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, 1998 Commission File Number 0-8672
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 at
November 6, 1998 was 84,162,387.
This Form 10-Q consists of 25 pages consecutively numbered.
The Exhibit Index to this Form 10-Q is set forth on page 16.
PART I FINANCIAL INFORMATION
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
------------------------------------------------
1998 1997 1998 1997
---------------------- ----------------------
Net sales $ 248,822 $ 233,189 $ 767,542 $ 745,035
Cost of sales 90,704 88,766 284,955 272,114
--------- --------- --------- ---------
Gross profit 158,118 144,423 482,587 472,921
Selling, general & administrative 83,266 88,365 264,093 282,778
Research & development 24,984 26,304 74,265 84,189
Special charges -- -- -- 30,645
--------- --------- --------- ---------
Operating profit 49,868 29,754 144,229 75,309
Other income (expense), net (7,494) (1,103) (2,273) 2,210
--------- --------- --------- ---------
Income before taxes 42,374 28,651 141,956 77,519
Income tax provision 12,924 10,099 43,297 27,325
========= ========= ========= =========
Net income $ 29,450 $ 18,552 $ 98,659 $ 50,194
========= ========= ========= =========
Earnings per common share:
Basic $ 0.35 $ 0.20 $ 1.14 $ 0.55
========= ========= ========= =========
Diluted $ 0.35 $ 0.20 $ 1.14 $ 0.54
========= ========= ========= =========
Average shares outstanding:
Basic 84,025 91,711 86,202 91,513
Diluted 84,267 93,251 86,727 92,856
See notes to condensed consolidated financial statements.
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PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
SEPTEMBER 30 DECEMBER 31
1998 1997
(Unaudited) (See Note)
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 10,822 $ 28,530
Marketable securities 76,921 156,006
Accounts receivable, less allowance
(1998 $12,585; 1997 - $12,712) 292,389 243,311
Inventories
Finished goods 135,588 137,651
Work in process 32,547 39,079
Raw materials 73,924 64,309
---------- ----------
Total inventories 242,059 241,039
Other current assets 91,456 74,396
---------- ----------
Total current assets 713,647 743,282
Property, plant and equipment 509,549 456,688
Less accumulated depreciation (178,877) (149,043)
---------- ----------
Net property, plant and equipment 330,672 307,645
Other assets 391,438 407,689
========== ==========
TOTAL ASSETS $1,435,757 $1,458,616
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 245,697 $ 251,594
Long-term debt 417,495 220,000
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 1998 - 84,162,661 shares;
1997 - 91,911,496 shares 8,416 9,191
Additional paid-in capital 6,045 244,347
Retained earnings 786,558 746,032
Accumulated other comprehensive income:
Cumulative translation adjustment (28,570) (24,150)
Unrealized gain on available-for-sale securities 116 11,602
---------- ----------
Total shareholders' equity 772,565 987,022
========== ==========
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,435,757 $1,458,616
========== ==========
NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
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PART I FINANCIAL INFORMATION (continued)
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1998 1997
-------- --------
Operating Activities:
Net income $ 98,659 $ 50,194
Depreciation and amortization 52,783 51,132
Special charges - 19,104
Net investment gain (10,156) -
Working capital change (82,627) (189,324)
-------- --------
Net cash provided by (used in) operating activities 58,659 (68,894)
-------- --------
Investing Activities:
Purchases of property, plant and equipment (54,818) (65,818)
Sales/purchases of available-for-sale securities, net 77,879 73,595
Proceeds from sale of business, net of cash disposed - 24,626
Other investing activities 1,164 (2,729)
-------- --------
Net cash provided by investing activities 24,225 29,674
-------- --------
Financing Activities:
Proceeds from exercise of stock options and stock issued 7,022 13,502
Purchase and retirement of common stock (304,887) -
Net borrowings under lines of credit 197,495 -
-------- --------
Net cash used in financing activities (100,370) 13,502
-------- --------
Effect of currency exchange rate changes on cash (222) (1,359)
-------- --------
Decrease in cash and cash equivalents (17,708) (27,077)
Cash and cash equivalents at beginning of year 28,530 49,388
-------- --------
Cash and cash equivalents at end of period $ 10,822 $ 22,311
======== ========
See notes to condensed consolidated financial statements.
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PART I FINANCIAL INFORMATION (continued)
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, 1998 are not necessarily indicative of the results that may be expected for
the full year ended December 31, 1998. 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, 1997.
NOTE 2 - CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has products liability insurance and
reserves sufficient to cover such claims and suits. In connection with two
pacemaker lead models, the Company may be subject to future uninsured claims.
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. The Company's product liability insurance
policies exclude coverage for two discontinued Pacesetter leads. Some of these
discontinued leads were the subject of class action product liability suits that
have been settled.
NOTE 3 - STATEMENT OF FINANCIAL STANDARDS NO. 130,
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" requires the Company to include in Other Comprehensive Income unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, net of taxes. Other Comprehensive Income
(Loss) for the third quarter 1998 and 1997 was $(4,741) and $5,499,
respectively. Other Comprehensive (Loss) for the first nine months of 1998 and
1997 was $(15,907) and $(6,434), respectively. Total Comprehensive Income
combines reported Net Income and Other Comprehensive Income (Loss). Total
Comprehensive Income for the third quarters ended September 30, 1998 and 1997
was $24,709 and $24,051, respectively. Total Comprehensive Income for the nine
months ended September 30, 1998 and 1997 was $82,752 and $43,760, respectively.
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PART I FINANCIAL INFORMATION (continued)
NOTE 4 - SPECIAL CHARGE UPDATE
The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and
1997, respectively. These special charges have decreased by $47,640 and $37,003,
respectively, since the date recorded.
NOTE 5 - STOCK REPURCHASE
On March 20, 1998, the Company repurchased 8,000,000 shares of its common stock
at $38 per share and bank-related debt increased by $304,000 using a $500,000
revolving credit line due in 2003. As of September 30, 1998, the Company had
$135,000 available under this credit line.
NOTE 6 - EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted earnings per
share. There were no adjustments to the numerator.
1998 1997
---------------------------- ------------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30 September 30 September 30 September 30
---------------------------- ------------------------------
Numerator:
Net income $29,450 $98,659 $18,552 $50,194
Denominator:
Basic-weighted shares outstanding 84,025 86,202 91,711 91,513
Effect of dilutive securities:
Employee stock options 209 492 1,481 1,284
Restricted shares 33 33 59 59
------- ------- ------- -------
Diluted-weighted shares outstanding 84,267 86,727 93,251 92,856
======= ======= ======= =======
Basic earnings per share $ 0.35 $ 1.14 $ 0.20 $ 0.55
======= ======= ======= =======
Diluted earnings per share $ 0.35 $ 1.14 $ 0.20 $ 0.54
======= ======= ======= =======
Net income and shares outstanding have not been adjusted for the Company's
convertible debentures for diluted earnings per share purposes because the
result would have been anti-dilutive.
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PART I FINANCIAL INFORMATION (continued)
NOTE 7 - STATEMENT OF ACCOUNTING STANDARDS NO. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through statement
of income. If the derivative is 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. The Company has not
yet determined what the effect of Statement No. 133 will be on the earnings and
financial position of the Company.
NOTE 8 - STATEMENT OF ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION
Under the new standard, the operating segments that the Company currently
expects to report on are heart valve disease management and cardiac rhythm
management.
NOTE 9 - CONVERTIBLE SUBORDINATED DEBENTURES
During October 1998, the Company repurchased $22,500 of its convertible
subordinated debentures bringing the total repurchased to $27,505. Consequently,
the number of shares that could be issued under the debenture decreased by
800,145 based on a conversion rate of 29.0909 shares per thousand dollars
principal amount of the notes. Gains/(losses) related to the repurchase of such
debentures are insignificant.
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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 1998 totaled $248,822, a $15,633, or
6.7% increase over 1997 third quarter net sales. Excluding $4.4 million of
non-pacing sales from a Far East distribution company that was sold in the third
quarter of 1997, third quarter 1998 net sales were 8.7% higher than the prior
year comparable quarter. For the first nine months, net sales totaled $767,542,
a $22,507, or 3.0% increase over the net sales recorded in the first nine months
of 1997. Excluding $21.6 million of non-pacing sales from the Far East
distribution company, the first nine months 1998 net sales increased 6.1% over
the first nine months of 1997. The change in foreign currency exchange rates had
the effect of increasing 1998 third quarter net sales by approximately $300, but
decreasing the first nine months net sales by approximately $7,700.
The third quarter and year-to-date net sales increases resulted primarily from
higher implantable cardioverter defibrillator (ICD), tissue heart valve and
electrophysiology catheter sales. ICD sales increased worldwide due to new
product introductions and expanded domestic sales coverage. Tissue heart valve
sales benefited from the U.S. market release of the Toronto SPV (TM) valve.
Electrophysiology catheter sales increased due to the introduction of new,
innovative electrophysiology catheters and expanded worldwide sales coverage.
GROSS PROFIT. The third quarter 1998 gross profit totaled $158,118, or 63.5% of
net sales, as compared to $144,423, or 61.9% of net sales in the comparable
period of 1997. For the first nine months of 1998 and 1997, gross profit was
$482,587 or 62.9% of net sales, and $472,921, or 63.5% of net sales ,
respectively. The higher 1998 gross profit margin for the quarter resulted
mainly from heart valve manufacturing efficiencies, higher mechanical heart
valve and ICD unit sales and slightly higher selling prices for pacemakers. The
lower 1998 year-to-date gross profit margin was due principally to the negative
foreign exchange impact on net sales.
SELLING, GENERAL & ADMINISTRATIVE. Selling, General & Administrative (SG&A)
expenses in the third quarter 1998 of $83,266 decreased $5,099, or 5.8% from the
third quarter of 1997. As a percentage of net sales, 1998 SG&A decreased to
33.5% from 37.9% in 1997. For the first nine months, 1998 SG&A expenses totaled
$264,093, an $18,685 decrease from 1997. The decreases for both the quarter and
the first nine months resulted mainly from the fourth quarter 1997 restructuring
of the cardiac rhythm management business.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses in the third
quarter of 1998 totaled $24,984, a $1,320 decrease from the third quarter of
1997. During the first nine months of 1998 R&D expenses totaled $74,265, a
$9,924 decrease from the comparable 1997 period. The decrease for both the
quarter and the first nine months was mainly attributable to the consolidation
of the Telectronics and Ventritex R&D groups into the cardiac rhythm management
business.
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PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
SPECIAL CHARGES. In the second quarter of 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, net in the third quarter 1998 totaled
$7,494 compared to $1,103 in the third quarter of 1997. Interest expense totaled
$6,940 in the third quarter, an increase of $3,506 over the comparable period in
1997. The higher interest expense resulted from the higher debt level associated
with the first quarter 1998 repurchase of eight million shares of common stock
for $304,000. The third quarter 1998 gain on the sale of an investment was $947
less than the gain on sale of investments recorded in the third quarter of 1997.
Interest income was $495 lower in the third quarter of 1998 than the comparable
period of 1997. Foreign exchange losses in 1998 were $1,163 higher than the
third quarter of 1997.
For the first nine months of 1998 other expense totaled $2,273 compared to other
income of $2,210 in the comparable period of 1997. The higher interest expense
associated with the debt related to the stock repurchase was the principal
reason for this change.
INCOME TAX PROVISION. The Company's 1998 effective income tax rate was 30.5%
compared to 35.25% in 1997. The reduction in the 1998 worldwide effective income
tax rate is primarily due to a greater proportion of income derived from lower
tax countries and the elimination of the non-deductible Ventritex related
transaction costs that occurred in 1997 but not 1998. Taxes are not provided on
undistributed earnings of non-U.S. subsidiaries because such earnings are
intended to be indefinitely reinvested.
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. To meet customer
needs, the Company intends to continue to broaden its product offerings through
internal development or external diversification opportunities. 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.
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PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors, some of which are set forth
below, 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 inability to execute its diversification strategy or to integrate
acquired companies, 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.
FINANCIAL CONDITION
The Company's financial condition at September 30, 1998 continues to remain
strong. Long-term debt of $417,495 was $197,495 higher than the prior year-end
balance due primarily to the stock repurchase in the first quarter of 1998 but
$73,005 less than the prior quarter-end balance. The ratio of current assets to
current liabilities was 2.9 to 1 at September 30, 1998.
Accounts receivable increased $49,078 due to a higher sales level particularly
in emerging markets that have extended credit terms. Cash and marketable
securities decreased $96,793 to reduce debt and to repurchase stock. In
addition, cash and marketable securities decreased due to the sale of
investments and to a decline in the valuation of investments available for sale.
Shareholders' equity decreased $214,457 during the first nine months of 1998.
Net income of $98,659 and the exercise of stock options of $7,474 were offset by
the repurchase of stock of $304,684, a net unrealized loss on investments of
$11,486 and a foreign currency translation loss adjustment of $4,420.
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PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
YEAR 2000
In August 1998, the Securities and Exchange Commission issued an Interpretive
Release, Statement of the Commission Regarding Disclosure of Year 2000 Issues
and Consequences by Public Companies, Investment Advisors, Investment Companies,
and Municipal Securities Issuers which was effective for the first periodic
reports filed subsequent to August 4, 1998. This Interpretive Release requires
the Company to make disclosures with respect to the Company's Year 2000 ("Y2K")
state of readiness, the costs and risks involved in adequately addressing the
issue and any contingency plans in place to respond to the likely worst case
scenario.
STATE OF READINESS. The Company's Y2K potential areas of risk relate to
products, business systems, embedded and non-embedded manufacturing systems and
tools, facility support systems, engineering and legacy systems, vendors and
customers. A Y2K program office, staffed by external Y2K experts, has been
established at the Company's corporate headquarters to facilitate the worldwide
assessment and correction of Y2K issues. In addition, personnel at each of the
Company's primary manufacturing facilities and distribution locations are
involved in addressing Y2K issues.
The Company has completed an assessment of Y2K compliance for its products. The
Company's products have no internal date-sensitive clocks. Accordingly, the
Company does not believe that the Year 2000 issue presents any exposure as it
relates to the Company's products.
In 1997 and 1998, the Company implemented an Enterprise Resource Planning (ERP)
system to manage its worldwide manufacturing, distribution and finance
operations. In addition, the system is used for FDA tracking compliance. This
system is Y2K compliant. In conjunction with the implementation of this ERP
system, the Company upgraded its hardware infrastructure. This hardware is also
Y2K compliant. Other related business systems, such as desktop support, and the
business systems of the remaining locations will be assessed for Y2K compliance
by the end of the first quarter 1999.
The Company has initiated the assessment of its manufacturing systems and tools,
facilities support systems, engineering and legacy systems. The Company is
approaching the Y2K issue in four phases: assessment, remediation, validation
and implementation. The full assessment of Y2K areas of risk is expected to be
completed during the first quarter of 1999. Remediation, including testing,
relating to material Y2K exposures is expected to be completed by the end of the
second quarter 1999. The Company expects to complete the validation and
implementation phases by the end of the third quarter 1999.
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PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)
The Company is in the process of contacting its major suppliers and customers to
determine its potential exposure to supply disruption or sales interruption. The
only major system interface relates to customer electronic data interfaces. The
Company is not aware of any vendor or customer with a Y2K issue that would
materially impact the Company's results of operations, liquidity or capital
resources. However, the Company has no means to ensure that vendors and
customers will be Y2K compliant.
COSTS. The Y2K program office will be staffed by external resources which will
be supported by internal resources. The cost to complete the Y2K assessment
phase is estimated to total $1,000 and will be funded by operating cash flow.
After the assessment is complete, the Company will be able to estimate the total
Y2K program costs.
RISKS. The Company's management believes it has implemented an effective program
to resolve Y2K issues in a timely manner. As noted above, the Company has not
completed all the required phases of the Y2K program. If the Company does not
complete all the necessary phases of its Y2K program, the Company may be unable
to manufacture products and may experience other business interruptions. In
addition, supplier or customer Y2K related disruptions could adversely affect
the Company. The economic effect of these risks cannot be quantified at this
time.
CONTINGENCY PLANS. Throughout 1999 the Company will determine if contingency
planning is needed.
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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 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 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.
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.
CPI, GSC and Lilly (collectively the "Federal Court Guidant 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 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.
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PART II OTHER INFORMATION (continued)
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 they have
vigorously defended their interests, and will continue to do so.
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
Guidant Parties' claims, as reflected in the Telectronics Action, are subject to
arbitration pursuant to the arbitration provisions of the Telectronics
Agreement, (ii) an order that the Defendants arbitrate their claims against the
Telectronics Group and Pacesetter in accordance with the arbitration provisions
of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and
permanently from litigating their dispute with the Telectronics Group and
Pacesetter in any other forum and (iv) certain costs. 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.
In response to the appeal by the Telectronics Group and Pacesetter, the
Court of Appeals issued a decision on May 4, 1998 reversing the district court
and vacating the district court's dismissal of the Minnesota federal district
court lawsuit which the Telectronics Group and Pacesetter brought against the
Guidant Parties. As part of this decision, the Court of Appeals remanded the
case to the district court in Minnesota and instructed the district court to
permit the arbitration requested by the Telectronics Group and Pacesetter to
proceed. The Court of Appeals also asked the district court in Minnesota to
reconsider the motion for an injunction previously brought by the Telectronics
Group and Pacesetter which sought to preliminarily and permanently enjoin the
Guidant Parties from litigating their dispute with the Telectronics Group and
Pacesetter in any forum outside the arbitration proceeding.
The Guidant Parties filed a request for re-hearing of the Eighth
Circuit Court of Appeals' May 4, 1998 decision and a suggestion that the matter
be considered by the court en banc. The Court of Appeals denied Guidant's
requests in this regard by order dated June 9, 1998.
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PART II OTHER INFORMATION (continued)
As a result of Eighth Circuit Court of Appeals' decision in favor of
Pacesetter and the Telectronics Group, the United States District Court for the
Southern District of Indiana issued an order on June 8, 1998 staying the case
which the Federal Court Guidant Parties had brought against St. Jude Medical and
Pacesetter. In addition, the State Superior Court in Marion County, Indiana also
issued an order on June 18, 1998 staying the Telectronics Action. Finally, 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. That court's order also requires Guidant to provide the
Telectronics Group and Pacesetter with advance notice if it seeks to lift either
of the stays that have been granted in the above cases.
The parties have initiated steps to select an arbitrator for the
arbitration proceeding. St. Jude Medical and Pacesetter will continue to
vigorously defend their interests against the claims asserted by Guidant and
associated entities in the arbitration.
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 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 trial is expected to begin in 1999. 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 of two models of
pacemaker leads that have subsequently been discontinued, of which approximately
25,000 were sold in the U.S.
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PART II OTHER INFORMATION (continued)
When St. Jude acquired from Siemens substantially all of its worldwide cardiac
rhythm management business ("Pacesetter"), the purchase agreement provided that
St. Jude would assume liability for products liability claims which arose after
September 30, 1994. Two class action suits were filed alleging that two
pacemaker lead models, which had failed prior to March 25, 1995, were defective.
These cases were settled by Siemens and St. Jude. St. Jude's portion of the
settlement was approximately $4.2 million and Siemens paid a substantially
larger amount. St. Jude's product liability insurance carrier, Steadfast, denied
coverage for claims relating to these two pacemaker lead models in a suit
against St. Jude. St. Jude and Steadfast settled the case prior to trial. As a
result of the settlement, St. Jude is self-insured for the estimated 10,000
pacing leads of these two models that remain implanted.
Item 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
2 Not applicable
4 Rights Agreement dated as of July 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 1 of the Registrant's Form 8A dated as of
August 6, 1997.
10 Form of Employment Agreement that the Company has entered into
with officers relating to severance matters in connection with
a change in control.
22 Not applicable
23 Not applicable
24 Not applicable
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 in its behalf by the
undersigned thereunto duly authorized.
ST. JUDE MEDICAL, INC.
November 13, 1998 /s/ JOHN C. HEINMILLER
- -------------------- ----------------------------------
DATE John C. Heinmiller
Vice President Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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