-----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, SIQkNKQtqF5lAieUI961Pj17mDTv33IDyqOx2F61lVo8HQoA0MNvmlHNGcWSnc/V 7HaImRtNTi9qiJ97rJVzYg== 0001045969-98-000607.txt : 19980817 0001045969-98-000607.hdr.sgml : 19980817 ACCESSION NUMBER: 0001045969-98-000607 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98686955 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 June 30, 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) (651) 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 August 3, 1998 was 84,165,410. This Form 10-Q consists of 15 pages consecutively numbered. The Exhibit Index to this Form 10-Q is set forth on page 15. 1 of 15 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 and six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the full year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2 - CONTINGENCIES The Company is involved in various products liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, the Company has products liability insurance and reserves sufficient to cover such claims and suits. In connection with two pacemaker lead models, the Company may be subject to future uninsured claims. Management believes losses that might be sustained from such actions would not have a material adverse effect on the Company's liquidity or financial condition, but could potentially be material to the net income of a particular future period if resolved unfavorably. The Company's product liability insurance policies exclude coverage for two discontinued Pacesetter leads, models 1016 and 1026. Some of these two models were the subject of class action product liability suits that have been settled. 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 second quarter 1998 and 1997 was $(27,170) and $3,411, respectively. Other Comprehensive (Loss) for the first six months of 1998 and 1997 was $(11,166) and $(11,933), respectively. Total Comprehensive Income combines reported Net Income and Other Comprehensive Income. Total Comprehensive Income for the second quarter ended June 30, 1998 and 1997 was $12,864 and $12,176 respectively. Total Comprehensive Income for the six months ended June 30, 1998 and 1997 was $58,043 and $19,709, respectively. 2 of 15 PART I FINANCIAL INFORMATION (continued) NOTE 4 - SPECIAL CHARGE UPDATE The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and 1997, respectively. These special charges have decreased by $47,359 and $32,721 respectively, since the date recorded. NOTE 5 - STOCK REPURCHASE On March 20, 1998, the Company repurchased 8,000,000 shares of its common stock at $38 per share and correspondingly increased bank debt by $304,000. The Company established a $500,000 revolving credit line due in 2003. As of June 30, 1998, the Company had $67,000 available under this credit line. NOTE 6 - EARNINGS PER SHARE The table below sets forth the computation of basic and diluted earnings per share. There were no adjustments to the numerator.
1998 1997 ---------------------------- ---------------------------- Three Months Six Months Three Months Six Months Ended June 30 Ended June 30 Ended June 30 Ended June 30 Numerator: Net income $40,034 $69,209 $ 8,765 $31,642 Denominator: Basic-weighted shares outstanding 83,975 87,276 91,419 91,402 Effect of dilutive securities: Employee stock options 796 741 1,102 1,185 Restricted shares 48 48 72 72 ------- ------- ------- ------- Diluted-weighted shares outstanding 84,819 88,065 92,593 92,659 ======= ======= ======= ======= Basic earnings per share $ 0.48 $ 0.79 $ 0.10 $ 0.35 ======= ======= ======= ======= Diluted earnings per share $ 0.47 $ 0.79 $ 0.09 $ 0.34 ======= ======= ======= =======
3 of 15 PART I FINANCIAL INFORMATION (continued) NOTE 7 - STATEMENT OF ACCOUNTING STANDARDS NO. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in years beginning after June 15, 1999. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement No. 133 will be on the earnings and financial position of the Company. 4 of 15 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net sales $261,232 $261,456 $518,720 $511,846 Cost of sales 96,025 91,632 194,251 183,348 -------- -------- -------- -------- Gross profit 165,207 169,824 324,469 328,498 Selling, general & administrative 88,763 100,025 180,827 194,413 Research & development 27,068 27,595 49,281 57,885 Special charges -- 30,645 -- 30,645 -------- -------- -------- -------- Operating profit 49,376 11,559 94,361 45,555 Other income, net 5,322 2,366 5,221 3,313 -------- -------- -------- -------- Income before taxes 54,698 13,925 99,582 48,868 Income tax provision 14,664 5,160 30,373 17,226 -------- -------- -------- -------- Net income $ 40,034 $ 8,765 $ 69,209 $ 31,642 ======== ======== ======== ======== Earnings per common share: Basic $ 0.48 $ 0.10 $ 0.79 $ 0.35 ======== ======== ======== ======== Diluted $ 0.47 $ 0.09 $ 0.79 $ 0.34 ======== ======== ======== ======== Average shares outstanding: Basic 83,975 91,419 87,276 91,402 Diluted 84,819 92,593 88,065 92,659 See notes to condensed consolidated financial statements. 5 of 15 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
JUNE 30 DECEMBER 31 1998 1997 (Unaudited) (See Note) ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 27,232 $ 28,530 Marketable securities 98,097 156,006 Accounts receivable, less allowance (1998 $12,004; 1997 - $12,712) 286,701 243,311 Inventories Finished goods 131,611 137,651 Work in process 32,230 39,079 Raw materials 67,198 64,309 ----------- ----------- Total inventories 231,039 241,039 Other current assets 76,121 74,396 ----------- ----------- Total current assets 719,190 743,282 Property, plant and equipment 515,465 456,688 Less accumulated depreciation (172,007) (149,043) ----------- ----------- Net property, plant and equipment 343,485 307,645 Other assets 395,745 407,689 ----------- ----------- TOTAL ASSETS $ 1,458,393 $ 1,458,616 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 220,686 $ 251,594 Long-term debt 490,500 220,000 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 - 84,153,890 shares; 1997 - 91,911,496 shares 8,415 9,191 Additional paid-in capital 5,332 244,347 Retained earnings 757,173 746,032 Accumulated other comprehensive income: Cumulative translation adjustment (28,371) (24,150) Unrealized gain on available-for-sale securities 4,658 11,602 ----------- ----------- Total shareholders' equity 747,207 987,022 ----------- ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,458,393 $ 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. 6 of 15 PART I FINANCIAL INFORMATION (continued) ST. JUDE MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30 ---------------------- 1998 1997 --------- --------- Operating Activities: Net income $ 69,209 $ 31,642 Depreciation and amortization 35,976 34,529 Special Charges -- 19,104 Net investment gain (8,514) -- Working capital change (83,581) (158,495) --------- --------- Net cash provided by (used in) operating activities 13,090 (73,220) --------- --------- Investing Activities: Purchases of property, plant and equipment (46,978) (38,261) Sales of available-for-sale securities, net 59,602 71,591 Other investing activities 1,120 1,153 --------- --------- Net cash provided by investing activities 13,744 34,483 --------- --------- Financing Activities: Proceeds from exercise of stock options and stock issued 6,635 6,966 Purchase and retirement of common stock (304,887) -- Net borrowings under lines of credit 270,500 12,000 --------- --------- Net cash provided by (used in) financing activities (27,752) 18,966 --------- --------- Effect of currency exchange rate changes on cash (380) (1,287) --------- --------- Decrease in cash and cash equivalents (1,298) (21,058) Cash and cash equivalents at beginning of year 28,530 49,388 --------- --------- Cash and cash equivalents at end of period $ 27,232 $ 28,330 ========= =========
See notes to condensed consolidated financial statements. 7 of 15 MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in thousands, except per share amounts) RESULTS OF OPERATIONS: NET SALES. Net sales for the second quarter 1998 totaled $261,232 a $224 decrease from the 1997 second quarter net sales. Excluding the non-pacing net sales from a Far East distribution company that was sold in the third quarter of 1997, of approximately $8,000, second quarter net sales were approximately 3.2% higher than the prior year comparable period. For the first six months, net sales totaled $518,720, a $6,874 or 1.3% increase, over the net sales recorded in the first six months of 1997. Excluding non-pacing sales from the Far East distribution company, of approximately $17,000, the first six months 1998 net sales increased about 4.9% over the first six months of 1997. Unfavorable foreign currency effects due to the stronger U.S. dollar reduced 1998 net sales as compared to 1997 by approximately $2,600 and $8,000 for the second quarter and first six months, respectively. Second quarter and the first six months net sales, exclusive of the non-pacing sales from the Far East distribution company, increased primarily due to higher tissue heart valve, implantable cardioverter defibrillator, and electrophysiology catheter unit sales that were partially offset by lower average selling prices and fewer bradycardia pulse generator unit sales. Average selling prices decreased because of pricing pressures, unfavorable foreign currency effects of a stronger U.S. dollar and more units being sold into lower priced developing markets. The decrease in bradycardia unit sales resulted mainly from the turnover of certain domestic sales representatives. GROSS PROFIT. Second quarter 1998 gross profit totaled $165,207 or 63.2% of net sales, as compared to $169,824 or 65.0% of net sales during the comparable 1997 period. For the first six months of 1998 and 1997, gross profit was $324,469 or 62.6% of net sales, and $328,498, or 64.2% of net sales, respectively. The lower gross profit margin for both the quarter and the first six months resulted from the foreign exchange impact on net sales, average selling price decreases due to geographical sales mix and pricing pressures in the cardiac rhythm management business. SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses in the second quarter 1998 of $88,763 decreased $11,262 or 11.3% from the second quarter of 1997. As a percentage of sales, 1998 SG&A decreased to 34.0% from 38.3% in 1997. On a year-to-date basis, 1998 SG&A expenses totaled $180,827, a $13,586 decrease from 1997. The decreases for both the quarter and first six months resulted mainly from the fourth quarter 1997 restructuring of the cardiac rhythm management business. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses in the second quarter of 1998 totaled $27,068, a $527 decrease from the second quarter of 1997. The first six months R&D expenditures totaled $49,281, an $8,604 decrease from the 1997 comparable period. The decrease for both the quarter and the first six months was primarily attributable to the consolidation of Telectronics R&D into the cardiac rhythm management business. 8 of 15 PART I MANAGEMENT DISCUSSION & ANALYSIS (continued) SPECIAL CHARGES. In the second quarter 1997, the Company recorded $30,645 of special charges related to the Ventritex merger which consisted of transaction charges of $8,227, U.S. distribution reorganization charges of $9,433, repositioning charges of $6,939 related to its tachycardia business and integration charges of $6,046. OTHER INCOME. Other income in the second quarter of 1998 totaled $5,322 compared to $2,366 in the second quarter of 1997. In the second quarter of 1998, a $16,362 gain was realized on the sale of an investment security that was partially offset by the recognition of a $3,263 reduction in the carrying value of an investment security. Interest expense in the second quarter 1998 totaled $7,299, or a $3,499 increase over the comparable 1997 period. The higher interest expense resulted from the higher debt level associated with the first quarter 1998 repurchase of eight million shares of common stock for $304,000. For the first six months of 1998 other income totaled $5,221 versus $3,313 in the comparable period of 1997. The increase over 1997 was principally attributable to the gain on investments that was partially offset by the increased interest expense associated with the stock repurchase. INCOME TAX PROVISION. The Company's 1998 year-to-date effective income tax rate was 30.50% compared to 35.25% in 1997. The reduction in the 1998 worldwide effective tax rate is primarily due to a greater proportion of income derived from lower tax rate countries and elimination of the non-deductible Ventritex related transaction costs that occurred in 1997 but not 1998. Taxes are not provided on undistributed earnings of non-U.S. subsidiaries because such earnings are either permanently reinvested or do not exceed available foreign tax credits. 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. 9 of 15 PART I MANAGEMENT DISCUSSION & ANALYSIS (continued) As provided for in the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors 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. FINANCIAL CONDITION The Company's financial condition at June 30, 1998, continues to remain strong. Long-term debt of $490,500 was $270,500 higher than the prior year-end balance. The increase was mainly attributable to the repurchase of eight million shares of common stock for $304,000. The ratio of current assets to current liabilities was 3.3 to 1 at June 30, 1998. Total assets decreased $223 during the first six months of 1998. Accounts receivable increased $43,390 due mainly to a higher sales level in emerging markets that have extended credit terms and delayed payments by certain domestic customers. Inventories decreased $10,000 principally because bradycardia programmers were placed into service and converted to a fixed asset. Cash and marketable securities decreased $59,207 primarily due to the reduction in carrying value of certain marketable securities. 10 of 15 PART I MANAGEMENT DISCUSSION & ANALYSIS (continued) Shareholders' equity decreased $239,815 during the first six months of 1998. Net income of $69,209 and the exercise of stock options of $6,826 were offset by a net unrealized loss on investments of $6,945 and the repurchase of stock of $304,684 and a foreign currency translation loss adjustment of $4,221. 11 of 15 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. 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. 12 of 15 PART II OTHER INFORMATION (continued) St. Jude Medical and Pacesetter believe that the foregoing state and federal court complaints contain a number of significant factual inaccuracies concerning the Telectronics Acquisition and the terms and effects of the various intellectual property license agreements referred to in such complaints. For these reasons and others, St. Jude Medical and Pacesetter believe that the allegations set forth in the complaints are without merit, and, 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. In response to the appeal by the Telectronics Group and Pacesetter, the Court of Appeals issued a decision on May 4, 1998 reversing the district court and vacating the district court's dismissal of the Minnesota federal district court lawsuit which the Telectronics Group and Pacesetter brought against the Guidant Parties. As part of this decision, the Court of Appeals remanded the case to the district court in Minnesota and instructed the district court to permit the arbitration requested by the Telectronics Group and Pacesetter to proceed. The Court of Appeals also asked the district court in Minnesota to reconsider the motion for an injunction previously brought by the Telectronics Group and Pacesetter which sought to preliminarily and permanently enjoin the Guidant Parties from litigating their dispute with the Telectronics Group and Pacesetter in any forum outside the arbitration proceeding. The Guidant Parties filed a request for re-hearing of the Eighth Circuit Court of Appeals' May 4, 1998 decision and a suggestion that the matter be considered by the court EN BANC. The Court of Appeals denied Guidant's requests in this regard by order dated June 9, 1998. As a result of Eighth Circuit Court of Appeals' decision in favor of Pacesetter and the Telectronics Group, the United States District Court for the Southern District of Indiana issued an order on June 8, 1998 staying the case which the Federal Court Guidant Parties had brought against St. Jude Medical and Pacesetter. In addition, the State Superior Court in Marion County, Indiana also issued an order on June 18, 1998 staying the Telectronics Action. Finally, the United States District Court for the District of Minnesota issued an order on July 8, 1998 directing the arbitration requested by the Telctronics Group and Pacesetter to proceed. That court's order also requires Guidant to provide the Telectronics Group and Pacesetter with advance notice if it seeks to lift either of the stays that have been granted in the above cases. 13 of 15 PART II OTHER INFORMAITON (continued) The parties have initiated steps to select an arbitrator for the arbitration proceeding. St. Jude Medical and Pacesetter will continue to vigorously defend their interests against the claims asserted by Guidant and associated entities in the arbitration. IRS LITIGATION The Internal Revenue Service ("IRS") completed an audit examination of the Company's 1990-1991 corporate income tax returns and issued deficiency notices in early 1997 for taxes of $16.4 million. In addition, the IRS completed an audit examination of the Company's 1992-1994 income tax returns in early 1998 and has proposed an adjustment of $41.8 million in taxes. Both adjustments relate primarily to the Company's Puerto Rican operations. The deficiency amounts do not include interest, state taxes, or offsetting Puerto Rico tax refunds, the net effect of which is not material. It is likely that a similar additional adjustment will be proposed for 1995. The Company is vigorously contesting this adjustment. The Company is refuting the IRS deficiency for 1990-1991 and asserting the Company is in fact owed a refund in a petition filed in Tax Court on June 24, 1997. The trial is expected to begin in 1999. The Company expects that the ultimate resolution will not have material adverse effect on its financial position or liquidity, but could potentially be material to the net income of a particular future period if resolved unfavorably. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on May 15, 1998. In conjunction therewith, proxies were solicited in accordance with Regulation 14A. The following actions were taken: (1) Fred B. Parks and Gail R. Wilensky were elected to the Board of Directors for terms ending in 2001. Shareholders approved management's nominees to the Board of Directors by votes as follows: 64,611,258 and 64,595,826 in favor, 1,359,436 and 1,374,868 withheld for Drs. Parks and Wilensky, respectively. Seven other directors are serving unexpired terms as follows: Thomas H. Garrett III, Roger G. Stoll and Paul J. Chiapparone - through 1999; and Ronald A. Matricaria, Walter L. Sembrowich, Daniel J. Starks and Walter F. Mondale - through 2000. (2) The shareholders ratified the reappointment of Ernst & Young LLP as the Company's independent auditor for the current fiscal year by a vote of 65,665,234 in favor, 118,427 opposed and 176,953 abstained from voting. 14 of 15 PART II OTHER INFORMATION (continued) Item 6. EXHIBITS and REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit ------ ------- 2 Not applicable 4 Rights Agreement dated as of July 16, 1997 between the Company and American Stock Transfer and Trust Company, as Rights Agent including the Certificate of Designation, Preferences and Rights of Series B Junior Preferred Stock is incorporated by reference to Exhibit 1 of the Registrant's Form 8A dated as of August 6, 1997. 10 Not applicable 22 Not applicable 23 Not applicable 24 Not applicable 27 Financial Data Schedule (b) Reports on Form 8-k None 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. August 14, 1998 /s/JOHN C. HEINMILLER - ----------------- ------------------------------------ DATE JOHN C. HEINMILLER Vice President Corporate Development and Chief Financial Officer (Principal Financial and Accounting Officer) 15 of 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 27,232 98,097 298,705 12,004 231,039 719,190 515,465 172,007 1,458,393 220,686 57,500 0 0 8,415 738,792 1,458,393 518,720 518,720 194,251 194,251 0 40 11,087 99,582 30,373 69,209 0 0 0 69,209 0.79 0.79
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