-----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, Fhs6WKGTEcPO6ORCBdDMO8tJPzpw2Ql28nY6smA6+pdLvTn8C7vGlQGTme3Gno/7 eUj6pVdH2822t4iKbTSDGA== 0001045969-98-000420.txt : 19980514 0001045969-98-000420.hdr.sgml : 19980514 ACCESSION NUMBER: 0001045969-98-000420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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-Q SEC ACT: SEC FILE NUMBER: 001-12441 FILM NUMBER: 98618233 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1998 Commission File Number 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 Identification No.) of incorporation or organization) One Lillehei Plaza, St. Paul, Minnesota 55117 --------------------------------------------- (Address of principal executive offices) (612) 483-2000 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ The number of shares of common stock, par value $.10 per share, outstanding at May 1, 1998 was 83,992,884. This Form 10-Q consists of 14 pages consecutively numbered. The Exhibit Index to this Form 10-Q is set forth on page 13. 1 of 14 PART I FINANCIAL INFORMATION ST. JUDE MEDICAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the full year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2 - CONTINGENCIES The Company is involved in various products liability lawsuits, claims and proceedings of a nature considered normal to its business with the exception noted below. Subject to self-insured retentions, the Company has products liability insurance sufficient to cover such claims and suits. 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 in 1994. The Company is defending this suit and has brought a claim against its insurance broker with respect to this matter. 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 was approximately $6,800. 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. 2 of 14 PART I FINANCIAL INFORMATION (continued) NOTE 3 - COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" requires the Company to include in Other Comprehensive Income unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, net of taxes. Other Comprehensive Income (Loss) for the first quarter 1998 and 1997 was $16,004 and $(15,344), respectively. Total Comprehensive Income combines reported net income and Other Comprehensive Income. Total Comprehensive Income for the quarters ended March 31, 1998 and 1997 was $45,179 and $7,533 respectively. NOTE 4 - SPECIAL CHARGE UPDATE The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and 1997, respectively. These special charges have decreased by $46,975 and $29,650, respectively, for cash payments since the date recorded. NOTE 5 - STOCK REPURCHASE On March 20, 1998, the Company repurchased 8,000,000 shares of its common stock at $38 per share and bank debt increased by $304,000. The Company established a $500,000 revolving credit line due in 2003. As of March 31, 1998, the Company had $70,000 available under this credit line. NOTE 6 - EARNINGS PER SHARE The table below sets forth the computation of basic and diluted earnings per share. There were no adjustments to the numerator. 1998 1997 ----------- ----------- Numerator: Net income $ 29,175 $ 22,877 Denominator: Basic-weighted shares outstanding 90,573,000 91,357,000 Effect of dilutive securities: Employee stock options 690,000 1,268,000 Restricted shares 52,000 74,000 ----------- ----------- Diluted-weighted shares outstanding 91,315,000 92,699,000 =========== =========== Basic earnings per share $ 0.32 $ 0.25 =========== =========== Diluted earnings per share $ 0.32 $ 0.25 =========== =========== 3 of 14 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED MARCH 31 ---------------------- 1998 1997 --------- --------- Net Sales $ 257,488 $ 250,390 Cost of sales 98,226 91,716 --------- --------- Gross profit 159,262 158,674 Selling, general & administrative 92,064 94,388 Research & Development 22,213 30,290 --------- --------- Operating profit 44,985 33,996 Other income (expense), net (101) 947 --------- --------- Income before taxes 44,884 34,943 Income tax provision 15,709 12,066 --------- --------- Net income $ 29,175 $ 22,877 ========= ========= Earnings per common share: Basic $ 0.32 $ 0.25 ========= ========= Diluted $ 0.32 $ 0.25 ========= ========= Average shares outstanding: Basic 90,573 91,357 Diluted 91,315 92,699 See notes to condensed consolidated financial statements. 4 of 14 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
MARCH 31 DECEMBER 31 1998 1997 (Unaudited) (See Note) ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 21,386 $ 28,530 Marketable securities 153,805 156,006 Accounts receivable, less allowance (1998 $12,431; 1997 - $12,712) 252,781 243,311 Inventories Finished goods 121,452 137,651 Work in process 29,111 39,079 Raw materials 67,286 64,309 ----------- ----------- Total inventories 217,849 241,039 Other current assets 59,765 74,396 ----------- ----------- Total current assets 705,586 743,282 Property, plant and equipment 501,787 456,688 Less accumulated depreciation (159,856) (149,043) ----------- ----------- Net property, plant and equipment 341,931 307,645 Other assets 400,584 407,689 ----------- ----------- TOTAL ASSETS $ 1,448,101 $ 1,458,616 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 230,594 $ 251,594 Long-term debt 487,500 220,000 Contingencies Shareholders' equity: Preferred stock, par value $1.00 per share - 25,000,000 shares authorized; no shares issued Common stock, par value $.10 per share - 25,000,000 shares authorized; issued and outstanding 1998 - 83,970,722 shares; 1997 - 91,911,496 shares 8,397 9,191 Additional paid-in capital 297 244,347 Retained earnings 717,857 746,032 Accumulated other comprehensive income: Cumulative translation adjustment (29,880) (24,150) Unrealized gain on available-for-sale securities 33,336 11,602 ----------- ----------- Total shareholders' equity 730,007 987,022 ----------- ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,448,101 $ 1,458,616 =========== ===========
NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. 5 of 14 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31 1998 1997 --------- --------- Operating Activities: Net income $ 29,175 $ 22,877 Depreciation and amortization 16,459 17,021 Working capital change (36,492) (101,979) --------- --------- Net cash provided by (used in) operating activities 9,142 (62,081) --------- --------- Investment Activities: Purchases of property, plant and equipment (19,978) (10,924) Sales of available-for-sale securities, net 37,000 39,956 Other investing activities 2,267 341 --------- --------- Net cash provided by investing activities 19,289 29,373 --------- --------- Financing Activities: Proceeds from exercise of stock options 1,771 1,791 Purchase and retirement of common stock (304,169) -- Net borrowings under lines of credit 267,500 13,000 --------- --------- Net cash provided by (used in) financing activities (34,898) 14,791 --------- --------- Effect of currency exchange rate changes on cash (677) (873) --------- --------- Increase (decrease) in cash and cash equivalents (7,144) (18,790) Cash and cash equivalents at beginning of year 28,530 49,388 --------- --------- Cash and cash equivalents at end of period $ 21,386 $ 30,598 ========= =========
See notes to condensed consolidated financial statements. 6 of 14 St. Jude Medical, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in thousands, except per share amounts) Results of Operations: NET SALES. Net sales for the first quarter 1998 totaled $257,488, a 3% increase over net sales recorded in the 1997 first quarter of $250,390. Excluding the 1997 non-pacing net sales of Medtel, which was sold in the third quarter of 1997, first quarter 1998 net sales were 7% higher than the prior year first quarter. Unfavorable foreign currency translation effects due to the stronger U.S. dollar reduced first quarter 1998 net sales by approximately $5,400, or 2%. Heart valve disease management net sales, which exceeded $73,000, increased almost 5% over 1997 comparable period net sales. The increase was mainly attributable to the successful domestic introduction of the Toronto SPV(R) stentless porceine valve, and the strong European SJM Biocor(TM) stented tissue valve net sales that were partially offset by unfavorable foreign currency effects. Cardiac rhythm management net sales of more than $184,000, increased almost $4,000, or more than 2% over the 1997 first quarter net sales. The increase principally resulted from higher implantable cardioverter defibrillator and electrophysiology (EP) catheter net sales that were partially offset by the elimination of non-pacing Medtel net sales and the effect of the stronger U.S. dollar. GROSS PROFIT. The first quarter 1998 gross profit totaled $159,262, or 61.9% of net sales as compared to $158,674, or 63.4% of net sales in last year's first quarter. The decrease in gross profit margin was primarily due to bradycardia price decreases that resulted from a shift in geographical sales mix and price compression in certain markets and the translation effects of the stronger U.S. dollar that were partially offset by lower heart valve manufacturing costs. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses decreased in the first quarter 1998 to $92,064 from $94,388 in the comparable period of 1997. The 2.5% decrease resulted mainly from the consolidation of Telectronics' support functions and the fourth quarter 1997 restructuring of the Cardiac Rhythm Management Division (CRMD). RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses totaled $22,213 in the first quarter 1998, an $8,077 decrease from the first quarter 1997. The decrease resulted principally from the consolidation of Telectronics related projects that were partially offset by increased spending for EP related products. 7 of 14 PART I MANAGEMENT DISCUSSION & ANALYSIS (continued) OTHER INCOME (EXPENSE). Other expense totaled $101 in the first quarter 1998 compared to other income of $947 in the first quarter of 1997. Interest income decreased in 1998 to approximately $1,300 from $2,000 in 1997 mainly because certain investments were liquidated. Interest expense increased to almost $3,800 from $3,600 in 1997 primarily because the Company repurchased 8,000,000 shares of its stock in the first quarter 1998 by increasing debt. Gain on the sale of investments increased in 1998 to almost $1,900 from $1,000 in 1997. Foreign exchange gains decreased to approximately $500 in 1998 from $1,300 in 1997. INCOME TAX PROVISION. The Company's income tax rate was 35% in the first quarter 1998, compared to the 34.5% effective income tax rate in the first quarter 1997. The higher effective tax rate was caused by changes to the Internal Revenue Code (IRC) Section 936 regulations that were finalized in 1996. These regulations reduced the tax benefits derived from the Company's Puerto Rican operations. OUTLOOK. The Company expects that market demands, government regulation and societal pressures will continue to change the healthcare industry worldwide resulting in further business consolidations and alliances. To meet customer needs, the Company intends to continue to broaden its product offerings through internal development or external diversification opportunities. The Company will participate with industry groups to promote the introduction and use of advanced medical device technology within a cost conscious environment. Finally, customer service in the form of cost-effective clinical outcomes will continue to be a primary focus for the Company. As provided for in the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors could cause actual future results of operations to vary from those anticipated in any forward-looking statements made in this document and elsewhere by or on behalf of the Company. Net sales could be materially affected by legislative or administrative reforms to the U.S. Medicare and Medicaid systems in a manner that would significantly reduce reimbursement for procedures using the Company's medical devices, the acquisition of key patents by competitors that would have the effect of excluding the Company from new market segments, healthcare industry consolidation resulting in customer demands for price concessions, products introduced by competitors with advanced technology and better features and benefits or lower prices, fewer procedures performed in a cost conscious environment, and the lengthy approval time by the FDA to clear implantable medical devices for commercial release. Cost of sales could be materially affected by unfavorable developments in the area of products liability and price increases from the Company's suppliers of critical components, a number of which are sole sourced. Operations could be affected by the Company's ability to execute its diversification strategy or to integrate acquired companies, a serious earthquake affecting the Company's facilities in California, adverse developments in the litigation arising from the acquisitions of Telectronics and Ventritex, including litigation related to the Ventritex Cadence model V-110 ICD device, unanticipated product failures and attempts by competitors to gain market share through aggressive marketing programs. 8 of 14 PART I MANAGEMENT DISCUSSION & ANALYSIS (continued) The Company's 1998 effective income tax rate decreased from the full-year 1997 effective income tax rate due to the elimination of non-deductible Ventritex related transaction costs that were partially offset by lower Puerto Rican tax benefits as IRC Section 936 tax benefits were 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 adjustments of approximately $58,200 in additional taxes relating primarily to the Company's Puerto Rican operations in 1990 through 1994. It is likely that similar adjustments will be proposed for 1995. The Company is vigorously contesting the proposed adjustments. FINANCIAL CONDITION. The financial condition of the Company at March 31, 1998, continues to be strong. Long-term debt increased to $487,500 from $220,000 at the end of 1997. The increase was associated with the repurchase of 8,000,000 shares of common stock for $304,000. The increase was partially offset by a $36,500 reduction to debt mainly as a result of cash provided by operations, the sale of securities and a reduction in excess cash balances. Total assets decreased $10,515 during the first quarter 1998. Cash and marketable securities decreased by $9,345 as cash was deployed to reduce debt. Accounts receivable increased $9,470 due to an increase in sales. Inventories decreased by $23,190 mainly because bradycardia programmers were placed into service and converted to a fixed asset. Other assets decreased by $21,736 primarily due to lower deferred taxes and amortization of goodwill. Shareholders' equity was reduced by $257,015 during the quarter to $730,007. Net income of $29,175, the exercise of stock options of $1,772 and an increase in unrealized gain on investments of $21,734 were offset by the repurchase of stock of $303,966 and a foreign currency translation adjustment loss of $5,730. 9 of 14 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS GUIDANT LITIGATION On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant Sales Corporation (a wholly owned subsidiary of CPI) ("GSC"), and Eli Lilly and Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc. ("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the Telectronics Group in State Superior Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit alleges, among other things, that, pursuant to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain intellectual property licenses relating to cardiac stimulation devices, and that such licenses would terminate upon the consummation of the merger of Ventritex into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an agreement entered into in 1994 (the "Telectronics Agreement"), CPI and Lilly granted the Telectronics Group certain intellectual property licenses relating to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit seeks declaratory and injunctive relief, among other things, to prevent and invalidate the transfer of the Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition of Telectronic's assets (the "Telectronics Acquisition") and the application of license rights granted under the Telectronics Agreement to the manufacture and sale by Pacesetter of Ventritex's products following the consummation of the Merger. On December 17, 1996, St. Jude Medical, Pacesetter, Ventritex and the Telectronics Group removed the lawsuit to the United States District Court for the Southern District of Indiana, and filed a motion to dismiss the complaint or, in the alternative, to stay proceedings pending arbitration of the dispute pursuant to the arbitration provisions of the Telectronics Agreement. On January 16, 1997, the Guidant Parties filed a motion to remand the lawsuit to Indiana state court which was granted in May 1997. St. Jude Medical, Pacesetter and Ventritex then filed a motion in Indiana state court to dismiss the complaint or, in the alternative, to stay the proceedings pending arbitration. This motion was denied by the Indiana state court on July 21, 1997. The Indiana state court action is currently in discovery and St. Jude Medical and Pacesetter are vigorously defending against the claims which the Guidant Parties have asserted in this action. The Indiana state court has set a January 11, 1999 trial date for this case. St. Jude Medical and Pacesetter will continue to vigorously defend their interests with respect to the claims asserted by the Guidant Parties, in whatever forum such claims are addressed (see description of the arbitration proceeding below). 10 of 14 PART II OTHER INFORMATION (continued) CPI, GSC and Lilly (collectively the "Federal Court Guidant Parties") also filed suit against St. Jude Medical, Pacesetter and Ventritex on November 26, 1996 in the United States District Court for the Southern District of Indiana seeking (i) a declaratory judgment that Pacesetter's manufacture, use or sale of cardiac stimulation devices of the type or similar to the type which Ventritex manufactured and sold at the time the Federal Court Guidant Parties filed their complaint would upon consummation of the Merger, be unlicensed and constitute an infringement of patent rights owned by CPI and Lilly, (ii) to enjoin the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of cardiac stimulation devices of the type which Ventritex manufactured at the time the Federal Court Guidant Parties filed their complaint and (iii) certain damages and costs. On December 19, 1996, St. Jude Medical, Pacesetter and Ventritex filed a motion to dismiss the complaint or, in the alternative, to stay proceedings pending resolution of the Telectronics Action or arbitration. The court denied this motion. The federal court action is currently in discovery, and St. Jude Medical and Pacesetter are vigorously defending against the claims which the Federal Court Guidant Parties asserted in this action. The federal court has reserved time in November 1998 for the trial of this case. St. Jude Medical and Pacesetter will continue to vigorously defend their interests with respect to the claims asserted by the Federal Court Guidant Parties, in whatever forum such claims are addressed (see description of the arbitration proceeding below). St. Jude Medical and Pacesetter believe that the foregoing state and federal court complaints contain a number of significant factual inaccuracies concerning the Telectronics Acquisition and the terms and effects of the various intellectual property license agreements referred to in such complaints. For these reasons and others, St. Jude Medical and Pacesetter believe that the allegations set forth in the complaints are without merit, and, as previously indicated, they are vigorously defending their interests. On December 24, 1996, the Telectronics Group and Pacesetter filed a lawsuit and a motion against the Guidant Parties in the United States District Court for the District of Minnesota seeking (i) a declaratory judgment that the Guidant Parties' claims, as reflected in the Telectronics Action, are subject to arbitration pursuant to the arbitration provisions of the Telectronics Agreement, (ii) an order that the Defendants arbitrate their claims against the Telectronics Group and Pacesetter in accordance with the arbitration provisions of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and permanently from litigating their dispute with the Telectronics Group and Pacesetter in any other forum and (iv) certain costs. On February 27, 1997, the court entered an order denying the motion brought by the Telectronics Group and Pacesetter and dismissing their complaint. On March 27, 1997, the Telectronics Group and Pacesetter filed a Notice of Appeal from the court's February 27, 1997 order. The Eighth Circuit Court of Appeals heard oral argument in this appeal on February 12, 1998. 11 of 14 PART II OTHER INFORMATION (continued) In response to the appeal by the Telectronics Group and Pacesetter, the Court of Appeals issued a decision on May 4, 1998 reversing the district court and vacating the district court's dismissal of the Minnesota federal district court lawsuit which the Telectronics Group and Pacesetter brought against the Guidant Parties. As part of this decision, the Court of Appeals remanded the case to the district court in Minnesota and instructed the district court to permit the arbitration requested by the Telectronics Group and Pacesetter to proceed. The Court of Appeals also asked the district court in Minnesota to reconsider the motion for an injunction previously brought by the Telectronics Group and Pacesetter which sought to preliminarily and permanently enjoin the Guidant Parties from litigating their dispute with the Telectronics Group and Pacesetter in any forum outside the arbitration proceeding. IRS LITIGATION The Internal Revenue Service ("IRS") completed an audit examination of the Company's 1990-1991 corporate income tax returns and issued deficiency notices in early 1997 for taxes of $16.4 million. In addition, the IRS completed an audit examination of the Company's 1992-1994 income tax returns in early 1998 and has proposed an adjustment of $41.8 million in taxes. Both adjustments relate primarily to the Company's Puerto Rican operations. The deficiency amounts do not include interest, state taxes, or offsetting Puerto Rico tax refunds, the net effect of which is not material. It is likely that a similar additional adjustment will be proposed for 1995. The Company is vigorously contesting this adjustment. The Company is refuting the IRS deficiency for 1990-1991 and asserting the Company is in fact owed a refund in a petition filed in Tax Court on June 24, 1997. The trial is currently scheduled to begin in September 1998. The Company expects that the ultimate resolution will not have material adverse effect on its financial position or liquidity, but could potentially be material to the net income of a particular future period if resolved unfavorably. OTHER LITIGATION AND PROCEEDINGS From 1987 to 1991, Siemens AG through its Pacesetter and other affiliates ("Siemens") manufactured and sold approximately 32,000 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. 12 of 14 PART II OTHER INFORMAITON (continued) 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 $6.8 million. 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. Item 6. EXHIBITS and REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit ------ ------- 27 Financial data schedule (b) Reports on Form 8-K A Form 8-K was filed on February 11, 1998 to present the supplemental financial statements, supplemental management's discussion and analysis of financial condition and results of operations, and other financial information that give effect to the May 15, 1997 acquisition of Ventritex, Inc., accounted for as a pooling of interests, by restating 1996 and certain prior years financial statements and information as if the Company and Ventritex always had been combined. 13 of 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. ST. JUDE MEDICAL, INC. May 11, 1998 /s/ ROBERT E. MUNZENRIDER - ------------- ---------------------------------- DATE ROBERT E. MUNZENRIDER Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 14 of 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 21,386 153,805 265,212 12,431 217,849 705,586 501,787 159,856 1,448,101 230,594 57,500 0 0 8,397 721,610 1,448,101 257,488 257,488 98,226 98,226 0 34 3,788 44,884 15,709 29,175 0 0 0 29,175 0.32 0.32
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