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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K ANNUAL REPORT
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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)
(612) 483-2000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS
(Title of class) (Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, or will not be contained, to
the best of the Registrant's knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $2.9 billion at March 20, 1998, when the
closing sale price of such stock, as reported on the New York Stock Exchange,
was $35.50.
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of March 20, 1998, was 83,962,846 shares.
Portions of the Annual Report to Shareholders for the year ended December
31, 1997, are incorporated by reference in Parts I, II and IV. Portions of the
Proxy Statement dated March 27, 1998, are incorporated by reference in Part III.
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The exhibit index is set forth on pages 16, 17 and 18. This Form 10-K
consists of 69 pages, consecutively numbered 1 through 69.
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ST. JUDE MEDICAL, INC.
1997 10-K
PART I
ITEM 1. BUSINESS
GENERAL
St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures
and markets medical devices and provides services for the cardiovascular segment
of the medical device industry. The Company's products are distributed in more
than 100 countries worldwide through a combination of direct sales personnel,
independent manufacturers' representatives and distribution organizations. The
main markets for the Company's products are the United States, Western Europe
and Japan.
Effective May 15, 1997, St. Jude acquired Ventritex, Inc., ("Ventritex") a
California-based manufacturer of implantable cardioverter defibrillators (ICDs)
and related products. ICDs are used to treat hearts that beat too fast.
Effective November 29, 1996, St. Jude Medical's Pacesetter subsidiary
acquired substantially all of the assets of Telectronics Pacing Systems, Inc.
("Telectronics"), a pacemaker company, and Medtel, a distribution company in the
Asia-Pacific region. In addition to state-of-the-art pacing technologies,
Telectronics enhances the Company's cardiac rhythm management division
operations by adding important intellectual property assets.
Effective September 23, 1996, the Company acquired Biocor(R) Industria E
Pesquisas Ltd., a Brazilian manufacturer of tissue heart valves.
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a
Minnesota based manufacturer of specialized cardiovascular catheters and related
products for the electrophysiology and interventional cardiology markets.
St. Jude provides products and services for a single industry segment, that
of cardiovascular medical devices. Substantially all of its operations and
assets are attributable to cardiovascular medical devices. The Company currently
operates through two global business units. The Heart Valve Division is
responsible for the Company's heart valve disease management products including
mechanical and tissue heart valves and annuloplasty rings. The Cardiac Rhythm
Management Division (CRMD) is responsible for the Company's cardiac rhythm
management products including bradycardia pulse generators, leads and
programmers and tachycardia implantable cardioverter defibrillators and leads.
CRMD also provides a broad array of catheter product offerings for
interventional cardiology, and electrophysiology catheters for diagnostic
mapping of the heart, ablation of malfunctioning heart tissue and temporary
cardiac pacing catheters. In addition, the Company maintains geographically
based sales and marketing organizations which are responsible for marketing,
sales and distribution of the Company's and third party products in Europe,
Africa, the Middle East, Japan, Canada, Latin America and the Asia-Pacific
region.
Typically, the Company's net sales are somewhat stronger in the first and
second quarters and weaker in the third quarter. This results from patient
tendency to defer, if possible, cardiac procedures during the summer months and
from the seasonality of the domestic and Western European markets where summer
vacation schedules normally result in fewer surgical procedures. Manufacturers'
representatives randomly place large orders which can distort the net sales
pattern noted above. In addition, new product introductions, acquisitions, and
regulatory approvals can modify the expected net sales pattern.
In 1997, approximately 72% of net sales were derived from cardiac rhythm
management products, and approximately 28% from heart valve disease management
products. Approximately 59% of the Company's 1997 net sales were in the U.S.
market, which was consistent with 1996 results.
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CARDIAC RHYTHM MANAGEMENT
The Cardiac Rhythm Management Division ("CRMD") is headquartered in Sylmar,
California and has manufacturing facilities in Sylmar and Sunnyvale, California,
Arizona, Minnesota, South Carolina, Sweden and Scotland. Pacesetter(R)
pacemakers and pacing leads treat patients with hearts that beat too slow and
which are irregular, a condition known as bradycardia. Ventritex(R) implantable
cardioverter defibrillators (ICD) and related systems treat patients with hearts
that beat too fast and which are irregular, a condition known as tachycardia.
Daig(R) specialized disposable cardiovascular catheters and related devices are
used in the electrophysiology and interventional cardiology markets.
Typically implanted just below the collarbone, pacemakers, or pulse
generators, 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, insulated wires that carry the
electrical impulses to the heart and information from the heart back to the
pacemaker. An external programmer enables the physician to retrieve diagnostic
information from the pacemaker and reprogram the device in accordance with the
patient's changing needs. Single-chamber pacemakers stimulate only one chamber
of the heart (atrium or ventricle), while dual-chamber devices can sense and
pace in both the upper and lower chambers.
CRMD's current Pacesetter(R) pacing products include the 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. Both pacemaker families are highly automatic and contain many
advanced features and diagnostic capabilities to optimize cardiac therapy. Both
are small and physiologic in shape to enhance patient comfort. The Tempo(TM) DR
device is the smallest dual-chamber rate-responsive pacemaker in the world.
Outside the United States, CRMD also offers the world's smallest
single-chamber pacemaker, the Microny(TM) SR+, and the Regency(TM) pacemaker
family, which are in clinical trials in the United States. These pacemakers
include the proprietary AutoCapture(TM) pacing system, a 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. For patients and
physicians, this technology means a new measure of automaticity, simplicity, and
safety in pacing--and a new level of efficiency in follow-up care.
CRMD's current pacing leads include the active-fixation Tendril(R) family
and the passive-fixation Passive Plus(R) family which are available worldwide,
and the passive-fixation Membrane(TM) EX family which is currently only
available outside the United States. All three lead families feature steroid
elution, which helps suppress the body's inflammatory response to a foreign
object, are designed to maximize energy efficiency and promote pacing system
longevity.
CRMD offers two pacemaker programmers, the APS(TM) III patient management
system, and the highly portable APS(TM)(mu) (micro), which allow the physician
to efficiently utilize the extensive diagnostic and therapeutic capabilities of
CRMD's pacemakers.
CRMD's Ventritex(R) ICDs monitor the heartbeat and deliver higher energy
electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and
ventricular fibrillation (VF). In ventricular tachycardia, the lower chambers of
the heart contract at an abnormally rapid rate and typically deliver less blood
to the body's tissues and organs. VT can progress to VF, in which the heart
beats so rapidly and erratically that it can no longer pump blood. Like
pacemakers, defibrillators are typically implanted pectorally, connected to the
heart by leads, and programmed non-invasively.
The current Ventritex offerings include the full-featured Angstrom(TM) II
and Contour(R) II ICDs, which are the thinnest defibrillators in the world. The
Angstrom(TM) II is also the world's smallest defibrillator, at 12 millimeters
thin and 44 cubic centimeters in volume. The Contour(R) II is the most powerful
ICD in the world, with maximum stored energy of 42 joules. Also available in
European markets are the Angstrom(TM) MD and Contour(R) MD ICDs, which feature a
unique Morphology Discrimination algorithm designed to differentiate between
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ventricular tachyarrhythmias and less serious atrial tachyarrhythmias in order
to protect against unnecessary shocking.
These ICDs are used with the dual electrode Ventritex(R) SPL(R) and single
electrode Ventritex(R) TVL(R) transvenous leads, which have superior handling
characteristics and performance. Ventritex ICDs are currently programmed with
the recently introduced PR-3500 programmer, which is both fast and
user-friendly.
Specialized disposable cardiovascular devices, sold under the Daig name,
include percutaneous (through the skin) catheter introducers, diagnostic
guidewires, electrophysiology catheters and bipolar temporary pacing catheters
(used with external pacemakers). Percutaneous catheter introducers are used to
create passageways for cardiovascular catheters from outside the human body
through the skin into a vein, artery or other location inside the body. Daig's
percutaneous catheter introducer products consist primarily of peel-away
sheaths, sheaths with and without hemostasis valves, dilators, guidewires,
repositioning sleeves, obturators and needles. All of these products are offered
in a variety of sizes and packaging configurations. Diagnostic guidewires are
used in conjunction with percutaneous catheter introducers to aid in the
introduction of intravascular catheters. Daig's diagnostic guidewires are
available in multiple lengths and incorporate a surface finish for lasting
lubricity.
Electrophysiology catheters are placed into the human body percutaneously
to aid in the diagnosis and treatment of cardiac arrhythmias (abnormal heart
rhythms). Between two and five electrophysiology catheters are generally used in
each electrophysiology procedure. Daig's electrophysiology catheters are
available in multiple configurations. Bipolar temporary pacing catheters are
inserted percutaneously for temporary use (less than one hour to a maximum of
one week) with external pacemakers to provide patient stabilization prior to
implantation of a permanent pacemaker, following a heart attack, or during
surgical procedures. Daig produces and markets several designs of bipolar
temporary pacing catheters.
HEART VALVE DISEASE MANAGEMENT
The Heart Valve Division (HVD) is headquartered in St. Paul, Minnesota and
has manufacturing facilities in St. Paul, Puerto Rico, Canada and Brazil. Heart
valve replacement or repair may be necessary because the natural heart valve has
deteriorated due to congenital defects or disease. Heart valves facilitate the
one-way flow of blood in the heart and prevent significant backflow of blood
into the heart and between the heart's chambers.
HVD offers both mechanical and tissue replacement heart valves and valve
repair products. The St. Jude Medical(R) mechanical heart valve is the most
widely implanted valve in the world with over 800,000 valves implanted to date.
The Company markets the Toronto SPV(R) stentless tissue valve, the world's
leading stentless tissue valve, and SJM(R) Biocor(TM) tissue valves. The Company
received FDA approval for the U.S. market release of the Toronto SPV(R) in
November 1997 at which time the product was launched and physician training
commenced.
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.
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HVD has also entered into several other relationships to provide additional
products and services for heart valve disease management, including:
1) An agreement with Heartport, Inc. to use the Company's heart valve
prosthesis in combination with Heartport's proprietary Port-Access(TM)
technology to perform less invasive heart surgery.
2) An agreement with LifeNet Transplant Services which enables HVD to
assist in the marketing of human donated allograft heart valves.
3) An alliance with DuPont Pharma to jointly develop educational programs
concerning the use of anticoagulant drugs with mechanical heart valves.
4) An alliance with Boehringer Mannheim Corporation which provides valve
patients the opportunity to use a home test kit for measuring
anticoagulation levels.
5) A worldwide license agreement with Spire Corporation to utilize their
proprietary anti-bacterial silver coating (SilzoneTM) on the sewing
cuffs of heart valves and related products.
SUPPLIERS
Under an agreement with CarboMedics, Inc. (CMI), which covers the supply of
pyrolytic carbon heart valve components for the mechanical heart valve, the
Company must purchase components that equal a minimum of 20% of its current year
unit sales through 1998 at negotiated prices. If CMI is unable or fails to
perform under the agreement, the license permits the Company to self-manufacture
its component requirements during the supply interruption. The agreement can be
extended for additional one year terms after 1998 at the Company's option and
prices the Company would pay in 1999 and beyond would be adjusted annually by a
producer price index based formula established in the agreement.
The Company purchases raw materials and other items from numerous suppliers
for use in its products. The Company maintains sizable inventories of up to
three years of its projected requirements for certain materials, some of which
are available only from a single vendor. The Company has been advised from time
to time that certain of these vendors may terminate sales of products to
customers that manufacture implantable medical devices in an effort to reduce
their potential products liability exposure. Some of these vendors have modified
their positions and have indicated a willingness to either temporarily continue
to provide product until such time as an alternative vendor or product can be
qualified or to reconsider the supply relationship. While the Company believes
that alternative sources of raw materials are available and that there is
sufficient lead time in which to qualify such other sources, any supply
interruption could have a material adverse effect on the Company's ability to
manufacture its products.
COMPETITION
Within the medical device industry, competitors range from small start-up
companies to companies with significant resources. The Company's customers
consider many factors when choosing supplier partners including product
reliability, clinical outcomes, product availability, inventory consignment,
price and product services provided by the manufacturer. Market share can shift
as a result of technological innovation, product recalls and product safety
alerts. This emphasizes the need to provide the highest quality products and
services. St. Jude expects the competition to continue to increase by using
tactics such as consigned inventory, bundled product sales and reduced pricing.
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.
CRMD has traditionally been a technological leader in the bradycardia
pacemaker market. Worldwide there are six primary manufacturers and suppliers of
bradycardia pacemakers, including the Company. One other company and CRMD
account for well over half of the worldwide bradycardia pacemaker net sales. The
Company has strong market share positions in all major developed markets.
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There are three principal manufacturers and suppliers of ICDs. This is a
rapidly growing and highly competitive market. Two of the competitors account
for more than 80% of the worldwide ICD sales. These two competitors are larger
than the Company and have invested substantial amounts in ICD research and
development.
The market areas Daig focuses on are the cardiac catherization laboratories
and the electrophysiology laboratories throughout the world. These are growing
markets with numerous competitors.
The cardiovascular segment of the medical device market is a dynamic market
currently undergoing significant change due to cost of care considerations,
regulatory reform, industry consolidation and customer consolidation. The
ability to provide cost effective clinical outcomes is becoming increasingly
more important for medical device manufacturers.
MARKETING
The Company's products are sold in over 100 countries throughout the world.
No distributor organization or single customer accounted for more than 10% of
1997 net sales.
In the United States, St. Jude sells directly to hospitals through an
employee based sales organization for its heart valve and catheter products and
a combination of independent manufacturers' representatives and an employee
based sales organization for its pacemaker products. In Western Europe, the
Company has an employee based sales organization selling in 14 countries.
Throughout the rest of the world the Company uses a combination of independent
distributor and direct sales organizations.
Payment terms worldwide are consistent with local practice. Orders are
shipped as they are received and, therefore, no material back orders exist.
RESEARCH AND DEVELOPMENT
The Company is focused on the development of new products and improvements
to existing products. In addition, research and development expense reflects the
Company's efforts to obtain FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses, exclusive of purchased research and
development, were $104,693,000 (10.5% of net sales), $107,644,000 (12.3%) and
$101,264,000 (11.9%) in 1997, 1996 and 1995, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in some instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which requires the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's
mechanical and tissue heart valves, implantable cardioverter defibrillators,
certain pacemakers and leads and certain electrophysiology catheter applications
are subject to this level of approval or as a supplement to a PMA approval.
Other pacemakers and leads, annuloplasty ring products and other
electrophysiology and interventional cardiology products are currently marketed
under the 510(k) pre-market notification procedure of the Act.
In addition, the FDA may require testing and surveillance programs to
monitor the effect of approved products which have been commercialized and it
has the power to prevent or limit further marketing of a product based on the
results of these post-marketing programs. The FDA also conducts inspections
prior to approval of a PMA to determine compliance with current good
manufacturing practice regulations (which also regulate product design) and may,
at any time after approval of a PMA, 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
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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. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
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 the U.S. government budget
deficit and 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 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 Union ("EEU"), the regulatory systems have been harmonized and approval
to market in EEU countries (the "CE mark") can be obtained through one agency.
In addition, government funding of medical procedures is limited and in certain
instances being reduced.
The Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services ("HHS") is currently conducting an
investigation regarding possible hospital submissions of improper claims to
Medicare/Medicaid programs for reimbursement for procedures using cardiovascular
medical devices that were not approved for marketing by the FDA at the time of
use. Beginning in June 1994, approximately 130 hospitals received subpoenas from
HHS seeking information with respect to reimbursement for procedures using
cardiovascular medical devices (including certain products manufactured by the
Company) that were subject to investigational exemptions or that may not have
been approved for marketing by the FDA at the time of use. The subpoenas also
sought information regarding various types of remuneration, including payments,
gifts, stock and stock options, received by the hospital or its employees from
manufacturers of medical devices. Civil and criminal sanctions may be imposed
against any person participating in an improper claim for reimbursement under
Medicare/Medicaid. The OIG's investigation and any related change in
reimbursement practices may discourage hospitals from participating in clinical
trials or from including Medicare and Medicaid patients in clinical trials,
which could lead to increased costs in the development of new products. St. Jude
believes it is too early to predict the possible outcome of this matter or when
it will be resolved. There can be no assurance that the OIG's investigation or
any changes in third-party payors' reimbursement practices will not materially
adversely affect the medical device industry in general or the Company in
particular. In 1995, HCFA, part of HHS, issued a regulation clarifying that
certain medical devices subject to investigational requirements under the Act
may qualify for reimbursement. In April 1996, a Federal District Court in
California declared the Health Care Financing Administration's governmental
guidelines, denying reimbursement for investigational devices, to be invalid.
The government appealed this decision, but the Court of Appeals referred the
case back to the district court to determine certain issues. 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.
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In May 1995 Telectronics and its President entered into a consent decree
with the FDA. The consent decree provided that Telectronics would not
manufacture or ship products for distribution in the United States until
Telectronics established to the satisfaction of the FDA that its manufacturing
facility in Florida operates in conformity with the FDA's good manufacturing
practice regulations. Telectronics has satisfied its obligations in this regard
and was released from these restrictions of the consent decree in June 1996. The
consent decree which remains in effect indefinitely requires that Telectronics
comply with the FDA's good manufacturing practice regulations and identifies
several specific provisions of those regulations. The consent decree provides
for FDA inspections and that Telectronics is obligated to pay certain costs of
the inspections.
In 1994 a state prosecutor in Germany began an investigation of allegations
of corruption in connection with the sale of heart valves. As part of that
investigation, the prosecutor seized documents from St. Jude's offices in
Germany as well as documents from certain competitors' offices. The
investigation is continuing and has been broadened to include other medical
devices. Subsequently, the United States Securities and Exchange Commission
issued a formal order of private investigation covering sales practices in
Europe of St. Jude and other manufacturers.
PATENTS AND LICENSES
The Company's policy is to protect the intellectual property rights in its
work on medical devices. Where appropriate, St. Jude applies for United States
and foreign patents. In those instances where the Company has acquired
technology from third parties, it has sought to obtain rights of ownership to
the technology through the acquisition of underlying patents or licenses.
While the Company believes design, development, regulatory and marketing
aspects of the medical device business represent the principal barriers to entry
into such business, it also recognizes that its patents and license rights may
make it more difficult for its competitors to market products similar to those
produced by the Company. St. Jude can give no assurance that any of its patent
rights, whether issued, subject to license or in process, will not be
circumvented or invalidated. Further, there are numerous existing and pending
patents on medical products and biomaterials. There can be no assurance that the
Company's existing or planned products do not or will not infringe such rights
or that others will not claim such infringement. The Company's principal patent
covering its mechanical heart valve will expire 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.
The Company's former products liability insurance carrier is currently
seeking to rescind its coverage of Pacesetter products for the period October 1,
1994, through December 31, 1995. Should the carrier prevail, the Company would
be self-insured for Pacesetter claims made during that period. St. Jude cannot
predict the outcome of the dispute. See Item 3 "Legal Proceedings".
California earthquake insurance is currently difficult to procure,
extremely costly, and restrictive in terms of coverage. The Company's earthquake
and related business interruption insurance for its operations located in Sylmar
and Sunnyvale, California does provide for limited coverage above a significant
self-insured retention. There are several factors that preclude the Company from
determining the effect an earthquake may have on its business. These factors
include, but are not limited to, the severity and location of the earthquake,
the extent of any damage to the Company's manufacturing facilities, the impact
of such an earthquake on the Company's California workforce and the
infrastructure of the surrounding communities, and the extent, if any, of damage
to the Company's inventory and work in process. While the Company's exposure to
significant losses occasioned by a California earthquake would be partially
mitigated by its ability to manufacture certain of the Pacesetter products at
its Swedish manufacturing facility, any such losses could have a material
adverse effect on the
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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, 1997, the Company had 3,772 full-time employees. It has
never experienced a work stoppage as a result of labor disputes and none of its
employees are represented by a labor organization, with the exception of the
Company's Swedish employees and certain employees in France.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical products and service industry is the single industry segment in
which the Company operates. The Company's domestic and foreign net sales,
operating profit and identifiable assets, and its export sales to unaffiliated
third parties are described in Note 8 to the Consolidated Financial Statements
on page 37 of the 1997 Annual Report to Shareholders and are incorporated herein
by reference.
The Company's foreign business is subject to such special risks as exchange
controls, currency devaluation, the imposition or increase of import or export
duties and surtaxes, and international credit or financial problems. Since its
international operations require the Company to hold assets in foreign countries
denominated in local currencies, many assets are dependent for their U.S. dollar
valuation on the values of a number of foreign currencies in relation to the
U.S. dollar. The Company may from time to time enter into purchase and sales
contracts in the forward markets for various foreign currencies with the
objective of protecting U.S. dollar values of assets and commitments denominated
in foreign currencies.
ITEM 2. PROPERTIES
St. Jude Medical's principal executive offices are owned and are located in
St. Paul, Minnesota. Manufacturing facilities are located in California,
Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico, Scotland and
Sweden. Approximately 51%, or 356,000 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 11 locations in 6 states and outside the United States at 36
locations in 18 countries. With the exception of one location, all of these
locations are leased.
In management's opinion, all building and machinery and equipment are in
good condition and suitable for their purposes and are maintained on a basis
consistent with sound operations.
ITEM 3. LEGAL PROCEEDINGS
GUIDANT LITIGATION
On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant
Sales Corporation (a wholly owned subsidiary of CPI) ( "GSC"), and Eli Lilly and
Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant
Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc.
("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses would terminate upon the consummation of the merger of Ventritex
into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an
agreement entered into in 1994 (the "Telectronics Agreement"), CPI and Lilly
granted the Telectronics Group certain intellectual property licenses relating
to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit
seeks declaratory and injunctive relief, among other things, to prevent and
invalidate the transfer of the Telectronics Agreement to Pacesetter in
connection with Pacesetter's acquisition of Telectronic's assets (the
"Telectronics Acquisition") and the application of license rights granted under
the
8
Telectronics Agreement to the manufacture and sale by Pacesetter of Ventritex's
products following the consummation of the Merger.
On December 17, 1996, St. Jude Medical, Pacesetter, Ventritex and the
Telectronics Group removed the lawsuit to the United States District Court for
the Southern District of Indiana, and filed a motion to dismiss the complaint
or, in the alternative, to stay proceedings pending arbitration of the dispute
pursuant to the arbitration provisions of the Telectronics Agreement. On January
16, 1997, the Guidant Parties filed a motion to remand the lawsuit to Indiana
state court which was granted in May 1997. St. Jude Medical, Pacesetter and
Ventritex then filed a motion in Indiana state court to dismiss the complaint
or, in the alternative, to stay the proceedings pending arbitration. This motion
was denied by the Indiana state court on July 21, 1997. The Indiana state court
action is currently in discovery and St. Jude Medical and Pacesetter are
continuing to vigorously defend the claims which the Guidant Parties have
asserted in this action. The Indiana state court has set a January 11, 1999
trial date for this case.
CPI, GSC and Lilly (collectively the "Federal Court Guidant Parties")
simultaneously filed suit against St. Jude Medical, Pacesetter and Ventritex in
the United States District Court for the Southern District of Indiana seeking
(i) a declaratory judgment that Pacesetter's manufacture, use or sale of cardiac
stimulation devices of the type or similar to the type which Ventritex
manufactured and sold at the time the Federal Court Guidant Parties filed their
complaint would upon consummation of the Merger, be unlicensed and constitute an
infringement of patent rights owned by CPI and Lilly, (ii) to enjoin the
manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of cardiac
stimulation devices of the type which Ventritex manufactured at the time the
Federal Court Guidant Parties filed their complaint and (iii) certain damages
and costs. On December 19, 1996, St. Jude Medical, Pacesetter and Ventritex
filed a motion to dismiss the complaint or, in the alternative, to stay
proceedings pending resolution of the Telectronics Action or arbitration. The
court denied this motion. The federal court action is currently in discovery,
and St. Jude Medical and Pacesetter are continuing to vigorously defend against
the claims which the Federal Court Guidant Parties asserted in this action. The
federal court has reserved time in November 1998 for the trial of this case.
St. Jude Medical and Pacesetter believe that the foregoing state and
federal court complaints contain a number of significant factual inaccuracies
concerning the Telectronics Acquisition and the terms and effects of the various
intellectual property license agreements referred to in such complaints. For
these reasons and others, St. Jude Medical and Pacesetter believe that the
allegations set forth in the complaints are without merit, and, as previously
indicated, they intend to defend the actions vigorously.
On December 24, 1996, the Telectronics Group and Pacesetter filed a lawsuit
and a motion against the Guidant Parties in the United States District Court for
the District of Minnesota seeking (i) a declaratory judgment that the
Defendants' claims, as reflected in the Telectronics Action, are subject to
arbitration pursuant to the arbitration provisions of the Telectronics
Agreement, (ii) an order that the Defendants arbitrate their claims against the
Telectronics Group and Pacesetter in accordance with the arbitration provisions
of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and
permanently from litigating their dispute with the Telectronics Group and
Pacesetter in any other forum and (iv) certain costs. On February 27, 1997, the
court entered an order denying the motion brought by the Telectronics Group and
Pacesetter and dismissing their complaint. On March 27, 1997, the Telectronics
Group and Pacesetter filed a Notice of Appeal from the court's February 27, 1997
order. The Eighth Circuit Court of Appeals heard oral argument in this appeal on
February 12, 1998. No decision has yet been issued by the Court of Appeals.
IRS LITIGATION
The Internal Revenue Service ("IRS") completed an audit examination of the
Company's 1990-1991 corporate income tax returns and issued deficiency notices
in early 1997 for taxes of $16.4 million. In addition, the IRS completed an
audit examination of the Company's 1992-1994 income tax returns in early 1998
and has proposed an adjustment of $41.8 million in taxes. Both adjustments
relate primarily to the Company's Puerto Rican operations. The deficiency
amounts do not include interest, state taxes, or offsetting Puerto Rico tax
refunds, the net effect of which is not material. It is likely that a similar
additional adjustment will be proposed for 1995. The Company is vigorously
contesting this adjustment. The Company is refuting the IRS deficiency
9
for 1990-1991 and asserting the Company is in fact owed a refund in a petition
filed in Tax Court on June 24, 1997. The Company expects that the ultimate
resolution will not have material adverse effect on its financial position or
liquidity, but could potentially be material to the net income of a particular
future period if resolved unfavorably.
OTHER LITIGATION AND PROCEEDINGS
From 1987 to 1991, Siemens AG through its Pacesetter and other affiliates
("Siemens") manufactured and sold approximately 32,000 model 1016T and 1026T
pacemaker leads of which approximately 25,000 were sold in the U.S. In March
1993 Siemens was sued in federal district court in Cincinnati, Ohio ("the Wilson
case"). The suit alleged that the model 1016T leads were negligently designed
and manufactured. Class action status was granted by the court in September
1993.
When St. Jude acquired from Siemens substantially all of its worldwide
cardiac rhythm management business ("Pacesetter") on September 30, 1994, the
purchase agreement specifically provided that Siemens retain all liability for
the Wilson case, as well as all other litigation that was pending or threatened
before October 1, 1994. The purchase agreement also provided that St. Jude would
assume liability for other products liability claims which arose after September
30, 1994.
Siemens and St. Jude were named defendants in a class action suit filed in
March 1995 in Houston, Texas for alleged defects in models 1016T and 1026T
pacemaker leads (the "Hann case"). The suit sought class action status for
patients who had inner insulation failures of these leads after March 22, 1993
and who were not members of the Wilson class. Siemens and St. Jude settled the
Wilson and Hann cases in November 1995. Management currently estimates the
Company's share of the settlement to be approximately $6.8 million. Apart from
this class action settlement, additional claims could be made or lawsuits
brought by patients with these leads whose leads fail at a later date or whose
leads fail for reasons outside the class definition.
St. Jude's products liability insurance carrier, Steadfast, a wholly owned
subsidiary of Zurich Insurance Company ("Zurich"), has denied coverage for this
case and has filed suit against St. Jude in federal district court in
Minneapolis seeking rescission of the policy covering Pacesetter business
retroactive to the date St. Jude acquired Pacesetter. Zurich alleges that St.
Jude made material negligent misrepresentations to Zurich including failure to
disclose the Wilson case in order to procure the insurance policy. St. Jude has
filed an answer denying Zurich's claim and has alleged that Zurich specifically
had knowledge of the Wilson case.
The terms of the products liability insurance policy which Zurich is
seeking to rescind provide that St. Jude would be entitled to $10 million in
coverage for the 1016T and 1026T pacemaker lead claims after payment by St. Jude
of a self insured retention. St. Jude is investigating whether it may have
claims against any entities, in addition to Zurich, arising from this situation,
and has brought suit against its former insurance broker, Johnson & Higgins.
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
Not applicable.
10
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position*
- ------------------------ ----- -----------------------------------------------------------
Ronald A. Matricaria 55 Chairman (1995) and Chief Executive Officer (1993)
Fred B. Parks 50 President and Chief Operating Officer (1998)
Daniel J. Starks 43 Chief Executive Officer, Cardiac Rhythm Management Division
(1997) and Daig (1996)
Terry L. Shepherd 45 President, Heart Valve Division (1994)
James W. Dennis 49 President Cardiac Rhythm Management Division (1997)
Patrick P. Fourteau 50 President, International (1998)
Michael J. Coyle 35 President Daig (1997)
John P. Berdusco 61 Vice President, Administration (1993)
Peter L. Gove 50 Vice President, Corporate Relations (1994)
Robert E. Munzenrider 53 Vice President, Finance and Chief Financial Officer (1997)
Kevin T. O'Malley, Esq. 46 Vice President and General Counsel (1994)
- -----------------------
* 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 and are elected annually for one year terms.
Mr. Matricaria's business experience is set forth in the Company's
definitive Proxy Statement dated March 27, 1998 under the Section "Election of
Directors." The information is incorporated herein by reference.
Dr. Parks' business experience is set forth in the Company's definitive
proxy statement dated March 27, 1998 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, 1998 under the section "Election of Directors."
The information is incorporated herein by reference.
Mr. Shepherd joined the Company in 1994 as President of the St. Jude
Medical Division. Prior to joining St. Jude, Mr. Shepherd was President and CEO
of Hybritech, Inc. where he had been employed for 3 years. Prior to that, Mr.
Shepherd held various management positions at Cardiac Pacemakers, Inc. (CPI) and
Eli Lilly & Company where he worked for 15 years. Hybritech and CPI were both
wholly owned subsidiaries of Eli Lilly & Company.
Mr. Dennis joined the Company in 1996 with the Company's acquisition of
Telectronics. He was appointed as President of the Company's Cardiac Rhythm
Management Division in 1997. At Telectronics he served as its President from
1994 to 1996 and as its Senior Executive Vice President of Operations from 1993
to 1994. From 1986 to 1993, Mr. Dennis held an operations management position
with Nellcor, Inc., a critical care monitoring company. From 1979 to 1986, Mr.
Dennis held an operations management position with IVAC, a medical instrument
division of Eli Lilly and Co.
Mr. Fourteau joined the Company in 1995 as President of St. Jude Medical
Europe. He was appointed President of the Pacesetter Division in May 1996. Mr.
Fourteau was appointed as President of the International Division in 1998. Prior
to joining the Company, he was employed by Eli Lilly and Co. for 19 years in
various positions including his last position of vice president of
pharmaceutical operations for Lilly International.
11
Mr. Coyle joined St. Jude Medical in 1994 as Director, Business Development
and was appointed as the President and Chief Operating Officer of Daig in 1997.
Prior to joining St. Jude, he spent nine years with Eli Lilly & Company in a
variety of technical and business management roles in both its Pharmaceutical
and Medical Device Divisions.
Mr. Berdusco joined the Company in 1993 as Vice President, Administration.
Prior to joining the Company, he was Executive Director Corporate Facilities
Planning, Manufacturing Strategy Development and Sourcing for Eli Lilly &
Company. From 1962 to 1993, Mr. Berdusco held various management positions with
Eli Lilly & Company in both domestic and international operations.
Mr. Gove joined the Company in 1994 as Vice President, Corporate Relations.
Prior to joining the Company, Mr. Gove was Vice President, Marketing and
Communications of Control Data Systems, Inc., a computer services company, from
1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions with
Control Data Corporation. From 1970 to 1981, Mr. Gove held various management
positions with the State of Minnesota and the U.S. Government.
Mr. Munzenrider joined the Company in 1997 as Vice President, Finance and
Chief Financial Officer. Prior to joining the Company, Mr. Munzenrider was Vice
President, Chief Financial Officer of Travelers Express Company, Inc. from 1991
to 1997. From 1983 to 1991 Mr. Munzenrider held financial executive positions
with Restaura, Inc. and Bell Atlantic Systems Leasing, Intl.
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 and
Co. for 15 years in various positions including his last position of General
Counsel of the Medical Device and Diagnostics Division.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information set forth under the captions "Supplemental Market Price
Data" and "Dividends" on page 40 of the Company's 1997 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five Year Summary of Selected
Financial Data" on page 39 of the Company's 1997 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 21 through
26 of the Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and Report
of Independent Auditors set forth on pages 27 through 38 of the Company's 1997
Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and
1995
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement dated March 27, 1998, 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, 1998, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the Company's
definitive Proxy Statement dated March 27, 1998, 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, 1998, 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 27 through 38 of
the Company's 1997 Annual Report to Shareholders are incorporated
herein by reference:
13
Consolidated Statements of Income - Years ended December 31, 1997,
1996 and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
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
NUMBER DESCRIPTION PAGE NUMBER
- -------- ------------------------------------------------------- -----------
II Valuation and Qualifying Accounts 22
The report of the Company's Independent Auditors with respect to the
above-listed financial statements and financial statement schedule appears on
page 21 of this Report.
All other financial statements and schedules not listed have been omitted
because the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable.
(3) Exhibits
EXHIBIT EXHIBIT INDEX PAGE 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.*
14
EXHIBIT EXHIBIT INDEX PAGE NUMBER
- --------------- ------------------------------------------------------------------- ------------
10.2 Supply Contract dated April 17, 1990, between the Company and ---
CarboMedics, Inc. (portions of this exhibit have been deleted
and filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2) is incorporated by reference
to the Company's Form 8 filed on April 17, 1990 amending the
Company's Form 10-K Annual Report for the year ended December
31, 1989.
10.3 Form of Indemnification Agreement that the Company has entered ---
into with officers and directors. Such agreement recites the
provisions of Minnesota Statutes Section 302A.521 and the
Company's Bylaw provisions (which are substantially identical
to the Statute) and is incorporated by reference to Exhibit
10(d) of the Company's Form 10-K Annual Report for the year
ended December 31, 1986.*
10.4 Form of Employment Agreement that the Company has entered into ---
with officers relating to severance matters in connection with
a change in control is incorporated by reference to Exhibit
10(f) of the Company's Form 10-K Annual Report for the year
ended December 31, 1987.*
10.5 Retirement Plan for members of the Board of Directors as amended ---
on March 15, 1995, is incorporated by reference to Exhibit 10.6
of the Company's Form 10-K Annual Report for the year ended
December 31, 1994.*
10.6 Management Savings Plan dated February 1, 1995, is incorporated by ---
reference to Exhibit 10.7 of the Company's Form 10-K Annual
Report for the year ended December 31, 1994.*
10.7 The St. Jude Medical, Inc. 1992 Employee Stock Purchase Savings ---
Plan is incorporated by reference to the Company's Form S-8
Registration Statement dated June 10, 1992, (Commission
File No. 33-48502).
10.8 1989 Restricted Stock Plan is incorporated by reference to the ---
Company's Form S-8 Registration Statement dated June 6, 1989
(Commission File No. 33-29085).*
10.9 The St. Jude Medical, Inc. 1991 Stock Plan is incorporated by ---
reference to the Company's Form S-8 Registration Statement
dated June 28, 1991 (Commission File No. 33-41459).*
15
EXHIBIT EXHIBIT INDEX PAGE NUMBER
- --------------- ------------------------------------------------------------------- ------------
10.10 The St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated ---
by reference to the Company's Form S-8 Registration Statement
dated July 1, 1994 (Commission File No. 33-54435).*
10.11 The St. Jude Medical Inc. 1997 Stock Option Plan is incorporated ---
by reference to the Company's Form S-8 Registration Statement
dated December 22, 1997 (Commission File No. 333-42945).*
10.12 The Management Incentive Compensation Plan is incorporated by --
reference to Appendix A of the Company's definitive Proxy
Statement dated March 27, 1995.*
13 1997 Annual Report to Shareholders. Except for those portions of 23
such report expressly incorporated by reference in this Form
10-K Annual Report, the Annual Report to Shareholders is not
deemed to be "filed" with the Securities and Exchange
Commission.
21 Subsidiaries of the Company 67
23 Consent of Independent Auditors 69
27 Financial Data Schedule
27.1 Restated Financial Data Schedule -- 1995
27.2 Restated Financial Data Schedule -- 1996
- -----------------------------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1997
No reports on Form 8-K were filed by the Company during the fourth
quarter 1997.
(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. 33-29085 (filed June 6,
1989), 33-41459 (filed June 28, 1991), 33-48502 (filed June 10, 1992), 33-54435
(filed July 1, 1994) and 333-42945 (filed December 22, 1997):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is
16
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.
17
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, 1998 By /S/ RONALD A. MATRICARIA
----------------------------
Ronald A. Matricaria
Chief Executive Officer
(Principal Executive Officer)
By /S/ ROBERT E. MUNZENRIDER
----------------------------
Robert E. Munzenrider
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 3/27/98
- ----------------------------
Ronald A. Matricaria
/S/ FRED B. PARKS Director 3/27/98
- ----------------------------
Fred B. Parks
/S/ PAUL J. CHIAPPARONE Director 3/27/98
- ----------------------------
Paul J. Chiapparone
/S/ THOMAS H. GARRETT III Director 3/27/98
- ----------------------------
Thomas H. Garrett III
/S/ KENNETH G. LANGONE Director 3/27/98
- ----------------------------
Kenneth G. Langone
/S/ WILLIAM R. MILLER Director 3/27/98
- ----------------------------
William R. Miller
/S/ WALTER F. MONDALE Director 3/27/98
- ----------------------------
Walter F. Mondale
/S/ WALTER L. SEMBROWICH Director 3/27/98
- ----------------------------
Walter L. Sembrowich
/S/ DANIEL J. STARKS Director 3/27/98
- ----------------------------
Daniel J. Starks
/S/ ROGER G. STOLL Director 3/27/98
- ----------------------------
Roger G. Stoll
/S/ GAIL R. WILENSKY Director 3/27/98
- ----------------------------
Gail R. Wilensky
18
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of St. Jude Medical, Inc.
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated February 12,
1998. Our audits also included the financial statement schedule listed in the
Index at 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.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
February 12, 1998
19
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1997
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------- --------------------- ------------------------- ------------ ----------------
ADDITIONS CHARGED TO
DESCRIPTION BALANCE AT ------------------------- BALANCE AT
BEGINNING OF PERIOD EXPENSE OTHER DEDUCTIONS END OF PERIOD
- ----------------------------------------- --------------------- ---------- ----------- ------------ ----------------
Year ended December 31, 1997
Allowance for doubtful accounts(3). $8,160 $678 $4,037(5) $163(1) $12,712
Products liability claims 8,304 --- --- 2,099(2) 6,205
reserve(4)
Year ended December 31, 1996
Allowance for doubtful accounts(3) 9,845 650 13(5) 2,348(1) 8,160
Products liability claims 8,558 --- 254(2) 8,304
reserve(4)
Year ended December 31, 1995
Allowance for doubtful accounts(3) 6,192 2,584 1,256(5) 187(1) 9,845
Products liability claims 1,500 --- 8,000(5) 942(2) 8,558
reserve(4)
- -------------------------
(1) Reserve for uncollectible accounts written off, net of recoveries.
(2) Reserve for claims written off, including settlements paid.
(3) Deducted from accounts receivable on the balance sheet.
(4) Included in other accrued expenses on the balance sheet.
(5) Balance assumed through acquisitions.
20