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, 1997 Commission File Number 0-8672
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ST. JUDE MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1276891
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
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(Address of principal executive offices)
(612) 483-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ____
The number of shares of common stock, par value $.10 per share, outstanding at
November 6, 1997 was 91,874,119.
This Form 10-Q consists of _______ pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page _________.
PART I FINANCIAL INFORMATION
ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the full year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 2 - ACQUISITIONS/DIVESTITURE
Effective May 15, 1997, the Company acquired Ventritex, Inc., a Sunnyvale,
California based manufacturer of implantable cardioverter defibrillators and
related products.
Each share of Ventritex common stock was converted into .5 shares of St. Jude
Medical common stock. The Company issued 10,437,800 shares to Ventritex
shareholders. The transaction was accounted for as a pooling of interests. The
accompanying financial statements, for all periods presented, are presented on a
pooled basis.
The results of Ventritex's operations have been included in the condensed
consolidated results of operations as if the merger had occurred at the
beginning of 1996. These results are not necessarily indicative of the results
that would have occurred had the merger actually taken place at the beginning of
1996, or of the expected future results of operations.
On November 29, 1996, the Company acquired from Pacific Dunlop, Ltd.
substantially all of the worldwide cardiac rhythm management assets of
Telectronics Pacing Systems, Inc. ("Telectronics") for $135,000. The acquisition
was accounted for under the purchase accounting method. The initial price can be
adjusted upward or downward based upon the change in net asset value between
June 30, 1996 and November 29, 1996. The Company and Pacific Dunlop, Ltd.
currently disagree about the final adjustment to the purchase price and are
following procedures in the purchase agreement to resolve their differences. The
Company expects that any adjustment to the purchase price would be recorded in
1997 as an adjustment to goodwill. Goodwill of approximately $76,000 including
approximately $43,000 of consolidation charges, is being amortized on a straight
line basis over 20 years. Telectronics operations have been included in the
consolidated results of operations from the date of acquisition.
PART I FINANCIAL INFORMATION (continued)
The following unaudited pro forma summary information presents the results of
operations of the Company and Telectronics for the nine months ended September
30, 1996, as if the acquisition had occurred at the beginning of 1996.
Nine Months
Ending
September 30
1996
(Unaudited)
-------------
Net sales $ 715,699
Net (loss) $ (11,585)
Primary (loss) per share $ (.13)
These pro forma results are not necessarily indicative of the results that would
have occurred had the acquisition actually taken place at the beginning of 1996,
or of the expected future results of the combined operations.
On August 29, 1997, the Company sold Medtel, a Far East distribution company, to
Getz Brothers and Co., Inc. The gain on the sale of this business was recorded
as an adjustment to previously recorded goodwill. The results of operations of
Medtel were not material to the consolidated results.
NOTE 3 - CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. In connection with
two pacemaker lead models, the Company may be subject to future uninsured
claims. The Company's products liability insurance carrier has denied coverage
for these models and has filed suit against the Company seeking rescission of
the policy covering Pacesetter business retroactive to the date the Company
acquired Pacesetter. The Company was a codefendant in a 1995 class action suit
with respect to these leads. This case was settled in November 1995. The
Company's share of the settlement is approximately $5,000. This case is more
fully described in Item I Part II of this Quarterly Report on Form 10-Q.
Additional claims could be filed by patients with these leads who were not class
members. Further, claims may be filed in the future relative to events currently
unknown to management. Management believes losses that might be sustained from
such actions would not have a material adverse effect on the Company's liquidity
or financial condition, but could potentially be material to the net income of a
particular future period if resolved unfavorably.
PART I FINANCIAL INFORMATION (continued)
NOTE 4 - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted for all financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. The impact is expected to result in an increase in basic earnings
per share of $.01 per share for the year-to-date amounts for both years
presented and no change for the third quarter for both years presented.
NOTE 5 - STATEMENT OF FINANCIAL STANDARDS NO. 130,
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income, which is required to be adopted for all
financial statements issued for periods beginning after December 15, 1997. At
that time the Company will be required to separately report the amounts (and the
related tax effect) classified as Other Comprehensive Income. Items recorded as
a separate component of equity such as foreign currency translation gains/losses
and unrealized gains/losses on certain investments in debt and equity securities
are included in Other Comprehensive Income.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
In January 1997, the SEC issued new rules related to disclosures about
derivative financial instruments. The new rules, effective for all financial
statements issued for periods ending after June 15, 1997, require enhanced
accounting policy disclosures regarding derivative financial instruments in the
financial statements and for periods ending after June 15, 1998, qualitative and
quantitative information about all financial instruments should be disclosed
outside the financial statements and related notes.
The Company has entered into readily marketable forward and option traded
contracts to manage its exposure to fluctuations in foreign currency exchange
rates. This hedging minimizes the impact of foreign exchange rate movements on
the Company's operating results. These contracts involve the exchange of foreign
currencies for U.S. dollars at specified rates at future dates. The changes in
market value of such contracts have a high correlation to the price changes in
the currency of the related hedged transaction. These contracts are recorded at
fair value and gains or losses are included in other income (expense).
NOTE 7 - SPECIAL CHARGE UPDATE
The Company's special charge accruals of $47,808 and $30,645 recorded in the
fourth quarter of 1996 and the second quarter of 1997 have decreased by $37,639
and $12,026, respectively, for cash payments since the date recorded.
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 233,189 $ 212,456 $ 745,035 $ 644,783
Cost of sales 88,766 69,464 272,114 213,063
---------- ---------- ---------- ----------
Gross profit 144,423 142,992 472,921 431,720
Selling, general & administrative 88,365 72,321 282,778 225,503
Research & development 26,304 25,970 84,189 77,801
Purchased research & development -- -- -- 5,000
Special charges -- -- 30,645 --
---------- ---------- ---------- ----------
Operating profit 29,754 44,701 75,309 123,416
Other income (expense) (1,103) 1,209 2,210 13,489
---------- ---------- ---------- ----------
Income before taxes 28,651 45,910 77,519 136,905
Income tax provision 10,099 15,731 27,325 46,748
---------- ---------- ---------- ----------
Net income $ 18,552 $ 30,179 $ 50,194 $ 90,157
========== ========== ========== ==========
Earnings per share:
Primary $ .20 $ .33 $ .54 $ .98
========== ========== ========== ==========
Fully diluted $ .20 $ .33 $ .54 $ .98
========== ========== ========== ==========
Shares outstanding
Primary 93,251 92,421 92,856 92,200
Fully diluted 93,251 92,814 93,053 92,331
See notes to condensed consolidated financial statements.
PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
SEPTEMBER 30 DECEMBER 31
1997 1996
(UNAUDITED) (SEE NOTE)
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ASSETS
Current assets:
Cash and cash equivalents $ 22,311 $ 49,388
Marketable securities 149,601 186,007
Accounts receivable, less allowance
(1997 - $7,776; 1996 - $8,160) 247,654 216,813
Inventories
Finished goods 139,207 119,736
Work in process 39,053 30,227
Raw materials 61,797 67,698
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Total inventories 240,057 217,661
Other current assets 71,033 78,015
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Total current assets 730,656 747,884
Property, plant and equipment 455,446 397,674
Less accumulated depreciation (142,621) (108,400)
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Net property, plant and equipment 312,825 289,274
Other assets 423,155 435,336
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TOTAL ASSETS $ 1,466,636 $ 1,472,494
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LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 257,812 $ 320,933
Long-term debt 229,500 229,500
Contingencies
Shareholders' equity:
Preferred stock, par value $1.00 per share -
25,000,000 shares authorized; no shares issued
Common stock, par value $.10 per share -
250,000,000 shares authorized; issued and
outstanding 1997 - 91,823,047 shares; 1996 -
91,404,961 shares 9,182 9,140
Additional paid-in capital 241,131 228,111
Retained earnings 743,086 692,892
Cumulative translation adjustment (26,125) 386
Unrealized gain/(loss) on available-for-sale securities 12,050 (8,028)
Receivable - stock issued -- (440)
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Total shareholders' equity 979,324 922,061
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,466,636 $ 1,472,494
============ ============
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See notes to condensed
consolidated financial statements.
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1997 1996
---- ----
Operating Activities:
Net income $ 50,194 $ 90,157
Depreciation and amortization 51,132 42,920
Purchased research and development -- 5,000
Special charges 19,104 --
Gain on sale of business -- (10,486)
Working capital change (189,324) (40,779)
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Net cash provided (used) by operating activities (68,894) 86,812
---------- ----------
Investment Activities:
Purchases of property, plant and equipment (65,818) (63,204)
Sales (purchases) of available-for-sale securities, net 73,595 (470)
Acquisitions, net of cash acquired -- (7,430)
Proceeds from sale of business, net of cash disposed 24,626 24,204
Other investing activities (2,729) (5,127)
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Net cash provided by (used in) investing activities 29,674 (52,027)
---------- ----------
Financing Activities:
Proceeds from exercise of stock options 13,062 22,893
Repayment of long-term debt -- (120,000)
Proceeds from issuance of convertible subordinated notes -- 57,500
Proceeds from receivable for stock issued 440 --
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Net cash used in financing activities 13,502 (39,607)
---------- ----------
Effect of currency exchange rate changes on cash (1,359) (151)
---------- ----------
Decrease in cash and cash equivalents (27,077) (4,973)
Cash and cash equivalents at beginning of year 49,388 62,638
---------- ----------
Cash and cash equivalents at end of period $ 22,311 $ 57,665
========== ==========
See notes to condensed consolidated financial statements.
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS:
NET SALES. Net sales for the third quarter 1997 totaled $233,189, a $20,733 or
9.8% increase over the 1996 third quarter net sales. Excluding Telectronics and
Far East distribution of other products net sales of approximately $16,000,
third quarter net sales were about 2.0% higher than the prior year comparable
period. For the first nine months, net sales totaled $745,035, a $100,252 or
15.5% increase over the net sales recorded in the first nine months of 1996.
Excluding Telectronics and Far East distribution of other products net sales of
approximately $72,000, the first nine months 1997 net sales increased about 4.4%
over the first nine months of 1996. Unfavorable foreign currency effects due to
the stronger U.S. dollar reduced 1997 net sales as compared to 1996 by
approximately $8,700 and $18,800 for the quarter and first nine months,
respectively.
Third quarter and the first nine months net sales increased primarily due to
higher mechanical heart valve, tissue heart valve, implantable cardioverter
defibrillator, electrophysiology catheter and bradycardia pulse generator and
lead unit sales that were partially offset by lower average selling prices.
Average selling prices decreased because of pricing pressures, unfavorable
foreign currency effects of a stronger U.S. dollar and more units being sold
into lower priced developing markets.
GROSS PROFIT. Third quarter 1997 gross profit totaled $144,423, or 61.9% of net
sales, as compared to $142,992, or 67.3% of net sales during the comparable 1996
period. For the first nine months of 1997 and 1996, gross profit was $472,921 or
63.5% of net sales, and $431,720, or 67.0% of net sales, respectively. The lower
1997 gross profit margin for both the quarter and year-to-date resulted from the
foreign currency impact on net sales, average selling price decreases due to
higher sales into developing markets, pricing pressures in the cardiac rhythm
management business and the inclusion of Telectronics in the 1997 results.
SELLING GENERAL & ADMINISTRATIVE. Selling General and Administrative (SG&A)
expenses in the third quarter 1997 of $88,365 increased $16,044, or 22.2% over
the third quarter of 1996. As a percentage of sales, 1997 SG&A increased to
37.9% from 34.0% in 1996. On a year-to-date basis, 1997 SG&A expenses totaled
$282,778, a $57,275, or 25.4% increase over 1996. The increases for both the
quarter and first nine months resulted from the inclusion of Telectronics in
1997, expenses for expanded sales and marketing organizations in the emerging
markets of Latin America, Asia Pacific and Canada, and expenses for and
enhancing information technology and communications systems.
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
RESEARCH AND DEVELOPMENT. Research and Development (R&D) expenses in the third
quarter of 1997 totaled $26,304, a $334 increase over the third quarter of 1996.
The first nine months of 1997 R&D expenses totaled $84,189, a $6,388 increase
over the 1996 comparable period. The increase for both the quarter and the first
nine months was attributable to the inclusion of Telectronics in 1997 which was
partially offset by the completion of certain Ventritex projects.
PURCHASED RESEARCH & DEVELOPMENT. The $5,000 non-cash 1996 charge related to
purchased Research & Development (R&D) in connection with the acquisition of the
Heart Valve Company. This represents the appraised value of in-process R&D which
must be expensed under generally accepted accounting principles for purchase
accounting.
SPECIAL CHARGES. In the second quarter 1997, the Company recorded $30,645 of
special charges related to the Ventritex merger which consisted of transaction
charges of $8,227, U.S. distribution reorganization charges of $9,433,
repositioning charges of $6,939 related to its tachycardia business and
integration charges of $6,046.
OTHER INCOME/(EXPENSE). Other expense in the third quarter 1997 totaled $1,103
compared to other income of $1,209 in the third quarter of 1996. For the first
nine months of 1997 other income totaled $2,210 versus $13,489 in the comparable
period of 1996.
Interest expense in the third quarter 1997 increased by approximately $3,100
over the third quarter of 1996. The increase was due to the higher debt level
associated with the Telectronics acquisition and the assumption of the Ventritex
convertible debenture which was issued in the third quarter of 1996. In the
third quarter 1997, gains on the sale of investments increased by almost $1,600
over the third quarter 1996.
On a year-to-date basis, several non-recurring 1996 transactions increased other
income over 1997 levels, including a $10,486 gain on the sale of the cardiac
assist business, a $2,951 gain as a result of the successful completion of
litigation related to a termination fee in connection with the Electromedics
acquisition less $5,500 of transaction costs associated with the Daig
acquisition.
INCOME TAX PROVISION. The Company's 1997 effective income tax rate was 35.25%
compared to 34.15% in 1996. The increase was due to the non-deductibility of
certain transaction costs related to the Ventritex acquisition and changes to
the Internal Revenue Code (IRC) Section 936 regulations that were finalized
during the second quarter of 1996. These regulations reduced the tax benefits
derived from the Company's Puerto Rican operations.
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
OUTLOOK. The Company expects that market demands, government regulation and
societal pressures will continue to change the healthcare industry worldwide
resulting in further business consolidations and alliances and pressure to
reduce prices and product purchases. To meet customer needs, the Company intends
to continue to broaden its product offerings through internal development or
external diversification opportunities. For the balance of 1997, however,
management intends to concentrate its efforts on the integration of Telectronics
and Ventritex into its Cardiac Rhythm Management business. In addition, the
Company will participate with industry groups to promote the introduction and
use of advanced medical device technology within a cost conscious environment.
Finally, customer service in the form of cost-effective clinical outcomes will
continue to be a primary focus for the Company.
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 any 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 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, healthcare 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 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
integrate acquired companies, to effectively implement its strategy of selling
products from acquired companies through its existing sales distribution
network, a serious earthquake affecting the Company's facilities in California,
adverse developments in the litigation arising from the acquisitions of
Telectronics and Ventritex, including litigation related to the Ventritex
Cadence model V-110 ICD device, unanticipated product failures and attempts by
competitors to gain market share through aggressive marketing programs.
The Company's 1997 effective income tax rate increased from 1996 due to
non-deductible transaction costs related to the Ventritex transaction, reduced
Puerto Rican income as a percentage of total income and a lower Puerto Rican tax
benefit as IRC Section 936 tax benefits are reduced by an additional 5% per year
through 1998. Legislation was also passed in 1996 to phase out the Section 936
tax benefit over a ten year period which will further negatively impact the
Company's effective tax rate. In addition, the IRS issued a Notice of Deficiency
of $16,353 in additional taxes relating primarily to the Company's Puerto Rican
operations in 1990 and 1991. It is likely that similar assessments will be
proposed for subsequent years. The Company filed a petition in Tax Court in June
1997 contesting the full amount of the deficiency.
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
FINANCIAL CONDITION
The Company's financial condition at September 30, 1997, continues to remain
strong. Long-term debt of $229,500 was unchanged from the prior year end
balance. The ratio of current assets to current liabilities was 2.8 to 1 at
September 30, 1997.
Total assets decreased $5,858 during the first nine months of 1997. Accounts
receivable increased $30,841 due to a higher sales level particularly in
emerging markets which have extended credit terms. Inventories increased $22,396
due to expanded product offerings. Cash and marketable securities decreased
$63,483 primarily to fund the operations of Telectronics and Ventritex and the
reduction of accrued liabilities.
Shareholders' equity increased $57,263 during the first nine months of 1997. The
increase resulted from net income of $50,194, the exercise of stock options of
$13,062, a net unrealized gain on investments of $20,078 and the repayment of a
stock receivable of $440 less a foreign currency translation adjustment of
$26,511.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant),
Guidant Sales Corporation (a wholly owned subsidiary of CPI),( "GSC"),
and Eli Lilly and Company (the former owner of CPI), ("Lilly")
(collectively, the "Guidant Parties"), filed a lawsuit against St.
Jude Medical, Inc., Pacesetter Inc. ("Pacesetter"), Ventritex Inc.
("Ventritex") and certain members of the Telectronics Group in State
Superior Court in Marion County, Indiana (the "Telectronics Action").
The lawsuit alleges, among other things, that, pursuant to an
agreement entered into in 1993, CPI and Lilly granted Ventritex
certain intellectual property licenses relating to cardiac stimulation
devices, and that such licenses will terminate upon consummation of
the merger of Ventritex into Pacesetter (the "Merger"). The lawsuit
further alleges that, pursuant to an agreement entered into in 1994
(the "Telectronics Agreement"), CPI and Lilly granted the Telectronics
Group certain intellectual property licenses relating to cardiac
stimulation devices (the "CPI/Telectronics License"). The lawsuit
seeks declaratory and injunctive relief, among other things, to
prevent and invalidate the transfer of the Telectronics Agreement to
Pacesetter in connection with Pacesetter's acquisition of
Telectronic's assets (the "Telectronics Acquisition") and the
application of license rights granted under the Telectronics Agreement
to the manufacture and sale by Pacesetter of Ventritex's products
following the consummation of the Merger. On December 17, 1996, St.
Jude Medical, Pacesetter, Ventritex and the Telectronics Group removed
the lawsuit to the United States District Court for the Southern
District of Indiana, and filed a motion to dismiss the complaint or,
in the alternative, to stay proceedings pending arbitration of the
dispute pursuant to the arbitration provisions of the Telectronics
Agreement. On January 16, 1997, the Guidant Parties filed a motion to
remand the lawsuit to state court which was granted in May 1997. St.
Jude Medical, Pacesetter and Ventritex filed a motion in state court
to dismiss the complaint or, in the alternative, to stay the
proceedings pending arbitration. This motion was denied by the court
on July 21, 1997. St. Jude Medical and Pacesetter are continuing to
vigorously defend the claims which the Guidant Parties have asserted
in this action.
PART II OTHER INFORMATION (continued)
CPI, GSC and Lilly (collectively the "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 the manufacture, use or sale
of cardiac stimulation devices of the type or similar to the type
currently manufactured and sold by Ventritex will, 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 currently manufactured by Ventritex
and (iii) certain damages and costs. On December 19, 1996, St. Jude
Medical, Pacesetter and Ventritex filed a motion to dismiss the
complaint or, in the alternative, to stay proceedings pending
resolution of the Telectronics Action or arbitration. The court denied
this motion. St. Jude Medical and Pacesetter are continuing to
vigorously defend against the claims which the Guidant Parties
asserted in this action.
St. Jude Medical believes that the foregoing 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. St. Jude
Medical and Pacesetter believe that the allegations set forth in the
complaints are without merit, and St. Jude Medical and Pacesetter
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 Telectronics Group's
and Pacesetter's motion 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.
PART II OTHER INFORMATION (continued)
OTHER LITIGATION AND PROCEEDINGS
From 1987 to 1991, Siemens AG, through its Pacesetter and other
affiliates, manufactured and sold approximately 32,000 model 1016T and
1026T pacemaker leads, of which approximately 25,000 were sold in the
United States. 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 Medical acquired Pacesetter from Siemens 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 Medical would assume liability
for other product liability claims which arose after September 30,
1994.
Siemens and St. Jude Medical were named defendants in a class action
suit filed in March 1995 in federal district court in Houston, Texas
for alleged defects in models 1016T and 1026T pacing 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 case class. Siemens and St. Jude Medical
settled the Wilson and Hann cases in November 1995. Management
currently estimates the Company's share of the settlement to be
approximately $5 million; however, the precise number of class
members, and the corresponding financial liability, could increase or
decrease as the process for filing claims is completed. The settlement
agreement has an "opt out" provision for class members. 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 Medical's products liability insurance carrier, Steadfast, a
wholly owned subsidiary of Zurich Insurance Company ("Zurich"), has
denied coverage for these cases and has filed suit against St. Jude
Medical in federal district court in Minneapolis, Minnesota seeking
rescission of the policy covering Pacesetter business retroactive to
the date St. Jude Medical acquired Pacesetter. Zurich alleges that St.
Jude Medical made material negligent misrepresentations to Zurich,
including failure to disclose the Wilson case in order to procure the
insurance policy. St. Jude Medical 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
Medical would be entitled to $10 million in coverage for the 1016T and
1026T pacemaker lead claims after payment by St. Jude Medical of a
self insured retention. In connection with these proceedings, St. Jude
Medical has filed suit against its former insurance broker, Johnson &
Higgins. Discovery has been completed and the case is ready for trial.
PART II OTHER INFORMATION (continued)
Item 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
2 Not applicable
3(ii) By-laws
4 Rights Agreement dated as of July 16, 1997
between the Company and American Stock
Transfer and Trust Company, as Rights Agent
including Certificate of Designation,
Preferences and Rights of Series B Junior
Preferred Stock is incorporated by reference
to Exhibit 4 of the Registrant's Form 10Q
dated as of August 12, 1997.
10 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Form 8-k dated August 6, 1997.
Item 5. Other Events
Announcement of the Rights Agreement dated
as of July 16, 1997, between the Company and
American Stock Transfer and Trust Company,
as Rights Agent including Certificate of
Designation, Preferences and Rights of
Series B Junior Preferred Stock.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
November 10, 1997 /s/ ROBERT E. MUNZENRIDER
- --------------------- -----------------------------------
DATE ROBERT E. MUNZENRIDER
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)