UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 Commission File Number 0-8672
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ST. JUDE MEDICAL, INC.
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(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Lillehei Plaza, St. Paul, Minnesota 55117
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(Address of principal executive offices)
(651) 483-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO
The number of shares of common stock, par value $.10 per share, outstanding on
April 28, 2000 was 83,828,478.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999
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Net sales $ 295,499 $ 266,734
Cost of sales 101,978 93,461
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Gross profit 193,521 173,273
Selling, general and administrative expense 103,299 96,423
Research and development expense 32,394 27,143
Purchased in-process research and development expense -- 47,775
Special charge 26,101 --
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Operating profit 31,727 1,932
Other income (expense) (7,106) (4,631)
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Earnings (loss) before income taxes 24,621 (2,699)
Income tax expense 8,793 9,358
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Net earnings (loss) $ 15,828 $(12,057)
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Net earnings (loss) per share:
Basic $ 0.19 $ (0.14)
Diluted $ 0.19 $ (0.14)
Weighted average shares outstanding:
Basic 83,779 84,194
Diluted 83,991 84,194
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See notes to condensed consolidated financial statements.
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ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999 (SEE NOTE)
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ASSETS
Current assets
Cash and cash equivalents $ 27,164 $ 9,655
Marketable securities 80,950 79,238
Accounts receivable, less allowances of $14,721 in 2000
and $13,529 in 1999 307,153 293,815
Inventories 226,396 235,407
Other current assets 75,511 72,184
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Total current assets 717,174 690,299
Property, plant and equipment - at cost 581,061 574,531
Less accumulated depreciation (244,849) (231,751)
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Net property, plant and equipment 336,212 342,780
Other assets, net 520,512 520,959
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TOTAL ASSETS $ 1,573,898 $ 1,554,038
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 117,000 $ --
Accounts payable and accrued expenses 231,753 238,822
Income taxes payable 56,177 43,700
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Total current liabilities 404,930 282,522
Long-term debt 360,675 477,495
Commitments and contingencies -- --
Shareholders' equity
Preferred stock -- --
Common stock 8,383 8,378
Additional paid-in capital 1,281 109
Retained earnings 849,051 833,223
Accumulated other comprehensive income
Cumulative translation adjustment (57,601) (53,977)
Unrealized gain on available-for-sale securities 7,179 6,288
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Total shareholders' equity 808,293 794,021
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,573,898 $ 1,554,038
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NOTE: THE BALANCE SHEET AT DECEMBER 31, 1999 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999
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Operating Activities
Net earnings (loss) $ 15,828 $(12,057)
Depreciation and amortization 22,894 19,608
Purchased in-process research and development expense -- 47,775
Special charge 26,101 --
Net investment gain (1,057) --
Working capital change, net of business acquisition (30,643) (6,065)
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Net cash provided by operating activities 33,123 49,261
Investing Activities
Purchase of property, plant and equipment (8,988) (9,675)
Proceeds from sale or maturity of marketable securities 1,332 --
Business acquisition -- (167,000)
Other (8,890) (7,487)
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Net cash used in investing activities (16,546) (184,162)
Financing Activities
Proceeds from exercise of stock options 971 838
Borrowings under debt facilities 1,220,100 241,500
Payments under debt facilities (1,200,600) (95,700)
Repurchase of convertible subordinated debentures (19,320) --
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Net cash provided by financing activities 1,151 146,638
Effect of currency exchange rate changes on cash (219) (1,288)
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Net increase in cash and cash equivalents 17,509 10,449
Cash and cash equivalents at beginning of period 9,655 3,775
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Cash and cash equivalents at end of period $ 27,164 $ 14,224
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See notes to condensed consolidated financial statements.
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ST. JUDE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
NOTE 2 - INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2000 1999
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Finished goods $117,806 $ 108,449
Work in progress 35,497 41,466
Raw materials 73,093 85,492
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Total inventory $226,396 $ 235,407
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NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
2000 1999
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Committed credit facility borrowings $ -- $ 299,000
Commercial paper borrowings 386,000 --
Uncommitted credit facility borrowings 81,000 148,500
Convertible subordinated debentures 10,675 29,995
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Total debt 477,675 477,495
Less current portion 117,000 --
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Total long-term debt $360,675 $ 477,495
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At March 31, 2000, the Company had a $350,000 committed revolving credit
facility that expires in March 2003 and a $150,000 committed revolving credit
facility that expires in March 2001. The Company also borrows from time to time
under uncommitted, due-on-demand credit facilities with various banks.
During the first quarter of 2000, the Company repurchased $19,320 of its
convertible subordinated debentures in open market transactions, recognizing an
immaterial gain. The Company also began issuing commercial paper with maturities
up to 270 days. These commercial paper borrowings are fully backed by committed
credit facilities and bear interest at varying market rates.
The Company classifies the above debt obligations as long-term on its balance
sheet to the extent it has the ability to repay all or a portion of the
short-term obligations with available cash under a long-term, committed credit
facility. Management continually reviews the Company's cash flow projections and
may from time to time repay a portion of the Company's borrowings.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
IRS MATTERS: The Company and the Internal Revenue Service ("IRS") have reached a
verbal agreement to settle the IRS Tax Court suit for the tax periods 1990-1991
and subsequent year disputes for the tax periods 1992-1995. The issues raised by
the IRS related primarily to the Company's Puerto Rican operations. It is
expected that an agreement between the Company and the IRS will be formalized in
writing within 60 days. The proposed settlement is not expected to impact the
Company's statement of earnings.
LITIGATION: Five separate lawsuits have been asserted against the Company
involving the Company's mechanical heart valves with a Silzone(R) coating. The
Company recalled products with the Silzone(R) coating on January 21, 2000 (see
Note 6 below) and sent a Recall Notice and Advisory concerning the recall to
physicians and others at that time. A number of these cases are seeking
monitoring of patients implanted with Silzone(R)-coated valves who have had no
injury to date. Three of the five cases that have been asserted seek class
action status. The Company intends to defend these cases.
The Company's product liability insurance policies exclude coverage for two
discontinued Pacesetter lead models. These discontinued lead models were the
subject of class action product liability suits that have been settled.
Management believes losses that might be sustained from any such future actions
would not have a material adverse effect on the Company's liquidity or financial
condition, but could potentially be material to the earnings of a particular
future period if resolved unfavorably.
The Company is involved in various other product liablilty lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has product liability insurance sufficient
to cover such claims and suits.
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NOTE 5 - SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company's authorized capital consists of 25,000 shares of
$1.00 per share par value preferred stock and 250,000 shares of $0.10 per share
par value common stock. There were no shares of preferred stock issued or
outstanding during 1999 or the first quarter of 2000. There were 83,828 and
83,781 shares of common stock outstanding at March 31, 2000 and December 31,
1999.
SHARE REPURCHASES: During the third quarter of 1999, the Company's Board of
Directors authorized the repurchase of up to $250,000 of the Company's
outstanding common stock over a three-year period. There were no share
repurchases during the first quarter of 2000.
NOTE 6 - SPECIAL CHARGES
On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will
no longer utilize the Silzone(R) coating. The Company recorded a special charge
accrual totaling $26,101 during the first quarter of 2000 relating to asset
write-downs ($9,465) and other costs, including monitoring expenses, ($16,636)
associated with this recall and product discontinuance. The Company has utilized
$10,631 of this special charge accrual through March 31, 2000. There can be no
assurance that the final costs associated with this recall, including
litigation-related costs, will not exceed management's estimates.
The Company recorded a $9,754 special charge accrual in 1999 relating to the
restructuring of its international operations, of which $6,055 has been utilized
through March 31, 2000. The Company also recorded special charge accruals in
1997 totaling $58,669 relating to various activities, of which $56,354 has been
utilized through March 31, 2000.
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NOTE 7 - NET EARNINGS (LOSS) PER SHARE
The table below sets forth the computation of basic and diluted net earnings
(loss) per share:
THREE MONTHS ENDED MARCH 31, 2000 1999
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Numerator:
Net earnings (loss) $ 15,828 $(12,057)
Denominator:
Basic-weighted average shares outstanding 83,779 84,194
Effect of dilutive securities:
Employee stock options 168 -
Restricted shares 44 -
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Diluted-weighted average shares outstanding 83,991 84,194
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Basic net earnings (loss) per share $ .19 $ (.14)
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Diluted net earnings (loss) per share $ .19 $ (.14)
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Net earnings (loss) and diluted-weighted average shares outstanding have not
been adjusted for the Company's convertible debentures or for certain employee
stock options and awards since the effect of these securities would have been
anti-dilutive.
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of unrealized gains or losses on
available-for-sale marketable securities and foreign currency translation
adjustments, net of taxes. Other comprehensive loss was $(2,733) and $(21,450)
for the three months ended March 31, 2000 and 1999. Total comprehensive income
(loss) combines reported net earnings (loss) and other comprehensive income
(loss). Total comprehensive income (loss) was $13,095 and $(33,507) for the
three months ended March 31, 2000 and 1999.
NOTE 9 - ACQUISITION
On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco
International Ltd. for $167,000 in cash. The Angio-Seal(TM) acquisition was
recorded using the purchase method of accounting and the operating results of
Angio-Seal(TM) was included in the Company's consolidated statement of earnings
from the date of acquisition. Pro forma results of operations have not been
presented for this acquisition since the effect of this acquisition was not
material to the Company's consolidated results of operations for the periods
presented. See the Company's 1999 Annual Report to Shareholders on Form 10-K for
further information on the Company's Angio-Seal(TM) acquisition.
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NOTE 10 - OTHER INCOME (EXPENSE)
Other income (expense), consists of the following:
THREE MONTHS ENDED MARCH 31, 2000 1999
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Interest expense $ (7,799) $ (5,822)
Other 693 1,191
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Other income (expense) $ (7,106) $ (4,631)
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NOTE 11 - SEGMENT INFORMATION
The Company has two reportable segments: Cardiac Rhythm Management (CRM) and
Heart Valve Disease Management (HVDM). The CRM segment, which includes the
results from the Company's Cardiac Rhythm Management Division and Daig Division,
develops, manufactures and distributes bradycardia pulse generator and
tachycardia implantable cardioverter defibrillator systems, electrophysiology
and interventional cardiology catheters and vascular closure devices. The HVDM
segment develops, manufactures and distributes mechanical and tissue heart
valves and valve repair products and is in the process of developing suture-free
devices to facilitate coronary artery bypass graft anastomoses.
The following table presents certain financial information about the Company's
reportable segments:
CRM HVDM ALL OTHER (1) TOTAL
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QUARTER ENDED MARCH 31, 2000
External net sales $ 225,258 $ 70,241 $ -- $ 295,499
Operating profit (loss) 32,094 35,120 (35,487) 31,727
QUARTER ENDED MARCH 31, 1999
External net sales $ 192,441 $ 74,293 $ -- $ 266,734
Operating profit (loss) 18,259 39,894 (56,221) 1,932
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(1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. ALL OTHER OPERATING
PROFIT (LOSS) AMOUNTS INCLUDE A SPECIAL CHARGE TOTALING $26,101 IN 2000 AND
A PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $47,775 IN 1999.
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NOTE 12 - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133), which is required to be adopted in
years beginning after June 15, 2000, although early adoption as of the beginning
of any fiscal quarter is permitted. Statement 133 requires companies to
recognize all derivatives on the balance sheet at fair value. Derivatives not
qualifying as hedges must be adjusted to fair value through earnings. If the
derivative qualifies as a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Management is continuing to
review the impact of Statement 133 on the Company's financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
ACQUISITIONS: The Company acquired the Angio-Seal(TM) business of Tyco
International Ltd. on March 16, 1999 and the outstanding common stock of
Vascular Science, Inc. (VSI) on September 27, 1999. These acquisitions have been
recorded using the purchase method of accounting. The operating results of each
of these acquisitions are included in the Company's consolidated statements of
earnings from the date of each acquisition.
NET SALES: Net sales for the first quarter of 2000 totaled $295,499, a 10.8%
increase over the $266,734 reported in the first quarter of 1999. Unfavorable
foreign currency effects due to a stronger U.S. dollar primarily against the
major Western European currencies reduced first quarter 2000 net sales as
compared with 1999 by approximately $7,800.
Cardiac rhythm management (CRM) net sales for the first quarter of 2000 were
$225,258, a 17.1% increase over the $192,441 recorded in the first quarter of
1999. The increase in CRM net sales for the first quarter of 2000 was primarily
attributable to increased bradycardia net sales, increased electrophysiology
(EP) catheter unit sales, and the effect of a full quarter of Angio-Seal net
sales. The increase in bradycardia net sales is due to the Company's on-going
rollout of the Affinity(R) pacemaker family and to an expanded U.S. sales
organization.
Heart valve disease management (HVDM) net sales for the first quarter of 2000
were $70,241, a 5.5% decrease from the $74,293 recorded in 1999. The decrease in
HVDM net sales was attributable to the effects of the stronger U.S. dollar and a
slight clinical preference shift from mechanical valves to tissue valves in the
U.S. market where HVDM holds significant mechanical valve market share and a
smaller share of the tissue valve market.
GROSS PROFIT: Gross profit for the first quarter of 2000 totaled $193,521 or
65.5% of net sales, as compared with $173,273, or 65.0% of net sales, during the
first quarter of 1999. The slight improvement in the gross profit percentage is
due primarily to higher CRM sales volumes and improved CRM manufacturing
efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the first
quarter of 2000 totaled $103,299, a 7.1% increase over the $96,423 reported in
the first quarter of 1999. The increase in SG&A expense in the first quarter of
2000 was primarily attributable to increased sales activities and to the effect
of a full quarter of Angio-Seal expenses.
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RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expenses in the first quarter of
2000 totaled $32,394, or 11.0% of net sales, compared with $27,143, or 10.2% of
net sales, for the first quarter of 1999. The slight increase in R&D expenses as
a percentage of net sales is primarily attributable to increased CRM activities
relating primarily to ICDs and products treating emerging indications in atrial
fibrillation and congestive heart failure.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: The Company recorded a
purchased in-process research and development charge totaling $47,775 during the
first quarter of 1999 in connection with its acquisition of Angio-Seal(TM).
The Company acquired certain in-process technologies in connection with its
acquisition of VSI in September 1999. The appraised value of the VSI in-process
technologies was determined to be $95,500, of which $67,453 was recorded at
close. The remaining balance of the in-process research and development
valuation ($28,047) is expected to be recorded in the Company's financial
statements as purchased in-process research and development when payment of
future contingent consideration is assured beyond a reasonable doubt. All other
contingent consideration payments in excess of the $28,047 are expected to be
capitalized as goodwill. Management currently anticipates additional in-process
research and development charges in 2000 related to VSI.
Management believes that the financial statement projections used in the
Angio-Seal and VSI acquisitions are still materially valid; however, there can
be no assurance that the projected results will be achieved. Certain in-process
technologies acquired in the Angio-Seal acquisition have been developed to the
point of commercial production and sale to customers. Management expects to
continue the development of the other in-process technologies acquired in the
Angio-Seal and VSI acquisitions and continues to believe that there is a
reasonable chance of successfully completing such development efforts. However,
there is risk associated with the completion of the in-process technologies and
there can be no assurance that any technologies will meet with either
technological or commercial success. Failure to successfully develop and
commercialize these in-process technologies would result in the loss of the
expected economic return inherent in the original fair value allocation.
Additionally, the value of other intangible assets acquired may become impaired.
SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide voluntary
recall of all field inventory of heart valve replacement and repair products
incorporating a Silzone(R) coating on the sewing cuff fabric. The Company
concluded that it will no longer utilize the Silzone(R) coating. The Company
recorded a special charge accrual totaling $26,101 during the first quarter of
2000 relating to asset write-downs ($9,465) and other costs, including
monitoring expenses, ($16,636) associated with this recall and product
discontinuance. The Company has utilized $10,631 of the special charge accrual
through March 31, 2000. Other than the effect of this special charge, management
believes that this recall will not materially impact the Company's future
earnings or cash flows based primarily on the fact that the Company's
non-Silzone(R) coated products, which represent 75% of the Company's HVDM
shipments, are not affected by this recall. However, there can be no assurance
that the final costs associated with this recall, including litigation-related
costs, will not exceed management's estimates.
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OTHER INCOME (EXPENSE): Interest expense was $7,799 during the first quarter of
2000 as compared with $5,822 in 1999. The increase in interest expense is due
primarily to increased debt levels resulting primarily from the Company's
acquisitions and share repurchases in 1999.
INCOME TAXES: The Company's effective income tax rate was 25% for the first
quarters of 2000 and 1999, exclusive of the 2000 special charge and the 1999
purchased in-process research and development charge which were primarily
recorded in taxing jurisdictions with a low income tax rate.
OUTLOOK: The Company expects that market demand, government regulation and
societal pressures will continue to change the worldwide health care industry
resulting in further business consolidations and alliances. The Company
participates with industry groups to promote the use of advanced medical device
technology in a cost conscious environment. Customer service in the form of
cost-effective clinical outcomes will continue to be a primary focus for the
Company.
The Company's HVDM business is in a highly competitive market. The market is
segmented between mechanical heart valves, tissue heart valves, and repair
products. During 1999 and the first quarter of 2000, the U.S. market continued
its slight shift to tissue valve and repair products from mechanical heart
valves resulting in a small market share loss. Competition is anticipated to
place pressure on pricing and terms, and health care reform is expected to
result in further hospital consolidations over time.
The Company's CRM business is also in a highly competitive industry that is
undergoing consolidation. The number of principal suppliers has decreased from
four to three. The Company's two principal competitors each have substantially
more assets, sales and sales personnel than the Company. In addition, the
Company's two principal competitors in the ICD market have dual-chamber ICDs on
the market that represent an increasing percentage of the overall ICD market.
The Company began clinical evaluation of a dual-chamber ICD in late 1999, and
also received CE mark approval in March 2000. However, until the Company
commercially introduces a dual-chamber ICD into the U.S. and other global
markets, the continued growth of dual-chamber ICDs at the expense of
single-chamber ICDs could adversely affect the Company. Rapid technological
change is expected to continue, requiring the Company to invest heavily in R&D
and to effectively market its products.
The global medical device market is highly competitive. Competitors have
historically employed litigation to gain a competitive advantage. In addition,
the Company's products must continually improve technologically and provide
improved clinical outcomes due to the competitive nature of the industry.
Group purchasing organizations (GPOs) in the U.S. continue to consolidate the
purchasing for some of the Company's customers. Several such GPOs have executed
contracts with the Company's CRM market competitors, which exclude the Company.
These contracts, if enforced, may adversely affect the Company's sales of CRM
products to members of these GPOs.
The Company and the IRS have reached a verbal settlement regarding litigation
over a tax issue. See Part II, Item 1, Legal Proceedings below for further
discussion.
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FINANCIAL CONDITION
The Company's liquidity and cash flows remained strong through March 31, 2000.
The Company's current assets to current liabilities ratio was 1.8 to 1 at March
31, 2000 as compared with 2.4 to 1 at December 31, 1999. The decrease in the
current ratio is due to the classification of certain interest-bearing debt as a
current liability at March 31, 2000 (see further discussion below).
Accounts receivable increased $13,338 from December 31, 1999 to March 31, 2000
due primarily to higher sales in the first quarter of 2000 as compared with the
fourth quarter of 1999. Total interest bearing debt remained relatively constant
from December 31, 1999 through March 31, 2000.
The Company classifies its interest-bearing debt obligations as long-term on its
balance sheet to the extent it has the ability to repay all or a portion of its
short-term, interest-bearing debt obligations with available cash under a
long-term, committed credit facility. Management continually reviews the
Company's cash flow projections and may from time to time repay a portion of the
Company's borrowings.
During the third quarter of 1999, the Company's Board of Directors authorized
the repurchase of up to $250,000 of the Company's outstanding common stock over
a three-year period. There were no share repurchases during the first quarter of
2000.
Management believes that cash generated from operations and cash available under
its credit facilities will be sufficient to meet the Company's working capital
and share repurchase plan needs in the near term. Should suitable investment
opportunities arise, management believes that the Company's earnings, cash flows
and balance sheet will permit the Company to obtain additional debt financing or
equity capital, if necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from December 31, 1999 through
March 31, 2000 in the Company's market risk, other than the maturity in January
2000 of its interest rate swap contract that hedged a substantial portion of the
Company's variable interest rate risk on $138,000 of the Company's revolving
credit facility borrowings.
For further information on market risk, refer to Item 7A in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GUIDANT LITIGATION
Guidant's Claims Against SJM: On November 26, 1996, Guidant Corporation
(a competitor of Pacesetter and Ventritex) ("Guidant") and related parties filed
a lawsuit against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc.
("Pacesetter"), Ventritex, Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, certain Guidant parties granted Ventritex
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses would terminate upon the consummation of the merger of Ventritex
into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an
agreement entered into in 1994 (the "Telectronics Agreement"), certain Guidant
parties granted the Telectronics Group intellectual property licenses relating
to cardiac stimulation devices. The lawsuit seeks declaratory and injunctive
relief, among other things, to prevent and invalidate the transfer of the
Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition
of Telectronics' assets (the "Telectronics Acquisition") and the application of
license rights granted under the Telectronics Agreement to the manufacture and
sale by Pacesetter of Ventritex's products following the consummation of the
Merger. The court overseeing this case issued a stay of this matter in July 1998
so that the issues could be addressed in an arbitration requested by the
Telectronics Group and Pacesetter.
Guidant and related parties also filed suit against St. Jude Medical,
Pacesetter and Ventritex on November 26, 1996 in the United States District
Court for the Southern District of Indiana. This second lawsuit seeks (i) a
declaratory judgment that Pacesetter's manufacture, use or sale of cardiac
stimulation devices of the type or similar to the type which Ventritex
manufactured and sold at the time the Guidant parties filed their complaint
would, upon consummation of the Merger, be unlicensed and constitute an
infringement of patent rights owned by certain Guidant parties, (ii) to enjoin
the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of
cardiac stimulation devices of the type which Ventritex manufactured at the time
the Guidant parties filed their complaint, and (iii) certain damages and costs.
This second lawsuit was stayed by the court in July 1998 given the order to
arbitrate which is mentioned below.
St. Jude Medical and Pacesetter believe that the foregoing state and
federal court complaints contain a number of significant factual inaccuracies
concerning the Telectronics Acquisition and the terms and effects of the various
intellectual property license agreements referred to in such complaints. For
these reasons and others, St. Jude Medical and Pacesetter believe that the
allegations set forth in the complaints are without merit. St. Jude Medical and
Pacesetter have vigorously defended their interests in these cases, and will
continue to do so.
Order to Arbitrate/Guidant Lawsuits Stayed: As a result of the state
and federal lawsuits brought by Guidant and related parties, the Telectronics
Group and Pacesetter filed a lawsuit in the United States District Court for the
District of Minnesota seeking (i) a declaratory judgment that the Guidant
parties' claims, as reflected in the Telectronics Action, are subject to
arbitration pursuant to the arbitration provisions of the Telectronics
Agreement, (ii) an order that the defendants arbitrate their claims against the
Telectronics Group and Pacesetter in accordance with the arbitration provisions
of the Telectronics Agreement, (iii) to enjoin the defendants
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preliminarily and permanently from litigating their dispute with the
Telectronics Group and Pacesetter in any other forum, and (iv) certain costs.
After the Eighth Circuit Court of Appeals ruled on an appeal in favor of the
Telectronics Group and Pacesetter in May 1998, the United States District Court
for the District of Minnesota issued an order on July 8, 1998 directing the
arbitration requested by the Telectronics Group and Pacesetter to proceed.
Status of Arbitration: An arbitrator for the arbitration has been
selected by the parties. The arbitrator has issued some interim rulings,
including that Pacesetter and St. Jude Medical should not participate in the
initial arbitration proceeding concerning whether the Telectronics Agreement
transferred to Pacesetter. The Telectronics Group and the Guidant parties will
be involved in this initial arbitration proceeding. This initial arbitration
proceeding occurred in late April 2000. A decision in the arbitration is not
expected until a post proceeding briefing is completed, which means a decision
is not likely until June or July 2000.
Background Concerning Patents Involved In Guidant's Claims: In the
federal court lawsuit in Indiana which has been stayed pending the result of the
above-described arbitration, Guidant asserted patent infringement claims against
St. Jude Medical and its Pacesetter subsidiary involving four separate patents.
One of these patents expired May 3, 1998. The other patents involved expire
March 7, 2001, February 25, 2003 and December 22, 2003. Although Guidant has
requested injunctive relief and damages as part of the federal court lawsuit in
Indiana, the request for an injunction would be barred for any expired patent.
Guidant's claims for damages for the period prior to expiration of a patent
could still be asserted if Guidant's claims for infringement remain after the
above-mentioned arbitration is completed.
In connection with the three patents that have yet to expire, a third
party initiated a Reexamination Request in the U.S. Patent Office. The Patent
Office Reexamination Action resulted in the preliminary rejection of all of the
claims in two of the unexpired patents. With respect to the third unexpired
patent, the Patent Office preliminarily rejected some of the claims in the
patent and upheld others. It is St. Jude Medical's understanding that Guidant is
in the process of responding to the Patent Examiner's preliminary position as
part of its Reexamination procedure. If the Patent Examiner maintains his
position, St. Jude Medical management believes that Guidant will appeal the
adverse rulings by the Patent Office concerning these three patents, a process
that typically takes between six and twelve months.
IRS MATTERS
The Company and the Internal Revenue Service ("IRS") have reached a
verbal agreement to settle the IRS Tax Court suit for the tax periods 1990-1991
and subsequent year disputes for the tax periods 1992-1995. The issues raised by
the IRS related primarily to the Company's Puerto Rican operations. It is
expected that an agreement between the Company and the IRS will be formalized in
writing within 60 days. The proposed settlement is not expected to impact the
Company's statement of earnings.
SILZONE(R) MATTERS
Five separate lawsuits have been asserted against the Company involving
the Company's mechanical heart valves with a Silzone(R) coating. The Company
recalled products with the Silzone(R) coating on January 21, 2000 (see Note 6 to
the Company's March 31, 2000 financial statements) and sent a Recall Notice and
Advisory concerning the recall to physicians and others at that time. A number
of these cases are seeking monitoring of patients implanted with
Silzone(R)-coated valves who have had no injury to date. Three of the five cases
that have been asserted seek class action status. The Company intends to defend
these cases.
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OTHER LITIGATION AND PROCEEDINGS
The Company is unaware of any other pending legal proceedings which it
regards as likely to have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 10, 2000. In
conjunction therewith, proxies were solicited in accordance with Regulation 14A.
The following actions were taken:
(1) Ronald A. Matricaria, Walter L. Sembrowich and Daniel J. Starks were
elected to the Board of Directors for terms ending in 2003.
Shareholders approved management's nominees to the Board of Directors
by votes as follows: 58,484,940, 58,522,162 and 58,595,575 in favor,
3,259,315, 3,222,093 and 3,148,680 withheld for Messrs Matricaria,
Sembrowich and Starks, respectively. Seven other directors are serving
unexpired terms as follows: Gail R. Wilensky, Lowell C. Anderson, David
A. Thompson, and Terry L. Shepherd - through 2001; Thomas H. Garrett
III, Roger G. Stoll, and Stuart M. Essig - through 2002.
(2) The shareholders ratified and approved the St. Jude Medical, Inc. 2000
Employee Stock Purchase Savings Plan by a vote of 41,429,400 in favor,
4,094,025 opposed and 372,554 abstaining from voting.
(3) The shareholders ratified and approved the St. Jude Medical, Inc. 2000
Stock Plan by a vote of 33,153,597 in favor, 12,176,350 opposed and
566,032 abstaining from voting.
(4) The shareholders ratified the reappointment of Ernst & Young LLP as the
Company's independent auditor for the current fiscal year by a vote of
61,101,217 in favor, 355,772 opposed and 287,266 abstaining from
voting.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibit
------ -------
10.15 St. Jude Medical, Inc. 2000 Employee Stock
Purchase Savings Plan
10.16 St. Jude Medical, Inc. 2000 Stock Plan
27 Financial data schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
May 12, 2000 /s/ JOHN C. HEINMILLER
- ------------ -----------------------
DATE JOHN C. HEINMILLER
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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