ITEM 1. BUSINESS
GENERAL
St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures and markets medical devices and provides services for the cardiovascular segment of the medical device industry. The Company's products are distributed in more than 100 countries worldwide through a combination of direct sales personnel, independent manufacturers' representatives and distribution organizations. The main markets for the Company's products are the United States and Western Europe.
Effective May 15, 1997, St. Jude acquired Ventritex, Inc., ("Ventritex") a California-based manufacturer of implantable cardioverter defibrillators (ICDs) and related products. ICDs are used to treat hearts that beat inappropriately fast.
Effective November 29, 1996, St. Jude Medical's Pacesetter subsidiary acquired substantially all of the assets of Telectronics Pacing Systems, Inc. ("Telectronics"), a pacemaker company, and Medtel, a distribution company in the Asia-Pacific region. In addition to state-of-the-art pacing technologies, Telectronics enhanced the Company's cardiac rhythm management division operations by adding important intellectual property assets.
Effective September 23, 1996, the Company acquired Newcor Industrial S.A. which owned most of the assets of Biocor(R) Industria E Pesquisas Ltd., a Brazilian manufacturer of tissue heart valves.
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a Minnesota based manufacturer of specialized cardiovascular catheters and related products for the electrophysiology and interventional cardiology markets.
St. Jude provides products and services for two industry segments: cardiac rhythm management and heart valve disease management. Substantially all of its operations and assets are attributable to cardiovascular medical devices. The Cardiac Rhythm Management Division (CRMD) is responsible for the Company's cardiac rhythm management products including bradycardia pulse generators (pacemakers), leads (insulated wires) and programmers and tachycardia implantable cardioverter defibrillators, leads and programmers. CRMD also provides a broad array of catheter product offerings for interventional cardiology, and electrophysiology catheters for diagnostic mapping of the heart, ablation of malfunctioning heart tissue and temporary cardiac pacing catheters. The Heart Valve Division is responsible for the Company's heart valve disease management products including mechanical and tissue heart valves and annuloplasty rings. In addition, the Company maintains geographically based sales and marketing organizations which are responsible for marketing, sales and distribution of the Company's and third party products in Europe, Africa, the Middle East, Japan, Canada, Latin America and the Asia-Pacific region.
Typically, the Company's net sales are somewhat higher in the first and second quarters and lower in the third and fourth quarters. This results from patient tendency to defer, if possible, cardiac procedures during the summer months and from the seasonality of the domestic and Western European markets where
summer vacation schedules normally result in fewer surgical procedures. Manufacturers' representatives randomly place large orders which can distort the net sales pattern noted above. In addition, new product introductions, acquisitions, and regulatory approvals can modify the expected net sales pattern.
In 1998, approximately 72% of net sales were derived from cardiac rhythm management products, and approximately 28% from heart valve disease management products. Approximately 59% of the Company's 1998 net sales were in the U.S. market, which was consistent with 1997 results.
CARDIAC RHYTHM MANAGEMENT The Cardiac Rhythm Management Division is headquartered in Sylmar, California and has manufacturing facilities in California, Arizona, Minnesota, South Carolina and Sweden. Pacesetter(R) pacemakers and related systems treat patients with hearts that beat inappropriately slow, a condition known as bradycardia. Ventritex(R) ICDs and related systems treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. Daig(R) specialized disposable cardiovascular catheters and related devices are used in the electrophysiology and interventional cardiology markets.
Typically implanted pectorally, just below the collarbone, pacemakers monitor the heart's rate and, when necessary, deliver low-level electrical impulses that stimulate an appropriate heartbeat. The pacemaker is connected to the heart by one or two leads that carry the electrical impulses to the heart and information from the heart back to the pacemaker. An external programmer enables the physician to retrieve diagnostic information from the pacemaker and reprogram the device in accordance with the patient's changing needs. Single-chamber pacemakers stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace in both the upper and lower chambers.
CRMD's current Pacesetter(R) pacing products include the January 1999 FDA approved Affinity(R) and the Trilogy(R) family of pacemakers, containing the proven Omnisense(TM) activity-based sensor, and the Tempo(TM) pacemaker family, which uses fifth-generation Minute Ventilation sensor technology. These pacemaker families are highly automatic and contain many advanced features and diagnostic capabilities to optimize cardiac therapy. All are small and physiologic in shape to enhance patient comfort.
Outside the United States, CRMD also offers the world's smallest single-chamber pacemaker, the Microny(TM) SR+, and the Regency(TM) pacemaker families, which are in clinical trials in the United States. The Affinity(R) and Regency(TM) families of pacemakers, as well as the Microny(TM) SR+, all offer the unique feature of AutoCapture(TM) pacing system. The AutoCapture(TM) pacing system is a proprietary technology that enables the pacemaker to monitor every paced beat for heart capture, deliver a back-up pulse in the event of noncapture, continuously measure threshold, and make adjustments in energy output to match changing patient needs.
CRMD's current pacing leads include the active-fixation Tendril(R) DX family and the passive-fixation Passive Plus(R) DX family which are available worldwide, and the passive-fixation Membrane(TM) EX family which is currently available outside the United States. All three lead families feature steroid elution, which helps suppress the body's inflammatory response to a foreign object, are designed to maximize energy efficiency and promote pacing system longevity.
CRMD offers two pacemaker programmers, the APS(TM) III patient management system, and the highly portable APS(TM)(mu) (micro), which allow the physician to efficiently utilize the extensive diagnostic and therapeutic capabilities of CRMD's pacemakers.
CRMD's Ventritex(R) ICDs monitor the heartbeat and deliver higher energy electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In ventricular tachycardia, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body's tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood. Like pacemakers, defibrillators are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively. The current Ventritex offerings include the Angstrom(TM) MD, Contour(R) MD and Profile(TM) MD ICDs.
These ICDs are used with the dual electrode Ventritex(R) SPL(R) and single electrode Ventritex(R) TVL(R) transvenous leads, which have superior handling characteristics and performance. Ventritex ICDs are currently programmed with the recently introduced PR-3500 and PR-1500 programmers.
Specialized disposable cardiovascular devices, sold under the Daig name, include percutaneous (through the skin) catheter introducers, diagnostic guidewires, electrophysiology catheters and bipolar temporary pacing catheters (used with external pacemakers). Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. Daig's percutaneous catheter introducer products consist primarily of peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves, obturators and needles. All of these products are offered in a variety of sizes and packaging configurations. Diagnostic guidewires are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. Daig's diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity.
Electrophysiology catheters are placed into the human body percutaneously to aid in the diagnosis and treatment of cardiac arrhythmias (abnormal heart rhythms). Between two and five electrophysiology catheters are generally used in each electrophysiology procedure. Daig's electrophysiology catheters are available in multiple configurations. Bipolar temporary pacing catheters are inserted percutaneously for temporary use (less than one hour to a maximum of one week) with external pacemakers to provide patient stabilization prior to implantation of a permanent pacemaker, following a heart attack, or during surgical procedures. Daig produces and markets several designs of bipolar temporary pacing catheters.
HEART VALVE DISEASE MANAGEMENT The Heart Valve Division (HVD) is headquartered in St. Paul, Minnesota and has manufacturing facilities in St. Paul, Puerto Rico, Canada and Brazil. Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart's chambers.
HVD offers both mechanical and tissue replacement heart valves and valve repair products. The St. Jude Medical(R) mechanical heart valve has been implanted in over 900,000 patients to date. The Company markets the Toronto SPV(R) stentless tissue valve, the world's leading stentless tissue valve and the SJM(R) Biocor(TM) tissue valves. The Company received FDA approval for the U.S. market release of the Toronto SPV(R) in November 1997 at which time the product was launched and physician training commenced. The SJM Epic(TM) tissue heart valve received European regulatory approval in late 1998 and is expected to be launched in Europe in 1999.
Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves. The Company has executed a license agreement with Professor Jacques Seguin to manufacture and market an advanced semi-rigid annuloplasty ring. The SJM(R) Seguin annuloplasty ring was cleared by the FDA for
U.S. release during first quarter 1997. The SJM Tailor(TM) annuloplasty ring received worldwide regulatory approvals in late 1998 and is expected to be launched worldwide in early 1999.
HVD has also entered into other relationships to provide additional products and services for heart valve disease management, including:
1) An agreement with LifeNet Transplant Services which enables HVD to assist in the marketing of human donated allograft heart valves. 2) An alliance with Boehringer Mannheim Corporation which provides valve patients the opportunity to use a home test kit for measuring anticoagulation levels. 3) A worldwide license agreement with Spire Corporation to utilize their proprietary anti-bacterial silver coating (Silzone(TM)) on the sewing cuffs of heart valves and related products.
SUPPLIERS The Company purchases raw materials and other items from numerous suppliers for use in its products. The Company maintains sizable inventories of up to three years of its projected requirements for certain materials, some of which are available only from a single vendor. The Company has been advised from time to time that certain of these vendors may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential products liability exposure. Some of these vendors have modified their positions and have indicated a willingness to either temporarily continue to provide product until such time as an alternative vendor or product can be qualified or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify such other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products.
COMPETITION Within the medical device industry, competitors range from small start-up companies to companies with significant resources. The Company's customers consider many factors when choosing supplier partners including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. Market share can shift as a result of technological innovation, product recalls and product safety alerts. This emphasizes the need to provide the highest quality products and services. St. Jude expects the competition to continue to increase by using tactics such as consigned inventory, bundled product sales and reduced pricing.
CRMD has traditionally been a technological leader in the bradycardia pacemaker market. Two other companies and CRMD account for well over eighty percent of the worldwide bradycardia pacemaker net sales. The Company has strong market share positions in all major developed markets.
There are three principal manufacturers and suppliers of ICDs. This is a rapidly growing and highly competitive market. Two of the competitors account for more than 80% of the worldwide ICD sales. These two competitors are larger than the Company and have invested substantial amounts in ICD research and development. The market areas Daig focuses on are the cardiac catherization laboratories and the electrophysiology laboratories throughout the world. These are growing markets with numerous competitors.
The Company is the world's leading manufacturer and supplier of mechanical heart valves. There are two other principal and several other smaller mechanical heart valve manufacturers. The Company competes against two principal and a large number of other smaller tissue heart valve manufacturers.
The cardiovascular segment of the medical device market is a dynamic market currently undergoing significant change due to cost of care considerations, regulatory reform, industry consolidation and customer consolidation. The ability to provide cost effective clinical outcomes is becoming increasingly more important for medical device manufacturers.
MARKETING The Company's products are sold in over 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 1998 net sales.
In the United States, St. Jude sells directly to hospitals through a combination of independent manufacturers' representatives and an employee based sales organization for its pacemaker products and through employee based sales organizations for its heart valve and catheter products. In Western Europe, the Company has an employee based sales organization selling in 14 countries. Throughout the rest of the world the Company uses a combination of independent distributor and direct sales organizations.
Payment terms worldwide are consistent with local practice. Orders are shipped as they are received and, therefore, no material back orders exist.
RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain products and processes and to maintain the highest quality standards of existing products. The Company's research and development expenses, exclusive of purchased research and development, were $99,756,000 (9.8% of net sales), $104,693,000 (10.5%) and $107,644,000 (12.3%) in 1998, 1997 and 1996, respectively.
GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in some instances, by state and foreign governmental authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and regulations thereunder, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements, the most comprehensive of which requires the completion of an FDA approved clinical evaluation program and submission and approval of a pre-market approval ("PMA") application before a device may be commercially marketed. The Company's mechanical and tissue heart valves, implantable cardioverter defibrillators, certain pacemakers and leads and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads, annuloplasty ring products and other electrophysiology and interventional cardiology products are currently marketed under the 510(k) pre-market notification procedure of the Act.
In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with the quality system regulations which covers manufacturing and design and may, at any time after approval of a PMA or granting of a 510(K), conduct periodic inspections to determine compliance with both good manufacturing practice regulations and/or current medical device reporting regulations. If the FDA were to conclude that St. Jude was not in
compliance with applicable laws or regulations, it could institute proceedings to detain or seize products, issue a recall, impose operating restrictions, assess civil penalties and recommend criminal prosecution to the Department of Justice. Furthermore, the FDA could proceed to ban, or request recall, repair, replacement or refund of the cost of, any device manufactured or distributed.
The FDA also regulates record keeping for medical devices and reviews hospital and manufacturers' required reports of adverse experiences to identify potential problems with FDA authorized devices. Aggressive regulatory action may be taken due to adverse experience reports.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the amount the United States government, through the Health Care Financing Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, several legislative proposals have been advanced which would restrict future funding increases for these programs. While the Company has been unaware of significant domestic price resistance directly as a result of DRG reimbursement policies, changes in current DRG reimbursement levels could have an adverse effect on its domestic pricing flexibility.
St. Jude Medical's business outside the United States is subject to medical device laws in individual foreign countries. These laws range from extensive device approval requirements in some countries for all or some of the Company's products to requests for data or certifications in other countries. Generally, regulatory requirements are increasing in these countries. In the European Economic Community ("EEC"), the regulatory systems have been harmonized and approval to market in EEC countries (the CE Mark) can be obtained through one agency. In addition, government funding of medical procedures is limited and in certain instances being reduced.
The Office of the Inspector General (the "OIG") of the United States Department of Health and Human Services ("HHS") is currently conducting an investigation regarding possible hospital submissions of improper claims to Medicare/Medicaid programs for reimbursement for procedures using cardiovascular medical devices that were not approved for marketing by the FDA at the time of use. Beginning in June 1994, approximately 130 hospitals received subpoenas from HHS seeking information with respect to reimbursement for procedures using cardiovascular medical devices (including certain products manufactured by the Company) that were subject to investigational exemptions or that may not have been approved for marketing by the FDA at the time of use. The subpoenas also sought information regarding various types of remuneration, including payments, gifts, stock and stock options, received by the hospital or its employees from manufacturers of medical devices. Civil and criminal sanctions may be imposed against any person participating in an improper claim for reimbursement under Medicare/Medicaid. The OIG's investigation and any related change in reimbursement practices may discourage hospitals from participating in clinical trials or from including Medicare and Medicaid patients in clinical trials, which could lead to increased costs in the development of new products. St. Jude believes it is too early to predict the possible outcome of this matter or when it will be resolved. There can be no assurance that the OIG's investigation or any changes in third-party payors' reimbursement practices will not materially adversely affect the medical device industry in general or the Company in particular. In 1995, HCFA, part of HHS, issued a regulation clarifying that certain medical devices subject to investigational requirements under the Act may qualify for reimbursement. In April 1996, a Federal District Court in California declared the HCFA's governmental guidelines, denying reimbursement for investigational devices, to be invalid. After an appeal, the district court has again found the regulation invalid and the government has appealed again. There can be no assurance that the OIG's investigation or any resulting or related changes in third-party payors' reimbursement practices will not materially adversely affect the medical device industry in general
or St. Jude Medical in particular.
In 1994 the predecessor organization to Pacesetter entered a consent decree which settled a lawsuit brought by the United States in U.S. District Court for the District of New Jersey. The consent decree which remains in effect indefinitely requires that Pacesetter comply with the FDA's good manufacturing practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Pacesetter is obligated to pay certain costs of the inspections.
In May 1995 Telectronics and its President entered into a consent decree with the FDA. The consent decree provided that Telectronics would not manufacture or ship products for distribution in the United States until Telectronics established to the satisfaction of the FDA that its manufacturing facility in Florida operates in conformity with the FDA's good manufacturing practice regulations. Telectronics has satisfied its obligations in this regard and was released from these restrictions of the consent decree in June 1996. The consent decree which remains in effect indefinitely requires that Telectronics comply with the FDA's good manufacturing practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Telectronics is obligated to pay certain costs of the inspections.
In 1994 a state prosecutor in Germany began an investigation of allegations of corruption in connection with the sale of heart valves. As part of that investigation, the prosecutor seized documents from St. Jude's offices in Germany as well as documents from certain competitors' offices. The investigation is continuing and has been broadened to include other medical devices. Subsequently, the United States Securities and Exchange Commission issued a formal order of private investigation covering sales practices in Europe of St. Jude and other manufacturers.
PATENTS AND LICENSES The Company's policy is to protect the intellectual property rights in its work on medical devices. Where appropriate, St. Jude applies for United States and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses.
While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that its patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license or in process, will not be circumvented or invalidated. Further, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. The Company's principal patent covering its mechanical heart valve expired in the United States in July 1998. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company.
INSURANCE The medical device industry has historically been subject to significant products liability claims. Such claims could be asserted against the Company in the future for events not known to management at this time. Management has adopted risk management practices, including products liability insurance coverage, which management believes are prudent.
California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company's earthquake and related business interruption insurance for its operations located in Sylmar and Sunnyvale, California does provide for limited coverage above a significant self-insured retention. There are several factors that preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company's manufacturing facilities, the impact of such an earthquake on the Company's California workforce and the infrastructure of the surrounding communities, and the extent, if any, of damage to the Company's inventory and work in process. While the Company's exposure to significant losses occasioned by a California earthquake would be partially mitigated by its ability to manufacture certain of the Pacesetter products at its Swedish manufacturing facility, any such losses could have a material adverse effect on the Company, the duration of which cannot be reasonably predicted. The Company has expanded the manufacturing capabilities at its Swedish facility and has constructed a pacemaker component manufacturing facility in Arizona. In addition, the Company has moved significant finished goods inventory to locations outside California. These facilities and inventory transfers would further mitigate the adverse impact of a California earthquake.
EMPLOYEES As of December 31, 1998, the Company had 3,984 full-time employees. It has never experienced a work stoppage as a result of labor disputes and none of its employees are represented by a labor organization, with the exception of the Company's Swedish employees and certain employees in France.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS St. Jude Medical provides products and services for two industry segments: cardiac rhythm management and heart valve disease management. The Company's domestic and foreign net sales, operating profit and identifiable assets are described in Note 9 to the Consolidated Financial Statements on pages 44 and 45 of the 1998 Annual Report to Shareholders and are incorporated herein by reference.
The Company's foreign business is subject to such special risks as exchange controls, currency devaluation, the imposition or increase of import or export duties and surtaxes, and international credit or financial problems. Since its international operations require the Company to hold assets in foreign countries denominated in local currencies, many assets are dependent for their U.S. dollar valuation on the values of a number of foreign currencies in relation to the U.S. dollar. The Company may from time to time enter into purchase and sales contracts in the forward markets for various foreign currencies with the objective of protecting U.S. dollar values of assets and commitments denominated in foreign currencies.
ITEM 2.
ITEM 2. PROPERTIES St. Jude Medical's principal executive offices are owned and are located in St. Paul, Minnesota. Manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. Approximately 69%, or 352,000 square feet, of the total manufacturing space is owned by the Company and the balance is leased.
The Company also maintains sales and administrative offices inside the United States at 14 locations in 6 states and outside the United States at 40 locations in 22 countries. With the exception of one location, all of these locations are leased.
In management's opinion, all building and machinery and equipment are in good condition and suitable for their purposes and are maintained on a basis consistent with sound operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GUIDANT LITIGATION On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant Sales Corporation (a wholly owned subsidiary of CPI) ("GSC"), and Eli Lilly and Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc. ("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the Telectronics Group in State Superior Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit alleges, among other things, that, pursuant to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain intellectual property licenses relating to cardiac stimulation devices, and that such licenses would terminate upon the consummation of the merger of Ventritex into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an agreement entered into in 1994 (the "Telectronics Agreement"), CPI and Lilly granted the Telectronics Group certain intellectual property licenses relating to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit seeks declaratory and injunctive relief, among other things, to prevent and invalidate the transfer of the Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition of Telectronic's assets (the "Telectronics Acquisition") and the application of license rights granted under the 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.
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.
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.
An arbitrator for the arbitration has been selected by the parties. The arbitrator has issued some interim rulings and the parties are presently waiting for the arbitrator's further instructions to proceed with the arbitration.
On December 23, 1998, the Guidant Parties gave the Telectronics Group and Pacesetter notice of their intent to seek to lift the stay of proceedings which had been issued in the federal court action in Indiana. On January 11, 1999, the Federal Court Guidant Parties served a copy of their motion to lift stay upon the Telectronics Group and Pacesetter. All parties have provided written briefs on this matter to the federal court in Indiana and are awaiting a ruling from the court.
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 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 On December 16, 1998, the Company began a lawsuit in federal court in Los Angeles seeking a declaration that it was permitted to hire certain sales representatives who previously had worked for Intermedics, which was acquired by Guidant. The Company's CRMD unit has hired 14 such representatives as of March 16, 1999, six of whom had no written agreement with Intermedics or Guidant. Guidant has filed a counterclaim in the lawsuit seeking damages from the Company for the hiring of these representatives and for their activities as sales representatives of CRMD. The Company intends to vigorously assert its position in this litigation.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
- ----------------------- *Dates in brackets indicate period during which the named executive officers began serving in such capacity.
Executive officers serve at the pleasure of the Board of Directors.
Mr. Matricaria's business experience is set forth in the Company's definitive Proxy Statement dated March 25, 1999 under the Section "Election of Directors." The information is incorporated herein by reference.
Dr. Parks' resigned from the Company effective March 31, 1999.
Mr. Stark's business experience is set forth in the Company's definitive Proxy Statement dated March 25, 1999 under the section "Election of Directors." The information is incorporated herein by reference.
Mr. Shepherd joined the Company in 1994 as President of the St. Jude Medical Division. Prior to joining St. Jude, Mr. Shepherd was President and CEO of Hybritech, Inc. where he had been employed for 3 years. Prior to that, Mr. Shepherd held various management positions at Cardiac Pacemakers, Inc. (CPI) and Eli Lilly & Company where he worked for 15 years. Hybritech and CPI were both wholly owned subsidiaries of Eli Lilly & Company. Effective May 5, 1999, Mr. Shepherd has been appointed as the President and Chief Executive Officer of St. Jude Medical, Inc.
Mr. Fourteau joined the Company in 1995 as President of St. Jude Medical Europe. He was appointed President of the Pacesetter Division in May 1996. Mr. Fourteau was appointed as President of the International Division in 1998. Prior to joining the Company, he was employed by Eli Lilly & Company for 19 years in various positions including his last position of vice president of pharmaceutical operations for Lilly International.
Mr. Coyle joined St. Jude Medical in 1994 as Director, Business Development and was appointed as the President and Chief Operating Officer of Daig in 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company in a variety of technical and business management roles in both its Pharmaceutical and Medical Device Divisions.
Mr. Berdusco joined the Company in 1993 as Vice President, Administration. Prior to joining the Company, he was Executive Director Corporate Facilities Planning, Manufacturing Strategy Development and Sourcing for Eli Lilly & Company. From 1962 to 1993, Mr. Berdusco held various management positions with Eli Lilly & Company in both domestic and international operations.
Mr. Gove joined the Company in 1994 as Vice President, Corporate Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing and Communications of Control Data Systems, Inc., a computer services company, from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions with Control Data Corporation. From 1970 to 1981, Mr. Gove held various management positions with the State of Minnesota and the U.S. Government.
Mr. O'Malley joined the Company in 1994 as Vice President and General Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly & Company for 15 years in various positions including his last position of General Counsel of the Medical Device and Diagnostics Division.
Mr. Heinmiller joined the Company in 1998 as Vice President of Corporate Business Development. In September 1998 he was appointed Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Heinmiller was president of Corporation, a privately held asset management company, and was vice president of finance and administration for Daig Corporation. Mr. Heinmiller is also a former audit partner in the Minneapolis office of Grant Thornton, a national public accounting firm, where he managed the firm's relationship with a number of clients. Mr. Heinmiller is a director of Lifecore Biomedical, Inc., Arctic Cat, Inc. and former director of Daig Corporation.
Mr. Cohen joined the Company in 1998 as Vice President, Business and Technology Development. Prior to joining the Company, he was employed by Sulzer Medica. During his 16-year career in the medical device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI Medical, an investment firm focused on the medical technology industry.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information set forth under the captions "Dividends" and "Stock Exchange Listing" on pages 30 and 48 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five Year Summary of Selected Financial Data" on page 47 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 25 through 32 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Market Risk Sensitive Instruments" one page 29 of the Company's 1998 Annual Report to shareholders is incorporated by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and Report of Independent Auditors set forth on pages 33 through 46 of the Company's 1998 Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement dated March 26, 1999, is incorporated herein by reference. Information on executive officers is set forth in Part I, Item 4A hereto.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation and Other Information" and "Election of Directors" in the Company's definitive Proxy Statement dated March 26, 1999, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Company's definitive Proxy Statement dated March 26, 1999, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement dated March 26, 1999, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and Report of Independent Auditors as set forth on pages 33 through 46 of the Company's 1998 Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed as part of this Form 10-K Annual Report:
The report of the Company's Independent Auditors with respect to the above-listed financial statements is set forth in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference and with respect to the financial statement schedule is incorporated by reference to Exhibit 23 attached hereto.
All other financial statements and schedules not listed have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable.
(3) EXHIBITS
- ----------------------------- * Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1998 No reports on Form 8-K were filed by the Company during the fourth quarter 1998.
(c) EXHIBITS: Reference is made to Item 14(a)(3).
(d) SCHEDULES: Reference is made to Item 14(a)(2).
For the purposes of complying with the amendments to the rules governing Form S-8 under the Securities Act of 1933, the undersigned Company hereby undertakes as follows, which undertaking shall be incorporated by reference into the Company's Registration Statements of Form S-8 Nos. 33-9262 (filed October 3, 1986), 33-29085 (filed June 6, 1989), 33-41459 (filed June 28, 1991), 33-48502 (filed June 10, 1992), 33-54435 (filed July 1, 1994) and 333-42945 (filed December 22, 1997):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ST. JUDE MEDICAL, INC.
Date: March 26, 1999 By /s/ RONALD A. MATRICARIA ------------------------- Ronald A. Matricaria CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
By /s/ JOHN C. HEINMILLER ----------------------- John C. Heinmiller VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31, 1998
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
- ------------------------- (1) Uncollectible accounts written off, net of recoveries. (2) Claims settled, including settlements paid. (3) Deducted from accounts receivable on the balance sheet. (4) Included in other accrued expenses on the balance sheet. (5) Balance assumed through acquisitions.