SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 Commission File Number 0-8672
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ST. JUDE MEDICAL, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-1276891
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
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(Address of principal executive offices)
(651) 483-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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The number of shares of common stock, par value $.10 per share, outstanding at
May 1, 1999 was 84,265,398.
This Form 10-Q consists of 30 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 18.
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PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
ENDED
MARCH 31
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1999 1998
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Net sales $ 266,734 $ 257,488
Cost of sales 93,461 98,226
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Gross profit 173,273 159,262
Selling, general & administrative 96,423 92,064
Research & development 27,143 22,213
In-process research & development 47,775 --
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Operating profit 1,932 44,985
Other expense, net (4,631) (101)
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Income (loss) before taxes (2,699) 44,884
Income tax provision 9,358 15,709
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Net income (loss) $ (12,057) $ 29,175
========= =========
Earnings (loss) per common share:
Basic $ (0.14) $ 0.32
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Diluted $ (0.14) $ 0.32
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Average shares outstanding:
Basic 84,194 90,573
Diluted 84,194 91,315
See notes to condensed consolidated financial statements.
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PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
(Unaudited) (See Note)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,224 $ 3,775
Marketable securities 78,734 84,215
Accounts receivable, less allowance
(1999 $12,536; 1998 - $12,352) 289,783 282,071
Inventories
Finished goods 124,362 126,927
Work in process 35,675 35,130
Raw materials 86,848 83,522
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Total inventories 246,885 245,579
Other current assets 73,306 66,824
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Total current assets 702,932 682,464
Property, plant and equipment 525,555 512,390
Less accumulated depreciation (198,903) (184,131)
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Net property, plant and equipment 326,652 328,259
Other assets 502,922 373,889
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TOTAL ASSETS $ 1,532,506 $ 1,384,612
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LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 237,804 $ 203,397
Long-term debt 520,795 374,995
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 1999 - 84,248,613 shares;
1998 - 84,174,699 shares 8,425 8,417
Additional paid-in capital 7,842 6,656
Retained earnings 804,883 816,940
Accumulated other comprehensive income:
Cumulative translation adjustment (51,259) (33,242)
Unrealized gain on available-for-sale securities 4,016 7,449
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Total shareholders' equity 773,907 806,220
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,532,506 $ 1,384,612
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</TABLE>
NOTE: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
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PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
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<S> <C> <C>
Operating Activities:
Net income (loss) $ (12,057) $ 29,175
Depreciation and amortization 19,608 16,459
In-process research and development 47,775 --
Net investment gain -- (1,220)
Working capital change (6,065) (37,149)
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Net cash provided by operating activities 49,261 7,265
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Investment Activities:
Purchases of property, plant and equipment (9,675) (19,978)
Sales of available-for-sale securities, net -- 38,877
Acquisition of business (167,000) --
Other investing activities (7,487) 2,267
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Net cash provided by (used in) investing activities (184,162) 21,166
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Financing Activities:
Proceeds from exercise of stock options 838 1,771
Common stock repurchased -- (304,169)
Net borrowings under lines of credit 145,800 267,500
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Net cash provided by (used in) financing activities 146,638 (34,898)
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Effect of currency exchange rate changes on cash (1,288) (677)
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Increase (decrease) in cash and cash equivalents 10,449 (7,144)
Cash and cash equivalents at beginning of year 3,775 28,530
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Cash and cash equivalents at end of period $ 14,224 $ 21,386
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the full year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Certain
reclassifications of previously reported amounts have been made to conform with
the current year presentation.
NOTE 2 - 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 financial condition, but could potentially be material to the net
income of a particular future period if resolved unfavorably.
NOTE 3 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" requires the Company to include in Other Comprehensive Income unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, net of taxes. Other comprehensive income
(loss) for the first quarter 1999 and 1998 was ($21,451) and $16,004,
respectively. Total comprehensive income (loss) combines reported net income and
other comprehensive income (loss). Total comprehensive income (loss) for the
quarters ended March 31, 1999 and 1998 was ($33,508) and $45,179, respectively.
NOTE 4 - SPECIAL CHARGE UPDATE
The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and
1997, respectively. These special charges have decreased by $50,761 and $48,831,
respectively, for cash payments since the date recorded.
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NOTE 5 - EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted earnings per
share. There were no adjustments to the numerator.
1999 1998
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Numerator:
Net income (loss) $ (12,057) $ 29,175
Denominator:
Basic-weighted shares outstanding 89,194,000 90,573,000
Effect of dilutive securities:
Employee stock options -- 690,000
Restricted shares -- 52,000
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Diluted-weighted shares outstanding 89,194,000 91,315,000
============ ===========
Basic earnings (loss) per share $ (.14) $ .32
============ ===========
Diluted earnings (loss) per share $ (.14) $ .32
============ ===========
Diluted shares outstanding have not been adjusted in 1999 for the effect of the
Company's employee stock options or the Company's convertible debentures because
the result would have been anti-dilutive.
NOTE 6 - SEGMENT AND GEOGRAPHIC 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, electophysiology 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.
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.
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<TABLE>
<CAPTION>
Quarter Ended March 31, 1999
CRM HVDM All Other (1) Total
--- ---- ------------- -----
<S> <C> <C> <C> <C>
Net sales to external customers $192,441 $74,293 $ -- $266,734
Operating profit (2), (3) $ 18,259 $39,894 $(8,446) $ 49,707
Quarter Ended March 31, 1998
Net sales to external customers $184,332 $73,156 $ -- $257,488
Operating profit $ 12,668 $38,431 $(6,114) $ 44,985
</TABLE>
(1) Amounts included in All Other relate primarily to Corporate, special charges
and purchased R&D.
(2) All Other includes purchased research and development charges of $47,775 for
1999.
(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.
The only material change to the segment assets reported in the 1998 annual
report was the Angio-Seal goodwill of approximately $130,000 recorded by CRM.
NOTE 7 - STATEMENT OF ACCOUNTING STANDARDS NO. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required
to be adopted in years beginning after June 15, 1999. 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 statement
of 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 No. 133 will be on the earnings and
financial position of the Company.
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St. Jude Medical, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS:
INTRODUCTION. Effective March 16, 1999, the Company acquired the assets of
Angio-Seal, a manufacturer of puncture wound management products. This
transaction was accounted for under the purchase acccounting method. The
Company's reported results for 1999 include Angio-Seal subsequent to March 16,
1999.
NET SALES. Net sales for the first quarter 1999 totaled $266,734, a 3.6%
increase over the $257,488 reported in the first quarter of 1998. Favorable
foreign currency translation effects due to a weaker U.S. dollar increased first
quarter net sales by approximately $2,400, or 1%.
Cardiac rhythm management net sales of $192,441 were $8,109, or 4.4% higher than
the $184,332 recorded in the first quarter of 1998. The first quarter of 1999
included $2,400 of Angio-Seal sales. The increase was mainly attributable to
higher implantable cardioverter defibrillator (ICD) and electrophysiology (EP)
catheter net sales that were partially offset by lower bradycardia net sales.
Heart valve disease management net sales totaled $74,293, a 1.6% increase over
the $73,156 recorded in the comparable quarter of 1998. The increase was
primarily due to strong mechanical heart valve sales in certain international
markets, the continued success of the Toronto SPV(R) stentless porceine valve in
the U.S. market and strong net sales of the European SJM Biocor (TM) stented
tissue valve.
GROSS PROFIT. The first quarter 1999 gross profit totaled $173,273, or 65.0% of
net sales as compared to $159,262, or 61.9% of net sales recorded in the first
quarter of 1998. The increase in gross profit and gross profit margin was
primarily due to increased net sales and lower heart valve and cardiac rhythm
management manufacturing costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased in the first quarter of 1999 to $96,423 from $92,064 reported
in the comparable quarter of 1998. The 4.7% increase resulted principally from
expenses associated with higher net sales, Year 2000 compliance costs, the
effects of the weaker U.S. dollar and transaction costs associated with the
purchase of the Angio-Seal assets.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled $27,143 in
the first quarter of 1999, a $4,930 increase over the $22,213 recorded in the
first quarter of 1998. The increase resulted mainly from higher spending
relating to ICD and EP catheter development projects.
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PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
IN-PROCESS RESEARCH AND DEVELOPMENT. In the first quarter of 1999, the Company
recorded a $47,775 in-process research and development charge. An independent
appraisal firm completed an appraisal of the intangible assets that were
acquired from Angio-Seal, including in-process research and development. Based
on this appraisal, under generally accepted accounting principles for purchase
accounting, the Company expensed the value of the in-process research and
development.
OTHER INCOME (EXPENSE): Other income (expense), net consisted of the following:
March 31, 1999 March 31, 1998
-------------- --------------
Interest income $719 $1,303
Interest expense (5,822) (3,788)
Net gain on the sale of equities - 1,870
Foreign exchange gain 682 555
Other (210) (41)
----- ----
Total ($4,631) ($101)
======= ======
INCOME TAX PROVISION. Excluding the in-process research and development charge,
the Company's effective income tax rate was 25% in the first quarter of 1999
compared to 35% in the first quarter of 1998. The decrease is primarily
attributable to the full year effect of the third quarter 1998 implementation of
a revised corporate structure associated with our Puerto Rican operations.
Because a foreign subsidiary, with a 4% effective income tax rate, purchased the
Angio-Seal intangible assets, this tax rate was applied to the in-process
research and development charge. Therefore, the Company recorded a tax provision
against a reported pre-tax loss on a blended basis.
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.
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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 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 Pacesetter
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 IRS has asserted adjustments of approximately $58,200 in additional taxes
relating primarily to the Company's Puerto Rican operations in years 1990
through 1994. It is likely that similar adjustments may be proposed for 1995.
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FINANCIAL CONDITION:
The financial condition of the Company at March 31, 1999 remained strong. The
Company's current assets to current liabilities was 3.0 to 1 at March 31, 1999.
Long-term debt increased to $520,795 from the December 31, 1998 balance of
$374,995 due to the Angio-Seal acquisition.
Accounts receivable increased $7,712 from the prior year-end balance due to
higher sales. Other assets increased $129,033 primarily due to the goodwill
associated with the Angio-Seal transaction.
Shareholder equity decreased $32,313 during the first quarter of 1999. The net
loss of $12,057, a foreign currency translation loss of $18,017 and an
unrealized loss on investments of $3,433 were partially offset by the exercises
of stock options of $1,194.
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.
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 was completed in the first quarter of 1999. Remediation and testing
is scheduled to be completed by the end of the third quarter of 1999.
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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.
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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 March 31, 1999, the Company has
spent almost $2 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
Development of a contingency plan to address situations that may result if the
Company or any of the third parties upon which the Company is dependent is
unable to achieve Year 2000 readiness, is ongoing.
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
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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.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant
Sales Corporation (a wholly owned subsidiary of CPI) ("GSC"), and Eli Lilly and
Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant
Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc.
("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses 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.
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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 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
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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.
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 many such representatives as of March
31, 1999. The court has granted the Company's motion for a temporary restraining
order permitting the hiring of such representatives. A hearing on the motion for
a preliminary injunction is scheduled for May 24, 1999. 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.
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Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 5, 1999. In
conjunction therewith, proxies were solicited in accordance with Regulation 14A.
The following actions were taken:
(1) Thomas H. Garrett III, Roger G. Stoll and Stuart M. Essig were elected
to the Board of Directors for terms ending in 2002. Shareholders
approved management's nominees to the Board of Directors by votes as
follows: 70,311,188, 70,348,632 and 70,409,996 in favor, 1,322,631,
1,285,187 and 1,223,823 withheld for Messrs Garrett, Stoll and Essig,
respectively. Seven other directors are serving unexpired terms as
follows: Ronald A. Matricaria, Walter L. Sembrowich, Daniel J. Starks
and Walter F. Mondale -- through 2000; and Gail R. Wilensky, Lowell C.
Anderson and David A. Thompson -- through 2001.
(2) The shareholders ratified the reappointment of Ernst & Young LLP as
the Company's independent auditor for the current fiscal year by a
vote of 71,217,940 in favor, 187,714 opposed and 228,165 abstaining
from voting.
(3) The shareholders ratified an amendment to the Company's Bylaws to
require at the earliest possible date, that a majority of the Board of
Directors be comprised of Independent Directors by a vote of
68,596,679 in favor, 1,491,647 opposed and 1,545,493 abstaining from
voting.
(4) The shareholders ratified and approved the St. Jude Medical, Inc.
Management Compensation Plan by a vote of 64,621,537 in favor,
6,242,941 opposed and 769,341 abstaining from voting.
Item 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
3 (ii) By-Laws
27 Financial data schedule
(b) Reports on Form 8-K None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
May 10, 1999 /s/ JOHN C. HEINMILLER
- ---------------------- -------------------------------------
DATE JOHN C. HEINMILLER
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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Item 6 (a) Exhibits
Exhibit 3 (ii) By-Laws
BYLAWS
OF
ST. JUDE MEDICAL, INC.*
ARTICLE I
Shareholders
Section 1. The shareholders of this corporation shall hold an annual
meeting in each calendar year at such time and place, within or without the
state of Minnesota, as may be designated by the Board of Directors, for the
purpose of electing directors, and for the transaction only of such other
business as is properly brought before the meeting in accordance with these
Bylaws; provided, however, that the interval between two consecutive annual
meetings shall not be more than fourteen (14) months nor less than ten (10)
months. A notice setting out the time and place of the annual meeting shall be
mailed by the secretary of the corporation, or his delegate, postage prepaid, to
each shareholder of record at his address as it appears on the records of the
corporation, or, if no such address appears, at his last known place of
residence, at least ten (10) days prior to said annual meeting, but any
shareholder may waive such annual notice by a signed waiver in writing.
Section 2. At the annual meeting, the shareholders shall elect
directors of the corporation and shall transact such other business as may
properly come before them. To be properly brought before the meeting, business
must be of a nature that is appropriate for consideration at an annual meeting
and must be (i) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, or (ii) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (iii) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for business to
be properly brought before the annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, each such notice must be given, either by personal
delivery or by United States mail, postage prepaid, to the secretary of the
corporation, not less than fifty (50) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event that less than sixty
(60) days' notice or prior public disclosure of the date of the meeting is given
or made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made, whichever first occurs. Each such notice to the secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (w) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (x) the name and address of record of the shareholder proposing
such business, (y) the class or series (if any) and number of shares of the
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corporation which are owned by the shareholder, and (z) any material interest of
the shareholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be transacted at the annual meeting except in
accordance with the procedures set forth in this Article; provided, however,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting, in
accordance with these Bylaws.
Section 3. Special meetings of the shareholders may be called for any
purpose or purposes at any time, by:
(a) The chief executive officer;
(b) The chief financial officer:
(c) Two or more directors;
(d) A shareholder or shareholders holding ten percent or more
of the voting power of all shares entitled to vote, except that a special
meeting for the purpose of considering any action to directly or indirectly
facilitate or effect a business combination, including any action to change or
otherwise affect the composition of the board of directors for that purpose,
must be called by 25 percent or more of the voting power of all shares entitled
to vote.
Such meeting shall be called by mailing a notice thereof as above
provided in the case of the annual meeting of shareholders, which notice shall
state the purpose or purposes of the meeting.
Section 4. At any shareholders' meeting, each shareholder shall be
entitled to one (1) vote for each share of common stock standing in his name on
the books of the corporation as of the record date. Any shareholder may vote
either in person or by proxy. The presence in person or by proxy of the holders
of a majority of the shares of common stock entitled to vote at any
shareholders' meeting shall constitute a quorum for the transaction of business.
If no quorum is present at any meeting, the shareholders present in person or by
proxy may adjourn the meeting to such future time as they shall agree upon
without further notice other than by announcement at the meeting at which such
adjournment is taken.
Section 5. At any shareholders' meeting for which there is a quorum
present, the shareholders may conduct such business as may be on the agenda or
otherwise proposed for such meeting, or any part of such business in the case of
an adjournment. All or any part of the business not conducted at the initial
meeting of shareholders may be conducted at any adjournments thereof, including
any specific proposals on the agenda for such initial meeting for which there
was no final disposition. A meeting of the shareholders at which there is a
quorum can be adjourned as to all or part of the matters to be considered at the
meeting upon motion by the person presiding at such meeting and by a majority
vote of shares represented in person or by proxy at such meeting. Such
adjournment shall be until a specific time and place, and the time and place for
the reconvened meeting shall be announced at the meeting and reflected in the
minutes thereof. In addition, if the adjourned date is less than ten (10) days
after the date of the meeting
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at which an adjournment proposal was passed, a public announcement shall be made
by the corporation as to the time and place for the reconvened meeting; or, if
the adjourned date for the reconvened meeting is ten (10) days or more after the
date of the meeting at which the adjournment proposal was passed, notice of the
time and place of the reconvened meeting shall be sent by first class mail to
all shareholders of record at least ten (10) days prior to such reconvened
meeting.
ARTICLE II
Directors
Section 1. The Board of Directors shall have the general management and
control of all business and affairs of the corporation and shall exercise all
the powers that may be exercised or performed by the corporation under the
statutes, its Articles of Incorporation and its Bylaws.
Section 2. (a) The Board of Directors shall consist of such number of
directors, not less than three, the exact number to be fixed from time to time
solely by resolution of the Board of Directors, acting by not less than a
majority of the directors then in office.
(b) The Board of Directors shall be divided into three
classes, with the term of office of one class expiring each year. At the Annual
Meeting of Shareholders in 1986, two directors of the first class shall be
elected to hold office for a term expiring at the 1987 Annual Meeting, two
directors of the second class shall be elected to hold office for a term
expiring at the 1988 Annual Meeting, and one director of the third class shall
be elected to hold office for a term expiring at the 1989 Annual Meeting.
Commencing with the Annual meeting of Shareholders in 1987, each class of
directors whose term shall then expire shall be elected to hold office for a
three-year term. In the case of any vacancy on the Board of Directors, including
a vacancy created by an increase in the number of directors, the vacancy shall
be filled by election of the Board of Directors with the director so elected to
serve for the remainder of the term of the director being replaced or, in the
case of an additional director, for the remainder of the term of the class to
which the director has been assigned. All directors shall continue in office
until the election and qualification of their respective successors in office.
When the number of directors is changed, any newly created directorships shall
be so assigned among the classes by a majority of the directors then in office,
though less than a quorum, as to make all classes as nearly equal in number as
possible. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.
(c) Any director or directors may be removed from office at
any time, but only for cause and only by the affirmative vote of at least 80% of
the votes entitled to be cast by holders of all the outstanding shares of Voting
Stock (as defined in Article XIII of the corporation's Articles of
Incorporation), voting together as a single class.
(d) In the event that the Board of Directors increases the
number of directors or fills a vacancy on the Board in accordance with the
provisions of paragraph (b) of this Section 2, the Board of Directors shall give
written notice to the shareholders of the corporation of any increase in the
number of directors and of pertinent information regarding any director so
elected
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by the Board to fill a vacancy. Such written notice shall be effected by
inclusion of such information in the next mailing to shareholders of the
corporation following any such increase in the number of directors or election
of a director to fill a vacancy by the Board.
(e) A majority of the Board of Directors shall be comprised of
Independent Directors. An "Independent Director" shall mean a director who:
(1) has not been employed by the corporation in an
executive capacity within the last five years;
(2) is not, and is not affiliated with a company that
is, an advisor or consultant to the corporation, or a significant customer or
supplier of the corporation;
(3) has no personal services contract(s) with the
corporation or the corporation's senior management;
(4) is not affiliated with a not-for-profit entity
that receives significant contributions from the corporation;
(5) is not employed by a public company at which an
executive officer of the corporation serves as a director;
(6) does not have a relationship described in 1
through 5 above with any affiliate of the corporation; and
(7) is not a member of the immediate family of any
person described in 1 through 6 above.
Section 3. Subject to the rights of holders of any class or series of
stock having a preference over the common shares as to dividends or upon
liquidation, nominations for the election of directors may be made by the Board
of Directors or a committee to be appointed by the Board of Directors or by any
shareholder entitled to vote generally in the election of directors. However,
any shareholder entitled to vote generally in the election of directors may
nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the secretary of the corporation not less than fifty
(50) nor more than seventy-five (75) days prior to the meeting; provided,
however, that in the event that less than sixty (60) days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of meeting was mailed or such public disclosure was made, whichever first
occurs. Each such notice to the secretary shall set forth: (i) the name and
address of record of the shareholder who intends to make the nomination; (ii) a
representation that the shareholder is a holder of record of shares of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) the name, age, business and residence addresses, and principal
occupation or employment of each nominee; (iv) a
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description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (v) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (vi)
the consent of each nominee to serve as a director of the corporation if so
elected. The corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the corporation to determine the
eligibility of such proposed nominee to serve as a director of the corporation.
The presiding officer of the meeting may, if the facts warrant, determine that a
nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 4. The Board of Directors may meet regularly at such time and
place as it shall fix by resolution, and no notice of regular meetings shall be
required. Special meetings of the Board of Directors may be called by the
chairman of the board, the president or by any majority of directors by giving
at least twenty-four (24) hours' notice to each of the other directors by mail,
telephone, telegraph, or in person.
Section 5. A majority of the directors shall constitute a quorum for
the transaction of business. Any act which might have been taken at a meeting of
the Board of Directors may be taken without a meeting if authorized in a writing
signed by all of the directors, and any such action shall be as valid and
effective in all respects as if taken by the Board at a regular meeting.
Section 6. The Board of Directors shall fix and change, as it may from
time to time determine, the compensation to be paid the president. The president
shall fix and change the compensation to be paid the other officers of the
corporation. See Article III.
Section 7. The Board of Directors may, by unanimous affirmative action
of the entire Board of Directors designate two (2) or more of their number to
constitute an Executive Committee which, to the extent determined by the Board,
shall have and exercise the authority of the Board in the management of the
business of the corporation. Such Executive Committee shall act only in the
interval between meetings of the Board and shall be subject at all times to the
control and direction of the Board.
ARTICLE III
Officers
Section 1. The officers of this corporation shall be a president, a
treasurer a secretary and such vice presidents and other officers as may from
time to time be elected by the Board of Directors. If a Chairman of the Board of
Directors is elected, he shall have the status of an officer of the corporation.
All officers shall be elected by the Board of Directors and shall serve at the
pleasure of the Board of Directors. Any two (2) of the offices, except those of
the president and vice president, may be held by the same person.
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Section 2. The president may fix and change, as he may from time to
time determine, the compensation to be paid the officers, other than the
president, and the employees of the corporation, subject to the power of the
directors to fix and change the compensation of the officers.
Section 3. The vice president, or executive vice president if there is
more than one, shall perform the duties and assume the responsibilities of the
president in the absence or inability to act of the president. In case of death,
resignation or permanent disability of the president, the executive vice
president shall act as president until the Board of Directors designates such
new president.
Section 4. The secretary shall keep a record of the minutes of the
proceedings of meetings of directors and of shareholders, and shall give notice
of such meetings as required in these Bylaws or by the Board of Directors.
Section 5. The treasurer shall keep accounts of all monies and other
assets of the corporation received or disbursed, shall deposit all monies and
valuables in the name of and to, the credit of the corporation in such banks or
depositories or with such custodians as may be authorized to receive the same by
these Bylaws and by the Board of Directors, and shall render such accounts
thereof as may be required by the Board of Directors, the president or the
shareholders.
Section 6. The Chairman of the Board of Directors, or the president if
there be no Chairman, shall preside at all meetings of the Board of Directors
and of the shareholders, shall make such reports to the Board and to the
shareholders as may from time to time be required of him and shall have such
other powers and perform such other duties as are incident to his office or as
may be from time to time assigned to him by the Board of Directors.
ARTICLE IV
Office
The principal office of the corporation shall be in the state of
Minnesota. The corporation may also have an office or offices in such other
places and in such other states as the Board of Directors may from time to time
authorize and establish.
ARTICLE V
No Seal; Stock Certificates
Section 1. The corporation shall have no corporate seal.
Section 2. Stock certificates issued by the corporation shall be signed
by any two (2) officers. When a certificate is signed by a transfer agent or
registrar, the signature of any such officer may be facsimiled, engraved or
printed.
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ARTICLE VI
Closing of Stock Records
or Fixing of Record Date
The Board of Directors shall have power to close the stock records of
the corporation for a period not to exceed sixty (60) days preceding the date of
any meeting of shareholders or the date for payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or for a period not exceeding
sixty (60) days in connection with obtaining the consent of shareholders for any
purpose; provided, however, that in lieu of closing the stock records, the Board
of Directors may fix in advance a date not exceeding sixty (60) days preceding
the date of any meeting of shareholders, or the date for the payment of any
dividend, or the date for the allotment of rights, or the date when any change
or conversion or exchange of capital stock shall go into effect, or a date in
connection with obtaining such consent of shareholders, or for the determination
of shareholders entitled to receive payment of any such dividend or to receive
any such allotment of rights or to exercise rights in respect of any such
change, conversion or exchange of capital stock, or to give any such consent, as
the case may be, and in such case only such shareholders shall be shareholders
of record on the date so fixed shall be entitled to such notice of and to attend
such meeting, or to receive payment of such dividend, or to receive such
allotment of rights, or to exercise any rights, or to give such consent, as the
case may be, notwithstanding the transfer of any stock on the books of the
corporation after any such record date fixed as aforesaid.
ARTICLE VII
Indemnification
Section 1. Definitions. (a) For purposes of this Article, the terms
defined in this Section have the meanings given them.
(b) "Corporation" includes a domestic or foreign corporation
that was the predecessor of the corporation in a merger or other transaction in
which the predecessor's existence ceased upon consummation of the transaction.
(c) "Official capacity" means (1) with respect to a director,
the position of director in the corporation, (2) with respect to a person other
than a director, the elective or appointive office or position held by an
officer, member of a committee of the Board, or the employment or agency
relationship undertaken by an employee or agent of the corporation (3) with
respect to a director, officer, employee or agent of the corporation who, while
a director, officer, employee or agent of the corporation, is or was serving at
the request of the corporation or whose duties in that position involve or
involved service as a director, officer, partner, trustee, or agent of another
organization or employee benefit plan, the position of that person as a
director, officer, partner, trustee, employee or agent, as the case may be, of
the other organization or employee benefit plan.
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(d) "Proceedings" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including a proceeding by or in the right of the corporation.
(e) "Special legal counsel" means counsel who has not
represented the corporation or a related corporation, or a director, officer,
employee or agent whose indemnification is in issue.
Section 2. Indemnification mandatory; standard. (a) Subject to the
provisions of Section 4, the corporation shall indemnify a person made or
threatened to be made a party to a proceeding by reason of the former or present
official capacity of the person against judgments, penalties, fines, including
without limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements and reasonable expenses, including attorneys'
fees and disbursements, incurred by the person in connection with the
proceeding, if, with respect to the acts or omissions of the person complained
of in the proceeding, the person:
(1) has not been indemnified by another organization
or employee benefit plan for the same judgments, penalties, fines, including,
without limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions;
(2) acted in good faith;
(3) received no improper personal benefit and
Minnesota Statutes, Section 302A.255, if applicable, has been satisfied;
(4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the
official capacity described in Section 1, paragraph (c), clause (1) or (2),
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions occurring in the official
capacity described in Section 1, paragraph (c), clause (3), reasonably believed
that the conduct was not opposed to the best interests of the corporation. If
the person's acts or omissions complained of in the proceeding relate to conduct
as a director, officer, trustee, employee or agent of an employee benefit plan,
the conduct is not considered to be opposed to the best interests of the
corporation if the person reasonably believed that the conduct was in the best
interests of the participants or beneficiaries of the employee benefit plan.
(b) The termination of a proceeding by judgment order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent does
not, of itself, establish that the person did not meet the criteria set forth in
this Section 2.
Section 3. Advances. Subject to the provisions of Section 4, if a
person is made or threatened to be made a party to a proceeding, the person is
entitled, upon written request to the
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corporation, to payment or reimbursement by the corporation of reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
advance of the final disposition of the proceeding, (a) upon receipt by the
corporation of a written affirmation by the person of a good faith belief that
the criteria for indemnification set forth in Section 2 have been satisfied and
a written undertaking by the person to repay all amounts so paid or reimbursed
by the corporation, if it is ultimately determined that the criteria for
indemnification have not been satisfied, and (b) after a determination that the
facts then known to those making the determination would not preclude
indemnification under this Article. The written-undertaking required by clause
(a) is an unlimited general obligation of the person making it, but need not be
secured and shall be accepted without reference to financial ability to make the
repayment.
Section 4. Reimbursement to witness. The corporation shall reimburse
expenses including attorneys' fees and disbursements, incurred by a person in
connection with an appearance as a witness in a proceeding at a time when the
person has not been made or threatened to be made a party to a proceeding.
Section 5. Determination of eligibility. (a) All determinations whether
indemnification of a person is required because the criteria set forth in
Section 2 have been satisfied and whether a person is entitled to payment or
reimbursement of expenses in advance of the final disposition of a proceeding as
provided in Section 3 shall be made:
(1) By the Board by a majority of a quorum. Directors
who are at the time parties to the proceeding shall not be counted for
determining either a majority or the presence of a quorum;
(2) If a quorum under clause (1) cannot be obtained,
by a majority of a Committee of the Board, consisting solely of two or more
directors not at the time parties to the proceeding, duly designated to act in
the matter by a majority of the full Board including directors who are parties;
(3) If a determination is not made under clause (1)
or (2), by special legal counsel, selected either by a majority of the Board or
a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of
the full Board cannot be obtained and the committee cannot be established, by a
majority of the full Board including directors who are parties;
(4) If a determination is not made under clauses (1)
to (3), by the shareholders, excluding the votes of shares held by parties to
the proceeding; or
(5) If an adverse determination is made under clauses
(1) to (4) or under paragraph (b), or if no determination is made under clauses
(1) to (4) or under paragraph (b) within sixty (60) days after the termination
of a proceeding or after a request for an advance of expenses, as the case may
be, by a court in Minnesota, which may be the same court in which the proceeding
involving the person's liability took place, upon application of the person and
any notice the court requires.
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<PAGE>
(b) With respect to a person who is not, and was not at the
time of the acts or omissions complained of in the proceedings, a director,
officer or person possessing, directly or indirectly, the power to direct or
cause the direction of the management or policies of the corporation, the
determination whether indemnification of this person is required because the
criteria set forth in Section 2 have been satisfied and whether this person is
entitled to payment or reimbursement of expenses in advance of the final
disposition of a proceeding as provided in Section 3 may be made by an
annually-appointed committee of the Board, having at least one member who is a
director. The committee shall report at least annually to the Board concerning
its actions.
Section 6. Insurance. The corporation may purchase and maintain
insurance on behalf of a person in that person's official capacity against any
liability asserted against and incurred by the person in or arising from that
capacity, whether or not the corporation would have been required to indemnify
the person against the liability under the provisions of this Article.
Section 7. Disclosure. The amount of any indemnification or advance
paid pursuant to this Article and to whom and on whose behalf it was pa id shall
be reported as part of the annual financial statements furnished to shareholders
pursuant to Minnesota Statutes, Section 302A.463 covering the period when the
indemnification or advance was paid or accrued under the accounting method of
the corporation reflected in the financial statements.
Section 8. Discretionary indemnification. Nothing in this Article VII
shall be construed to limit the ability of the Board of Directors, to the extent
permitted by applicable law, to indemnify any person or entity not described in
this Article VII pursuant to, and to the extent described in, an agreement
authorized in accordance with the provisions of Section 5(a) above, or as
otherwise determined by the Board of Directors in its discretion. Furthermore,
the Board of Directors may authorize written agreements between the Company and
persons, whether or not described in this Article VII, to grant contractual
rights to such persons as permitted by law.
ARTICLE VIII
Adoption and Amendment of Bylaws
Section 1. The Board of Directors may alter or amend these Bylaws and
may make or adopt additional Bylaws subject to the power of the Shareholders to
change or repeal the Bylaws, except that the Board of Directors shall not make
or alter any Bylaws fixing their qualifications, classifications or term of
office, or reducing their number.
Section 2. The shareholders may alter or amend these Bylaws and may
make or adopt additional Bylaws by a majority vote at any annual meeting of the
shareholders or at any special meeting called for that purpose, except as may be
provided by Article IX or any other provisions of the Articles of Incorporation
of the corporation.
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<PAGE>
Certification
The undersigned, Kevin T. O'Malley, Secretary of St. Jude Medical,
Inc., a corporation duly incorporated under the laws of the state of Minnesota,
hereby certifies that the Bylaws attached hereto are true and correct; as
amended to date.
Executed this 5th day of May, 1999.
/s/ Kevin T. O'Malley
---------------------------------
Secretary
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