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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE
(Name of exchange on which registered)
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, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or 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 $2.1 billion at March 10, 2000, when the
closing sale price of such stock, as reported on the New York Stock Exchange,
was $25.50.
The number of shares outstanding of the Registrant's Common Stock, $.10
par value, as of March 10, 2000, was 83,823,073 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1999, are incorporated by reference in Parts I,
II and IV. Portions of the Proxy Statement dated March 27, 2000, are
incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
St. Jude Medical, Inc., together with its subsidiaries ("St. Jude"
or the "Company") is a global leader in the development, manufacturing and
distribution of medical device products for the cardiac rhythm management,
cardiology and vascular access, and heart valve disease management markets.
St. Jude has two reportable segments: Cardiac Rhythm Management
(CRM) and Heart Valve Disease Management (HVDM). The CRM segment, which includes
the results from the Company's Cardiac Rhythm Management Division and Daig
Division, develops, manufactures and distributes bradycardia pulse generator and
tachycardia implantable cardioverter defibrillators (ICD) systems,
electrophysiology and interventional cardiology catheters, and vascular closure
devices. The HVDM segment develops, manufactures and distributes mechanical and
tissue heart valves and valve repair products, and is in the process of
developing suture-free devices to facilitate coronary artery bypass graft
anastomoses.
Effective September 27, 1999, St. Jude acquired Vascular Science,
Inc. ("VSI"), a development-stage company focused on the development of
suture-free devices to facilitate coronary artery bypass graft anastomoses.
Effective March 16, 1999, St. Jude purchased the Angio-Seal business
of Tyco International Ltd. Angio-Seal develops, manufactures and distributes
hemostatic vascular closure devices.
During 1999, the Company acquired the assets of various businesses
used in the distribution of the Company's products.
Effective May 15, 1997, St. Jude acquired Ventritex, Inc.,
("Ventritex") a California-based manufacturer of implantable cardioverter
defibrillators and related products. ICDs are used to treat hearts that beat
inappropriately fast.
Effective November 29, 1996, St. Jude's Pacesetter Inc. 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.
The Company markets its products primarily in the United States,
Western Europe and Japan through both a direct employee-based sales organization
and independent distributors. In addition, St. Jude maintains geographically
based sales and marketing organizations that are responsible for
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marketing, sales and distribution of the Company's and third party products in
Eastern Europe, Africa, the Middle East, 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 U.S. and Western European markets
where summer vacation schedules normally result in fewer surgical procedures.
Independent distributors 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 1999, approximately 76% of net sales were derived from cardiac
rhythm management segment products, and approximately 24% from heart valve
disease management segment products. Approximately 62% of the Company's 1999 net
sales were in the U.S. market, which was slightly higher than the 1998 results.
Additional segment information is set forth in the Company's 1999 Annual Report
to Shareholders on page 41 and is incorporated herein by reference.
CARDIAC RHYTHM MANAGEMENT
The Cardiac Rhythm Management Division ("CRMD") is headquartered in
Sylmar, California and has manufacturing facilities in California, Arizona,
South Carolina and Sweden. The Daig Division ("Daig") is headquartered and has
manufacturing facilities in Minnesota.
CRMD pacemakers and related systems treat patients with hearts that
beat inappropriately slow, a condition known as bradycardia. ICDs and related
systems treat patients with hearts that beat inappropriately fast, a condition
known as tachycardia. Daig 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 pacemaker 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 pacing products include the January 1999 FDA approved
Affinity(R), the August 1999 FDA approved Entity(TM) and 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 single-chamber
pacemakers, the Microny(TM) SR+, and the Regency(TM) pacemaker families, which
are in clinical trials in the United States. The Affinity(R), the Entity(TM) 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 and SDX families 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, and 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 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, ICDs are typically implanted pectorally, connected to the heart by
leads, and programmed non-invasively. The current CRMD ICD offerings include the
Photon(TM), Angstrom(TM) MD, Contour(R) MD and Profile(TM) MD.
St. Jude implanted its first dual chamber ICD, the Photon(TM) DR, in
December 1999 to begin this product's clinical approval process. The Photon(TM)
DR is a dual chamber ICD, offering the features of Morphology Discrimination
(MD) and AV Rate Branch for precise arrythmia detection. In addition, the
Photon(TM) offers SVT discrimination algorithms.
These ICDs are used with the dual electrode and single electrode TVL
and TVL-ADX (active-fix) transvenous leads, which have superior handling
characteristics and performance. The Photon(TM) DR ICD is programmable with the
APS III universal programmer. The Angstrom(TM) MD, Contour(R) MD and Profile(TM)
ICDs are currently programmable with the PR-3500 and PR-1500 programmers and
will be programmable by the APS III programmer in the fourth quarter of 2000.
Specialized disposable cardiovascular devices, sold by Daig, include
percutaneous (through the skin) catheter introducers, diagnostic guidewires,
vascular sealing devices, 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. Vascular sealing devices are used to close
femoral artery puncture wounds following angioplasty, stenting and diagnostic
procedures.
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 Minnesota, 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 one million patients to date. The SJM Regent(TM) mechanical
heart valve was approved for sale in Europe in December 1999 and is currently in
a clinical trial in the United States. The Company markets the Toronto SPV(R)
stentless tissue valve, the world's leading stentless tissue valve and the
SJM(R) Biocor(TM) tissue valve. 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 was launched in
Europe in 1999. On January 21, 2000 the Company discontinued sales of HVD
products, including heart valves, with Silzone(R) cuffs
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due to a higher incidence of perivalvular leak associated with this product in a
clinical study. The Company also recalled unimplanted inventory of this product.
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 U.S. release during first quarter 1997. The SJM Tailor(TM) annuloplasty ring
received worldwide regulatory approvals in late 1998 and was 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.
SUPPLIERS
The Company purchases raw materials and other items from numerous
suppliers for use in its products. For certain materials that the Company
believes are critical and may be difficult to obtain an alternative supplier,
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 supplier. The Company has been advised from time to time that certain of
these suppliers 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 suppliers 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, as well as other business factors. 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. The Company has strong bradycardia 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 catheterization 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.
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.
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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 1999, 1998 and 1997 net sales.
In the United States, St. Jude sells directly to hospitals through a
combination of independent distributors 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.
Group purchasing organizations (GPOs) in the U.S. continue to
consolidate the purchasing for some of the Company's customers. Several such
GPOs have executed contracts with the Company's CRM market competitors which
exclude the Company. These contracts, if enforced, may adversely affect the
Company's sales of CRM products to members of these GPOs.
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 in-process
purchased research and development, were $125,059,000 (11.2% of net sales),
$99,756,000 (9.8%) and $104,693,000 (10.5%) in 1999, 1998 and 1997,
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 U.S. 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 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.
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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
is unable to predict the 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 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 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, in
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1996 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 its intellectual property rights
related to its 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.
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 CRMD 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, 1999, the Company had 4,379 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.
INTERNATIONAL OPERATIONS
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.
Currency exchange rate fluctuations vis-a-vis the U.S. dollar can affect
reported net earnings. The Company attempts to hedge a portion of this exposure
to reduce the effect of foreign currency rate fluctuations on net earnings. See
the "Market Risk" section of Management's Discussion
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and Analysis of Results of Operations and Financial Condition", incorporated by
reference to St. Jude's 1999 Annual Report to Shareholders. Operations outside
the United States present complex tax and cash management issues that
necessitate sophisticated analysis and diligent monitoring to meet the Company's
financial objectives.
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 59%, or 343,000 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 12 locations in 5 states and outside the United States at
36 locations in 23 countries. With the exception of one location, all of these
locations are leased.
In management's opinion, all buildings, machinery and equipment are
in good condition, suitable for their purposes and are maintained on a basis
consistent with sound operations. Currently the Company is using substantially
all of its available space to develop, manufacture and market its products.
ITEM 3. LEGAL PROCEEDINGS
GUIDANT LITIGATION
On November 26, 1996, Guidant Corporation (a competitor of
Pacesetter and Ventritex) ("Guidant") and related parties filed a lawsuit
against St. Jude Medical, Inc. ("St. Jude Medical"), 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, certain Guidant parties granted Ventritex
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"), certain Guidant
parties granted the Telectronics Group intellectual property licenses relating
to cardiac stimulation devices. 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 Telectronics' 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. The court overseeing this case issued a stay of this matter in July 1998
so that the issues could be addressed in an arbitration requested by the
Telectronics Group and Pacesetter.
Guidant and related 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. This second lawsuit seeks
(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 Guidant parties filed their complaint
would, upon consummation of the Merger, be unlicensed and constitute an
infringement of patent rights owned by certain Guidant parties, (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 Guidant parties filed their complaint, and (iii) certain damages and costs.
This second lawsuit was stayed by the court in July 1998 given the order to
arbitrate which is mentioned below.
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. St. Jude Medical and
Pacesetter have vigorously defended their interests in these cases, and will
continue to do so.
8
<PAGE>
As a result of the state and federal lawsuits brought by Guidant and
related parties, the Telectronics Group and Pacesetter filed a lawsuit 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. After the Eighth Circuit Court of Appeals ruled on an appeal in
favor of the Telectronics Group and Pacesetter in May 1998, 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.
An arbitrator for the arbitration has been selected by the parties.
The arbitrator has issued some interim rulings, including that Pacesetter and
St. Jude Medical should not participate in the initial arbitration proceeding
concerning whether the Telectronics Agreement transferred to Pacesetter. The
Telectronics Group and the Guidant parties will be involved in this initial
arbitration proceeding. Although the arbitration proceeding was scheduled to
begin in March 2000, the arbitrator postponed the proceeding. No order has been
issued to date concerning when the arbitration will be held.
In the federal court lawsuit in Indiana which has been stayed
pending the result of the above-described arbitration, Guidant asserted patent
infringement claims against St. Jude Medical and its Pacesetter, Inc. subsidiary
involving four separate patents. One of these patents expired May 3, 1998. The
other patents involved expire March 7, 2001, February 25, 2003 and December 22,
2003. Although Guidant has requested injunctive relief and damages as part of
the federal court lawsuit, the request for an injunction would be barred for any
expired patent, but Guidant's claims for damages for the period prior to
expiration could still be asserted if Guidant's claims for infringement remain
after the arbitration is completed.
In connection with the three patents that have yet to expire, a
third party initiated a Reexamination Request in the U.S. Patent Office. The
Patent Office Reexamination Action resulted in the preliminary rejection of all
of the claims in two of the unexpired patents. With respect to the third
unexpired patent, the Patent Office preliminarily rejected some of the claims in
the patent and upheld others. It is the Company's understanding that Guidant is
in the process of responding to the Patent Examiner's preliminary position as
part of its Reexamination procedure. If the Patent Examiner maintains his
position, we believe that Guidant will appeal the adverse rulings by the Patent
Office concerning these three patents, a process that typically takes between
six and twelve months.
IRS LITIGATION
The Company and the Internal Revenue Service ("IRS") are in Tax
Court over tax deficiency notices totaling $16.4 million for the tax periods
1990-1991. The Company is refuting the IRS deficiency and has asserted that in
fact the Company is owed a refund. The trial for this matter is currently
scheduled to begin in June 2000. In addition, the IRS has proposed adjustments
totaling $41.8 million in additional taxes related to the Company's 1992-1994
income tax returns. The Company is disputing these adjustments, however,
resolution of these matters is stayed pending resolution of the 1990-1991
litigation. Management believes that the IRS will propose a similar adjustment
of approximately $15.5 million for 1995. The issues raised by the IRS relate
primarily to the Company's Puerto Rican operations. Management is vigorously
contesting these adjustments and expects that the ultimate resolution will not
have material adverse effect on the Company's financial position or liquidity,
but could potentially be material to the net earnings of a particular future
period if resolved unfavorably.
OTHER LITIGATION AND PROCEEDINGS
The Company is unaware of any other pending legal proceedings which
it regards as likely to have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
9
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position*
- ------------------------- --- --------------------------------------------
Ronald A. Matricaria 57 Chairman of the Board of Directors (1999)
Terry L. Shepherd 47 President and Chief Executive Officer (1999)
Daniel J. Starks 45 Chief Executive Officer, Cardiac Rhythm
Management Division (1997)
Steven J. Healy 42 President, Heart Valve Division (1999)
Michael J. Coyle 37 President, Daig Division (1997)
Kevin T. O'Malley, Esq. 48 Vice President and General Counsel (1994)
John C. Heinmiller 45 Vice President, Finance and Chief Financial
Officer (1998)
George J. Fazio 40 President, Health Care Services (1999)
Robert Cohen 42 Vice President Business & Technology
Development (1998)
Peter L. Gove 52 Vice President, Corporate Relations (1994)
Frieda J. Valk 46 Vice President, Administration (1999)
- -----------------------
*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 27, 2000 under the section "Election of
Directors." The information is incorporated herein by reference.
Mr. Shepherd's business experience is set forth in the Company's
definitive Proxy Statement dated March 27, 2000 under the section "Election of
Directors." The information is incorporated herein by reference.
Mr. Stark's business experience is set forth in the Company's
definitive Proxy Statement dated March 27, 2000 under the section "Election of
Directors." The information is incorporated herein by reference.
Mr. Healy first joined the Company in 1983 as a Heart Valve Division
sales representative. In 1999 he was appointed as the President, Heart Valve
Division. From 1996 to 1999, Mr. Healy was the Vice President of Sales and
Marketing for the Heart Valve Division. He served as the Heart Valve Division's
Vice President of Marketing from 1993 to 1996.
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. 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 LLP, 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. Fazio joined St. Jude in 1992 as a Heart Valve Division
territory sales representative. In 1999, he was appointed as the President,
Healthcare Services. From 1997 to 1999 Mr. Fazio served as the General Manager
of Canada.
Mr. Cohen joined the Company in 1998 as Vice President, Business &
Technology Development. Prior to joining the Company, he was employed by Sulzer
Medica. During his 16-year career in the
10
<PAGE>
medical device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI
Medical, an investment firm focused on the medical technology industry.
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.
Mrs. Valk joined the Company in 1996 as Human Resources Director of
St. Jude Medical Europe. She was appointed as Vice President, Administration in
1999. Prior to joining the Company, Mrs. Valk was employed by Eli Lilly &
Company for sixteen years in various positions including pharmaceutical sales,
sales management, sales training and human resources.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information set forth under the captions "Dividends" and "Stock
Exchange Listings" on pages 28 and 44 of the Company's 1999 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five Year Summary
Financial Data" on page 43 of the Company's 1999 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 23
through 28 of the Company's 1999 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" on pages
26 and 27 of the Company's 1999 Annual Report to shareholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
Report of Independent Auditors set forth on pages 29 through 42 of the Company's
1999 Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Earnings - Fiscal Years ended December
31, 1999, 1998 and 1997
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity - Fiscal Years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - Fiscal Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors"
in the Company's definitive Proxy Statement dated March 27, 2000, is
incorporated herein by reference. Information on executive officers is set forth
in Part I, Item 4A hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation
and Other Information" and "Election of Directors" in the Company's definitive
Proxy Statement dated March 27, 2000, 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 Named Executive Officers" and "Election of
Directors" in the Company's definitive Proxy Statement dated March 27, 2000, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Election of Directors"
in the Company's definitive Proxy Statement dated March 27, 2000, 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 29
through 42 of the Company's 1999 Annual Report to Shareholders
are incorporated herein by reference:
Consolidated Statements of Earnings - Fiscal Years ended
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity - Fiscal Years
ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - Fiscal Years ended
December 31, 1999, 1998 and 1997
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:
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
-------- -------------------------------------------- ------
II Valuation and Qualifying Accounts 16
The report of the Company's Independent Auditors with respect to
the financial statement schedule is incorporated herein 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.
12
<PAGE>
(3) EXHIBITS
PAGE
EXHIBIT EXHIBIT INDEX NUMBER
--------- ---------------------------------------------- ------
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 Company to Ronald A.
Matricaria is incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.*
10.3 Employment letter dated as of February 23, ---
1999, between the Company and Ronald A.
Matricaria is incorporated by reference to
Exhibit 10.13 of the Company's Form 10-K
Annual Report for the year ended December 31,
1998.*
10.4 Employment Agreement effective as of May 5, ---
1999 between the Company and Terry L. Shepherd
is incorporated by reference to Exhibit 10.15
of the Company's Form 10-K Annual Report for
the year ended December 31, 1998.*
10.5 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.*
10.6 Form of Employment Agreement that the Company ---
has entered into with officers relating to
severance matters in connection with a change
in control is incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.*
10.7 The Management Incentive Compensation Plan is ---
incorporated by reference to Appendix A of the
Company's definitive Proxy Statement dated
March 26, 1999.*
10.8 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.*
13
<PAGE>
PAGE
EXHIBIT EXHIBIT INDEX NUMBER
--------- ---------------------------------------------- ------
10.9 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.*
10.10 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).
10.11 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).*
10.12 The St. Jude Medical, Inc. 1994 Stock Option ---
Plan is incorporated by reference to the
Company's Form S-8 Registration Statement
dated July 1, 1994 (Commission File No.
33-54435).*
10.13 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).*
10.14 A Split Dollar Insurance Agreement as amended ---
April 29, 1999 between St. Jude Medical, Inc.
and Ronald A. and Lucille E. Matricaria.
13 Portions of the 1999 Annual Report to ---
Shareholders are incorporated by reference in
this Form 10-K Annual Report.
21 Subsidiaries of the Company ---
23 Consent of Independent Auditors ---
27 Financial Data Schedule ---
- ----------------------------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1999
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.
(c) EXHIBITS: Reference is made to Item 14(a)(3).
(d) SCHEDULES: Reference is made to Item 14(a)(2).
For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned Company
hereby undertakes as follows, which undertaking shall be incorporated by
reference into the Company's Registration Statements of Form S-8 Nos. 33-9262
(filed October 3, 1986), 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.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ST. JUDE MEDICAL, INC.
Date: March 27, 2000 By /s/ TERRY L. SHEPHERD
----------------------
Terry L. Shepherd
PRESIDENT AND 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.
/s/ RONALD A. MATRICARIA Director March 27, 2000
- ------------------------------
Ronald A. Matricaria
/s/ LOWELL C. ANDERSON Director March 27, 2000
- ------------------------------
Lowell C. Anderson
/s/ TERRY L. SHEPHERD Director March 27, 2000
- ------------------------------
Terry L. Shepherd
/s/ STUART M. ESSIG Director March 27, 2000
- ------------------------------
Stuart M. Essig
/s/ THOMAS H. GARRETT III Director March 27, 2000
- ------------------------------
Thomas H. Garrett III
/s/ WALTER F. MONDALE Director March 27, 2000
- ------------------------------
Walter F. Mondale
/s/ WALTER L. SEMBROWICH Director March 27, 2000
- ------------------------------
Walter L. Sembrowich
/s/ DANIEL J. STARKS Director March 27, 2000
- ------------------------------
Daniel J. Starks
/s/ ROGER G. STOLL Director March 27, 2000
- ------------------------------
Roger G. Stoll
/s/ DAVID A. THOMPSON Director March 27, 2000
- ------------------------------
David A. Thompson
/s/ GAIL R. WILENSKY Director March 27, 2000
- ------------------------------
Gail R. Wilensky
15
<PAGE>
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
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, 1999
Allowance for doubtful
accounts ................... $12,352 $ 5,421 $ -- $ 4,244(1) $13,529
Products liability claims
reserve .................... 4,391 -- -- 370(2) 4,021
Year ended December 31, 1998
Allowance for doubtful
accounts ................... 12,712 14 -- 374(1) 12,352
Products liability claims
reserve .................... 6,205 -- -- 1,814(2) 4,391
Year ended December 31, 1997
Allowance for doubtful
accounts ................... 8,160 678 4,037(3) 163(1) 12,712
Products liability claims
reserve .................... 8,304 -- -- 2,099(2) 6,205
</TABLE>
- -------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Claims settled.
(3) Balance assumed through acquisitions.
16
EXHIBIT 10.14
SPLIT-DOLLAR INSURANCE AGREEMENT
AS AMENDED APRIL 29, 1999
THIS AGREEMENT, originally effective as of this 10th day of January, 1997,
is amended effective April 29, 1999 by agreement between the Company and the
Owner:
DEFINITIONS:
A. "Company": St. Jude Medical, Inc., a Minnesota corporation, of St. Paul,
Minnesota.
B. "Executive": Ronald A. Matricaria, the Chairman and Chief Executive
Officer of the Company, residing in North Oaks, Minnesota.
C. "Insured": Collectively, the Executive and Lucille E. Matricaria, his
spouse, and the survivor thereof.
D. "Insurer": The Phoenix Home Life Mutual Insurance Company.
E. "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable Life
Insurance Trust.
F. "Policy": The policy of insurance on the life of the Insured issued by the
Insurer and listed on Exhibit "A" annexed hereto together with any
supplementary contracts issued by the Insurer in conjunction therewith.
G. "Policy Interest": The Company's Policy Interest shall be an amount equal
to the lesser of the cumulative total of its share of the premiums paid on
the Policy or cash surrender value of the Policy. The existence of the
Company's Policy Interest shall be evidenced by filing with the Insurer an
assignment in substantially the form annexed hereto as Exhibit "B".
RECITALS:
A. The Owner is the owner of the Policy, and was established by the Insured
to provide a benefit for the Insured's family in the event of the death of
the survivor of the Insured.
B. The Executive had been and is a valuable employee of the Company. As an
additional benefit to the Executive and his spouse, the Company wishes to
assist the Owner in the payment of premiums on the Policy as set forth in
this Agreement.
C. In exchange for such premium assistance, the Owner is willing to grant to
the Company an interest in the Policy as provided herein.
D. This Agreement is intended to qualify as a life insurance employee benefit
plan as described in Revenue Ruling 64-328.
<PAGE>
THEREFORE, for value received, it is agreed:
1. PREMIUM PAYMENTS
(a) Each annual premium on the Policy during the term of this Agreement
shall be paid as follows:
(1) The Owner shall pay a portion of each annual premium due in an
amount equal to the current term rate for the Insured's age
multiplied by the excess of the current death benefit over the
Company's current Policy Interest. For purposes of this
Agreement, the "current term rate" shall mean:
(A) Prior to the death of one of the Insured, the lesser of
the Insurer's annual term insurance rate or the rates
specified in Revenue Rulings 64-328 and 66-110 based on
the joint life expectancies of the Insured;
(B) In the event of the death of one of the Insured prior to
the termination of this Agreement, thereafter, the
lesser of the Insurer's annual term insurance rate or
the rate specified in Revenue Rulings 64-328 and 66-110
based on the life expectancy of the surviving Insured.
(2) In connection with the amount described in (1) above, the
Company shall pay in cash to the Executive, or in the event of
Executive's death, the Executive's spouse, at least 30 days
prior to the due date of any premium due under the Policy, an
amount which, after payment by the Executive or spouse of any
federal, state and local income (including FICA) tax
liability, if any, will equal the amount of the Owner's
premium described in (1) above. The Executive, the Executive's
spouse or their tax advisor shall provide the Company with an
estimate of the effective combined federal, state and local
tax rate for the year in which the Owner's premium is due. The
payment described in this paragraph (2) shall be deemed a
bonus to the Executive during his employment, and thereafter,
a retirement benefit to the Executive and/or his spouse.
(3) The Company shall pay all premium amounts not paid by the
Owner.
(b) The Owner's premium share and the Company's premium share (other
than that paid with policy loans) shall be remitted to the Insurer
before expiration of the grace period.
(c) Dividends on the Policy shall be applied as elected by the Owner.
(d) The Policy may, at the Company's discretion, provide for the waiver
of premium on the Executive's disability. If it does so provide, the
cost thereof shall be borne by the Company.
2
<PAGE>
2. POLICY OWNERSHIP
(a) Except as provided in subsection (b), the Owner shall be sole and
exclusive owner of the Policy. This includes all the rights of
"owner" under the terms of the Policy including, but not limited to,
the right to designate beneficiaries, select settlement and dividend
options and to surrender the Policy. All such rights may be
exercised by the Owner without the Company's consent.
(b) In exchange for the Company's payment of its premium contribution
under Section 1, the Owner hereby assigns to the Company the
following rights in the Policy:
(1) The right to realize against the cash value of the Policy, to
the extent of its Policy Interest in the event of termination
of this Agreement as provided in Section 4.
(2) The right to realize against proceeds of the Policy, to the
extent of its Policy Interest, in the event of the Insured's
death.
(c) It is agreed that benefits may be paid under the Policy by the
Insurer either by separate checks to the parties entitled thereto,
or by a joint check. In the later instance, the Owner and the
Company agree that the benefits shall be divided as provided herein.
3. THE OWNER - The Owner shall have the right to assign any part or all of
the Owner's retained interest in the Policy and this Agreement to any
person, entity or trust by execution of a written assignment delivered to
the Insurer.
4. TERMINATION OF AGREEMENT
(a) This Agreement shall not terminate until, but shall terminate
immediately upon the first to occur of the following:
(1) Surrender of the Policy by the Owner, who has the sole and
exclusive right of surrender.
(2) Lapse, failure to make premium contributions as required by
Section 1 or other termination of the Policy by the Owner.
(3) The death of the survivor of the Insured
(4) The bankruptcy, receivership or dissolution of the Company.
(5) Payment of the annual premium for the 15th policy year, which
shall occur in January, 2012.
3
<PAGE>
(b) On any termination of this Agreement, the Owner shall pay to the
Company the Company's Policy Interest and the Company will release
its collateral assignment in the Policy to the Owner.
5. THE INSURER - The Insurer shall be bound only by the provisions of and
endorsements on the Policy, and any payments made or actions taken by it
in accordance therewith shall fully discharge it from all claims, suits
and demands of all persons whatsoever. It shall in no way be bound by or
be deemed to have notice of the provisions of this Agreement.
6. AMENDMENT OF AGREEMENT - This amended Agreement shall restate and replace
the Split Dollar Insurance Agreement between the Company and the Owner
dated January 10, 1997. The Owner and the Company can mutually agree to
further amend this Agreement and such amendment shall be in writing and
signed by the Owner and Company.
7. SUCCESSOR RIGHTS - Notwithstanding anything herein to the contrary, the
Company's rights and obligations under this Agreement shall not cease, but
shall continue and shall be enforceable in the event of the merger of the
Company in which it is not the survivor, or in the event of the sale of
all or substantially all of the assets of the Company, and said successor
shall assume such rights and obligations hereunder.
8. ADMINISTRATION AND FUNDING - The following provisions are part of this
Agreement and are intended to meet the requirements of the Employee
Retirement Income Security Act of 1974:
(a) The named fiduciary: The Vice President, Finance/Chief Financial
Officer.
(b) The funding policy under this Agreement is that all premiums on the
Policy be remitted to the Insurer when due.
(c) Direct payment by the Insurer is the basis of payment of benefits
under this Agreement, with those benefits in turn being based on the
payment of premiums as provided in the Agreement.
(d) For claims procedure purposes, the "Claims Manager" shall be the
Vice President, Assistant Secretary/General Counsel.
(1) If for any reason a claim for benefits under this Agreement is
denied by the Company, the Claims Manager shall deliver to the
claimant a written explanation setting forth the specific
reasons for the denial, pertinent references to the Agreement
section on which the denial is based, such other data as may
be pertinent and information on the procedures to be followed
by the claimant in obtaining a review of his claim, written in
a manner calculated to be understood by the claimant. For this
purpose:
(A) The claimant's claim shall be deemed filed when
presented orally or in writing to the Claims manager.
4
<PAGE>
(B) The Claims Manager's explanation shall be in writing
delivered to the Claimant within 90 days of the date the
claim is filed.
(2) The claimant shall have 60 days following his receipt of the
denial of the claim to file with the Claims Manager a written
request for review of the denial. For such review, the
claimant or his representative may submit pertinent documents
and written issues and comments.
(3) The Claims Manager shall decide the issue on review and
furnish the claimant with a copy within 60 days of receipt of
the claimant's request for review of his claim. The decision
on review shall be in writing and shall include specific
reasons for the decision written in a manner calculated to be
understood by the claimant, as well as specific references to
the pertinent provisions of this Agreement on which the
decision is based. If a copy of the decision is not so
furnished to the claimant within such 60 days, the claim shall
be deemed denied on review.
(e) If any claim arising under this Agreement is not resolved under (d)
above or any other dispute arises under the terms of this Agreement,
the Company and Owner agree to submit the claim or dispute to
arbitration proceedings held in accordance with the rules of the
American Arbitration Association. Judgment upon the award rendered
by the arbitrators may be entered in any court having jurisdiction
thereof. Pending final resolution of the dispute, the parties shall
continue to comply with the provisions of this Agreement not in
dispute. The expenses of the arbitration shall be borne equally by
the parties to the arbitration, provided that each party shall pay
for and bear the costs of its own experts, evidence and legal
counsel. Such arbitration shall be held in Minneapolis, Minnesota.
9. MISCELLANEOUS
(a) This Agreement shall be binding upon and inure to the benefit of the
Company and the Owner and their respective successors and assigns.
(b) Any notice, consent or demand required or permitted to be given
under the provisions of this Agreement shall be in writing, and
shall be signed by the party giving or making the same. If such
notice, consent or demand is mailed to a party hereto, it shall be
sent by United States certified mail, postage prepaid, addressed to
such party's last known address as shown on the records of the
Company. The date of such mailing shall be deemed the date of
notice, consent or demand.
(c) This Agreement, and the rights of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State
of Minnesota, except to the extent preempted by federal law.
5
<PAGE>
IN WITNESS WHEREOF the parties have signed this Agreement, as amended,
effective as of this 29th day of April, 1999.
In the presence of COMPANY
St. Jude Medical, Inc.
/s/ Karen M. Jurney By: /s/ Kevin T. O'Malley
- ---------------------------------- ------------------------------------
Karen M. Jurney Kevin T. O'Malley
Its: Vice President
--------------------------------
OWNER
The Ronald A. and Lucille E. Matricaria
1997 Irrevocable Life Insurance Trust
/s/ Karen M. Jurney /s/ John P. Berdusco
- ---------------------------------- ---------------------------------------
Karen M. Jurney John P. Berdusco, Trustee
6
<PAGE>
EXHIBIT "A"
LIFE INSURANCE
POLICY NUMBER FACE AMOUNT
2,708,353 $3,000,000
<PAGE>
EXHIBIT "B"
SPLIT DOLLAR ASSIGNMENT
Insurer: The Phoenix Home Mutual Life Insurance Company.
Insured: Ronald A. and Lucille Matricaria
THIS ASSIGNMENT, originally made January 10, 1997, is amended and affirmed
by the undersigned Owner effective as of April 29, 1999.
DEFINITIONS:
A. "Assignee": St. Jude Medical, Inc., a Minnesota corporation, of St.
Paul, Minnesota.
B. "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable
Life Insurance Trust.
C. "Policy": The following policy of insurance issued by the Insurer on
the life of the insured, together with any supplementary contracts
issued in conjunction therewith:
POLICY NUMBER FACE AMOUNT
2,708,353 $3,000,000
D. "Policy Interest": The Assignee's Policy Interest shall be as set
forth in the Split Dollar Agreement. The Insurer shall be entitled
to rely on the Assignee's certification of the amount of its Policy
Interest.
E. "Split Dollar Agreement": That certain Agreement, dated January 10,
1997, as amended effective April 29, 1999, between the Owner and the
Assignee. The Insurer is not bound by nor deemed to have notice of
the provisions of the Split Dollar Agreement.
RECITALS:
A. Under the Split Dollar Agreement, the Assignee has agreed to assist
the Owner in payment of premiums on the Policy.
B. In consideration of such premium payments by the Assignee, the Owner
here intends to grant the Assignee certain limited interests in the
Policy.
<PAGE>
THEREFORE, for value received, it is agreed:
1. ASSIGNMENT - The Owner hereby assigns, transfers and sets over to the
Assignee, its successor and assigns, the following specific rights in the
Policy and subject to the following terms and conditions:
(a) The right to realize against the cash value of the Policy, to the
extent of its Policy Interest, in the event of the Policy's
surrender by the Owner.
(b) The right to realize against proceeds of the Policy, to the extent
of its Policy Interest, in the event of the Insured's death.
(c) The right to borrow against the security of the Policy, but not
against the Policy itself.
2. RETAINED RIGHTS - Except as expressly provided in Section 1, the Owner
retains all rights under the Policy including, but not limited to, the
exclusive right to name beneficiaries, select settlement and dividend
options and to surrender the Policy without the consent of the Assignee.
3. INSURER - The Insurer is hereby authorized to recognize, and is fully
protected in recognizing:
(a) The claims of the Assignee to rights hereunder, without
investigating the reasons for such action by the Assignee, or the
validity or the amount of such claims.
(b) The Owner's request for surrender of the Policy without the consent
of the Assignee. Upon the surrender, the Policy shall be terminated
and of no further force or effect.
4. AMENDMENT - This Assignment shall not be altered or amended by the Owner
without the written consent of the Assignee.
5. RELEASE OF ASSIGNMENT - Upon payment to the Assignee of its Policy
Interest, the Assignee shall executive a written release of this
Assignment.
IN WITNESS WHEREOF the Owner has executed this Assignment on the date
first above written.
In the presence of The Ronald A. and Lucille E. Matricaria
1997 Irrevocable Life Insurance Trust
/s/ Karen M. Jurney /s/ John P. Berdusco
- ---------------------------------- --------------------------------------
John P. Berdusco, Trustee
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
St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a global leader
in the development, manufacturing and distribution of medical device products
for the cardiac rhythm management, cardiology and vascular access, and heart
valve disease management markets. The Company has two reportable segments:
Cardiac Rhythm Management (CRM) and Heart Valve Disease Management (HVDM). The
CRM segment, which includes the results from the Company's Cardiac Rhythm
Management Division and Daig Division, develops, manufactures and distributes
bradycardia pulse generator and tachycardia implantable cardioverter
defibrillator (ICD) systems, electrophysiology and interventional cardiology
catheters, and vascular closure devices. The HVDM segment develops, manufactures
and distributes mechanical and tissue heart valves and valve repair products,
and is in the process of developing suture-free devices to facilitate coronary
artery bypass graft anastomoses.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Saturday nearest December 31, but for clarity of presentation, describes all
periods as if the year end is December 31. Fiscal years 1999 and 1998 each
consisted of fifty-two weeks and fiscal year 1997 consisted of fifty-three
weeks.
The commentary that follows should be read in conjunction with the Company's
consolidated financial statements and related notes.
ACQUISITIONS
Following is a discussion on the Company's business acquisitions during the last
three years:
VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the
outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. VSI was a development-stage
company focused on the development of suture-free devices to facilitate coronary
artery bypass graft anastomoses.
ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the
Angio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash.
Angio-Seal(TM)manufactures and markets hemostatic puncture closure devices.
OTHER: During 1999, the Company acquired the assets of various businesses used
in the distribution of the Company's products for $21,056 in cash and common
stock.
VENTRITEX, INC. ("VENTRITEX"): On May 15, 1997, the Company acquired Ventritex,
a manufacturer of ICDs and related products. St. Jude Medical issued 10,437,800
shares of its common stock to the Ventritex shareholders at an exchange rate of
0.5 shares of Company common stock for every one share of Ventritex common
stock. The transaction qualified as a tax-free reorganization.
The 1999 acquisitions were recorded using the purchase method of accounting. The
operating results of each of these acquisitions were included in the Company's
consolidated financial statements from the date of each acquisition. The
Ventritex acquisition was accounted for as a pooling of interests and as such,
the historical results of St. Jude Medical were restated at the time of the
acquisition to include the historical operating results of Ventritex.
NET SALES
Net sales by geographic markets were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 689,051 $ 604,524 $581,514
Western Europe 259,300 248,070 227,871
Other foreign countries 166,198 163,400 185,011
- --------------------------------------------------------------------------------
Total net sales $1,114,549 $1,015,994 $994,396
- --------------------------------------------------------------------------------
Overall, foreign exchange rate movements had an unfavorable year-to-year impact
of $14,900 and $5,200 in 1999 and 1998, respectively, due primarily to the
strengthening of the U.S. dollar against the major Western European currencies.
This negative effect is not necessarily indicative of the impact on net earnings
due to partially offsetting favorable foreign currency changes on operating
costs and to the Company's hedging activities.
Segment net sales were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
CRM $ 843,117 $ 735,123 $716,347
HVDM 271,432 280,871 278,049
- --------------------------------------------------------------------------------
Total net sales $1,114,549 $1,015,994 $994,396
- --------------------------------------------------------------------------------
CRM 1999 net sales increased 14.7% over 1998 due primarily to increased
bradycardia net sales, increased electrophysiology (EP) catheter unit sales, and
the acquisition of Angio-Seal(TM).
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The bradycardia net sales increase relates to the Company's introduction of the
Affinity(R) pacemaker family in the second quarter of 1999 and to an expanded
U.S. sales force. CRM 1998 net sales increased 2.6% over 1997 due primarily to
higher ICD sales with the commercial release of the Angstrom(R) II and the
Angstrom(R) MD ICDs during 1998, offset in part by lower bradycardia sales due
to the effects of the stronger U.S. dollar, fewer domestic sales
representatives, the timing of certain distributor orders, and to a fifty-two
week year in 1998 versus a fifty-three week year in 1997. The impact of one
less selling week in 1998 effectively reduced net sales by approximately $11,000
as compared to 1997.
HVDM 1999 net sales decreased 3.4% from 1998 due to the effects of the stronger
U.S. dollar, reduced sales to certain distributors in emerging markets, and a
slight clinical preference shift from mechanical valves to tissue valves in the
U.S. market where HVDM holds significant mechanical valve market share and a
smaller share of the tissue valve market. HVDM 1998 net sales increased 1.0%
from 1997 due the introduction of the Toronto SPV(R) valve in the U.S., offset
in part by the effects of the stronger U.S. dollar, the timing of certain
distributor orders, curtailed marketing efforts in certain international
markets, and to a fifty-two week year in 1998 versus a fifty-three week year
in 1997. The impact of one less selling week in 1998 effectively reduced net
sales by approximately $5,000 as compared to 1997.
GROSS PROFIT
Gross profits were as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Gross profit $733,647 $643,054 $628,679
Percentage of net sales 65.8% 63.3% 63.2%
z==============================================================================
The Company's 1999 gross profit margin increased 2.5 percentage points over
1998 due primarily to CRM's manufacturing efficiencies and higher CRM unit
sales that were partially offset by the impact of the stronger U.S. dollar and
lower HVDM unit sales. The Company's 1998 gross profit percentage remained
relatively constant from 1997 due primarily to HVDM's manufacturing
efficiencies, the elimination of certain acquired facilities, and increased ICD
net sales, offset in part by the impact of the stronger U.S. dollar and lower
mechanical heart valve and bradycardia unit sales.
OPERATING EXPENSES
Certain operating expenses were as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Selling, general
and administrative $394,418 $349,346 $378,500
Percentage of net sales 35.4% 34.4% 38.1%
Research and development $125,059 $ 99,756 $104,693
Percentage of net sales 11.2% 9.8% 10.5%
z==============================================================================
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense increased in
1999 due primarily to increased sales activities, increased litigation, Year
2000 related expenses, and to higher intangible asset amortization related to
the Angio-Seal(TM) acquisition. SG&A expense decreased in 1998 from 1997 due
primarily to the full year effect of the Company's 1997 integration and
consolidation efforts related to acquisitions, as well as to further
consolidation of certain other pre-existing CRM operations.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 1999 due to
increased CRM activities relating primarily to ICDs and products to treat
emerging indications in atrial fibrillation and congestive heart failure, and
to HVDM activities associated with the technology acquired in the VSI
acquisition. R&D expense decreased in 1998 from 1997 due primarily to the full
year effect of the Company's 1997 integration and consolidation efforts related
to acquisitions.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: In 1999, the Company
recorded purchased in-process research and development charges of $47,775 and
$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI,
respectively. The purchased in-process research and development charges were
computed by an independent third-party appraisal company and were expensed at
close, except as noted below, since technological feasibility had not been
established and since there were no alternative future uses for the technology.
The values assigned to purchased in-process research and development were
determined primarily by the income approach, utilizing discount rates ranging
from 25% to 35%. Certain other factors considered in these valuations included
the stage of development of each project, which ranged from 35% to 90% complete,
complexity of the work completed at the valuation date, and market introductions
for products resulting from the technology beginning in late 1999 for
Angio-Seal(TM) and 2000 for VSI.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The purchased in-process technologies required additional development to create
commercially viable products. This development included completion of design,
prototyping, and testing to ensure the technologies meet their design
specifications, including functional, technical and economic performance
requirements. In addition, the technology was required to undergo both
international and domestic regulatory reviews and approvals prior to being
commercially released to the market.
The total appraised value of the VSI purchased in-process research and
development was $95,500, of which $67,453 was expensed at close. The remaining
balance of the in-process research and development valuation ($28,047) will be
recorded in the Company's financial statements as purchased in-process research
and development expense when payment of the contingent consideration is assured
beyond a reasonable doubt. All other contingent consideration payments in excess
of the $28,047 will be capitalized as goodwill.
SPECIAL CHARGES: The Company restructured its international operations during
the third quarter of 1999 to improve the effectiveness and efficiency of its
international business by clarifying business unit accountabilities and focusing
the operations of its business units outside the U.S., and by removing
administrative redundancies in the Company's non-U.S. management structure. This
restructuring resulted in the elimination of certain administrative management
positions. The Company recorded a $9,754 charge in the third quarter of 1999
related primarily to this restructuring, of which $4,102 was used through
December 31, 1999. The Company anticipates that substantially all of the
remaining balance will be utilized during 2000.
The Company recorded special charges totaling $58,669 during 1997 related to
Ventritex merger transaction costs ($8,227), various distributor agreement
terminations ($12,925), repositioning of Pacesetter manufacturing operations in
connection with the Ventritex integration ($18,139), and to the repositioning of
Ventritex operations ($19,378). The Company has utilized $56,090 of the special
charge reserves through December 31, 1999. The balance of the remaining special
charge accruals are expected to be utilized as the remaining contractual
obligations come due.
OTHER INCOME (EXPENSE)
Interest expense was $28,104 in 1999, $23,667 in 1998 and $14,374 in 1997. The
increases in 1999 and 1998 were due to increased debt levels resulting primarily
from the Company's acquisitions and share repurchases during 1999 and 1998.
Net investment gains of $848 in 1999, $15,624 in 1998 and $6,768 in 1997
resulted primarily from the periodic sales of the Company's marketable equity
security holdings.
INCOME TAXES
The Company's reported effective income tax rate was 63.8% in 1999 as compared
with 30.5% in 1998. Exclusive of the purchased in-process research and
development and special charges, the Company's effective income tax rate was
25.0% in 1999. The decrease in the effective income tax rate from 30.5% in 1998
to 25.0% in 1999 was primarily attributable to higher research and development
credits and foreign sales corporation benefits relative to pre-tax earnings in
1999. The 1999 purchased in-process research and development charges were either
non-deductible for income tax purposes or were recorded in a taxing jurisdiction
with a low income tax rate.
The Company's effective income tax rate decreased from 38.0% in 1997 to 30.5% in
1998 due primarily to a greater proportion of earnings in countries with lower
tax rates and to the elimination of non-deductible merger costs related to the
1997 Ventritex acquisition.
The Company has not recorded deferred income taxes on its foreign subsidiaries'
undistributed earnings as such amounts are currently intended to be
indefinitely reinvested.
NET EARNINGS
Net earnings, exclusive of purchased in-process research and development
charges, special charges and cumulative effect of accounting change, were
$143,989 in 1999, $129,082 in 1998 and $97,692 in 1997. Reported net earnings
and diluted net earnings per share were $24,227, or $0.29 per share, in 1999,
$129,082, or $1.50 per share, in 1998, and $53,140, or $0.58 per share, in 1997.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OUTLOOK
The Company expects that market demand, government regulation and societal
pressures will continue to change the worldwide health care industry resulting
in further business consolidations and alliances. The Company participates with
industry groups to promote the use of advanced medical device technology in a
cost conscious environment. Customer service in the form of cost-effective
clinical outcomes will continue to be a primary focus for the Company.
The Company's HVDM business is in a highly competitive market. The market is
segmented between mechanical heart valves, tissue heart valves, and repair
products. During 1999, the U.S. market continued its slight shift to tissue
valve and repair products from mechanical heart valves resulting in a small
market share loss. 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 CRM business is also in a highly competitive industry that is
undergoing consolidation. The number of principal suppliers 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, the
Company's two principal competitors in the ICD market have dual-chamber ICDs on
the market that represent an increasing percentage of the overall ICD market.
The Company began clinical evaluation of a dual-chamber ICD in late 1999.
However, until the Company commercially introduces a dual-chamber ICD into the
market, the continued 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 global medical device market is highly competitive. Competitors have
historically employed litigation to gain a competitive advantage. In addition,
the Company's products must continually improve technologically and provide
improved clinical outcomes due to the competitive nature of the industry.
Group purchasing organizations (GPOs) in the U.S. continue to consolidate the
purchasing for some of the Company's customers. Several such GPOs have executed
contracts with the Company's CRM market competitors which exclude the Company.
These contracts, if enforced, may adversely affect the Company's sales of CRM
products to members of these GPOs.
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
proprietary Silzone(R) coating on the sewing cuff fabric. The Company also
concluded that it will no longer utilize the Silzone(R) coating. The Company
expects to record a non-recurring charge against first quarter 2000 earnings,
which is currently estimated at $16,000 to $20,000, for the write-off of
inventory and other costs related to this recall and product discontinuation.
However, there can be no assurance that the final costs associated with this
recall will not exceed management's current estimates. Other than this
non-recurring charge, management believes that this recall will not materially
impact the Company's year 2000 earnings or cash flows based primarily on the
fact that the Company's non-Silzone(R) coated products, which represent 75% of
the Company's heart valve shipments, are not affected by this recall.
The IRS has proposed adjustments of approximately $58,200 in additional taxes
relating primarily to the Company's Puerto Rican operations for the years 1990
through 1994. Management believes that the IRS will propose similar
adjustments of approximately $15,500 for 1995. Management is vigorously
contesting these adjustments and expects that the ultimate resolution will not
have material adverse effect on the Company's financial position or liquidity,
but could potentially be material to the net earnings of a particular future
period if resolved unfavorably.
MARKET RISK
The Company is exposed to foreign exchange rate fluctuations due to its
transactions denominated primarily in Euros, currencies tied to the Euro,
Canadian Dollars, British Pounds, and Swedish Kroners. The Company is also
exposed to interest rate risk on its interest-bearing debt and equity price risk
on its marketable equity security investments.
The Company attempts to minimize a portion of its foreign exchange rate risk
through the use of forward exchange or option contracts. The gains or losses on
these contracts offset changes in the fair value of the anticipated foreign
currency transactions. It is the Company's practice to not enter into contracts
for trading purposes.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's forward exchange contracts had fair values of ($263) and ($422) at
December 31, 1999 and 1998. Utilizing the Company's outstanding forward exchange
contracts at December 31, 1999 and 1998, a hypothetical 10% unfavorable change
in the foreign currency spot rates would have negatively impacted the fair value
of the Company's forward exchange contracts by $2,745 and $3,327. A majority of
any gains or losses on the fair value of these contracts would ultimately be
offset by gains or losses on the anticipated transactions. Such offsetting gains
or losses are not reflected in the hypothetical 10% unfavorable change.
A substantial portion of the Company's interest-bearing debt provides for
interest at variable rates tied to the London Interbank Offered Rate ("LIBOR").
The Company periodically enters into interest rate swap or option contracts to
reduce its exposures to interest rate fluctuations. During the third quarter of
1999, the Company entered into an interest rate swap contract to hedge a
substantial portion of its variable interest rate risk through January 2000 on
$138,000 of revolving credit facility borrowings. The fair market value of this
contract at December 31, 1999, and the impact of the contract on 1999 earnings
were not material. There were no interest rate contracts outstanding in 1998 or
1997.
The Company periodically invests in marketable equity securities of emerging
technology companies. The Company's investments in these companies had a fair
value of $15,487 and $20,300 at December 31, 1999 and 1998, which is subject to
the underlying price risk of the public equity markets.
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, and adopted the Euro as the legal
common currency for their countries. The sovereign 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 sovereign 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 effect on the Company's operations.
However, subsequent to the Year 2001, cross-country pricing in the EEC may
become more transparent, which may impact the pricing of the Company's products.
The Company has modified its computer programs to accommodate the Euro, the
cost of which was not material. The Company will continue to evaluate the need
to make other changes to accommodate the conversion to the Euro.
NEW ACCOUNTING PRONOUNCEMENT
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, 2000, although early adoption as of the beginning
of any fiscal quarter is permitted. Statement 133 requires companies to
recognize all derivatives on the balance sheet at fair value. Derivatives not
qualifying as hedges must be adjusted to fair value through earnings. If the
derivative qualifies as 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. Management is continuing to
review the impact of Statement 133 on the Company's financial statements.
FINANCIAL CONDITION
LIQUIDITY
The Company's liquidity and cash flows remained strong during 1999. Cash
provided by operating activities was $256,067 in 1999, a $147,598 increase over
1998. The Company's current ratio was 2.4 to 1 at December 31, 1999.
Accounts receivable increased $11,744 from December 31, 1998, due to higher
sales, offset in part by a decrease in average days to collect the receivables.
Other assets increased $147,070 due primarily to the addition of certain
intangible assets from the Angio-Seal(TM) acquisition. Interest-bearing debt
increased $102,500 during 1999 due primarily to additional borrowings for the
Angio-Seal(TM) and VSI acquisitions and the repurchase of common stock, offset
in part by the repayment of debt with cash generated from operations. As of
March 6, 2000, the Company had committed credit facilities totaling $500,000, of
which $24,500 was unused.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Management believes that cash generated from operations and cash available under
its credit facilities will be sufficient to meet the Company's working capital
and share repurchase plan needs in the near term. Should suitable investment
opportunities arise, management believes that the Company's earnings, cash
flows and balance sheet will permit the Company to obtain additional debt or
equity capital, if necessary.
CAPITAL STRUCTURE
The Company's capital structure consists of interest-bearing debt and equity.
Interest-bearing debt as a percent of the Company's total capitalization
increased from 32% at December 31, 1998 to 38% at December 31, 1999 due
primarily to the Angio-Seal(TM) and VSI acquisitions.
During 1999, the Company's Board of Directors authorized the repurchase of up to
$250,000 of the Company's outstanding common stock over a three-year period. The
Company repurchased 977,500 shares of its common stock for $29,826 during 1999.
DIVIDENDS
The Company has not declared or paid any dividends during 1999, 1998 or 1997.
Management currently intends to utilize the Company's earnings for operating and
investment purposes, including the repurchase of its common stock.
YEAR 2000 DISCLOSURE
The Company has not experienced any material disruptions related to the Year
2000. The Company's products were effectively not impacted by the Year 2000.
Also, the Company was able to execute its plans to address any internal Year
2000 issues related to its information technology and business systems, and to
make general inquiries of its business partners' readiness for Year 2000.
However, because the Company is dependent on various business partners for
certain aspects of its business, the impact on the Company related to the Year
2000 may still not be known. Management continues to monitor for potential
issues related to the Year 2000 and will execute its contingency plans, if
necessary. However, based upon the Company's interactions with its business
partners in 2000, management believes that any future, material event related to
the Year 2000 is unlikely.
The total cost associated with the Company's Year 2000 remediation was
approximately $3,500 and was reflected in the Company's historical results of
operations. The cost of implementing the Company's uniform worldwide business
and accounting information system (approximately $45,000) has not been included
in this figure since replacement of the previous systems was not accelerated due
to Year 2000 issues.
CAUTIONARY STATEMENTS
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 and 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 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.
28
<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 accounting principles
generally accepted in the United States 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 accounting principles
generally accepted in the United States, 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 meet with, and
have confidential access to, the Audit Committee to discuss the results of
their audit work.
/s/ Terry L. Shepherd
TERRY L. SHEPHERD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ John C. Heinmiller
JOHN C. HEINMILLER
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
St. Jude Medical, Inc.
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 9, 2000
29
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,114,549 $ 1,015,994 $ 994,396
Cost of sales 380,902 372,940 365,717
- ----------------------------------------------------------------------------------------------------------
Gross profit 733,647 643,054 628,679
Selling, general and administrative expense 394,418 349,346 378,500
Research and development expense 125,059 99,756 104,693
Purchased in-process research and development expense 115,228 -- --
Special charges 9,754 -- 58,669
- ----------------------------------------------------------------------------------------------------------
Operating profit 89,188 193,952 86,817
Other income (expense) (22,184) (8,222) 1,419
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes and accounting change 67,004 185,730 88,236
Income tax expense 42,777 56,648 33,530
- ----------------------------------------------------------------------------------------------------------
Net earnings before accounting change 24,227 129,082 54,706
Cumulative effect of accounting change, net of taxes -- -- (1,566)
- ----------------------------------------------------------------------------------------------------------
Net earnings $ 24,227 $ 129,082 $ 53,140
==========================================================================================================
BASIC EARNINGS PER SHARE:
Net earnings before accounting change $ 0.29 $ 1.51 $ 0.60
Cumulative effect of accounting change -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------
Basic net earnings per share $ 0.29 $ 1.51 $ 0.58
==========================================================================================================
DILUTED EARNINGS PER SHARE:
Net earnings before accounting change $ 0.29 $ 1.50 $ 0.59
Cumulative effect of accounting change -- -- (0.01)
- ----------------------------------------------------------------------------------------------------------
Diluted net earnings per share $ 0.29 $ 1.50 $ 0.58
==========================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 84,274 85,714 91,426
Diluted 84,735 86,145 92,052
==========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,655 $ 3,775
Marketable securities 79,238 84,215
Accounts receivable, less allowances for doubtful accounts 293,815 282,071
Inventories 235,407 245,579
Deferred income taxes 36,609 34,187
Other 35,575 32,637
- ---------------------------------------------------------------------------------------------
Total current assets 690,299 682,464
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 111,746 111,016
Machinery and equipment 286,706 270,246
Diagnostic equipment 176,079 131,128
- ---------------------------------------------------------------------------------------------
Property, plant and equipment at cost 574,531 512,390
Less accumulated depreciation (231,751) (184,131)
- ---------------------------------------------------------------------------------------------
Net property, plant and equipment 342,780 328,259
OTHER ASSETS
Goodwill and other intangible assets, net 452,519 322,434
Deferred income taxes 51,838 44,667
Other 16,602 6,788
- ---------------------------------------------------------------------------------------------
Total other assets 520,959 373,889
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,554,038 $ 1,384,612
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 91,874 $ 94,076
Income taxes payable 43,700 2,461
Accrued expenses
Employee compensation and related benefits 67,046 45,370
Other 79,902 61,490
- ---------------------------------------------------------------------------------------------
Total current liabilities 282,522 203,397
LONG-TERM DEBT 477,495 374,995
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock -- --
Common stock 8,378 8,417
Additional paid-in capital 109 6,656
Retained earnings 833,223 816,940
Accumulated other comprehensive income:
Cumulative translation adjustment (53,977) (33,242)
Unrealized gain on available-for-sale securities 6,288 7,449
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 794,021 806,220
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,554,038 $ 1,384,612
=============================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<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 (Loss) Issued Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 91,446,656 $ 9,145 $ 228,106 $692,892 $ (7,642) $ (440) $922,061
Comprehensive income:
Net earnings 53,140 53,140
Other comprehensive income (loss)
Unrealized gain (loss) on investments,
net of taxes ($12,031) and reclassification
adjustment (see below) 19,630 19,630
Foreign currency translation adjustment (24,536) (24,536)
--------
Other comprehensive income (loss) (4,906)
--------
Comprehensive income 48,234
========
Issuance of common stock, including exercise of
stock options, net of shares surrendered for
exercise price and taxes 400,651 40 12,112 12,152
Tax benefit from stock options 2,006 2,006
Issuance of common stock for business acquisition 64,189 6 2,123 2,129
Proceeds for stock issued 440 440
===================================================================================================================================
Balance at December 31, 1997 91,911,496 9,191 244,347 746,032 (12,548) -- 987,022
Comprehensive income:
Net earnings 129,082 129,082
Other comprehensive income (loss)
Unrealized gain (loss) on investments,
net of taxes ($2,545) and 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 shares surrendered
for exercise price and taxes 263,203 26 7,054 7,080
Tax benefit from stock options 1,070 1,070
Repurchase of common stock (8,000,000) (800) (245,815) (58,174) (304,789)
===================================================================================================================================
Balance at December 31, 1998 84,174,699 8,417 6,656 816,940 (25,793) -- 806,220
Comprehensive income:
Net earnings 24,227 24,227
Other comprehensive income (loss)
Unrealized gain (loss) on investments,
net of taxes ($712) and reclassification
adjustment (see below) (1,161) (1,161)
Foreign currency translation adjustment (20,735) (20,735)
--------
Other comprehensive income (loss) (21,896)
--------
Comprehensive income 2,331
========
Issuance of common stock, including exercise
of stock options, net of shares surrendered
for exercise price and taxes 381,206 38 8,855 8,893
Tax benefit from stock options 969 969
Issuance of common stock for business acquisition 161,072 16 3,984 4,000
Issuance of common stock in
settlement of obligation 41,108 4 1,430 1,434
Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826)
===================================================================================================================================
Balance at December 31, 1999 83,780,585 $ 8,378 $ 109 $833,223 $ (47,689) $ -- $794,021
===================================================================================================================================
Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income
taxes
1997 $ 1,285
1998 9,282
1999 2,875
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 24,227 $ 129,082 $ 53,140
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation 54,588 45,959 45,277
Amortization 31,114 22,894 20,784
Purchased in-process research and development expense 115,228 -- --
Special charges 9,754 -- 58,669
Net investment gain (848) (15,624) (6,768)
Deferred income taxes 369 15,459 6,624
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts receivable (26,319) (35,236) (41,731)
Inventories 14,466 (7,458) (36,929)
Other current assets (6,722) 4,897 (1,892)
Accounts payable and accrued expenses (1,998) (35,853) (124,739)
Income taxes 42,208 (15,651) (4,059)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 256,067 108,469 (31,624)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (69,419) (74,197) (84,638)
Purchase of marketable securities -- -- (7,000)
Proceeds from sale or maturity of marketable securities 17,552 82,879 80,363
Business acquisitions, net of cash acquired (259,127) -- --
Proceeds from sale of business, net of cash disposed -- -- 24,626
Other (19,438) 561 (3,867)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (330,432) 9,243 9,484
FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued 8,893 7,080 12,592
Common stock repurchased (29,826) (304,789) --
Borrowings under revolving credit facilities 989,500 785,036 498,500
Payments under revolving credit facilities (887,000) (602,536) (508,000)
Repurchase of convertible subordinated notes -- (27,505) --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 81,567 (142,714) 3,092
Effect of currency exchange rate changes on cash (1,322) 247 (1,810)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,880 (24,755) (20,858)
Cash and cash equivalents at beginning of year 3,775 28,530 49,388
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,655 $ 3,775 $ 28,530
=============================================================================================================
Supplemental Cash Flow Information
=============================================================================================================
Cash paid during the year for:
Interest $ 28,934 $ 21,703 $ 14,320
Income taxes 21,200 55,031 33,755
=============================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OVERVIEW: St. Jude Medical, Inc. (the "Company") is a global leader in
the development, manufacturing and distribution of medical technology products
for the cardiac rhythm management, cardiology and vascular access, and heart
valve disease management markets. The Company's principal products include
pacemaker and implantable cardioverter defibrillator (ICD) systems, prosthetic
heart valve replacement and repair products, electrophysiology and
interventional cardiology catheters and vascular closure devices. The Company
markets its products primarily in the United States, Western Europe and Japan
through both a direct employee-based sales organization and independent
distributors.
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 to the current year presentation.
FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year
ending on the Saturday nearest December 31, but for clarity of presentation,
describes all periods as if the year end is December 31. Fiscal years 1999 and
1998 each consisted of fifty-two weeks and fiscal year 1997 consisted of
fifty-three weeks.
CASH EQUIVALENTS: The Company considers highly liquid temporary investments with
an original maturity of three months or less to be a cash equivalent. Cash
equivalents are stated at cost, which approximates market.
MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank
certificates of deposit, U.S. government obligations, commercial paper, notes
and bonds. Marketable securities are classified as available-for-sale and
recorded at fair market value, based upon quoted market prices. Gross unrealized
gains totaling $10,142, $12,015 and $18,714, net of taxes of $3,854, $4,566 and
$7,112, were recorded in shareholders' equity at December 31, 1999, 1998 and
1997. Realized gains totaling $4,636, $15,624 and $6,768 in 1999, 1998, and 1997
from the sale of marketable securities have been recorded in other income.
Realized gains are computed using the specific identification method.
INVENTORIES: Inventories are stated at the lower of cost or market with cost
determined using the first-in, first-out method. Inventories consist of the
following:
1999 1998
- --------------------------------------------------------------------------------
Finished goods $108,449 $126,927
Work in process 41,466 35,130
Raw materials 85,492 83,522
- --------------------------------------------------------------------------------
$235,407 $245,579
================================================================================
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated
using the straight-line method over their estimated useful lives, ranging from
31-to-39 years for buildings and improvements, three-to-seven years for
machinery and equipment and five-to-eight years for diagnostic equipment.
Accelerated depreciation methods are used for income tax purposes.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost
over the fair value of identifiable net assets of businesses acquired. Other
intangible assets consist primarily of licensed and purchased technology,
patents and customer lists. Goodwill and other intangible assets are amortized
primarily on a straight-line basis using lives ranging from 5-to-20 years.
Accumulated amortization totaled $115,239 and $86,415 at December 31, 1999 and
1998. The Company periodically reviews its long-lived assets, including fixed
assets, for indicators of impairment using an estimate of the undiscounted cash
flows generated by those assets. The Company's financial statements for 1997
through 1999 reflect no such impairments.
REVENUE RECOGNITION: The Company recognizes revenue when the products are
shipped to the customer. 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 customer has used the inventory. The
allowance for doubtful accounts was $13,529 at December 31, 1999, and $12,352 at
December 31, 1998.
RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense
as incurred. Purchased in-process research and development is recognized in
purchase business combinations for the portion of the purchase price allocated
to the appraised value of in-process technologies. The portion assigned to
in-process research and development technologies excludes the value of core and
developed technologies, which are recognized as intangible assets.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of
accounting for its employee stock-based compensation. Pro forma information
related to the fair value method of accounting is provided in Note 5.
EARNINGS PER SHARE: Basic earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares during the
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares and common share
equivalents, when dilutive.
The table below sets forth the computation of basic and diluted net earnings per
share before accounting change:
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator:
Net earnings before
accounting change $24,227 $129,082 $54,706
Denominator:
Basic-weighted average
shares outstanding 84,274,000 85,714,000 91,426,000
Effect of dilutive securities:
Employee stock options 414,000 401,000 574,000
Restricted shares 47,000 30,000 52,000
- --------------------------------------------------------------------------------
Diluted-weighted average
shares outstanding 84,735,000 86,145,000 92,052,000
================================================================================
Basic earnings per share $ 0.29 $ 1.51 $ 0.60
================================================================================
Diluted earnings per share $ 0.29 $ 1.50 $ 0.59
================================================================================
Net earnings and diluted-weighted average shares outstanding have not been
adjusted for the Company's convertible debentures and for certain employee stock
options and awards since the effect of these securities would have been
anti-dilutive.
FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign
currencies are translated at average exchange rates in effect throughout the
year. Assets and liabilities of foreign operations are translated at year-end
exchange rates. Gains and losses from translation of net assets of foreign
operations are recorded in other comprehensive income. Foreign currency
transaction gains and losses are included in other income (expense).
FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management
periodically utilizes derivative financial instruments to help manage a portion
of the Company's exposure to foreign currencies and interest rates. Management
generally utilizes forward exchange or option contracts to manage anticipated
foreign currency exposures and interest rate swaps to manage interest rate
exposures. Management does not enter into derivative financial instruments for
trading purposes. The Company records the fluctuation in the fair value of the
forward exchange or option contracts in other income (expense) and the
fluctuation in the fair value of the interest rate swaps in interest expense.
USE OF ESTIMATES: Preparation of the Company's consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT: 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, 2000, although early
adoption as of the beginning of any fiscal quarter is permitted. Statement 133
requires companies to recognize all derivatives on the balance sheet at fair
value. Derivatives not qualifying as hedges must be adjusted to fair value
through earnings. If the derivative qualifies as 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.
Management is continuing to review the impact of Statement 133 on the Company's
financial statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 - ACQUISITIONS
VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the
outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. VSI was a development-stage
company focused on the development of suture-free devices to facilitate coronary
artery bypass graft anastomoses.
An independent appraisal firm performed a valuation of VSI's identifiable
intangible assets ($580) and in-process research and development ($95,500). The
value assigned to in-process research and development was determined by the
income approach, utilizing discount rates ranging from 30% to 35% and
assumptions on product introductions which begin in the year 2000. Total
consideration, including the net present value of future estimated contingent
consideration, is approximately $142,000. The total consideration paid at close
was allocated to the fair value of the net assets acquired ($7,618), and
in-process research and development ($67,453). The remaining balance of the
in-process research and development valuation ($28,047) will be recorded in the
Company's financial statements as purchased in-process research and development
expense when payment of the contingent consideration is assured beyond a
reasonable doubt. All other contingent consideration payments in excess of the
$28,047 will be capitalized as goodwill.
ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)
business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)
manufactures and markets hemostatic puncture closure devices. Total
consideration for Angio-Seal(TM), including the fair value of the net assets
acquired and the acquisition accounting adjustments, was $177,714, which was
allocated to in-process research and development ($47,775), various other
identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of
the in-process research and development and other identifiable intangible assets
was based upon an independent appraisal. The values assigned to in-process
research and development and other identifiable intangible assets were
determined primarily by the income approach, utilizing discount rates of 25% for
in-process research and development and 19.5% to 21.5% for the other intangible
assets, and assumptions on product introductions which began in late 1999.
OTHER: During 1999, the Company acquired the assets of various businesses used
in the distribution of the Company's products. Aggregate consideration paid was
$21,056 in cash and common stock.
The above acquisitions have been recorded using the purchase method of
accounting. The operating results of each of these acquisitions are included in
the Company's consolidated statements of earnings from the date of each
acquisition. The values assigned to in-process research and development were
expensed at close, except as note above, since technological feasibility had not
been established and since there were no alternative future uses for the
technology. Pro forma results of operations have not been presented for these
acquisitions since the effects of these business acquisitions were not material
to the Company either individually or in aggregate. Goodwill and other
intangible assets associated with these acquisitions will be amortized using
lives ranging from 5-to-20 years.
VENTRITEX, INC. (VENTRITEX): On May 15, 1997, the Company acquired Ventritex, a
manufacturer of implantable cardioverter defibrillators and related products.
The Company issued 10,437,800 shares of its common stock to the Ventritex
shareholders at an exchange rate of 0.5 shares of Company common stock for every
one share of Ventritex common stock. The transaction qualified as a tax-free
reorganization and was accounted for as a pooling of interests. Net sales, net
earnings and other changes in shareholders' equity for the separate companies
preceding the acquisition from January 1, 1997 through March 31, 1997, were as
follows:
OTHER CHANGES
IN SHAREHOLDERS'
NET SALES NET EARNINGS EQUITY
- -------------------------------------------------------------------------------
St. Jude Medical $229,678 $27,791 $(14,550)
Ventritex 20,712 (7,977) 997
Adjustments* -- 3,063 --
- -------------------------------------------------------------------------------
Combined $250,390 $22,877 $(13,553)
===============================================================================
* TO REFLECT THE COMBINED TAX POSITION AS IF THE ACQUISITION HAD OCCURRED AT THE
BEGINNING OF 1997.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 - LONG-TERM DEBT
Long-term debt consisted of the following:
1999 1998
- --------------------------------------------------------------------------------
Committed credit facility borrowings $299,000 $330,000
Uncommitted credit facility borrowings 148,500 15,000
Convertible subordinated debentures 29,995 29,995
- --------------------------------------------------------------------------------
Total long-term debt $477,495 $374,995
================================================================================
COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving
credit facility that expires in March 2003. At December 31, 1999, the Company
also had $300,000 of short-term, unsecured revolving credit facilities that
expire in March 2000. These credit facilities provide for variable interest tied
to the London Interbank Offered Rate. The weighted-average interest rate on
these borrowings was 6.4% and 5.5% at December 31, 1999 and 1998.
UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under
unsecured, due-on-demand credit facilities with various banks. These credit
facilities provide for variable interest tied to the London Interbank Offered
Rate. The weighted-average interest rate on these borrowings was 6.9% and 5.3%
at December 31, 1999 and 1998.
CONVERTIBLE SUBORDINATED DEBENTURES: The Company's convertible subordinated
debentures are due August 15, 2001, and bear interest at 5.75%. At the option of
the holder, the debentures are convertible into shares of common stock at a
conversion rate of 29.0909 shares per thousand dollars principal, which equates
to a conversion price of $34.375 per share. In addition, the Company can call
the debentures prior to maturity, requiring the debenture holder to either
convert their debentures to common stock or sell their debentures to the Company
for cash. During 1998, the Company repurchased $27,505 of these debentures in
open market transactions, recognizing an immaterial gain.
OTHER: In March, 2000, the Company replaced its $300,000 short-term committed
credit facilities with a $150,000 committed credit facility. The new credit
facility is due in March 2001 and provides for variable interest tied to the
London Interbank Offered Rate. In addition, during January 2000, the Company
began issuing short-term, unsecured commercial paper with maturities up to 270
days. The commercial paper is fully backed by committed credit facilities and
bears interest at varying market rates.
The Company's credit facility agreements contain various restrictive covenants
including minimum financial ratios, limitations on additional liens or
indebtedness, and limitations on certain acquisitions and investments, which the
Company was in compliance with at December 31, 1999.
The Company classifies all of its credit facility and commercial paper
borrowings as long-term on its balance sheet as the Company has the ability to
repay any short-term maturity with available cash from an existing long-term,
committed credit facility. Management continually reviews the Company's cash
flow projections and may from time to time repay a portion of the Company's
borrowings.
The fair value of the convertible subordinated debentures at December 31, 1999,
was estimated to be approximately $32,000, based upon quoted market prices.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases various facilities under noncancelable operating
lease arrangements. Future minimum lease payments under these leases are as
follows: $7,179 in 2000; $6,642 in 2001; $5,246 in 2002; $3,224 in 2003; and
$3,516 in 2004 and thereafter. Rent expense under all operating leases was
$7,397, $7,341 and $7,081 in 1999, 1998 and 1997.
IRS MATTERS: The Company and the Internal Revenue Service ("IRS") are in Tax
Court over tax deficiency notices totaling $16,400 for the tax periods
1990-1991. The Company is refuting the IRS deficiency and has asserted that in
fact the Company is owed a refund. The trial for this matter is currently
scheduled to begin in June 2000. In addition, the IRS has proposed adjustments
totaling $41,800 in additional taxes related to the Company's 1992-1994 income
tax returns. The Company is disputing these adjustments, however, resolution of
these matters is stayed pending resolution of the 1990-1991 litigation.
Management believes that the IRS will propose a similar adjustment of
approximately $15,500 for 1995. The issues raised by the IRS relate primarily to
the Company's Puerto Rican operations. Management is vigorously contesting these
adjustments and expects that the ultimate resolution will not have material
adverse effect on the Company's financial position or liquidity, but could
potentially be material to the net earnings of a particular future period if
resolved unfavorably.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LITIGATION: The Company is involved in various product liability lawsuits,
claims and proceedings of a nature considered normal to its business. Subject to
self-insured retentions, management believes the Company has product 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 any such future actions would not have a material
adverse effect on the Company's liquidity or financial condition, but could
potentially be material to the earnings of a particular future period if
resolved unfavorably.
NOTE 5 - SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of
$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per
share par value common stock. There were no shares of preferred stock issued or
outstanding during 1999, 1998 or 1997.
SHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the
repurchase of up to $250,000 of the Company's outstanding common stock over a
three-year period. The Company repurchased 977,500 shares of its common stock
for $29,826 during 1999. During 1998, the Company repurchased 8,000,000 shares
of its common stock for $304,789 under a modified "Dutch Auction" self-tender
offer.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase
savings plan allows participating employees to purchase, through payroll
deductions, shares of the Company's un-issued common stock at 85% of the fair
market value at specified dates. Employees purchased 94,386, 107,545 and 112,469
shares in 1999, 1998 and 1997 under this plan. At December 31, 1999, 180,042
shares of additional un-issued common stock were available for purchase under
the plan.
STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the
issuance of stock-based awards, such as restricted stock or stock options, to
directors, officers and employees. Stock option awards under these plans
generally have a 10-year life, an exercise price equal to the fair market value
on the date of grant, and a four-year vesting term. At December 31, 1999, the
Company had 1,441,654 shares of common stock available for grant under these
plans.
Stock option transactions under these plans during each of the three fiscal
years in the period ended December 31, 1999, are as follows:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
- --------------------------------------------------------------------------------
Balance at January 1, 1997 5,419,016 $ 31.27
Granted 5,049,875 34.03
Cancelled (615,140) 38.39
Exercised (296,893) 23.56
- --------------------------------------------------------------------------------
Balance at December 31, 1997 9,556,858 32.60
Granted 1,350,300 30.21
Cancelled (979,284) 36.09
Exercised (158,593) 20.36
- --------------------------------------------------------------------------------
Balance at December 31, 1998 9,769,281 32.12
Granted 3,046,880 28.10
Cancelled (1,146,767) 35.39
Exercised (257,781) 22.88
- --------------------------------------------------------------------------------
Balance at December 31, 1999 11,411,613 $ 30.93
================================================================================
Stock options totaling 4,976,093, 3,961,943 and 3,362,361 were exercisable at
December 31, 1999, 1998 and 1997.
The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGES OF NUMBER REMAINING YEARS AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.77-17.55 40,688 0.8 $ 16.14 40,688 $ 16.14
17.55-26.32 1,442,387 4.1 21.91 1,333,180 21.69
26.32-35.10 7,246,388 8.2 29.51 2,328,928 30.26
35.10-43.87 2,495,496 7.3 38.79 1,090,378 38.77
43.87-52.64 141,912 4.3 49.43 138,177 49.50
52.64-87.74 44,742 3.5 68.49 44,742 68.49
- ---------------------------------------------------------------------------------------------
11,411,613 7.4 $ 30.93 4,976,093 $ 30.58
=============================================================================================
</TABLE>
The Company also granted 42,359 shares of restricted common stock during the
three years ended December 31, 1999, under the Company's stock compensation
plans.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's net earnings and diluted net earnings per share would have been
reduced by $18,614, or $0.22 per share, in 1999, $11,822, or $0.14 per share, in
1998 and $12,911, or $0.14 per share, in 1997 had the fair value based method of
accounting been used for valuing the employee stock based awards. The impact on
net earnings from these stock based awards may not be representative of future
disclosures because they do not take into effect the pro forma compensation
expense related to grants made prior to 1995.
The weighted-average fair value of options granted and assumptions used in the
Black-Scholes options pricing model are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Fair value of options granted $11.12 $10.91 $13.22
Assumptions used:
Expected life (years) 5 5 6
Risk-free rate of return 5.8% 4.5% 6.0%
Volatility 33.2% 33.4% 34.2%
Dividend yield 0% 0% 0%
===============================================================================
SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that
entitles shareholders to purchase one-tenth of a share of Series B Junior
Preferred Stock at a stated price, or to purchase either the Company's shares or
shares of an acquiring entity at half their market value, upon the occurrence of
certain events which result in a change in control, as defined by the Plan. The
rights related to this plan expire in 2007.
NOTE 6 - SPECIAL CHARGES
1999 SPECIAL CHARGE: The Company restructured its international operations
during the third quarter of 1999 to improve the effectiveness and efficiency of
its international business by clarifying business unit accountabilities and
focusing the operations of its business units outside the U.S. and by removing
administrative redundancies in the Company's non-U.S. management structure. This
restructuring resulted in the elimination of certain administrative management
positions. The Company recorded a $9,754 charge in the third quarter of 1999
related primarily to this restructuring, of which $4,102 was used through
December 31, 1999. The Company anticipates that substantially all of the
remaining balance will be utilized during 2000.
1997 SPECIAL CHARGES: The Company recorded charges totaling $58,669 during 1997
related to Ventritex merger transaction costs ($8,227), various distributor
agreement terminations ($12,925), repositioning of Pacesetter manufacturing
operations in connection with the Ventritex integration ($18,139), and to the
repositioning of Ventritex operations ($19,378). The Company has utilized
$56,090 of the special charge reserves through December 31, 1999. The balance of
the remaining special charge accruals are expected to be utilized as the
remaining contractual obligations come due.
NOTE 7 - OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
1999 1998 1997
- -------------------------------------------------------------------------------
Interest expense $(28,104) $(23,667) $(14,374)
Interest income 2,726 4,125 6,365
Net investment gain 848 15,624 6,768
Foreign currency
transaction gain (loss) 2,666 (3,304) 2,078
Other (320) (1,000) 582
- -------------------------------------------------------------------------------
Other income (expense) $(22,184) $ (8,222) $ 1,419
===============================================================================
NOTE 8 - INCOME TAXES
The Company's earnings before income taxes and accounting change were generated
from domestic and foreign operations as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Domestic $ 2,408 $132,574 $81,311
Foreign 64,596 53,156 6,925
- -------------------------------------------------------------------------------
Earnings before income taxes
and accounting change $67,004 $185,730 $88,236
===============================================================================
Income tax expense consists of the following:
1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $28,641 $28,409 $20,957
State and Puerto Rico
Section 936 2,810 5,771 3,754
Foreign 10,957 7,009 2,195
- -------------------------------------------------------------------------------
Total current 42,408 41,189 26,906
Deferred 369 15,459 6,624
- -------------------------------------------------------------------------------
Income tax expense $42,777 $56,648 $33,530
===============================================================================
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of the cumulative temporary differences between the tax bases of
assets and liabilities and their carrying amount for financial statement
purposes are as follows:
1999 1998
- -------------------------------------------------------------------------------
Deferred income tax assets:
Net operating loss carryforwards $46,399 $45,258
Tax credit carryforwards 16,070 3,837
Inventories 25,678 23,302
Intangible assets 14,365 17,034
Accrued liabilities 7,913 6,456
- -------------------------------------------------------------------------------
Deferred income tax assets 110,425 95,887
- -------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on marketable securities (3,854) (4,566)
Property, plant and equipment (18,124) (12,467)
- -------------------------------------------------------------------------------
Deferred income tax liabilities (21,978) (17,033)
- -------------------------------------------------------------------------------
Net deferred income tax asset $88,447 $78,854
===============================================================================
A reconciliation of the U.S. federal statutory income tax rate to the Company's
effective income tax rate is as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Income tax expense at the
U.S. federal statutory rate $23,451 $65,006 $30,883
State income taxes, net of
federal benefit 1,811 4,091 2,613
Foreign taxes at higher
(lower) rates (1,567) (6,212) 1,023
Tax benefits from foreign
sales corporation (3,309) (5,662) (4,600)
Research and
development credits (3,679) (2,906) (2,890)
Non-deductible purchased
in-process research and
development charge 23,608 -- --
Non-deductible acquisition costs -- -- 6,280
Other 2,462 2,331 221
- -------------------------------------------------------------------------------
Income tax expense $42,777 $56,648 $33,530
- -------------------------------------------------------------------------------
Effective income tax rate 63.8% 30.5% 38.0%
===============================================================================
At December 31, 1999, the Company has net operating loss and tax credit
carryforwards of $132,569 and $16,070, that will expire from 2002 through 2018
if not utilized. Such amounts are subject to annual usage limitations.
The Company has not recorded deferred income taxes on $112,266 of its foreign
subsidiaries' undistributed earnings as such amounts are currently intended to
be indefinitely reinvested.
NOTE 9 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The Company changed its accounting policy in the fourth quarter of 1997 relating
to the capitalization of certain business process reengineering costs which were
incurred in connection with the Company's ERP software implementation project.
Pursuant to Emerging Issues Task Force (EITF) Statement No. 97-13, the Company
expensed the unamortized balance of the business process reengineering costs
previously capitalized, net of $980 in taxes, as a cumulative effect of
accounting change.
NOTE 10 - RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that
provide retirement benefits to substantially all full-time U.S. employees.
Eligible employees may contribute a percentage of their annual compensation,
subject to IRS limitations, with the Company matching a portion of the
employees' contributions. The Company also contributes a portion of its profits
to the plan, based upon Company performance. The Company's matching and profit
sharing contributions are at the discretion of the Company's Board of Directors.
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. Company contributions under all defined contribution plans
totaled $11,416, $9,858 and $8,859 in 1999, 1998 and 1997.
DEFINED BENEFIT PLANS: The Company has defined benefit plans for employees in
certain countries outside the U.S. The Company has an accrued liability totaling
approximately $7,000 at December 31, 1999, which approximates the actuarially
calculated unfunded liability. The related pension expense was not material.
NOTE 11 - MARKET AND CONCENTRATION RISK
FOREIGN CURRENCY RISK: The Company had forward exchange contracts totaling
$27,451 and $38,353 at December 31, 1999 and 1998, related primarily to the
exchange of Canadian Dollars, British Pounds, Swedish Kroner and the U.S.
dollar. These instruments typically have a maturity of one year or less.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST RATE RISK: During the third quarter of 1999, the Company entered into
an interest rate swap contract to hedge a substantial portion of its variable
interest rate risk through January 2000 on $138,000 of revolving credit facility
borrowings. The fair market value of this contract was not material at December
31, 1999. The impact of interest rate contracts on the Company's net earnings
was not material during 1999 and there were no interest rate contracts
outstanding during 1998 and 1997.
CONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the
normal course of business but generally does not require collateral or any other
security to support its receivables. Within the European Economic Union and in
many emerging markets, payment of certain accounts receivable balances are 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 Company's other trade receivables
is mitigated due to dispersion of the receivables over a large number of
customers in many geographic areas.
NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm
Management (CRM) and Heart Valve Disease Management (HVDM). The CRM segment,
which includes the results from the Company's Cardiac Rhythm Management Division
and Daig Division, develops, manufactures and distributes bradycardia pulse
generator and tachycardia implantable cardioverter defibrillator systems,
electrophysiology and interventional cardiology catheters and vascular closure
devices. The HVDM segment develops, manufactures and distributes mechanical and
tissue heart valves and valve repair products and is in the process of
developing suture-free devices to facilitate coronary artery bypass graft
anastomoses.
The following table presents certain financial information about the Company's
reportable segments:
CRM HVDM ALL OTHER(1) TOTAL
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1999
External net sales $843,117 $271,432 $ -- $1,114,549
Operating profit(2) 96,291 145,675 (152,778) 89,188
Depreciation and
amortization expense 74,626 9,581 1,495 85,702
Assets(3) 1,174,672 211,424 167,942 1,554,038
Expenditures for
long-lived assets(4) 71,190 5,717 1,771 78,678
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1998
External net sales $735,123 $280,871 $ -- $1,015,994
Operating profit 70,024 147,832 (23,904) 193,952
Depreciation and
amortization expense 59,679 7,810 1,364 68,853
Assets(3) 992,291 222,033 170,288 1,384,612
Expenditures for
long-lived assets(4) 58,323 14,546 1,328 74,197
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1997
External net sales $716,347 $278,049 $ -- $ 994,396
Operating profit(2) 23,673 142,707 (79,563) 86,817
Depreciation and
amortization expense 55,704 8,136 2,221 66,061
Assets(3) 988,977 184,246 279,893 1,453,116
Expenditures for
long-lived assets(4) 68,539 13,348 2,751 84,638
================================================================================
(1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.
(2) ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $9,754 AND $58,669 IN
1999 AND 1997, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF
$115,228 IN 1999.
(3) ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE
SEGMENT'S ASSETS WITH THE EXCEPTION OF CERTAIN HVDM OFFICE FACILITIES, WHICH
ARE INCLUDED IN CORPORATE'S ASSETS. HVDM IS ALLOCATED ITS PROPORTIONATE
SHARE OF DEPRECIATION. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH,
MARKETABLE SECURITIES, PROPERTY AND EQUIPMENT AND DEFERRED INCOME TAXES.
(4) INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND
INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITIONS OF
ANGIO-SEAL(TM) AND VARIOUS DISTRIBUTION BUSINESSES, AND THE HVDM SEGMENT
ACQUISITION OF VSI IN 1999.
GEOGRAPHIC INFORMATION: The following tables present certain geographical
financial information:
NET SALES 1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 689,051 $ 604,524 $581,514
Western Europe 259,300 248,070 227,871
Other foreign countries 166,198 163,400 185,011
- --------------------------------------------------------------------------------
$1,114,549 $1,015,994 $994,396
================================================================================
LONG-LIVED ASSETS* 1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 607,851 $ 538,403 $532,381
Western Europe 57,082 44,860 40,697
Other foreign countries 130,366 67,430 74,370
- --------------------------------------------------------------------------------
$ 795,299 $ 650,693 $647,448
================================================================================
* LONG-LIVED ASSETS INCLUDE PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND
OTHER INTANGIBLE ASSETS.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 13 - SUBSEQUENT EVENT
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
proprietary Silzone(R) coating on the sewing cuff fabric. The Company concluded
that it will no longer utilize the Silzone(R) coating. The Company expects to
record a non-recurring charge against first quarter 2000 earnings, which is
currently estimated at $16,000 to $20,000, for the write-off of inventory and
other costs related to this recall and product discontinuation. However, there
can be no assurance that the final costs associated with this recall will not
exceed management's current estimates.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
QUARTER
FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1999
Net sales $266,734 $290,659 $275,814 $281,342
Gross profit 173,273 190,910 181,529 187,935
Net earnings (loss) (12,057)* 37,205 (36,994)** 36,073
Diluted net earnings
(loss) per share $ (0.14) $ 0.44 $ (0.44) $ 0.43
Fiscal 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 earnings 29,175 40,034 29,450 30,423
Diluted net earnings
per share $ 0.32 $ 0.47 $ 0.35 $ 0.36
======================================================================================
</TABLE>
* INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF
$47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION.
** INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF
$67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL
CHARGE OF $9,754.
42
<PAGE>
FIVE-YEAR SUMMARY FINANCIAL DATA
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999* 1998 1997** 1996*** 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:
Net sales $1,114,549 $1,015,994 $ 994,396 $ 876,747 $ 848,078
- --------------------------------------------------------------------------------------------------------------
Gross profit $ 733,647 $ 643,054 $ 628,679 $ 581,859 $ 555,290
- --------------------------------------------------------------------------------------------------------------
Percent of sales 65.8% 63.3% 63.2% 66.4% 65.5%
- --------------------------------------------------------------------------------------------------------------
Operating profit $ 89,188 $ 193,952 $ 86,817 $ 69,469 $ 169,086
- --------------------------------------------------------------------------------------------------------------
Percent of sales 8.0% 19.1% 8.7% 8.0% 19.9%
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 24,227 $ 129,082 $ 53,140 $ 60,637 $ 117,116
- --------------------------------------------------------------------------------------------------------------
Percent of sales 2.2% 12.7% 5.3% 6.9% 13.8%
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.29 $ 1.50 $ 0.58 $ 0.66 $ 1.28
- --------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END:
Cash and marketable securities $ 88,893 $ 87,990 $ 184,536 $ 235,395 $ 239,621
- --------------------------------------------------------------------------------------------------------------
Working capital 407,777 479,067 497,188 429,451 405,060
- --------------------------------------------------------------------------------------------------------------
Total assets 1,554,038 1,384,612 1,453,116 1,469,994 1,192,235
- --------------------------------------------------------------------------------------------------------------
Long-term debt 477,495 374,995 220,000 229,500 120,000
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity 794,021 806,220 987,022 922,061 855,388
- --------------------------------------------------------------------------------------------------------------
OTHER DATA:
Diluted weighted average
shares outstanding 84,735 86,145 92,052 92,372 91,335
- --------------------------------------------------------------------------------------------------------------
</TABLE>
THE FIVE-YEAR SUMMARY FINANCIAL DATA INCLUDES THE RESULTS OF VENTRITEX, INC. FOR
ALL PERIODS PRESENTED. ALSO, THE COMPANY HAS NOT DECLARED OR PAID ANY DIVIDENDS
DURING 1995 THROUGH 1999.
*RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228 RELATED TO THE
ANGIO-SEAL(TM) AND VASCULAR SCIENCE, INC. ACQUISITIONS.
**RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES.
***RESULTS FOR 1996 INCLUDE A $52,926 SPECIAL CHARGE AND PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT CHARGES TOTALING $40,350 RELATED TO VARIOUS
ACQUISITIONS.
43
<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
a division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
1-800-317-4445
www.equiserve.com (Account Access Availability)
Hearing impaired # TDD: 201-222-4955
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May
10, 2000, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,
Minneapolis, MN.
INVESTOR CONTACTS
Laura C. Merriam, Director of Investor Relations
John M. Buske, Corporate Controller
Dennis J. McFadden, Treasurer
To obtain information about the Company call 1-800-552-7664, visit our Web site
www.sjm.com, or write to:
Investor Relations
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, MN 55117-9983.
Latest Company news releases, including quarterly results, and other information
can be received by calling Investor Relations at a toll-free number
(1-800-552-7664) or on the St. Jude Medical home page. Company news releases are
also available through "Company News On-Call" by fax (1-800-758-5804, ext.
816662) or at http://www.prnewswire.com on the Internet.
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 quarterly range of high and low prices per share for the Company's common
stock for fiscal years 1999 and 1998 are set forth below. As of February 10,
2000, the Company had 4,443 shareholders of record.
YEAR ENDED DECEMBER 31 1999 1998
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First $29.38 $22.94 $38.00 $29.06
Second $38.31 $23.88 $39.69 $33.06
Third $40.75 $29.75 $36.63 $19.19
Fourth $30.69 $25.13 $31.88 $19.19
TRADEMARKS
Aescula(TM), Affinity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R), Aortic
Connector(TM), AutoCapture(TM), Contour(R), Daig Cardiac Ablation System(TM),
Dynamic Atrial Overdrive(TM), EnCap(TM), Entity(TM), Fast-Cath(TM),
Frontier(TM), Genesis(TM), GuideRight(TM), Integrity(TM), Linx(TM), Livewire
TC(TM), Livewire(TM), Maximum Xtra(TM), Microny(R), Photon(TM), Profile(TM),
RAMP(TM), Regency(R), Seal-Away(TM), Silzone(R), SJM Biocor(TM), SJM Epic(TM),
SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), SJM(R), Spyglass(TM),
Supreme(TM), Tendril(R), Toronto Duo(TM), Toronto SPV(R), Trilogy(R), TVL(R)
Cardima(R) is a trademark of Cardima, Inc.
Housecall(TM) is a trademark of Raytel Cardiac Services.
44
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) (doing business as St. Jude Medical
Cardiac Rhythm Management Division)
* St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation)
* St. Jude Medical Sales Corporation - 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)
* 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 representative offices
- Korean and Taiwan branch offices
- India liaison office (in Mumbai and New Delhi)
* St. Jude Medical Cardiac Assist Division - St. Paul, Minnesota (Delaware
corporation), (Assets of St. Jude Medical, Inc., Cardiac Assist Division
sold to Bard 1/19/96)
* 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)
* St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian
corporation)
* St. Jude Medical Cardiovascular Group, Plymouth, Minnesota (Minnesota
corporation) formerly known as Vascular Science, Inc.
* SJM Europe, Inc. - St. Paul, Minnesota (Delaware corporation) (formerly
known as St. Jude Medical, International)
- Tokyo, Japan branch
<PAGE>
SJM Europe Inc. 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-owed 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.)
- 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 (Veddesta, Sweden) (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.
(Portuguese corporation)
* 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 Espana, S.A. (Spanish corporation)
* St. Jude Medical France S.A. (French corporation)
* 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 9, 2000, included in the
1999 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 Registration Statement No.
33-9262, Registration Statement No. 33-41459, Registration Statement No.
33-48502, Registration Statement No. 33-54435, and Registration Statement No.
333-42945 on Form S-8 of our report dated February 9, 2000, with respect to the
consolidated financial statements and schedule of St. Jude Medical, Inc.
incorporated by reference in the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 23, 2000
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