-K Annual Report.
21 Subsidiaries of the Company 67
23 Consent of Independent Auditors 68
27 Financial Data Schedule 69
</TABLE>
- -----------------------------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1998 No reports
on Form 8-K were filed by the Company during the fourth quarter 1998.
(c) EXHIBITS: Reference is made to Item 14(a)(3).
(d) SCHEDULES: Reference is made to Item 14(a)(2).
18
<PAGE>
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 of 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), 33-54435 (filed July 1, 1994) and
333-42945 (filed December 22, 1997):
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.
19
<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 26, 1999 By /s/ RONALD A. MATRICARIA
-------------------------
Ronald A. Matricaria
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By /s/ JOHN C. HEINMILLER
-----------------------
John C. Heinmiller
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>
<S> <C> <C> <C> <C> <C>
/s/ RONALD A. MATRICARIA Director 3/26/99 /s/ WALTER L. SEMBROWICH Director 3/26/99
- --------------------------- --------------------------
Ronald A. Matricaria Walter L. Sembrowich
/s/ LOWELL C. ANDERSON Director 3/26/99 /s/ DANIEL J. STARKS Director 3/26/99
- --------------------------- --------------------------
Lowell C. Anderson Daniel J. Starks
/s/ PAUL J. CHIAPPARONE Director 3/26/99 Director 3/26/99
- --------------------------- --------------------------
Paul J. Chiapparone Roger G. Stoll
Director 3/26/99 /s/ DAVID A. THOMPSON Director 3/26/99
- --------------------------- --------------------------
Stuart M. Essig David A. Thompson
/s/ THOMAS H. GARRETT III Director 3/26/99 /s/ GAIL R. WILENSKY Director 3/26/99
- --------------------------- --------------------------
Thomas H. Garrett III Gail R. Wilensky
/s/ WALTER F. MONDALE Director 3/26/99
- ---------------------------
Walter F. Mondale
</TABLE>
20
<PAGE>
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1998
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------- ------------ ---------------------- ------------ -----------
DESCRIPTION BALANCE AT ADDITIONS CHARGED TO BALANCE AT
BEGINNING OF ---------------------- END OF
PERIOD EXPENSE OTHER DEDUCTIONS PERIOD
- --------------------------------------- ------------ --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful
accounts(3) $ 12,712 $ 14 $ $ 374(1) $ 12,352
Products liability claims
reserve(4) 6,205 -- -- 1,814(2) 4,391
Year ended December 31, 1997
Allowance for doubtful
accounts(3) 8,160 678 4,037(5) 163(1) 12,712
Products liability claims
reserve(4) 8,304 -- -- 2,099(2) 6,205
Year ended December 31, 1996
Allowance for doubtful
accounts(3) 9,845 650 13(5) 2,348(1) 8,160
Products liability claims
reserve(4) 8,558 -- -- 254(2) 8,304
</TABLE>
- -------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Claims settled, including settlements paid.
(3) Deducted from accounts receivable on the balance sheet.
(4) Included in other accrued expenses on the balance sheet.
(5) Balance assumed through acquisitions.
21
EXHIBIT 10.2
November 8, 1996
Mr. Ronald A. Matricaria
[ADDRESS OMITTED]
Re: RONALD A. MATRICARIA - SUCCESSION PLANNING
Dear Ron:
I am pleased to outline for you the recommendations made by the Compensation
Committee, and subsequently approved by the Board, in connection with a revised
compensation program offered to you in exchange for extending your existing
employment agreement with the Company for a period of five years.
The Board approved the following changes in your compensation:
1) BASE SALARY. Effective January 1, 1997, you shall receive a base salary at
the rate of Seven Hundred Fifty Thousand Dollars ($750,000) per annum, payable
in bi-weekly installments.
2) BONUS. Bonus compensation payable to you will remain the same, that is, the
opportunity to earn 100% of base salary each fiscal year upon achievement of
established targets to be mutually agreed upon by yourself and the Board of
Directors.
3) STOCK OPTIONS.
(a) You will be granted a non-qualified option to purchase 236,000
shares of the Company's common stock under the 1991 Stock
Plan. These shares will be exercisable at the rate of 25% per
year on the next four anniversary dates from July 16, 1996.
The purchase price of the shares of common stock covered by
this option shall be the fair market value on July 16, 1996.
[Note: The July 16, 1996, fair market value was $31.375 as
determined by the average of the high and low trades on July
16, 1996].
(b) You will be granted a non-qualified option to purchase 260,000
shares of the Company's common stock under the 1994 Stock
Option Plan. These shares will be exercisable at the rate of
25% per year on the next four anniversary dates from July 16,
1996. The purchase price of the shares of common stock covered
by this option shall be the fair market value on July 16,
1996. [Note: The July 16, 1996, fair market value was $31.375
as determined by the average of the high and low trades on
July 16, 1996].
<PAGE>
MR. RONALD A. MATRICARIA
PAGE 2
NOVEMBER 8, 1996
(c) You will be granted a non-qualified option to purchase 500,000
shares of the Company's common stock subject to shareholder
approval. These shares will be exercisable at the rate of 25%
per year on the next four anniversary dates from July 16,
1996. The purchase price of the shares of common stock covered
by this option shall be $31.375, the fair market value on July
16, 1996. [Note: The July 16, 1996, fair market value was
$31.375 as determined by the average of the high and low
trades on July 16, 1996].
(d) You will be granted a non-qualified option to purchase 500,000
shares of the Company's common stock subject to shareholder
approval. The purchase price of the shares of common stock
covered by this option shall be the fair market value on July
16, 1996. [Note: The July 16, 1996, fair market value was
$31.375 as determined by the average of the high and low
trades on July 16, 1996].
The right to exercise the option shall occur in accordance
with the following schedule:
PERFORMANCE STOCK OPTIONS
ACCELERATED VESTING SCHEDULING
(BASE WILL BE THE FAIR MARKET VALUE ON JULY 16, 1996)
-------------------- -------------- ----------------------
FINAL TRADING STOCK PRICE OPTIONS VESTING
DAYS FOR YEARS* TARGET PERCENTAGE
-------------------- -------------- ----------------------
1997 $37.65 20%
-------------------- -------------- ----------------------
1998 $45.18 20%
-------------------- -------------- ----------------------
1999 $54.22 20%
-------------------- -------------- ----------------------
2000 $62.35 20%
-------------------- -------------- ----------------------
2001 $71.70 20%
-------------------- -------------- ----------------------
Note: The "stock price target" section of the grid was completed by using the
fair market value on July 16, 1996 and applying the formula for share increases
set by the Committee (20% increases during the first three periods and 15% in
years 4 and 5).
<PAGE>
MR. RONALD A. MATRICARIA
PAGE 3
NOVEMBER 8, 1996
*Exercise of Option. This Option shall become exercisable if the arithmetic mean
closing prices of the Common Stock as reported on NASDAQ-NMS for all the trading
days of December of the calendar year noted above meets or exceeds the Stock
Price Target set forth above.
If the Stock Price Target for a calendar year is not met or exceeded in that
year, the Shares which would have been exercisable will carry forward to the
next subsequent calendar year and will become exercisable if subsequent year
Stock Price Targets are achieved..
The number of Shares which may be exercisable will be accelerated if the
arithmetic mean of the stock price in December of a year meets or exceeds the
Stock Price Target for a subsequent year(s).
In the event the above performance levels are not achieved, this Option will
become fully exercisable on the 16th day of July, 2006, if you remain as an
employee or as a board member of the Company.
4) RESTRICTED STOCK. You will be granted a total of 50,000 shares of the
Company's $0.10 par value common stock (shares) under the St. Jude Medical 1989
Restricted Stock Plan. The shares will be subject to certain restrictions during
the restriction period enumerated in the Restricted Stock Agreement.
Restrictions will lapse on twenty-five percent of the shares on each annual
anniversary date from July 16, 1996.
5) SPLIT DOLLAR LIFE INSURANCE. The Committee hereby approves the adoption of a
$3,000,000 split dollar life or similar life insurance policy for you.
6) CHANGE OF CONTROL AGREEMENT. Your original change of control agreement will
be renewed. In addition, a new change of control agreement will be entered
providing you with a payment of $10,000,000 upon a change of control as defined
in your existing change of control agreement and regardless of whether he
remains employed by the Company or is terminated subsequent to a change in
control.
7) USE OF COMPANY PLANE. The Company finds that it is in the best interest of
the Company, for both security reasons and time management reasons, that you and
your immediate family from time-to-time use the Company plane for personal, as
well as business use. The Company will be responsible for payment of any tax due
for such personal use.
8) ST. JUDE MEDICAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND TRUST
(SERP). In 1993, the Company established a nonqualified supplemental retirement
plan which is subject to a substantial risk of forfeiture in the event you leave
the Company prior to October 1, 1996. As further consideration for the amended
terms of your employment agreement and to tie the value and security of your
retirement income to your continued commitment to the financial success of the
Company, St. Jude shall before October 1, 1996, terminate and liquidate the SERP
and in lieu thereof make a discretionary contribution under the St. Jude
Medical, Inc. Management Savings Plan (MSP), in the amount of $3,460,000 to be
held and distributed in accordance with the terms of the MSP.
<PAGE>
MR. RONALD A. MATRICARIA
PAGE 4
NOVEMBER 8, 1996
9) STOCK OPTION AMENDMENTS. If you cease to be an employee, but remain as a
director, your outstanding stock options will be amended to permit the exercise
of any vested shares for the original option term.
If you retire from the Company or from the Board (with consent by the Committee)
any stock options held may thereafter be exercised to the extent they were
exercisable at the time of retirement, up to one year from the date of such
retirement, or the expiration of the stated terms of the options, whichever
period is shorter.
Congratulations Ron on the success you have achieved through your outstanding
leadership for the Company during your short tenure. You have significantly
reduced the risk profile through diversification and improved the growth profile
of St. Jude Medical thereby significantly enhancing shareholder value.
Onward and upward!
Best Regards,
/s/ WILLIAM R. MILLER
William R. Miller
Chairman, Compensation Committee
WRM:kj
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made and entered into by and between St. Jude
Medical, Inc., a Minnesota corporation with its principal offices at St. Paul,
Minnesota ("St. Jude") and _____________________ _, residing at (the
"Executive"), and shall be effective as of this ____ day of _______________,
199___.
WHEREAS, St. Jude considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of St. Jude and its shareholders; and
WHEREAS, the Executive is expected to make, due to Executive's intimate
knowledge of the business and affairs of St. Jude, its policies, methods,
personnel, and problems, a significant contribution to the profitability,
growth, and financial strength of St. Jude; and
WHEREAS, St. Jude, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist, and that such possibility and the
uncertainty and questions which it may raise among management may result in the
departure or distraction of the Executive in the performance of the Executive's
duties, to the detriment of St. Jude and its shareholders; and
WHEREAS, it is in the best interests of St. Jude and its stockholders
to reinforce and encourage the continued attention and dedication of management
personnel, including Executive, to their assigned duties without distraction and
to ensure the continued availability to St. Jude of the Executive in the event
of a Change in Control.
THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on
the date hereof and shall continue in effect until such time
as St. Jude notifies the Executive of the termination of this
Agreement. Notwithstanding the preceding sentence, if a Change
in Control occurs, this Agreement shall continue in effect for
a period of 36 months from the date of the occurrence of a
Change in Control.
<PAGE>
2. Change in Control. No benefits shall be payable
hereunder unless there shall have been Change in Control, as
set forth below.
(a) shall mean a change in control which would be
required to be reported in response to Item 1 of Form 8-K
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not St. Jude is then
subject to such reporting requirement including, without
limitation, if:
(i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) becomes
a "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of
securities of St. Jude representing 40% or more of
the combined voting power of St. Jude's then
outstanding securities; or
(ii) there ceases to be a majority of the
Board of Directors comprised of: (A) individuals who
on the date hereof constituted the Board of St. Jude;
and (B) any new director who subsequently was elected
or nominated for election by a majority of the
directors who held such office immediately prior to a
Change in Control.
(b) Executive agrees that, subject to the terms and
conditions of this Agreement, in the event of a Change in
Control of St. Jude occurring after the date hereof, Executive
will remain in the employ of St. Jude for a period of 90 days
from the occurrence of such Change in Control.
3. Termination Following Change in Control. If a Change
in Control shall have occurred during the term of this
Agreement, Executive shall be entitled to the benefits
provided in subsection 4(d) unless such termination is (A)
because of Executive's death or Retirement, (B) by St. Jude
for Cause or Disability, or (C) by Executive other than for
Good Reason.
(a) Disability; Retirement. If, as a result of
incapacity due to physical or mental illness, the Executive
shall have been absent from the full-time performance of
Executive's duties with St. Jude for six consecutive months,
and within 30 days after written Notice of Termination is
given the Executive shall not have returned to the full-time
performance of the Executive's duties, St. Jude may terminate
Executive's employment for "Disability". Any question as to
the existence of Executive's Disability upon which Executive
and St. Jude cannot agree shall be determined by a qualified
independent physician selected by Executive (or, if the
Executive is unable to make such selection, it shall be made
by any adult member of the Executive's immediate family), and
approved by St. Jude. The determination of such physician made
in writing to St. Jude and to Executive
<PAGE>
shall be final and conclusive for all purposes of this
Agreement. Termination by St. Jude or Executive of Executive's
employment based on "Retirement" shall mean termination on or
after attaining Normal Retirement Age in accordance with the
St. Jude Medical, Inc. Profit Sharing Employee Savings Plan
and Trust.
(b) Cause. Termination by St. Jude of Executive's
employment for "Cause" shall mean termination upon the
conviction of the Executive by a court of competent
jurisdiction for felony criminal conduct.
(c) Good Reason. Executive shall be entitled to
terminate his employment for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean, without Executive's
express written consent, any of the following:
(i) The assignment to Executive of any
duties inconsistent with Executive's status or
position with St. Jude, or a substantial alteration
in the nature or status of Executive's
responsibilities from those in effect immediately
prior to the Change in Control;
(ii) a reduction by St. Jude in Executive's
annual compensation in effect immediately prior to a
Change in Control;
(iii) location more than fifty miles from
St. Paul, Minnesota or St. Jude requiring Executive
to be based anywhere other than St. Jude's principal
executive offices except for required travel on St.
Jude's business to an extent substantially consistent
with Executive's business travel obligations
immediately prior to the Change in Control;
(iv) the failure by St. Jude to continue to
provide Executive with benefits at least as favorable
to those enjoyed by Executive under any of St. Jude's
pension, life insurance, medical, health and
accident, disability, deferred compensation,
incentive awards, incentive stock options, or savings
plans in which Executive was participating
immediately prior to the Change in Control, the
taking of any action by St. Jude which would directly
or indirectly materially reduce any of such benefits
or deprive Executive of any material fringe benefit
enjoyed immediately prior to the Change in Control,
or the failure by St. Jude to provide Executive with
the number of paid vacation days to which Executive
is entitled immediately prior to the Change in
Control, provided, however, that St. Jude may amend
any such plan or programs as long as such amendments
do not reduce any benefits to which Executive would
be entitled upon termination;
<PAGE>
(v) The failure of St. Jude to obtain a
satisfactory agreement from any successor to assume
and agree to perform this Agreement, as contemplated
in Section 6; or
(vi) Any purported termination of
Executive's employment which is not made pursuant to
a Notice of Termination satisfying the requirements
of subsection (e) below; for purposes of this
Agreement, no such purported termination shall be
effective.
(d) Voluntary Termination Deemed Good Reason.
Notwithstanding anything herein to the contrary, if the Change
in Control arises from a transaction or series of transactions
which are not authorized, recommended or approved by formal
action taken by the Board of Directors as defined in Section
2(a)(ii) of this Agreement, Executive may voluntarily
terminate his employment for any reason during the period
commencing on the 91st day following a Change in Control and
ending on the 180th day following the Change in Control, and
such termination shall be deemed "Good Reason" for all
purposes of this Agreement.
(e) Notice of Termination. Any purported termination
of Executive's employment by St. Jude or by Executive shall be
communicated by written Notice of Termination to the other
party hereto in accordance with Section 7. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth the facts and
circumstances claimed to provide a basis for termination of
Executive's employment.
(f) Date of Termination. For purposes of this
Agreement, "Date of Termination" shall mean:
(i) If Executive's employment is terminated
for Disability, 30 days after Notice of Termination
is given (provided that the Executive shall not have
returned to the full-time performance of the
Executive's duties during such 30 day period); and
(ii) If Executive's employment is terminated
pursuant to subsections (b), (c) or (d) above or for
any other reason (other than Disability), the date
specified in the Notice of Termination (which, in the
case of a termination pursuant to subsection (b)
above shall not be less than 10 days, and in the case
of a termination pursuant to subsection (c) or (d)
above shall not be less than 10 nor more than 30
days, respectively, from the date such Notice of
Termination is given).
<PAGE>
(g) Dispute of Termination. If, within 10 days after
any Notice of Termination is given, the party receiving such
Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination
shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent
jurisdiction (which is not appealable or the time for appeal
therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, St. Jude shall continue to pay
Executive full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to,
base salary) and continue Executive as a participant in all
compensation, benefit and insurance plans in which the
Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved in
accordance with this subsection. Amounts paid under this
subsection are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other
amounts under this Agreement.
4. Compensation Upon Termination or During Disability.
Following a Change in Control of St. Jude, as defined in
subsection 2(a), upon termination of Executive's employment or
during a period of Disability, Executive shall be entitled to
the following benefits:
(a) During any period that Executive fails to perform
full-time duties with St. Jude as a result of a Disability,
St. Jude shall pay Executive, the Executive's base salary as
in effect at the commencement of any such period and the
amount of any other form or type of compensation otherwise
payable for such period if the Executive were not so disabled,
until such time as the Executive is determined to be eligible
for long term disability benefits in accordance with St.
Jude's insurance programs then in effect.
(b) If Executive's employment shall be terminated by
St. Jude for Cause or by Executive other than for Good Reason,
Disability or Retirement, St. Jude shall pay to Executive his
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and St.
Jude shall have no further obligation to Executive under this
Agreement.
<PAGE>
(c) If Executive's employment shall be terminated by
St. Jude or by Executive for Disability or Retirement, or by
reason of death, St. Jude shall immediately commence payment
to the Executive (or Executive's designated beneficiaries or
estate, if no beneficiary is designated) of any and all
benefits to which the Executive is entitled under St. Jude's
retirement and insurance programs then in effect.
(d) If Executive's employment shall be terminated (A)
by St. Jude other than for Cause, Retirement, or Disability or
(B) by Executive for Good Reason, then Executive shall be
entitled to the benefits provided below:
(i) St. Jude shall pay Executive, through
the Date of Termination, the Executive's base salary
as in effect at the time the Notice of Termination is
given and any other form or type of compensation
otherwise payable for such period;
(ii) In lieu of any further salary payments
for periods subsequent to the Date of Termination,
St. Jude shall pay a severance payment (the
"Severance Payment") equal to the amount described in
either (A) or (B) below, whichever is applicable: (A)
if the Executive has been an employee in any capacity
of St. Jude or any Affiliate as defined below for an
uninterrupted period of 3 or more years of elapsed
time on the Date of Termination, two (2) times the
Executive's Annual Compensation as defined below; or
(B) if the Executive has been an employee in any
capacity of St. Jude or any Affiliate as defined
below for an uninterrupted period of less than 3
years of elapsed time on the Date of Termination, one
(1) times the Executive's Annual Compensation as
defined below. For purposes of this Section 4,
"Annual Compensation" shall mean the Executive's
annual salary (regardless of whether all or any
portion of such salary has been contributed to a
deferred compensation plan), the annual amount of the
Executive's Perk Package, the target bonus for which
the Executive is eligible upon attainment of 100% of
the target (regardless of whether such target bonus
has been achieved or whether conditions of such
target bonus are actually fulfilled), and any other
type or form of compensation paid to Executive by St.
Jude (or any corporation ("Affiliate") affiliated
with St. Jude within the meaning of Section 1504 of
the Internal Revenue Code of 1986 as may be amended
from time to time (the "Code")) and included in
Executive's gross income for federal tax purposes
during the 12-month period ending immediately prior
to the Date of Termination but excluding: a) any
amount actually paid to the Executive as a cash
payment of the target bonus (regardless of whether
all or any portion of such target bonus was
contributed to a deferred compensation plan); b)
compensation income recognized as a result of the
exercise of
<PAGE>
stock options or sale of the stock so acquired; and
c) any payments actually or constructively received
from a plan or arrangement of deferred compensation
between St. Jude and the Executive. All of the
factors included in Annual Compensation shall be
those in effect on the Date of Termination and shall
be calculated without giving effect to any reduction
in such compensation which would constitute a breach
of this Agreement. The Severance Payment shall be
made in a single lump sum within 60 days after the
Date of Termination.
(iii) For the period of time after the Date
of Termination on which the Severance Payment is
determined in accordance with paragraph (ii) above,
St. Jude shall arrange to provide, at its sole
expense, Executive with life, disability, accident
and health insurance benefits substantially similar
to those which the Executive is receiving or entitled
to receive immediately prior to the Notice of
Termination. The cost of providing such benefits
shall be in addition to (and shall not reduce) the
Severance Payment. Benefits otherwise receivable by
Executive pursuant to this paragraph (iii) shall be
reduced to the extent comparable benefits are
actually received by Executive during such period,
and any such benefits actually received by Executive
shall be reported to St. Jude.
(iv) St. Jude shall also pay to Executive
all legal fees and expenses incurred by Executive as
a result of such termination (including all such fees
and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to
obtain or enforce any right or benefit provided by
this Agreement).
(v) The Severance Payment shall be reduced
and offset by the amount of any payment received or
to be received by Executive in connection with the
termination of employment pursuant to the provisions
of the St. Jude policy HR-1.02.25 entitled "Severance
Pay," effective January 1, 1994, as amended from time
to time, or any successor to such policy. Except as
provided in the preceding sentence, no other offset
or reduction in the amount payable under this section
shall be made, regardless of whether or not such
payments are tax deductible by St. Jude.
(e) Executive shall not be required to mitigate the
amount of any payment provided for in this Section 4 by
seeking other employment or otherwise, nor shall the amount of
any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits
after the Date of Termination, or otherwise.
<PAGE>
(f) Executive shall be entitled to receive all
benefits payable to the Executive under the St. Jude Medical,
Inc. Profit Sharing Employee Savings Plan or any successor of
such Plan and any other plan or agreement relating to
retirement benefits which shall be in addition to, and not
reduced by, any other amounts payable to Executive under this
Section 4.
(g) Executive shall be entitled to exercise all
rights and to receive all benefits accruing to Executive under
any and all St. Jude stock purchase and stock option plans or
programs, or any successor to any such plans or programs,
which shall be in addition to, and not reduced by, any other
amounts payable to Executive under this Section 4.
5. Funding of Payments. In order to assure the
performance of St. Jude or its successor of its obligations
under this Agreement, St. Jude may deposit in trust an amount
equal to the maximum payment that will be due the Executive
under the terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to the Executive (or the
Executive's legal representative, as the case may be) the
amount to which the Executive shall be entitled under the
terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to St. Jude. If
St. Jude deposits funds in trust, payment shall be made no
later than the occurrence of a Change in Control. If and to
the extent there are not amounts in trust sufficient to pay
Executive under this Agreement, St. Jude shall remain liable
for any and all payments due to Executive. In accordance with
the terms of such trust, at all times during the term of this
Agreement, Executive shall have no rights, other than as an
unsecured general creditor of St. Jude, to any amounts held in
trust and all trust assets shall be general assets of St. Jude
and subject to the claims of creditors of St. Jude. Failure of
St. Jude to establish or fully fund such trust shall not be
deemed a revocation or termination of this Agreement by St.
Jude.
6. Successors; Binding Agreement. St. Jude will require
any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of St. Jude to expressly
assume and agree to perform this Agreement in the same manner
and to the same extent that St. Jude would be required to
perform it if no such succession had taken place. Failure of
St. Jude to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to the Compensation and
benefits from St. Jude in the same amount and on the same
terms as he would be entitled hereunder if he terminated his
employment for Good Reason following a Change in Control,
except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be
deemed the Date of Termination.
<PAGE>
(a) This Agreement shall inure to the benefit of and
be enforceable by Executive's personal or legal
representatives, successors, heirs, and designated
beneficiaries. If Executive should die while any amount would
still be payable to Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this
Agreement to the Executive's designated beneficiaries, or, if
there is no such designated beneficiary, to the Executive's
estate.
7. Notice. For the purpose of this Agreement, notices
and all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid,
addressed to the last known residence address of the Executive
or in the case of St. Jude, to its principal office to the
attention of each of the then directors of St. Jude with a
copy to its Secretary, or to such other address as either
party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any condition or provision of this Agreement
to be performed by such other-party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same
or at any prior or similar time. No agreements or
representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of
Minnesota.
9. Validity. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the undersigned officer, on behalf of St. Jude
Medical, Inc., and the Executive have hereunto set their hands as of the date
first above written.
ST. JUDE MEDICAL, INC.
By
--------------------------------------
Its
-----------------------------------
EXECUTIVE:
----------------------------------------
EXHIBIT 10.13
February 23, 1999
Mr. Ronald A. Matricaria
[ADDRESS OMITTED]
Dear Ron:
This letter will set forth our agreement with respect to our mutual rights and
responsibilities from and after May 5, 1999, in connection with your transition
to the position and duties of Chairman of the Board of St. Jude Medical, Inc.
(the Company). You and the Company entered into a letter agreement dated
November 8, 1996, governing your employment as President, Chief Executive
Officer and Chairman for the period through July 16, 2001. That Agreement shall
continue in full force and effect, except as modified herein, until July 16,
2001. You have also entered into the 1998 Restated Employment Agreement dated
September 4, 1998 and a Supplemental Employment Agreement dated July 16, 1996,
both of which apply in the event of a change in control of the Company (as
defined in those agreements) and those agreements shall continue in full force
and effect through July 16, 2001. A copy of those agreements is appended to this
letter for your reference.
During the period May 5, 1999 through August 1, 2000, you shall continue to be
employed by the Company in accordance with your employment letter dated November
8, 1996, modified as follows:
1. EMPLOYMENT: Your sole duties and responsibilities will be that of Chairman
of the Board of Directors of St. Jude Medical, Inc. As such, you shall no
longer be President or Chief Executive Officer nor responsible for
directing the management and operations of the Company. Rather, you shall
continue to perform the duties of Board Chairman and Director, which shall
include regular interaction with your successor as President and Chief
Executive Officer, maintaining relationships with customers in the medical
community, serving as the Company's representative on the HIMA Board, and
providing interaction with the Cardiac Rhythm Management Division as
appropriate.
2. SALARY: As full compensation for your services as Chairman, the Company
will pay you, effective May 5, 1999, a salary at a rate of Three Hundred
Seventy Five Thousand Dollars ($375,000) per annum, payable in bi-weekly
installments.
3. BONUS: As of May 5, 1999, you shall no longer be eligible to earn a bonus
on your compensation under the Company's annual bonus plans. However, you
will continue to be entitled to earn a bonus for the period prior to May 5,
1999, as provided in the November 8, 1996 agreement equal to 4/12 of the
annual bonus amount based on your annual base salary in effect prior to May
5, 1999. For the period May 5, 1999 to August 1, 2000, you shall earn each
quarter a guaranteed bonus equal to 100% of your base salary each quarter,
which shall be payable on the last day of the calendar quarter.
<PAGE>
Mr. Ronald A. Matricaria
February 23, 1999
Page 2
4. FRINGE BENEFITS: In addition to fringe benefits currently provided, the
Company shall pay up to Two Thousand Dollars ($2,000) per month to provide
you with office space at a suitable off-site location.
By executing this letter, you consent to the change in your principal
duties, responsibilities and to the other modifications described in this letter
and agree that such changes will not constitute "good reason" as defined under
the terms of your November 8, 1996 agreement. However, this definition shall
continue to apply in the event that the Company, without your written consent,
takes any action not provided in this letter subsequent to the date hereof,
which would constitute "good reason."
Effective August 1, 2000, you shall cease to be an employee of the
Company, and your base salary, perquisites and all pension, welfare and fringe
benefits (including your use of the Company airplane), other than the split
dollar agreement, provided to you as an employee shall thereupon cease.
Thereafter, you agree to continue to serve as Chairman of the Board at the
pleasure of the Board (but for a period of not less than 12 months until August
1, 2001) and for such services the Company shall pay you an annual fee of Three
Hundred Seventy Five Thousand Dollars ($375,000) payable in monthly
installments. During that time, you shall be entitled to any and all benefits
provided to Directors of the Company, or as otherwise required by law. You shall
be responsible for all taxes on such fees.
We trust that this Agreement sets forth your understanding of your
duties and benefits in your transition to Chairman. This agreement is executed
on behalf of St. Jude by an Executive Officer who has the authority and approval
of the Board as set forth below. Please sign this letter where indicated below
and return a copy to me.
Sincerely,
ST. JUDE MEDICAL, INC.
/s/ JOHN P. BERDUSCO
By: John P. Berdusco
Its: Vice President, Administration
<PAGE>
Mr. Ronald A. Matricaria
February 23, 1999
Page 3
On behalf of the Board of Directors
By: /s/ THG
Thomas H. Garrett, III, Director
Accepted and agreed to by:
/s/ RONALD A. MATRICARIA
Ronald A. Matricaria
EXHIBIT 10.14
March 1, 1999
CONFIDENTIAL
Fred B. Parks
[ADDRESS OMITTED]
Dear Fred:
The purpose of this letter is to set forth an agreement between St. Jude
Medical, Inc. (the "Company") and you with respect to your voluntary
resignation. You will resign as a member of the Board of Directors of St. Jude
Medical, Inc., effective March 1, 1999 and you will resign as an employee and
officer of St. Jude Medical, as well as any other position you hold with the
Company or its affiliates, effective March 31, 1999, (hereinafter "Resignation
Date"). You will be eligible for all employee benefits, consistent with employee
status until your Resignation Date. The following is our proposal for
compensation for you after March 31, 1999:
COMPENSATION/BENEFITS:
1) In exchange for signing the attached Release, which must be executed
effective on the day after your Resignation Date, the Company will
provide you continuation of base pay plus perquisite allowance for an
additional twelve (12) months (including the employer portion of FICA)
until March 31, 2000, to be paid on each regularly scheduled pay day.
By signing the Release and accepting the payments described above, you
release the Company from all claims you may have against the Company
relating to your employment with the Company. You acknowledge and agree
that the Company is under no obligation to provide you with the
payments described above, prior to execution of this Agreement. If you
elect not to sign the Release, the payments described in this letter
will not be provided to you.
a) Your participation in all employee fringe benefit programs
will terminate as of your Resignation Date. Any accrued and
unused vacation will be paid to you following the Resignation
Date.
b) The Company agrees to pay its portion of the medical and
dental insurance premiums for your COBRA coverage through
March 31, 2000, (you will be responsible for the employee
portion) or until you obtain alternative employment, whichever
occurs first. You have the right under federal law (COBRA) to
continue medical and dental insurance for eighteen (18) months
from the Resignation Date.
c) Your life insurance coverage will terminate as of the
Resignation Date. Payment for continued coverage after that
date will be your sole responsibility. Please contact Paula
Hutton, Manager, Corporate Benefits to coordinate your
continued coverage.
<PAGE>
Mr. Fred B. Parks
March 1, 1999
Page 2
d) Your interest in the St. Jude Medical, Inc. Employee Profit
Sharing & Savings Plan will be valued in accordance with the
provisions of the plan. St. Jude Medical will continue to
match your 401(k) contributions until the Resignation Date,
however, you will not be eligible for a profit sharing
contribution in 1999.
e) You will be entitled to a pro rata portion of your bonus for
1999, (i.e. until March 31, 1999), should one become due under
the terms of the 1999 Management Incentive Compensation
Program.
f) Your vested interest in the St. Jude Medical, Inc. Management
Savings Plan will be distributed within thirty (30) days from
the close of the quarter in which the termination occurs.
g) The Company agrees to reimburse you for expenses associated
with outplacement services through an outplacement group to be
selected by you in an amount not to exceed $22,500.
h) If you are a participant in the Employee Stock Purchase Plan
your contribution will be paid out to you with interest.
i) Per your request, the Company has offered to sell you, upon
your Resignation Date, your laptop computer and office chair
at their current book value as of March 31, 1999.
2) You understand that you are bound by the terms and conditions of the
Non-Competition Agreement you signed on December 12, 1997. A copy is
attached for your reference.
3) If you have been unable to secure employment by year end December 31,
1999, and you so wish, the Company will reimburse you for the actual
cost of moving your household goods and automobiles from
Minneapolis/St. Paul to any contiguous 48 states, but not to exceed the
cost of the move to Boston provided such move occurs within twelve (12)
months of your Resignation Date. Other expenses of relocation such as
realtor's fees, closing costs, attorney's fees, new auto licenses and
other miscellaneous expenses will not be reimbursed. The sale of any
residence will be your responsibility.
4) The Company's records indicate that you hold options covering the
purchase of St. Jude Medical, Inc. Common stock. Under the terms of the
option agreements, you are entitled to exercise any vested options
within ninety (90) days from your Termination Date. Stock options that
have not vested as of your Termination Date will terminate effective
upon your termination of employment per their terms.
<PAGE>
Mr. Fred B. Parks
March 1, 1999
Page 3
----------------------- ---------- ---------- ----------- -----------
UNITS VESTED REMAINING GRANT EXERCISE
DATE PRICE
----------------------- ---------- ---------- ----------- -----------
100,000 25,000 75,000 01/02/98 $31.625
(TIME VESTING)
----------------------- ---------- ---------- ----------- -----------
100,000 0 100,000 01/02/98 $31.625
(PERFORMANCE VESTING)
----------------------- ---------- ---------- ----------- -----------
5) You will continue to be covered as former officer and director and for
all positions and functions which you have held at St. Jude Medical by
your indemnification agreement.
6) You agree that you will keep the terms, amount and facts of this
Agreement confidential and that, unless required to do so by law or
court order, or if necessary to enforce this Agreement or defend
yourself against claims by the company or its affiliates, you will not
disclose any information about this Agreement to anyone other than your
spouse, attorneys, tax advisors, and applicable governmental
authorities, if any. Similarly, the Company agrees that it will keep
the terms, amount and facts of this Agreement confidential and that
unless required to do so by law or court order, or if necessary to
enforce this Agreement or defend itself against claims by you, it will
not disclose any information about this Agreement to anyone other than
those within the Company or its affiliates with a need to know, and the
attorneys, tax advisors, and applicable governmental authorities, if
any, of the Company and its affiliates.
7) You agree that you will not disparage or otherwise make any unfavorable
statements, oral or written, or perform any act or omission, which is
detrimental to the reputation or goodwill of the Company. For purpose
of the prior sentence, the Company shall mean the Company, its
successors and affiliates and their officers, directors, employees.
Similarly, the Company agrees that it will not disparage or otherwise
make any unfavorable statements, oral or written, or perform any act or
omission, which is detrimental to your reputation or goodwill.
<PAGE>
Mr. Fred B. Parks
March 1, 1999
Page 4
8) In further consideration of the benefits provided to you under this
Agreement, you acknowledge your obligation to maintain in confidence
and not to use for any purpose other than the benefit of the company,
all confidential information of the Company you received during your
employment.
9) This agreement and the accompanying Release set forth the entire
agreement between you, on the one hand, and the Company and its
affiliates, on the other hand, concerning the subject matters addressed
here, and supersedes any prior oral and/or written agreements or
communications between you and the Company and/or any of its affiliates
concerning these subjects. This Agreement and the accompanying Release
shall be construed and interpreted in accordance with the laws of
Minnesota without regard to its conflict of law principles.
DUTIES:
(1) You agree to not solicit St. Jude Medical employees for employment
elsewhere for a period of two (2) years from your Resignation Date,
without receiving prior written consent from me.
(2) Any communications released by the Company or you regarding your
resignation will be mutually agreed upon prior to release or will be
required to be made by the Company under law, as determined by the
Company's counsel.
Please sign both originals of this Letter Agreement and Release where indicated,
thereby signifying your acceptance of the terms and return one set of originals
to me.
Fred, I sincerely appreciate the very professional and thoughtful manner in
which you have conducted yourself in this matter. I trust these terms are
consistent with our discussion and they strike me as fair to both you and St.
Jude. I wish you and Alison the best in the future.
Sincerely, AGREED AND ACCEPTED BY:
/S/ R. A. MATRICARIA /S/ FRED B. PARKS
Ronald A. Matricaria -----------------------------------------
Fred B. Parks
RAM/kmj
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the
5th day of May, 1999, by and between St. Jude Medical, Inc., a Minnesota
corporation with its principal place of business at Lillihei Plaza, Little
Canada, Minnesota (the "Company"), and Terry L. Shepherd, an individual residing
at [ADDRESS OMITTED] (the "Executive").
RECITALS
Executive is presently employed by the Company in the capacity of
President, Heart Valve Division. The Company desires to continue the employ the
Executive, due to his certain unique skills, talents, contacts, judgment and
knowledge of the Company's business, strategies, ethics and objectives and the
Executive desires to be employed by the Company. In consideration of the mutual
covenants and promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the parties agree as follows:
1. Term of Employment. The Term of this Agreement shall commence on the
date hereof and, subject to the further provisions of this Agreement, shall end
on the 4th day of May, 2004.
2. Title; Capacity. The Executive shall serve as President and Chief
Executive Officer of the Company or in such other position as the Company's
Board of Directors (the "Board") may determine from time to time. The Executive
shall be subject to the supervision of, shall report directly to, and shall have
such authority as is delegated to him by, the Board of Directors.
The Executive shall be responsible for all operations of the Company
and all administrative functions, including strategic planning, annual profit
planning, diversification (M&A), public relations and investor relations. The
following functions and units shall report to the Executive: CRMD, Heart Valve
Division, International, Administration, Legal, Finance, Corporate
Communications, Business Development and Information Systems. Executive shall,
if appointed or elected to the Company's Board of Directors, serve as a member
at no additional compensation.
The Executive hereby accepts such employment and agrees to
undertake the duties and responsibilities inherent in such position and such
other duties and responsibilities as the Board or its designee shall from time
to time reasonably assign to him. The Executive agrees to devote his entire
business time, attention and energies to the business and interests of the
Company (and its affiliates as required by the Company's investments and the
Executive's positions therein) during the Employment Period. The Executive
agrees to abide by the rules, regulations, instructions, personnel practices and
policies of the Company and any changes therein which may be adopted from time
to time. The Executive acknowledges receipt of copies of all such rules and
policies committed to writing as of the date of this Agreement.
<PAGE>
3. Compensation and Benefits.
a. Salary. The Company shall pay the Executive an annual base
salary of $500,000.00 for the one-year period commencing on the Commencement
Date in the same intervals as other exempt employers. Such salary shall be
subject to annual increases thereafter as determined by the Board, in its sole
discretion.
b. Bonus. The Executive's target bonus under the MICP shall be
100% of base salary (and shall be prorated for 1999).
c. Perk Package. The Executive shall be eligible for the
Company's executive perk package at the level of $26,000.
d. Fringe Benefits. The Executive shall be entitled to
participate in all bonus and benefit programs that the Company establishes and
makes available to its Executives, if any, to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him eligible
to participate.
e. Reimbursement of Expenses. The Company shall reimburse the
Executive for all reasonable travel, entertainment and other expenses incurred
or paid by the Executive in connection with, or related to, the performance of
his duties, responsibilities or services under this Agreement, upon presentation
by the Executive of documentation, expense statements, vouchers and/or such
other supporting information in accordance with standard company policies.
f. Stock Options. Under separate agreement, the Executive is
being granted a non-qualified stock option to purchase 200,000 shares of stock,
vesting at the rate of 20% per year for five years and another non-qualified
stock option to purchase 200,000 shares which will vest based upon performance
criteria.
4. Employment Termination. The employment of the Executive by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
a. Expiration of the Employment Period in accordance with
Section 1;
b. At the election of the Company, for "Cause", immediately
upon written notice by the Company to the Executive. "Cause" for such
termination shall include, but not limited to, the following:
i. Dishonesty of the Executive with respect to the
Company;
ii. Willful misfeasance or nonfeasance of duty intended
to injure or having the effect of injuring the reputation, business or business
relationships of the Company or its respective officers, directors or
Executives;
<PAGE>
iii. Upon a charge by a governmental entity against the
Executive of any crime involving moral turpitude which is demonstrably and
materially injurious to the Company or upon the filing of any civil action
involving a charge of embezzlement, theft, fraud or other similar act which is
demonstrably and materially injurious to the Company;
iv. Willful or prolonged absence from work by the
Executive (other than by reason of disability due to physical or mental illness)
or failure, neglect or refusal by the Executive to perform his duties and
responsibilities without the same being corrected upon ten (10) days prior
written notice; or
v. Breach by the Executive of any of the covenants
contained in this Agreement.
c. Immediately upon the death or disability of the Executive.
As used in this Agreement, the term "disability" shall mean the inability of the
Executive, due to a physical or mental disability, for a period of 90 days,
whether or not consecutive, during any 360 day period to perform the services
contemplated under this Agreement. A determination of disability shall be made
by a physician to the Company.
d. At the election of the Company or the Executive, with or
without cause upon 90 days written notice by one party to the other.
5. Effect of Termination.
a. Termination for Cause or at Election of Either Party. In
the event the Executive's employment is terminated at the election of the
Company pursuant to Section 4(d), the Company shall immediately pay to the
Executive an amount equal to the two times the Executive's then current salary
and two times the Executive's then current target bonus.
b. Termination for Death or Disability. If the Executive's
employment is terminated by death or because of disability pursuant to Section
4(c), the Company shall pay to the estate of the Executive or to the Executive,
as the case may be, the compensation which would otherwise be payable to the
Executive up to the end of the month in which the termination of his employment
because of death or disability occurs.
c. Terminate for Cause or Voluntary. In the event a
termination for cause pursuant to Section 4(b) or by the voluntary resignation
of Executive pursuant to Section 4(d), then no further compensation other than
that already accrued shall be due to Executive under this Agreement.
6. Notices. All notices required or permitted under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 9.
<PAGE>
7. Pronouns. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
9. Other Agreements. This Agreement is intended to supplement and not
replace the following other agreements between the Executive and the Company:
Non-Disclosure and Non-Competition Agreement, Indemnification Agreement and 1998
Restated Employment Agreement (Change of Control).
10. Amendment. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Executive.
11. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of Minnesota, without giving
effect to that State's conflict of laws provisions.
12. Choice of Venue. All actions or proceedings with respect to this
Agreement shall be instituted only in any state or federal court sitting in
Ramsey County, Minnesota, and by execution and delivery of this Agreement, the
parties irrevocably and unconditionally subject to the jurisdiction (both
subject matter and personal) of each such court and irrevocably and
unconditionally waive: (a) any objection that the parties might now or hereafter
have to the venue of any of such court; and (b) any claim that any action or
proceeding brought in any such court has been brought in an inconvenient forum.
13. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Executive are personal and shall not be assigned by him.
14. Waiver. No delay or omission by the Company in exercising any right
under this Agreement shall operate as a waiver of that or any other right. A
waiver or consent given by the Company on any once occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
15. Captions and Headings. The captions of the sections of this
Agreement are for convenience of reference only and in no way define, limit or
affect the scope or substance of any section of this Agreement.
16. Severability. In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
<PAGE>
17. Counterparts. This Agreement may be executed in a number of
counterparts and all of such counterparts executed by the Company or the
Executive, shall constitute one and the same agreement, and it shall not be
necessary for all parties to execute the same counterpart hereof.
18. Facsimile Signatures. The parties hereby agree that, for purposes
of the execution of this Agreement, facsimile signatures shall constitute
original signatures.
19. Incorporation by Reference. The preamble and recitals to this
Agreement are hereby incorporated by reference and made a part hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
ST. JUDE MEDICAL, INC.,
A MINNESOTA CORPORATION
/s/ R. A. MATRICARIA
----------------------------------------
NAME: RONALD A. MATRICARIA
TITLE: CHAIRMAN/CEO
EXECUTIVE:
/s/ T. L. SHEPHERD
----------------------------------------
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
INTRODUCTION: The Company designs, manufactures and markets medical devices and
provides services primarily for the cardiovascular segment of the medical device
market. Principal products include mechanical heart valves, tissue heart valves,
bradycardia pacemakers, pacemaker leads, implantable cardioverter defibrillators
(ICDs) and specialty catheters.
A principal objective for management is to increase shareholder value by
continuing to focus on maximizing and expanding the core competencies and
technology platforms associated with its heart valve disease management and
cardiac rhythm management businesses.
Effective May 15, 1997, the Company acquired Ventritex, Inc. ("Ventritex"), a
manufacturer of implantable cardioverter defibrillators and related products.
Each share of Ventritex common stock was converted into .5 shares of Company
common stock. The Company issued 10,437,800 shares to Ventritex shareholders.
The transaction qualified as a tax-free reorganization and was accounted for as
a pooling of interests, and, accordingly, the accompanying financial statements
for 1997 and 1996 have been restated to include the results of Ventritex.
Effective November 29, 1996, St. Jude Medical acquired substantially all of the
assets of Telectronics Pacing Systems, Inc. ("Telectronics"), a pacemaker
company, and Medtel, a distribution company in the Asia-Pacific region, both of
which were wholly owned subsidiaries of Pacific Dunlop, Ltd. The acquisition,
which was accounted for as a purchase, included cash payments totaling
approximately $139,000 and an earnout provision tied to future pacing sales
which could result in additional payments of up to $40,000 over six years if
certain revenue milestones are achieved. No payments to-date have been made
under this earnout provision.
The Company's reported results for 1996 include Telectronics and Medtel
subsequent to November 29, 1996. On August 29, 1997, the Company sold Medtel.
The gain on the sale of this business was recorded as an adjustment of
previously recorded goodwill.
Effective September 23, 1996, the Company acquired Newcor Industrial S.A.
("Newcor") which held most of the assets of Biocor Industria E Pesquisas Ltd., a
Brazilian manufacturer of tissue heart valves, for $4,000 in cash and an
earn-out which could result in additional cash payments of up to $4,000 over the
subsequent three years. In 1998 and 1997, such additional cash payments totaled
$2,400.
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a
Minnesota-based manufacturer of specialized cardiovascular devices for the
electrophysiology and interventional cardiology markets. Each share of Daig
common stock was converted into .651733 shares of Company common stock and the
Company issued 10,013,319 shares to Daig shareholders. The transaction qualified
as a tax-free reorganization and was accounted for as a pooling of interests
and, accordingly, the accompanying financial statements for 1996 have been
restated to include the results of Daig.
Effective January 19, 1996, the Company sold its cardiac assist operations to
C.R. Bard for approximately $24,000. Also in 1996, the Company acquired the
remaining 50% of The Heart Valve Company for $1,000 in cash and 149,153 shares
of its common stock.
The commentary that follows should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements. The
Company's fiscal year is the 52 or 53 week period ending the Saturday nearest
December 31. Fiscal years 1998 and 1996 consisted of 52 weeks and fiscal year
1997 consisted of 53 weeks.
Shown in the following table for the periods indicated are the net sales by
segment and the percentage relationships of certain items in the consolidated
statements of income to consolidated net sales and the percentage change of the
dollar amounts of such items as compared with the prior period. Due primarily to
the impact of the
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Telectronics, Medtel and Newcor acquisitions, and the cardiac assist business
divestiture, amounts are not directly comparable between years.
<TABLE>
<CAPTION>
YEAR-TO-YEAR
PERCENT OF NET SALES CHANGE
- --------------------------------------------------------------------------------------------
1998 1997
YEAR ENDED DECEMBER 31 COMPARED COMPARED
1998 1997 1996 TO 1997 TO 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales
Heart valve 27.6% 28.0% 30.7% 1% 3%
Cardiac rhythm management 72.4% 72.0% 69.3% 3% 18%
====================================================================
Net sales 100.0% 100.0% 100.0% 2% 13%
Cost of sales 36.7% 36.8% 33.6% 2% 24%
====================================================================
Gross profit 63.3% 63.2% 66.4% 2% 8%
====================================================================
Selling, general and administrative 34.4% 38.1% 35.5% (8%) 22%
Research and development 9.8% 10.5% 12.3% (5%) (3%)
Purchased research and development -- -- 4.6% -- --
Special charges -- 5.9% 6.0% -- 11%
- --------------------------------------------------------------------
Operating profit 19.1% 8.7% 8.0% 123% 25%
Other income (expense), net (.8%) .2% 2.3% -- (93%)
- --------------------------------------------------------------------
Income before tax 18.3% 8.9% 10.3% 110% (3%)
Income tax provision 5.6% 3.4% 3.4% 69% 12%
============================================================================================
Net income before the cumulative effect of
an accounting change 12.7% 5.5% 6.9% 136% (10%)
Cumulative effect of an accounting change -- .2% -- -- --
============================================================================================
Net income 12.7% 5.3% 6.9% 143% (12%)
============================================================================================
</TABLE>
NET SALES
(IN MILLIONS)
[BAR GRAPH]
NET SALES: Net sales totaled $1,015,994 in 1998, a $21,598, or 2%, increase over
1997 net sales of $994,396.
As a percentage of total sales, sales outside the U.S. in 1998 were 41% of total
net sales. This reflects an increasing percentage of net sales in higher growth,
developing foreign markets which were partially offset by the foreign currency
effect of the stronger U.S. dollar. Unfavorable foreign currency effects due to
the stronger U.S. dollar reduced 1998 net sales compared to 1997 by
approximately $5,200. This negative impact on sales was partially offset by a
favorable foreign currency impact on operating expenses.
Heart valve net sales of approximately $281,000 increased 1% in 1998. One less
selling week in 1998 effectively reduced net sales by approximately $5,000.
Based on a comparable number of selling days, heart valve sales increased at
approximately the rate of market growth.
Domestic heart valve net sales increased in 1998 due to the introduction of the
Toronto SPV(R) valve and price increases associated with product enhancements
that were partially offset by fewer selling days. International heart valve net
sales in 1998 were lower than 1997 due to the effects of the stronger U.S.
dollar, the timing of distributor orders and curtailed marketing in certain
markets.
Cardiac rhythm management net sales increased 3% from 1997 levels. The increase
over 1997 was attributable to higher ICD sales due to the commercial release of
the Angstrom(R) II and the Angstrom(R) MD ICDs. Bradycardia sales were less than
1997 due to the effects of the stronger U.S. dollar, fewer domestic sales
representatives and the timing of distributor orders. One less selling week in
1998 effectively reduced net sales by $11,000.
NET SALES
(IN MILLIONS)
[BAR GRAPH]
Net sales in 1997 of $994,396 were $117,649 or 13% higher than 1996 net sales
of $876,747. The increase resulted from higher mechanical and tissue heart valve
sales due to new mechanical and tissue valve product introductions and expanded
marketing programs in the developing markets. In addition, ICD net sales
increased due to the market release of the Contour(R) ICD, the Contour(R) MD ICD
and the Ventritex SPL(R) transvenous lead. Also, bradycardia sales increased
over 1996 due to reporting a full year of Telectronics net sales and higher unit
sales in all major geographical markets that were partially offset by the impact
of the stronger U.S. dollar.
COST OF SALES: As a percentage of net sales, cost of sales in 1998 decreased to
36.7% from 36.8% in 1997 primarily due to heart valve manufacturing
efficiencies, the elimination of Telectronics facilities costs and increased ICD
net sales that were offset by the impact of the stronger U.S. dollar and lower
mechanical heart valve and bradycardia unit sales.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As a percentage of net sales, cost of sales in 1997 increased to 36.8% from
33.6% in 1996 primarily as a result of higher manufacturing costs associated
with the Telectronics facilities and the impact of the stronger U.S. dollar that
were partially offset by an increase in the percentage of internally produced
mechanical heart valve components.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative (SG&A)
expense decreased in 1998 to $349,346 from $378,500 in 1997, a decrease of 7.7%.
As a percentage of net sales, SG&A decreased to 34.4% in 1998 from 38.1% in
1997. The decrease was attributable to the full year effect of the Company's
1997 consolidation activities. During 1997, the Company integrated Telectronics
operations into its existing operations and merged its cardiac rhythm management
operations with Ventritex. In addition, during the fourth quarter of 1997, the
Company's cardiac rhythm management operations further consolidated its own
activities and reduced its administrative support levels.
Selling, general and administrative expense increased in 1997 to $378,500 from
$311,470 in 1996. As a percentage of net sales, SG&A increased to 38.1% in 1997
from 35.5% in 1996. The higher dollar amount and percentage of net sales
increases were mainly due to the continued shift to direct sales particularly in
Canada, Latin America and the Asia-Pacific region, as well as increased
expenditures for European and information systems infrastructure. SG&A in 1997
also included a full-year of Telectronics-related expenses.
RESEARCH & DEVELOPMENT
(IN MILLIONS)
[BAR GRAPH]
RESEARCH AND DEVELOPMENT: Research and development (R&D) in 1998 decreased to
$99,756 from $104,693 recorded in 1997, and as a percentage of net sales
decreased to 9.8% from 10.5%. The decrease resulted mainly from further
consolidation and leveraging of ICD and bradycardia research efforts within the
cardiac rhythm management division. The Ventritex and Pacesetter ICD-related
research organizations were combined. Within Pacesetter, bradycardia research
related to Telectronics was fully integrated into the existing organization.
Research and development expense in 1997 decreased to $104,693 from $107,644
recorded in 1996, and as a percentage of net sales decreased to 10.5% from
12.3%. The decrease was attributable primarily to the conclusion of several
Telectronics related projects and the conclusion of other Pacesetter projects.
There was, however, increased R&D spending associated with ongoing ICD programs.
R&D spending for the heart valve business increased due to tissue valve
research.
PURCHASED RESEARCH AND DEVELOPMENT: In 1996, the Company incurred $40,350 of
purchased research and development charges, representing the appraised value of
in-process R&D which must be expensed under generally accepted accounting
principles for purchase accounting. The purchased R&D related to the
acquisitions of The Heart Valve Company ($5,000), Telectronics ($32,200) and
Newcor ($3,150).
SPECIAL CHARGES: In 1997, the Company recorded $58,669 of special charges which
consisted of $8,227 in Ventritex transaction costs, $18,139 and $19,378
associated with repositioning Pacesetter and Ventritex manufacturing operations,
respectively, and $12,925 related to distributor termination charges. In 1996,
the Company recorded $52,926 of special charges which consisted of a $25,000
payment to Intermedics, Inc. to resolve various patent and legal disputes, Daig
transaction charges of $5,118, repositioning charges of $11,100 related to its
tissue heart valve business, distributor termination charges of $7,700 in
support of the Company's continued transition to direct sales, integration
charges of $2,200 incurred by Pacesetter as a result of the Telectronics
acquisition, and non-recurring special charges of $1,808.
OTHER INCOME (EXPENSE): Other income (expense), net consisted of the following:
1998 1997 1996
- --------------------------------------------------------------------------------
Interest income $ 4,125 $ 6,365 $ 9,463
Interest expense (23,667) (14,374) (4,725)
Foreign exchange gains (losses) (3,304) 2,078 2,165
Net gain on the sale of equities 15,624 6,768 1,195
Net gain on the sale of a business -- -- 10,486
Other (1,000) 582 2,556
- --------------------------------------------------------------------------------
Other income (expense), net $ (8,222) $ 1,419 $ 21,140
================================================================================
Interest expense increased in 1998 primarily as a result of debt associated with
the March 1998 repurchase of eight million shares of common stock. In 1997,
interest expense increased mainly due to the full year effect of the debt
financed November 1996 acquisition of Telectronics and Medtel. Also, Ventritex
issued $57,500 of convertible subordinated notes in the third quarter of 1996.
The Company periodically directly invests in the equities of emerging
technologies that may complement the
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company's technologies. In 1998, 1997 and 1996, the Company realized gains on
the sales of certain of these equity investments. In 1996, the Company sold its
cardiac assist device business.
INCOME TAX PROVISION: The Company's 1998 effective income tax rate was 30.5%
compared to 38.0% in 1997. The decrease was principally due to a greater
proportion of income derived from lower tax countries and the elimination of the
non-deductible Ventritex related transaction costs that occurred in 1997.
Deferred income taxes are not provided on the undistributed earnings of non-U.S.
subsidiaries because such earnings are intended to be indefinitely reinvested.
The Company's 1997 effective income tax rate was 38.0% compared to 33.1% in
1996. The increase was primarily attributable to non-deductible expenses
associated with the Ventritex acquisition and to separate, previously legislated
changes relating to taxation of Puerto Rican operations.
NET INCOME: Reported net income for 1998 was $129,082, or $1.50 per diluted
share. Reported net income for 1997, including the effect of pre-tax special
charges of $58,669 and the after-tax cumulative effect of an accounting change
of $1,566, was $53,140, or $.58 per diluted share.
OUTLOOK: The Company expects that market demands, government regulation and
societal pressures will continue to change the health care industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to pursue diversification opportunities
in the form of acquisitions, joint ventures, partnerships and strategic business
alliances. 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.
The Company's heart valve business is in a highly competitive market. In 1998,
the Company estimates it maintained its share of the worldwide heart valve
market. The market is segmented between mechanical heart valves, tissue heart
valves and repair products. During 1998, the market continued its shift slightly
to tissue valve and repair products. Competition is anticipated to place
pressure on pricing and terms and health care reform is expected to result in
further hospital consolidations over time.
The Company's cardiac rhythm management business is also in a highly competitive
market. During 1998, the Company essentially completed the integration of the
Telectronics and Ventritex acquisitions into its own operations. The cardiac
rhythm management industry is undergoing consolidation. The number of principal
competitors has decreased from four to three. The Company's two principal
competitors each have substantially more assets, sales and sales personnel than
the Company. In addition, several new implantable cardioverter defibrillators
were introduced to the market. The Company's two principal competitors in the
ICD segment of the cardiac rhythm management market have introduced dual-chamber
ICDs that represent an increasing percentage of the ICD market. The Company has
a dual-chamber ICD in development. Until the Company introduces a dual-chamber
ICD, the growth of dual-chamber ICDs at the expense of single-chamber ICDs could
adversely affect the Company. Rapid technological change is expected to
continue, requiring the Company to invest heavily in R&D and to effectively
market its products.
The medical device market is highly competitive. Competitors, in the past and
may in the future, employ litigation to gain a competitive advantage. In
addition, the Company's products must continually improve technologically due to
the competitive nature of the industry.
Group purchasing organizations (GPOs) in the U.S. have emerged to consolidate
the purchasing of Company products for some of the Company's customers. One such
GPO, Premier, recently executed exclusive contracts with the Company's two
principal cardiac rhythm management competitors. This contract, if enforced,
may adversely affect the Company's sales of cardiac rhythm management products
to members of this GPO.
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 previously made
forward-looking statements and any other 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 or other non-U.S. reimbursement 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
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
market segments, health care 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 or other government authorities 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 Sylmar or Sunnyvale,
California, adverse developments in the litigation arising from the acquisitions
of Telectronics and Ventritex, unanticipated product failures and attempts by
competitors to gain market share through aggressive marketing programs.
The Company anticipates that its 1999 effective income tax rate may decrease due
to the full year effect of converting its Puerto Rican operations to a
controlled foreign corporation. The IRS has proposed adjustments of
approximately $58,200 in additional taxes relating primarily to the Company's
Puerto Rican operations in years 1990 through 1994. (See Note 4) It is likely
that similar adjustments may be proposed for 1995.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS: The analysis below presents the
sensitivity of the fair value of the Company's financial instruments and
positions to selected changes in market rates and prices. The range of changes
selected reflects the Company's estimate of changes that are reasonably possible
over a one-year period. The equity investments, debt instruments and foreign
exchange contracts were not entered into for trading purposes.
Equity securities at December 31, 1998, which are recorded at a fair market
value of approximately $20,300 and include net unrealized gains of $12,015, have
exposure to price changes. This risk is estimated as the potential loss in fair
market value resulting from a hypothetical 10% decline in prices quoted by stock
exchanges and amounts to $2,030.
At December 31, 1998, the estimated fair value of the Company's fixed rate
long-term debt was $32,000. Market risk is estimated as the potential increase
in fair value resulting from a hypothetical decrease in interest rates. A
decrease of one-half percentage point to interest rates results in an immaterial
change to the fair value of this debt.
In order to reduce the risk of foreign currency exchange rate fluctuations, the
Company follows a policy of hedging a substantial portion of its expected
foreign currency denominated cash flow from operations. The instruments used for
hedging are readily marketable traded forward contracts and options with banks.
The changes in fair value of such contracts have a high correlation to the price
changes in the related hedged cash flow. The risk of transaction gains and
losses from changes in the fair value of the Company's foreign exchange position
is not material because most transactions occur in either the functional
currency or in a currency that has a high correlation to the functional
currency. At December 31, 1998, the foreign currency denominated net asset
position translated into dollars was approximately $125,000. A 10% adverse
change, assuming all currencies move in the same direction, to the foreign
exchange rates amounts to a potential fair value loss of $12,500. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels or local currency
prices.
On January 1, 1999, eleven of the fifteen member countries of the European
Economic Community (EEC) established fixed conversion rates between their
existing sovereign currencies and the Euro. The Euro was adopted as the legal
common currency for these nations on that date. The Euro will trade on currency
exchanges and will be available for non-cash transactions. These nations will
issue sovereign debt exclusively in the Euro and will redenominate outstanding
sovereign debt. The legacy currencies of these countries will remain legal
tender as denominations of the Euro between January 1, 1999 and January 1, 2002.
During this transition period, public and private parties may pay for goods and
services using either the Euro or the legacy currency. Beginning January 1,
2002, these countries will issue new Euro-denominated bills and coins for use in
cash transactions. The Company does not expect the Euro conversion to have a
short-term material affect on the Company's operations. The Company modified
certain computer programs to accommodate the Euro. Subsequent to the Year 2001,
cross-country pricing in the EEC may become more transparent and may affect the
Company's sales activities.
The Company has manufacturing and sales operations in Brazil. In early 1999,
Brazil devalued its currency, the Real. The local currency manufacturing
expenses effectively hedge the local currency sales. As a result of this
devaluation, the Brazilian government is currently reviewing its reimbursement
policy with respect to medical devices. Failure to increase substantially the
reimbursement level for the Company's products could adversely affect the
Company's Brazilian results.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company will adopt Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133) in
2000. FAS 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. The Company's policies do not permit derivative
transactions unless they are hedges. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of FAS 133 will be on the
consolidated earnings and financial position of the Company.
FINANCIAL CONDITION
SUMMARY: The financial condition of the Company remained strong during 1998.
Cash and marketable securities decreased to $87,990 at December 31, 1998, from
$184,536 at December 31, 1997. Working capital, the difference between current
assets and current liabilities, was $479,067 at December 31, 1998, an $18,121
decrease from the prior year end level. Eight million shares of common stock
were repurchased in March 1998 for approximately $300,000 financed by debt. As a
result of the stock repurchase, debt peaked in the second quarter at $490,500.
Since that date, cash flow from operations, working capital management and
matured investments reduced debt by $115,505.
LIQUIDITY: Company operations provide a strong, positive cash flow which is
sufficient to meet the Company's operational requirements. Cash provided by
operations in 1998 amounted to $108,469 compared to a use of $31,624 in 1997.
The current ratio was 3.4 to 1 at December 31, 1998.
The Company has a $150,000 revolving line of credit through March 1999 with a
twenty-one member banking syndicate comprised of banks in the United States and
other countries where it conducts its business. At December 31, 1998, the
Company had $150,000 available under this line. The revolving credit line was
increased to $200,000 in March 1999 with a seventeen member banking syndicate.
The Company also maintains other non-committed credit facilities which it
utilizes to supplement the revolving line of credit.
Accounts receivable increased $38,760 in 1998 principally due to increased sales
and a shift in sales to emerging markets with longer payment cycles. Inventories
increased $4,540 primarily as a result of expanded product offerings in both the
heart valve and cardiac rhythm management businesses. Net property, plant and
equipment increased $26,114 due to the pacemaker programmer investments and
investments in information systems.
Cash flow from operations and access to additional capital will enable the
Company to pursue further diversification opportunities and to fund expected
capital expenditures.
CAPITAL STRUCTURE
(IN MILLIONS)
[BAR GRAPH]
CAPITAL: The Company's capital structure consists of equity and interest bearing
debt. Interest bearing debt as a percent of total capital was 32% at December
31, 1998, an increase from 18% at December 31, 1997. The increase was
attributable to the debt financed repurchase of eight million shares of common
stock.
DIVIDENDS: The Company did not pay cash dividends in 1998, 1997 or 1996.
OUTLOOK: Management is unaware of any adverse business trends that would
materially affect the Company's strong financial position. Should suitable
investment opportunities arise that would require additional financing,
management believes that the Company's excellent earnings, strong cash flow and
solid balance sheet provide a substantial basis to obtain additional financing
at competitive rates and terms.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the arrival of the Year 2000 on its
business, as well as on the businesses of its customers, suppliers and business
partners. The "Year 2000 Issue" is a term used to describe the problems created
by systems that are unable to accurately interpret dates after December 31,
1999. These problems are derived predominantly from the fact that many software
programs have historically categorized the "year" in a two-digit format. The
Year 2000 Issue creates potential risks for the Company because the Company
relies heavily on Information Technology ("IT") systems and other systems,
facilities and suppliers to conduct its business. The Company may also be
exposed to risks from third parties with whom the Company interacts who fail to
adequately address their own Year 2000 Issues.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE COMPANY'S STATE OF READINESS
While the Company's Year 2000 efforts have been underway for several years, the
Company centralized its focus on addressing the Year 2000 Issue in 1998 by
forming a Year 2000 project team, chaired by the Company's Chief Information
Officer. The Board of Directors receives a monthly status report on the
Company's Year 2000 readiness program.
The Year 2000 project team developed a phased approach to identifying the
remediating Year 2000 Issues, with many of these phases overlapping with one
another or conducted simultaneously.
The first phase was to develop a corporate-wide, uniform strategy for addressing
the Year 2000 Issue and to assess the Company's current state of Year 2000
readiness. This included a review of all IT and non-IT systems, including
Company products and internal operating systems for potential Year 2000 Issues.
The Company completed this phase during the first quarter of 1999.
The second phase of the Company's Year 2000 readiness program (begun
simultaneously with the first phase) was to define a Year 2000 "Readiness"
standard and to begin remediation of those systems requiring correction,
building on work done by the Company's Year 2000 external consulting partner.
This phase is scheduled for completion in the first quarter of 1999.
The Company has completed an assessment of its Year 2000 compliance for its
products. With the exception of certain pacemaker and ICD programmers, all the
Company's products are Year 2000 compliant. The programmers require a simple
corrective action by the user the first time they are used after December 31,
1999, and with one model programmer must also be reset by the user again at two
later dates. The Company's implantable pacemakers and ICDs do not have internal
clocks and are not susceptible to Year 2000 Issues. The Year 2000 Issue
affecting certain programmers would not affect potential health or safety but
could result in an erroneous date on a printout.
The Company has also undertaken a review of its internal IT and non-IT systems
to identify potential Year 2000 Issues. In 1995, the Company began the process
of implementing a uniform worldwide business and accounting information system
to improve internal reporting processes. The internal IT systems replaced
included order entry systems, distribution, purchasing and inventory management
systems, and the Company's general financial systems. Based upon representations
from the manufacturer, this uniform information system is Year 2000 compliant.
Replacement of older legacy business systems with this new system has
significantly reduced the effort required to remediate business systems. The
Company expects to replace its Human Resource Information System by the end of
the second quarter 1999. With respect to non-IT systems, the Company is actively
analyzing its manufacturing equipment in order to assess any Year 2000 Issues.
To date, no material problems have been discovered, and the Company will
continue to review, test and remediate (if necessary) such equipment. The
Company is also evaluating its other critical non-IT facility and internal
systems with date sensitive operating controls for Year 2000 Issues. While the
Company believes that most of these systems will function without substantial
Year 2000 readiness problems, the Company will continue to review, test and
remediate (if necessary) such systems. Based on the testing results, the Company
expects to complete the remediation of identified problems by the end of the
third quarter of 1999. At this stage of assessment, no non-compliant high cost,
high business risk systems have been identified which might cause business
interruption or product failure.
The Company is presently evaluating each of its principal suppliers, service
providers and other business partners to determine each of such party's Year
2000 status. The Company has developed a questionnaire and a Year 2000
certification for use with such third parties, and, as of December 31, 1998, the
Company had contacted key suppliers and service providers about their Year 2000
readiness. This includes many of the suppliers that the Company has identified
as critical suppliers. The Company anticipates that this evaluation will be
on-going through the remainder of 1999.
The Company is working jointly with customers, strategic vendors and business
partners to identify and resolve any Year 2000 issues that may impact the
Company. However, there can be no assurance that the companies with which the
Company does business will achieve a Year 2000 conversion in a timely fashion,
or that such failure to convert by another company will not have a material
adverse effect on the Company.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The total cost associated with the Company's Year 2000 remediation is not
expected to be material to the Company's financial condition or results of
operations. The estimated total cost of the Company's Year 2000 remediation is
not expected to exceed $10 million. Through December 31, 1998, the Company has
spent approximately $1 million in connection with Year 2000 Issues. The cost of
implementing the uniform worldwide business and accounting information system
(approximately $45 million) has not been included in this figure since the
replacement of the previous systems was not accelerated due to Year 2000 Issues.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
There can be no assurance that the Company will be completely successful in its
efforts to address Year 2000 Issues. If some of the Company's products or
systems are not Year 2000 compliant, the Company could suffer manufacturing
delays, lost sales or other negative consequences, including, but not limited
to, diversion of resources, damage to the Company's reputation, increased
service and warranty costs and litigation, any of which could materially
adversely affect the Company's business operations or financial statements.
The Company cannot predict the consequences of failure of its customers or
government health payers and providers, such as the U.S. Health Care Financing
Administration, to adopt Year 2000 compliant software in a timely manner. The
Company is also dependent on third parties such as its suppliers, service
providers and other business partners. If these or other third parties fail to
adequately address Year 2000 Issues, the Company could experience a negative
impact on its business operations or financial statements. For example, the
failure of certain of the Company's principal suppliers to have Year 2000
compliant internal systems could impact the Company's ability to manufacture
and/or ship its products or to maintain adequate inventory levels for
production.
THE COMPANY'S CONTINGENCY PLANS
The Company has identified 786 business systems which may require a written
contingency plan. Twenty such plans have now been written. The Company's goal is
to have the balance of these systems evaluated and, in those cases where it
decides a written contingency plan is prudent, to have such a written plan
completed by the end of the third quarter of 1999.
YEAR 2000 FORWARD-LOOKING STATEMENTS
The foregoing Year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all product and relevant IT and non-IT systems, results
of Year 2000 testing, adequate resolution of Year 2000 Issues by businesses and
other third parties who are service providers, suppliers or customers of the
Company, unanticipated system costs, the adequacy of and ability to develop and
implement contingency plans and similar uncertainties. The "forward-looking
statement" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
32
<PAGE>
REPORT OF MANAGEMENT
The management of St. Jude Medical, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements were prepared in accordance with generally accepted
accounting principles and include amounts which reflect management's best
estimates based on its informed judgement and consideration given to
materiality. Management is also responsible for the accuracy of the related data
in the annual report and its consistency with the financial statements.
In the opinion of management, the Company's accounting systems and procedures,
and related internal controls, provide reasonable assurance that transactions
are executed in accordance with management's intention and authorization, that
financial statements are prepared in accordance with generally accepted
accounting principles, and that assets are properly accounted for and
safeguarded. The concept of reasonable assurance is based on the recognition
that there are inherent limitations in all systems of internal control, and that
the cost of such systems should not exceed the benefits to be derived therefrom.
Management reviews and modifies the system of internal controls to improve its
effectiveness. The effectiveness of the controls system is supported by the
selection, retention and training of qualified personnel, an organizational
structure that provides an appropriate division of responsibility and a strong
budgeting system of control.
St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and business conduct. This responsibility is
reflected in the Company's business ethics policy.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. The independent auditors and internal
auditor meet with, and have confidential access to, the Audit Committee to
discuss the results of their audit work.
/s/ Ronald A. Matricaria /s/ John C. Heinmiller
RONALD A. MATRICARIA JOHN C. HEINMILLER
CHAIRMAN AND VICE PRESIDENT, FINANCE AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
Board of Directors
St. Jude Medical, Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude Medical,
Inc. and subsidiaries at December 31, 1998 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 8, 1999
33
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=========================================================================================================
<S> <C> <C> <C>
Net sales $ 1,015,994 $ 994,396 $ 876,747
Cost of sales 372,940 365,717 294,888
=========================================================================================================
Gross profit 643,054 628,679 581,859
Selling, general and administrative expense 349,346 378,500 311,470
Research and development expense 99,756 104,693 107,644
Purchased research and development charges -- -- 40,350
Special charges -- 58,669 52,926
=========================================================================================================
Operating profit 193,952 86,817 69,469
Other income (expense), net (8,222) 1,419 21,140
---------------------------------------------------------------------------------------------------------
Income before taxes 185,730 88,236 90,609
Income tax provision 56,648 33,530 29,972
=========================================================================================================
Net income before the cumulative effect of an accounting
change for business process reengineering 129,082 54,706 60,637
Cumulative effect of an accounting change, net of taxes -- 1,566 --
---------------------------------------------------------------------------------------------------------
Net income $ 129,082 $ 53,140 $ 60,637
---------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER
COMMON SHARE: Income before accounting change $ 1.51 $ 0.60 $ 0.67
Cumulative effect of accounting change -- (0.02) --
---------------------------------------------------------------------------------------------------------
Net income per common share $ 1.51 $ 0.58 $ 0.67
=========================================================================================================
DILUTED EARNINGS (LOSS) PER
COMMON SHARE: Income before accounting change $ 1.50 $ 0.59 $ 0.66
Cumulative effect of accounting change -- (0.01) --
---------------------------------------------------------------------------------------------------------
Net income per common share $ 1.50 $ 0.58 $ 0.66
=========================================================================================================
AVERAGE SHARES Basic 85,714,000 91,426,000 90,989,000
OUTSTANDING: Diluted 86,145,000 92,052,000 92,372,000
=========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
============================================================================================================
<S> <C> <C>
ASSETS Cash and cash equivalents $ 3,775 $ 28,530
CURRENT ASSETS Marketable securities 84,215 156,006
Accounts receivable, less allowance 282,071 243,311
Inventories:
Finished goods 126,927 137,651
Work in process 35,130 39,079
Raw materials 83,522 64,309
===========================================================================================================
Total inventories 245,579 241,039
Prepaid income taxes 34,187 36,279
Other current assets 32,637 38,117
===========================================================================================================
Total current assets 682,464 743,282
-----------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND Land 16,635 17,040
EQUIPMENT Buildings and improvements 94,381 74,392
Machinery and equipment 321,308 261,428
Construction in progress 80,066 103,828
===========================================================================================================
Gross property, plant and equipment 512,390 456,688
Less accumulated depreciation (184,131) (154,543)
===========================================================================================================
Net property, plant and equipment 328,259 302,145
===========================================================================================================
OTHER ASSETS Other Assets 373,889 407,689
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,384,612 $ 1,453,116
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY Accounts payable $ 94,076 $ 111,065
CURRENT LIABILITIES Accrued income taxes 2,461 19,182
Accrued employee compensation and related taxes 45,370 50,711
Other accrued expenses 61,490 65,136
-----------------------------------------------------------------------------------------------------------
Total current liabilities 203,397 246,094
-----------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES Long-term debt 374,995 220,000
-----------------------------------------------------------------------------------------------------------
CONTINGENCIES 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 1998-84,174,699; 1997-91,911,496 shares 8,417 9,191
Additional paid-in capital 6,656 244,347
Retained earnings 816,940 746,032
Accumulated other comprehensive income:
Cumulative translation adjustment (33,242) (24,150)
Unrealized gain on available-for-sale securities 7,449 11,602
===========================================================================================================
Total shareholders' equity 806,220 987,022
===========================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,384,612 $ 1,453,116
===========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TOTAL
------------------------ ADDITIONAL OTHER RECEIVABLE SHARE-
NUMBER OF PAID-IN RETAINED COMPREHENSIVE FOR STOCK HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME ISSUED EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 90,281,312 $ 9,028 $ 200,535 $632,255 $ 14,010 $ (440) $ 855,388
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 60,637 60,637
Other comprehensive income (loss)
Unrealized gain (loss) on
investments, net of taxes
($10,860) (17,719) (17,719)
Foreign currency translation
adjustment (3,933) (3,933)
--------
Other comprehensive income (21,652)
--------
Comprehensive income 38,985
------
Issuance of common stock, including
exercise of stock options,
net of taxes withheld 1,161,191 116 20,701 20,817
Tax benefit realized upon exercise
of stock options 7,597 7,597
Purchase and retirement of common
shares (145,000) (14) (6,712) (6,726)
Issuance of common stock for
business acquired 149,153 15 5,985 6,000
====================================================================================================================================
Balance December 31, 1996 91,446,656 9,145 228,106 692,892 (7,642) (440) 922,061
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 53,140 53,140
Other comprehensive income (loss)
Unrealized gain (loss) on
investments, net of taxes
($12,031) and net of
reclassification adjustment
(see below) 19,630 19,630
Foreign currency translation
adjustment (24,536) (24,536)
-------
Other comprehensive income (4,906)
------
Comprehensive income 48,234
------
Issuance of common stock, including
exercise of stock options,
net of taxes withheld 400,651 40 12,112 12,152
Tax benefit realized upon
exercise of stock options 2,006 2,006
Issuance of common stock for
business acquired 64,189 6 2,123 2,129
Proceeds for stock issued 440 440
====================================================================================================================================
Balance December 31, 1997 91,911,496 9,191 244,347 746,032 (12,548) -- 987,022
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 129,082 129,082
Other comprehensive income (loss)
Unrealized gain (loss) on
investments, net of taxes
($2,545)and net of
reclassification adjustment
(see below) (4,153) (4,153)
Foreign currency translation
adjustment (9,092) (9,092)
----------
Other comprehensive income (13,245)
----------
Comprehensive income 115,837
----------
Issuance of common stock, including
exercise of stock options,
net of taxes withheld 263,203 26 7,054 7,080
Tax benefit realized upon exercise
of stock options 1,070 1,070
Purchase and retirement of common
shares (8,000,000) (800) (245,815) (58,174) (304,789)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 84,174,699 $ 8,417 $ 6,656 $ 816,940 $ (25,793) $ -- $ 806,220
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income
Reclassification Adjustments
for net gains realized in net
income on investments sold
1997 $ 1,285
1998 9,282
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES Net income $129,082 $ 53,140 $ 60,637
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 45,959 45,277 38,533
Amortization 22,894 20,784 19,649
Purchased research and development charges -- -- 40,350
Special charges -- 44,687 20,586
Gain on sale of business -- -- (10,486)
Net investment gain (10,156) (4,399) (777)
Changes in operating assets and liabilities
net of acquisitions:
Increase in accounts receivable (35,236) (41,731) (27,267)
Increase in inventories (7,458) (36,929) (9,331)
Decrease (increase) in other current assets 4,897 (1,892) (14,411)
Increase (decrease) in accounts payable and
accrued expenses (35,853) (110,757) 13,613
Increase (decrease) in accrued income taxes (21,119) (5,448) (12,151)
Decrease (increase) in prepaid and deferred
income taxes 15,459 5,644 (32,855)
==============================================================================================================
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 108,469 (31,624) 86,090
==============================================================================================================
INVESTING ACTIVITIES Purchase of property, plant and equipment (78,227) (90,962) (100,501)
Proceeds from the sale of property, plant and equipment 4,030 6,324 --
Purchase of marketable securities -- (7,000) (90,018)
Proceeds from sale or maturity of marketable securities 82,879 80,363 67,064
Investments in companies, joint ventures and partnerships (1,955) (260) (155)
Acquisitions, net of cash acquired -- -- (117,800)
Proceeds from sale of business, net of cash disposed -- 24,626 24,204
Other investing activities 2,516 (3,607) (5,393)
==============================================================================================================
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,243 9,484 (222,599)
==============================================================================================================
FINANCING ACTIVITIES Proceeds from exercise of stock options and stock issued 7,080 12,592 20,817
Common stock repurchased (304,789) -- (6,726)
Net payments under lines of credit (602,536) (508,000) (249,853)
Net borrowings under lines of credit 785,036 498,500 301,853
Issuance (repurchase) of convertible subordinated notes (27,505) -- 57,500
--------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (142,714) 3,092 123,591
==============================================================================================================
Effect of currency exchange rate changes on cash 247 (1,810) (332)
==============================================================================================================
DECREASE IN CASH AND CASH EQUIVALENTS (24,755) (20,858) (13,250)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,530 49,388 62,638
-------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,775 $ 28,530 $ 49,388
==============================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: St. Jude Medical, Inc. develops, manufactures and
distributes medical devices with an emphasis on cardiovascular products and
services. The Company's products are sold in more than 100 countries. Principal
products include prosthetic heart valves, pacemakers, implantable cardioverter
defibrillators (ICDs) and electrophysiology and interventional cardiology
catheters. The main markets for these products are the United States, Western
Europe and Japan. In the United States, the Company uses a direct employee-based
sales organization for its heart valve and catheter products and a combination
of independent contractors and an employee-based sales organization for its
pacemaker and ICD products. In Western Europe, the Company has a direct sales
presence in 14 countries. Throughout the rest of the world, the Company
principally uses distributor-based sales organizations.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform with the current year presentation.
USE OF ESTIMATES: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period ending
the Saturday nearest December 31. Fiscal years 1998 and 1996 consisted of 52
weeks and fiscal year 1997 consisted of 53 weeks.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates in effect on reporting
dates and differences due to changing exchange rates are recorded as "cumulative
translation adjustment" in accumulated other comprehensive income. Income and
expenses are translated at average monthly rates of exchange. Gains and losses
from foreign currency transactions are included in other income (expense), net.
CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
approximates market.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method. Allowances are made for
slow-moving, obsolete, unsalable or unusable inventories.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record compensation cost for stock-based compensation plans at fair
value. The Company elected to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. See Note 5.
SEGMENTS: Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement 131). Statement 131 superseded FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise." Statement
131 establishes standards for the way that public businesses report information
about operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 9.
COMPREHENSIVE INCOME: Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and the foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HEDGING ACTIVITIES: In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133), which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not yet adopted Statement 133. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of Statement 133 will be on the earnings and
financial position of the Company.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight line method based on
useful lives of 31.5 to 39 years for buildings and improvements and
three-to-seven years for machinery and equipment. Leasehold improvements are
amortized over the shorter of the life of the related asset or the term of the
lease. Accelerated depreciation is used by the Company for tax accounting
purposes only.
GOODWILL: The excess of the purchase price over the value of the net assets
acquired is included in other assets and is amortized generally on a straight
line basis over 20 years. The Company periodically reviews its goodwill for
indicators of impairment.
LONG-LIVED ASSETS: Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The Company's financial statements reflect no such
losses.
REVENUE RECOGNITION: The Company's general practice is to recognize revenues
from product sales as shipped and for services as performed. For certain
products, the Company maintains consigned inventory at customer locations. For
these products, revenue is recognized at the time the Company is notified that
the inventory has been used by the customer. The accumulated provision for
doubtful accounts at December 31, 1998 and December 31, 1997, was $12,352 and
$12,712, respectively.
RESEARCH AND DEVELOPMENT: Research and development expense includes all
expenditures for general research into scientific phenomena, development of
useful ideas into merchantable products, and continuing support and upgrading of
various products. All such expense is charged to operations as incurred.
EARNINGS PER SHARE: Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net income available to common shareholders by the common shares
outstanding during the period adjusted by the number of additional shares that
would have been outstanding had the dilutive potential common shares been
issued.
The table below sets forth the computation of basic and diluted earnings per
common share before the cumulative effect of an accounting change. There were no
adjustments to the numerator.
1998 1997 1996
================================================================================
Numerator:
Net income before accounting change $129,082 $54,706 $60,637
Denominator:
Basic-weighted average shares outstanding 85,714,000 91,426,000 90,989,000
Effect of dilutive securities:
Employee stock options 401,000 574,000 1,316,000
Restricted shares 30,000 52,000 67,000
- --------------------------------------------------------------------------------
Diluted-weighted shares outstanding 86,145,000 92,052,000 92,372,000
================================================================================
Basic earnings per share $ 1.51 $ .60 $ .67
================================================================================
Diluted earnings per share $ 1.50 $ .59 $ .66
================================================================================
Net income and shares outstanding have not been adjusted for the Company's
convertible debentures for diluted earnings per share purposes because the
result would have been anti-dilutive.
NOTE 2 ACQUISITIONS
On May 15, 1997, the Company acquired Ventritex, Inc. ("Ventritex"), a
manufacturer of implantable cardioverter defibrillators and related products.
Each share of Ventritex common stock was converted into .5 shares of Company
common stock. The Company issued 10,437,800 shares to Ventritex shareholders.
The transaction qualified as a tax-free reorganization and was accounted for as
a pooling of interests. The accompanying financial statements for 1997 and 1996
have been restated to
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
include the results of Ventritex. Net sales, net income and other changes in
shareholder equity for the separate companies preceding the acquisition were as
follows:
1997* 1996
===========================================================================
Net Sales:
St. Jude Medical $229,678 $808,780
Ventritex 20,712 67,967
- ---------------------------------------------------------------------------
Combined $250,390 $876,747
===========================================================================
Net Income:
St. Jude Medical $ 27,791 $ 92,181
Ventritex (7,977) (51,208)
Adjustments** 3,063 19,664
- ---------------------------------------------------------------------------
Combined $ 22,877 $ 60,637
===========================================================================
Other Changes in Shareholders' Equity:
St. Jude Medical $ (14,550) $ 7,471
Ventritex 997 (3,331)
Adjustments** -- 1,896
- ---------------------------------------------------------------------------
Combined $ (13,553) $ 6,036
===========================================================================
* AS OF MARCH 31, 1997
** TO REFLECT THE COMBINED TAX POSITION AS IF THE ACQUISITION HAD OCCURRED AT
THE BEGINNING OF 1995.
On November 29, 1996, the Company acquired substantially all of the worldwide
cardiac rhythm management assets of Telectronics Pacing Systems, Inc.
("Telectronics") and Medtel, an Asia-Pacific distribution company for
approximately $139,000 and an earnout provision tied to future pacing sales
which could result in additional payments of up to $40,000 over six years if
certain revenue milestones are achieved. No payments to-date have been made
under this earnout provision. The acquisition was accounted for under the
purchase accounting method. The results of Telectronics operations have been
included in the consolidated results of operations from the date of acquisition.
In conjunction with the Telectronics acquisition, the Company in 1996 recorded a
pre-tax charge of $32,200 relating to that portion of the purchase price
attributable to purchased research and development. In August 1997, the Company
sold Medtel. The gain on the sale was recorded as an adjustment to previously
recorded goodwill.
Unaudited pro forma information has been prepared assuming that the acquisition
of Telectronics had occurred at the beginning of 1995 and including the results
of Ventritex on the above restated basis. For 1996, the pro forma net sales, net
loss and diluted loss per share were $973,262, $8,400 and $.09, respectively.
Pro forma adjustments to reported results include amortization of goodwill,
increased interest expense, decreased interest income and the related income tax
effects. Pro forma results are not necessarily indicative of the results that
would have occurred had the acquisitions actually taken place at the beginning
of the specified periods, or the expected results of future operations.
On September 23, 1996, the Company acquired Newcor Industrial S.A. (Newcor)
which held most of the assets of Biocor Industria E Pesquisas Ltd., a Brazilian
tissue heart valve manufacturer, for $4,000 in cash and an earn-out which could
result in additional cash payments of up to $4,000 over the subsequent three
years. In 1997 and 1998, additional payments for the purchase totaled $2,400. On
January 5, 1996, the Company acquired the remaining shares of The Heart Valve
Company it did not previously own for $1,000 in cash and 149,153 shares of its
common stock. In connection with the acquisitions of Newcor and The Heart Valve
Company, the Company recorded pre-tax charges of $3,150 and $5,000,
respectively, relating to purchased research and development. The results of
Newcor and The Heart Valve Company have been included in the Company's results
of operations since the dates of acquisition and were not material to 1996
results of operations.
On May 31, 1996, the Company acquired Daig Corporation ("Daig"), a manufacturer
of specialized cardiovascular devices for the electrophysiology and
interventional cardiology markets. Each share of Daig common stock was converted
into .651733 shares of Company common stock. The Company issued 9,929,897 shares
to Daig shareholders. Additionally, one outstanding option to acquire 128,000
shares of Daig common stock was converted to an option to acquire 83,422 shares
of Company common stock. The transaction qualified as a tax-free reorganization
and was accounted for as a pooling of interests. The accompanying financial
statements for 1996 have been restated to include the results of Daig, which
were not material.
NOTE 3 SPECIAL CHARGES
Results of operations for 1997 include pre-tax charges of $58,669 recorded in
the second and fourth quarters of $30,645 and $28,024, respectively. These
special charges related to Ventritex merger transaction charges ($8,227), the
termination of various distributor agreements ($12,925), repositioning of
Pacesetter manufacturing operations in connection with the Ventritex integration
($18,139), and repositioning of Ventritex operations ($19,378). The special
charge accruals decreased by $47,045 since the dates recorded as a result of
cash payments or asset impairments.
Results of operations for 1996 include pre-tax charges of $52,926 for costs
relating to patent and litigation settlements and repositioning several of the
Company's operations. Patent and other legal disputes between Pacesetter and a
third party were settled for $25,000. Daig transaction costs totaled $5,118. The
repositioning charges of $22,808 related to the planned consolidation of tissue
heart valve
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
manufacturing operations ($11,100), the termination of various distributor
agreements in conjunction with the conversion to direct sales ($7,700), the
realignment of Pacesetter manufacturing operations in connection with the
Telectronics integration ($2,200), and other non-recurring expenses ($1,808).
The 1996 special charge accruals decreased $50,067, since the date recorded as a
result of cash payments or asset impairments.
NOTE 4 INCOME TAXES
The components of income before taxes were as follows:
1998 1997 1996
===============================================================================
Domestic $132,574 $81,311 $89,305
Foreign 53,156 6,925 1,304
- -------------------------------------------------------------------------------
Income before taxes $185,730 $88,236 $90,609
===============================================================================
The components of the income tax provision were as follows:
1998 1997 1996
===============================================================================
Current:
Federal $28,409 $20,957 $52,129
State and Puerto Rico Section 936 5,771 3,754 9,676
Foreign 7,009 2,195 1,022
- -------------------------------------------------------------------------------
Total current 41,189 26,906 62,827
- -------------------------------------------------------------------------------
Deferred:
Federal 15,459 6,624 (32,855)
- -------------------------------------------------------------------------------
Total deferred 15,459 6,624 (32,855)
- -------------------------------------------------------------------------------
Income tax provision $56,648 $33,530 $29,972
===============================================================================
Deferred income tax assets (liabilities) were comprised of the following at
December 31:
1998 1997
===============================================================================
Deferred income tax assets:
Net operating loss carryforwards $45,258 $45,236
Tax credit carryforwards 3,837 3,837
Inventory (intercompany profit in inventory
and excess of tax over book valuation) 23,302 19,377
Intangibles 17,034 22,200
Accruals not currently deductible 6,456 17,229
- -------------------------------------------------------------------------------
Deferred income tax assets 95,887 107,879
- -------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on investments (4,566) (7,112)
Accumulated depreciation (12,467) (9,000)
- -------------------------------------------------------------------------------
Deferred income tax liabilities (17,033) (16,112)
- -------------------------------------------------------------------------------
Net deferred income tax assets $78,854 $91,767
===============================================================================
The reconciliation of the Company's effective income tax rate to the statutory
U.S. federal income tax rate of 35% is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===========================================================================================
<S> <C> <C> <C>
Income tax provision at U.S. statutory rate $65,006 $30,883 $31,713
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 4,091 2,613 4,309
Tax benefits from foreign sales corporation (5,662) (4,600) (3,878)
Tax benefits from Puerto Rican Section 936 operations (63) (1,152) (3,128)
Non-deductible acquisition costs -- 6,280 1,960
Foreign taxes at higher (lower) rates (6,212) 1,023 1,849
Other (512) (1,517) (2,853)
- -------------------------------------------------------------------------------------------
Income tax provision $56,648 $33,530 $29,972
===========================================================================================
Effective income tax rate 30.5% 38.0% 33.1%
===========================================================================================
</TABLE>
At December 31, 1998, the Company has net operating loss and research and
development tax credit carryforwards for federal income tax purposes of
approximately $139,862 and $3,682, respectively, that will expire from 2002
through 2011 if not utilized, and are subject to annual limitations.
The Company is in Tax Court with the Internal Revenue Service ("IRS") over
deficiency notices for $16,400 in taxes for the period 1990-1991. The Company is
refuting the IRS deficiency and has asserted that the Company is in fact owed a
refund. The trial is expected to begin in 1999. In addition, the IRS completed
an audit examination of the Company's 1992-1994 income tax returns in early 1998
and proposed an adjustment of $41,800 in taxes. The Company filed a protest for
the 1992-1994 audit cycle, which is currently held in suspense pending the
resolution of the 1990-1991 litigation. The adjustments relate primarily to the
Company's Puerto Rican operations. The deficiency amounts do not include
interest, state taxes, or offsetting Puerto Rico tax refunds. The net effect of
these items is not material. It is likely that a similar additional adjustment
will be proposed for 1995. The Company is vigorously contesting this adjustment.
The Company expects that the ultimate resolution will not have material adverse
effect on its financial position or liquidity, but could potentially be material
to the net income of a particular future period if resolved unfavorably.
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries ($56,945 at December 31, 1998) because such
earnings are intended to be indefinitely reinvested.
The Company made income tax payments of $48,031, $33,755 and $68,525 in 1998,
1997 and 1996, respectively.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 STOCK PURCHASE AND OPTION PLANS
STOCK PURCHASE: The Company's employee stock purchase savings plan allows
participating employees to purchase, through payroll deductions, shares of
common stock at 85% of the fair market value at specified dates. Under the terms
of the plan, 750,000 shares of common stock have been reserved for purchase by
plan participants. Employees purchased 107,545, 112,469 and 108,795 shares in
1998, 1997 and 1996, respectively. At December 31, 1998, 274,428 shares were
available for purchase under the plan.
STOCK-BASED COMPENSATION: Under the terms of the Company's various stock plans,
13,551,137 shares of common stock have been reserved for issuance to directors,
officers and employees upon the grant of restricted stock or the exercise of
stock options. Stock options are exercisable over periods up to 10 years from
date of grant and may be "incentive stock options" or "non-qualified stock
options" and may have stock appreciation rights attached. At December 31, 1998,
there were a maximum of 3,781,856 shares available for grant and 9,769,281
options outstanding. At December 31, 1998, 1997 and 1996, there were options
exercisable of 3,961,943, 3,362,361 and 2,578,387, respectively. Stock option
transactions were:
WEIGHTED RANGE OF
OPTIONS AVERAGE PRICE OPTION
OUTSTANDING PER SHARE EXERCISE PRICES
================================================================================
Balance at December 31, 1995 4,350,007 $26.27 $ 3.06-87.74
- --------------------------------------------------------------------------------
Granted 2,288,998 36.36 25.00-46.76
Cancelled (302,785) 39.78 18.58-57.50
Exercised (917,204) 20.84 3.06-43.00
- --------------------------------------------------------------------------------
Balance at December 31, 1996 5,419,016 31.27 3.56-87.74
- --------------------------------------------------------------------------------
Granted 5,049,875 34.03 29.75-42.19
Cancelled (615,140) 38.39 18.58-87.74
Exercised (296,893) 23.56 3.56-43.00
- --------------------------------------------------------------------------------
Balance at December 31, 1997 9,556,858 32.60 5.44-87.74
- --------------------------------------------------------------------------------
Granted 1,350,300 30.21 20.63-38.47
Cancelled (979,284) 36.09 18.58-87.74
Exercised (158,593) 20.36 5.44-35.33
- --------------------------------------------------------------------------------
Balance at December 31, 1998 9,769,281 32.12 6.46-87.74
================================================================================
The weighted-average fair value of options granted during 1998 was $10.91 per
share. The following table summarizes the information about fixed-price options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING YEARS AVERAGE AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
================================================================================================
<S> <C> <C> <C> <C> <C>
$ 6.46 - 8.77 40,977 0.1 $ 7.17 40,977 $ 7.17
8.77 - 17.55 76,801 1.2 14.61 76,801 14.61
17.55 - 26.32 1,475,442 5.0 21.84 1,344,148 21.60
26.32 - 35.10 4,991,280 8.1 30.57 1,704,363 30.07
35.10 - 43.87 2,897,817 8.3 38.71 517,979 39.22
43.87 - 52.64 220,756 5.0 49.50 211,467 49.62
52.64 - 87.74 66,208 4.5 66.54 66,208 66.54
- ------------------------------------------------------------------------------------------------
9,769,281 7.5 32.12 3,961,943 29.51
================================================================================================
</TABLE>
Pursuant to the terms of the Company's various stock plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related tax
liabilities. Any such shares are acquired from the optionee at the fair market
value of the stock on the transaction date.
All options have been granted at not less than fair market value at dates of
grant. When stock options are exercised, the par value of the shares issued is
credited to common stock and the excess of the proceeds over the par value is
credited to additional paid-in capital. When non-qualified options are
exercised, the Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and the stock option
exercise price. These tax benefits do not affect the income tax provision, but
rather are credited directly to additional paid-in capital.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for its stock option awards. Had compensation expense for the
Company's stock option awards been determined based upon their grant date fair
value consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced by $11,822,
or $.14 per share, $12,911, or $.14 per share, and $4,985, or $.05 per share for
1998, 1997 and 1996, respectively. These amounts are not necessarily indicative
of the amounts that
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
will be reported in the future. The fair value of the options at the grant date
was estimated using a variation of the Black-Scholes model with the following
weighted average assumptions:
1998 1997 1996
=============================================================================
Expected life (years) 5 6 6
Interest rate 4.5% 6.0% 6.3%
Volatility 33.4% 34.2% 40.5%
Dividend yield 0% 0% 0%
=============================================================================
Under the terms of the Company's Shareholder Rights Plan, upon the occurrence of
certain events which result in a change in control as defined by the Plan,
registered holders of common shares are entitled to purchase one-hundredth of a
share of Series B Junior Preferred Stock at a stated price, or to purchase
either the Company's shares or shares of the acquiring entity at half their
market value.
NOTE 6 LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997, consisted of the following
instruments:
<TABLE>
<CAPTION>
1998 1997
==============================================================================================
<S> <C> <C>
Revolving Credit Facility due March, 2003 at weighted
average interest of 5.49% $330,000 $ --
Revolving Credit Facility due July, 2001 at weighted
average interest of 5.95% -- 116,000
Uncommitted lines of credit at weighted average interest
of 5.33% and 5.95% in 1998 and 1997, respectively. 15,000 46,500
Convertible Subordinated Debenture
due August 15, 2001 with a 5.75% interest rate 29,995 57,500
- ----------------------------------------------------------------------------------------------
$374,995 $220,000
==============================================================================================
</TABLE>
The Company has a $350,000 committed revolving credit facility that expires on
March 16, 2003 with a group of twenty-one banks. In addition, the Company has a
$150,000 committed revolving credit facility that expires on March 15, 1999,
with a group of twenty-one banks and was renewed in March 1999 with a group of
seventeen banks and increased to $200,000. The rate of interest payable under
these borrowing facilities is a floating rate and is a function of the London
Interbank Offered Rate. A facility fee of .11% of the $350,000 revolving credit
facility is paid quarterly and a .09% facility fee is paid quarterly on the
$150,000 revolving credit facility.
These credit agreements contain various covenants that require the Company to
maintain specified financial ratios, limit liens, regulate asset dispositions
and subsidiary indebtedness and limits certain acquisitions and investments. At
December 31, 1998, the Company was in compliance with these covenants.
In August 1996, the Company issued $57,500 aggregate principal amount of 5.75%
convertible subordinated debentures due August 15, 2001. At the option of the
holder, the notes are convertible at any time prior to maturity, unless
previously redeemed or repurchased, into shares of common stock at a conversion
rate of 29.0909 shares per thousand dollars principal amount of notes
(equivalent to a conversion price of $34.375 per share). Subsequent to August
15, 1999, the Company may notify holders of the debentures that they must either
convert to common stock or redeem the debentures for cash. During 1998, the
Company repurchased $27,505 principal amount of these debentures. Gains (losses)
related to the repurchase of such debentures were insignificant. The fair value
of the outstanding debentures at December 31, 1998, was estimated to be
approximately $32,000.
NOTE 7 FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
Foreign Currency Hedging Activities: The Company enters into foreign exchange
contracts to reduce its exposure to fluctuations in foreign currency exchange
rates. The instruments used for hedging are readily marketable range forward
options and forward contracts with banks. The changes in market value of such
contracts have a high correlation to price changes in the currency of the hedged
activity. Maturities of these instruments are typically one year or less from
the transaction date.
The Company had foreign currency contracts totaling $38,353 and $85,213 at
December 31, 1998 and December 31, 1997, respectively. The 1998 contracts are
related to the exchange of German Marks, Canadian Dollars, British Pounds,
Swedish Kroner and U.S. Dollars. These instruments were recorded at their fair
market value at each balance sheet date and any resulting gains or losses are
included in other income (expense), net.
OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity
instruments, bank certificates of deposit, U.S. government obligations,
commercial paper, and Puerto Rico industrial development bonds. Under Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Securities," debt securities that the Company does not have
the positive intent to hold to maturity and all marketable equity securities are
classified as available-for-sale and are carried at fair value. A net realized
gain of $15,624, $6,768 and $1,195 was recorded in other income on sales of
available-for-sale securities in 1998, 1997 and 1996, respectively. The net
unrealized holding gain on available-for-sale securities included in accumulated
other comprehensive income was $7,449 (net of $4,566 of current deferred income
taxes) at December 31, 1998.
The cost and estimated fair market value of financial instruments at December
31, 1998 and December 31, 1997, consisted of the following:
1998 1997
================================================================================
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
================================================================================
Assets:
Cash and Cash Equivalents $ 3,775 $ 3,775 $ 28,530 $ 28,530
Marketable Securities $72,200 $84,215 $137,292 $156,006
================================================================================
CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable
securities and foreign exchange contracts may subject the Company to
concentration of credit risk.
Within the European Economic Union and in many emerging markets, payment of
certain accounts receivable is made by the national health care system within
several countries. Although the Company does not anticipate collection problems
with these receivables, payment is dependent to a certain extent upon the
economic situation within these countries. The credit risk associated with the
balance of the trade receivables is mitigated due to dispersion of the
receivables over a large number of customers in many geographic areas. The
Company monitors the credit worthiness of its customers to which it grants
credit terms in the normal course of business.
Marketable securities are placed with high credit qualified financial
institutions and Company policy limits the credit exposure to any one financial
institution. Counterparties to foreign exchange contracts are major financial
institutions; therefore, credit loss from counterparty nonperformance is
unlikely.
NOTE 8 RETIREMENT PLANS
DEFINED CONTRIBUTION PLAN: The Company has a defined contribution profit sharing
plan, including features under section 401(k) of the Internal Revenue Code,
which provides retirement benefits to substantially all full-time U.S.
employees. Under the 401(k) portion of the plan, eligible employees may
contribute a percentage of their annual compensation, subject to IRS
limitations, with the Company matching certain eligible contributions. The
Company's level of contribution to the profit sharing portion of the plan is
subject to Board of Directors approval and is based on Company performance. In
addition, the Company has defined contribution programs for employees outside
the United States. The benefits under these plans are based primarily on
compensation levels. Total retirement plan expense was $9,858, $8,859 and $5,783
in 1998, 1997 and 1996, respectively.
DEFINED BENEFIT PLANS: In certain countries outside the United States, the
Company maintains defined benefit plans. An accrual of $6,179 was recorded as of
December 31, 1998, which is approximately equal to the actuarially calculated
unfunded liability and the related pension expense was not material.
NOTE 9 SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm
Management (CRM) and Heart Valve Disease Management (HVDM). The Company's
Cardiac Rhythm Management Division and its Daig Division have been aggregated
for CRM. The CRM segment develops, manufactures and distributes bradycardia
pulse generators and leads, tachycardia implantable cardioverter defibrillators,
electrophysiology catheters and cardiology catheters. The HVDM segment develops,
manufactures and distributes mechanical and tissue heart valves and valve repair
products. Both segments sell their products through a combination of direct
sales representatives and independent sales representatives.
Segment performance is evaluated based on worldwide operating results.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. There were no
inter-segment sales or transfers.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's reportable segments are business units that offer different
products to distinct customers. These segments are each managed separately
because they manufacture different products with discrete manufacturing
processes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 CRM HVDM ALL OTHER(1) TOTAL
==============================================================================================
<S> <C> <C> <C> <C>
Net sales to external customers $735,123 $280,871 $ -- $1,015,994
Depreciation and amortization expense 55,297 6,106 7,450 68,853
Operating profit (3) 70,024 147,832 (23,904) 193,952
Assets (4) 952,921 185,135 246,556 1,384,612
Expenditures for long-lived assets 45,866 5,828 26,533 78,227
- ----------------------------------------------------------------------------------------------
Year Ended December 31, 1997
==============================================================================================
Net sales to external customers $716,347 $278,049 $ -- $ 994,396
Depreciation and amortization expense 52,560 6,724 6,777 66,061
Operating profit (2), (3) 23,673 142,707 (79,563) 86,817
Assets (4) 968,249 155,899 328,968 1,453,116
Expenditures for long-lived assets 60,513 4,359 26,090 90,962
- ----------------------------------------------------------------------------------------------
Year Ended December 31, 1996
==============================================================================================
Net sales to external customers $607,277 $269,470 $ -- $ 876,747
Depreciation and amortization expense 45,599 6,800 5,783 58,182
Operating profit (2), (3) 45,482 135,417 (111,430) 69,469
Assets (4) 977,796 123,541 368,657 1,469,994
Expenditures for long-lived assets 81,372 5,280 13,849 100,501
==============================================================================================
</TABLE>
(1) AMOUNTS INCLUDED IN ALL OTHER RELATE PRIMARILY TO CORPORATE, SPECIAL
CHARGES AND PURCHASED R&D.
(2) ALL OTHER INCLUDES SPECIAL CHARGES TOTALING $58,669 AND $52,926 FOR 1997
AND 1996, RESPECTIVELY. IN ADDITION, ALL OTHER INCLUDES PURCHASED RESEARCH
AND DEVELOPMENT CHARGES OF $40,350 FOR 1996.
(3) OTHER INCOME (EXPENSE), NET WAS EXCLUDED FROM THIS TABLE BECAUSE THIS
FINANCIAL INFORMATION IS NOT USED BY THE CHIEF OPERATING DECISION MAKER TO
EVALUATE SEGMENT PERFORMANCE AND MUST BE ADDED TO OPERATING PROFIT TO
RECONCILE TO INCOME BEFORE TAXES.
(4) ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE
SEGMENT'S ASSETS WITH THE EXCEPTION OF THE HVDM HEADQUARTERS FACILITY THAT
IS INCLUDED IN THE CORPORATE HEADQUARTERS ASSETS. HVDM IS ALLOCATED ITS
PROPORTIONATE SHARE OF DEPRECIATION. CORPORATE ASSETS CONSIST PRINCIPALLY
OF CASH AND CASH EQUIVALENTS, MARKETABLE SECURITIES AND PROPERTY AND
EQUIPMENT.
Geographic Information:
LONG-LIVED
YEAR ENDED DECEMBER 31, 1998 NET SALES ASSETS
================================================================================
United States $ 604,524 $538,403
Europe 248,070 44,860
Other foreign countries 163,400 67,430
- --------------------------------------------------------------------------------
Consolidated $ 1,015,994 $650,693
================================================================================
Year Ended December 31, 1997
United States $ 581,514 $532,381
Europe 227,871 40,697
Other foreign countries 185,011 74,370
- --------------------------------------------------------------------------------
Consolidated $ 994,396 $647,448
================================================================================
Year Ended December 31, 1996
United States $ 519,240 $528,066
Europe 220,017 42,456
Other foreign countries 137,490 75,404
- --------------------------------------------------------------------------------
Consolidated $ 876,747 $645,926
================================================================================
CRM and HVDM do not have any single customer that represents more than 10% of
applicable consolidated net sales. Net sales are allocated to specific
geographies based on the location of the customer. Long-lived assets consist of
net property, plant and equipment, net goodwill and other net intangibles.
NOTE 10 OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following:
1998 1997 1996
================================================================================
Interest income $ 4,125 $ 6,365 $ 9,463
Interest expense (23,667) (14,374) (4,725)
Foreign exchange gains (3,304) 2,078 2,165
Net gain on the sale of equities 15,624 6,768 1,195
Gain on the sale of a business -- -- 10,486
Other (1,000) 582 2,556
- --------------------------------------------------------------------------------
Other income (expense), net $ (8,222) $ 1,419 $ 21,140
================================================================================
The Company periodically directly invests in the equities of emerging
technologies that may complement the Company's technologies. In 1998, 1997 and
1996, the Company realized a gain on the sale of certain of these equity
investments. In 1996, the Company sold its cardiac assist operations for
approximately $24,000.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11 OTHER ASSETS
Other assets as of December 31, 1998 and 1997, net of accumulated amortization
of $86,415 and $65,009, respectively, consisted of the following:
1998 1997
================================================================================
Investments in companies, joint ventures and partnerships $ 3,735 $ 4,717
Goodwill and other intangibles 322,434 345,303
Deferred tax assets 44,667 55,488
Other 3,053 2,181
- --------------------------------------------------------------------------------
Other assets, net $373,889 $407,689
================================================================================
Investments in companies, joint ventures, and partnerships are stated at cost
which approximates market. Goodwill and other intangible assets consist
principally of the excess of cost over net assets of certain acquired businesses
and technology and are being amortized over periods ranging from 10 to 20 years.
NOTE 12 LEASE COMMITMENTS
The Company leases various facilities under noncancelable operating lease
arrangements. The major facility leases are for terms of three to ten years and
generally provide renewal options. In most cases, management expects that in the
normal course of business, leases that expire will be renewed or replaced by
other leases. Rent expense under all operating leases was approximately $7,341,
$7,081 and $6,596 in 1998, 1997 and 1996, respectively.
Future minimum lease payments under operating leases that have initial or
remaining noncancelable terms in excess of one year as of December 31, 1998, are
as follows:
YEAR ENDING DECEMBER 31
=================================================================
1999 $ 7,465
2000 6,724
2001 6,268
2002 5,185
2003 4,535
After 2003 372
- -----------------------------------------------------------------
Total minimum lease payments $30,549
=================================================================
NOTE 13 CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
Pursuant to Emerging Issues Task Force (EITF) No. 97-13, the Company changed its
accounting policy in the fourth quarter of 1997, regarding a project it began in
1995, to install a new software system and to reengineer certain related
processes. Previously, substantially all the system costs relating to the
project were capitalized, including the portion related to business process
reengineering. The Company expensed the unamortized balance of these costs as of
September 30, 1997, of $1,566 (net of income taxes of $980) and recorded the
charge as a cumulative effect of an accounting change during the fourth quarter
of 1997.
NOTE 14 CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has products liability insurance sufficient
to cover such claims and suits. The Company's product liability insurance
policies exclude coverage for two discontinued Pacesetter lead models. These
discontinued lead models were the subject of class action product liability
suits that have been settled. Management believes losses that might be sustained
from such actions would not have a material adverse effect on the Company's
liquidity or consolidated financial condition, but could potentially be material
to the net income of a particular future period if resolved unfavorably.
NOTE 15 SUBSEQUENT EVENT
On February 5, 1999, the Company executed a definitive purchase and sale
agreement to acquire the Angio-Seal business of Tyco International Ltd. for
$167,000. The transaction is subject to government review under the
Hart-Scott-Rodino Act, but is expected to be completed by the end of the first
quarter of 1999. This transaction will be accounted for under the purchase
accounting method.
NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1998 and 1997 was as follows:
QUARTER
FIRST SECOND THIRD FOURTH
================================================================================
Year Ended December 31, 1998:
Net sales $257,488 $261,232 $248,822 $248,452
Gross profit 159,262 165,207 158,118 160,467
Net income 29,175 40,034 29,450 30,423
Diluted earnings per share .32 .47 .35 .36
Year Ended December 31, 1997:
Net sales $250,390 $261,456 $233,189 $249,361
Gross profit 158,674 169,824 144,423 155,758
Net income 22,877 8,765* 18,552 2,946*
Diluted earnings per share .25 .09 .20 .03
================================================================================
THE FULL YEAR 1997 DILUTED EARNINGS PER SHARE WERE $.01 HIGHER THAN THE SUM OF
THE QUARTERS DUE TO ROUNDING.
* INCLUDES THE EFFECT OF PRE-TAX SPECIAL CHARGES ASSOCIATED WITH THE
VENTRITEX MERGER AND THE CONSOLIDATION OF CARDIAC RHYTHM MANAGEMENT
OPERATIONS OF $30,645 AND $28,024 IN THE SECOND AND FOURTH QUARTERS,
RESPECTIVELY.
46
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997* 1996** 1995 1994***
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS Net sales $1,015,994 $ 994,396 $ 876,747 $ 848,078 $ 517,433
FOR THE YEAR ENDED: --------------------------------------------------------------------------------------------
Gross profit $ 643,054 $ 628,679 $ 581,859 $ 555,290 $ 353,623
--------------------------------------------------------------------------------------------
Percent of sales 63.3% 63.2% 66.4% 65.5% 68.3%
--------------------------------------------------------------------------------------------
Operating profit $ 193,952 $ 86,817 $ 69,469 $ 169,086 $ 123,516
--------------------------------------------------------------------------------------------
Percent of sales 19.1% 8.7% 8.0% 19.9% 23.9%
--------------------------------------------------------------------------------------------
Net income $ 129,082 $ 53,140 $ 60,637 $ 117,116 $ 95,749
--------------------------------------------------------------------------------------------
Percent of sales 12.7% 5.3% 6.9% 13.8% 18.5%
--------------------------------------------------------------------------------------------
Diluted earnings per
share $ 1.50 $ 0.58 $ 0.66 $ 1.28 $ 1.06
--------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END: Cash and marketable
securities $ 87,990 $ 184,536 $ 235,395 $ 239,621 $ 209,099
--------------------------------------------------------------------------------------------
Working capital $ 479,067 $ 497,188 $ 429,451 $ 405,060 $ 426,297
--------------------------------------------------------------------------------------------
Total assets $1,384,612 $1,453,116 $1,469,994 $1,192,235 $1,101,283
--------------------------------------------------------------------------------------------
Long-term debt $ 374,995 $ 220,000 $ 229,500 $ 120,000 $ 255,000
--------------------------------------------------------------------------------------------
Total shareholders'
equity $ 806,220 $ 987,022 $ 922,061 $ 855,388 $ 772,629
--------------------------------------------------------------------------------------------
OTHER DATA: Dividend declared
per share $ -- $ -- $ -- $ -- $ 0.20
--------------------------------------------------------------------------------------------
Diluted weighted
average shares
outstanding 86,145,000 92,052,000 92,372,000 91,335,000 90,558,000
--------------------------------------------------------------------------------------------
Total employees 3,984 3,772 4,168 3,090 2,980
============================================================================================
</TABLE>
NOTE: THE FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA INCLUDES THE RESULTS OF
VENTRITEX, INC. AND DAIG CORPORATION ON A POOLING OF INTERESTS BASIS FOR
ALL PERIODS PRESENTED.
* RESULTS FOR 1997 INCLUDE $58,669 PRE-TAX CHARGE FOR SPECIAL CHARGES.
** RESULTS FOR 1996 INCLUDE $88,158 PRE-TAX CHARGE FOR PURCHASED RESEARCH AND
DEVELOPMENT AND SPECIAL CHARGES.
*** RESULTS FOR 1994 INCLUDE $40,800 PRE-TAX CHARGE FOR PURCHASED RESEARCH AND
DEVELOPMENT.
47
<PAGE>
INVESTOR INFORMATION
TRANSFER AGENT
Requests concerning the transfer or exchange of shares, lost stock
certificates, duplicate mailings or change of address should be directed to
the Company's Transfer Agent at:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
800-317-4445
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday,
May 5, 1999, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,
Minneapolis, Minnesota.
INVESTOR INFORMATION
A copy of the Company's annual report on Form 10-K or other financial results
will be provided free of charge to any shareholder upon written request to
Investor Relations, St. Jude Medical, Inc., One Lillehei Plaza, St.
Paul, Minnesota 55117-9983.
To obtain information about the Company call 1-800-552-7664, or write to: Laura
Merriam, Director, Investor Relations, St. Jude Medical, Inc., One Lillehei
Plaza, St. Paul, Minnesota 55117-9983.
COMPANY STOCK SPLITS
2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90
3:2 on 11/16/95
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Chicago Board Options Exchange (CB)
Symbol: STJ
The range of high and low prices per share for the Company's common stock for
fiscal 1998 and 1997 is set forth below. As of February 10, 1999, the Company
had 4,443 shareholders of record.
YEAR ENDED DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------
QUARTER HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------
First $38.00 $29.06 $42.38 $33.25
Second $39.69 $33.06 $39.75 $29.13
Third $36.63 $19.19 $42.88 $33.50
Fourth $31.88 $19.19 $35.06 $27.06
TRADEMARKS
Affinity(R), Angstrom(R), APS(R) III, AutoCapture(TM), Contour(R), EnCap(TM),
Flatcap(TM), Genisis(R), Lynx(TM), Livewire(TM), Locator(TM), Microny(TM),
Passive Plus(R) DX, Phoenix(R), Profile(TM), Silzone(TM), SJM(R), SJM Epic(TM),
SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), Spyglass(TM), Toronto SPV(R),
Trilogy(R).
48
EXHIBIT 21
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
St. Jude Medical, Inc. Wholly Owned Subsidiaries:
* Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,
South Carolina (Delaware corporation)
* St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota
corporation)
* St. Jude Medical Sales Corp. - St. Paul, Minnesota (Barbados
corporation)
* St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware
corporation)
- Brussels, Belgium branch
* St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,
Quebec (Ontario, Canada corporation) (former name: St. Jude Medical,
Ltd.)
* 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation)
* St. Jude Medical Hong Kong Ltd. - Kowloon, Hong Kong (Hong Kong
corporation)
- Shanghai and Beijing, China branches
- India liaison office
* St. Jude Medical Tissue Corporation, Inc. - St. Paul, Minnesota
(Delaware corporation) (formerly known as St. Jude Medical, Inc.,
Cardiac Assist Division; Assets of St. Jude Medical, Inc., Cardiac
Assist Division sold to Bard 1/19/96)
* Glory Telectronics, Ltd. - Hong Kong (Hong Kong corporation)
- Glory EME China, Ltd. - Hong Kong (Hong Kong corporation)
(wholly-owned subsidiary of Glory Telectronics, Ltd. - Hong
Kong)
- Glory EME, Ltd. - Hong Kong (Hong Kong corporation)
(wholly-owned subsidiary of Glory Telectronics, Ltd.
Hong Kong)
* St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian
corporation)
* St. Jude Medical Brasil, Ltda. - Sao Paulo, Brazil (Brazilian
corporation)
- Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian
corporation)
* Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand
corporation)
* Daig Corporation - Minnetonka, Minnesota (Minnesota corporation)
SJM Europe Inc.'s Wholly Owned Subsidiaries
* St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware
corporation)
- St. Jude Medical Puerto Rico Holding, B.V. (Netherlands
corporation) (wholly-owned subsidiary of St. Jude Medical
Puerto Rico, Inc.)
- St. Jude Medical B.V. (Netherlands corporation) (wholly-
owned subsidiary of St. Jude Medical Puerto Rico Holding,
B.V.)
- Telectronics B.V. (Netherlands corporation) (wholly-
owned subsidiary of St. Jude Medical B.V.)
- St. Jude Medical Netherlands Distribution AB (Swedish
corporation headquartered in the Netherlands) (wholly-
owned subsidiary of St. Jude Medical Puerto Rico Holding,
B.V.)
<PAGE>
- St. Jude Medical Puerto Rico B.V. (Netherlands) (wholly-
owned subsidiary of St. Jude Medical Netherlands
Distribution AB)
- Puerto Rico branch of St. Jude Medical Puerto Rico
B.V.
- St. Jude Medical Coordination Center (Belgium branch of St.
Jude Medical Netherlands
Distribution AB)
* Pacesetter AB (Swedish corporation)
* St. Jude Medical Sweden AB (Swedish corporation)
* St. Jude Medical Denmark A/S (Danish corporation)
- Telectronics Scandinavia Aps (Danish corporation) (wholly-
owned subsidiary of St. Jude Medical
Denmark A/S)
* St. Jude Medical Pacesetter Sales AB (Swedish corporation)
* St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda.
* St. Jude Medical Export Ges.m.b.H. (Austrian corporation)
* St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)
* St. Jude Medical Italia S.p.A (Italian corporation)
* N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)
- Portugal branch
* St. Jude Medical Espagna S.A. (Spanish corporation)
* St. Jude Medical France S.A. (French corporation) (former name:
Pacesetter France S.A.)
* St. Jude Medical Finland O/y (Finnish corporation)
* St. Jude Medical Sp.zo.o. (Polish corporation)
* St. Jude Medical GmbH (German corporation)
* St. Jude Medical UK Limited (United Kingdom corporation)
* St. Jude Medical AG (Swiss corporation)
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of St. Jude Medical, Inc. of our report dated February 8, 1999, included in the
1998 Annual Report to Shareholders of St. Jude Medical, Inc.
Our audits also included the financial statement schedule of St. Jude Medical,
Inc. listed in 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.
We also consent to the incorporation by reference in the Registration Statement
No. 33-9262, Registration Statement No. 33-29085, Registration Statement No.
33-41459, Registration Statement No. 33-48502, Registration Statement No.
33-54435, and Registration Statement No. 333-42495 on Form S-8 of our report
dated February 8, 1999, with respect to the consolidated financial statements
and schedule of St. Jude Medical, Inc. included and/or incorporated by reference
in the Annual Report on Form 10-K for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,775
<SECURITIES> 84,215
<RECEIVABLES> 294,423
<ALLOWANCES> 12,352
<INVENTORY> 245,579
<CURRENT-ASSETS> 682,464
<PP&E> 512,390
<DEPRECIATION> 184,131
<TOTAL-ASSETS> 1,384,612
<CURRENT-LIABILITIES> 203,397
<BONDS> 29,995
0
0
<COMMON> 8,417
<OTHER-SE> 797,803
<TOTAL-LIABILITY-AND-EQUITY> 1,384,612
<SALES> 1,015,994
<TOTAL-REVENUES> 1,015,994
<CGS> 372,940
<TOTAL-COSTS> 372,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 23,667
<INCOME-PRETAX> 185,730
<INCOME-TAX> 56,648
<INCOME-CONTINUING> 129,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,082
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.50
</TABLE>
