-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUzH21GCf5aUcGd7gHknWj0MIHiAltg2bAbdszvd8/PmEYAlqY7CMlzHhQNrGjJA GIsMTukX8crmBpH1H1I+Rg== 0000203077-97-000001.txt : 19970328 0000203077-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000203077-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 97565427 BUSINESS ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 BUSINESS PHONE: 6124832000 MAIL ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-8672 ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive office) (612) 483-2000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS (Title of class) (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, or will not be contained, to the best of the Registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ____ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $3.0 billion at March 7, 1997, when the closing sale price of such stock, as reported on the New York Stock Exchange, was $38 1/8. The number of shares outstanding of the Registrant's Common Stock, $.10 par value, as of March 7, 1997, was 81,027,862 shares. Portions of the Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated March 24, 1997, are incorporated by reference in Part III. -------------------- The exhibit index set is forth on pages 12, 13, and 14. ST. JUDE MEDICAL, INC. 1996 10-K PART I Item 1. BUSINESS GENERAL St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures and markets medical devices and provides services for the cardiovascular segment of the medical device industry. The Company's products are distributed in more than 100 countries worldwide through a combination of direct sales personnel, independent manufacturers' representatives and distribution organizations. The main markets for the Company's products are the United States, Western Europe and Japan. Effective September 30, 1994, St. Jude acquired from Siemens AG substantially all the worldwide assets of its cardiac rhythm management operations ("Pacesetter"). The acquisition significantly expanded the Company's product offerings and provided a platform for potential further diversification activities within the cardiac rhythm management market. Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a Minnesota based manufacturer of specialized cardiovascular devices for the electrophysiology and interventional cardiology markets. Daig's competencies are in catheter development and manufacturing and certain of its electrophysiology products complement other St. Jude Medical cardiac rhythm management ("CRM") product offerings. Effective September 23, 1996, the Company acquired Biocor(R) Industria E Pesquisas Ltd., a Brazilian manufacturer of tissue heart valves. 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, both wholly owned subsidiaries of Pacific Dunlop, Ltd. In addition to state-of-the-art pacing technologies, Telectronics enhances the Company's CRM operations by adding important intellectual property assets and an experienced sales organization. On October 23, 1996, the Company and Ventritex, Inc. ("Ventritex") signed a definitive agreement for a tax-free, stock-for-stock merger. The merger is subject to regulatory approvals and Ventritex shareholder approval. In January 1997, Ventritex reported three deaths related to a component failure in its Cadence(R) model V110 ICD device. Ventritex received FDA approval to reprogram or replace approximately 5,600 devices which utilize that component to prevent further incidents related to component failures. The Company is performing further investigation of the component failure and its impact on the Ventritex business prior to concluding the merger. There can be no assurance given as to if and when the merger will be concluded. St. Jude provides products and services for a single industry segment, that of cardiovascular medical devices. Substantially all of its operations and assets are attributable to cardiovascular medical devices. The Company currently operates through three global business units. The Heart Valve Division is responsible for the Company's heart valve disease management products including mechanical and tissue heart valves and annuloplasty rings. The Pacesetter Division is responsible for the Company's cardiac rhythm management products including bradycardia pulse generators, leads and programmers and tachycardia research and development. The Daig Division provides a broad array of product offerings for interventional cardiology, including percutaneous angiography catheters, introducers used in catheter procedures, guidewires and guiding sheaths. Daig also participates in the electrophysiology market with catheters for diagnostic mapping of the heart, ablation of malfunctioning heart tissue and temporary cardiac pacing catheters. In addition, the Company maintains geographically based sales and marketing organizations which are responsible for marketing, sales and distribution of the Company's and third party products in Europe, Africa, the Middle East, Japan, Canada, Latin America and the Asia-Pacific region. Typically, the Company's net sales are somewhat stronger in the first and second quarters and weaker in the third quarter. This results from patient tendency to defer, if possible, cardiac procedures during the summer months and from the seasonality of the domestic and Western European markets where summer vacation schedules normally result in fewer surgical procedures. Manufacturers' representatives randomly place large orders which can distort the net sales pattern noted above. In addition, new product introductions, acquisitions, and regulatory approvals can modify the expected net sales pattern. In 1996, approximately 62% of net sales were derived from cardiac rhythm management products, approximately 33% from heart valve products and the balance from interventional cardiology products. Approximately 57% of the Company's 1996 net sales were in the U.S. market, down from 59% in 1995. CARDIAC RHYTHM MANAGEMENT The Pacesetter Division is headquartered in Sylmar, California and has manufacturing facilities in Sylmar; Miami Lakes, Florida; Denver, Colorado; Sweden and Scotland. Pacesetter pulse generators and pacing leads treat patients with hearts that beat too slowly or irregularly; a condition known as bradycardia. Various models of bradycardia pulse generators and leads are produced by Pacesetter. Pulse generators can sense and produce impulses in both the upper and lower chambers of the heart, adapt to changes in heart rate and can be non-invasively programmed by the physician to adjust sensing, electrical pulse intensity, duration, rate and other characteristics. The pulse generator contains a lithium battery power source and electronic circuitry. It generates pacing pulses and monitors the heart's activity to sense abnormalities requiring correction. It is most often implanted pectorally, just below the collarbone. The leads are insulated wires that carry the pulses to the heart and information from the heart back to the pacemaker. A pacemaker uses electrical currents equivalent to those in a healthy heart. Pacesetter's product line includes a new pacing system platform called the Trilogy(R) series. The series was an outgrowth of the highly successful Synchrony(R) platform and was designed with the philosophy of cardiac optimization. Trilogy(R) has an ovoid shape, doubles memory, adds new diagnostic capabilities and in some versions has an automaticity feature. Microny(TM), a single chamber pacemaker, which was the first pacemaker in the world to incorporate AutoCapture(TM), has been introduced in international markets and is in clinical trials in the U.S. The AutoCapture(TM)algorithm is capable of adjusting the pacemaker's output to provide the minimal amount of electrical impulse necessary to stimulate the heart and provides an appropriate safety margin on a beat by beat basis. Microny(TM) is the world's smallest pacemaker weighing only about 13 grams. The sensor is an accelerometer, a "ball in a cage" sensor which has excellent sensitivity to the intensity of the patient's body movement in determining the proper pacing rate. The Regency(TM) family of single chamber pacemakers incorporates the AutoCapture(TM) feature and several advanced diagnostic capabilities. Pacesetter has released the Regency(TM) pacemaker in most international markets and commenced U.S. clinical trials in 1996. Telectronics products which are marketed through the Telectronics sales force include the Meta(TM) 1256 DDDR pulse generator and other pulse generator products. The Meta(TM) device includes Telectronics' Minute Ventilation(TM) biosensor feature and third generation Automatic Mode Switching (AMS)(TM). HEART VALVES The St. Jude Medical Division 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. St. Jude offers both mechanical and tissue replacement heart valves and valve repair products. The St. Jude Medical(R) mechanical heart valve is the most widely implanted valve in the world with over 725,000 valves implanted to date. Internationally the Company markets the Toronto SPV(R) stentless tissue valve, the world's leading stentless tissue valve, and SJM(R) Biocor(TM) tissue valves. The Toronto SPV(R) commenced domestic clinical trials in 1994. Under an agreement with Heartport, Inc. ("Heartport"), St. Jude's heart valve prostheses will be used in combination with Heartport's proprietary Port-AccessTM technology to perform less invasive heart valve surgery to repair or replace diseased heart valves. In early 1997, Heartport received FDA authorization to commence U.S. marketing of its Port-Access(TM) mitral valve repair and replacement system. 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. This SJM(R) Seguin annuloplasty ring, cleared by the FDA for U.S. release during first quarter 1997, can be used with conventional surgery and Heartport's Port-Access(TM) technology. St. Jude has also entered into several other relationships to provide additional products and services for heart valve disease management, including: 1) An agreement with LifeNet Transplant Services which enables St. Jude to assist in the marketing of human donated allograft heart valves. 2) An alliance with DuPont Pharma to jointly develop educational programs on using anticoagulant drugs with mechanical heart valves. 3) An alliance with Boehringer Mannheim Corporation which provides valve patients the opportunity to use a home test kit for measuring anticoagulation levels. ELECTROPHYSIOLOGY AND INTERVENTIONAL CARDIOLOGY Daig is headquartered and has its manufacturing operations in Minnetonka, Minnesota. Daig designs, manufactures and markets specialized disposable cardiovascular devices for the electrophysiology and interventional cardiology markets, including percutaneous catheter introducers, diagnostic guidewires, electrophysiology catheters and bipolar temporary pacing catheters (used with external pacemakers). Percutaneous (through the skin) 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 proprietary 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. In addition to these current products, Daig continually explores the possibility for new products and for new or expanded applications for existing products. Daig has received marketing clearance for a diagnostic angiography catheter and plans to launch this product commercially during 1997. Daig is also involved in various research and development efforts, including two related to its Livewire(TM) steerable electrophysiology catheter. One of these efforts aims to expand the approved diagnostic labeling of the Livewire(TM) steerable electrophysiology catheter to include certain ablation therapies. The other, which is being conducted pursuant to an FDA Investigational Device Exemption ("IDE"), involves a clinical trial to gather data in support of the use of the Livewire(TM) steerable electrophysiology catheter in combination with specialized guiding introducers as a cure for atrial fibrillation (a heart rhythm disorder). SUPPLIERS Under an agreement with CarboMedics, Inc. (CMI), which covers the supply of pyrolytic carbon heart valve components for the mechanical heart valve, the Company must purchase a minimum of 20% of its needs through 1998 at negotiated prices. If CMI is unable or fails to perform under the agreement, the license permits the Company to self-manufacture its component requirements during the supply interruption. The agreement can be extended for additional one year terms after 1998 at the Company's option and prices the Company would pay in 1999 and beyond would be adjusted annually by a producer price index based formula established in the agreement. The Company purchases raw materials and other items from numerous suppliers for use in its products. The Company maintains sizable inventories of up to three years of its projected requirements for certain materials, some of which are available only from a single vendor. The Company has been advised from time to time that certain of these vendors may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential products liability exposure. Some of these vendors have modified their positions and have indicated a willingness to either temporarily continue to provide product until such time as an alternative vendor or product can be qualified or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify such other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products. COMPETITION Within the medical device industry, competitors range from small start-up companies to companies with significant resources. The Company's customers consider many factors when choosing supplier partners including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. Market share can shift as a result of technological innovation, product recalls and product safety alerts. This emphasizes the need to provide the highest quality products and services. St. Jude expects the competition to continue to increase by using tactics such as consigned inventory, bundled product sales and reduced pricing. The Company is the world's leading manufacturer and supplier of mechanical heart valves. There are two other principal and several other smaller mechanical heart valve manufacturers. The Company competes against two principal and a large number of other smaller tissue heart valve manufacturers. Pacesetter has traditionally been a technological leader in the bradycardia pacemaker market. Worldwide there are six primary manufacturers and suppliers of bradycardia pacemakers, including the Company. One other company and Pacesetter account for well over half of the worldwide bradycardia pacemaker net sales. The Company has strong market share positions in all major developed markets. The market areas Daig focuses on are the cardiac catherization laboratories and the electrophysiology laboratories in hospitals throughout the world. These are growing markets with numerous competitive companies. 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 1996 net sales. In the United States, St. Jude sells directly to hospitals through an employee based sales organization for its heart valve and catheter products and a combination of independent manufacturers' representatives and an employee based sales organization for its pacemaker products. In Western Europe, the Company has an employee based sales organization selling in 14 countries. Throughout the rest of the world the Company uses a combination of independent distributor and direct sales organizations. Payment terms worldwide are consistent with local practice. Orders are shipped as they are received and, therefore, no material back orders exist. RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain products and processes and to maintain the highest quality standards of existing products. The Company's research and development expenses, exclusive of purchased research and development, were $74,841,000 (9.3% of net sales), $72,305,000 (9.5%) and $23,471,000 (6.0%) in 1996, 1995 and 1994, 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, certain pacemakers and leads and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads, annuloplasty ring products and other electrophysiology and interventional cardiology products are currently marketed under the 510(k) pre-market notification procedure of the Act. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with current good manufacturing practice regulations and may, at any time, 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 Medical 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 against employees 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. FDA device tracking and post-market surveillance requirements are expected to increase future regulatory compliance costs. Diagnostic-related groups ("DRG") reimbursement schedules regulate the amount the United States government, through the Health Care Financing Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient care of persons covered by Medicare. In response to the U.S. government budget deficit and rising Medicare and Medicaid costs, several legislative proposals have been advanced which would restrict future funding increases for these programs. While the Company has been unaware of significant domestic price resistance directly as a result of DRG reimbursement policies, changes in current DRG reimbursement levels could have an adverse effect on its domestic pricing flexibility. St. Jude business outside the United States is subject to medical device laws in individual foreign countries. These laws range from extensive device approval requirements in some countries for all or some of the Company's products to requests for data or certifications in other countries. Generally, regulatory requirements are increasing in these countries. In the European Economic Union ("EEU"), the regulatory systems have been harmonized and approval to market in EEU countries (the "CE mark") can be obtained through one agency. In addition, government funding of medical procedures is limited and in certain instances being reduced. The Office of the Inspector General (the "OIG") of the United States Department of Health and Human Services ("HHS") is currently conducting an investigation regarding possible hospital submissions of improper claims to Medicare/Medicaid programs for reimbursement for procedures using cardiovascular medical devices that were not approved for marketing by the FDA at the time of use. Beginning in June 1994, approximately 130 hospitals received subpoenas from HHS seeking information with respect to reimbursement for procedures using cardiovascular medical devices (including certain products manufactured by the Company) that were subject to investigational exemptions or that may not have been approved for marketing by the FDA at the time of use. The subpoenas also sought information regarding various types of remuneration, including payments, gifts, stock and stock options, received by the hospital or its employees from manufacturers of medical devices. Civil and criminal sanctions may be imposed against any person participating in an improper claim for reimbursement under Medicare/Medicaid. The OIG's investigation and any related change in reimbursement practices may discourage hospitals from participating in clinical trials or from including Medicare and Medicaid patients in clinical trials, which could lead to increased costs in the development of new products. St. Jude believes it is too early to predict the possible outcome of this matter or when it will be resolved. There can be no assurance that the OIG's investigation or any changes in third-party payors' reimbursement practices will not materially adversely affect the medical device industry in general or the Company in particular. In 1995, HCFA, part of HHS, issued a regulation clarifying that certain medical devices subject to investigational requirements under the Act may qualify for reimbursement. In April 1996, a Federal District Court in California declared the Health Care Financing Administration's governmental guidelines, denying reimbursement for investigational devices, to be invalid. The government has appealed this decision, and the impact on the OIG investigation is uncertain. 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 of St. Jude and other manufacturers in Germany. PATENTS AND LICENSES The Company's policy is to protect the intellectual property rights in its work on medical devices. Where appropriate, St. Jude applies for United States and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that its patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license or in process, will not be circumvented or invalidated. Further, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. The Company's principal patent covering its mechanical heart valve will expire in the United States in July 1998. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company. INSURANCE The medical device industry has historically been subject to significant products liability claims. Such claims could be asserted against the Company in the future for events not known to management at this time. Management has adopted risk management practices, including products liability insurance coverage, which management believes are prudent. The Company's former products liability insurance carrier is currently seeking to rescind its coverage of Pacesetter products for the period October 1, 1994, through December 31, 1995. Should the carrier prevail, the Company would be self-insured for Pacesetter claims made during that period. St. Jude cannot predict the outcome of the dispute. See Item 3 "Legal Proceedings". California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company's earthquake and related business interruption insurance for its operations located in Los Angeles County, 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 is currently engaged in the expansion of manufacturing capabilities at its Swedish facility and has constructed a pacemaker component manufacturing facility in Arizona. These facilities would further mitigate the adverse impact of a California earthquake. EMPLOYEES As of December 31, 1996, the Company had 3,620 full-time employees. It has never experienced a work stoppage as a result of labor disputes and none of its employees are represented by a labor organization, with the exception of the Company's Swedish employees and certain employees in France. INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS The medical products and service industry is the single industry segment in which the Company operates. The Company's domestic and foreign net sales, operating profit and identifiable assets, and its export sales to unaffiliated third parties are described in Note 8 to the Consolidated Financial Statements on page 37 of the 1996 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, dividend restrictions, the imposition or increase of import or export duties and surtaxes, and international credit or financial problems. Since its international operations require the Company to hold assets in foreign countries denominated in local currencies, many assets are dependent for their U.S. dollar valuation on the values of a number of foreign currencies in relation to the U.S. dollar. The Company may from time to time enter into purchase and sales contracts in the forward markets for various foreign currencies with the objective of protecting U.S. dollar values of assets and commitments denominated in foreign currencies. Item 2. PROPERTIES St. Jude Medical's principal executive offices are owned and are located in St. Paul, Minnesota. Manufacturing facilities are located in California, Colorado, Minnesota, Florida, Canada, Puerto Rico, Scotland and Sweden. Approximately 61%, or 243,000 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 13 locations in 8 states and outside the United States at 37 locations in 20 countries. With the exception of one location, all of these locations are leased. In management's opinion, all building and machinery and equipment are in good condition and suitable for their purposes and are maintained on a basis consistent with sound operations. Item 3. LEGAL PROCEEDINGS GUIDANT LITIGATION On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant Sales Corporation (a wholly owned subsidiary of Guidant, "GSC"), and Eli Lilly and Company, (the former owner of CPI, "Lilly"), filed a lawsuit against 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, CPI and Lilly granted Ventritex certain intellectual property licenses relating to cardiac stimulation devices, and that such licenses will terminate upon consummation of the proposed merger of Ventritex and 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 non-transferable intellectual property licenses relating to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit seeks declaratory and injunctive relief to prevent and invalidate the transfer to Pacesetter of the intellectual property rights covered by the CPI/Telectronics License pursuant to Pacesetter's acquisition of Telectronics (the "Telectronics Acquisition") and the application of such license rights 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. CPI, GSC and Lilly simultaneously filed suit against St. Jude Medical, Pacesetter, Ventritex and others in the United States District Court for the Southern District of Indiana seeking (i) a declaratory judgment that continued manufacture, use or sale by Ventritex of cardiac stimulation devices of the type currently manufactured and sold by Ventritex will, upon consummation of the Merger, be unlicensed and constitute an infringement of patent rights owned by CPI and Lilly, (ii) to enjoin the manufacture or sale by St. Jude Medical, Pacesetter or Ventritex of cardiac stimulation devices of the type currently manufactured by Ventritex from and after consummation of the Merger 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. St. Jude Medical believes that the foregoing complaints contain a number of significant factual inaccuracies concerning the Telectronics Acquisition and the terms and effects of the various intellectual property license agreements referred to in such complaints. St Jude Medical believes that the allegations set forth in the complaints are without merit, and St. Jude Medical intends to defend the actions vigorously. On December 24, 1996, the Telectronics Group and Pacesetter filed a lawsuit against Guidant, CPI, GSC and Lilly (the "Defendants") in the United States District Court for the District of Minnesota seeking (i) a declaratory judgment that the Defendants' claims, as reflected in the Telectronics Action, are subject to arbitration pursuant to the arbitration provisions of the Telectronics Agreement, (ii) an order that the Defendants arbitrate their claims against the Telectronics Group and Pacesetter in accordance with the arbitration provisions of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and permanently from litigating their dispute with the Telectronics Group and Pacesetter in any other forum and (iv) certain costs. The Court ruled against the Company and held that the Telectronics Agreement is not subject to arbitration. OTHER LITIGATION AND PROCEEDINGS From 1987 to 1991, Siemens AG through its Pacesetter and other affiliates ("Siemens") manufactured and sold approximately 32,000 model 1016T and 1026T pacemaker leads of which approximately 25,000 were sold in the U.S. In March 1993 Siemens was sued in federal district court in Cincinnati, Ohio ("the Wilson case"). The suit alleged that the model 1016T leads were negligently designed and manufactured. Class action status was granted by the court in September 1993. When St. Jude acquired from Siemens substantially all of its worldwide cardiac rhythm management business ("Pacesetter") on September 30, 1994, the purchase agreement specifically provided that Siemens retain all liability for the Wilson case, as well as all other litigation that was pending or threatened before October 1, 1994. The purchase agreement also provided that St. Jude would assume liability for other products liability claims which arose after September 30, 1994. Siemens and St. Jude were named defendants in a class action suit filed in March 1995 in Houston, Texas for alleged defects in models 1016T and 1026T pacemaker leads (the "Hann case"). The suit sought class action status for patients who had inner insulation failures of these leads after March 22, 1993 and who were not members of the Wilson class. Siemens and St. Jude settled the Wilson and Hann cases in November 1995. Management currently estimates the Company's share of the settlement to be approximately $5 million; the precise number of class members, and the corresponding financial liability, could increase or decrease as the process for filing claims is completed. The settlement agreement has an "opt out" provision for class members. Apart from this class action settlement, additional claims could be made or lawsuits brought by patients with these leads whose leads fail at a later date or whose leads fail for reasons outside the class definition. St. Jude's products liability insurance carrier, Steadfast, a wholly owned subsidiary of Zurich Insurance Company ("Zurich"), has denied coverage for this case and has filed suit against St. Jude in federal district court in Minneapolis seeking rescission of the policy covering Pacesetter business retroactive to the date St. Jude acquired Pacesetter. Zurich alleges that St. Jude made material negligent misrepresentations to Zurich including failure to disclose the Wilson case in order to procure the insurance policy. St. Jude has filed an answer denying Zurich's claim and has alleged that Zurich specifically had knowledge of the Wilson case. The terms of the products liability insurance policy which Zurich is seeking to rescind provide that St. Jude would be entitled to $10 million in coverage for the 1016T and 1026T pacemaker lead claims after payment by St. Jude of a self insured retention. St. Jude is investigating whether it may have claims against any entities, in addition to Zurich, arising from this situation, and has brought suit against its former insurance broker, Johnson & Higgins. The Company is unaware of any other pending legal proceedings which it regards as likely to have a material adverse effect on its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Item 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME AGE POSITION* - ---- --- --------- Ronald A. Matricaria 54 Chairman (1995), President and Chief Executive Officer (1993) Patrick P. Fourteau 49 President, Pacesetter (1996) Terry L. Shepherd 44 President, St. Jude Medical Division (1994) and President, International (1995) Daniel J. Starks 42 Chief Executive Officer, Daig (1996) John P. Berdusco 60 Vice President, Administration (1993) Peter L. Gove 49 Vice President, Corporate Relations (1994) Kevin T. O'Malley, Esq. 45 Vice President and General Counsel (1994) Stephen L. Wilson 44 Vice President, Finance and Chief Financial Officer (1990) * Dates in brackets indicate period during which the named executive officers began serving in such capacity. Executive officers serve at the pleasure of the Board of Directors and are elected annually for one year terms. Mr. Matricaria's business experience is set forth in the Company's definitive Proxy Statement dated March 24, 1997 under the Section "Election of Directors." The information is incorporated herein by reference. 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. Prior to joining the Company, he was employed by Eli Lilly and Co. for 19 years in various positions including his last position of vice president of pharmaceutical operations for Lilly International. 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) where he worked for 15 years. Hybritech and CPI were both wholly owned subsidiaries of Eli Lilly & Company. Mr. Stark's business experience is set forth in the Company's definitive Proxy Statement dated March 24, 1997 under the section "Election of Directors." The information is incorporated herein by reference. 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 and Co. for 15 years in various positions including his last position of General Counsel of the Medical Device and Diagnostics Division. Mr. Wilson joined the Company in 1990 as Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Wilson was Vice President and Controller of the Foxboro Company, a process automation company, where he had been employed for five years. Prior to that, Mr. Wilson was employed by Brown & Sharpe Manufacturing Company, a metrology products and machine tools company, and previously was with Coopers & Lybrand. PART II Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information set forth under the captions "Supplemental Market Price Data" and "Dividends" on page 40 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five Year Summary of Selected Financial Data" on page 39 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 21 through 26 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and Report of Independent Auditors set forth on pages 27 through 38 of the Company's 1996 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Income - Years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement dated March 24, 1997, is incorporated herein by reference. Information on executive officers is set forth in Part I, Item 4A hereto. Item 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation and Other Information" and "Election of Directors" in the Company's definitive Proxy Statement dated March 24, 1997, is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Company's definitive Proxy Statement dated March 24, 1997, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement dated March 24, 1997, is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this Report (1) FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company and Report of Independent Auditors as set forth on pages 27 through 38 of the Company's 1996 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Income - Years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE The following financial statement schedule is filed as part of this Form 10-K Annual Report: Schedule Page Number Description Number ------ ----------- ------ II Valuation and Qualifying Accounts 17 The report of the Company's Independent Auditors with respect to the above-listed financial statements and financial statement schedule appears on page 16 of this Report. All other financial statements and schedules not listed have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable. (3) EXHIBITS Exhibit Index 2.1 Agreement and Plan of Merger dated January 29, 1996 related to the Daig acquisition is incorporated by reference to Schedule 13D filed February 13, 1996. 2.2 Asset Purchase Agreement dated September 24, 1996 related to the Telectronics purchase is incorporated by reference to Form 8-K dated November 29, 1996. 2.3 Agreement and Plan of Merger dated October 23, 1996 related to the Ventritex merger. # 3.1 Articles of Incorporation are incorporated by reference to Exhibit 3(a) of the Company's Form 8 filed on August 20, 1987, amending the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987. 3.2 Amendment to Articles of Incorporation dated September 5, 1996. # 3.3 Bylaws are incorporated by reference to Exhibit 3B of the Company's Form S-3 Registration Statement dated September 25, 1986 (Commission File No. 33-8308). 4.1 Amended and Restated Rights Agreement dated as of June 26, 1990, between the Company and Norwest Bank Minneapolis, N.A., as Rights Agent including the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock is incorporated by reference to Exhibit 1 of the Company's Form 8 Amendment 2 to Form 8-A dated July 6, 1990. 10.1 Employment letter dated as of March 9, 1993, between the Company and Ronald A. Matricaria is incorporated by reference to Exhibit 10.1 of the Company's Form 10-K Annual Report for the year ended December 31, 1993.* 10.2 Employment letter dated as of November 8, 1996, from the Company to Ronald A. Matricaria.* # 10.3 Supply Contract dated April 17, 1990, between the Company and CarboMedics, Inc. (portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2) is incorporated by reference to the Company's Form 8 filed on April 17, 1990 amending the Company's Form 10-K Annual Report for the year ended December 31, 1989. 10.4 Form of Indemnification Agreement that the Company has entered into with officers and directors. Such agreement recites the provisions of Minnesota Statutes Section 302A.521 and the Company's Bylaw provisions (which are substantially identical to the Statute) and is incorporated by reference to Exhibit 10(d) of the Company's Form 10-K Annual Report for the year ended December 31, 1986.* 10.5 Form of Employment Agreement that the Company has entered into with officers relating to severance matters in connection with a change in control is incorporated by reference to Exhibit 10(f) of the Company's Form 10-K Annual Report for the year ended December 31, 1987.* 10.6 Retirement Plan for members of the Board of Directors as amended on March 15, 1995, is incorporated by reference to Exhibit 10.6 of the Company's Form 10-K Annual Report for the year ended December 31, 1994.* 10.7 Management Savings Plan dated February 1, 1995, is incorporated by reference to Exhibit 10.7 of the Company's Form 10-K Annual Report for the year ended December 31, 1994.* 10.8 The St. Jude Medical, Inc. 1992 Employee Stock Purchase Savings Plan is incorporated by reference to the Company's Form S-8 Registration Statement dated June 10, 1992, (Commission File No. 33-48502). 10.9 1989 Restricted Stock Plan is incorporated by reference to the Company's Form S-8 Registration Statement dated June 6, 1989 (Commission File No. 33-29085).* 10.10 The St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference to the Company's Form S-8 Registration Statement dated June 28, 1991 (Commission File No. 33- 41459).* 10.11 The St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference to the Company's Form S-8 Registration Statement dated July 1, 1994 (Commission File No. 33-54435).* 10.12 The Management Incentive Compensation Plan is incorporated by reference to Appendix A of the Company's definitive Proxy Statement dated March 27, 1995.* 10.13 Assumption by the Company of the Daig Corporation Non-Qualified Stock Option Agreement dated March 1, 1995, incorporated by reference to the Company's Form S- 8 Registration Statement dated May 31, 1996 (Commission File No. 333-4935).* 11 Computation of Earnings Per Share # 13 1996 Annual Report to Shareholders. Except for those portions of such report expressly incorporated by reference in this Form 10-K Annual Report, the Annual Report to Shareholders is not deemed to be "filed" with the Securities and Exchange Commission. # 21 Subsidiaries of the Company # 23 Consent of Independent Auditors # 27 Financial Data Schedule # - ----------------------------- * Management contract or compensatory plan or arrangement. # Filed as a part of this Form 10-K Annual Report. (b) Reports on Form 8-K during the quarter ended December 31, 1996 Form 8-K dated October 22, 1996 Item 5. Other Events Announcement of definitive agreements to acquire 1) substantially all the cardiac rhythm management assets of Telectronics Pacing Systems, Inc. and 2) Medtel, both from Pacific Dunlop, Ltd.; and settle certain legal and patent disputes with Intermedics Inc. Separately, announcement of a definitive agreement for the merger of Ventritex, Inc. with the Company's Pacesetter subsidiary. Form 8-K dated November 29, 1996 Item 2. Acquisition or disposition of assets Effective November 29, 1996, St. Jude completed the acquisition from Telectronics Pacing Systems, Inc. of substantially all of its cardiac rhythm management assets and the acquisition of Medtel from Pacific Dunlop. Item 7. Exhibits Form 8-K dated December 6, 1996 Item 5. Other Events Presentation of supplemental financial statements, supplemental management's discussion and analysis of financial condition and results of operations, and other information that give effect to the May 31, 1996, acquisition of Daig Corporation. Item 7. Financial Statements and Exhibits (c) Exhibits: Reference is made to Item 14(a)(3). (d) Schedules: Reference is made to Item 14(a)(2). SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ST. JUDE MEDICAL, INC. Date: March 27, 1997 By /s/ Ronald A. Matricaria ------------------------------------------- Ronald A. Matricaria Chairman, President and Chief Executive Officer (Principal Executive Officer) By /s/ Stephen L. Wilson ------------------------------------------- Stephen L. Wilson Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ Ronald A. Matricaria Director 3/27/97 /s/ Charles V. Owens, Jr. Director 3/27/97 - ---------------------------------- --------------------------------- Ronald A. Matricaria Charles V. Owens, Jr. /s/ Paul J. Chiapparone Director 3/27/97 /s/ Walter L. Sembrowich Director 3/27/97 - ---------------------------------- --------------------------------- Paul J. Chiapparone Walter L. Sembrowich /s/ Thomas H. Garrett III Director 3/27/97 /s/ Daniel J. Starks Director 3/27/97 - ---------------------------------- --------------------------------- Thomas H. Garrett III Daniel J. Starks /s/ Kenneth G. Langone Director 3/27/97 /s/ Roger G. Stoll Director 3/27/97 - ---------------------------------- --------------------------------- Kenneth G. Langone Roger G. Stoll /s/ William R. Miller Director 3/27/97 /s/ Gail R. Wilensky Director 3/27/97 - ---------------------------------- --------------------------------- William R. Miller Gail R. Wilensky
Report of Independent Auditors We have audited the consolidated financial statements of St. Jude Medical, Inc. as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 5, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Minneapolis, Minnesota February 5, 1997
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31, 1996 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) COL. A COL. B COL. C COL D. COL E. - ----------------------------------------- -------------------- -------------------- ---------- -------------- Additions Charged to Balance at Beginning -------------------- Balance at End Description of Period Expense Other Deductions of Period - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 Allowance for doubtful accounts(3) $9,361 $ 650 $ 15(5) $2,348(1) $7,678 Products liability claims reserve(4) 8558 ---- ---- 254(2) 8304 Year ended December 31, 1995 Allowance for doubtful accounts(3) $5,782 $2,510 $1,256(5) $ 187(1) $9,361 Products liability claims reserve(4) 1,500 ---- 8,000(5) 942(2) 8,558 Year ended December 31, 1994 Allowance for doubtful accounts(3) 1873 715 3,675(5) 481(1) 5782 Products liability claims reserve(4) 401 1,181 ---- 82(2) 1,500
(1) Reserve or uncollectible accounts written off, net of recoveries. (2) 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. EX-2.3 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER AMONG VENTRITEX, INC. ST. JUDE MEDICAL, INC. AND PACESETTER, INC.
TABLE OF CONTENTS ARTICLE 1 THE MERGER............................................................................. 1 SECTION 1.2. Effective Time................................................. 1 SECTION 1.3. Closing of the Merger.......................................... 1 SECTION 1.4. Effects of the Merger.......................................... 1 SECTION 1.5. Certificate of Incorporation and Bylaws........................ 2 SECTION 1.6. Directors...................................................... 2 SECTION 1.7. Officers....................................................... 2 SECTION 1.8. Conversion of Shares........................................... 2 SECTION 1.9. Exchange of Certificates....................................... 2 SECTION 1.10. Stock Options.................................................. 4 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................... 5 SECTION 2.1. Organization and Qualification; Subsidiaries................... 5 SECTION 2.2. Capitalization of the Company and its Subsidiaries............. 6 SECTION 2.3. Authority Relative to this Agreement........................... 6 SECTION 2.4. SEC Reports; Financial Statements.............................. 7 SECTION 2.5. Information Supplied........................................... 7 SECTION 2.6. Consents and Approvals; No Violations.......................... 8 SECTION 2.7. No Default..................................................... 8 SECTION 2.8. No Undisclosed Liabilities; Absence of Changes................. 8 SECTION 2.9. Litigation..................................................... 9 SECTION 2.10. Compliance with Applicable Law................................. 9 SECTION 2.11. Employee Plans................................................. 9 SECTION 2.12. Environmental Laws and Regulations............................. 10 SECTION 2.13. Tax Matters.................................................... 11 SECTION 2.14. Intangible Property............................................ 12 SECTION 2.15. Opinion of Financial Advisor................................... 12 SECTION 2.16. Brokers........................................................ 12 SECTION 2.17. Accounting Matters............................................. 13 SECTION 2.18. Material Contracts............................................. 13 SECTION 2.19. Products....................................................... 13 SECTION 2.20. Amendment to Rights Agreement.................................. 14 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION.............................................................. 14 SECTION 3.1. Organization................................................... 14 SECTION 3.2. Capitalization of Parent and its Subsidiaries.................. 15 SECTION 3.3. Authority Relative to this Agreement........................... 15 SECTION 3.4. SEC Reports; Financial Statements.............................. 15 SECTION 3.5. Information Supplied........................................... 16 SECTION 3.6. Consents and Approvals; No Violations.......................... 16 SECTION 3.7. No Default..................................................... 17 SECTION 3.8. No Undisclosed Liabilities; Absence of Changes................. 17 SECTION 3.9. Litigation..................................................... 17 SECTION 3.10. Compliance with Applicable Law................................. 18 SECTION 3.11. Tax Matters.................................................... 18 SECTION 3.12. Products....................................................... 18 SECTION 3.13. Intangible Property............................................ 18 SECTION 3.14. Brokers........................................................ 19 SECTION 3.15. Accounting Matters............................................. 19 SECTION 3.16. Telectronics Agreements........................................ 19 SECTION 3.17. Medtronic Agreement............................................ 19 ARTICLE 4 COVENANTS.............................................................................. 19 SECTION 4.1. Conduct of Business of the Company and Parent.................. 19 SECTION 4.2. Preparation of S-4 and the Proxy Statement..................... 22 SECTION 4.3. No Solicitation................................................ 22 SECTION 4.4. Intentionally omitted.......................................... 23 SECTION 4.5. Stockholder Meeting............................................ 23 SECTION 4.6. Access to Information.......................................... 23 SECTION 4.7. Additional Agreements; Best Efforts............................ 24 SECTION 4.9. Public Announcements........................................... 25 SECTION 4.10. Indemnification; Directors' and Officers' Insurance............ 25 SECTION 4.11. Notification of Certain Matters................................ 26 SECTION 4.12. Pooling........................................................ 26 SECTION 4.13. Tax-Free Reorganization Treatment.............................. 27 SECTION 4.14. Employee Matters............................................... 27 SECTION 4.15. Company Affiliates............................................. 27 SECTION 4.16. SEC Filings.................................................... 27 SECTION 4.17. Guarantee of Performance....................................... 28 ARTICLE 5 CONDITIONS TO CONSUMMATION OF THE MERGER............................................... 28 SECTION 5.1. Conditions to Each Party's Obligations to Effect the Merger.... 28 SECTION 5.2. Conditions to the Obligations of the Company................... 28 SECTION 5.3. Conditions to the Obligations of Parent and Acquisition........ 30 ARTICLE 6 TERMINATION; AMENDMENT; WAIVER......................................................... 30 SECTION 6.1. Termination.................................................... 30 SECTION 6.2. Effect of Termination.......................................... 31 SECTION 6.3. Fees and Expenses.............................................. 31 SECTION 6.4. Amendment...................................................... 32 SECTION 6.5. Extension; Waiver.............................................. 32 ARTICLE 7 MISCELLANEOUS.......................................................................... 32 SECTION 7.1. Nonsurvival of Representations and Warranties.................. 32 SECTION 7.2. Entire Agreement; Assignment................................... 32 SECTION 7.3. Validity....................................................... 33 SECTION 7.4. Notices........................................................ 33 SECTION 7.5. Governing Law.................................................. 33 SECTION 7.6. Descriptive Headings........................................... 33 SECTION 7.7. Parties in Interest............................................ 33 SECTION 7.8. Severability................................................... 34 SECTION 7.9. Specific Performance........................................... 34 SECTION 7.10. Subsidiaries................................................... 34 SECTION 7.11. Counterparts................................................... 34
AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of October 23, 1996, is among VENTRITEX, INC.,a Delaware corporation (the "Company"), ST. JUDE MEDICAL, INC., a Minnesota corporation ("Parent"), and PACESETTER, INC., a Delaware corporation and a direct wholly-owned subsidiary of Parent ("Acquisition"). WHEREAS, the Boards of Directors of the Company, Parent and Acquisition each have, in light of and subject to the terms and conditions set forth herein, (i) determined that the Merger (as defined in Section 1.1) is fair to their respective stockholders and in the best interests of such stockholders and (ii) approved the Merger in accordance with this Agreement; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, it is intended that the Merger shall be recorded for accounting purposes as a "pooling-of-interests". NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, the Company, Parent and Acquisition hereby agree as follows: ARTICLE 1 THE MERGER SECTION 1.1. The Merger. At the Effective Time and upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware General Corporation Law (the "DGCL"), the Company shall be merged with and into Acquisition (the "Merger"). Following the Merger, Acquisition shall continue as the surviving corporation (the "Surviving Corporation") and the separate corporate existence of the Company shall cease. SECTION 1.2. Effective Time. Subject to the provisions of this Agreement, Parent, Acquisition and the Company shall cause the Merger to be consummated by filing an appropriate Certificate of Merger or other appropriate documents (the"Certificate of Merger") with the Secretary of State of the State of Delaware in such form as required by, and executed in accordance with, the relevant provisions of the DGCL, as soon as practicable on or after the Closing Date (as defined in Section 1.3). The Merger shall become effective upon such filing or at such time thereafter as is provided in the Certificate of Merger (the "Effective Time"). SECTION 1.3. Closing of the Merger. The closing of the Merger (the "Closing") will take place at a time and on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article 5, other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions (the "Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, unless another time, date or place is agreed to in writing by the parties hereto. SECTION 1.4. Effects of the Merger. The Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Acquisition shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Acquisition shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.5. Certificate of Incorporation and Bylaws. The certificate of incorporation of Acquisition in effect at the Effective Time shall be the certificate of incorporation of the Surviving Corporation until amended in accordance with applicable law. The bylaws of Acquisition in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law. SECTION 1.6. Directors. The directors of Acquisition at the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation until such director's successor is duly elected or appointed and qualified. SECTION 1.7. Officers. The officers of Acquisition at the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation until such officer's successor is duly elected or appointed and qualified. The officers of the Company at the Effective Time shall be the initial officers of the Ventritex division of the Surviving Corporation, each to hold such position in accordance with the certificate of incorporation and bylaws of the Surviving Corporation until such person's successor is duly appointed and qualified. SECTION 1.8. Conversion of Shares. (a) At the Effective Time, each share of common stock, par value $0.001 per share, of the Company ("Company Common Stock") issued and outstanding immediately prior to the Effective Time (individually a "Share" and collectively, the Shares") (other than Shares held by Parent, Acquisition or any other subsidiary of Parent) shall, by virtue of the Merger and without any action on the part of Acquisition, the Company or the holder thereof, be converted into and shall become exchangeable for 0.6 of a fully paid and nonassessable share of common stock, par value $0.10 per share, of Parent ("Parent Common Stock") (the "Exchange Ratio"). If between the date of this Agreement and the Effective Time the outstanding shares of Parent Common Stock shall have been changed into a different number of shares or a different class by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the amount of shares of Parent Common Stock constituting the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or other similar transaction. (b) At the Effective Time, each outstanding share of the common stock, par value $1.00 per share, of Acquisition shall remain outstanding as one share of common stock, par value $1.00 per share, of the Surviving Corporation. (c) At the Effective Time, each Share held by Parent, Acquisition or any subsidiary of Parent or Acquisition immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of Acquisition, the Company or the holder thereof, be canceled, retired and cease to exist and no payment shall be made with respect thereto. (d) In accordance with Section 262 of the DGCL, no appraisal rights shall be available to holders of Shares in connection with the Merger. SECTION 1.9. Exchange of Certificates. (a) As of the Effective Time, Parent shall make available to American Stock Transfer & Trust Company (the "Exchange Agent"), for the benefit of the holders of Shares, for exchange in accordance with this Article 1, through the Exchange Agent: (i) certificates representing the appropriate number of shares of Parent Common Stock issuable pursuant to Section 1.8 in exchange for outstanding Shares and (ii) cash to be paid in lieu of fractional shares of Parent Common Stock pursuant to Section 1.9(f) (such shares of Parent Common Stock and such cash are hereinafter referred to as the "Exchange Fund"). (b) As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding Shares (the "Certificates") whose Shares were converted into the right to receive shares of Parent Common Stock pursuant to Section 1.8: (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent and Acquisition, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Parent Common Stock and, if applicable, a check representing the cash consideration to which such holder may be entitled pursuant to Section 1.9(f) on account of a fractional share of Parent Common Stock, which such holder has the right to receive pursuant to the provisions of this Article 1, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock may be issued to a transferee if the Certificate representing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 1.9, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate representing shares of Parent Common Stock and cash in lieu of any fractional shares of Parent Common Stock as contemplated by this Section 1.9. Holders of unsurrendered Certificates shall be entitled to vote after the Effective Time at any meeting of Parent stockholders the number of whole shares of Parent Common Stock represented by such Certificates, regardless of whether such holders have exchanged their Certificates. (c) No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 1.9(f) until the holder of record of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 1.9(f) and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock. (d) In the event that any Certificate for Shares shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange therefor, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock and cash in lieu of fractional shares, if any, as may be required pursuant to this Agreement; PROVIDED, HOWEVER, that Parent may, in its discretion, require the delivery of a suitable bond or indemnity. (e) All shares of Parent Common Stock issued upon the surrender for exchange of Shares in accordance with the terms hereof (including any cash paid pursuant to Section 1.9(c) or 1.9(f)) shall be deemed to have been issued in full satisfaction of all rights pertaining to such Shares, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. (f) No fractions of a share of Parent Common Stock shall be issued in the Merger, but in lieu thereof each holder of Shares otherwise entitled to a fraction of a share of Parent Common Stock shall, upon surrender of his or her Certificate or Certificates, be entitled to receive an amount of cash (without interest) determined by multiplying the average closing price for Parent Common Stock as reported on the Nasdaq Stock Market (or any subsequent national securities exchange on which shares of Parent Common Stock are listed for trading) for the five trading days immediately preceding the date of the meeting of the Company's stockholders held in connection with the Merger by the fractional share interest to which such holder would otherwise be entitled. The parties acknowledge that payment of the cash consideration in lieu of issuing fractional shares was not separately bargained for consideration but merely represents a mechanical rounding off for purposes of simplifying the corporate and accounting problems which would otherwise be caused by the issuance of fractional shares. (g) Any portion of the Exchange Fund which remains undistributed to the stockholders of the Company for six months after the Effective Time shall be delivered to Parent, upon demand, and any stockholders of the Company who have not theretofore complied with this Article I shall thereafter look only to Parent for payment of their claim for Parent Common Stock for any cash in lieu of fractional shares of Parent Common Stock and any dividends or distributions with respect to Parent Common Stock, as the case may be. (h) Neither Parent nor the Company shall be liable to any holder of Shares, or Parent Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. SECTION 1.10. Stock Options. (a) At the Effective Time, each outstanding option to purchase shares of Company Common Stock (a "Company Stock Option" or, collectively, "Company Stock Options") issued pursuant to the Company's stock option plans listed on Schedule 1.10 hereto (the "Company Plans"), whether vested or unvested, shall be cancelled and, in lieu thereof, Parent shall issue to each holder of a Company Stock Option an option (each, a "Parent Option"), to acquire, on substantially the same terms and subject to substantially the same conditions as were applicable under such Company Stock Option, including, without limitation, term, exercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Code, acceleration and termination provisions, the same number of shares of Parent Common Stock as the holder of such Company Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time, at a price per share equal to (y) the aggregate exercise price for the shares of Company Common Stock otherwise purchasable pursuant to such Company Stock Option divided by (z) the number of full shares of Parent Common Stock deemed purchasable pursuant to such Company Stock Option; provided, however, that in the case of any option to which Section 421 of the Code applies by reason of its qualification under any of Sections 422 through 424 of the Code, the exercise price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall be adjusted, if necessary, in order to comply with Section 424 of the Code and provided, further, however, that the number of shares of Parent Common Stock that may be purchased upon exercise of any such Parent Option shall not include any fractional share and, upon exercise of the Parent Option, a cash payment shall be made for any fractional share based upon the average closing price for Parent Common Stock as reported on the Nasdaq Stock Market (or any subsequent national securities exchange on which shares of Parent Common Stock are listed for trading) for the five trading days immediately preceding the date of exercise. Employment with the Company shall be credited to the optionees for purposes of determining the number of vested shares of Parent Common Stock subject to exercise under converted Company Options after the Effective Time. None of the Company Stock Options that are unvested at the Effective Time shall become vested as a result of the execution and delivery of this Agreement or the consummation of the Merger. (b) As soon as practicable after the Effective Time, but no later than 30 days thereafter, Parent shall deliver to the holders of Company Stock Options appropriate notices setting forth such holders' rights pursuant to the respective Company Plans and stating that the holders will receive Parent Options exercisable for shares of Parent Common Stock on substantially the same terms and conditions as their Company Stock Options (subject to the adjustments required by this Section 1.10 after giving effect to the Merger). At or prior to the Effective Time, Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of Parent Options issued by it in accordance with this Section 1.10. As soon as practicable after the Effective Time, to the extent the Parent Common Stock issuable upon exercise of the Parent Options issued in accordance with this Section 1.10 has not previously been registered under the Securities Act of 1933, as amended (the "Securities Act"), then Parent shall file a registration statement on Form S-3 or Form S-8, as the case may be (or any successor or other appropriate forms), or another appropriate form with respect to the Parent Common Stock subject to such Parent Options, and shall use its best efforts to maintain the effectiveness of such registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as the Parent Options remain outstanding. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each of Parent and Acquisition as follows: SECTION 2.1. Organization and Qualification; Subsidiaries. (a) The Company and each of its subsidiaries (as defined in Section 7.10), is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Company Material Adverse Effect (as defined below). When used in connection with the Company or its subsidiaries, the term "Company Material Adverse Effect" means any change or effect (i) that is materially adverse to the properties, business, results of operations or financial condition of the Company and its subsidiaries, taken as whole, other than any change or effect arising out of general economic conditions or conditions generally affecting the cardiovascular medical device market or (ii) that would impair the ability of the Company to consummate the transactions contemplated hereby. (b) Except as set forth in Section 2.1(b) of the Disclosure Schedule previously delivered by the Company to Parent (the "Company Disclosure Schedule"), the Company has no subsidiaries and does not own, directly or indirectly, beneficially or of record, any shares of capital stock or other security of any other entity or any other investment in any other entity. (c) Each of the Company and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Company Material Adverse Effect. (d) The Company has heretofore delivered to Parent accurate and complete copies of the certificate of incorporation and by-laws, as currently in effect, of each of the Company and each of its subsidiaries. SECTION 2.2. Capitalization of the Company and its Subsidiaries. (a) The authorized capital stock of the Company consists of: 35,000,000 Shares, of which, as of October 15, 1996, 20,959,260 Shares were issued and outstanding, and 5,000,000 shares of preferred stock, par value $0.001 per share (the "Company Preferred Stock"), of which, as of the date hereof, none are issued and outstanding. All of the issued and outstanding Shares have been validly issued, and are fully paid, nonassessable and free of preemptive rights. As of October 15, 1996, 2,782,116 Shares were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding Company Stock Options issued pursuant to the Company Plans, 78,813 Shares were reserved for issuance under the Company's 1991 Employee Stock Purchase Plan (the "ESPP") and 3,345,455 Shares were reserved for issuance pursuant to the conversion of the Company's 5-3/4% Convertible Subordinated Notes due August 15, 2001 (the "Convertible Notes"). The final purchase by participants under the ESPP will occur no later than the business day immediately preceding the Effective Time. The ESPP will terminate at the Effective Time. A total of 35,000 shares of Preferred Stock have been designated as Series A Participating Preferred Stock and reserved for issuance in connection with the exercise of the Rights (as defined in Section 2.20). Except as set forth in Section 2.2(a) of the Company Disclosure Schedule, since October 15, 1996, no shares of the Company's capital stock have been issued other than pursuant to stock options already in existence on October 15, 1996, and no stock options have been granted. Except as set forth above or as set forth in Section 2.2(a) of the Company Disclosure Schedule, as of the date hereof, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company or its subsidiaries convertible into or exchangeable for shares of capital stock or voting securities of the Company, (iii) no options or other rights to acquire from the Company or its subsidiaries, and no obligations of the Company or its subsidiaries to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company, and (iv) no equity equivalents, interests in the ownership or earnings of the Company or its subsidiaries or other similar rights (including stock appreciation rights) (collectively, "Company Securities"). There are no outstanding obligations of the Company or its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. Except as set forth in Section 2.2(a) of the Company Disclosure Schedule, there are no stockholder agreements, voting trusts or other agreements or understandings to which the Company is a party or to which it is bound relating to the voting of any shares of capital stock of the Company. (b) All of the outstanding capital stock of the Company's subsidiaries is owned by the Company, directly or indirectly, free and clear of any Lien (as defined below) or any other limitation or restriction (including any restriction on the right to vote or sell the same, except as may be provided as a matter of law). There are no securities of the Company or its subsidiaries convertible into or exchangeable for, no options or other rights to acquire from the Company or its subsidiaries, and no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly, of any capital stock or other ownership interests in, or any other securities of, any subsidiary of the Company. There are no outstanding contractual obligations of the Company or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any subsidiary of the Company. For purposes of this Agreement, "Lien" means, with respect to any asset (including, without limitation, any security) any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 2.3. Authority Relative to this Agreement. (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company (the "Company Board") and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than, with respect to the Merger, the approval and adoption of this Agreement by the holders of a majority of the then outstanding shares of Company Common Stock). This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (the "Bankruptcy and Equity Exception"). (b) The Company Board has, by unanimous vote of those present, duly and validly approved, and taken all corporate actions required to be taken by the Company Board for the consummation of, the transactions, including the Merger, contemplated hereby and resolved to recommend that the stockholders of the Company approve and adopt this Agreement. SECTION 2.4. SEC Reports; Financial Statements. (a) The Company has filed all required forms, reports and documents with the Securities and Exchange Commission (the "SEC") since January 1, 1995, each of which has complied in all material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each as in effect on the dates such forms, reports and documents were filed. The Company has heretofore delivered to Parent, in the form filed with the SEC (including any amendments thereto), (i) its Annual Report on Form 10-K for the fiscal year ended June 30, 1996, (ii) all definitive proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since July 1, 1995 and (iii) all other reports or registration statements filed by the Company with the SEC since January 1, 1995 (the "Company SEC Reports"). As of their respective dates, none of such Company SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the Company SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly present, in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). Since June 30, 1996, except as set forth in the Company SEC Reports, there has not been any change, or any application or request for any change, by the Company or any of its subsidiaries in accounting principles, methods or policies for financial accounting or tax purposes (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). (b) The Company has heretofore made available to Parent a complete and correct copy of any material amendments or modifications, which have not yet been filed with the SEC, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Exchange Act. SECTION 2.5. Information Supplied. None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by Parent in connection with the issuance of shares of Parent Common Stock in the Merger (the "S-4") will, at the time the S-4 is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the proxy statement relating to the meeting of the Company's stockholders to be held in connection with the Merger (the "Proxy Statement"), will, at the date mailed to stockholders and at the time of the meeting of stockholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to the Company, its officers and directors or any of its subsidiaries should occur which is required to be described in an amendment of, or a supplement to, the S-4 or the Proxy Statement, the Company shall promptly so advise Parent and such event shall be so described, and such amendment or supplement (which Parent shall have a reasonable opportunity to review) shall be promptly filed with the SEC and, as required by law, disseminated to the stockholders of the Company. The Proxy Statement, insofar as it relates to the meeting of the Company's stockholders to vote on the Merger, will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. SECTION 2.6. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the filing and recordation of the Certificate of Merger as required by the DGCL and as otherwise set forth in Section 2.6 to the Company Disclosure Schedule, no filing or registration with or notice to, and no permit, authorization, consent or approval of, any court or tribunal or administrative, governmental or regulatory body, agency, commission or authority (a "Governmental Entity") is necessary for the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Company Material Adverse Effect. Except as set forth in Section 2.6 to the Company Disclosure Schedule, neither the execution, delivery and performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective certificate or articles of incorporation or bylaws (or similar governing documents) of the Company or any of its subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which would not have a Company Material Adverse Effect. SECTION 2.7. No Default. None of the Company or its subsidiaries is in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its certificate or articles of incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company, its subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults that would not have a Company Material Adverse Effect. SECTION 2.8. No Undisclosed Liabilities; Absence of Changes. Except as and to the extent publicly disclosed by the Company in the Company SEC Reports, as of June 30, 1996, none of the Company or its subsidiaries had any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, and whether due or to become due or asserted or unasserted, which would be required by GAAP to be reflected in, reserved against or otherwise described in the consolidated balance sheet of the Company (including the notes thereto) as of such date. Except as publicly disclosed by the Company in the Company SEC Reports, since the date of the end of the period covered by the latest Company SEC Report, (i) the business of the Company and its subsidiaries has been carried on only in the ordinary and usual course, and (ii) to the knowledge of the Company, none of the Company or its subsidiaries has incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, and there have been no events, changes or effects with respect to the Company or its subsidiaries, which would have a Company Material Adverse Effect. For purposes of this Agreement, "knowledge of the Company" means the actual knowledge of any executive officer or member of the Company Board as listed in Section 2.8 of the Company Disclosure Schedule. SECTION 2.9. Litigation. Except as publicly disclosed by the Company in the Company SEC Reports or disclosed in Section 2.9 of the Company Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries or any of their respective properties or assets which (i) would have, individually or in the aggregate, a Company Material Adverse Effect or (ii) as of the date hereof, questions the validity of this Agreement or any action to be taken by the Company in connection with the consummation of the transactions contemplated hereby or could otherwise prevent or delay the consummation of the transactions contemplated by this Agreement. Except as publicly disclosed by the Company, none of the Company or its subsidiaries is subject to any outstanding order, writ, injunction or decree which would have a Company Material Adverse Effect or would prevent or delay the consummation of the transactions contemplated hereby. SECTION 2.10. Compliance with Applicable Law. Except as publicly disclosed by the Company in the Company SEC Reports, the Company and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the conduct of their respective businesses as presently conducted (the "Company Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which would not have a Company Material Adverse Effect. Except as publicly disclosed by the Company in the Company SEC Reports, the Company and its subsidiaries are in compliance with the terms of the Company Permits, except where the failure so to comply would have a Company Material Adverse Effect. Except as publicly disclosed by the Company in the Company SEC Reports, the businesses of the Company and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity except that no representation or warranty is made in this Section 2.10 with respect to Environmental Laws (as defined in Section 2.12(a)) and except for violations or possible violations which would not have a Company Material Adverse Effect. Except as publicly disclosed by the Company in the Company SEC Reports or as disclosed in Section 2.10 of the Company Disclosure Schedule, to the knowledge of the Company, no investigation or review by any Governmental Entity with respect to the Company or its subsidiaries is pending or threatened, nor, to the knowledge of the Company, has any Governmental Entity indicated an intention to conduct the same, other than, in each case, those which would not have a Company Material Adverse Effect. SECTION 2.11. Employee Plans. (a) Section 2.11(a) of the Company Disclosure Schedule lists all "employee benefit plans," as defined in Section 3(3) of ERISA, and all other employee benefit plans or other benefit arrangements, including executive compensation, directors' benefit, bonus or other incentive compensation, severance and deferred compensation plans and practices which the Company or any of its subsidiaries maintains, contributes to or has any obligation to or liability for (each an "Employee Benefit Plan" and collectively, the "Employee Benefit Plans"). (b) True, correct and complete copies or descriptions of each Employee Benefit Plan (and, where applicable, the most recent summary plan description, actuarial report, determination letter, most recent Form 5500 and trust agreement) have been delivered or made available to Parent for review prior to the date hereof. (c) As of the date hereof, except as disclosed on Section 2.11(c) of the Company Disclosure Schedule, (i) all material payments required to be made by or under any Employee Benefit Plan or any related trusts have been made; (ii) the Company and its subsidiaries have performed all material obligations required to be performed by them under any Employee Benefit Plan; (iii) the Employee Benefit Plans, have been administered in material compliance with their terms and the requirements of ERISA, the Code and other applicable laws; (iv) there are no material actions, suits, arbitrations or claims (other than routine claims for benefit) pending or threatened with respect to any Employee Benefit Plan; and (v) the Company and its subsidiaries have no material liability as a result of any "prohibited transaction" (as defined in Section 406 of ERISA and Section 4975 of the Code) for any excise tax or civil penalty. (d) Except as disclosed on Section 2.11(d) of the Company Disclosure, none of the Employee Benefit Plans is subject to Title IV of ERISA. (e) Except as set forth on Section 2.11(e) of the Company Disclosure Schedule, the Company and its subsidiaries have not incurred any unsatisfied withdrawal liability with respect to any Multiemployer Plan. (f) Except as set forth on Section 2.11(f) of the Company Disclosure Schedule, each of the Employee Benefit Plans which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined by the Internal Revenue Service to be so "qualified" and the Company knows of no fact which would adversely affect the qualified status of any such Employee Benefit Plan. (g) Except as set forth on Section 2.11(g) of the Company Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any material payment becoming due, or materially increase the amount of compensation due, to any current or former employee of the Company or any of its subsidiaries; (ii) materially increase any benefits otherwise payable under any Employee Benefit Plan; or (iii) result in the acceleration of the time of payment or vesting of any such material benefits. SECTION 2.12. Environmental Laws and Regulations. (a) Except as publicly disclosed by the Company in the Company SEC Reports, (i) each of the Company and its subsidiaries is in compliance with all applicable federal, state and local laws and regulations relating to pollution, the protection of human health from the effects of pollution or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) (collectively, "Environmental Laws"), except for non-compliance that would not have a Company Material Adverse Effect, which compliance includes, but is not limited to, the possession by the Company and its subsidiaries of all material permits and other governmental authorizations required under applicable Environmental Laws necessary for the operation of its business as presently conducted, and compliance with the terms and conditions thereof; (ii) none of the Company or its subsidiaries has received written notice of, or, to the knowledge of the Company, is the subject of, any action, cause of action, claim, investigation, demand or notice by any person or entity alleging liability under or non-compliance with any Environmental Law (an "Environmental Claim") that would have a Company Material Adverse Effect; and (iii) to the knowledge of the Company, there are no circumstances that are reasonably likely to prevent or interfere with such material compliance in the future. (b) Except as publicly disclosed by the Company in the Company SEC Reports, there are no Environmental Claims which would have a Company Material Adverse Effect that are pending or, to the knowledge of the Company, threatened against the Company or its subsidiaries or, to the knowledge of the Company, against any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has or may have retained or assumed either contractually or by operation of law. SECTION 2.13. Tax Matters. (a) The Company and each of its subsidiaries has timely filed all Federal income tax returns and all other material tax returns and reports required to be filed by it. All such tax returns are complete and correct in all material respects. The Company and each of its subsidiaries has paid (or the Company has paid on its subsidiaries' behalf) all taxes shown due on such tax returns. The most recent consolidated financial statements contained in the Company SEC Reports reflect an adequate reserve for all taxes payable by the Company and its subsidiaries for all taxable periods and portions thereof through the date of such financial statements. The Company has previously delivered to Parent copies of the Federal and California income tax returns filed by the Company for its taxable years ended in 1993, 1994 and 1995. For purposes of this Agreement, "tax" or "taxes" shall mean all taxes, charges, fees, imposts, levies, gaming or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign). "Tax returns" shall mean any report, return, document, declaration or any other information or filing required to be supplied to any taxing authority or jurisdiction (foreign or domestic) with respect to taxes, including without limitation, information returns, any document with respect to or accompanying payments or estimated taxes, or with respect to or accompanying requests for the extension of time in which to file any such report, return document, declaration or other information. (b) Except as disclosed on Section 2.13 of the Company Disclosure Schedule, no material deficiencies for any taxes have been proposed, asserted or assessed against the Company or any of its subsidiaries that have not been fully paid or adequately provided for in the appropriate financial statements of the Company and its subsidiaries, no requests for waivers of the time to assess any taxes are pending, and no power of attorney with respect to any taxes has been executed or filed with any taxing authority. No material issues relating to taxes have been raised in writing by the relevant taxing authority during any presently pending audit or examination. None of the Federal income tax returns of the Company or any of its subsidiaries consolidated in such tax returns has been examined by the Internal Revenue Service. (c) No material liens for taxes exist with respect to any assets or properties of the Company or any of its subsidiaries, except for statutory liens for taxes not yet due. (d) Except as disclosed on Section 2.13 of the Company Disclosure Schedule and other than with respect to contractual tax indemnity obligations of the Company and its subsidiaries involving claims for state and local taxes which are not material in amount, none of the Company or any of its subsidiaries is a party to or is bound by any tax sharing agreement, tax indemnity obligation or similar agreement, arrangement or practice with respect to taxes (including any advance pricing agreement, closing agreement or other agreement relating to taxes with any taxing authority). (e) None of the Company or any of its subsidiaries has taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. (f) Except as disclosed in Section 2.13 of the Company Disclosure Schedule, there are no employment, severance or termination agreements, other compensation arrangements or Employee Benefit Plans currently in effect which provide for the payment of any amount (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement to any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in Section 280G(c) of the Code), that would be characterized as an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code). (g) Except as disclosed in Section 2.13 of the Company Disclosure Schedule, no Federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending with regard to any Federal income or material state, local or foreign taxes or tax returns of the Company or any of its subsidiaries and neither the Company nor any of its subsidiaries has received a written notice of any pending audit or proceeding with regard to any federal income or material state, local or foreign taxes or tax returns of the Company or any of its subsidiaries. (h) Neither the Company nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. (i) Neither the Company nor any of its subsidiaries has (i) with regard to any assets or property held or acquired by any of them, filed a consent to the application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company or any of its subsidiaries or (ii) received, or filed any requests for, rulings or determinations in respect of any taxes within the last five years. (j) No property owned by the Company or any of its subsidiaries (i) is property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the meaning of Section 168(h)(1) of the Code; or (iii) is "tax exempt bond financed property" within the meaning of Section 168(g) of the Code. (k) The Company and each of its subsidiaries are not currently, have not been within the last five years, and do not anticipate becoming a "United States real property holding company" within the meaning of Section 897(c) of the Code. (l) No subsidiary of the Company owns any Shares. SECTION 2.14. Intangible Property. To the Company's knowledge, the Company and its subsidiaries own or possess adequate licenses or other valid rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, trade secrets, applications for trademarks and for service marks, know-how and other proprietary rights and information used or held for use in connection with the business of the Company and its subsidiaries as currently conducted, except for failures to own or possess adequate licenses or other valid rights to use any of the foregoing which would not have a Company Material Adverse Effect, and, except as set forth in the Company SEC Reports or Section 2.14 of the Company Disclosure Schedule, to the knowledge of the Company there are no pending assertions or claims challenging the validity of any of the foregoing which would have a Company Material Adverse Effect. Except as disclosed in Section 2.14 of the Company Disclosure Schedule, to the Company's knowledge, there are no current claims or notices that the manufacture and sale of the Company's products infringes the patents of any third party. SECTION 2.15. Opinion of Financial Advisor. Goldman, Sachs & Co. (the "Financial Advisor") has delivered to the Company Board its opinion to the effect that, as of the date of such opinion, the Exchange Ratio is fair to the holders of Shares, and such opinion has not been withdrawn. SECTION 2.16. Brokers. No broker, finder or investment banker (other than the Financial Advisor, a true and correct copy of whose engagement agreement has been provided to Parent) is entitled to any brokerage, finder's or other fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company or any of its affiliates. SECTION 2.17. Accounting Matters. Neither the Company nor, to the best of its knowledge, any of its affiliates or stockholders (including the Company Affiliates), has taken or agreed to take any action that would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling-of-interests." The Company has not failed to bring to the attention of Parent any actions, or agreements or understandings, whether written or oral, to act that would be reasonably likely to prevent Parent from accounting for the Merger as a "pooling-of-interests." SECTION 2.18. Material Contracts. (a) The Company has filed as an exhibit to an Annual Report on Form 10-K or another document filed pursuant to the Securities Act or the Exchange Act, or has delivered or otherwise made available to Parent true, correct and complete copies of all contracts and agreements to which the Company or any of its subsidiaries is a party that are required to be filed in an exhibit to an Annual Report on Form 10-K filed by the Company with the SEC as of the date of this Agreement (the "Contracts"). The Contracts include any severance or other agreement with any employee or consultant pursuant to which such person would be entitled to receive any additional compensation or an accelerated payment of compensation as a result of the consummation of the transactions contemplated hereby. (b) Each of the Contracts is valid and enforceable in accordance with its terms, and there is no default under any Contract so listed either by the Company or, to the knowledge of the Company, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by the Company or, to the knowledge of the Company, any other party, in any such case in which such default or event would have a Company Material Adverse Effect. (c) No party to any such Contract has given notice to the Company of or made a claim against the Company with respect to any breach or default thereunder, in any such case in which such breach or default would have a Company Material Adverse Effect. SECTION 2.19. Products. Except as disclosed in the Company SEC Reports: (a) Each of the products currently being produced or sold by the Company and its subsidiaries (i) is in compliance in all material respects with all applicable U.S. federal, state and local laws and regulations and (ii) conforms in all material respects to any promises or affirmations of fact made on the container or label for such product or in connection with its sale; (b) To the knowledge of the Company, no facts exist which would reasonably be expected to furnish a substantial basis for the recall, withdrawal or suspension by the Company or any of its subsidiaries of any such product as a result of, or in order to comply with, any U.S. federal, state or local law, regulation or rule or order of any Governmental Entity, except for such recalls, withdrawals or suspensions as would not have a Company Material Adverse Effect; (c) Section 2.19 of the Company Disclosure Schedule sets forth a list of all licenses and approvals granted by or pending with any Governmental Entity in any country to market any product of the Company and its subsidiaries (the "Company Product Registrations"). All products sold under the Company Product Registrations are manufactured and marketed in all material respects in accordance with the specifications and standards contained in the Company Product Registrations. The Company and its subsidiaries have the sole rights under the Company Product Registrations and such registrations are in full force and effect; and (d) Except as disclosed in Section 2.19 of the Company Disclosure Schedule, since January 1, 1993, there have been no statements, citations, warning letters, FDA Forms 483, or decisions by any Governmental Entity that any product produced, manufactured, marketed or distributed at any time by the Company or any of its subsidiaries is defective or fails to meet any applicable standards promulgated by any such Governmental Entity. Except as disclosed in Section 2.19 of the Company Disclosure Schedule, there is no proceeding by the FDA or any other Governmental Entity, including, but not limited to, a grand jury investigation, a 405 hearing or a civil penalty proceeding, pending, or to the Company's knowledge threatened, against the Company or any of its subsidiaries, and no such proceedings have been brought at any time in the past relating to the safety or efficacy of the products of the Company and its subsidiaries and, to the Company's knowledge, there is no basis for such a proceeding. SECTION 2.20. Amendment to Rights Agreement. The Company Board has taken all necessary action to amend the Rights Agreement, dated as of August 16, 1994, as amended, between the Company and Chemical Trust Company of California, as Rights Agent (the "Rights Agreement") so that none of the execution or delivery of this Agreement, the exchange of Parent Common Stock for the Shares in accordance with Article I, or any other transaction contemplated hereby will cause (i) the rights (the "Rights") issued pursuant to the Rights Agreement to become exercisable under the Rights Agreement, (ii) Parent or Acquisition to be deemed an "Acquiring Person" (as defined in the Rights Agreement), or (iii) the "Shares Acquisition Date" (as defined in the Rights Agreement) to occur upon any such event. The "Expiration Date" (as defined in the Rights Agreement) of the Rights shall occur immediately prior to the Effective Time. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION Parent and Acquisition hereby represent and warrant to the Company as follows: SECTION 3.1. Organization. (a) Each of Parent and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Parent Material Adverse Effect (as defined below). When used in connection with Parent or Acquisition, the term "Parent Material Adverse Effect" means any change or effect that is (i) materially adverse to the properties, business, results of operations or financial condition of Parent and its subsidiaries, taken as a whole, other than any change or effect arising out of general economic conditions unrelated to any businesses in which Parent and its subsidiaries are engaged or (ii) that would impair the ability of Parent and/or Acquisition to consummate the transactions contemplated hereby. The parties acknowledge and agree that a decrease in the market value of the Parent Common Stock will not, in and of itself, constitute a Parent Material Adverse Effect. (b) Except as set forth in Section 3.1(b) of the Disclosure Schedule previously delivered by Parent to the Company (the "Parent Disclosure Schedule"), Parent has no subsidiaries and does not own, directly or indirectly, beneficially or of record, any shares of capital stock or other security of any other entity or any other investment in any other entity. (c) Each of Parent and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Parent Material Adverse Effect. (d) Parent has heretofore delivered to the Company accurate and complete copies of the articles of incorporation and by-laws, as currently in effect, of Parent. SECTION 3.2. Capitalization of Parent and its Subsidiaries. (a) The authorized capital stock of Parent consists of (i) 250,000,000 shares of Parent Common Stock, of which, as of September 30, 1996, 80,976,337 shares of Parent Common Stock were issued and outstanding, and (ii) 25,000,000 shares of preferred stock, $.01 par value per share, of which, as of the date hereof, none are issued and outstanding. All of the shares of Parent Common Stock have been validly issued, and are fully paid, nonassessable and free of preemptive rights. As of September 30, 1996, 5,155,986 shares of Parent Common Stock were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding options and 494,442 shares of Parent Common Stock were reserved for issuance in connection with Parent's employee stock purchase savings plan. Except as set forth in Section 3.2 of the Parent Disclosure Schedule since September 30, 1996, no shares of Parent's capital stock have been issued other than pursuant to stock options already in existence on September 30, 1996, and no stock options have been granted. Except as set forth above or as described in Section 3.2 of the Parent Disclosure Schedule, as of the date hereof, there are outstanding (i) no shares of capital stock or other voting securities of Parent, (ii) no securities of Parent or its subsidiaries convertible into or exchangeable for shares of capital stock or voting securities of Parent, (iii) no options or other rights to acquire from Parent or its subsidiaries, and no obligations of Parent or its subsidiaries to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of Parent, and (iv) no equity equivalents, interests in the ownership or earnings of Parent or its subsidiaries or other similar rights (including stock appreciation rights) (collectively, "Parent Securities"). There are no outstanding obligations of Parent or any of its subsidiaries to repurchase, redeem or otherwise acquire any Parent Securities. Except as set forth in Section 3.2 of the Parent Disclosure Schedule, there are no stockholder agreements, voting trusts or other agreements or understandings to which Parent is a party or to which it is bound relating to the voting of any shares of capital stock of Parent. (b) All of the outstanding capital stock of Parent's subsidiaries (including Acquisition) is owned by Parent, directly or indirectly, free and clear of any Lien or any other limitation or restriction (including any restriction on the right to vote or sell the same, except as may be provided as a matter of law). There are no securities of Parent or its subsidiaries convertible into or exchangeable for, no options or other rights to acquire from Parent or its subsidiaries, and no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly, of any capital stock or other ownership interests in, or any other securities of, any subsidiary of Parent. There are no outstanding contractual obligations of Parent or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any subsidiary of Parent. SECTION 3.3. Authority Relative to this Agreement. Each of Parent and Acquisition has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the boards of directors of Parent and Acquisition and by Parent as the sole stockholder of Acquisition, and no other corporate proceedings on the part of Parent or Acquisition are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Parent and Acquisition and constitutes a valid, legal and binding agreement of each of Parent and Acquisition, enforceable against each of Parent and Acquisition in accordance with its terms, subject to the Bankruptcy and Equity Exception. SECTION 3.4. SEC Reports; Financial Statements. (a) Parent has filed all required forms, reports and documents with the SEC since January 1, 1995, each of which has complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, each as in effect on the dates such forms, reports and documents were filed. Parent has heretofore delivered to the Company, in the form filed with the SEC (including any amendments thereto), (i) its Annual Reports on Form 10-K for the fiscal year ended December 31, 1995, (ii) all definitive proxy statements relating to Parent's meetings of stockholders (whether annual or special) held since January 1, 1996 and (iii) all other reports or registration statements filed by Parent with the SEC since January 1, 1995 (the "Parent SEC Reports"). As of their respective dates, none of such Parent SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of Parent included in the Parent SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Parent and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). Since December 31, 1995, except as set forth in the Parent SEC Reports, there has not been any change, or any application or request for any change, by Parent or any of its subsidiaries in accounting principles, methods or policies for financial accounting or tax purposes. (b) Parent has heretofore made available to the Company a complete and correct copy of any material amendments or modifications, which have not yet been filed with the SEC, to agreements, documents or other instruments which previously had been filed by Parent with the SEC pursuant to the Exchange Act. SECTION 3.5. Information Supplied. None of the information supplied or to be supplied by Parent or Acquisition for inclusion or incorporation by reference in (i) the S-4 will, at the time the S-4 is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the Proxy Statement will, at the date mailed to stockholders and at the time of the meeting of stockholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to Parent, its officers and directors or any of its subsidiaries should occur which is required to be described in an amendment of, or a supplement to, the S-4 or the Proxy Statement, Parent shall promptly so advise the Company and such event shall be so described, and such amendment or supplement (which the Company shall have a reasonable opportunity to review) shall be promptly filed with the SEC. The S-4 will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder. SECTION 3.6. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the HSR Act, the filing and recordation of the Certificate of Merger as required by the DGCL and as otherwise set forth in Section 3.6 to the Parent Disclosure Schedule, no filing or registration with or notice to, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the execution and delivery by Parent or Acquisition of this Agreement or the consummation by Parent or Acquisition of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Parent Material Adverse Effect. Except as set forth in Section 3.6 of the Parent Disclosure Schedule, neither the execution, delivery and performance of this Agreement by Parent or Acquisition nor the consummation by Parent or Acquisition of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective articles of incorporation or bylaws (or similar governing documents) of Parent or Acquisition or any of Parent's subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or Acquisition or any of Parent's subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound or (iii) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to Parent or Acquisition or any of Parent's subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which would not have a Parent Material Adverse Effect. SECTION 3.7. No Default. None of the Parent or its subsidiaries is in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its certificate or articles of incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or any of its subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to Parent, its subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults that would not have a Parent Material Adverse Effect. SECTION 3.8. No Undisclosed Liabilities; Absence of Changes. Except as and to the extent publicly disclosed by Parent in the Parent SEC Reports, as of June 30, 1996, none of Parent or its subsidiaries had any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, and whether due or to become due or asserted or unasserted, which would be required by GAAP to be reflected in, reserved against or otherwise described in the consolidated balance sheet of Parent (including the notes thereto) as of such date. Except as publicly disclosed by Parent in the Parent SEC Reports and except for the execution by Parent, Acquisition and certain affiliates of Parent of that certain Asset Purchase Agreement (United States), dated as of September 24, 1996, among Acquisition, Telectronics Pacing Systems, Inc. and TPLC, Inc., the International Purchase Agreements referred to in such Asset Purchase Agreement (United States) and the other agreements to be executed pursuant to such Asset Purchase Agreement (United States) and International Purchase Agreements (collectively, the "Telectronics Agreements"), since the date of the end of the period covered by the latest Parent SEC Report, (i) the business of Parent and its subsidiaries has been carried on only in the ordinary and usual course, and (ii) to the knowledge of Parent, none of Parent or its subsidiaries has incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, which would have, and there have been no events, changes or effects with respect to Parent or its subsidiaries which would have, a Parent Material Adverse Effect. For purposes of this Agreement, "knowledge of the Parent" means the actual knowledge of any executive officer or member of the Board of Directors of the Parent as listed in Section 3.8 of the Parent Disclosure Schedule. SECTION 3.9. Litigation. Except as publicly disclosed by Parent in the Company SEC Reports or disclosed in Section 3.9 of the Parent Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of Parent, threatened against Parent or any of its subsidiaries or any of their respective properties or assets which (i) would have, individually or in the aggregate, a Parent Material Adverse Effect or (ii) as of the date hereof, questions the validity of this Agreement or any action to be taken by Parent in connection with the consummation of the transactions contemplated hereby or could otherwise prevent or delay the consummation of the transactions contemplated by this Agreement. Except as publicly disclosed by Parent, none of Parent or its subsidiaries is subject to any outstanding order, writ, injunction or decree which would have a Parent Material Adverse Effect or would prevent or delay the consummation of the transactions contemplated hereby. SECTION 3.10. Compliance with Applicable Law. Except as publicly disclosed by Parent in the Parent SEC Reports, Parent and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the conduct of their respective businesses as presently conducted (the "Parent Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which would have a Parent Material Adverse Effect. Except as publicly disclosed by Parent in the Parent SEC Reports, Parent and its subsidiaries are in compliance with the terms of the Parent Permits, except where the failure so to comply would not have a Parent Material Adverse Effect. Except as publicly disclosed by Parent in the Parent SEC Reports, the businesses of Parent and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for violations or possible violations which would not have a Parent Material Adverse Effect. Except as publicly disclosed by Parent in the Parent SEC Reports, to the knowledge of Parent, no investigation or review by any Governmental Entity with respect to Parent or its subsidiaries is pending or threatened, nor, to the knowledge of Parent, has any Governmental Entity indicated an intention to conduct the same, other than, in each case, those which would not have a Parent Material Adverse Effect. SECTION 3.11. Tax Matters. Neither Parent nor any of its affiliates has taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. SECTION 3.12. Products. Except as disclosed in the Parent SEC Reports and except for the products to be acquired pursuant to the Telectronics Agreements, as to which no representation or warranty is being made hereunder: (a) Each of the products currently being produced or sold by Parent and its subsidiaries (i) is in compliance in all material respects with all applicable U.S. federal, state and local laws and regulations and (ii) conforms in all material respects to any promises or affirmations of fact made on the container or label for such product or in connection with its sale; (b) To the knowledge of Parent, no facts exist which would reasonably be expected to furnish a substantial basis for the recall, withdrawal or suspension by Parent or any of its subsidiaries of any such product as a result of, or in order to comply with, any U.S. federal, state or local law, regulation or rule or order of any Governmental Entity, except for such recalls, withdrawals or suspensions as would not have a Parent Material Adverse Effect; (c) All products sold under all licenses and approvals granted by or pending with any Governmental Entity in any country to market any product of Parent and it subsidiaries (the "Parent Product Registrations") are manufactured and marketed in all material respects in accordance with the specifications and standards contained in the Parent Product Registrations. Parent and its subsidiaries have the sole rights under the Parent Product Registrations in the United States and such registrations are in full force and effect; and (d) As of the date hereof, there are no pending and unsatisfied statements, citations, warning letters, FDA Forms 483, or decisions by any United States Governmental Entity that any product produced, manufactured, marketed or distributed by Parent or any of its subsidiaries is defective or fails to meet any applicable standards promulgated by any such United States Governmental Entity. There is no proceeding by the FDA or any other United States Governmental Agency, including, but not limited to, a grand jury investigation, a 405 hearing or a civil penalty proceeding, pending, or to Parent's knowledge threatened, against Parent or any of its subsidiaries, relating to the safety or efficacy of the products of Parent and its subsidiaries and, to Parent's knowledge, there is no basis for such a proceeding. SECTION 3.13. Intangible Property. To Parent's knowledge, Parent and its subsidiaries own or possess adequate licenses or other valid rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, trade secrets, applications for trademarks and for service marks, know-how and other proprietary rights and information used or held for use in connection with the business of Parent and its subsidiaries as currently conducted, except for failures to own or possess adequate licenses or other valid rights to use any of the foregoing which would not have a Parent Material Adverse Effect, and, except as set forth in the Parent SEC Reports or Section 3.13 of the Parent Disclosure Schedule, to the knowledge of Parent there are no pending assertions or claims challenging the validity of any of the foregoing which would have a Parent Material Adverse Effect. Except as disclosed in Section 3.13 of the Parent Disclosure Schedule, to Parent's knowledge, there are no pending claims or notices that the manufacture and sale of Parent's products infringes the patents of any third party. SECTION 3.14. Brokers. No broker, finder or investment banker (other than CS First Boston) is entitled to any brokerage, finder's or other fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Acquisition or any of their affiliates. SECTION 3.15. Accounting Matters. Neither Parent nor, to the best of its knowledge, any of its affiliates, has taken or agreed to take any action that would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling-of-interests." Parent has not failed to bring to the attention of the Company any actions, or agreements or understandings, whether written or oral, to act that would be reasonably likely to prevent Parent from accounting for the Merger as a "pooling-of-interests." SECTION 3.16. Telectronics Agreements. Parent has furnished to counsel to the Company true, complete and correct copies of all Telectronics Agreements in effect as of the date of this Agreement and any written documents, instruments or other arrangements executed by the parties thereto in connection therewith. SECTION 3.17. Medtronic Agreement. The License Agreement, dated August 26, 1992, between Medtronic Inc. and Siemens AG as assigned to Parent on August 23, 1994 is in full force and effect and will not by its terms terminate by reason of the Merger. ARTICLE 4 COVENANTS SECTION 4.1. Conduct of Business of the Company and Parent. (a) Except as contemplated by this Agreement or Section 4.1 of the Company Disclosure Schedule, during the period from the date hereof to the Effective Time, the Company will, and will cause each of its subsidiaries to, conduct its operations in the ordinary course of business consistent with past practice and, to the extent consistent therewith, with no less diligence and effort than would be applied in the absence of this Agreement, seek to preserve intact its current business organizations, seek to keep available the service of its current officers and employees and seek to preserve its relationships with customers, suppliers and others having business dealings with it. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Effective Time, neither the Company nor any of its subsidiaries will, without the prior written consent of Parent, which consent shall not be unreasonably withheld: (i) amend its certificate of incorporation or bylaws (or other similar governing instrument); (ii) authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, any stock options or stock appreciation rights), except for the sale of up to 78,813 shares of Company Common Stock to employees under the ESPP, the issuance of shares of Company Common Stock pursuant to the conversion of the Convertible Notes in accordance with the terms thereof and the issuance or sale of shares of Company Common Stock pursuant to outstanding options granted prior to the date hereof under the Company Plans (in each case, in the ordinary course of business and consistent with past practice); (iii) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, make any other actual, constructive or deemed distribution in respect of any shares of its capital stock or otherwise make any payments to stockholders in their capacity as such, or, except as set forth in Section 4.1(c) below, redeem or otherwise acquire any of its securities or any securities of any of its subsidiaries; (iv) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries (other than the Merger); (v) alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any subsidiary in a manner that would have a Company Material Adverse Effect; (vi) (A) incur or assume any long-term or short-term debt or issue any debt securities except for borrowings under existing lines of credit in the ordinary course of business and in amounts not material to the Company and its subsidiaries taken as a whole; (B) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person except in the ordinary course of business consistent with past practice and in amounts not material to the Company and its subsidiaries, taken as a whole, and except for obligations of the wholly owned subsidiaries of the Company; (C) make any loans, advances or capital contributions to, or investments in, any other person (other than to the wholly owned subsidiaries of the Company or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance); (D) pledge or otherwise encumber shares of capital stock of the Company or its subsidiaries; or (E) mortgage or pledge any of its material assets, tangible or intangible, or create, grant or incur any material Lien thereupon; (vii) except as may be required by law or as contemplated by this Agreement, enter into, adopt or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option (except for normal grants to newly hired or current employees, consistent with past practice), stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund, award or other arrangement for the benefit or welfare of any director, officer or employee in any manner, or (except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company, and as required under existing agreements or in the ordinary course of business generally consistent with past practice) increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock appreciation rights or performance units); (viii) acquire, sell, lease or dispose of any assets outside the ordinary course of business or any assets which in the aggregate are material to the Company and its subsidiaries taken as a whole, enter into any commitment or transaction outside the ordinary course of business or grant any exclusive distribution rights; (ix) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it; (x) revalue in any material respect any of its assets, including, without limitation, writing down the value of inventory or writing-off notes or accounts receivable other than in the ordinary course of business or as required by generally accepted accounting principles; (xi) (A) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or any equity interest therein; (B) enter into any contract or agreement, other than in the ordinary course of business or amend in any material respect any of the Contracts or the agreements referred to in Section 2.18; (C) authorize any new capital expenditure or expenditures which, individually, is in excess of $500,000 or, in the aggregate, are in excess of $5 million; PROVIDED, that none of the foregoing shall limit any capital expenditure already included in the Company's fiscal 1996 or fiscal 1997 capital expenditure budget provided to Parent prior to the date hereof; or (D) enter into or amend any contract, agreement, commitment or arrangement providing for the taking of any action that would be prohibited hereunder; (xii) make or revoke any tax election or settle or compromise any tax liability in a manner that involves the payment of a sum of money in excess of $100,000 or change (or make a request to any taxing authority to change) any material aspect of its method of accounting for tax purposes; (xiii) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company and its subsidiaries or incurred in the ordinary course of business consistent with past practice; (xiv) settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated hereby in a manner that involves the payment of a sum of money in excess of $100,000 or that imposes material non-monetary obligations on the Company; or (xv) take, propose to take, or agree in writing or otherwise to take, any of the actions described above or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect in any material respect. (b) Except as otherwise expressly provided in this Agreement, prior to the Effective Time, neither Parent nor any of its subsidiaries will, without the prior written consent of the Company, which consent shall not be unreasonably withheld: (i) amend its certificate of incorporation or bylaws (or other similar governing instrument); (ii) authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents, except for the sale of shares of Parent Common Stock to employees under the Parent's employee stock purchase savings plan, the issuance of shares of Parent Common Stock pursuant to outstanding options granted prior to the date hereof under the Parent's employee stock option plans and the grant of options after the date hereof (and the issuance of shares pursuant thereto) pursuant to such plans (in each case, in the ordinary course of business and consistent with past practice); (iii) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock (other than in respect of periodic regular cash dividends), make any other actual, constructive or deemed distribution in respect of any shares of its capital stock or otherwise make any payments to stockholders in their capacity as such, or redeem or otherwise acquire any of its securities or any securities of any of its subsidiaries; (iv) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of Parent or any of its subsidiaries (other than the Merger); (v) alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any subsidiary in a manner that would have a Parent Material Adverse Effect; (vi) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it; or (vii) take, propose to take, or agree in writing or otherwise to take, any of the actions described above or any actions which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect in any material respect. (c) Notwithstanding the provisions of Section 4.1(a) hereof, following the public announcement of the execution of this Agreement and prior to the Effective Time, the Company shall repurchase in open market transactions 200,000 shares of Company Common Stock outstanding on the date hereof. SECTION 4.2. Preparation of S-4 and the Proxy Statement. The Company will, as promptly as practicable, prepare and file with the SEC the Proxy Statement in connection with the vote of the stockholders of the Company with respect to the Merger. Parent will, as promptly as practicable, prepare, following receipt of notification from the SEC that it has no further comments on the Proxy Statement, and file with the SEC the S-4, containing a proxy statement/prospectus and form of proxy, in connection with the registration under the Securities Act of the shares of Parent Common Stock issuable upon conversion of the Shares and the other transactions contemplated hereby. Parent and the Company will, and will cause their accountants and lawyers to, use all reasonable best efforts to have or cause the S-4 declared effective as promptly as practicable, including, without limitation, causing their accountants to deliver necessary or required instruments such as opinions, consents and certificates, and will take any other action required or necessary to be taken under federal or state securities laws or otherwise in connection with the registration process. The Company will use its reasonable best efforts to cause the Proxy Statement to be mailed to its stockholders at the earliest practicable date. SECTION 4.3. No Solicitation. (a) Until the earlier of the Effective Time or the termination of this Agreement, the Company agrees that neither it nor any of its subsidiaries, nor any of the officers, directors or employees of it or its subsidiaries shall, and it shall direct and use its best efforts to cause its and its subsidiaries' representatives and agents (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its subsidiaries), not to, directly or indirectly, initiate, solicit or knowingly encourage (including by way of furnishing non-public information or assistance), or take any other action knowingly to facilitate, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal; provided, however, that nothing in this Agreement shall prohibit the Company Board from (i) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal or (ii) furnishing information to, or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal after the date of this Agreement, if, in the case referred to in clause (ii) above, the Company Board, after consultation with and based upon the advice of independent legal counsel, determines in good faith that such action is likely to be required for the Company Board to comply with its fiduciary duties to stockholders under applicable law and, prior to taking such action, the Company receives from such person or entity an executed confidentiality agreement in reasonably customary form. For purposes of this Agreement, "Acquisition Proposal" means an inquiry, offer or proposal regarding any of the following (other than the transactions contemplated by this Agreement) involving the Company or any of its subsidiaries: (w) any merger, consolidation, share exchange, recapitalization, business combination or other similar transaction; (x) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or substantially all the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or series of related transactions; (y) any tender offer or exchange offer for 20 percent or more of the outstanding shares of Company Common Stock or the filing of a registration statement under the Securities Act in connection therewith; or (z) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (b) Except as set forth in this Section 4.3(b), the Company Board shall not (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by the Company Board, (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal or (iii) cause the Company to enter into any agreement with respect to any Acquisition Proposal. Notwithstanding the foregoing, if the Board of Directors of the Company, after consultation with and based upon the advice of independent legal counsel, determines in good faith that it is necessary to do so in order to comply with its fiduciary duties to stockholders under applicable law, the Company Board may approve or recommend a Superior Proposal (as defined below) or cause the Company to enter into an agreement with respect to a Superior Proposal, but in each case only (i) after providing reasonable written notice to Parent (a "Notice of Superior Proposal") advising Parent that the Company Board has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal and (ii) if Parent does not make within 48 hours of Parent's receipt of the Notice of Superior Proposal, an offer which the Company Board, after consultation with its financial advisors, determines is superior to such Superior Proposal. For purposes of this Agreement, a "Superior Proposal" means any bona fide Acquisition Proposal that the Company Board determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation) to be more favorable to the Company's stockholders than the Merger. SECTION 4.4. Intentionally omitted. SECTION 4.5. Stockholder Meeting. The Company shall call a meeting of its stockholders to be held as promptly as practicable for the purpose of voting upon this Agreement and related matters. The Company will, through the Company Board recommend to its stockholders approval of such matters; PROVIDED, HOWEVER, that the Company Board may withdraw its recommendation if the Company Board by a majority vote determines in its good faith judgment, after consultation with and based upon the advice of independent legal counsel, that it is necessary to do so to comply with its fiduciary duties to stockholders under applicable law. SECTION 4.6. Access to Information. (a) Between the date hereof and the Effective Time, upon reasonable notice and except as may be otherwise required by applicable law, each party (for these purposes, Parent and Acquisition shall be deemed to be one party) will give to the other party and the other party's authorized representatives reasonable access during normal business hours to its employees, plants, offices, warehouses and other facilities and to all of its books and records, will permit the other party to make such inspections as the other party may reasonably require and will cause its officers and those of its subsidiaries to furnish the other party with such financial and operating data and other information with respect to its business, properties and personnel as the other party may from time to time reasonably request, provided that no investigation pursuant to this Section 4.6(a) shall affect or be deemed to modify any of the representations or warranties made herein and provided, further, that the foregoing shall not require either party to permit any inspection, or to disclose any information, that in its reasonable judgment would result in the violation of any of its obligations to a third party with respect to confidentiality if it shall have used best efforts to obtain the consent of such third party to such inspection or disclosure. (b) Between the date hereof and the Effective Time, the Company shall furnish to Parent and Acquisition within five business days after the delivery thereof to management, such monthly financial statements and data as are regularly prepared for distribution to Company management. At the earliest time they are available, each party shall furnish to the other party such quarterly and annual financial statements as are prepared for its SEC filings, which shall be in accordance with its books and records. (c) Parent will furnish to counsel to the Company true, complete and correct copies of all Telectronics Agreements (and any written documents, instruments or other arrangements executed by the parties thereto in connection therewith) executed following the date hereof and on or prior to the Effective Time. (d) Each party will hold and will cause its consultants and advisors to hold in confidence all documents and information concerning the other party furnished to it in connection with the transactions contemplated by this Agreement pursuant to the terms of the Confidentiality Agreements entered into between the Company and Parent dated August 30, 1996. SECTION 4.7. Additional Agreements; Best Efforts. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Telectronics Agreements as soon as practicable, including, without limitation, (i) cooperation in the preparation and filing of the Proxy Statement and the S-4 and any amendments to any thereof; (ii) the taking of all action necessary, proper or advisable to secure any necessary consents of all third parties and Governmental Entities; (iii) contesting and resisting any legal proceeding relating to the Merger or the Telectronics Agreements and having vacated, lifted, reversed or overturned any decree, judgment or other order that restricts, prevents or prohibits the Merger or any other transaction contemplated hereby or by the Telectronics Agreements; and (iv) the execution of any additional instruments, including the Certificate of Merger, necessary to consummate the transactions contemplated hereby. In case at any time after the Effective Time any further action is necessary to carry out the purposes of this Agreement, the proper officers and directors of each party hereto shall take all such necessary action. Notwithstanding the provisions of this Section 4.7, except for contractual arrangements in effect on the date hereof, neither party shall be required to pay any amounts of money to third parties to secure any consent or approval or to agree to any request or requirement of any Governmental Entity that would materially impair or diminish the benefits or ownership rights expected to be derived by Parent or the Company from the transactions contemplated by this Agreement and the Telectronics Agreements. SECTION 4.8. Antitrust Reviews. Each party hereto will use its best efforts (a) to file with the US Department of Justice and US Federal Trade Commission, as soon as practicable after the date hereof, the Notification and Report Form under the HSR Act and any supplemental information or material requested pursuant to the HSR Act, and (b) to comply as soon as practicable after the date hereof with any other laws of any country and the European Union under which any consent, authorization, registration, declaration or other action with respect to the transactions contemplated herein may be required. Each party hereto shall furnish to the other such information and assistance as the other may reasonably request in connection with any filing or other act undertaken in compliance with the HSR Act or other such laws, and shall keep each other timely apprised of the status of any communications with, and any inquiries or requests for additional information from, any Governmental Entity under the HSR Act or other such laws. SECTION 4.9. Public Announcements. Each of Parent, Acquisition and the Company will consult with one another before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, including, without limitation, the Merger, and shall not issue any such press release or make any such public statement or any filing with any third party or Governmental Entity prior to such consultation. SECTION 4.10. Indemnification; Directors' and Officers' Insurance. (a) Indemnification. From and after the Effective Time, Parent shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, a director, officer or employee of the Company or any subsidiary thereof (each an "Indemnified Party" and, collectively, the "Indemnified Parties") against all losses, expenses and costs (including reasonable attorneys' fees and expenses), claims, damages or liabilities or, subject to the proviso of the next succeeding sentence, amounts paid in settlement, arising out of actions or omissions occurring at or prior to the Effective Time and whether asserted or claimed prior to, at or after the Effective Time that are in whole or in part (i) based on, or arising out of the fact that such person is or was a director, officer or employee of the Company or one or more of its subsidiaries or (ii) based on, arising out of or pertaining to the transactions contemplated by this Agreement. Parent hereby agrees that any loss, expense, cost (including reasonable attorneys' fees and expenses), claims, damages or liability suffered by any director, officer or employee of the Company arising out of any claim initiated by Intermedics, Inc., Peter Dorflinger or any other officer or employee of Intermedics, Inc. shall be deemed to be a loss, expense, cost, claim, damage or liability arising out of the fact that such person is or was a director, officer or employee of the Company or one or more of its subsidiaries. In the event of any loss, expense, claim, damage or liability (whether or not arising before the Effective Time) described in the first sentence of this Section 4.10(a), (i) Parent shall pay the reasonable fees and expenses of counsel selected by the Indemnified Parties, which counsel shall be reasonably satisfactory to Parent, promptly after statements therefor are received and otherwise advance to such Indemnified Party upon request reimbursement of documented expenses reasonably incurred, in either case to the extent not prohibited by the DGCL and upon receipt of any affirmation and undertaking required by the DGCL, (ii) Parent will cooperate in the defense of any such matter and (iii) any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under the DGCL and Parent's articles of incorporation or bylaws shall be made by independent counsel mutually acceptable to Parent and the Indemnified Party; PROVIDED, HOWEVER, that Parent shall not be liable for any settlement effected without its written consent (which consent shall not be reasonably withheld). The Indemnified Parties as a group may retain only one law firm with respect to each related matter except to the extent there is, in the opinion of counsel to an Indemnified Party, under applicable standards of professional conduct, a conflict on any significant issue between positions of any two or more Indemnified Parties. (b) Insurance. For a period of three years after the Effective Time, Parent shall cause to be maintained in effect the policies of directors' and officers' liability insurance maintained by the Company for the benefit of those persons who are covered by such policies at the Effective Time (or Parent may substitute therefor policies of at least the same coverage with respect to matters occurring prior to the Effective Time), to the extent that such liability insurance can be maintained annually at a cost to Parent not greater than 150 percent of the premium for the current Company directors' and officers' liability insurance; provided that if such insurance cannot be so maintained or obtained at such costs, Parent shall maintain or obtain as much of such insurance as can be so maintained or obtained at a cost equal to 150 percent of the current annual premiums of the Company for such insurance. (c) Successors. In the event Parent or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity or such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in either such case, proper provision shall be made so that the successors and assigns of Parent shall assume the obligations set for in this Section 4.10. (d) Survival of Indemnification. To the fullest extent permitted by law, from and after the Effective Time, all rights to indemnification now existing in favor of the employees, agents, directors or officers of the Company and its subsidiaries with respect to their activities as such prior to the Effective Time, as provided in the Company's certificate of incorporation or bylaws, in effect on the date thereof or otherwise in effect on the date hereof, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time. (e) Benefit. The provisions of this Section 4.10 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her representatives. SECTION 4.11. Notification of Certain Matters. The Company shall give prompt notice to Parent and Acquisition, and Parent and Acquisition shall give prompt notice to the Company, of the status of matters relating to completion of the transactions contemplated hereby, including (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time, (ii) any material failure of the Company, Parent or Acquisition, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, (iii) any notice of, or other communication relating to, a default or event which, with notice or lapse of time or both, would become a default, received by it or any of its subsidiaries subsequent to the date of this Agreement and prior to the Effective Time, under any contract or agreement material to the financial condition, properties, businesses or results of operations of it and its subsidiaries taken as a whole to which it or any of its subsidiaries is a party or is subject, (iv) any notice or other communication from any third party or Governmental Entity with respect to the Merger or the other transactions contemplated hereby or alleging that the consent of such third party or Governmental Entity is or may be required in connection with the Merger or the other transactions contemplated by this Agreement, or (v) any material adverse change in their respective financial condition, properties, businesses or results of operations, taken as a whole, other than changes resulting from general economic conditions; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this Section 4.11 shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 4.12. Pooling. The Company and Parent each agrees that it will not take any action which could prevent the Merger from being accounted for as a "pooling-of-interests" for accounting purposes, and the Company will bring to the attention of Parent, and Parent will bring to the attention of the Company, any actions, or agreements or understandings, whether written or oral, that could be reasonably likely to prevent Parent from accounting for the Merger as a "pooling-of-interests." The Company and Parent shall use their best efforts to cause Ernst & Young LLP ("E&Y") to deliver to Parent and the Company a letter, addressed to the Company and Parent, stating that after appropriate review of this Agreement and based upon its familiarity with the Company and Parent, following the Merger the Company and Parent are entities that qualify as parties to a pooling of interests transaction under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations. Each party will inform all Company Affiliates (as hereinafter defined in Section 4.15) and other relevant affiliates and employees of the parties as to those actions that should or should not be taken by such persons so that the Merger will be accounted for as a "pooling-of-interests" and will use its best efforts to cause such affiliates and persons employed by it to take or not take such actions as either party may be informed by any Governmental Entity are necessary to be taken or not to be taken so that the Merger will be accounted for as a "pooling-of-interests." SECTION 4.13. Tax-Free Reorganization Treatment. The Company, Parent and Acquisition shall execute and deliver to Sullivan & Cromwell, counsel to the Company, and Weil, Gotshal & Manges LLP, counsel to Parent, certificates containing customary representations, at such time or times as reasonably requested by such law firms in connection with their respective deliveries of opinions with respect to the transactions contemplated hereby. SECTION 4.14. Employee Matters. (a) For the period commencing with the Effective Time and ending on June 30, 1998, Parent shall and shall cause its subsidiaries to maintain with respect to their employees who had been employed by the Company or any of its subsidiaries (i) base salary or regular hourly wage rates for each such employee at not less than the rate applicable immediately prior to the Merger to such employee, and (ii) benefits under employee benefit plans (as defined for purposes of Section 3(3) of ERISA), other than employee benefits as to which the employees' interests are based upon the Shares, which are substantially comparable in the aggregate to such benefits provided by the Company and its subsidiaries immediately prior to the Merger. Thereafter, in Parent's discretion, either (i) the provisions of the preceding sentence shall be complied with by Parent or (ii) employees of the Company and its subsidiaries shall be treated no less favorably under the compensation and benefits programs of Parent than other similarly situated employees of Parent and its subsidiaries. (b) Parent and its subsidiaries shall credit employees of the Company and its subsidiaries with their service prior to the Merger with the Company and its subsidiaries to the same extent such service was counted under the Company ERISA Plans for all purposes other than benefit accruals under the defined benefit pension plans of Parent and its subsidiaries. (c) Parent will, and will cause the Surviving Corporation to, honor the employment and severance agreements and all other obligations of the Surviving Corporation listed on Section 4.14(c) of the Company Disclosure Schedule. Nothing contained herein shall be construed as requiring Parent or the Surviving Corporation to continue any specific plans or to continue the employment of any specific person. SECTION 4.15. Company Affiliates. Prior to the Effective Time, each of the Company and Parent will deliver to the other a letter identifying all persons who, at the time of the meeting of the Company's stockholders referred to in Section 4.5, it believes are its "affiliates" for purposes of Rule 145 under the Securities Act and for the purposes of applicable interpretations regarding the pooling-of-interests method of accounting (the persons identified in the Company's letter are each hereinafter referred to as a "Company Affiliate" and the persons identified in Parent's letter are each hereinafter referred to as a "Parent Affiliate"). The Company shall use its best efforts to obtain a written agreement on or prior to the Effective Time from each person who is identified as a Company Affiliate providing that (i) such Company Affiliate will not sell, pledge, transfer or otherwise dispose of any shares of Parent Common Stock issued to such Company Affiliate pursuant to the Merger, except in compliance with Rule 145 promulgated under the Securities Act or an exemption from the registration requirements of the Securities Act. Each of the Company and Parent shall use its best efforts to obtain a written agreement on or prior to the Effective Time from each Company Affiliate and Parent Affiliate, respectively, providing that (ii) on or prior to the earlier of (x) the mailing of the Proxy Statement or (y) the thirtieth day prior to the Effective Time such person will not thereafter sell or in any other way reduce such person's risk relative to any shares of Parent Common Stock (within the meaning of the SEC's Financial Reporting Release No. 1, "Codification of Financing Reporting Policies," ss. 201.01 47 F.R. 21028 (April 15, 1982)), until such time as financial results (including combined sales and net income) covering at least 30 days of post-merger operations have been published, except as permitted by Staff Accounting Bulletin No. 76 issued by the SEC. SECTION 4.16. SEC Filings. Each of Parent and the Company shall promptly provide the other party (or its counsel) with copies of all filings made by the other party or any of its subsidiaries with the SEC or any other state or federal Governmental Entity in connection with this Agreement and the transactions contemplated hereby. SECTION 4.17. Guarantee of Performance. Parent hereby guarantees the performance by Acquisition of its obligations under this Agreement. ARTICLE 5 CONDITIONS TO CONSUMMATION OF THE MERGER SECTION 5.1. Conditions to Each Party's Obligations to Effect the Merger. The respective obligations of each party hereto to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) this Agreement shall have been approved and adopted by the requisite vote of the stockholders of the Company; (b) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any court or other Governmental Entity and continued in effect which prohibits, restrains, enjoins or restricts the consummation of the Merger; (c) any waiting period applicable to the Merger under the HSR Act shall have terminated or expired, and any other governmental or regulatory notices or approvals required with respect to the transactions contemplated hereby shall have been either filed or received; (d) the S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order, and Parent shall have received all state securities laws or "blue sky" permits and authorizations necessary to issue shares of Parent Common Stock in exchange for the Shares in the Merger; (e) the Company and Parent each shall have received from E&Y a letter stating that after appropriate review of this Agreement and based upon its familiarity with the Company and Parent, following the Merger the Company and Parent are entities that qualify as parties to a pooling of interests transaction under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations and such letter shall not have been withdrawn or modified in any material respect; (f) [intentionally omitted]; and (g) the closing contemplated by the Asset Purchase Agreement (United States), dated as of September 24, 1996, by and among Acquisition, Telectronics Pacing Systems, Inc. and TPLC, Inc. shall have occurred. SECTION 5.2. Conditions to the Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of Parent and Acquisition contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time (except for the representation and warranty made in the first sentence of Section 3.12(d), which is being made only as of the date of this Agreement), and at the Closing Parent and Acquisition shall have delivered to the Company a certificate to that effect; (b) each of the obligations of Parent and Acquisition to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Effective Time, and at the Closing Parent and Acquisition shall have delivered to the Company a certificate to that effect; (c) each Parent Affiliate shall have delivered and performed his or her obligations under the letter referenced in Section 4.15; (d) the shares of Parent Common Stock issuable to the Company stockholders pursuant to this Agreement and such other shares required to be reserved for issuance in connection with the Merger shall have been authorized for listing on the Nasdaq Stock Market (or any subsequent national securities exchange on which shares of Parent Common Stock are then listed for trading) upon official notice of issuance; (e) the opinion of Sullivan & Cromwell, counsel to the Company, addressed to the Company substantially to the effect that (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (ii) each of Parent, Acquisition and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by a stockholder of the Company as a result of the Merger with respect to Shares converted into shares of Parent Common Stock (other than with respect to cash received in lieu of fractional shares of Parent Common Stock), dated the Closing Date, shall have been delivered and such opinion shall not have been withdrawn or modified in any material respect; (f) there shall have been no events, changes or effects with respect to Parent or its subsidiaries (other than such events, changes or effects that arise out of or result from the execution of this Agreement or the proposed consummation of the Merger and the other transactions contemplated hereby) having or which would have a Parent Material Adverse Effect; (g) Parent and Acquisition shall have executed with State Street Bank and Trust Company a supplemental indenture with respect to the Convertible Notes, which supplemental indenture shall provide that upon consummation of the Merger, (i) Acquisition shall assume the due and punctual payment of the principal of and interest on all the Convertible Notes and the performance and observance of every covenant to be performed or observed by the Company under the Indenture under which such Convertible Notes were issued, (ii) the holder of each Convertible Note outstanding immediately following the Merger thereafter shall have the right to convert such Convertible Note into Parent Common Stock at the rate of 34.90908 shares of Parent Common Stock for each $1,000 principal amount of the Convertible Notes and (iii) Parent shall assume as a joint obligor Acquisition's obligations to pay the principal of and premium, if any, and interest on the Convertible Notes; (h) the Agreement, dated the date hereof, between Intermedics, Inc. and Acquisition (the "Intermedics Consent") shall be in full force and effect without any modification or amendment that would materially and adversely affect the ability of the Surviving Corporation following the Effective Time to conduct the operations of the Company as such operations are conducted by the Company on the date of this Agreement; (i) Acquisition shall have offered to enter into an employment agreement in the form annexed hereto as Exhibit A with each of the persons listed in Section 5.2(i) of the Company Disclosure Schedule; and (j) Intermedics, Inc. and Acquisition shall have entered into the 1996 License Agreement referred to in the Intermedics Consent, such 1996 License Agreement to be in substance as described in the Intermedics Consent as determined in the reasonable judgment of the Company. SECTION 5.3. Conditions to the Obligations of Parent and Acquisition. The respective obligations of Parent and Acquisition to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of the Company contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time, and at the Closing the Company shall have delivered to Parent and Acquisition a certificate to that effect; (b) each of the obligations of the Company to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Effective Time, and at the Closing the Company shall have delivered to Parent and Acquisition a certificate to that effect; (c) each Company Affiliate shall have delivered and performed his or her obligations under the letter referenced in Section 4.15; (d) there shall have been no events, changes or effects with respect to the Company or its subsidiaries (other than such events, changes or effects that arise out of or result from the execution of this Agreement or the proposed consummation of the Merger and the other transactions contemplated hereby) having or which would have a Company Material Adverse Effect; (e) the opinion of Weil, Gotshal & Manges LLP, addressed to Parent, substantially to the effect that (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (ii) each of Parent, Acquisition and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by Parent, Acquisition or the Company as a result of the Merger, dated the Closing Date, shall have been delivered and such opinion shall not have been withdrawn or modified in any material respect; and (f) the Surviving Corporation shall have entered into an employment agreement with each of the persons listed in Section 5.3(f) of the Parent Disclosure Schedule. ARTICLE 6 TERMINATION; AMENDMENT; WAIVER SECTION 6.1. Termination. This Agreement may be terminated and the Merger may be abandoned at any time, but prior to the Effective Time: (a) by mutual written consent of Parent, Acquisition and the Company; (b) by Parent and Acquisition or the Company if (i) the Merger has not been consummated by May 1, 1997, PROVIDED that no party may terminate this Agreement pursuant to this clause (i) if such party's failure to fulfill any of its obligations under this Agreement shall have been the reason that the Effective Time shall not have occurred on or before said date, or (ii) the Company or Parent shall have convened a meeting of its respective stockholders and failed to obtain the requisite vote of its respective stockholders; or (c) by the Company if (i) there shall have been a breach of any representation or warranty on the part of Parent or Acquisition set forth in this Agreement, or if any representation or warranty of Parent or Acquisition shall have become untrue, in either case such that the conditions set forth in Section 5.2(a) would be incapable of being satisfied by May 1, 1997 (or as otherwise extended), (ii) there shall have been a breach by Parent or Acquisition of any of their respective covenants or agreements hereunder having a Parent Material Adverse Effect or materially adversely affecting the consummation of the Merger, and Parent or Acquisition, as the case may be, has not cured such breach within 20 business days after notice by the Company thereof, or (iii) the Company enters into a definitive agreement relating to a Superior Proposal in accordance with Section 4.3(b) (provided that such termination shall not be effective until payment of the amount required under Section 6.3(a)). (d) by Parent and Acquisition if (i) there shall have been a breach of any representation or warranty on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 5.3(a) would be incapable of being satisfied by May 1, 1997 (or as otherwise extended), (ii) there shall have been a breach by the Company of its covenants or agreements hereunder having a Company Material Adverse Effect or materially adversely affecting the consummation of the Merger, and the Company has not cured such breach within 20 business days after notice by Parent or Acquisition thereof, or (iii) the Company Board shall have withdrawn, modified or changed its approval or recommendation of this Agreement or the Merger, shall have recommended to the Company's stockholders any Acquisition Proposal (other than the Merger), shall have failed to call, give notice of, convene or hold a stockholders' meeting to vote upon the Merger, or shall have adopted any resolution to effect any of the foregoing, or the Company shall have entered into a definitive agreement relating to a Superior Proposal. SECTION 6.2. Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 6.1, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its affiliates, directors, officers or shareholders, other than the provisions of this Section 6.2 and Sections 4.6(c) and 6.3. Nothing contained in this Section 6.2 shall relieve any party from liability for any wilful breach of this Agreement. SECTION 6.3. Fees and Expenses. (a) In the event that this Agreement shall be terminated pursuant to: (i) Sections 6.1(d)(i) or 6.1(d)(ii) as a result of a wilful breach by the Company and, within twelve months thereafter, the Company enters into an agreement with respect to any Acquisition Proposal (other than the Merger)), or (ii) Sections 6.1(c)(iii) or 6.1(d)(iii), then Parent and Acquisition would suffer direct and substantial damages, which damages cannot be determined with reasonable certainty. To compensate Parent and Acquisition for such damages, and in full satisfaction and settlement of any claims that Parent otherwise might have against the Company in respect of any such termination of this Agreement, the Company shall pay to Parent the amount of Fourteen Million Five Hundred Thousand Dollars ($14,500,000) (and not as a penalty) as follows: (i) in the case of a termination under Section 6.1(d)(i) or 6.1(d)(ii), such amount shall be paid on the date the Company consummates an Acquisition Proposal and (ii) in the case of a termination under Section 6.1(c)(iii) or 6.1(d)(iii), such amount shall be paid on the date of such termination. Notwithstanding the immediately preceding sentence, any payment as a result of a termination of this Agreement pursuant to Section 6.1(d)(i) or 6.1(d)(ii) shall be reduced by the amount of any damages actually recovered by Parent or Acquisition in respect thereof. (b) If the Company Board withdraws its recommendation to Company stockholders that they vote to approve this Agreement and related matters by reason of changes to the market prices of Parent Common Stock (in the absence of any occurrences that had or would have a Parent Material Adverse Effect) following the date hereof and the Merger is not consummated by reason of such withdrawal, then the Company shall pay to Parent the amount of Fourteen Million Five Hundred Thousand Dollars ($14,500,000). Such payment shall not be deemed to be the exclusive remedy or remedies for any breach of this Agreement by the Company, but shall be in addition to all other remedies available to Parent at law or equity. Nothing contained in this Section 6.3(b) shall be an admission by Parent that a change in the market prices of Parent Common Stock (in the absence of any occurrences that had or would have a Parent Material Adverse Effect) following the date hereof is an appropriate basis for the Company Board to withdraw its recommendation to Company stockholders pursuant to Section 4.5 hereof. (c) Each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. The cost of printing the S-4 and the Proxy Statement shall be borne equally by the Company and Parent. SECTION 6.4. Amendment. This Agreement may be amended by action taken by the Company, Parent and Acquisition at any time before or after approval of this Agreement by the stockholders of the Company but, after any such approval, no amendment shall be made which requires the approval of such stockholders under applicable law without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of the parties hereto. SECTION 6.5. Extension; Waiver. At any time prior to the Effective Time, each party hereto (for these purposes, Parent and Acquisition shall together be deemed one party and the Company shall be deemed the other party) may (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance by the other party with any of the agreements or conditions contained herein. Any agreement on the part of either party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of either party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE 7 MISCELLANEOUS SECTION 7.1. Nonsurvival of Representations and Warranties. The representations and warranties made herein shall not survive beyond the Effective Time or a termination of this Agreement. SECTION 7.2. Entire Agreement; Assignment. This Agreement (a) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof; and (b) shall not be assigned by operation of law or otherwise; PROVIDED, HOWEVER, that Acquisition may assign any or all of its rights and obligations under this Agreement to any direct wholly-owned subsidiary of Parent, but no such assignment shall relieve Acquisition of its obligations hereunder if such assignee does not perform such obligations. SECTION 7.3. Validity. If any provision of this Agreement, or the application thereof to any person or circumstance, is held invalid or unenforceable, the remainder of this Agreement, and the application of such provision to other persons or circumstances, shall not be affected thereby, and to such end, the provisions of this Agreement are agreed to be severable. SECTION 7.4. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, facsimile or telex, or by registered or certified mail (postage prepaid, return receipt requested), to the other party as follows: if to Parent or to Acquisition to: St. Jude Medical, Inc. One Lillehei Plaza St. Paul, MN 55117 Attention: General Counsel Facsimile: (612) 490-4333 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Dennis J. Block, Esq. Facsimile: (212) 310-8007 if to the Company to: Ventritex, Inc. 701 East Evelyn Avenue Sunnyvale, CA 94086 Attention: Mr. Frank M. Fischer Facsimile: (408) 738-0285 with a copy to: Sullivan & Cromwell 125 Broad Street New York, NY 10004 Attention: Benjamin F. Stapleton, Esq. Facsimile: (212) 558-3588 or to such other address as the person to whom notice is given may have previously furnished to the other in writing in the manner set forth above. SECTION 7.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. SECTION 7.6. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 7.7. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, and except as provided in Sections 4.10 and 7.2 nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 7.8. Severability. If any term or other provision of this Agreement is invalid, illegal or unenforceable, all other provisions of this Agreement shall remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. SECTION 7.9. Specific Performance. The parties hereto acknowledge that irreparable damage would result if this Agreement were not specifically enforced, and they therefore consent that the rights and obligations of the parties under this Agreement may be enforced by a decree of specific performance issued by a court of competent jurisdiction. Such remedy shall, however, not be exclusive and, shall be in addition to any other remedies which any party may have under this Agreement or otherwise. SECTION 7.10. Subsidiaries. The term "subsidiary" shall mean, when used with reference to any entity, any entity more than fifty percent (50%) of the outstanding voting securities or interests (including membership interests) of which are owned directly or indirectly by such former entity. SECTION 7.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the day and year first above written. ST. JUDE MEDICAL, INC. By: /s/ Ronald A. Matricaria ----------------------------------- Name: Ronald A. Matricaria Title: President and Chief Executive Officer PACESETTER, INC. By: /s/ Patrick Forteau ----------------------------------- Name: Patrick Forteau Title: President VENTRITEX, INC. By: /s/ Frank M. Fischer ----------------------------------- Name: Frank M. Fischer Title: President and Chief Executive Officer EX-3.2 3 ARTICLES OF AMENDMENT EXHIBIT 3.2 ARTICLES OF AMENDMENT OF ST. JUDE MEDICAL, INC. I, the undersigned Kevin T. O'Malley, Assistant Secretary of St. Jude Medical, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes, known as the Minnesota Business Corporation Act, hereby certify that resolutions adopting an amendment to the language of Article VII of the Articles of Incorporation to read as set forth below were adopted pursuant to Chapter 302A, Minnesota Statutes, by the Board of Directors and by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote at a meeting of the shareholders held on May 9, 1996. RESOLVED, that the first sentence of Article VII of the corporation's Articles of Incorporation be replaced with the following: "The authorized capital stock of this corporation shall be Two Hundred Fifty Million (250,000,000) shares of common stock of the par value of Ten Cents ($.10) per share (the "Common Stock") and Twenty-Five Million (25,000,000) shares of preferred stock of the par value of One Dollar ($1.00) per share (the "Preferred Stock")." RESOLVED FURTHER, that the officers of the corporation acting individually, are each authorized and directed to execute such documents and certificates and to take such other action as may be necessary to give effect to the previous resolution. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of September, 1996. /s/ Kevin T. O'Malley ------------------------------------------- Kevin T. O'Malley, Assistant Secretary EX-10.2 4 SUCCESSION PLANNING EXHIBIT 10.2 November 8, 1996 Mr. Ronald A. Matricaria 62 West Pleasant Lake Road North Oaks, MN 55127 Re: RONALD A. MATRICARIA - SUCCESSION PLANNING Dear Ron: I am pleased to outline for you the recommendations made by the Compensation Committee, and subsequently approved by the Board, in connection with a revised compensation program offered to you in exchange for extending your existing employment agreement with the Company for a period of five years. The Board approved the following changes in your compensation: 1) BASE SALARY. Effective January 1, 1997, you shall receive a base salary at the rate of Seven Hundred Fifty Thousand Dollars ($750,000) per annum, payable in bi-weekly installments. 2) BONUS. Bonus compensation payable to you will remain the same, that is, the opportunity to earn 100% of base salary each fiscal year upon achievement of established targets to be mutually agreed upon by yourself and the Board of Directors. 3) STOCK OPTIONS. (a) You will be granted a non-qualified option to purchase 236,000 shares of the Company's common stock under the 1991 Stock Plan. These shares will be exercisable at the rate of 25% per year on the next four anniversary dates from July 16, 1996. The purchase price of the shares of common stock covered by this option shall be the fair market value on July 16, 1996. [Note: The July 16, 1996, fair market value was $31.375 as determined by the average of the high and low trades on July 16, 1996]. (b) You will be granted a non-qualified option to purchase 260,000 shares of the Company's common stock under the 1994 Stock Option Plan. These shares will be exercisable at the rate of 25% per year on the next four anniversary dates from July 16, 1996. The purchase price of the shares of common stock covered by this option shall be the fair market value on July 16, 1996. [Note: The July 16, 1996, fair market value was $31.375 as determined by the average of the high and low trades on July 16, 1996]. (c) You will be granted a non-qualified option to purchase 500,000 shares of the Company's common stock subject to shareholder approval. These shares will be exercisable at the rate of 25% per year on the next four anniversary dates from July 16, 1996. The purchase price of the shares of common stock covered by this option shall be $31.375, the fair market value on July 16, 1996. [Note: The July 16, 1996, fair market value was $31.375 as determined by the average of the high and low trades on July 16, 1996]. (d) You will be granted a non-qualified option to purchase 500,000 shares of the Company's common stock subject to shareholder approval. The purchase price of the shares of common stock covered by this option shall be the fair market value on July 16, 1996. [Note: The July 16, 1996, fair market value was $31.375 as determined by the average of the high and low trades on July 16, 1996]. The right to exercise this option shall vest based on achievement of stock price targets as measured for the month of December in each of the five years from December 1997 through December 2001. Specifically, the options will vest at the rate of 20% for each 20% compounded increase in the stock price from the grant date to each of December 1997, 1998 and 1999, and each 15% compounded increase in the stock price thereafter to each of December 2000 and 2001. The stock price for each December will be calculated as the arithmetic mean of the closing prices of the stock for all the trading days of December of each year. If the stock price target for any calendar year is not met or exceeded in that year, the number of shares which would have been exercisable will carry forward to the next subsequent year and will become exercisable only if the next subsequent year's stock price target is achieved. The number of exercisable shares can be accelerated if the arithmetic mean of the stock price in December of an earlier year meets or exceeds the stock price target for a subsequent year(s). In the event the stock price targets are not achieved, this option will become fully exercisable only on the 16th day of July, 2006, if you remain as an employee or as a board member of the Company. 4) RESTRICTED STOCK. You will be granted a total of 50,000 shares of the Company's $0.10 par value common stock (shares) under the St. Jude Medical 1989 Restricted Stock Plan. The shares will be subject to certain restrictions during the restriction period enumerated in the Restricted Stock Agreement. Restrictions will lapse on twenty-five percent of the shares on each annual anniversary date from July 16, 1996. 5) SPLIT DOLLAR LIFE INSURANCE. The Committee hereby approves the adoption of a $3,000,000 split dollar life or similar life insurance policy for you. 6) CHANGE OF CONTROL AGREEMENT. Your original change of control agreement will be renewed. In addition, a new change of control agreement will be entered providing you with a payment of $10,000,000 upon a change of control as defined in your existing change of control agreement and regardless of whether he remains employed by the Company or is terminated subsequent to a change in control. 7) USE OF COMPANY PLANE. The Company finds that it is in the best interest of the Company, for both security reasons and time management reasons, that you and your immediate family from time-to-time use the Company plane for personal, as well as business use. The Company will be responsible for payment of any tax due for such personal use. 8) ST. JUDE MEDICAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND TRUST (SERP). In 1993, the Company established a nonqualified supplemental retirement plan which is subject to a substantial risk of forfeiture in the event you leave the Company prior to October 1, 1996. As further consideration for the amended terms of your employment agreement and to tie the value and security of your retirement income to your continued commitment to the financial success of the Company, St. Jude shall before October 1, 1996, terminate and liquidate the SERP and in lieu thereof make a discretionary contribution under the St. Jude Medical, Inc. Management Savings Plan (MSP), in the amount of $3,460,000 to be held and distributed in accordance with the terms of the MSP. 9) STOCK OPTION AMENDMENTS. If you cease to be an employee, but remain as a director, your outstanding stock options will be amended to permit the exercise of any vested shares for the original option term. If you retire from the Company or from the Board (with consent by the Committee) any stock options held may thereafter be exercised to the extent they were exercisable at the time of retirement, up to one year from the date of such retirement, or the expiration of the stated terms of the options, whichever period is shorter. Congratulations Ron on the success you have achieved through your outstanding leadership for the Company during your short tenure. You have significantly reduced the risk profile through diversification and improved the growth profile of St. Jude Medical thereby significantly enhancing shareholder value. Onward and upward! Best Regards, /s/ William R. Miller William R. Miller Chairman, Compensation Committee WRM:kj EX-11 5 COMPUTATION OF EARNINGS PER SHARE
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31, 1996 EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE Year Ended December 31 --------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ PRIMARY Average shares outstanding 80,636,809 79,790,294 79,617,015 Net effect of dilutive stock options, based on the treasury stock method using average market price 1,316,272 1,197,510 467,894 ------------ ------------ ------------ TOTAL 81,953,081 80,987,804 80,084,909 ============ ============ ============ Net Income $ 92,180,708 $138,847,849 $ 86,450,001 ============ ============ ============ Earnings Per Share $ 1.12 $ 1.71 $ 1.08 FULLY DILUTED Average shares outstanding 80,636,809 79,790,294 79,617,015 Net effect of dilutive stock options, based on the treasury stock method using year-end market price, if higher than average market price 1,607,200 1,674,162 814,628 ------------ ------------ ------------ TOTAL 82,244,009 81,464,456 80,431,643 ============ ============ ============ Net Income $ 92,180,708 $138,847,849 $ 86,450,001 ============ ============ ============ Earnings Per Share $ 1.12 $ 1.70 $ 1.07
EX-13 6 1996 ANNUAL REPORT ST. JUDE MEDICAL, INC. ANNUAL REPORT 1996 CELEBRATING 20 YEARS OF LIVES SAVED AND IMPROVED -- THE ST. JUDE MEDICAL(R) HEART VALVE. [PHOTO] DR. C. WALTON LILLEHEI, THE "FATHER OF OPEN HEART SURGERY," ENCOURAGED THE INNOVATIVE DESIGN OF THE ST. JUDE VALVE AT THE UNIVERSITY OF MINNESOTA. [PHOTO] SINCE RECEIVING A ST. JUDE MEDICAL(R) HEART VALVE IN 1978, 77-YEAR-OLD NORA CARVALHO CONTINUES TO WORK AND MAKE CERAMIC DOLLS. [PHOTO] TOM COOK CREDITS THE VALVE WITH SAVING HIS LIFE, WHICH ALLOWED HIM TO WITNESS THE DEVELOPMENT OF DAUGHTER RACHEL'S FILM CAREER. [PHOTO] ROBERT BRECKINRIDGE, A RETIRED EXECUTIVE WHO ENJOYS FREQUENT TRAVEL FOLLOWING HIS VALVE SURGERY, SAYS, "I FEEL LIKE A NEW PERSON." [PHOTO] "I HAVE A WHOLE NEW LIFE SINCE HEART VALVE SURGERY," SAYS JOAN HURD, WHO SERVES AS A FOSTER CARE PARENT TO SPECIAL NEEDS CHILDREN. More than 725,000 St. Jude Medical(R) mechanical heart valves have been implanted since 1977, representing the highest quality of design for the highest quality of life. The St. Jude mechanical valve -- one of the most successful prosthetic devices ever brought to market -- has proven itself to be unmatched in clinical performance and economic value and is the foundation for St. Jude Medical's commitment to providing THE BEST SOLUTIONS FOR HEART VALVE DISEASE WORLDWIDE(SM). These people from around the world represent two decades of lives changed by skilled surgeons and medical technology. All are part of the St. Jude Medical(R) heart valve story. [PHOTO] AN ENERGETIC 14-YEAR-OLD WHO SWIMS AND RUNS THE MILE, REBECCA KLOOZ RECEIVED TWO VALVES AS AN INFANT IN 1982 AND AGAIN LAST YEAR. [PHOTO] ELIZABETH HOFFMANN BECAME LINGUIST-SECRETARY TO THE ASSISTANT MEDICAL DIRECTOR, GERMAN HEART CENTRE OF BERLIN, AFTER A 1983 VALVE IMPLANT SAVED HER LIFE. [PHOTO] BEFORE VALVE SURGERY, CATERING MANAGER ROBERT ZABEL WAS EXHAUSTED AT DAY'S END. NOW HE HAS THE ENERGY FOR SPORTS AND HOBBIES. [PHOTO] LEONARD BRUCCIANI HAS RIDDEN HIS BIKE 10,000 MILES SINCE RETIRING FROM THE MINNEAPOLIS POLICE DEPARTMENT...AND SINCE RECEIVING A MECHANICAL HEART VALVE IN 1985. [PHOTO] SPORTS ENTHUSIAST TONY NGUYEN RUNS DAILY, PLAYS VOLLEYBALL AND PERFORMS CHINESE DRAGON DANCING WHEN NOT WORKING AT THE COMPANY'S WOODRIDGE FACILITY. MISSION: St. Jude Medical, Inc. is dedicated to the design, manufacture and distribution of innovative medical devices of the highest quality, offering physicians, patients and payors unmatched clinical performance and demonstrated economic value. The Company's three operating divisions provide the medical marketplace with products and services across a wide variety of cardiovascular applications: the St. Jude Medical Heart Valve Division, the global leader in heart valve disease management; Pacesetter, a leader in innovation for cardiac rhythm management; and Daig, a pioneer in specialty catheters. The Company's products are sold in more than 100 countries. St. Jude Medical has fourteen operations and manufacturing facilities around the world. As of December 31, 1996, the Company employed 3,620 people. [PHOTO] NASHVILLE, TENNESSEE, VALVE RECIPIENTS DR. STEWART PERLMAN AND RABBI STEPHEN FUCHS MAINTAIN DEMANDING WORK SCHEDULES WHILE STILL EXCELLING AT THEIR FAVORITE SPORTS. [PHOTO] JUDITH GAVIN CALLS HER LIFE "HYPERACTIVE" -- SHE SKIS, TRAVELS EXTENSIVELY FOR EMPLOYER IBM, AND VOLUNTEERS WITH THE AMERICAN HEART ASSOCIATION. [PHOTO] SEVEN YEARS AFTER SURGERY, FARRELL JOHNSON SAYS HE'S MORE ACTIVE THAN EVER AND HAS "PEACE OF MIND" WITH HIS SJM HEART VALVE. [PHOTO] SURGEON KIT AROM, M.D., HAPPILY RECEIVES A GIFT FROM 1990'S 500,000TH VALVE PATIENT, LINDA STACK, WHOSE HOBBIES INCLUDE FISHING, WATER SKIING AND SNOW TUBING. [PHOTO] ACCORDING TO LI JUE'S CARDIOLOGIST, SHE DOES MORE THAN MOST PEOPLE HER AGE, WHICH, IN CHINA, INCLUDES REGULAR BICYCLING. TABLE OF CONTENTS 1 Letter to Shareholders 5 Heart Valve Disease Management 11 Cardiac Rhythm Management 16 Catheter Technology 18 A Global Company 21 Management's Discussion and Analysis 27 Report of Management 27 Report of Independent Auditors 28 Consolidated Financial Statements 39 Five-Year Summary of Selected Financial Data 40 Investor Information 41 Leadership and Board of Directors [PHOTO] RETIRED BUS DRIVER THOMAS HAGERTY ENJOYS READING AND DANCING AND IS PROUD TO BE ONE OF ST. JUDE'S VALVE PATIENTS. [PHOTO] JOANNE LAMOREAUX, UTAH TEACHER AND HORSEBACK RIDER, IS GRATEFUL FOR THE HEART VALVE RECEIVED IN 1993 THAT LET HER ENJOY A FIRST GRANDCHILD THIS YEAR. [PHOTO] SEVENTEEN-YEAR-OLD DENISE OPLAND NOW HAS THE ENDURANCE TO DO IT ALL -- PLAY GUITAR, "SURF THE INTERNET" AND RUN ON HER HIGH SCHOOL TRACK TEAM. [PHOTO] MARIA EUGENIA VIVEROS, 12, OF CALI, COLOMBIA, CAN RUN AND PLAY AGAIN THANKS TO A HEART VALVE DONATED TO CHILDREN'S HEARTLINK BY ST. JUDE MEDICAL. [PHOTO] RECIPIENT OF THE 700,000TH ST. JUDE VALVE IN 1996, KENT ADEE JOINED THE CELEBRATION WHEN ST. JUDE MEDICAL MOVED ITS LISTING TO THE NEW YORK STOCK EXCHANGE. TO OUR SHAREHOLDERS ST. JUDE MEDICAL'S 2OTH ANNIVERSARY, 1996, WAS a defining year for the future of our Company. [PHOTO] ST. JUDE MEDICAL(R) MECHANICAL HEART VALVE SJM(R) MASTERS SERIES We again achieved record net sales and earnings, exclusive of purchased research and development and special charges related to strategic acquisitions. All businesses strengthened their market position as the size and scope of St. Jude Medical increased. We continued to expand from a single-product company and diversify into multiple medical technology platforms, a strategy initiated in 1993 to increase shareholder value. As we begin 1997, we are excited by the Company's growth prospects and have aggressive plans for the future. This year's report commemorates the 20th anniversary of the first implant in October 1977 of the St. Jude Medical(R) mechanical heart valve, arguably the most successful medical device ever brought to market. The cover depicts people from around the world who represent over 725,000 individuals whose lives have been enriched by this remarkable product -- the foundation for St. Jude Medical's reputation for quality, commitment to excellence and financial strength. Net sales in 1996 grew to $800 million, an increase of 7 percent from 1995 on a comparable business basis. Income per share increased 9 percent from 1995 to $1.87, excluding purchased research and development and special charges. We repaid the remainder of the 1994 Pacesetter acquisition debt ahead of schedule. We borrowed funds, which we expect to repay in about one year, to acquire Telectronics' assets. Our financial condition is excellent. [PHOTO] "NEVER MISS A BEAT" LAPEL BUTTON Creating shareholder value continues to be a principal objective of the Board and management. Since we began to diversify in 1994, the stock price has more than doubled and market capitalization has increased approximately $2 billion. On December 2, we listed St. Jude Medical's common stock on the New York Stock Exchange to reach the broadest base of investors. Representatives of our principal constituencies -- customers, employees and shareholders -- joined members of the Board of Directors and Company executives for "St. Jude Medical Day" on Wall Street. 1 In 1996, our heart valve business strengthened its undisputed global leadership position in prosthetic valves while continuing to execute its strategy to offer a full range of solutions for heart valve disease management. Few businesses in any market are as strong and well-positioned as the St. Jude Medical Heart Valve Division. [LOGO] (DAIG) We completed a stock-for-stock merger with Daig, a specialty catheter company, to expand our offerings in cardiac rhythm management (CRM), enter the interventional cardiology market, and acquire important core competencies in catheter design and manufacturing. Daig's prospects are very exciting. Pacesetter, our first cardiac rhythm management business, made progress on many fronts. Several new products were introduced, continuing Pacesetter's tradition of technological innovation and a focus on quality speed to market. A new Pacesetter hybrid component facility in Scottsdale, Arizona, is complete and a new manufacturing facility in Stockholm, Sweden, will open this summer. Both are important investments in vertical integration and the latest manufacturing technologies. In October, we announced several important agreements regarding our cardiac rhythm management strategy. Industry analysts have characterized these transactions as innovative and far-reaching. All are now complete except the Ventritex merger, which we hope to close in the near future. Ventritex will provide St. Jude Medical extensive technology and an approved product line of state-of-the-art implantable cardioverter defibrillators (ICDs) to complement our pacemaker products. With Ventritex, we immediately gain a market position in ICDs. [LOGO] (TELECTRONICS) Telectronics adds important intellectual property, including pioneering work in automatic mode switching and minute ventilation technologies, advanced pulse generator products and an experienced sales organization. A settlement with Intermedics resolves long-standing disputes among several companies and facilitates the announced Ventritex merger. With Pacesetter, Daig and Telectronics, St. Jude Medical has assembled one of the world's largest cardiac rhythm management businesses in just over two years. We are now focused on combining these operations into a global, resource-rich organization offering a broad range of products to diagnose and treat arrhythmias. Building on the St. Jude Medical(R) mechanical heart valve, we have executed since 1993 a series of acquisitions and strategic alliances to position the Company to offer products and services to clinicians and healthcare professionals in heart valve disease Page 2 management, cardiac rhythm management and interventional cardiology -- all large, growing and important global therapeutic markets. We are poised for continued growth in all three markets. We remain interested in other cardiovascular challenges including atrial fibrillation, restenosis and congestive heart failure. [PIE GRAPH] STRATEGIC PLATFORMS In recognition of the dramatic changes in the scale of the Company, we continue to invest in our information technology and distribution infrastructure. We selected Electronic Data Systems Corporation (EDS) as our global information technology services partner and are implementing an enterprise-wide integrated hardware and software system. We are leveraging the worldwide capabilities of Federal Express Corporation to enhance our distribution system and better support our customers. The Company continued in 1996 to expand global operations. We increased our sales and support resources in Europe. We moved from distributor to direct sales in Brazil, the largest healthcare market in South America. In the Asia-Pacific region, operations substantially expanded as we opened sales offices in Hong Kong, Shanghai and Beijing, China. As governments, providers and payors around the world continue to deal with healthcare availability and financing, St. Jude Medical is focused on bringing to market cost-effective devices with demonstrated value and clinical benefit. Comprehensive reform at the U.S. Food & Drug Administration (FDA) did not pass, but Congress limited the FDA's ability to restrict exports of U.S. products approved for sale in other countries. Unfortunately, legislation to protect suppliers of biomaterials for medical technology products did not materialize. Both FDA and biomaterials reform are important priorities for the 105th Congress. Our principal goal in 1997 is to effectively integrate the recent transactions into one global cardiac rhythm management business. Substantial progress has been made with Telectronics. Assuming the completion of the Ventritex merger, we plan to immediately offer ICD products to our customers through our extensive global sales and support resources. In other sections of this report we will delineate our objectives in each business and geography. We welcomed Paul J. Chiapparone and Daniel J. Starks to the Board of Directors. Mr. Chiapparone is executive vice president of EDS and brings a wealth of experience in international business and information technology to the Board. Mr. Starks is the CEO of Daig and has considerable medical technology expertise. After 14 years of 3 service to St. Jude Medical, Charles V. Owens will be retiring from the Board of Directors. Charlie's wealth of medical technology industry experience has been invaluable, and we appreciate his many contributions to the Company. The Board continued an annual CEO performance evaluation. A similar process for Board members is now in place. In recognition of the Company's 20th anniversary, we formed the St. Jude Medical Foundation to support clinical and community involvement projects consistent with cardiovascular health. We also established the Hendrickson Technical Achievement Award, in honor of former Board member and chairman William G. Hendrickson, Ph.D., to recognize technical contributions by our employees. As we begin 1997, we have achieved the commitments we made to you in 1993 to diversify and strengthen St. Jude Medical. Today, St. Jude Medical is a larger, more diverse and stronger global company than ever. While we have accomplished a great deal, we have aggressive goals for sales growth and increasing profitability. We see a bright and exciting future for the Company. On behalf of the Board of Directors and the 3,620 global members of the St. Jude Medical team, thank you for your continued support. For the Board of Directors, /s/ Ronald A. Matricaria Ronald A. Matricaria Chairman, President and Chief Executive Officer March 5, 1997 [PHOTO] RON MATRICARIA WITH 5-YEAR-OLD RYAN JOHNSON, WHO RECEIVED A ST. JUDE MEDICAL(R) VALVE IN AUGUST 1994. RYAN IS AN ACTIVE KINDERGARTNER WHO ENJOYS COLLECTING DINOSAUR TOYS. 4 HEART VALVE DISEASE MANAGEMENT [PHOTO] REBECCA KLOOZ AND ST. JUDE MEDICAL HAVE "GROWN UP" TOGETHER. AT AGE TWO, REBECCA WAS ONE OF THE YOUNGEST PATIENTS TO RECEIVE A MECHANICAL VALVE. HER COURAGE AND SMILE ARE INSPIRING! REBECCA IS A VERY ACTIVE TEENAGER WHO ENJOYS PIANO AND CRAFTS. THE STRENGTH OF ST. JUDE MEDICAL'S MARKET and technology leadership in heart valves is evident in the more than 725,000 valves that have been implanted by surgeons around the world, four times the closest competitor. In October 1977 at the University of Minnesota Hospital, Helen Heikkinen received the first St. Jude Medical(R) mechanical heart valve, implanted by cardiovascular surgeon Dr. Demetre Nicoloff. Its innovative bi-leaflet design, coupled with unsurpassed quality and reliability and a series of product enhancements, has made the St. Jude valve an extremely successful product and afforded us undisputed leadership in this market. The valve was developed and brought to market by a unique collaboration of clinicians, engineers and entrepreneurs. The stories of several of our patients are told on the cover and throughout this annual report. As we celebrate the 20th anniversary of our flagship product, we continued in 1996 to execute our strategy: to provide our customers comprehensive, uncompromising solutions to the multifold challenges of heart valve disease. We are dedicated to continuing our market leadership in heart valve disease management, building on the unequaled record of performance of the St. Jude Medical(R) mechanical heart valve. During 1996, we advanced our core heart valve business with the worldwide launch of the St. Jude Medical(R) mechanical heart valve SJM(R) Masters Series rotatable valve. Approval from the Japanese Ministry of Health and Welfare came in January. In February, the first U.S. implants occurred and the Conformite Europeene (CE) Mark was received for the mitral version of this product. In just over a year, more than 25,000 Masters Series valves have been implanted. 5 In 1997, we will introduce another enhancement to the St. Jude Medical valve with a new, unique cuff with anti-bacterial properties to lessen the risk of serious infections. Other important mechanical product line extensions are in development. [LOGO] BIOCOR We made important progress toward global leadership in bioprosthetic valves consistent with our strategy to offer clinically proven tissue valves of the highest quality. We acquired Biocor(R) Industria E Pesquisas Ltd. of Belo Horizonte, Brazil. A leading world developer and producer of tissue heart valves with more than 13 years of proven clinical performance, Biocor is a market leader for tissue valves in Brazil. SJM Biocor(TM) bioprosthetic heart valves are CE Mark approved and a principal focus of our European sales plan for 1997. Biocor dramatically increases our tissue valve market share and will be a cornerstone of this business in the years to come. [PHOTO] (TORONTO SPV(R) VALVE*) Our Toronto SPV(R) valve, the leading stentless porcine tissue valve in Europe and Canada, was specifically designed to overcome the historical limitations on hemodynamics and durability associated with tissue valves. The Toronto SPV(R) valve has a documented record of excellent performance. The valve continues to yield very promising results in U.S. clinical studies. We anticipate FDA approval of this innovative product late this year. In addition, we made substantial progress with several innovative anti-mineralization technologies that hold promise for improving long-term durability of tissue valves. We hope to introduce one or more of these technologies in the next two years. In early 1996, we purchased the remaining assets of The Heart Valve Company, our former joint venture with Hancock Jaffe Laboratories, and will apply its unique technologies across our tissue valve products. We continue to pursue a longer-term goal of developing the first durable replacement heart valve that functions more like natural tissue without requiring anticoagulants. [PHOTO] JOANNE LAMOREAUX TEACHES 6TH GRADE IN SOUTH JORDAN, UTAH. AFTER JOANNE RECEIVED HER HEART VALVE IN 1993 AT THE LDS HOSPITAL IN SALT LAKE CITY, AS A CLASS PROJECT HER STUDENTS WROTE TO ST. JUDE AND THANKED THE COMPANY FOR HELPING MRS. LAMOREAUX. *NOT AVAILABLE IN U.S., PENDING FDA APPROVAL. 6 [PHOTO] ABOVE: BIOCOR(R) FOUNDER DR. MARIO VRANDECIC AND DAVID ELIZONDO, TECHNICAL SERVICES MANAGER AT BIOCOR, INSPECT AN SJM BIOCOR(TM) VALVE*. RIGHT: BOB ELGIN, VICE PRESIDENT, OPERATIONS, HEART VALVE DIVISION, WITH HEART VALVE PRODUCTS FROM BIOCOR. *NOT AVAILABLE IN U.S. [PHOTO] ABOVE: DAVE STRONACH, ST. JUDE MEDICAL SALES REPRESENTATIVE IN ONTARIO, CANADA, WHO IS ALSO A HEART VALVE RECIPIENT, WITH THE COAGUCHEK(TM) PRODUCT*, WHICH OFFERS EASY SELF-TESTING AT HOME FOR MEASURING BLOOD COAGULATION LEVELS WITH ACCURATE RESULTS IN TWO MINUTES. RIGHT: DICKEY FRANSSEN-BRADER, SENIOR PRODUCT MANAGER IN THE HEART VALVE DIVISION, OVERSEES THE INTRODUCTION OF THE COAGUCHEK(TM) MONITORING PRODUCT. *NOT AVAILABLE IN U.S., PENDING FDA APPROVAL. [PHOTO] MEETING AT THE COMPANY'S LILLEHEI FACILITY, THE HEART VALVE DIVISION'S INTERNATIONAL SCIENTIFIC ADVISORY BOARD REVIEWS TRENDS IN HEART VALVE DISEASE. [PHOTO] SJM(R) SEGUIN ANNULOPLASTY RING [PHOTO] TOM COOK WORKS WITH KIDS AT OLSON MIDDLE SCHOOL IN BLOOMINGTON, MINNESOTA. TOM RECEIVED A ST. JUDE VALVE IN 1979 AFTER HIS HEALTH DRAMATICALLY DECLINED. HIS STORY WAS RECOUNTED IN A LOCAL NEWSPAPER -- "ILLNESS TAUGHT TEACHER A LESSON IN LIVING." WITH HIS NEW VALVE, TOM SAID, "I LIVED TO SEE MY DAUGHTER BEGIN A FILM CAREER AND WATCH MY SON GROW UP." In 1996, we expanded initiatives to address other important needs in the management of heart valve disease: * A January agreement with LifeNet Transplant Services enables St. Jude Medical to assist in the marketing of human donated allograft heart valves for patients who are not suitable for mechanical or bioprosthetic devices. * An alliance in April with Boehringer Mannheim Corporation provides mechanical valve patients the opportunity to use a home test kit for measuring anticoagulation levels. Boehringer Mannheim's CoaguChek(TM) has decreased the number of anticoagulation-related complications for over 6,000 patients in Europe, reducing the cost while enhancing the quality of care. Together we are pursuing FDA approval to offer this device for home use in 1997 and plan to extend our alliance to additional markets. * European implants began in May of the SJM(R) Seguin annuloplasty ring used to correct malfunctioning mitral valves. We hold an exclusive license for this innovative product and expect the market for valve repair, currently under 10 percent of heart valve surgical procedures, to expand. FDA approval to offer this product in the United States was received last month. Under our agreement with Heartport, Inc., worldwide clinical trials began of Heartport's innovative Port-Access(TM) system for less-invasive heart valve replacement and repair surgeries. Heartport recently received FDA approval of its Port-Access(TM) system, a major regulatory milestone for both Heartport and St. Jude Medical. [LOGO] HEARTPORT The Heartport(TM) Port-Access(TM) system, in combination with a St. Jude Medical(R) Port-Access(TM) mechanical heart valve system, allows surgical access to the heart from small incisions between the ribs, and implantation of the valve without cutting the chest bone and surrounding tissue. 9 To date, approximately 50 patients worldwide have received a St. Jude valve using Heartport's less-invasive technology. Surgical time is shortened, patient trauma lessened and recovery time greatly reduced, all contributing to shorter hospital stays and convalescence and reduced healthcare costs. We also are monitoring other approaches to less- invasive heart valve replacement and repair surgery. In 1996, in honor of his major contributions to surgery, cardiovascular medicine and St. Jude Medical, we dedicated a new training room in our Lillehei facility to Dr. C. Walton Lillehei, who remains a major contributor to our heart valve business. 1996 was a year of hard work and building for the future in the heart valve business. 1997 will be a very exciting year for the division, our customers and their patients. We anticipate more new and important product introductions than this market has ever seen, while continuing an absolute commitment to quality without compromise -- a commitment that began 20 years ago this October with the first implant of the St. Jude Medical(R) mechanical heart valve. [PHOTO] KENT ADEE, RETIRED LONG ISLAND SOCIAL STUDIES TEACHER, RECEIVED A ST. JUDE VALVE IN 1996. KENT ENJOYS FISHING, GARDENING AND SINGING IN CHURCH WITH HIS DAUGHTER KELLY AND WIFE CONNIE. [PHOTO] BUST OF DR. C. WALTON LILLEHEI IN THE COMPANY'S LILLEHEI FACILITY. [PHOTO] THE WOODRIDGE CARBON TECHNOLOGY TEAM -- WINNERS OF THE COMPANY'S HENDRICKSON AWARD -- (STANDING LEFT TO RIGHT) BILL SCHEID, PAUL KELLEY, RICH RODRIGUEZ, MIKE JACKSON, BOB ENO, (SEATED LEFT TO RIGHT) MIKE COYLE AND JIM BRAZIL. [PHOTO] TERRY SHEPHERD, PRESIDENT, ST. JUDE MEDICAL HEART VALVE DIVISION AND INTERNATIONAL. 10 CARDIAC RHYTHM MANAGEMENT [PHOTO] PACESETTER MICRONY(TM) SR+* (ACTUAL SIZE) [PIE CHART] THE GLOBAL CARDIAC RHYTHM MANAGEMENT MARKET *BRADYCARDIA *TACHYCARDIA *ELECTROPHYSIOLOGY *ATRIAL FIBRILLATION (DEVELOPING MARKET) [PHOTO] MARTHA HUBBARD OF COVINA, CALIFORNIA, WHO RECEIVED A PACESETTER REGENCY(TM) SR+* PACEMAKER, WITH HER PHYSICIAN, DR. MARK MYERS. *NOT AVAILABLE IN U.S., PENDING FDA APPROVAL. TRADITIONALLY A TECHNOLOGY-DRIVEN MARKET cardiac rhythm management (CRM) today presents opportunity and challenge -- rapidly evolving products, changing customer profiles, increasing cost-benefit focus and promising advances in clinical research. Bradycardia, the largest and most mature of the four CRM market segments, generates over $2.2 billion annually in pacemaker system sales to treat slow heart rates. Two other market segments, VT/VF (ventricular tachycardia/ventricular fibrillation) and electrophysiology, represent over $800 million of device sales to diagnose and treat fast heart rates and are experiencing double-digit growth. Technological innovation and advancing clinical knowledge are driving the fourth emerging CRM segment, atrial fibrillation (AF), which affects two million U.S. citizens per year. AF is a known precursor to stroke and is currently managed with medication. Newer treatments involving catheter mapping and ablation and electrical stimulation device therapy are currently under investigation. St. Jude Medical has aggressively pursued a leadership position in the total CRM market, expected to exceed $5 billion by the year 2000. The acquisition of Pacesetter in 1994 provided the Company the number two position in the bradycardia segment. Several 1996 events essentially complete our cardiac rhythm management strategy: * The acquisition of Daig provides catheter core competencies and products and an impressive patent portfolio for electrophysiology and AF. * The acquisition of substantially all of Telectronics Pacing Systems' assets broadens our bradycardia product portfolio and provides valuable intellectual property. * The settlement of intellectual property disputes with Intermedics resolves pending litigation and helps facilitate our announced merger with Ventritex, Inc. * The Ventritex merger will provide our cardiac rhythm management business with approved, state-of-the-art ICD products and an immediate presence in the important and fast-growing VT/VF market. 11 [PHOTO] ABOVE: PROCESS TECHNICIAN NAM NGUYEN OVERSEES A PROGRAMMABLE ROBOTIC COMPONENT PLACEMENT STATION. RIGHT: JOHN DARBY, PLANT MANAGER, AND FRANK KELLY, VICE PRESIDENT, HYBRID OPERATIONS, LED THE TEAM THAT BUILT THE NEW PACESETTER HYBRID PRODUCTION FACILITY. [PHOTO] MEMBERS OF THE PACESETTER ICD TECHNOLOGY TEAM -- JIM GREEN, DR. MARK KROLL, JIM CAUSEY AND SUE BIENKOWSKI. [PHOTO] TRILOGY(R) DR+ [PHOTO] META(TM) DDDR 1256 [LOGO] CELLULAR TESTED Pacesetter's 1996 accomplishments in the Bradycardia market segment helped prepare for a substantial expansion of our CRM business In September, the FDA approved market release of our newest, most sophisticated pacemaker, the Trilogy(R) DR+. We initiated U.S. clinical trials of the first commercially released AutoCapture(TM) pacing systems, Microny(TM) and Regency(TM). Both have enjoyed wide international acceptance. The Microny(TM) is the world's smallest pacemaker. AutoCapture(TM) pacing systems are unique in the industry and provide the foundation for true Automaticity(TM) in pacing therapy -- the ability of the pacemaker to monitor patient heart beats and automatically adjust its output as a result. Automated features address physician needs to save time while improving patient outcomes and cost-effectiveness. In 1996, Pacesetter received the only FDA approval to use the term Cellular Tested(TM) on product labeling and literature, meaning patients with these devices need not take special precautions when using cellular telephones, as they are advised to do with other pacemakers that experience electrical interference from cellular signals. In addition, over the past year, Pacesetter: * Received CONFORMITE EUROPEENE (CE) Mark approval for the ADDVENT(R) VDDR pacing system. * Completed U.S. trials and European market release of the Tendril(R) DX and Passive PLUS(R) DX steroid-eluting leads -- expected to attain FDA approval this year -- and completed trials in preparation for European launch of the Membrane EX(TM) lead. * Obtained positive customer reaction to the prototype of its next-generation, highly automated programmer, the APS(TM) III, expected to reach the U.S. and European markets by the end of this year. * Demonstrated, in response to worldwide customer demand, the effect of a renewed emphasis on quality speed to market with rapid development of the Trilogy(R) DC+. Our bradycardia offerings have expanded with the Telectronics line of innovative pulse generators led by the META(TM) DDDR 1256, now approved for the U.S. market. This device includes Telectronics' exclusive Minute Ventilation(TM) biosensor feature and the market's first Automatic Mode Switching (AMS(TM)) capability, in its third generation. Early acceptance of the META(TM) DDDR 1256 is very encouraging. 13 In addition, new Pacesetter manufacturing facilities in Scottsdale, Arizona, and Jarfalla, Sweden, outside of Stockholm, are key elements of our vertical integration strategy. These facilities will improve operational efficiency and expand manufacturing capacity. The integration of Pacesetter, Daig, Telectronics and Ventritex into a worldwide, resource-rich CRM business is our principal priority. Progress to date with the Telectronics integration is substantial. Ventritex has several important ingredients for our future in the VT/VF market segment: state-of-the-art, market-released ICD products that are well regarded by electrophysiologists; sales and marketing teams with established customer relationships; and a technology platform to complement the intellectual property assets and research and development capabilities of Pacesetter and Telectronics. 1997 holds great promise for St. Jude Medical's cardiac rhythm management business. The integration of the recent transactions provides the resources to effectively compete in this large and growing marketplace. Our CRM business prospects are very exciting. [PHOTO] PACESETTER'S STATE-OF-THE-ART HYBRID PRODUCTION FACILITY IN SCOTTSDALE, ARIZONA. [PHOTO] BUEHL TRUEX, WINNER OF THE HENDRICKSON AWARD FOR HIS WORK AT PACESETTER IN PULSE GENERATOR MECHANICAL DESIGN, WITH DAVE MORLEY, EXECUTIVE VICE PRESIDENT, PACESETTER. [PHOTO] JIM DENNIS, PRESIDENT, TELECTRONICS, AND PATRICK FOURTEAU, PRESIDENT, PACESETTER. [PHOTO] HENDRICKSON AWARD WINNER HANS ABRAHAMSSON, OF PACESETTER AB SWEDEN, FOR HIS CONTRIBUTION TO THE APS(TM) PROGRAMMER DEVELOPMENT. 14 [PHOTO] ABOVE: GENNARO FLORIO OF HAMDEN, CONNECTICUT, RECEIVED A TRILOGY(R) DR+ IN 1996. GENNARO'S SON JOE, A SENIOR SCIENTIST AT PACESETTER, WORKED ON THE DESIGN OF THE TRILOGY(R) PACEMAKER THAT NOW HELPS HIS DAD AND HIM ENJOY A GAME OF GOLF. LEFT: JOANNE LEDESMA AND NOEL AGREDANO ARE PART OF THE MANUFACTURING TEAM THAT ASSEMBLES PACESETTER TRILOGY(R) PULSE GENERATORS IN SYLMAR, CALIFORNIA. CATHETER TECHNOLOGY THE ACQUISITION OF DAIG WAS AN IMPORTANT STEP in St. Jude Medical's cardiac rhythm management strategy. With products for electrophysiology and investigational devices for atrial fibrillation (AF), Daig provides St. Jude Medical a presence in these two cardiac rhythm management market segments. Daig also provides an entry into interventional cardiology (IC), where it is a market leader in hemostasis and specialty guiding introducers. Daig's strength with the electrophysiologist, an increasingly important customer, is built upon two assets: a broad and technologically innovative line of specialty catheters and guiding introducers and a strong field clinical support capability. The Livewire(TM) EP catheter, released two years ago in the United States for diagnostic mapping of the heart, received in 1996 the CE Mark for mapping and ablation (surgical destruction of malfunctioning tissue to improve electrical performance). We expect in 1997 to gain FDA approval to use this catheter for supraventricular ablation procedures. Atrial fibrillation, treatable but not curable with drugs, afflicts over four million people worldwide, posing serious and costly complications. Treatment alternatives, including catheter ablation, often with a subsequent pacemaker implantation, show promise. Daig's Livewire(TM) system is the first ablation product in U.S. clinical trials to treat AF. Daig's percutaneous catheters, introducers and guiding sheaths provide differentiated niche products to the worldwide interventional cardiology market. Daig's Spyglass(TM) angiography catheter and the Maximum(TM) hemostasis introducer have recently been released. The segments of the IC market in which Daig participates are expected to reach $400 million by the year 2000. Daig's world-class catheter technology and manufacturing expertise can be used by St. Jude Medical in other therapeutic classes. Daig had strong growth in 1996 and will be an important contributor to St. Jude Medical in the years ahead. [PHOTO] JOANNE SCHNEEWIND AND JEAN LUEBKE PREPARE DAIG INTRODUCER COMPONENTS PRIOR TO ASSEMBLY. [PHOTO] LIVEWIRE(TM) EP CATHETER [PHOTO] SPYGLASS(TM) ANGIOGRAPHY CATHETERS 16 [PHOTO] ABOVE: MARIE FERGUSON OF WORCESTER, MASSACHUSETTS, WAS PLAGUED BY SYMPTOMS OF CHRONIC, UNCONTROLLED ARRHYTHMIAS. HER PHYSICIAN OFFERED HER HOPE WITH A CATHETER RF ABLATION PROCEDURE USING A DAIG PRODUCT. FOLLOWING THE PROCEDURE MARIE IS LESS TIRED AND HER OUTLOOK ON LIFE IS MUCH IMPROVED. RIGHT: DAN STARKS, CEO, AND MIKE COYLE, PRESIDENT, LEAD DAIG'S EXPANSION IN ELECTROPHYSIOLOGY AND INTERVENTIONAL CARDIOLOGY. A GLOBAL COMPANY MAJOR PROGRESS IN EXPANDING OUR GLOBAL resources occurred during 1996. Demand for cardiovascular devices from customers beyond the United States has never been greater. Extending our presence to take full advantage of opportunities in these markets for all of our businesses is a major goal of St. Jude Medical. In 1996, approximately 43 percent of our total sales came from international markets representing over 100 countries. In 1995, 41 percent of sales came from these same countries. Growth in international sales in 1996 exceeded 11 percent, with all business units participating. In markets that can support the investment required to establish a direct presence, we are aggressively pursuing that approach to expand our business platforms. St. Jude Medical has a significant presence throughout Western Europe and several countries in Latin America. In 1996, we continued to expand direct operations in Brazil, Canada and Portugal. To take advantage of potentially explosive growth in the very diverse yet vital Asia-Pacific market, we established a regional structure, including the headquarters in Hong Kong and representative offices in Shanghai and Beijing. Overall sales in the area increased more than 30 percent in 1996. In 1997, a representative office will open in India, another significant emerging market. In Japan, as a result of the combined efforts of our pacing distributors, Getz Brothers and Fukuda, we maintained a market leadership position in pacing as sales increased over 20 percent from 1995. The Company's long-time role as the market leader in the Japanese heart valve market continued. [PHOTO] PACESETTER AB'S NEW EUROPEAN MANUFACTURING FACILITY IN JARFALLA, NORTH OF STOCKHOLM, SWEDEN. [PHOTO] DAVID GREEN RECEIVED A ST. JUDE VALVE IN 1991. A COMMUNICATIONS CONSULTANT, HE IS AN ACTIVE VOLUNTEER WITH CHILDREN'S HEARTLINK AND WENT TO COLOMBIA AS A MEDICAL VOLUNTEER WHERE HE MET MARIA EUGENIA VIVEROS. 18 [PHOTO] ABOVE: IN PRAGUE FOR AN INTERNATIONAL CARDIOLOGY MEETING ARE (LEFT TO RIGHT) IVO NEKUDO, THE COMPANY'S DISTRIBUTOR IN THE CZECH REPUBLIC; PETER VAN DER SLUIS, AREA DIRECTOR, EASTERN EUROPE; AND ANNETTE UELZE, HEART VALVE PRODUCT MANAGER FOR EASTERN EUROPE, MIDDLE EAST AND AFRICA. RIGHT: HELENA MATYSOVA, OF PRAGUE, RECEIVED A ST. JUDE MEDICAL(R) MECHANICAL HEART VALVE IN 1996. HELENA SKIS, JOGS AND ENJOYS GARDENING. In the Western European medical device market, estimated to grow to $50 billion by 2003, we added Daig's catheter and introducer products to support interventional cardiologists. Both the heart valve and pacing businesses grew, in part due to a decision to implement a direct sales organization in Italy. We are poised to offer ICD products in Europe, assuming the completion of the Ventritex merger. During 1996, we dramatically expanded the reach of St. Jude Medical into Russia and other countries of the former Soviet Union, Eastern Europe, Asia, the Middle East and certain areas of Latin America, where our business is best represented by distributors for scale and support reasons. Important progress was made in these regions, as sales growth in several countries approached 50 percent. We plan to continue to take full advantage of market opportunities in a number of emerging markets. As we expand our product offerings in 1997 to address the different types of cardiovascular disease around the world, our goal is to ensure that any patient, anywhere, anytime, can access the important technologies and related support services of St. Jude Medical. [PHOTO] STEVE HEALY, VICE PRESIDENT, WORLDWIDE SALES AND MARKETING FOR THE HEART VALVE DIVISION (STANDING), MEETS WITH A GROUP OF FRENCH DOCTORS WHO WERE AMONG OVER 200 PHYSICIANS WHO TOURED THE COMPANY'S HEART VALVE MANUFACTURING OPERATIONS IN 1996. [PHOTO] AT AN INTERNATIONAL CLINICIANS' MEETING, RAJIV MAJAJAN, PRESIDENT OF J. MITRA AND BROS. OF NEW DELHI, INDIA AND A COMPANY DISTRIBUTOR, DISCUSSES ASIAN MARKET STRATEGIES WITH DR. DAVID LIK CHING CHEUNG OF THE UNIVERSITY OF HONG KONG GRANTHAM HOSPITAL. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS INTRODUCTION: The Company designs, manufactures and markets medical devices and provides services primarily for the cardiovascular segment of the medical device market. Principal products include the world's most frequently implanted mechanical heart valves, tissue heart valves, bradycardia pacemakers, pacemaker leads and specialty catheters. The principal objective for management is to increase shareholder value. This is accomplished through a focus on customer satisfaction, product innovation, continual product and process improvement and investment in medical technologies. The Company has implemented a long-term business strategy which focuses investment on specific medical device technologies which will provide innovative solutions to health care providers and patients. Effective November 29, 1996, St. Jude Medical 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, both of which were wholly owned subsidiaries of Pacific Dunlop, Ltd. The acquisition, which was accounted for as a purchase, included a $135,000 cash payment and an earnout provision tied to future pacing sales which could result in additional payments of up to $40,000 over six years if certain revenue milestones are achieved. The purchase price is also subject to adjustment based on changes to the net asset value of Telectronics and Medtel between June 30, 1996, and November 29, 1996. The Company and Pacific Dunlop currently disagree on the amount of the adjustment and are following the process prescribed in the asset sale agreement to resolve the disagreement. The Company expects that any adjustment would be made in 1997. The Company's reported results for 1996 include Telectronics and Medtel subsequent to November 29, 1996. Effective September 23, 1996, the Company acquired Biocor(R) Industria E Pesquisas Ltd., a Brazilian manufacturer of tissue heart valves for $4,000 in cash and an earn-out which could result in additional cash payments of up to $4,000 over the next three years. Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a Minnesota-based manufacturer of specialized cardiovascular devices for the electrophysiology and interventional cardiology markets. Each share of Daig common stock was converted into .651733 shares of Company common stock and the Company issued 10,013,319 shares to Daig shareholders. The transaction qualifies as a tax-free reorganization and was accounted for as a pooling of interests. The accompanying financial statements, for all periods presented, have been restated to include the results of Daig. Effective September 30, 1994, St. Jude Medical acquired from Siemens AG substantially all the worldwide assets of its cardiac rhythm management operations ("Pacesetter") for $511,300. The acquisition represented a significant diversification and provided the Company with its cardiac rhythm management technology platform. The Company's fourth quarter 1994 and full year 1995 and 1996 financial results include Pacesetter's operations. Effective January 19, 1996, the Company sold its cardiac assist operations to C.R. Bard for approximately $24,000. Cardiac assist net sales were approximately $12,000 and $10,500 in 1995 and 1994, respectively. Also in January, the Company acquired the remaining 50% of The Heart Valve Company for $1,000 in cash and 149,153 shares of its common stock. The commentary that follows should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest December 31. Fiscal years 1996, 1995 and 1994 consisted of 52 weeks. Shown in the following table for the periods indicated are the net sales by technology platform and the percentage relationships of certain items in the consolidated statements of income to consolidated net sales and the percentage change of the dollar amounts of such items as compared with the prior period. Due to the impact of the Telectronics, Medtel and Biocor acquisitions, and the cardiac assist business divestiture, as well as the September 1994 purchase of Pacesetter, amounts are not directly comparable between years. 21 Year-to Year Percent of Net Sales Increase/(Decrease) - -------------------------------------------------------------------------------- 1996 1995 Year Ended December 31 Compared Compared 1996 1995 1994 to 1995 to 1994 - -------------------------------------------------------------------------------- Net sales: Heart valve 33.3% 33.7% 62.2% 5% 5% Cardiac rhythm management 62.4% 60.7% 27.9% 9% 323% Interventional cardiology 4.2% 4.0% 7.2% 12% 9% Cardiac assist .1% 1.6% 2.7% (95%) 15% - -------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 6% 94% Cost of sales 30.5% 30.8% 28.6% 5% 110% - -------------------------------------------------------- Gross profit 69.5% 69.2% 71.4% 7% 88% - -------------------------------------------------------- Selling, general and administrative 33.6% 32.5% 27.0% 10% 133% Research and development 9.3% 9.5% 6.0% 4% 208% Purchased research and development 5.0% -- 10.4% -- (100%) Special charges 5.9% -- -- -- -- - -------------------------------------------------------- Operating profit 15.7% 27.2% 28.0% (39%) 89% Other income (expense), net 1.8% (.8%) 1.9% 360% (175%) Income before taxes 17.5% 26.4% 29.9% (30%) 72% Income tax provision 6.1% 8.2% 7.8% (21%) 103% Net income 11.4% 18.2% 22.1% (34%) 61% - -------------------------------------------------------------------------------- [BAR GRAPH] NET SALES (IN MILLIONS) * UNITED STATES * INTERNATIONAL NET SALES: Net sales totalled $808,780 in 1996, a $46,945, or 6%, increase over 1995 net sales of $761,835. Excluding the approximately $8,000 of Telectronics net sales subsequent to its acquisition and the results of the cardiac assist business, which was sold in January 1996, net sales increased approximately 7% over 1995 net sales. Sales outside the U.S. improved from 41% of net sales in 1995 to 43% in 1996 reflecting increasing sales in higher growth, developing foreign markets. Unfavorable foreign currency effects due to the stronger U.S. dollar reduced 1996 net sales compared to 1995 by approximately $4,200. This negative impact on sales was offset by a favorable foreign currency impact on operating expenses and gains relating to the Company's hedging activities, which were recorded in other income. Heart valve net sales of approximately $269,000 increased 5% in 1996 despite worldwide healthcare reform and increased competition which continued to put pressure on the number of procedures performed as well as pricing flexibility. Heart valve 1995 sales levels benefited from substantial non-recurring second and third quarter sales to Iran. Excluding these non-recurring sales, 1996 net sales would have increased 7% over 1995 net sales. Domestic mechanical heart valve net sales increased in 1996 due to the full year availability of the St. Jude Medical(R) mechanical heart valve SJM(R) Masters Series valve and general price increases that were partially offset by a slight reduction in unit sales due to a reduction in procedures and hospital inventory management. International mechanical heart valve net sales in 1996 were more than 7% higher than 1995. This resulted mainly from increased unit sales in the developing markets of Latin America, Eastern Europe, Africa and Asia-Pacific regions. Tissue heart valve net sales in 1996 increased significantly from 1995 levels due to the continuing physician acceptance of the Toronto SPV(R) valve and the September 1996 acquisition of Biocor(R) Industria E Pesquisas Ltd., a Brazilian manufacturer of tissue heart valves. [BAR GRAPH] NET SALES (IN MILLIONS) * HEART VALVES * CARDIAC RHYTHM MANAGEMENT * INTERVENTIONAL CARDIOLOGY Cardiac rhythm management net sales of approximately $504,000 increased 9% from 1995 levels. Pacesetter's higher sales level resulted from a 12% increase in units partially offset by a 5% decrease in average selling prices because of pricing pressures and more units being sold in lower priced developing markets. Domestic pacemaker sales were affected by the lack of a competitive auto mode switching feature in the Company's Trilogy(R) line for the first nine months of 1996. Subsequent to the early fourth quarter FDA approval of the Trilogy(R) DR+ pacemaker, which has this feature, domestic sales increased at twice the rate in the fourth quarter compared with the average sales increase during the first nine months. Telectronics sales totalled almost $8,000 in December 1996. Daig's sales of electrophysiology catheters and related products increased by over 50% in 1996 compared with 1995. 22 Interventional cardiology net sales of approximately $34,000 increased 12% over 1995 due to increased sales and marketing activities in the U.S. market and to the introduction of new products. Net sales in 1995 of $761,835 were $369,886 or 94% higher than 1994 net sales of $391,949. Approximately $349,000 of the increase was attributable to the full year effect of the Pacesetter acquisition and increased Pacesetter sales. The increase also resulted from higher mechanical heart valve sales in emerging international markets and increased Daig sales due to new product introductions and expanded marketing programs. Domestic mechanical heart valve sales increased due to the full year availability of the St. Jude Medical(R) Hemodynamic Plus Series valves and general price increases that were partially offset by a reduction in unit sales. COST OF SALES: As a percentage of net sales, cost of sales in 1996 decreased to 30.5% from 30.8% in 1995 primarily as a result of manufacturing efficiencies, an increase in the percentage of internally produced Fmechanical heart valve components and the elimination of a 2% mechanical heart valve royalty payment during the first quarter 1995. The decrease in cost of sales was partially offset by the negative foreign currency impact on net sales, average selling price decreases due to higher unit sales in lower margin emerging markets and pricing pressure in the cardiac rhythm management business. In 1995, cost of sales as a percentage of sales increased to 30.8% from 28.6% in 1994 primarily as a result of Pacesetter operations. Although Pacesetter margins are consistent with the industry, its margins are not as high as the Company's heart valve margins. In addition, the Company pays an approximate 5.5% royalty on all cardiac rhythm management product sales. The increase was also attributable to a higher percentage of mechanical heart valve sales into lower margin emerging markets and a price increase from the Company's supplier of pyrolytic carbon components. These increases were partially offset by the elimination of a 2% mechanical heart valve royalty payment during the first quarter 1995. SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative (SG&A) expense increased in 1996 to $272,121 from $247,389 in 1995. As a percentage of net sales, SG&A increased to 33.6% in 1996 from 32.5% in 1995. The higher dollar amount and percentage of net sales increases were mainly due to the continued move to direct sales particularly in Canada, Latin America and the Asia-Pacific region, as well as increased expenditures for European and information systems infrastructure. SG&A in 1996 also included Telectronics subsequent to the November 29, 1996 acquisition date. During 1995, selling, general and administrative expense increased $141,418 over 1994 levels, which was mainly attributable to the Pacesetter operations. Selling efforts for pacemakers are much more labor intensive and the Company uses a commission-based independent contractor sales force in the U.S. and distributors in all international markets except Western Europe. In addition, Pacesetter related goodwill amortization was recorded for the full year in 1995 compared to only one quarter in 1994. SG&A expenses also increased due to additional marketing costs attributable to expanded coverage in the Pacific Rim and Latin American markets and an increased infrastructure in Western Europe as a result of the Pacesetter acquisition. RESEARCH AND DEVELOPMENT: Research and development (R&D) expense in 1996 increased to $74,841 from $72,305 recorded in 1995, but as a percentage of net sales decreased to 9.3% from 9.5%. The dollar increase was attributable primarily to Pacesetter which has major ongoing R&D programs in the areas of bradycardia pacemakers and tachycardia defibrillators as well as development of a new programmer. R&D spending for the heart valve business increased slightly due to tissue valve research while Daig R&D spending decreased slightly. R&D in 1996 also included Telectronics subsequent to the acquisition date. [BAR GRAPH] RESEARCH AND DEVELOPMENT (IN MILLIONS) 23 In 1995, research and development expense increased to $72,305 from $23,471 recorded in 1994. The increase mainly resulted from the full year effect of Pacesetter's operations. A slight decrease in R&D for the heart valve business resulted from the completion of certain phases of the development of the SJM(R) Masters Series rotatable heart valve which was introduced in 1995. Daig R&D expense increased in 1995 principally due to electrophysiology catheter development efforts. PURCHASED RESEARCH AND DEVELOPMENT: In 1996, the Company incurred $40,350 of non-cash purchased research and development charges, representing the appraised value of in-process R&D which must be expensed under generally accepted accounting principles for purchase accounting. The purchased R&D related to the acquisitions of The Heart Valve Company ($5,000), Telectronics ($32,200) and Biocor ($3,150). The Pacesetter acquisition was also accounted for as a purchase and a non-cash charge of $40,800 for purchased research and development was incurred in 1994. SPECIAL CHARGES: In 1996 the Company recorded $47,808 of special charges which consisted of a $25,000 payment to Intermedics, Inc. to resolve various patent and legal disputes, repositioning charges of $11,100 related to its tissue heart valve business, distributor termination related charges of $7,700 in support of the Company's continued move to direct sales, integration charges of $2,200 to be incurred by Pacesetter as a result of the Telectronics acquisition, and non-recurring special charges of $1,808. OTHER INCOME (EXPENSE): Other income in 1996 totalled $15,053 compared to other expense of $5,790 in 1995. Interest expense during 1996 decreased to $3,537 from $12,962 in 1995 due to the elimination of Pacesetter acquisition debt which was repaid by the end of third quarter 1996. This was partially offset by interest expense on the fourth quarter 1996 borrowings in support of the Telectronics and Medtel acquisitions and a settlement payment to Intermedics, Inc. In addition, several non-recurring 1996 transactions increased other income over 1995, including a gain on sale of the Company's cardiac assist business and the successful completion of litigation related to the terminated Electromedics' acquisition which were partially offset by transaction costs associated with the Daig acquisition. The Company also recorded increased foreign exchange hedging gains and gains on the sale of various investments in 1996. Other expense totalled $5,790 in 1995 compared to other income of $7,680 in 1994. Interest expense in 1995 increased significantly over 1994 levels as a result of a full year of debt as opposed to one quarter of debt associated with the Pacesetter acquisition. Due to fluctuations in the U.S. dollar and a shift in the relationship between European currencies, foreign exchange contract gains and foreign exchange transaction gains were recorded in 1995 compared to losses recorded in 1994. INCOME TAX PROVISION: The Company's 1996 effective income tax rate was 35.0% compared to 31.1% in 1995. The increase was primarily attributable to changes to Treasury regulations pertaining to taxation of Puerto Rican operations, which were finalized in the second quarter 1996 retroactive to the beginning of 1996, as well as to non-deductible expenses associated with the Daig acquisition and to separate previously legislated changes relating to taxation of Puerto Rican operations. The Treasury regulation changes have significantly reduced tax benefits derived from the Company's Puerto Rican operations. The Company's 1995 effective income tax rate increased to 31.1% from 26.3% in 1994. The higher rate resulted from lower tax advantaged investment income, income from Pacesetter operations which is generally taxed at a higher rate than the Company's previously existing business and reduced tax benefits derived from the Company's Puerto Rican operations. The Omnibus Budget Reconciliation Act of 1993 significantly reduced the tax benefits which were previously available from income generated by the Company's Puerto Rican operations under Internal Revenue Code (IRC) Section 936. As a result of this legislation, Puerto Rican tax benefits were reduced by 50% in 1996, 45% in 1995 and 40% in 1994. NET INCOME: Reported net income for 1996 -- including the effect of pre-tax purchased R&D charges of $40,350, special charges of $47,808 and Telectronics post-acquisition operating losses of approximately $5,600 -- was $92,181, or $1.12 per share. Without these items, net income on a comparable business basis would have been $153,500, or $1.87 per share. 24 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 pursue diversification opportunities in the form of acquisitions, joint ventures, partnerships and strategic business alliances. In addition, the Company will participate with industry groups to promote the introduction and use of advanced medical device technology within a cost conscious environment. Finally, customer service in the form of cost-effective clinical outcomes will continue to be a primary focus for the Company. In 1996, competition continued to increase in the Company's heart valve business; however, the Company estimates it held its share of the worldwide heart valve market. During 1996, increased domestic competition resulted in a slight reduction in domestic unit demand for the Company's products. International unit sales growth exceeded 6% reflecting continued penetration of emerging markets. Competition is anticipated to place pressure on pricing and terms and healthcare reform is expected to result in further hospital consolidations over time. The Company's cardiac rhythm management business is also in a highly competitive market. During 1996, the Company introduced to the market several new pulse generators and pacemaker lead products. Rapid technological change is expected to continue, requiring the Company to invest heavily in R&D and to effectively market its products. As provided for in the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors could cause actual future results of operations to vary from those anticipated in previously made forward-looking statements and any other 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 or other non-U.S. reimbursement 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 or other government authorities to clear implantable medical devices for commercial release. Cost of sales could be materially affected by unfavorable developments in the area of products liability and price increases from the Company's suppliers of critical components, a number of which are sole sourced. Operations could be affected by the Company's ability to execute its diversification strategy or to integrate acquired companies, a serious earthquake affecting the Company's Pacesetter facility in Los Angeles, California, adverse developments in the litigation arising from the acquisitions of Telectronics and Ventritex, unanticipated product failures and attempts by competitors to gain market share through aggressive marketing programs. The Company expects to incur significant charges in connection with its merger with Ventritex, Inc. and the Telectronics and Ventritex businesses are presently reporting operating losses. The Company anticipates that its 1997 effective income tax rate may increase due to a higher ratio of Pacesetter and Daig income which is generally taxed at a higher rate than the Company's heart valve income, reduced Puerto Rican income as a percentage of total income and a lower Puerto Rican tax benefit as IRC Section 936 tax benefits are reduced by an additional 5% per year through 1998. Legislation was also passed in 1996 to phase out the Section 936 tax benefit over a ten year period which will further negatively impact the Company's effective tax rate. In addition, the IRS has proposed an adjustment of approximately $16,600 in additional taxes relating primarily to the Company's Puerto Rican operations in 1990 and 1991. It is likely that similar adjustments will be proposed for subsequent years. The Company is vigorously contesting the proposed adjustment. On October 23, 1996, the Company and Ventritex, Inc. ("Ventritex") signed a definitive agreement for a tax-free, stock-for-stock merger. The merger is subject to regulatory approvals and Ventritex shareholder approval. There can be no assurance given as to if and when the merger will be concluded. 25 FINANCIAL CONDITION SUMMARY: The financial condition of the Company remained strong during 1996. The $255,000 of debt incurred in the fourth quarter 1994 with respect to the Pacesetter acquisition was fully repaid by the end of third quarter 1996, but $172,000 of new debt was incurred in the fourth quarter 1996 relating to the Telectronics and Medtel acquisitions and the payment to Intermedics. Cash and marketable securities decreased to $184,570 at December 31, 1996, from $187,382 at December 31, 1995. Working capital, the difference between current assets and current liabilities, was $371,268 at December 31, 1996, a $16,497 increase from the prior year end level attributable primarily to the Telectronics aquisition. LIQUIDITY: Company operations provide a strong, positive cash flow which is more than sufficient to meet the Company's operational requirements. Cash provided by operations in 1996 amounted to $134,520 compared to $185,172 in 1995. The current ratio was 2.3 to 1 at December 31, 1996. The Company has a $130,000 long-term revolving line of credit through July 2001 with a seven member banking syndicate comprised of banks in the United States and other countries where it conducts its business. At December 31, 1996, the Company had $10,000 available under the line. The Company also maintains other non-committed credit facilities which it utilizes to supplement the revolving line of credit. Accounts receivable increased approximately $36,000 in 1996 principally due to increased sales, a shift in sales to emerging markets with longer payment cycles and the acquisition of Telectronics. Inventories increased approximately $36,000 primarily as a result of expanded product offerings in both the heart valve and cardiac rhythm management businesses and the acquisition of Telectronics. Net property, plant and equipment increased almost $106,000 due to the construction of two new Pacesetter facilities in Arizona and Sweden, pacemaker programmer investments and the acquisitions of Telectronics and Biocor. [BAR GRAPH] CASH FLOWS FROM OPERATIONS (IN MILLIONS) Cash flow from operations and access to additional capital will enable the Company to pursue further diversification opportunities and to fund expected capital expenditures. During 1997, the Company will fund the completion of cardiac rhythm management manufacturing facilities in both the U.S. and Sweden. In addition, the Company will continue to invest in its information systems and telecommunications infrastructure. CAPITAL: The Company's capital structure consists of equity and interest bearing debt. Interest bearing debt as a percent of total capital was 17.1% at December 31, 1996, an increase from 14.0% at December 31, 1995. The ratio of debt to cash flow from operations increased from .6/1 to 1.3/1. Cash dividends paid to shareholders in 1994 were $13,935. The Company discontinued its cash dividend subsequent to the third quarter 1994 in order to accelerate debt repayment and to provide additional funds for investment in new businesses. OUTLOOK: Management is unaware of any adverse business trends that would materially affect the Company's strong financial position. Should suitable investment opportunities arise that would require additional financing, management believes that the Company's excellent earnings, strong cash flow and solid balance sheet provide a substantial basis to obtain additional financing at highly competitive rates and terms. [BAR GRAPH] CAPITAL STRUCTURE (IN MILLIONS) * EQUITY * DEBT 26 REPORT OF MANAGEMENT The management of St. Jude Medical, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with generally accepted accounting principles and include amounts which reflect management's best estimates based on its informed judgement and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements. In the opinion of management, the Company's accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management's intention and authorization, that financial statements are prepared in accordance with generally accepted accounting principles, and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a strong budgeting system of control. St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and business conduct. This responsibility is reflected in the Company's business ethics policy. The adequacy of the Company's internal accounting controls, the accounting principles employed in its financial reporting and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent auditors and internal auditor meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work. /s/ Ronald A. Matricaria Ronald A. Matricaria CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ Stephen L. Wilson Stephen L. Wilson VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER REPORT OF INDEPENDENT AUDITORS Board of Directors St. Jude Medical, Inc. St. Paul, Minnesota We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. and subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota February 5, 1997 27 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 1996 1995 1994 - ----------------------------------------------------------------------------------------- Net sales $ 808,780 $ 761,835 $ 391,949 Cost of sales 246,896 234,830 112,087 - ----------------------------------------------------------------------------------------- Gross profit 561,884 527,005 279,862 Selling, general and administrative expense 272,121 247,389 105,971 Research and development expense 74,841 72,305 23,471 Purchased research and development charges 40,350 -- 40,800 Special charges 47,808 -- -- - ----------------------------------------------------------------------------------------- Operating profit 126,764 207,311 109,620 Other income (expense), net 15,053 (5,790) 7,680 - ----------------------------------------------------------------------------------------- Income before taxes 141,817 201,521 117,300 Income tax provision 49,636 62,673 30,850 ========================================================================================= Net income $ 92,181 $ 138,848 $ 86,450 Earnings per share: Primary $ 1.12 $ 1.71 $ 1.08 Fully diluted $ 1.12 $ 1.70 $ 1.07 ========================================================================================= Cash dividends paid per share $ -- $ -- $ 0.20 ========================================================================================= Average shares outstanding: Primary 81,953,000 80,988,000 80,085,000 Fully diluted 82,244,000 81,464,000 80,432,000 =========================================================================================
See notes to consolidated financial statements. 28
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31 1996 1995 - ------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 41,124 $ 34,767 Marketable securities 143,446 152,615 Accounts receivable, less allowance (1996 - $7,678, 1995 - $9,361) 205,869 169,690 Inventories: Finished goods 115,795 82,176 Work in process 26,255 27,544 Raw materials 57,425 53,583 - ------------------------------------------------------------------------------------------------ Total inventories 199,475 163,303 Prepaid income taxes 44,234 15,930 Other current assets 30,462 15,909 - ------------------------------------------------------------------------------------------------ Total current assets 664,610 552,214 - ------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT Land 14,232 9,949 Buildings and improvements 57,472 46,014 Machinery and equipment 202,375 142,311 Construction in progress 66,863 19,315 - ------------------------------------------------------------------------------------------------ Gross property, plant and equipment 340,942 217,589 Less accumulated depreciation (73,228) (55,519) - ------------------------------------------------------------------------------------------------ Net property, plant and equipment 267,714 162,070 - ------------------------------------------------------------------------------------------------ OTHER ASSETS 369,043 339,532 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,301,367 $ 1,053,816 ================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 191,820 $ 79,894 Accrued income taxes 24,205 41,346 Accrued employee compensation and related taxes 44,374 45,503 Other accrued expenses 32,943 30,700 - ------------------------------------------------------------------------------------------------ Total current liabilities 293,342 197,443 - ------------------------------------------------------------------------------------------------ LONG-TERM LIABILITIES Long-term debt 172,000 120,000 - ------------------------------------------------------------------------------------------------ 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 1996 - 81,009,796 shares; 1995 - 79,921,597 shares 8,101 7,992 Additional paid-in capital 63,783 34,769 Retained earnings 772,223 680,042 Cumulative translation adjustment 386 4,319 Unrealized gain (loss) on available-for-sale securities (8,028) 9,691 Receivable for stock issued (440) (440) - ------------------------------------------------------------------------------------------------ Total shareholders' equity 836,025 736,373 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,301,367 $ 1,053,816 ================================================================================================
See notes to consolidated financial statements.
29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Common Stock ----------------------------- Additional Number of Paid-In Retained Shares Amount Capital Earnings - --------------------------------------------------------------------------------------------------- Balance December 31, 1993 79,520,007 $ 7,953 $ 27,688 $ 468,679 - --------------------------------------------------------------------------------------------------- Net income 86,450 Issuance of common stock upon exercise of stock options, net of taxes withheld 107,658 10 704 Tax benefit realized upon exercise of stock options 223 Cash dividends ($.20 per share) (13,935) Purchase and retirement of common shares (125) Translation adjustment Unrealized gain on investments, net of taxes - --------------------------------------------------------------------------------------------------- Balance December 31, 1994 79,627,665 7,963 28,490 541,194 - --------------------------------------------------------------------------------------------------- Net income 138,848 Issuance of common stock upon exercise of stock options, net of taxes withheld 293,932 29 4,930 Tax benefit realized upon exercise of stock options 1,349 Translation adjustment Unrealized gain on investments, net of taxes Receivable for stock issued - --------------------------------------------------------------------------------------------------- Balance December 31, 1995 79,921,597 7,992 34,769 680,042 - --------------------------------------------------------------------------------------------------- Net income 92,181 Issuance of common stock upon exercise of stock options, net of taxes withheld 939,046 94 17,328 Tax benefit realized upon exercise of stock options 5,701 Issuance of common stock for business acquired 149,153 15 5,985 Translation adjustment Unrealized gain (loss) on investments, net of taxes - --------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 81,009,796 $ 8,101 $ 63,783 $ 772,223 ===================================================================================================
[WIDE TABLE CONTINUED FROM ABOVE] Cumulative Unrealized Receivable Total Translation Gain (Loss) on for Stock Shareholders' Adjustment Investments Issued Equity - ----------------------------------------------------------------------------------------------------- Balance December 31, 1993 $ (3,609) $ -- $ -- $ 500,711 - ----------------------------------------------------------------------------------------------------- Net income 86,450 Issuance of common stock upon exercise of stock options, net of taxes 714 withheld Tax benefit realized upon 223 exercise of stock options Cash dividends (13,935) ($.20 per share) Purchase and retirement of common shares (125) Translation adjustment 1,125 1,125 Unrealized gain on investments, net of taxes 686 686 - ----------------------------------------------------------------------------------------------------- Balance December 31, 1994 (2,484) 686 -- 575,849 - ----------------------------------------------------------------------------------------------------- Net income 138,848 Issuance of common stock upon exercise of stock options, net of taxes withheld 4,959 Tax benefit realized upon exercise of stock options 1,349 Translation adjustment 6,803 6,803 Unrealized gain on investments, net of taxes 9,005 9,005 Receivable for stock issued (440) (440) - ----------------------------------------------------------------------------------------------------- Balance December 31, 1995 4,319 9,691 (440) 736,373 - ----------------------------------------------------------------------------------------------------- Net income 92,181 Issuance of common stock upon exercise of stock options, net of taxes 17,422 withheld Tax benefit realized upon exercise of stock options 5,701 Issuance of common stock for business acquired 6,000 Translation adjustment (3,933) (3,933) Unrealized gain (loss) on investments, net of taxes (17,719) (17,719) - ----------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 $ 386 $ (8,028) $ (440) $ 836,025 =====================================================================================================
See notes to consolidated financial statements.
30 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 92,181 $ 138,848 $ 86,450 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 25,445 21,524 9,218 Amortization 19,490 20,102 7,816 Purchased research and development charges 40,350 -- 40,800 Special charges 20,586 -- -- Gain on sale of business (10,486) -- -- Changes in operating assets and liabilities net of acquisitions: Increase in accounts receivable (22,038) (19,245) (23,885) Increase in inventories (868) (23,499) (4,965) Decrease (increase) in other current assets (13,108) 1,289 (9,516) Increase in accounts payable and accrued expenses 7,734 38,482 8,018 Increase (decrease) in accrued income taxes (11,558) 20,288 (3,334) Increase in prepaid and deferred income taxes (13,208) (12,617) (14,331) - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 134,520 185,172 96,271 - ------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (95,018) (44,935) (20,836) Purchases of marketable securities (27,000) (26,524) (88,760) Proceeds from sale or maturity of marketable securities 21,044 14,500 308,761 Investments in companies, joint ventures and partnerships (155) (3,701) (13,564) Acquisitions, net of cash acquired (117,800) 13,000 (524,300) Proceeds from sale of business 24,204 -- -- Other investing activities (2,528) 2,694 (7,686) - ------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (197,253) (44,966) (346,385) - ------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from exercise of stock options 17,422 4,514 644 Cash dividends paid -- -- (13,935) Common stock repurchased -- -- (125) Proceeds from the issuance of long-term debt 172,000 -- 255,000 Repayment of long-term debt (120,000) (135,000) -- - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 69,422 (130,486) 241,584 - ------------------------------------------------------------------------------------------------------------- Effect of currency exchange rate changes on cash (332) 647 567 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,357 10,367 (7,963) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,767 24,400 32,363 - ------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,124 $ 34,767 $ 24,400 =============================================================================================================
See notes to consolidated financial statements. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: St. Jude Medical, Inc. develops, manufactures and distributes medical devices with an emphasis on cardiac care products and services. The Company's products are sold in more than 100 countries. Principal products include prosthetic heart valves, pacemakers and electrophysiology and interventional catheters. The main markets for these products are the United States, Western Europe and Japan. In the United States, the Company uses a direct employee-based sales organization for its heart valve and catheter products and a combination of independent contractors and an employee-based sales organization for its pacemaker products. In Western Europe, the Company has a direct sales presence in 14 countries. Throughout the rest of the world, the Company principally uses distributor-based sales organizations. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of previously reported amounts have been made to conform with the current year presentation. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest December 31. Fiscal years 1996, 1995 and 1994 consist of 52 weeks. TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the Company's foreign subsidiaries are translated at exchange rates in effect on reporting dates and differences due to changing exchange rates are recorded as "cumulative translation adjustment" in shareholders' equity. Income and expenses are translated at rates which approximate those in effect on transaction dates. CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a maturity of three months or less when purchased, are stated at cost which approximates market. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Allowances are made for slow-moving, obsolete, unsalable or unusable inventories. STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. See Note 5. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment are stated at cost and are depreciated using the straight line method based on useful lives of 31.5 to 39 years for buildings and improvements and three to seven years for machinery and equipment. Accelerated depreciation is used by the Company for tax accounting purposes only. LONG-LIVED ASSETS: The Company adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. FAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. There was no financial impact to the Company upon adopting FAS No. 121. REVENUE RECOGNITION: The Company's general practice is to recognize revenues from product sales as shipped and for services as performed. For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the Company is notified that the device has been used. RESEARCH AND DEVELOPMENT: Research and development expense includes all expenditures for general research into scientific phenomena, development of useful ideas into merchantable products and continuing support and upgrading of various products. All such expense is charged to operations as incurred. EARNINGS PER SHARE: Primary and fully diluted earnings per share are computed by dividing net income for the year by the weighted average number of shares of common stock and common stock equivalents outstanding. NOTE 2 ACQUISITIONS On September 30, 1994, the Company acquired substantially all of the Siemens AG worldwide cardiac rhythm management business ("Pacesetter") for $511,300. The acquisition was accounted for under the purchase accounting method. Goodwill is amortized on a straight line basis over 20 years. The results of Pacesetter's operations have been included in the consolidated results of operations from the date of acquisition. 32 In conjunction with the Pacesetter acquisition, the Company recorded a non-cash pre-tax charge of $40,800 relating to that portion of the purchase price attributable to purchased research and development. The purchased research and development charge represents the appraised value of the in-process research and development that must be expensed under generally accepted accounting principles. On November 29, 1996, the Company acquired from Pacific Dunlop, Ltd. substantially all of the worldwide cardiac rhythm management assets of Telectronics Pacing Systems, Inc. ("Telectronics") for $135 million. The initial price can be adjusted upward or downward based upon the change in net asset value between June 30, 1996 and November 29, 1996. The Company and Pacific Dunlop, Ltd. currently disagree about the final adjustment to the purchase price and are following procedures in the purchase agreement to resolve their differences. The Company expects that any adjustment to the purchase price would be recorded in 1997. The acquisition was accounted for under the purchase accounting method. Goodwill of approximately $76,000 including approximately $43,000 of consolidation charges, is amortized on a straight line basis over 20 years. During 1997, the Company expects to consolidate Telectronics operations into its Pacesetter operations and plans to close Telectronics manufacturing facilities. The results of Telectronics operations have been included in the consolidated results of operations from the date of acquisition. In conjunction with the Telectronics acquisition, the Company recorded a pre-tax charge of $32,200 relating to that portion of the purchase price attributable to purchased research and development. The following unaudited pro forma information has been prepared assuming that the acquisition of Pacesetter had occurred at the beginning of 1993 and the acquisition of Telectronics had occurred at the beginning of 1995. Pro forma adjustments include amortization of goodwill, increased interest expense, decreased interest income and the related income tax effects. Pro forma results are not necessarily indicative of the results that would have occurred had the acquisitions actually taken place at the beginning of the specified periods, or the expected results of future operations. 1996 1995 1994 =================================================== Net sales $905,295 $921,920 $696,739 Net income $ 19,060 $ 93,362 $119,174 Earnings per share $ 0.23 $ 1.15 $ 1.49 =================================================== On September 23, 1996, the Company acquired Biocor(R) Industria E Pesquisas Ltd., a Brazilian tissue heart valve manufacturer for $4,000 in cash and an earn-out which could result in additional cash payments of up to $4,000 over the next three years. On January 5, 1996, the Company acquired the remaining shares of The Heart Valve Company for $1,000 in cash and 149,153 shares of its common stock. In connection with the acquisitions of Biocor and The Heart Valve Company, the Company recorded pre-tax charges of $3,150 and $5,000, respectively, relating to purchased research and development. The results of Biocor and The Heart Valve Company have been included in the Company's results of operations since the dates of acquisition and were not material. On May 31, 1996, the Company acquired Daig Corporation ("Daig"), a manufacturer of specialized cardiovascular devices for the electrophysiology and interventional cardiology markets. Each share of Daig common stock was converted into .651733 shares of Company common stock. The Company issued 9,929,897 shares to Daig shareholders. Additionally, one outstanding option to acquire 128,000 shares of Daig common stock was converted to an option to acquire 83,422 shares of Company common stock. The transaction qualified as a tax-free reorganization and was accounted for as a pooling of interests. The accompanying financial statements, for all periods presented, have been restated to include the results of Daig, which were not material. NOTE 3 SPECIAL CHARGES Results of operations for 1996 include pre-tax charges recorded in the fourth quarter of $47,808 for costs relating to patent and litigation settlements and repositioning several of the Company's operations. Patent and other legal disputes between Pacesetter and a third party were settled for $25,000. The repositioning charges of $22,808 related to the planned consolidation of tissue heart valve manufacturing operations ($11,100), the termination of various distributor agreements in conjunction with the conversion to direct sales ($7,700), the realignment of Pacesetter manufacturing operations in connection with the Telectronics integration ($2,200), and other non-recurring expenses ($1,808). NOTE 4 INCOME TAXES The components of income before taxes were as follows: 1996 1995 1994 ======================================================== Domestic $ 142,236 $ 183,525 $ 108,249 Foreign (419) 17,996 9,051 - -------------------------------------------------------- Income before taxes $ 141,817 $ 201,521 $ 117,300 ======================================================== 33 The components of the income tax provision were as follows: 1996 1995 1994 =========================================================== Current: Federal $ 63,005 $ 47,281 $ 36,368 State and Puerto Rico 9,676 11,518 10,217 Foreign 1,022 6,226 3,107 - ----------------------------------------------------------- Total current 73,703 65,025 49,692 - ----------------------------------------------------------- Deferred: Prepaid (28,304) (7,329) (5,757) Deferred 4,237 4,977 (13,085) - ----------------------------------------------------------- Total deferred (24,067) (2,352) (18,842) - ----------------------------------------------------------- Income tax provision $ 49,636 $ 62,673 $ 30,850 =========================================================== Deferred income tax assets (liabilities) were comprised of the following at December 31: 1996 1995 - --------------------------------------------------------------------- Deferred income tax asset: Inventory (intercompany profit in inventory and excess of tax over book valuation) $ 12,429 $ 16,590 Intangibles 30,915 10,728 Accruals not currently deductible 5,825 7,923 Unrealized loss on investments 5,029 -- - --------------------------------------------------------------------- Deferred income tax asset 54,198 35,241 - --------------------------------------------------------------------- Deferred income tax liability: Unrealized gain on investments -- (5,830) Accumulated depreciation (7,757) (7,037) - --------------------------------------------------------------------- Deferred income tax liability (7,757) (12,867) - --------------------------------------------------------------------- Net deferred income tax asset $ 46,441 $ 22,374 ===================================================================== The reconciliation of the Company's effective income tax rate to the statutory U.S. federal income tax rate of 35% is as follows: 1996 1995 1994 ====================================================================== Income tax provision at U.S. statutory rate $ 49,636 $ 70,533 $ 41,055 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit 4,309 4,434 1,763 Tax benefits from Foreign Sales Corporation (3,878) (1,886) (1,557) Tax benefits from Puerto Rican operations (3,128) (8,442) (7,880) Tax exempt income -- -- (2,274) Foreign taxes at higher (lower) rates 1,849 (1,640) 194 Other 848 (326) (451) - ---------------------------------------------------------------------- Income tax provision $ 49,636 $ 62,673 $ 30,850 - ---------------------------------------------------------------------- Effective income tax rate 35.0% 31.1% 26.3% ====================================================================== The Company's effective income tax rate is favorably affected by Puerto Rican tax exemption grants which result in Puerto Rican earnings being partially tax exempt through the year 2003. The Internal Revenue Service ("IRS") is currently examining the Company's 1992-1994 federal income tax returns. In addition, the IRS has completed an audit examination of the Company's 1990-1991 income tax returns and has proposed an adjustment of approximately $16,600 in additional taxes, not including interest or state income taxes, for which the Company anticipates receiving statutory notices of deficiency in the near future. The proposed adjustment relates primarily to the Company's Puerto Rican operations. It is likely that similar adjustments will be proposed for subsequent years. The Company is vigorously contesting the proposed adjustment and expects that the ultimate resolution will not have a 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. The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries ($15,906 at December 31, 1996) because distribution of these earnings generally would not require additional taxes due to available foreign tax credits. The Company made income tax payments of $68,460, $52,624 and $49,565 in 1996, 1995 and 1994, respectively. NOTE 5 STOCK PURCHASE AND OPTION PLANS STOCK PURCHASE: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, shares of common stock at 85% of the fair market value at specified dates. Under the terms of the plan, 750,000 shares of common stock have been reserved for purchase by plan participants. Employees purchased 108,795, 97,525 and 26,041 shares in 1996, 1995 and 1994, respectively. At December 31, 1996, 494,442 shares were available for purchase under the plan. STOCK BASED-COMPENSATION: Under the terms of the Company's various stock plans, 7,687,769 shares of common stock have been reserved for issuance to directors, officers and employees upon the grant of restricted stock or the exercise of stock options. Stock options are exercisable over periods up to 10 years from date of grant and may be "incentive stock options" or "non-qualified stock options" and may have stock appreciation rights attached. At December 31, 1996, there were a maximum of 3,591,959 shares available for grant and 34 4,095,810 options outstanding. At December 31, 1996, 1995 and 1994, there were options excersisable of 2,038,824, 2,507,524 and 1,320,036, respectively. Stock option and long-term performance award transactions were: Options/Awards Weighted Average OutstandingPrice Per Share ==================================================================== Balance at December 31, 1993 2,113,162 $ 19.03 Granted 1,148,625 20.86 Cancelled (320,495) 25.37 Exercised (8,250) 7.87 - --------------------------------------------- Balance at December 31, 1994 2,933,042 19.48 Granted 756,552 27.01 Cancelled (165,744) 21.04 Exercised (196,627) 14.80 - --------------------------------------------- Balance at December 31, 1995 3,327,223 21.17 Granted 1,690,600 37.04 Cancelled (141,964) 31.20 Exercised (780,049) 17.43 - --------------------------------------------- Balance at December 31, 1996 4,095,810 28.41 ==================================================================== Pursuant to the terms of the Company's various stock plans, optionees can use cash, previously owned shares or a combination of cash and previously owned shares to reimburse the Company for the cost of the option and the related tax liabilities. Shares are acquired from the optionee at the fair market value of the stock on the transaction date. All options have been granted at not less than fair market value at dates of grant. When stock options are exercised, the par value of the shares issued is credited to common stock and the excess of the proceeds over the par value is credited to additional paid-in capital. When non-qualified options are exercised, the Company realizes income tax benefits based on the difference between the fair value of the stock on the date of exercise and the stock option exercise price. These tax benefits do not affect the income tax provision, but rather are credited directly to additional paid-in capital. In July 1996, the Board of Directors approved a stock option grant of 1,000,000 shares at an exercise price of $31.38 per share to the Company's CEO. This grant is subject to shareholder approval at the May 1997 shareholders' meeting of a one-time waiver of the 300,000 share annual limitation under the Company's 1994 Stock Option Plan which will have the effect of ratifying this grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its stock option awards. Had compensation expense for the Company's stock option awards been determined based upon their grant date fair value consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced by $4,850, or $.05 per share and $2,115, or $.02 per share for 1996 and 1995, respectively. These amounts are not necessarily indicative of the amounts that will be reported in the future. The fair value of the options at the grant date was estimated using the Black-Scholes model with the following weighted average assumptions: 1996 1995 ======================================= Expected life (years) 6 6 Interest rate 6.3% 7.2% Volatility 40.5% 31.1% Dividend yield 0% 0% ======================================= Under the terms of the Company's shareholder rights agreement, upon the occurance of certain events which result in a change in control as defined by the agreement, registered holders of common shares are entitled to purchase one-tenth of a share of Series A Junior Participating Preferred Stock at a stated price, or to purchase either the Company's shares or shares of the acquiring entry at half their market value. NOTE 6 FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: The Company may enter into foreign exchange contracts to manage its exposure to fluctuations in foreign currency exchange rates. These contracts involve the exchange of foreign currencies for U.S. dollars at specified rates at future dates. Counterparties to these contracts are major international financial institutions. Maturities of these instruments are typically one year or less from the transaction date. Gains or losses from these contracts are included in other income (expense). The Company had contracts totalling $25,217 at December 31, 1996 and $12,483 at December 31, 1995, to exchange French Francs, German Marks and Canadian Dollars into U.S. dollars. These instruments were recorded at their fair value at each balance sheet date. The cumulative unrealized gain (loss) on these contracts totalled $905, $45 and $(128) at December 31, 1996, 1995 and 1994, respectively, and was recorded as other income (expense). LONG-TERM DEBT: The Company has an unsecured $130,000 committed revolving line of credit with a group of seven banks that terminates in July 2001. The Company also maintains $100,000 of non-committed lines of credit with two banks to supplement the revolving line of credit, that expires in November 1999. The rate of interest payable under these borrowing facilities is a floating rate and is a function of the London Interbank 35 Offered Rate. The weighted average interest rates at December 31, 1996 and 1995, were 5.6% and 6.1%, respectively. A facility fee of .08% of the revolving line commitment is paid quarterly. At December 31, 1996, the Company had borrowings under the committed line of $120,000 and $52,000 under the non-committed lines. The credit agreement contains various covenants which require the Company to maintain a specified financial ratio, limit liens, regulate asset disposition and subsidiary indebtedness and restrict certain acquisitions and investments. At December 31, 1996, the Company was in compliance with these covenants. OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity instruments, bank certificates of deposit and Puerto Rico industrial development bonds. Under Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," debt securities that the Company does not have the positive intent to hold to maturity and all marketable equity securities are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity. A net realized gain of $1,195 was recorded on sales of available-for-sale securities in 1996. No net realized gains or losses were recorded in 1995. The net unrealized holding loss on available-for-sale securities included as a separate component of shareholders' equity was $8,028 (net of $5,029 of current deferred income taxes) at December 31, 1996. 1996 1995 ================================================================================ Estimated Estimated Fair Fair Cost Value Cost Value - -------------------------------------------------------------------------------- Assets: Cash and Cash Equivalents $ 41,124 $ 41,124 $ 34,767 $ 34,767 Marketable Securities $156,503 $143,446 $137,094 $152,615 ================================================================================ The Company also guarantees certain obligations of its subsidiaries. As of December 31, 1996 and 1995, the maximum amount of such guarantees was $7,500. CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable securities and foreign exchange contracts are the financial instruments which may subject the Company to concentration of credit risk. Within the European Economic Union, payment of certain accounts receivable is made by the national healthcare system within several countries. Although the Company does not anticipate collection problems with these receivables, payment is contingent to a certain extent upon the economic situation within these countries. The credit risk associated with the balance of the trade receivables is limited due to dispersion of the receivables over a large number of customers in many geographic areas. The Company monitors the credit worthiness of its customers to which it grants credit terms in the normal course of business. Marketable securities are placed with high credit qualified financial institutions and Company policy limits the credit exposure to any one financial institution. Counterparties to foreign exchange contracts are major financial institutions; therefore, credit loss from counterparty nonperformance is unlikely. NOTE 7 RETIREMENT PLANS DEFINED CONTRIBUTION PLAN: The Company has a defined contribution profit sharing plan, including features under section 401(k) of the Internal Revenue Code, which provides retirement benefits to substantially all full-time U.S. employees. Under the 401(k) portion of the plan, eligible employees may contribute a maximum of 10% of their annual compensation with the Company matching the first 3%. The Company's level of contribution to the profit sharing portion of the plan is subject to Board of Directors approval and is based on Company performance. The Company has additional defined contribution programs for employees outside the United States. The benefits under these plans are based primarily on compensation levels. Total retirement plan expense was $5,124, $6,558 and $2,873 in 1996, 1995 and 1994, respectively. DEFINED BENEFIT PLANS: In certain countries outside the United States, the Company maintains defined benefit plans. An accrual of $5,023 was recorded as of December 31, 1996 which is approximately equal to the actuarially calculated unfunded liability. 36 NOTE 8 GEOGRAPHIC AREA The Company operates in the medical products industry and is segmented into three geographic areas -- the United States (including export sales to unaffiliated customers except to customers in Europe, the Middle East and Africa), Europe (including export sales to unaffiliated customers in the Middle East, Africa, Latin America and Asia-Pacific) and other international. Operating profit for export sales is reported in the exporting geography. Sales between geographic areas are made at transfer prices which approximate prices to unaffiliated third parties. Export sales to unaffiliated customers included in United States sales were $65,946, $61,865 and $45,856 for 1996, 1995 and 1994, respectively.
Net sales by geographic area were as follows: Other United Inter- Elimina- States Europe national tions Total ======================================================================================= 1996 Customer sales $ 525,204 $ 268,076 $ 15,500 $ -- $ 808,780 Inter- company sales 105,822 -- 8,198 (114,020) -- - --------------------------------------------------------------------------------------- $ 631,026 $ 268,076 $ 23,698 $(114,020) $ 808,780 ======================================================================================= 1995 Customer sales $ 509,029 $ 248,836 $ 3,970 $ -- $ 761,835 Inter- company sales 91,523 -- 8,869 (100,392) -- - --------------------------------------------------------------------------------------- $ 600,552 $ 248,836 $ 12,839 $(100,392) $ 761,835 ======================================================================================= 1994 Customer sales $ 277,385 $ 113,236 $ 1,328 $ -- $ 391,949 Inter- company sales 68,604 -- 3,800 (72,404) -- - --------------------------------------------------------------------------------------- $ 345,989 $ 113,236 $ 5,128 $ (72,404) $ 391,949 =======================================================================================
Operating profit (loss) by geographic area was as follows: Other United Inter- States Europe national Corporate Total ============================================================================ 1996 $116,920 $ 57,486 $ (2,582) $(45,060) $126,764 1995 $169,759 $ 51,345 $ (90) $(13,703) $207,311 1994 $ 82,871 $ 38,799 $ (509) $(11,541) $109,620 ============================================================================ Identifiable assets by geographic area were as follows: Other United Inter- States Europe national Corporate Total =============================================================================== 1996 $ 706,440 $ 279,741 $ 52,209 $ 262,977 $1,301,367 1995 $ 595,744 $ 203,044 $ 9,772 $ 245,256 $1,053,816 1994 $ 558,568 $ 181,470 $ 4,523 $ 202,261 $ 946,822 =============================================================================== 1996 operating profit reflects purchased research and development charges of $40,350 and special charges of $47,808 and 1994 operating profit reflects a purchased research and development charge of $40,800. Corporate expenses consist principally of non-allocable general and administrative expenses. Corporate identifiable assets consist principally of cash and cash equivalents and marketable securities. NOTE 9 OTHER INCOME (EXPENSE), NET Other income (expense), net consisted of the following: 1996 1995 1994 ============================================================================== Interest income $ 7,076 $ 8,056 $14,351 Interest expense (3,537) (12,962) (3,776) Foreign exchange gains (losses) 2,395 541 (1,937) Gain on the sale of a business 10,486 -- -- Acquisition transaction costs (5,118) -- -- Other 3,751 (1,425) (958) - ------------------------------------------------------------------------------ Other income (expense), net $15,053 $ (5,790) $ 7,680 ============================================================================== NOTE 10 OTHER ASSETS Other assets as of December 31, 1996 and 1995, net of accumulated amortization of $42,792 and $34,923, respectively, consisted of the following: 1996 1995 =========================================================== Investments in companies, joint ventures and partnerships $ 7,684 $ 22,356 Intangibles and other 361,359 317,176 - ----------------------------------------------------------- Other assets $369,043 $339,532 =========================================================== Investments in companies, joint ventures, and partnerships are stated at cost which approximates market. Intangibles and other assets consist principally of the excess of cost over net assets of certain acquired businesses and technology. Intangibles and other assets are being amortized over periods ranging from 10 to 20 years. 37 NOTE 11 CONTINGENCIES The Company is involved in various products liability lawsuits, claims and proceedings of a nature considered normal to its business. In connection with two pacemaker lead models, the Company may be subject to future uninsured claims. The Company's products liability insurance carrier has denied coverage for these models and has filed suit against the Company seeking rescission of the policy covering Pacesetter business retroactive to the date the Company acquired Pacesetter. The Company was a codefendant in a 1995 class action suit with respect to these leads. This case was settled in November 1995. The Company's share of the settlement is approximately $5,000. Additional claims could be filed by patients with these leads who were not class members. Further, claims may be filed in the future relative to events currently unknown to management. Management believes losses that might be sustained from such actions would not have a material adverse effect on the Company's liquidity or financial condition, but could potentially be material to the net income of a particular future period if resolved unfavorably. NOTE 12 SHAREHOLDERS' EQUITY On October 17, 1995, the Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend to shareholders of record on November 2, 1995. Earnings per share, dividends per share, shares outstanding and weighted average shares outstanding have been restated to reflect the stock dividend. NOTE 13 PENDING TRANSACTION On October 23, 1996, the Company and Ventritex, Inc. ("Ventritex") signed a definitive agreement for a tax-free, stock-for-stock merger. The merger is subject to regulatory approvals and Ventritex shareholder approval. There can be no assurance given as to if and when the merger will be concluded. The Company expects to incur significant transaction and integration charges if the merger is completed. NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly data for 1996 and 1995 was as follows: Quarter First Second Third Fourth ================================================================================ Year Ended December 31, 1996: Net sales $ 199,028 $ 203,217 $ 193,846 $ 212,689 Gross profit $ 138,012 $ 140,355 $ 134,793 $ 148,724 Net income $ 38,440 $ 36,597 $ 36,295 $ (19,151)* Earnings per share $ .47 $ .45 $ .44 $ (.23)* Year Ended December 31, 1995: Net sales $ 189,138 $ 195,072 $ 186,176 $ 191,449 Gross profit $ 127,202 $ 136,087 $ 129,775 $ 133,941 Net income $ 32,635 $ 35,613 $ 34,400 $ 36,200 Earnings per share $ .40 $ .44 $ .42 $ .44 ================================================================================ * Includes the effect of pre-tax charges of $35,350 for purchased research and development associated with the Telectronics and Biocor acquisitions and special charges of $47,808 for patent and litigation settlements and repositioning of several of the Company's operations. Primary and fully diluted per share results are the same for all quarters in 1996, but differed by $.01 per share in the first quarter of 1995 due to rounding. The full year 1996 primary and fully diluted earnings per share were $.01 lower than the sum of the reported quarterly earnings per share due to rounding. The full year 1995 primary earnings per share was $.01 higher than fully diluted earnings per share due to rounding. 38
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996** 1995 1994*** 1993 1992 ========================================================================================================== Summary of Operations for the Year Ended: - ---------------------------------------------------------------------------------------------------------- Net sales $ 808,780 $ 761,835 $ 391,949 $ 278,320 $ 258,734 - ---------------------------------------------------------------------------------------------------------- Gross profit $ 561,884 $ 527,005 $ 279,862 $ 207,887 $ 191,008 - ---------------------------------------------------------------------------------------------------------- Percent of sales 69.5% 69.2% 71.4% 74.7% 73.8% - ---------------------------------------------------------------------------------------------------------- Operating profit $ 126,764 $ 207,311 $ 109,620 $ 139,046 $ 127,100 - ---------------------------------------------------------------------------------------------------------- Percent of sales 15.7% 27.2% 28.0% 50.0% 49.1% - ---------------------------------------------------------------------------------------------------------- Net income $ 92,181 $ 138,848 $ 86,450 $ 114,573 $ 105,185 - ---------------------------------------------------------------------------------------------------------- Percent of sales 11.4% 18.2% 22.1% 41.2% 40.7% - ---------------------------------------------------------------------------------------------------------- Primary earnings per share* $ 1.12 $ 1.71 $ 1.08 $ 1.42 $ 1.30 - ---------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT YEAR END: - ---------------------------------------------------------------------------------------------------------- Cash and marketable securities $ 184,570 $ 187,382 $ 150,577 $ 377,434 $ 342,772 - ---------------------------------------------------------------------------------------------------------- Working capital $ 371,268 $ 354,771 $ 339,844 $ 421,859 $ 384,514 - ---------------------------------------------------------------------------------------------------------- Total assets $ 1,301,367 $ 1,053,816 $ 946,822 $ 545,788 $ 482,056 - ---------------------------------------------------------------------------------------------------------- Long-term debt $ 172,000 $ 120,000 $ 255,000 -- $ 495 - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 836,025 $ 736,373 $ 575,849 $ 500,711 $ 439,244 - ---------------------------------------------------------------------------------------------------------- OTHER DATA: - ---------------------------------------------------------------------------------------------------------- Dividends declared per share -- -- $ .20 $ .27 $ .20 - ---------------------------------------------------------------------------------------------------------- Primary weighted average shares outstanding* 81,953,000 80,988,000 80,085,000 80,499,000 81,203,000 - ---------------------------------------------------------------------------------------------------------- Total employees 3,620 2,579 2,480 917 865 ==========================================================================================================
Note: The Five-Year Summary of Selected Financial Data includes the results of Daig Corporation for all periods presented. *Earnings per share and share data have been adjusted for a 50% stock dividend paid in 1995. **Results for 1996 include $88,158 pre-tax for purchased research and development and special charges. ***Results for 1994 include a $40,800 pre-tax charge for purchased research and development. [BAR GRAPH] NET SALES (DOLLARS IN MILLIONS) [BAR GRAPH] OPERATING PROFIT (DOLLARS IN MILLIONS) [BAR GRAPH] NET INCOME (DOLLARS IN MILLIONS) [BAR GRAPH] PRIMARY EARNINGS PER SHARE (IN DOLLARS) * PURCHASED RESEARCH AND DEVELOPMENT AND SPECIAL CHARGES. 39 INVESTOR INFORMATION TRANSFER AGENT American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 718-921-8293 800-937-5449 Correspondence regarding stock holdings and changes of address should be directed to the transfer agent. When shares owned by one shareholder are held in different forms of the same name (e.g., John Doe, J. Doe) or when new accounts are established for shares purchased at different times, duplicate mailings of shareholder information results. The Company, by law, is required to mail to each name on the shareholder list unless the shareholder requests that duplicate mailings be eliminated or consolidates all accounts. Such requests should be directed, in writing, to American Stock Transfer, 6201 15th Avenue, Brooklyn, NY 11219. ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May 1, 1997, at the Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, MN. INVESTOR INFORMATION A copy of the Company's annual report on Form 10-K or other financial reports will be provided free of charge to any shareholder upon written request to Investor Relations, St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, MN 55117-9983. St. Jude Medical, Inc. does not issue quarterly shareholder reports. Shareholders and security analysts can obtain the latest Company news releases, including quarterly results, and other information by calling Investor Relations at a toll-free number (1-800-552-7664). Company news releases are also available through "Company News On-Call" by fax (1-800-758-5804, ext. 816662) or at www.prnewswire.com on the Internet. St. Jude Medical's home page on the Internet is available at www.sjm.com. DIVIDENDS St. Jude Medical, Inc. discontinued its cash dividend upon completion of the acquisition of Pacesetter, which was finalized September 30, 1994. The Company did not pay any cash dividends in 1995 or 1996. On November 16, 1995, the Company distributed a 50% common stock dividend to shareholders of record as of November 2, 1995. RESEARCH COVERAGE The following firms currently provide research coverage of St. Jude Medical, Inc.: Bear, Stearns & Company, New York, NY C.J. Lawrence/Deutsche Bank Securities Corp., New York, NY Dain Bosworth Incorporated, Minneapolis, MN Donaldson, Lufkin, Jenrette, New York, NY Goldman Sachs & Company, New York, NY Jefferies & Company, Incorporated, Los Angeles, CA John G. Kinnard & Company, Minneapolis, MN J.P. Morgan Securities, Incorporated, New York, NY Lehman Brothers, Incorporated, New York, NY Montgomery Securities, San Francisco, CA Morgan Stanley & Company, Incorporated, New York, NY NatWest Securities, Incorporated, New York, NY Needham & Company, Incorporated, New York, NY Olde Discount, Detroit, MI PaineWebber Incorporated, New York, NY Piper Jaffray Incorporated, Minneapolis, MN Principal Financial Securities, Incorporated, Dallas, TX Robert W. Baird & Company, Incorporated, Milwaukee, WI Salomon Brothers Incorporated, New York, NY Sanford C. Bernstein & Company, Incorporated, New York, NY Schroder, Wertheim & Company, Incorporated, New York, NY Smith Barney, New York, NY UBS Securities, New York, NY Wasserstein Perella Securities, Incorporated, New York, NY Wessels, Arnold & Henderson, Minneapolis, MN SUPPLEMENTAL MARKET PRICE DATA On December 2, 1996, the common stock of St. Jude Medical, Inc., began trading on the New York Stock Exchange under the symbol STJ. The range of high and low prices per share for the Company's common stock for fiscal 1996 and 1995 are set forth below. As of February 5, 1997, the Company had 4,624 shareholders of record. Year Ended December 31 1996 1995 - ------------------------------------------------------------ Quarter High Low High Low - ------------------------------------------------------------ First $46.00 $36.38 $28.83 $23.67 Second $39.50 $33.25 $35.67 $27.08 Third $41.50 $29.63 $42.67 $32.58 Fourth $43.25 $35.00 $43.25 $32.50 Listed options are traded on the Chicago Board Options Exchange under the symbol STJ. TRADEMARKS Biocor(R), SJM(R), SJMBiocor(TM), St. Jude Medical(R), St. Jude Medical(R) Port-Access(TM), Toronto SPV(R), ADDVENT(R), AMS(TM), APS(TM), AutoCapture(TM), Automaticity(TM), Cellular Tested(TM), Membrane EX(TM), META(TM), Microny(TM), Minute Ventilation(TM), Passive PLUS(R), Regency(TM), Tendril(R), Trilogy(R), Livewire(TM), Maximum(TM), and Spyglass(TM). Heartport(TM) and Port-Access(TM) are trademarks of Heartport, Inc. Contour(TM) is a trademark of Ventritex, Inc. CoaguChek(TM) is a trademark of Boehringer Mannheim Corporation. 40 LEADERSHIP ST. JUDE MEDICAL, INC. ST. PAUL, MINNESOTA - -------------------------------------------------------------------------------- Ronald A. Matricaria CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER John P. Berdusco VICE PRESIDENT, ADMINISTRATION David W. Elliot, Jr. DIRECTOR, CORPORATE BUSINESS DEVELOPMENT Peter L. Gove VICE PRESIDENT, CORPORATE RELATIONS Robert J. Helbling VICE PRESIDENT, CORPORATE DISTRIBUTION Kevin T. O'Malley, Esq. VICE PRESIDENT AND GENERAL COUNSEL Stephen L. Wilson VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER Harold A. Bencic CHIEF INFORMATION OFFICER EDS HEART VALVE DIVISION ST. PAUL, MINNESOTA - -------------------------------------------------------------------------------- Terry L. Shepherd PRESIDENT, HEART VALVE DIVISION AND INTERNATIONAL Darrin J. Bergman DIRECTOR, MECHANICAL DEVELOPMENT Robert S. Elgin VICE PRESIDENT, OPERATIONS Alan R. Flory, DVM DIRECTOR, CLINICAL AND REGULATORY AFFAIRS Donald S. Guzik DIRECTOR, QUALITY SYSTEMS Steven J. Healy VICE PRESIDENT, WORLDWIDE SALES AND MARKETING C. Walton Lillehei, Ph.D., M.D. MEDICAL DIRECTOR M. William Mirsch, II DIRECTOR, TISSUE DEVELOPMENT Patrick J. O'Neill DIRECTOR, FINANCE Jan M. Webster DIRECTOR, HUMAN RESOURCES CARDIAC RHYTHM MANAGEMENT DIVISION PACESETTER LOS ANGELES, CALIFORNIA - -------------------------------------------------------------------------------- Patrick P. Fourteau PRESIDENT Fred A. Colen EXECUTIVE VICE PRESIDENT, QUALITY SPEED TO MARKET Eric N. Falkenberg VICE PRESIDENT, BUSINESS DEVELOPMENT AND STRATEGIC PLANNING Barry L. Forwand VICE PRESIDENT, NORTH AMERICAN SALES Diane M. Johnson, Esq. EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL Mark W. Kroll, Ph.D. VICE PRESIDENT, TACHYCARDIA BUSINESS UNIT Paul A. Levine, M.D., F.A.C.A. VICE PRESIDENT, MEDICAL SERVICES Joseph H. McCullough VICE PRESIDENT, MARKETING David R. Morley EXECUTIVE VICE PRESIDENT, OPERATIONS Franklin R. Rick VICE PRESIDENT, FINANCE Mary C. Sutton VICE PRESIDENT, HUMAN RESOURCES CARDIAC RHYTHM MANAGEMENT DIVISION TELECTRONICS ENGLEWOOD, COLORADO - -------------------------------------------------------------------------------- James W. Dennis PRESIDENT, TELECTRONICS John M. Buske DIRECTOR, FINANCE Thomas V. Brown EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, SALES AND MARKETING Kenneth A. Collins EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, CLINICAL John D. Greenbaum VICE PRESIDENT, QA/RA Tibor A. Nappholz VICE PRESIDENT, STRATEGIC RESEARCH Gary R. Pehrson EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, BRADYCARDIA DAIG MINNETONKA, MINNESOTA - -------------------------------------------------------------------------------- Daniel J. Starks CHIEF EXECUTIVE OFFICER Michael J. Coyle PRESIDENT James A. Hassett DIRECTOR, CLINICAL DEVELOPMENT Robert A. Eno DIRECTOR, OPERATIONS Dennis A. Stowers DIRECTOR, MANUFACTURING Peter C. McLane DIRECTOR, MARKETING INTERNATIONAL OPERATIONS - -------------------------------------------------------------------------------- Terrie M. Ajamil VICE PRESIDENT, AREA OPERATIONS, ASIA-PACIFIC Michel Cavadini VICE PRESIDENT, ADMINISTRATION EUROPE/MIDDLE EAST Ruud Helwig VICE PRESIDENT, BENSAS, EASTERN EUROPE, MIDDLE EAST AND AFRICA Angelo Rivetti VICE PRESIDENT, EUROPE Edward A. Storch VICE PRESIDENT, AREA OPERATIONS, LATIN AMERICA, JAPAN, AUSTRALIA AND NEW ZEALAND Dr. Ignacio L. Balboa MANAGING DIRECTOR, SPAIN AND PORTUGAL Joel D. Becker BUSINESS UNIT DIRECTOR, HEART VALVE DIVISION Alain Brunier MANAGING DIRECTOR, FRANCE Eric Delwart MANAGING DIRECTOR, BELGIUM Erwin Eggenschwiler COUNTRY MANAGER, SWITZERLAND Luciano Frattini MANAGING DIRECTOR, ITALY George Fazio GENERAL MANAGER, ST. JUDE MEDICAL CANADA Jurgen Fuchs MANAGING DIRECTOR, GERMANY Roland Gerard DIRECTOR, EUROPEAN REGULATORY AFFAIRS AND QUALITY ASSURANCE ULF GRAPE COUNTRY MANAGER, SWEDEN Svend-Erik Hansen COUNTRY MANAGER, DENMARK Frans M. van Heck MANAGING DIRECTOR, NETHERLANDS Jon P. Hunt, Ph.D. BUSINESS UNIT DIRECTOR, CARDIAC RHYTHM MANAGEMENT Luit Mulder AREA DIRECTOR, MIDDLE EAST AND AFRICA Arto Nousiainen COUNTRY MANAGER, FINLAND Roger G. Osborne MANAGING DIRECTOR, UNITED KINGDOM Wolfgang Sacken COUNTRY MANAGER, AUSTRIA Peter van der Sluis AREA DIRECTOR, EASTERN EUROPE Frieda J. Valk DIRECTOR, HUMAN RESOURCES BOARD OF DIRECTORS [PHOTO] ST. JUDE MEDICAL BOARD OF DIRECTORS IN THE COMPANY'S LILLEHEI FACILITY WITH HENDRICKSON AWARD DISPLAY. - -------------------------------------------------------------------------------- Roger G. Stoll, Ph.D.(3) CHIEF EXECUTIVE OFFICER AND PRESIDENT, OHMEDA, INC. LIBERTY CORNER, NEW JERSEY Kenneth G. Langone(2) MANAGING DIRECTOR, INVEMED ASSOCIATES, INC. NEW YORK, NEW YORK Thomas H. Garrett, III(3) BUSINESS CONSULTANT, MINNEAPOLIS, MINNESOTA Walter L. Sembrowich, (1,2) Ph.D. PRESIDENT, AVIEX, INC. MINNEAPOLIS, MINNESOTA William R. Miller(2) FORMER VICE CHAIRMAN, BRISTOL-MYERS SQUIBB CO. NEW YORK, NEW YORK - -------------------------------------------------------------------------------- Paul J. Chiapparone(1) EXECUTIVE VICE PRESIDENT, ELECTRONIC DATA SYSTEMS CORPORATION PLANO, TEXAS Charles V. Owens(3) CHAIRMAN, GENESIS LABS, INC. MINNEAPOLIS, MINNESOTA Daniel J. Starks CHIEF EXECUTIVE OFFICER, DAIG CORPORATION MINNETONKA, MINNESOTA - -------------------------------------------------------------------------------- Gail R. Wilensky, Ph.D.(1) SENIOR FELLOW, PROJECT HOPE, WASHINGTON, D.C. Ronald A. Matricaria CHAIRMAN - -------------------------------------------------------------------------------- 1 DENOTES MEMBERS OF THE NOMINATING COMMITTEE 2 DENOTES MEMBERS OF THE COMPENSATION COMMITTEE 3 DENOTES MEMBERS OF THE AUDIT COMMITTEE ST. JUDE MEDICAL GLOBAL LEADERSHIP IN MEDICAL TECHNOLOGY ST. JUDE MEDICAL, INC. ONE LILLEHEI PLAZA ST. PAUL, MN 55117-9983 PHONE: 612.483.2000 TELEX: 298453 FAX: 612.490.4333 INTERNET: www.sjm.com EX-21 7 SUBSIDIARIES OF THE REGISTRANT ST. JUDE MEDICAL, INC. AND SUBSIDIARIES EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT St. Jude Medical, Inc. Wholly Owned Subsidiaries: Pacesetter, Inc. (Delaware) St. Jude Medical S.C., Inc. (Delaware) St. Jude Medical Europe, Inc. - (Delaware) SJM Europe, Inc. - (Delaware) St. Jude Medical Sales Corporation (Barbados) St. Jude Medical Puerto Rico, Inc. (Delaware) St. Jude Medical Canada, Inc. (Canada) 151703 Canada Inc. (Canada) SJM Acquisition Corp (Minnesota) St. Jude Medical, Inc., Cardiac Assist Division (Delaware) St. Jude Medical (Hong Kong) Ltd. (Hong Kong) Glory Telectronics Ltd. (Hong Kong) Medical Telectronics Ltd. (New Zealand) Telectronics N.V. (Netherlands Antilles) St. Jude Medical Brasil, Ltda. (Brazil) - Newcor Industrial S.A. (Brazil) - Telectronics Medica Ltda (Brazil) (wholly owned by above-named corporation) Daig Corporation (Minnesota) - Flite Time, Inc. (Minnesota) (wholly owned by above-named corporation) St. Jude Medical Pty. Ltd. (Australia) SJM Europe Inc.'s Wholly Owned Subsidiaries: Pacesetter Netherlands Distribution AB (Sweden) Pacesetter AB (Sweden) St. Jude Medical Sweden AB (Sweden) St. Jude Medical Pacesetter Sales AB (Sweden) St. Jude Medical Italia S.p.A (Italy) St. Jude Medical Espagna S.A. (Spain) St. Jude Medical Danmark A/s (Denmark) - Telectronics Scandinavia A/s (Denmark) (wholly-owned by above-named corporation) St. Jude Medical Finland O/y (Finland) St. Jude Medical AG (Switzerland) St. Jude Medical GmbH (Germany) St. Jude Medical Medizintechnik Ges.m.b.H. (Austria) - Telectronics Gesellschaft MBH (Austria) (wholly-owned by above-named corporation) N.V. St. Jude Medical Belgium, S.A. (Belgium) - Portugal branch St. Jude Medical France S.A. (France) St. Jude France S.A. (France) St. Jude Medical UK Limited (United Kingdom) - Pacesetter Medical Products Limited (United Kingdom) (wholly-owned by above-named corporation) St. Jude Medical Nederland B.V. (Netherlands) - Telectronics B.V. (Netherlands) (wholly-owned by above-named corporation) Telectronics S.A. - Belgium EX-23 8 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of St. Jude Medical, Inc. of our report dated February 5, 1997, included in the 1996 Annual Report to Shareholders of St. Jude Medical, Inc. We also consent to the incorporation by reference in Registration Statement No. 33-29085; Registration Statement No. 33-41459; Registration Statement No. 33-48502 and Registration Statement No. 33-54435 on Form S-8 of our reports dated February 5, 1997, with respect to the consolidated financial statements and schedules of St. Jude Medical, Inc. included in or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. /s/ Ernst & Young LLP Minneapolis, Minnesota March 26, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 41,124 143,446 213,547 7,678 199,475 664,610 340,942 73,228 1,301,367 293,342 0 0 0 8,101 827,924 1,301,367 808,780 808,780 246,896 246,896 0 650 3,537 141,817 49,636 92,181 0 0 0 92,181 1.12 1.12
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