UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number 0-8672
------------------ ------
ST. JUDE MEDICAL, INC.
----------------------
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
--------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
---------------------------------------------
(Address of principal executive offices)
(651) 483-2000
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
The number of shares of common stock, par value $.10 per share, outstanding on
November 3, 2000 was 85,001,843.
Page 1 of 22
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 286,969 $ 275,814 $ 883,407 $ 833,207
Cost of sales 93,008 94,285 293,562 287,495
-------------------------------------------------------------------------------------------------------
Gross profit 193,961 181,529 589,845 545,712
Selling, general and administrative expense 102,688 94,586 313,753 295,391
Research and development expense 34,657 31,378 101,947 91,608
Purchased in-process research and
development expense -- 67,453 5,000 115,228
Special charge -- 9,754 26,101 9,754
-------------------------------------------------------------------------------------------------------
Operating profit (loss) 56,616 (21,642) 143,044 33,731
Other income (expense) (5,950) (6,360) (20,599) (14,825)
-------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 50,666 (28,002) 122,445 18,906
Income tax expense 12,667 8,992 34,499 30,752
-------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 37,999 $ (36,994) $ 87,946 $ (11,846)
=======================================================================================================
=======================================================================================================
Net earnings (loss) per share:
Basic $ 0.45 $ (0.44) $ 1.05 $ (0.14)
Diluted $ 0.44 $ (0.44) $ 1.03 $ (0.14)
Weighted average shares outstanding:
Basic 84,269 84,586 83,970 84,397
Diluted 86,494 84,586 85,136 84,397
=======================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
Page 2 of 22
<PAGE>
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,
(UNAUDITED) 1999 (SEE NOTE)
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 17,098 $ 9,655
Marketable securities 79,119 79,238
Accounts receivable, less allowances of $19,407
in 2000 and $13,529 in 1999 305,869 293,815
Inventories 230,258 235,407
Other 80,756 72,184
------------------------------------------------------------------------------------------
Total current assets 713,100 690,299
Property, plant and equipment - at cost 586,823 574,531
Less accumulated depreciation (271,317) (231,751)
------------------------------------------------------------------------------------------
Net property, plant and equipment 315,506 342,780
Other assets, net 501,672 520,959
------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,530,278 $ 1,554,038
==========================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,100 $ --
Accounts payable and accrued expenses 223,880 238,822
Income taxes payable 51,721 43,700
------------------------------------------------------------------------------------------
Total current liabilities 278,701 282,522
Long-term debt, less current maturities 350,000 477,495
Commitments and contingencies -- --
Shareholders' equity
Preferred stock -- --
Common stock 8,477 8,378
Additional paid-in capital 33,507 109
Retained earnings 921,169 833,223
Accumulated other comprehensive income:
Cumulative translation adjustment (69,715) (53,977)
Unrealized gain on available-for-sale securities 8,139 6,288
------------------------------------------------------------------------------------------
Total shareholders' equity 901,577 794,021
------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,530,278 $ 1,554,038
==========================================================================================
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1999 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
Page 3 of 22
<PAGE>
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 87,946 $ (11,846)
Depreciation and amortization 69,919 59,985
Purchased in-process research and development expense 5,000 115,228
Special charge 26,101 9,754
Net investment gain (2,056) (829)
Working capital change, net of business acquisition (61,300) (3,253)
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 125,610 169,039
Investing Activities
Purchase of property, plant and equipment (23,042) (58,659)
Proceeds from sale or maturity of marketable securities 7,871 11,210
Business acquisition -- (242,071)
Other (8,912) (20,605)
---------------------------------------------------------------------------------------------
Net cash used in investing activities (24,083) (310,125)
Financing Activities
Proceeds from exercise of stock options 20,662 8,882
Repurchase of common stock -- (16,625)
Borrowings under debt facilities 3,478,537 432,800
Payments under debt facilities (3,572,937) (277,900)
Repurchase of convertible subordinated debentures (19,320) --
---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (93,058) 147,157
Effect of currency exchange rate changes on cash (1,026) (1,139)
---------------------------------------------------------------------------------------------
Net increase in cash and equivalents 7,443 4,932
Cash and equivalents at beginning of year 9,655 3,775
---------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 17,098 $ 8,707
=============================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 22
<PAGE>
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------------------------------------------------------------------
Finished goods $122,944 $ 108,449
Work in progress 37,214 41,466
Raw materials 70,100 85,492
------------------------------------------------------------------------------
Total inventory $230,258 $ 235,407
==============================================================================
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------------------------------------------------------------------
Committed credit facility borrowings $ -- $ 299,000
Commercial paper borrowings 236,800 --
Uncommitted credit facility borrowings 116,300 148,500
Convertible subordinated debentures -- 29,995
------------------------------------------------------------------------------
Total debt 353,100 477,495
Less current portion 3,100 --
------------------------------------------------------------------------------
Total long-term debt $350,000 $ 477,495
==============================================================================
Page 5 of 22
<PAGE>
At September 30, 2000, the Company had a $350,000 committed revolving credit
facility that expires in March 2003 and a $150,000 committed revolving credit
facility that expires in March 2001. The Company also borrows from time to time
under uncommitted, due-on-demand credit facilities with various banks.
During the first quarter of 2000, the Company repurchased $19,320 of its
convertible subordinated debentures in open market transactions, recognizing an
immaterial gain. During the third quarter of 2000, all of the remaining
convertible subordinated debenture holders converted their debentures, plus
accrued interest, into 311 shares of the Company's common stock.
During 2000, the Company began issuing commercial paper with maturities up to
270 days. These commercial paper borrowings are fully backed by the above
committed credit facilities and bear interest at varying market rates.
The Company classifies the above debt obligations as long-term on its balance
sheet to the extent it has the ability to repay all or a portion of the
short-term obligations with available cash under its 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.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
IRS MATTERS: The Company and the Internal Revenue Service ("IRS") have agreed to
settle the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year
disputes for the tax periods 1992-1997. The issues raised by the IRS related
primarily to the Company's Puerto Rican operations. The settlement did not have
an impact on the Company's statement of earnings.
SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in
the Company's mechanical heart valves with a Silzone(R) coating. The Company
recalled products with the Silzone(R) coating on January 21, 2000 (see Note 6
below) and sent a Recall Notice and Advisory concerning the recall to physicians
and others. Some of these cases are seeking monitoring of patients implanted
with Silzone(R)-coated valves who have had no injury to date. Some of these
cases are seeking class action status. The Company intends to vigorously defend
these cases.
GUIDANT LITIGATION: Guidant's Claims Against SJM 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
Page 6 of 22
<PAGE>
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, as discussed below.
St. Jude Medical believes 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 believes that the allegations set forth in the
complaints are without merit. St. Jude Medical has vigorously defended its
interests in these cases, and will continue to do so.
Order to Arbitrate 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.
Status of Arbitration The arbitrator selected for the arbitration
initially ruled that Pacesetter and St. Jude Medical should not participate in
the arbitration proceeding which would determine whether the Telectronics
Agreement transferred to Pacesetter. Based on this ruling, the Telectronics
Group and the Guidant parties were the ones participating in the arbitration
proceeding. This proceeding occurred in late April 2000, and, on July 10, 2000,
the arbitrator
Page 7 of 22
<PAGE>
issued a ruling that the attempted assignment and transfer of patent licenses in
the Telectronics Agreement by the Telectronics Group to Pacesetter was
ineffective. As a result of this decision, the Guidant parties filed papers with
the U.S. District Court for the Southern District of Indiana seeking to lift the
stay of the patent infringement court proceedings in that court which had been
entered in June 1998. The court granted Guidant's request to lift the stay and
this matter is scheduled for trial in June 2001.
Background Concerning Patents Involved In Guidant's Claims In the
patent infringement case in federal court in Indiana, the Guidant parties
asserted claims against St. Jude Medical and its Pacesetter 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
respectively, although St. Jude Medical has claims in the court action which, if
upheld, would cause the patents to expire earlier, if they apply at all.
Although Guidant has requested injunctive relief and damages as part of the
federal court lawsuit in Indiana, the request for an injunction would be barred
for any expired patent. Guidant is seeking damages for the time period prior to
expiration of the patents.
St. Jude Medical continues to believe that the patent infringement
claims raised by the Guidant parties in the patent infringement case are without
merit, and will continue to vigorously defend its interests in these cases.
OTHER LITIGATION MATTERS: 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.
The Company is involved in various other product liability lawsuits,
claims and proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has product liability insurance sufficient
to cover such claims and suits.
NOTE 5 - SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company's authorized capital consists of 25,000 shares of
$1.00 per share par value preferred stock and 250,000 shares of $0.10 per share
par value common stock. There were no shares of preferred stock issued or
outstanding during 1999 or 2000. There were 84,767 and 83,781 shares of common
stock outstanding at September 30, 2000 and December 31, 1999.
SHARE REPURCHASES: During the third quarter of 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 has repurchased
978 shares for $29,826 through September 30, 2000.
Page 8 of 22
<PAGE>
NOTE 6 - SPECIAL CHARGES AND OTHER
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will
no longer utilize the Silzone(R) coating. The Company recorded a special charge
accrual totaling $26,101 during the first quarter of 2000 relating to asset
write-downs ($9,465) and other costs ($16,636), including monitoring expenses,
associated with this recall and product discontinuance. The Company has utilized
$15,436 of this special charge accrual through September 30, 2000. There can be
no assurance that the final costs associated with this recall, including
litigation-related costs, will not exceed management's estimates.
During the quarter ending September 30, 2000, the Company received a cash
payment related to a non-product arbitration judgement pertaining to business
matters occurring in 1997 and 1998. This cash receipt, net of other provisions
for legal matters and fees, was $15,158 and has been credited to selling,
general and administrative expenses. In addition, during the quarter ending
September 30, 2000, the Company recorded additional expenses related to a $3,500
discretionary contribution to its charitable foundation, $6,672 primarily for
non-recurring write-offs of certain assets and related costs, and $4,900 for an
increase to its allowance for doubtful accounts. These additional costs and
expenses are also recorded in selling, general and administrative expenses.
The Company recorded a $9,754 special charge accrual in 1999 relating to the
restructuring of its international operations, of which $8,292 has been utilized
through September 30, 2000. The Company also recorded special charge accruals in
1997 totaling $58,669 relating to various activities, of which $56,424 has been
utilized through September 30, 2000.
Page 9 of 22
<PAGE>
NOTE 7 - NET EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted net earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 37,999 $ (36,994) $ 87,946 $ (11,846)
Convertible debenture interest, net of taxes 95 -- 95 --
----------------------------------------------------------------------------------------------------------
Adjusted net earnings $ 38,094 $ (36,994) $ 88,041 $ (11,846)
Denominator:
Basic-weighted average shares outstanding 84,269 84,586 83,970 84,397
Effect of dilutive securities:
Employee stock options 1,882 -- 1,023 --
Restricted shares 32 -- 40 --
Convertible debentures 311 -- 103 --
----------------------------------------------------------------------------------------------------------
Diluted-weighted average shares outstanding 86,494 84,586 85,136 84,397
===========================================================================================================
Basic net earnings per share $ .45 $ (.44) $ 1.05 $ (.14)
===========================================================================================================
Diluted net earnings per share $ .44 $ (.44) $ 1.03 $ (.14)
===========================================================================================================
</TABLE>
Net earnings and diluted-weighted average shares outstanding for certain periods
have not been adjusted for the Company's convertible debentures or for certain
employee stock options and other awards where the effect of those securities
would have been anti-dilutive.
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of unrealized gains or losses on
available-for-sale marketable securities, net of taxes, and foreign currency
translation adjustments. Other comprehensive income (loss) was ($1,743) and
$6,714 for the three months ended September 30, 2000 and 1999, and $(13,887) and
$(14,689) for the first nine months of 2000 and 1999. Total comprehensive income
(loss) combines reported net earnings (loss) and other comprehensive income
(loss). Total comprehensive income was $36,256 and $(30,280) for the three
months ended September 30, 2000 and 1999, and $74,059 and $(26,535) for the
first nine months of 2000 and 1999.
Page 10 of 22
<PAGE>
NOTE 9 - ACQUISITIONS
On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco
International Ltd. for $167,000 in cash. On September 27, 1999, the Company
purchased the outstanding common stock of Vascular Science, Inc. (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. During the second quarter of 2000, the Company paid $5,000 of contingent
consideration for a VSI milestone that was achieved. The Angio-Seal(TM) and VSI
acquisitions were recorded using the purchase method of accounting and the
operating results of Angio-Seal(TM) and VSI were included in the Company's
consolidated statement of earnings from the date of acquisition. Pro forma
results of operations have not been presented for these acquisitions since the
effect of these acquisitions was not material to the Company's consolidated
results of operations for the periods presented. See the Company's 1999 Annual
Report to Shareholders on Form 10-K for further information on the Company's
Angio-Seal(TM) and VSI acquisitions.
NOTE 10 - OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ (7,272) $ (6,937) $ (22,979) $ (19,482)
Other 1,322 577 2,380 4,657
--------------------------------------------------------------------------------
Other income (expense) $ (5,950) $ (6,360) $ (20,599) $ (14,825)
================================================================================
</TABLE>
NOTE 11 - SEGMENT INFORMATION
The Company has two reportable segments: Cardiac Rhythm Management (CRM) and
Cardiac Surgery (CS - formerly known as Heart Value Disease Management). 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 CS segment develops, manufactures and distributes mechanical and
tissue heart valves and valve repair products, and suture-free devices to
facilitate coronary artery bypass graft anastomoses.
Page 11 of 22
<PAGE>
The following table presents certain financial information about the Company's
reportable segments:
<TABLE>
<CAPTION>
CRM CS ALL OTHER(a) TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 2000
External net sales $ 226,016 $ 60,953 -- $ 286,969
Operating profit (loss) 32,430 32,039 (7,853) 56,616
QUARTER ENDED SEPTEMBER 30, 1999
External net sales 211,578 64,236 -- 275,814
Operating profit (loss) (b) 26,779 35,129 (83,550) (21,642)
NINE MONTHS ENDED SEPTEMBER 30, 2000
External net sales 685,562 197,845 883,407
Operating profit (loss) (b) 97,512 100,838 (55,306) 143,044
NINE MONTHS ENDED SEPTEMBER 30, 1999
External net sales 622,112 211,095 -- 833,207
Operating profit (loss) (b) 68,259 113,764 (148,292) 33,731
==============================================================================================
</TABLE>
(a) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.
(b) ALL OTHER OPERATING PROFIT (LOSS) AMOUNTS INCLUDE SPECIAL CHARGES TOTALING
$26,101 IN THE FIRST QUARTER OF 2000 AND $9,754 IN THE THIRD QUARTER OF
1999, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $5,000
IN THE SECOND QUARTER OF 2000, $67,453 IN THE THIRD QUARTER OF 1999 AND
$47,775 IN THE FIRST QUARTER OF 1999.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
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 but
currently believes such impact of adoption on January 1, 2001 will not be
material to the Company's operations.
Page 12 of 22
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance clarifies certain conditions to be met in order to
recognize revenue. The Company will recognize any impact of adopting SAB 101 in
the fourth quarter of 2000.
Page 13 of 22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
ACQUISITIONS: The Company acquired the Angio-Seal(TM) business of Tyco
International Ltd. on March 16, 1999 and the outstanding common stock of
Vascular Science, Inc. (VSI) on September 27, 1999. These 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.
NET SALES: Net sales for the third quarter of 2000 totaled $286,969, a 4.0%
increase over the $275,814 reported in the third quarter of 1999. For the first
nine months of 2000, net sales totaled $883,407, a 6.0% increase over the
$833,207 reported in 1999. Unfavorable foreign currency effects due to a
stronger U.S. dollar primarily against the major Western European currencies
reduced 2000 net sales as compared with 1999 by approximately $6,900 for the
third quarter and $22,000 for the first nine months.
Cardiac rhythm management (CRM) net sales for the third quarter of 2000 were
$226,016, a 6.8% increase over the $211,578 recorded in the third quarter of
1999. CRM net sales for the first nine months of 2000 were $685,562, a 10.2%
increase over the $622,112 recorded in 1999. The increase in CRM net sales for
the third quarter and first nine months of 2000 was primarily attributable to
increased bradycardia net sales and increased electrophysiology (EP) catheter
unit sales, offset partially by a decline in tachycardia net sales resulting
from fewer single chamber procedures. The increase in bradycardia net sales is
mainly due to the Company's on-going rollout of the Affinity(R) pacemaker family
and to an expanded U.S. sales organization.
Cardiac Surgery (CS - formerly known as Heart Valve Disease Management) net
sales for the third quarter of 2000 were $60,953, a 5.1% decrease from the
$64,236 recorded in 1999. CS net sales for the first nine months of 2000 were
$197,845 compared with $211,095 recorded in 1999. The decrease in CS net sales
for the third quarter and the first nine months was attributable to the effects
of the stronger U.S. dollar and a slight clinical preference shift from
mechanical valves to tissue valves in the U.S. market, where CS holds
significant mechanical valve market share and a smaller share of the tissue
valve market.
GROSS PROFIT: Gross profit for the third quarter of 2000 totaled $193,961 or
67.6% of net sales, as compared with $181,529, or 65.8% of net sales, during the
third quarter of 1999. For the first nine months of 2000 and 1999, gross profit
was $589,845 or 66.8% of net sales and $545,712, or 65.5% of net sales. The
improvement in the gross profit percentage for the third quarter and the first
nine months of 2000 is due primarily to improved CRM manufacturing efficiencies
and product and geographical sales mix.
Page 14 of 22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the third
quarter of 2000 totaled $102,688, an 8.6% increase over the $94,586 reported in
the third quarter of 1999. For the first nine months of 2000, SG&A expense
totaled $313,753, a 6.2% increase over the $295,391 recorded in 1999. The
increase in SG&A expense in the third quarter and first nine months of 2000 was
primarily attributable to increased sales activities and acquisitions.
During the quarter ending September 30, 2000, the Company received a cash
payment related to a non-product arbitration judgement pertaining to business
matters occurring in 1997 and 1998. This cash receipt, net of other provisions
for legal matters and fees, was $15,158 and has been credited to selling,
general and administrative expenses. In addition, during the quarter ending
September 30, 2000, the Company recorded additional expenses related to a $3,500
discretionary contribution to its charitable foundation, $6,672 primarily for
non-recurring write-offs of certain assets and related costs, and $4,900 of an
increase to its allowance for doubtful accounts. These additional costs and
expenses are also recorded in selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense in the third quarter of 2000
totaled $34,657, or 12.1% of net sales, compared with $31,378, or 11.4% of net
sales, for the third quarter of 1999. For the first nine months of 2000, R&D
expense totaled $101,947 or 11.5% of net sales, compared with $91,608, or 11.0%
of net sales, for the first nine months of 1999. The increase in R&D expense and
as a percentage of net sales was primarily attributable to increased CRM
activities relating mainly to ICDs, products treating emerging indications in
atrial fibrillation and congestive heart failure, and specialty catheter
development and CS vascular closure devices.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: The Company acquired
certain in-process technologies in connection with its acquisitions of
Angio-Seal and VSI. The Company recorded a $47,775 purchased in-process research
and development charge in the first quarter of 1999 related to the Angio-Seal
acquisition. The appraised value of the VSI in-process technologies was
determined to be $95,500, of which $67,453 was recorded at close in September
1999 and $5,000 was recorded in the second quarter of 2000. The remaining
balance of the in-process research and development valuation ($23,047) is
expected to be recorded in the Company's financial statements as purchased
in-process research and development when payment of future contingent
consideration is assured beyond a reasonable doubt. The Company expects to
capitalize as goodwill all other contingent consideration payments in excess of
the $23,047. Management currently anticipates that additional milestone payments
will be made in the next twelve months.
Management believes that the financial statement projections used in the
Angio-Seal and VSI acquisitions are still materially valid; however, there can
be no assurance that the projected results will be achieved. Certain in-process
technologies acquired in the Angio-Seal and VSI acquisitions have been developed
to the point of commercial production and sale to customers. Management expects
to continue the development of the other in-process technologies acquired in the
Angio-Seal and VSI acquisitions and continues to believe that there is a
reasonable chance of successfully completing such development efforts. However,
there is risk associated with the completion of the in-process technologies and
there can be no assurance that any technologies
Page 15 of 22
<PAGE>
will meet with either technological or commercial success. Failure to
successfully develop and commercialize these in-process technologies would
result in the loss of the expected economic return inherent in the original fair
value allocation. Additionally, the value of other intangible assets acquired
may become impaired.
SPECIAL CHARGES: On January 21, 2000, the Company initiated a worldwide
voluntary recall of all field inventory of heart valve replacement and repair
products incorporating a Silzone(R) coating on the sewing cuff fabric. The
Company concluded that it will no longer utilize the Silzone(R) coating. The
Company recorded a special charge accrual totaling $26,101 during the first
quarter of 2000 relating to asset write-downs ($9,465) and other costs,
including monitoring expenses, ($16,636) associated with this recall and product
discontinuance. The Company has utilized $15,436 of this special charge accrual
through September 30, 2000. Other than the effect of this special charge,
management believes that this recall will not materially impact the Company's
future earnings or cash flows based primarily on the fact that the Company's
non-Silzone(R) coated products, which represented 75% of the Company's CS
shipments at the time of the recall, are not affected by this recall. However,
there can be no assurance that the final costs associated with this recall,
including litigation-related costs, will not exceed management's estimates.
During the third quarter of 1999, the Company restructured its international
operations to improve both 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 removing administrative
redundancies in the Company'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 $8,292 has been utilized through September 30, 2000.
OTHER INCOME (EXPENSE): Other expense was $20,599 during 2000 as compared with
$14,825 in 1999. This increase in other expense was due primarily to higher
interest costs on the Company's debt and to foreign exchange losses in 2000
versus gains in 1999.
INCOME TAXES: The Company's effective income tax rate was 25% during 2000 and
1999, exclusive of the special charges and purchased in-process research and
development expense. The special charges and purchased in-process research and
development expense were recorded primarily in taxing jurisdictions with low
income tax rates or were not deductible for tax purposes.
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 CS business is in a highly competitive market. The market is
segmented between mechanical heart valves, tissue heart valves, and repair
products. During 1999 and 2000, the U.S. market continued its slight shift to
tissue valve and repair products from mechanical heart valves
Page 16 of 22
<PAGE>
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 has
undergone consolidation. There are currently three principal suppliers,
including the Company, and the Company's two principal competitors each have
substantially more assets, sales and sales personnel than 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.
The Company and the Internal Revenue Service ("IRS") have agreed to settle
litigation over a tax issue. See Part II, Item 1, Legal Proceedings for further
discussion.
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.
Page 17 of 22
<PAGE>
FINANCIAL CONDITION
The Company's liquidity and cash flows remained strong through September 30,
2000. The Company's current assets to current liabilities ratio was 2.6 to 1 at
September 30, 2000 as compared with 2.4 to 1 at December 31, 1999. The increase
in the current ratio was due primarily to cash generated from operations.
Accounts receivable increased $12,054 from December 31, 1999 to September 30,
2000 primarily due to higher sales in 2000 as compared with 1999. Total interest
bearing debt decreased $124,395 from December 31, 1999 through September 30,
2000 primarily to debt repayments as a result of cash generated from operations,
the conversion of $10,675 of convertible debentures into the Company's common
stock, and the proceeds from the exercise of stock options.
The Company classifies its interest-bearing debt obligations as long-term on its
balance sheet to the extent it has the ability to repay all or a portion of its
short-term, interest-bearing debt obligations with available cash under a
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.
During the third quarter of 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 has repurchased 978 shares for $29,826 through
September 30, 2000.
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 position will permit the Company to obtain additional debt
financing or equity capital, if necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from December 31, 1999 through
September 30, 2000 in the Company's market risk, other than the maturity in
January 2000 of its interest rate swap contract that hedged a substantial
portion of the Company's variable interest rate risk on $138,000 of the
Company's revolving credit facility borrowings.
For further information on market risk, refer to Item 7A in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
Page 18 of 22
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
Guidant's Claims Against SJM 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 as discussed below.
St. Jude Medical believes 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 believes that the allegations set forth in the
complaints are without merit. St. Jude Medical has vigorously defended its
interests in these cases, and will continue to do so.
Page 19 of 22
<PAGE>
Order to Arbitrate 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.
Status of Arbitration The arbitrator selected for the arbitration
initially ruled that Pacesetter and St. Jude Medical should not participate in
the arbitration proceeding which would determine whether the Telectronics
Agreement transferred to Pacesetter. Based on this ruling, the Telectronics
Group and the Guidant parties were the ones participating in the arbitration
proceeding. This proceeding occurred in late April 2000, and, on July 10, 2000,
the arbitrator issued a ruling that the attempted assignment and transfer of
patent licenses in the Telectronics Agreement by the Telectronics Group to
Pacesetter was ineffective. As a result of this decision, the Guidant parties
filed papers with the U.S. District Court for the Southern District of Indiana
seeking to lift the stay of the patent infringement court proceedings in that
court which had been entered in June 1998. The court granted Guidant's request
to lift the stay and this matter is scheduled for trial in June 2001.
Background Concerning Patents Involved In Guidant's Claims In the
patent infringement case in federal court in Indiana, the Guidant parties
asserted claims against St. Jude Medical and its Pacesetter 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
respectively, although St. Jude Medical has claims in the court action which, if
upheld, would cause the patents to expire earlier, if they apply at all.
Although Guidant has requested injunctive relief and damages as part of the
federal court lawsuit in Indiana, the request for an injunction would be barred
for any expired patent. Guidant is seeking damages for the time period prior to
expiration of the patents.
St. Jude Medical continues to believe that the patent infringement claims
raised by the Guidant parties in the patent infringement case are without merit,
and will continue to vigorously defend its interests in these cases.
IRS LITIGATION
The Company and the Internal Revenue Service ("IRS") have agreed to
settle the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year
disputes for the tax periods 1992-1997. The issues raised by the IRS related
primarily to the Company's Puerto Rican operations. The settlement did not have
an impact on the Company's statement of earnings.
Page 20 of 22
<PAGE>
SILZONE(R) MATTERS
The Company has been sued by patients alleging defects in the Company's
mechanical heart valves with a Silzone(R) coating. The Company recalled products
with the Silzone(R) coating on January 21, 2000 (see Note 6 below) and sent a
Recall Notice and Advisory concerning the recall to physicians and others. Some
of these cases are seeking monitoring of patients implanted with
Silzone(R)-coated valves who have had no injury to date. Some of these cases are
seeking class action status. The Company intends to vigorously defend these
cases.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial data schedule
(b) Reports on Form 8-K
None
Page 21 of 22
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
November 13, 2000 /s/ John C. Heinmiller
----------------- ----------------------
DATE JOHN C. HEINMILLER
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 22 of 22
