edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7A/G1AJsEFAqdAuZ+FADdw+l5mgh1mVS1VeT99dsD6OyolpCMhCOkza5ADHV1IdTw8n1YtVrlmbXQ1v4yE+XgylQ==910<SEC-DOCUMENT>0000897101-00-000277.txt : 2000032811<SEC-HEADER>0000897101-00-000277.hdr.sgml : 2000032812ACCESSION NUMBER: 0000897101-00-00027713CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 615CONFORMED PERIOD OF REPORT: 1999123116FILED AS OF DATE: 200003271718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: ST JUDE MEDICAL INC22CENTRAL INDEX KEY: 000020307723STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]24IRS NUMBER: 41127689125STATE OF INCORPORATION: MN26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT:31SEC FILE NUMBER: 001-1244132FILM NUMBER: 5793393334BUSINESS ADDRESS:35STREET 1: ONE LILLEHEI PLAZA36CITY: ST PAUL37STATE: MN38ZIP: 5511739BUSINESS PHONE: 65148320004041MAIL ADDRESS:42STREET 1: ONE LILLEHEI PLAZA43CITY: ST PAUL44STATE: MN45ZIP: 5511746</SEC-HEADER>47<DOCUMENT>48<TYPE>10-K49<SEQUENCE>150<TEXT>51525354================================================================================5556SECURITIES AND EXCHANGE COMMISSION57WASHINGTON, D. C. 205495859-----------------------6061FORM 10-K6263ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF64THE SECURITIES EXCHANGE ACT OF 19346566FOR THE FISCAL YEAR ENDED DECEMBER 31, 19996768COMMISSION FILE NO. 0-86726970-----------------------7172ST. JUDE MEDICAL, INC.73(Exact name of Registrant as specified in its charter)7475MINNESOTA 41-127689176(State or other jurisdiction (I.R.S. Employer77of incorporation or organization) Identification No.)7879ONE LILLEHEI PLAZA80ST. PAUL, MINNESOTA 5511781(Address of principal executive office)8283(651) 483-200084(Registrant's telephone number, including area code)8586-----------------------8788SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:8990COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS91(Title of class) (Title of class)9293NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE94(Name of exchange on which registered)9596SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE9798-----------------------99100Indicate by check mark if disclosure of delinquent filers pursuant to101Item 405 of Regulation S-K is not contained herein, and will not be contained,102to the best of the Registrant's knowledge, in definitive proxy or information103statements incorporated by reference in Part III of this Form 10-K or any104amendment to this Form 10-K. _____105106Indicate by check mark whether the Registrant: (1) has filed all107reports required to be filed by Section 13 or 15(d) of the Securities Exchange108Act of 1934 during the preceding 12 months; and (2) has been subject to such109filing requirements for the past 90 days.110111Yes __X__ No _____112113The aggregate market value of the voting stock held by non-affiliates114of the Registrant was approximately $2.1 billion at March 10, 2000, when the115closing sale price of such stock, as reported on the New York Stock Exchange,116was $25.50.117118The number of shares outstanding of the Registrant's Common Stock, $.10119par value, as of March 10, 2000, was 83,823,073 shares.120121================================================================================122123<PAGE>124125126DOCUMENTS INCORPORATED BY REFERENCE127128Portions of the Company's Annual Report to Shareholders for the129fiscal year ended December 31, 1999, are incorporated by reference in Parts I,130II and IV. Portions of the Proxy Statement dated March 27, 2000, are131incorporated by reference in Part III.132133PART I134135ITEM 1. BUSINESS136137GENERAL138St. Jude Medical, Inc., together with its subsidiaries ("St. Jude"139or the "Company") is a global leader in the development, manufacturing and140distribution of medical device products for the cardiac rhythm management,141cardiology and vascular access, and heart valve disease management markets.142143St. Jude has two reportable segments: Cardiac Rhythm Management144(CRM) and Heart Valve Disease Management (HVDM). The CRM segment, which includes145the results from the Company's Cardiac Rhythm Management Division and Daig146Division, develops, manufactures and distributes bradycardia pulse generator and147tachycardia implantable cardioverter defibrillators (ICD) systems,148electrophysiology and interventional cardiology catheters, and vascular closure149devices. The HVDM segment develops, manufactures and distributes mechanical and150tissue heart valves and valve repair products, and is in the process of151developing suture-free devices to facilitate coronary artery bypass graft152anastomoses.153154Effective September 27, 1999, St. Jude acquired Vascular Science,155Inc. ("VSI"), a development-stage company focused on the development of156suture-free devices to facilitate coronary artery bypass graft anastomoses.157158Effective March 16, 1999, St. Jude purchased the Angio-Seal business159of Tyco International Ltd. Angio-Seal develops, manufactures and distributes160hemostatic vascular closure devices.161162During 1999, the Company acquired the assets of various businesses163used in the distribution of the Company's products.164165Effective May 15, 1997, St. Jude acquired Ventritex, Inc.,166("Ventritex") a California-based manufacturer of implantable cardioverter167defibrillators and related products. ICDs are used to treat hearts that beat168inappropriately fast.169170Effective November 29, 1996, St. Jude's Pacesetter Inc. subsidiary171acquired substantially all of the assets of Telectronics Pacing Systems, Inc.172("Telectronics"), a pacemaker company, and Medtel, a distribution company in the173Asia-Pacific region. In addition to state-of-the-art pacing technologies,174Telectronics enhanced the Company's Cardiac Rhythm Management Division175operations by adding important intellectual property assets.176177Effective September 23, 1996, the Company acquired Newcor Industrial178S.A. which owned most of the assets of Biocor(R)Industria E Pesquisas Ltd., a179Brazilian manufacturer of tissue heart valves.180181Effective May 31, 1996, the Company acquired Daig Corporation182("Daig"), a Minnesota based manufacturer of specialized cardiovascular catheters183and related products for the electrophysiology and interventional cardiology184markets.185186The Company markets its products primarily in the United States,187Western Europe and Japan through both a direct employee-based sales organization188and independent distributors. In addition, St. Jude maintains geographically189based sales and marketing organizations that are responsible for1901911921193<PAGE>194195196marketing, sales and distribution of the Company's and third party products in197Eastern Europe, Africa, the Middle East, Canada, Latin America and the198Asia-Pacific region.199200Typically, the Company's net sales are somewhat higher in the first201and second quarters and lower in the third and fourth quarters. This results202from patient tendency to defer, if possible, cardiac procedures during the203summer months and from the seasonality of the U.S. and Western European markets204where summer vacation schedules normally result in fewer surgical procedures.205Independent distributors randomly place large orders which can distort the net206sales pattern noted above. In addition, new product introductions, acquisitions,207and regulatory approvals can modify the expected net sales pattern.208209In 1999, approximately 76% of net sales were derived from cardiac210rhythm management segment products, and approximately 24% from heart valve211disease management segment products. Approximately 62% of the Company's 1999 net212sales were in the U.S. market, which was slightly higher than the 1998 results.213Additional segment information is set forth in the Company's 1999 Annual Report214to Shareholders on page 41 and is incorporated herein by reference.215216CARDIAC RHYTHM MANAGEMENT217The Cardiac Rhythm Management Division ("CRMD") is headquartered in218Sylmar, California and has manufacturing facilities in California, Arizona,219South Carolina and Sweden. The Daig Division ("Daig") is headquartered and has220manufacturing facilities in Minnesota.221222CRMD pacemakers and related systems treat patients with hearts that223beat inappropriately slow, a condition known as bradycardia. ICDs and related224systems treat patients with hearts that beat inappropriately fast, a condition225known as tachycardia. Daig specialized disposable cardiovascular catheters and226related devices are used in the electrophysiology and interventional cardiology227markets.228229Typically implanted pectorally, just below the collarbone,230pacemakers monitor the heart's rate and, when necessary, deliver low-level231electrical impulses that stimulate an appropriate heartbeat. The pacemaker is232connected to the heart by one or two leads that carry the electrical impulses to233the heart and information from the heart back to the pacemaker. An external234programmer enables the physician to retrieve diagnostic information from the235pacemaker and reprogram the pacemaker in accordance with the patient's changing236needs. Single-chamber pacemakers stimulate only one chamber of the heart (atrium237or ventricle), while dual-chamber devices can sense and pace in both the upper238and lower chambers.239240CRMD's current pacing products include the January 1999 FDA approved241Affinity(R), the August 1999 FDA approved Entity(TM) and Trilogy(R) family of242pacemakers, containing the proven Omnisense(TM) activity-based sensor, and the243Tempo(TM) pacemaker family, which uses fifth-generation Minute Ventilation244sensor technology. These pacemaker families are highly automatic and contain245many advanced features and diagnostic capabilities to optimize cardiac therapy.246All are small and physiologic in shape to enhance patient comfort.247248Outside the United States, CRMD also offers single-chamber249pacemakers, the Microny(TM) SR+, and the Regency(TM) pacemaker families, which250are in clinical trials in the United States. The Affinity(R), the Entity(TM) and251Regency(TM) families of pacemakers, as well as the Microny(TM) SR+, all offer252the unique feature of AutoCapture(TM) pacing system. The AutoCapture(TM) pacing253system is a proprietary technology that enables the pacemaker to monitor every254paced beat for heart capture, deliver a back-up pulse in the event of255noncapture, continuously measure threshold, and make adjustments in energy256output to match changing patient needs.257258CRMD's current pacing leads include the active-fixation Tendril(R)259DX and SDX families and the passive-fixation Passive Plus(R) DX family which are260available worldwide, and the passive-fixation Membrane(TM) EX family which is261currently available outside the United States. All three lead families feature262steroid elution, which helps suppress the body's inflammatory response to a263foreign object, and are designed to maximize energy efficiency and promote264pacing system longevity.265266CRMD offers two pacemaker programmers, the APS(TM) III patient267management system, and the highly portable APS(TM)(mu) (micro), which allow the268physician to efficiently utilize the extensive diagnostic and therapeutic269capabilities of CRMD's pacemakers.2702712722273<PAGE>274275276CRMD's ICDs monitor the heartbeat and deliver higher energy277electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and278ventricular fibrillation (VF). In ventricular tachycardia, the lower chambers of279the heart contract at an abnormally rapid rate and typically deliver less blood280to the body's tissues and organs. VT can progress to VF, in which the heart281beats so rapidly and erratically that it can no longer pump blood. Like282pacemakers, ICDs are typically implanted pectorally, connected to the heart by283leads, and programmed non-invasively. The current CRMD ICD offerings include the284Photon(TM), Angstrom(TM) MD, Contour(R) MD and Profile(TM) MD.285286St. Jude implanted its first dual chamber ICD, the Photon(TM) DR, in287December 1999 to begin this product's clinical approval process. The Photon(TM)288DR is a dual chamber ICD, offering the features of Morphology Discrimination289(MD) and AV Rate Branch for precise arrythmia detection. In addition, the290Photon(TM) offers SVT discrimination algorithms.291292These ICDs are used with the dual electrode and single electrode TVL293and TVL-ADX (active-fix) transvenous leads, which have superior handling294characteristics and performance. The Photon(TM) DR ICD is programmable with the295APS III universal programmer. The Angstrom(TM) MD, Contour(R) MD and Profile(TM)296ICDs are currently programmable with the PR-3500 and PR-1500 programmers and297will be programmable by the APS III programmer in the fourth quarter of 2000.298299Specialized disposable cardiovascular devices, sold by Daig, include300percutaneous (through the skin) catheter introducers, diagnostic guidewires,301vascular sealing devices, electrophysiology catheters and bipolar temporary302pacing catheters (used with external pacemakers). Percutaneous catheter303introducers are used to create passageways for cardiovascular catheters from304outside the human body through the skin into a vein, artery or other location305inside the body. Daig's percutaneous catheter introducer products consist306primarily of peel-away sheaths, sheaths with and without hemostasis valves,307dilators, guidewires, repositioning sleeves, obturators and needles. All of308these products are offered in a variety of sizes and packaging configurations.309Diagnostic guidewires are used in conjunction with percutaneous catheter310introducers to aid in the introduction of intravascular catheters. Daig's311diagnostic guidewires are available in multiple lengths and incorporate a312surface finish for lasting lubricity. Vascular sealing devices are used to close313femoral artery puncture wounds following angioplasty, stenting and diagnostic314procedures.315316Electrophysiology catheters are placed into the human body317percutaneously to aid in the diagnosis and treatment of cardiac arrhythmias318(abnormal heart rhythms). Between two and five electrophysiology catheters are319generally used in each electrophysiology procedure. Daig's electrophysiology320catheters are available in multiple configurations. Bipolar temporary pacing321catheters are inserted percutaneously for temporary use (less than one hour to a322maximum of one week) with external pacemakers to provide patient stabilization323prior to implantation of a permanent pacemaker, following a heart attack, or324during surgical procedures. Daig produces and markets several designs of bipolar325temporary pacing catheters.326327HEART VALVE DISEASE MANAGEMENT328The Heart Valve Division (HVD) is headquartered in St. Paul,329Minnesota and has manufacturing facilities in Minnesota, Puerto Rico, Canada and330Brazil. Heart valve replacement or repair may be necessary because the natural331heart valve has deteriorated due to congenital defects or disease. Heart valves332facilitate the one-way flow of blood in the heart and prevent significant333backflow of blood into the heart and between the heart's chambers.334335HVD offers both mechanical and tissue replacement heart valves and336valve repair products. The St. Jude Medical(R) mechanical heart valve has been337implanted in over one million patients to date. The SJM Regent(TM) mechanical338heart valve was approved for sale in Europe in December 1999 and is currently in339a clinical trial in the United States. The Company markets the Toronto SPV(R)340stentless tissue valve, the world's leading stentless tissue valve and the341SJM(R) Biocor(TM) tissue valve. The Company received FDA approval for the U.S.342market release of the Toronto SPV(R) in November 1997 at which time the product343was launched and physician training commenced. The SJM Epic(TM) tissue heart344valve received European regulatory approval in late 1998 and was launched in345Europe in 1999. On January 21, 2000 the Company discontinued sales of HVD346products, including heart valves, with Silzone(R) cuffs3473483493350<PAGE>351352353due to a higher incidence of perivalvular leak associated with this product in a354clinical study. The Company also recalled unimplanted inventory of this product.355356Annuloplasty rings are prosthetic devices used to repair diseased or357damaged mitral heart valves. The Company has executed a license agreement with358Professor Jacques Seguin to manufacture and market an advanced semi-rigid359annuloplasty ring. The SJM(R) Seguin annuloplasty ring was cleared by the FDA360for U.S. release during first quarter 1997. The SJM Tailor(TM) annuloplasty ring361received worldwide regulatory approvals in late 1998 and was launched worldwide362in early 1999.363364HVD has also entered into other relationships to provide additional365products and services for heart valve disease management, including:3663671) An agreement with LifeNet Transplant Services which enables HVD to368assist in the marketing of human donated allograft heart valves.3692) An alliance with Boehringer Mannheim Corporation which provides370valve patients the opportunity to use a home test kit for measuring371anticoagulation levels.372373SUPPLIERS374The Company purchases raw materials and other items from numerous375suppliers for use in its products. For certain materials that the Company376believes are critical and may be difficult to obtain an alternative supplier,377the Company maintains sizable inventories of up to three years of its projected378requirements for certain materials, some of which are available only from a379single supplier. The Company has been advised from time to time that certain of380these suppliers may terminate sales of products to customers that manufacture381implantable medical devices in an effort to reduce their potential products382liability exposure. Some of these suppliers have modified their positions and383have indicated a willingness to either temporarily continue to provide product384until such time as an alternative vendor or product can be qualified or to385reconsider the supply relationship. While the Company believes that alternative386sources of raw materials are available and that there is sufficient lead time in387which to qualify such other sources, any supply interruption could have a388material adverse effect on the Company's ability to manufacture its products.389390COMPETITION391Within the medical device industry, competitors range from small392start-up companies to companies with significant resources. The Company's393customers consider many factors when choosing supplier partners including394product reliability, clinical outcomes, product availability, inventory395consignment, price and product services provided by the manufacturer. Market396share can shift as a result of technological innovation, product recalls and397product safety alerts, as well as other business factors. This emphasizes the398need to provide the highest quality products and services. St. Jude expects the399competition to continue to increase by using tactics such as consigned400inventory, bundled product sales and reduced pricing.401402CRMD has traditionally been a technological leader in the403bradycardia pacemaker market. The Company has strong bradycardia market share404positions in all major developed markets. There are three principal405manufacturers and suppliers of ICDs. This is a rapidly growing and highly406competitive market. Two of the competitors account for more than 80% of the407worldwide ICD sales. These two competitors are larger than the Company and have408invested substantial amounts in ICD research and development. The market areas409Daig focuses on are the cardiac catheterization laboratories and the410electrophysiology laboratories throughout the world. These are growing markets411with numerous competitors.412413The Company is the world's leading manufacturer and supplier of414mechanical heart valves. There are two other principal and several other smaller415mechanical heart valve manufacturers. The Company competes against two principal416and a large number of other smaller tissue heart valve manufacturers.417418The medical device market is a dynamic market currently undergoing419significant change due to cost of care considerations, regulatory reform,420industry consolidation and customer consolidation. The ability to provide cost421effective clinical outcomes is becoming increasingly more important for medical422device manufacturers.4234244254426<PAGE>427428429MARKETING430The Company's products are sold in over 100 countries throughout the431world. No distributor organization or single customer accounted for more than43210% of 1999, 1998 and 1997 net sales.433434In the United States, St. Jude sells directly to hospitals through a435combination of independent distributors and an employee based sales organization436for its pacemaker products and through employee based sales organizations for437its heart valve and catheter products. In Western Europe, the Company has an438employee based sales organization selling in 14 countries. Throughout the rest439of the world the Company uses a combination of independent distributor and440direct sales organizations.441442Group purchasing organizations (GPOs) in the U.S. continue to443consolidate the purchasing for some of the Company's customers. Several such444GPOs have executed contracts with the Company's CRM market competitors which445exclude the Company. These contracts, if enforced, may adversely affect the446Company's sales of CRM products to members of these GPOs.447448Payment terms worldwide are consistent with local practice. Orders449are shipped as they are received and, therefore, no material back orders exist.450451RESEARCH AND DEVELOPMENT452The Company is focused on the development of new products and453improvements to existing products. In addition, research and development expense454reflects the Company's efforts to obtain FDA approval of certain products and455processes and to maintain the highest quality standards of existing products.456The Company's research and development expenses, exclusive of in-process457purchased research and development, were $125,059,000 (11.2% of net sales),458$99,756,000 (9.8%) and $104,693,000 (10.5%) in 1999, 1998 and 1997,459respectively.460461GOVERNMENT REGULATION462The medical devices manufactured and marketed by the Company are463subject to regulation by the FDA and, in some instances, by state and foreign464governmental authorities. Under the U.S. Federal Food, Drug and Cosmetic Act465(the "Act"), and regulations thereunder, manufacturers of medical devices must466comply with certain policies and procedures that regulate the composition,467labeling, testing, manufacturing, packaging and distribution of medical devices.468Medical devices are subject to different levels of government approval469requirements, the most comprehensive of which requires the completion of an FDA470approved clinical evaluation program and submission and approval of a pre-market471approval ("PMA") application before a device may be commercially marketed. The472Company's mechanical and tissue heart valves, implantable cardioverter473defibrillators, certain pacemakers and leads and certain electrophysiology474catheter applications are subject to this level of approval or as a supplement475to a PMA approval. Other pacemakers and leads, annuloplasty ring products and476other electrophysiology and interventional cardiology products are currently477marketed under the 510(k) pre-market notification procedure of the Act.478479In addition, the FDA may require testing and surveillance programs480to monitor the effect of approved products which have been commercialized and it481has the power to prevent or limit further marketing of a product based on the482results of these post-marketing programs. The FDA also conducts inspections483prior to approval of a PMA to determine compliance with the quality system484regulations which covers manufacturing and design and may, at any time after485approval of a PMA or granting of a 510(K), conduct periodic inspections to486determine compliance with both good manufacturing practice regulations and/or487current medical device reporting regulations. If the FDA were to conclude that488St. Jude was not in compliance with applicable laws or regulations, it could489institute proceedings to detain or seize products, issue a recall, impose490operating restrictions, assess civil penalties and recommend criminal491prosecution to the Department of Justice. Furthermore, the FDA could proceed to492ban, or request recall, repair, replacement or refund of the cost of, any device493manufactured or distributed.494495The FDA also regulates record keeping for medical devices and496reviews hospital and manufacturers' required reports of adverse experiences to497identify potential problems with FDA authorized devices. Aggressive regulatory498action may be taken due to adverse experience reports.4995005015502<PAGE>503504505Diagnostic-related groups ("DRG") reimbursement schedules regulate506the amount the United States government, through the Health Care Financing507Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient508care of persons covered by Medicare. In response to rising Medicare and Medicaid509costs, several legislative proposals have been advanced which would restrict510future funding increases for these programs. While the Company has been unaware511of significant domestic price resistance directly as a result of DRG512reimbursement policies, changes in current DRG reimbursement levels could have513an adverse effect on its domestic pricing flexibility.514515St. Jude Medical's business outside the United States is subject to516medical device laws in individual foreign countries. These laws range from517extensive device approval requirements in some countries for all or some of the518Company's products to requests for data or certifications in other countries.519Generally, regulatory requirements are increasing in these countries. In the520European Economic Community ("EEC"), the regulatory systems have been harmonized521and approval to market in EEC countries (the CE Mark) can be obtained through522one agency. In addition, government funding of medical procedures is limited and523in certain instances being reduced.524525The Office of the Inspector General (the "OIG") of the United States526Department of Health and Human Services ("HHS") is currently conducting an527investigation regarding possible hospital submissions of improper claims to528Medicare/Medicaid programs for reimbursement for procedures using cardiovascular529medical devices that were not approved for marketing by the FDA at the time of530use. Beginning in June 1994, approximately 130 hospitals received subpoenas from531HHS seeking information with respect to reimbursement for procedures using532cardiovascular medical devices (including certain products manufactured by the533Company) that were subject to investigational exemptions or that may not have534been approved for marketing by the FDA at the time of use. The subpoenas also535sought information regarding various types of remuneration, including payments,536gifts, stock and stock options, received by the hospital or its employees from537manufacturers of medical devices. Civil and criminal sanctions may be imposed538against any person participating in an improper claim for reimbursement under539Medicare/Medicaid. The OIG's investigation and any related change in540reimbursement practices may discourage hospitals from participating in clinical541trials or from including Medicare and Medicaid patients in clinical trials,542which could lead to increased costs in the development of new products. St. Jude543is unable to predict the outcome of this matter or when it will be resolved.544There can be no assurance that the OIG's investigation or any changes in545third-party payors' reimbursement practices will not materially adversely affect546the medical device industry in general or the Company in particular. In 1995,547HCFA, part of HHS, issued a regulation clarifying that certain medical devices548subject to investigational requirements under the Act may qualify for549reimbursement. In April 1996, a Federal District Court in California declared550the HCFA's governmental guidelines, denying reimbursement for investigational551devices, to be invalid. After an appeal, the district court has again found the552regulation invalid and the government has appealed again. There can be no553assurance that the OIG's investigation or any resulting or related changes in554third-party payors' reimbursement practices will not materially adversely affect555the medical device industry in general or St. Jude Medical in particular.556557In 1994 the predecessor organization to Pacesetter entered a consent558decree which settled a lawsuit brought by the United States in U.S. District559Court for the District of New Jersey. The consent decree which remains in effect560indefinitely requires that Pacesetter comply with the FDA's good manufacturing561practice regulations and identifies several specific provisions of those562regulations. The consent decree provides for FDA inspections and that Pacesetter563is obligated to pay certain costs of the inspections.564565In May 1995 Telectronics and its President entered into a consent566decree with the FDA. The consent decree which remains in effect indefinitely567requires that Telectronics comply with the FDA's good manufacturing practice568regulations and identifies several specific provisions of those regulations. The569consent decree provides for FDA inspections and that Telectronics is obligated570to pay certain costs of the inspections.571572In 1994 a state prosecutor in Germany began an investigation of573allegations of corruption in connection with the sale of heart valves. As part574of that investigation, the prosecutor seized documents from St. Jude's offices575in Germany as well as documents from certain competitors' offices. The576investigation is continuing and has been broadened to include other medical577devices. Subsequently, in5785795806581<PAGE>5825835841996 the United States Securities and Exchange Commission issued a formal order585of private investigation covering sales practices in Europe of St. Jude and586other manufacturers.587588PATENTS AND LICENSES589The Company's policy is to protect its intellectual property rights590related to its medical devices. Where appropriate, St. Jude applies for United591States and foreign patents. In those instances where the Company has acquired592technology from third parties, it has sought to obtain rights of ownership to593the technology through the acquisition of underlying patents or licenses.594595While the Company believes design, development, regulatory and596marketing aspects of the medical device business represent the principal597barriers to entry into such business, it also recognizes that its patents and598license rights may make it more difficult for its competitors to market products599similar to those produced by the Company. St. Jude can give no assurance that600any of its patent rights, whether issued, subject to license or in process, will601not be circumvented or invalidated. Further, there are numerous existing and602pending patents on medical products and biomaterials. There can be no assurance603that the Company's existing or planned products do not or will not infringe such604rights or that others will not claim such infringement. The Company's principal605patent covering its mechanical heart valve expired in the United States in July6061998. No assurance can be given that the Company will be able to prevent607competitors from challenging the Company's patents or entering markets currently608served by the Company.609610INSURANCE611The medical device industry has historically been subject to612significant products liability claims. Such claims could be asserted against the613Company in the future for events not known to management at this time.614Management has adopted risk management practices, including products liability615insurance coverage, which management believes are prudent.616617California earthquake insurance is currently difficult to procure,618extremely costly, and restrictive in terms of coverage. The Company's earthquake619and related business interruption insurance for its operations located in Sylmar620and Sunnyvale, California does provide for limited coverage above a significant621self-insured retention. There are several factors that preclude the Company from622determining the effect an earthquake may have on its business. These factors623include, but are not limited to, the severity and location of the earthquake,624the extent of any damage to the Company's manufacturing facilities, the impact625of such an earthquake on the Company's California workforce and the626infrastructure of the surrounding communities, and the extent, if any, of damage627to the Company's inventory and work in process. While the Company's exposure to628significant losses occasioned by a California earthquake would be partially629mitigated by its ability to manufacture certain of the CRMD products at its630Swedish manufacturing facility, any such losses could have a material adverse631effect on the Company, the duration of which cannot be reasonably predicted. The632Company has expanded the manufacturing capabilities at its Swedish facility and633has constructed a pacemaker component manufacturing facility in Arizona. In634addition, the Company has moved significant finished goods inventory to635locations outside California. These facilities and inventory transfers would636further mitigate the adverse impact of a California earthquake.637638EMPLOYEES639As of December 31, 1999, the Company had 4,379 full-time employees.640It has never experienced a work stoppage as a result of labor disputes and none641of its employees are represented by a labor organization, with the exception of642the Company's Swedish employees and certain employees in France.643644INTERNATIONAL OPERATIONS645The Company's foreign business is subject to such special risks as646exchange controls, currency devaluation, the imposition or increase of import or647export duties and surtaxes, and international credit or financial problems.648Currency exchange rate fluctuations vis-a-vis the U.S. dollar can affect649reported net earnings. The Company attempts to hedge a portion of this exposure650to reduce the effect of foreign currency rate fluctuations on net earnings. See651the "Market Risk" section of Management's Discussion6526536547655<PAGE>656657658and Analysis of Results of Operations and Financial Condition", incorporated by659reference to St. Jude's 1999 Annual Report to Shareholders. Operations outside660the United States present complex tax and cash management issues that661necessitate sophisticated analysis and diligent monitoring to meet the Company's662financial objectives.663664ITEM 2. PROPERTIES665666St. Jude Medical's principal executive offices are owned and are667located in St. Paul, Minnesota. Manufacturing facilities are located in668California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and669Sweden. Approximately 59%, or 343,000 square feet, of the total manufacturing670space is owned by the Company and the balance is leased.671672The Company also maintains sales and administrative offices inside673the United States at 12 locations in 5 states and outside the United States at67436 locations in 23 countries. With the exception of one location, all of these675locations are leased.676677In management's opinion, all buildings, machinery and equipment are678in good condition, suitable for their purposes and are maintained on a basis679consistent with sound operations. Currently the Company is using substantially680all of its available space to develop, manufacture and market its products.681682ITEM 3. LEGAL PROCEEDINGS683684GUIDANT LITIGATION685On November 26, 1996, Guidant Corporation (a competitor of686Pacesetter and Ventritex) ("Guidant") and related parties filed a lawsuit687against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc.688("Pacesetter"), Ventritex, Inc. ("Ventritex") and certain members of the689Telectronics Group in State Superior Court in Marion County, Indiana (the690"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant691to an agreement entered into in 1993, certain Guidant parties granted Ventritex692intellectual property licenses relating to cardiac stimulation devices, and that693such licenses would terminate upon the consummation of the merger of Ventritex694into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an695agreement entered into in 1994 (the "Telectronics Agreement"), certain Guidant696parties granted the Telectronics Group intellectual property licenses relating697to cardiac stimulation devices. The lawsuit seeks declaratory and injunctive698relief, among other things, to prevent and invalidate the transfer of the699Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition700of Telectronics' assets (the "Telectronics Acquisition") and the application of701license rights granted under the Telectronics Agreement to the manufacture and702sale by Pacesetter of Ventritex's products following the consummation of the703Merger. The court overseeing this case issued a stay of this matter in July 1998704so that the issues could be addressed in an arbitration requested by the705Telectronics Group and Pacesetter.706707Guidant and related parties also filed suit against St. Jude708Medical, Pacesetter and Ventritex on November 26, 1996 in the United States709District Court for the Southern District of Indiana. This second lawsuit seeks710(i) a declaratory judgment that Pacesetter's manufacture, use or sale of cardiac711stimulation devices of the type or similar to the type which Ventritex712manufactured and sold at the time the Guidant parties filed their complaint713would, upon consummation of the Merger, be unlicensed and constitute an714infringement of patent rights owned by certain Guidant parties, (ii) to enjoin715the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of716cardiac stimulation devices of the type which Ventritex manufactured at the time717the Guidant parties filed their complaint, and (iii) certain damages and costs.718This second lawsuit was stayed by the court in July 1998 given the order to719arbitrate which is mentioned below.720721St. Jude Medical and Pacesetter believe that the foregoing state and722federal court complaints contain a number of significant factual inaccuracies723concerning the Telectronics Acquisition and the terms and effects of the various724intellectual property license agreements referred to in such complaints. For725these reasons and others, St. Jude Medical and Pacesetter believe that the726allegations set forth in the complaints are without merit. St. Jude Medical and727Pacesetter have vigorously defended their interests in these cases, and will728continue to do so.7297307318732<PAGE>733734735As a result of the state and federal lawsuits brought by Guidant and736related parties, the Telectronics Group and Pacesetter filed a lawsuit in the737United States District Court for the District of Minnesota seeking (i) a738declaratory judgment that the Guidant parties' claims, as reflected in the739Telectronics Action, are subject to arbitration pursuant to the arbitration740provisions of the Telectronics Agreement, (ii) an order that the defendants741arbitrate their claims against the Telectronics Group and Pacesetter in742accordance with the arbitration provisions of the Telectronics Agreement, (iii)743to enjoin the defendants preliminarily and permanently from litigating their744dispute with the Telectronics Group and Pacesetter in any other forum, and (iv)745certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal in746favor of the Telectronics Group and Pacesetter in May 1998, the United States747District Court for the District of Minnesota issued an order on July 8, 1998748directing the arbitration requested by the Telectronics Group and Pacesetter to749proceed.750751An arbitrator for the arbitration has been selected by the parties.752The arbitrator has issued some interim rulings, including that Pacesetter and753St. Jude Medical should not participate in the initial arbitration proceeding754concerning whether the Telectronics Agreement transferred to Pacesetter. The755Telectronics Group and the Guidant parties will be involved in this initial756arbitration proceeding. Although the arbitration proceeding was scheduled to757begin in March 2000, the arbitrator postponed the proceeding. No order has been758issued to date concerning when the arbitration will be held.759760In the federal court lawsuit in Indiana which has been stayed761pending the result of the above-described arbitration, Guidant asserted patent762infringement claims against St. Jude Medical and its Pacesetter, Inc. subsidiary763involving four separate patents. One of these patents expired May 3, 1998. The764other patents involved expire March 7, 2001, February 25, 2003 and December 22,7652003. Although Guidant has requested injunctive relief and damages as part of766the federal court lawsuit, the request for an injunction would be barred for any767expired patent, but Guidant's claims for damages for the period prior to768expiration could still be asserted if Guidant's claims for infringement remain769after the arbitration is completed.770771In connection with the three patents that have yet to expire, a772third party initiated a Reexamination Request in the U.S. Patent Office. The773Patent Office Reexamination Action resulted in the preliminary rejection of all774of the claims in two of the unexpired patents. With respect to the third775unexpired patent, the Patent Office preliminarily rejected some of the claims in776the patent and upheld others. It is the Company's understanding that Guidant is777in the process of responding to the Patent Examiner's preliminary position as778part of its Reexamination procedure. If the Patent Examiner maintains his779position, we believe that Guidant will appeal the adverse rulings by the Patent780Office concerning these three patents, a process that typically takes between781six and twelve months.782783IRS LITIGATION784The Company and the Internal Revenue Service ("IRS") are in Tax785Court over tax deficiency notices totaling $16.4 million for the tax periods7861990-1991. The Company is refuting the IRS deficiency and has asserted that in787fact the Company is owed a refund. The trial for this matter is currently788scheduled to begin in June 2000. In addition, the IRS has proposed adjustments789totaling $41.8 million in additional taxes related to the Company's 1992-1994790income tax returns. The Company is disputing these adjustments, however,791resolution of these matters is stayed pending resolution of the 1990-1991792litigation. Management believes that the IRS will propose a similar adjustment793of approximately $15.5 million for 1995. The issues raised by the IRS relate794primarily to the Company's Puerto Rican operations. Management is vigorously795contesting these adjustments and expects that the ultimate resolution will not796have material adverse effect on the Company's financial position or liquidity,797but could potentially be material to the net earnings of a particular future798period if resolved unfavorably.799800OTHER LITIGATION AND PROCEEDINGS801The Company is unaware of any other pending legal proceedings which802it regards as likely to have a material adverse effect on its business.803804ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS805806There were no matters submitted to a vote of security holders during807the fourth quarter of 1999.8088098109811<PAGE>812813814ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY815816Name Age Position*817- ------------------------- --- --------------------------------------------818Ronald A. Matricaria 57 Chairman of the Board of Directors (1999)819820Terry L. Shepherd 47 President and Chief Executive Officer (1999)821822Daniel J. Starks 45 Chief Executive Officer, Cardiac Rhythm823Management Division (1997)824825Steven J. Healy 42 President, Heart Valve Division (1999)826827Michael J. Coyle 37 President, Daig Division (1997)828829Kevin T. O'Malley, Esq. 48 Vice President and General Counsel (1994)830831John C. Heinmiller 45 Vice President, Finance and Chief Financial832Officer (1998)833834George J. Fazio 40 President, Health Care Services (1999)835836Robert Cohen 42 Vice President Business & Technology837Development (1998)838839Peter L. Gove 52 Vice President, Corporate Relations (1994)840841Frieda J. Valk 46 Vice President, Administration (1999)842843- -----------------------844*Dates in brackets indicate period during which the named executive officers845began serving in such capacity.846847Executive officers serve at the pleasure of the Board of Directors.848849Mr. Matricaria's business experience is set forth in the Company's850definitive Proxy Statement dated March 27, 2000 under the section "Election of851Directors." The information is incorporated herein by reference.852853Mr. Shepherd's business experience is set forth in the Company's854definitive Proxy Statement dated March 27, 2000 under the section "Election of855Directors." The information is incorporated herein by reference.856857Mr. Stark's business experience is set forth in the Company's858definitive Proxy Statement dated March 27, 2000 under the section "Election of859Directors." The information is incorporated herein by reference.860861Mr. Healy first joined the Company in 1983 as a Heart Valve Division862sales representative. In 1999 he was appointed as the President, Heart Valve863Division. From 1996 to 1999, Mr. Healy was the Vice President of Sales and864Marketing for the Heart Valve Division. He served as the Heart Valve Division's865Vice President of Marketing from 1993 to 1996.866867Mr. Coyle joined St. Jude Medical in 1994 as Director, Business868Development and was appointed as the President and Chief Operating Officer of869Daig in 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly &870Company in a variety of technical and business management roles in both its871Pharmaceutical and Medical Device Divisions.872873Mr. O'Malley joined the Company in 1994 as Vice President and874General Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli875Lilly & Company for 15 years in various positions including his last position of876General Counsel of the Medical Device and Diagnostics Division.877878Mr. Heinmiller joined the Company in 1998 as Vice President of879Corporate Business Development. In September 1998 he was appointed Vice880President, Finance and Chief Financial Officer. Prior to joining the Company,881Mr. Heinmiller was president of F3 Corporation, a privately held asset882management company, and was vice president of finance and administration for883Daig Corporation. Mr. Heinmiller is also a former audit partner in the884Minneapolis office of Grant Thornton LLP, a national public accounting firm,885where he managed the firm's relationship with a number of clients. Mr.886Heinmiller is a director of Lifecore Biomedical, Inc., Arctic Cat, Inc. and887former director of Daig Corporation.888889Mr. Fazio joined St. Jude in 1992 as a Heart Valve Division890territory sales representative. In 1999, he was appointed as the President,891Healthcare Services. From 1997 to 1999 Mr. Fazio served as the General Manager892of Canada.893894Mr. Cohen joined the Company in 1998 as Vice President, Business &895Technology Development. Prior to joining the Company, he was employed by Sulzer896Medica. During his 16-year career in the89789889910900<PAGE>901902903medical device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI904Medical, an investment firm focused on the medical technology industry.905906Mr. Gove joined the Company in 1994 as Vice President, Corporate907Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing908and Communications of Control Data Systems, Inc., a computer services company,909from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions910with Control Data Corporation. From 1970 to 1981, Mr. Gove held various911management positions with the State of Minnesota and the U.S. Government.912913Mrs. Valk joined the Company in 1996 as Human Resources Director of914St. Jude Medical Europe. She was appointed as Vice President, Administration in9151999. Prior to joining the Company, Mrs. Valk was employed by Eli Lilly &916Company for sixteen years in various positions including pharmaceutical sales,917sales management, sales training and human resources.918919PART II920921ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS922923The information set forth under the captions "Dividends" and "Stock924Exchange Listings" on pages 28 and 44 of the Company's 1999 Annual Report to925Shareholders is incorporated herein by reference.926927ITEM 6. SELECTED FINANCIAL DATA928929The information set forth under the caption "Five Year Summary930Financial Data" on page 43 of the Company's 1999 Annual Report to Shareholders931is incorporated herein by reference.932933ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND934FINANCIAL CONDITION935936The information set forth under the caption "Management's Discussion937and Analysis of Results of Operations and Financial Condition" on pages 23938through 28 of the Company's 1999 Annual Report to Shareholders is incorporated939herein by reference.940941ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK942943The information appearing under the caption "Market Risk" on pages94426 and 27 of the Company's 1999 Annual Report to shareholders is incorporated945herein by reference.946947ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA948949The following Consolidated Financial Statements of the Company and950Report of Independent Auditors set forth on pages 29 through 42 of the Company's9511999 Annual Report to Shareholders are incorporated herein by reference:952953Consolidated Statements of Earnings - Fiscal Years ended December95431, 1999, 1998 and 1997955956Consolidated Balance Sheets - December 31, 1999 and 1998957958Consolidated Statements of Shareholders' Equity - Fiscal Years ended959December 31, 1999, 1998, and 1997960961Consolidated Statements of Cash Flows - Fiscal Years ended December96231, 1999, 1998 and 1997963964Notes to Consolidated Financial Statements965966ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND967FINANCIAL DISCLOSURE968969None.97097197211973<PAGE>974975976PART III977978ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT979980The information set forth under the caption "Election of Directors"981in the Company's definitive Proxy Statement dated March 27, 2000, is982incorporated herein by reference. Information on executive officers is set forth983in Part I, Item 4A hereto.984985ITEM 11. EXECUTIVE COMPENSATION986987The information set forth under the caption "Executive Compensation988and Other Information" and "Election of Directors" in the Company's definitive989Proxy Statement dated March 27, 2000, is incorporated herein by reference.990991ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT992993The information set forth under the caption "Security Ownership of994Certain Beneficial Owners and Named Executive Officers" and "Election of995Directors" in the Company's definitive Proxy Statement dated March 27, 2000, is996incorporated herein by reference.997998ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS9991000The information set forth under the caption "Election of Directors"1001in the Company's definitive Proxy Statement dated March 27, 2000, is1002incorporated herein by reference.10031004PART IV10051006ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K10071008(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT10091010(1) FINANCIAL STATEMENTS10111012The following Consolidated Financial Statements of the Company1013and Report of Independent Auditors as set forth on pages 291014through 42 of the Company's 1999 Annual Report to Shareholders1015are incorporated herein by reference:10161017Consolidated Statements of Earnings - Fiscal Years ended1018December 31, 1999, 1998 and 199710191020Consolidated Balance Sheets - December 31, 1999 and 199810211022Consolidated Statements of Shareholders' Equity - Fiscal Years1023ended December 31, 1999, 1998, and 199710241025Consolidated Statements of Cash Flows - Fiscal Years ended1026December 31, 1999, 1998 and 199710271028Notes to Consolidated Financial Statements10291030(2) FINANCIAL STATEMENT SCHEDULE10311032The following financial statement schedule is filed as part of1033this Form 10-K Annual Report:10341035SCHEDULE PAGE1036NUMBER DESCRIPTION NUMBER1037-------- -------------------------------------------- ------1038II Valuation and Qualifying Accounts 1610391040The report of the Company's Independent Auditors with respect to1041the financial statement schedule is incorporated herein by1042reference to Exhibit 23 attached hereto.10431044All other financial statements and schedules not listed have been1045omitted because the required information is included in the consolidated1046financial statements or the notes thereto, or is not applicable.104710481049121050<PAGE>10511052(3) EXHIBITS10531054PAGE1055EXHIBIT EXHIBIT INDEX NUMBER1056--------- ---------------------------------------------- ------10573.1 Articles of Incorporation as amended on ---1058September 5, 1996, are incorporated by1059reference to Exhibit 3.2 of the Company's Form106010-K filed on March 27, 1997.106110623.2 Bylaws are incorporated by reference to ---1063Exhibit 3(ii) of the Company's Form 10-Q filed1064on November 10, 1997.106510664.1 Rights Agreement dated as of June 16, 1997, ---1067between the Company and American Stock1068Transfer and Trust Company, as Rights Agent1069including the Certificate of Designation,1070Preferences and Rights of Series B Junior1071Preferred Stock is incorporated by reference1072to Exhibit 4 of the Company's Form 10-Q dated1073August 12, 1997.107410754.2 Indenture dated as of August 21, 1996, between ---1076the Company and State Street Bank and Trust1077Company, as Trustee is incorporated by1078reference to Ventritex's Form S-3/A (no.1079333-07651) filed on August 2, 1996.1080108110.1 Employment letter dated as of March 9, 1993, ---1082between the Company and Ronald A. Matricaria1083is incorporated by reference to Exhibit 10.11084of the Company's Form 10-K Annual Report for1085the year ended December 31, 1993.*1086108710.2 Employment letter dated as of November 8, ---10881996, between the Company to Ronald A.1089Matricaria is incorporated by reference to1090Exhibit 10.2 of the Company's Form 10-K Annual1091Report for the year ended December 31, 1998.*1092109310.3 Employment letter dated as of February 23, ---10941999, between the Company and Ronald A.1095Matricaria is incorporated by reference to1096Exhibit 10.13 of the Company's Form 10-K1097Annual Report for the year ended December 31,10981998.*1099110010.4 Employment Agreement effective as of May 5, ---11011999 between the Company and Terry L. Shepherd1102is incorporated by reference to Exhibit 10.151103of the Company's Form 10-K Annual Report for1104the year ended December 31, 1998.*1105110610.5 Form of Indemnification Agreement that the ---1107Company has entered into with officers and1108directors. Such agreement recites the1109provisions of Minnesota Statutes Section1110302A.521 and the Company's Bylaw provisions1111(which are substantially identical to the1112Statute) and is incorporated by reference to1113Exhibit 10(d) of the Company's Form 10-K1114Annual Report for the year ended December 31,11151986.*1116111710.6 Form of Employment Agreement that the Company ---1118has entered into with officers relating to1119severance matters in connection with a change1120in control is incorporated by reference to1121Exhibit 10.2 of the Company's Form 10-K Annual1122Report for the year ended December 31, 1998.*1123112410.7 The Management Incentive Compensation Plan is ---1125incorporated by reference to Appendix A of the1126Company's definitive Proxy Statement dated1127March 26, 1999.*1128112910.8 Management Savings Plan dated February 1, ---11301995, is incorporated by reference to Exhibit113110.7 of the Company's Form 10-K Annual Report1132for the year ended December 31, 1994.*113311341135131136<PAGE>113711381139PAGE1140EXHIBIT EXHIBIT INDEX NUMBER1141--------- ---------------------------------------------- ------114210.9 Retirement Plan for members of the Board of ---1143Directors as amended on March 15, 1995, is1144incorporated by reference to Exhibit 10.6 of1145the Company's Form 10-K Annual Report for the1146year ended December 31, 1994.*1147114810.10 The St. Jude Medical, Inc. 1992 Employee Stock ---1149Purchase Savings Plan is incorporated by1150reference to the Company's Form S-81151Registration Statement dated June 10, 1992,1152(Commission File No. 33-48502).1153115410.11 The St. Jude Medical, Inc. 1991 Stock Plan is ---1155incorporated by reference to the Company's1156Form S-8 Registration Statement dated June 28,11571991 (Commission File No. 33-41459).*1158115910.12 The St. Jude Medical, Inc. 1994 Stock Option ---1160Plan is incorporated by reference to the1161Company's Form S-8 Registration Statement1162dated July 1, 1994 (Commission File No.116333-54435).*1164116510.13 The St. Jude Medical Inc. 1997 Stock Option ---1166Plan is incorporated by reference to the1167Company's Form S-8 Registration Statement1168dated December 22, 1997 (Commission File No.1169333-42945).*1170117110.14 A Split Dollar Insurance Agreement as amended ---1172April 29, 1999 between St. Jude Medical, Inc.1173and Ronald A. and Lucille E. Matricaria.1174117513 Portions of the 1999 Annual Report to ---1176Shareholders are incorporated by reference in1177this Form 10-K Annual Report.1178117921 Subsidiaries of the Company ---1180118123 Consent of Independent Auditors ---1182118327 Financial Data Schedule ---11841185- ----------------------------1186* Management contract or compensatory plan or arrangement.11871188(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 19991189No reports on Form 8-K were filed by the Company during the fourth1190quarter of 1999.11911192(c) EXHIBITS: Reference is made to Item 14(a)(3).11931194(d) SCHEDULES: Reference is made to Item 14(a)(2).11951196For the purposes of complying with the amendments to the rules1197governing Form S-8 under the Securities Act of 1933, the undersigned Company1198hereby undertakes as follows, which undertaking shall be incorporated by1199reference into the Company's Registration Statements of Form S-8 Nos. 33-92621200(filed October 3, 1986), 33-41459 (filed June 28, 1991), 33-48502 (filed June120110, 1992), 33-54435 (filed July 1, 1994) and 333-42945 (filed December 22,12021997):12031204Insofar as indemnification for liabilities arising under1205the Securities Act of 1933 may be permitted to directors, officers1206and controlling persons of the Company pursuant to the foregoing1207provisions, or otherwise, the Company has been advised that, in the1208opinion of the Securities and Exchange Commission, such1209indemnification is against public policy as expressed in the1210Securities Act of 1933 and is, therefore, unenforceable. In the1211event that a claim for indemnification against such liabilities1212(other than the payment by the Company of expenses incurred or paid1213by a director, officer or controlling person of the Company in the1214successful defense of any action, suit or proceeding) is asserted by1215such director, officer or controlling person in connection with the1216securities being registered, the Company will, unless in the opinion1217of its counsel the matter has been settled by controlling precedent,1218submit to a court of appropriate jurisdiction the question whether1219such indemnification by it is against public policy as expressed in1220the Act and will be governed by the final adjudication of such1221issue.122212231224141225<PAGE>122612271228SIGNATURES12291230Pursuant to the requirements of Sections 13 or 15(d) of the1231Securities Exchange Act of 1934, the Registrant has duly caused this report to1232be signed on its behalf by the undersigned, thereunto duly authorized.123312341235ST. JUDE MEDICAL, INC.123612371238Date: March 27, 2000 By /s/ TERRY L. SHEPHERD1239----------------------1240Terry L. Shepherd1241PRESIDENT AND CHIEF EXECUTIVE OFFICER1242(PRINCIPAL EXECUTIVE OFFICER)12431244By /s/ JOHN C. HEINMILLER1245-----------------------1246John C. Heinmiller1247VICE PRESIDENT, FINANCE AND1248CHIEF FINANCIAL OFFICER1249(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)12501251Pursuant to the requirements of the Securities Exchange Act of 1934,1252this report has been signed below by the following persons on behalf of the1253Registrant and in the capacities and on the date indicated.12541255/s/ RONALD A. MATRICARIA Director March 27, 20001256- ------------------------------1257Ronald A. Matricaria12581259/s/ LOWELL C. ANDERSON Director March 27, 20001260- ------------------------------1261Lowell C. Anderson12621263/s/ TERRY L. SHEPHERD Director March 27, 20001264- ------------------------------1265Terry L. Shepherd12661267/s/ STUART M. ESSIG Director March 27, 20001268- ------------------------------1269Stuart M. Essig12701271/s/ THOMAS H. GARRETT III Director March 27, 20001272- ------------------------------1273Thomas H. Garrett III12741275/s/ WALTER F. MONDALE Director March 27, 20001276- ------------------------------1277Walter F. Mondale12781279/s/ WALTER L. SEMBROWICH Director March 27, 20001280- ------------------------------1281Walter L. Sembrowich12821283/s/ DANIEL J. STARKS Director March 27, 20001284- ------------------------------1285Daniel J. Starks12861287/s/ ROGER G. STOLL Director March 27, 20001288- ------------------------------1289Roger G. Stoll12901291/s/ DAVID A. THOMPSON Director March 27, 20001292- ------------------------------1293David A. Thompson12941295/s/ GAIL R. WILENSKY Director March 27, 20001296- ------------------------------1297Gail R. Wilensky129812991300151301<PAGE>130213031304ST. JUDE MEDICAL, INC. AND SUBSIDIARIES13051306SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS1307(DOLLARS IN THOUSANDS)13081309<TABLE>1310<CAPTION>1311COL. A COL. B COL. C COL. D COL. E1312- ------------------------------------- ------------ -------------------- ---------- ----------1313DESCRIPTION BALANCE AT ADDITIONS CHARGED TO BALANCE AT1314BEGINNING OF -------------------- END OF1315PERIOD EXPENSE OTHER DEDUCTIONS PERIOD1316- ------------------------------------- ------------ ------- --------- ---------- ----------1317<S> <C> <C> <C> <C> <C>1318Year ended December 31, 19991319Allowance for doubtful1320accounts ................... $12,352 $ 5,421 $ -- $ 4,244(1) $13,5291321Products liability claims1322reserve .................... 4,391 -- -- 370(2) 4,02113231324Year ended December 31, 19981325Allowance for doubtful1326accounts ................... 12,712 14 -- 374(1) 12,3521327Products liability claims1328reserve .................... 6,205 -- -- 1,814(2) 4,39113291330Year ended December 31, 19971331Allowance for doubtful1332accounts ................... 8,160 678 4,037(3) 163(1) 12,7121333Products liability claims1334reserve .................... 8,304 -- -- 2,099(2) 6,2051335</TABLE>13361337- -------------------------1338(1) Uncollectible accounts written off, net of recoveries.1339(2) Claims settled.1340(3) Balance assumed through acquisitions.1341134213431613441345</TEXT>1346</DOCUMENT>1347<DOCUMENT>1348<TYPE>EX-10.141349<SEQUENCE>21350<DESCRIPTION>SPLIT-DOLLAR INSURANCE AGREEMENT1351<TEXT>135213531354EXHIBIT 10.14135513561357SPLIT-DOLLAR INSURANCE AGREEMENT1358AS AMENDED APRIL 29, 199913591360THIS AGREEMENT, originally effective as of this 10th day of January, 1997,1361is amended effective April 29, 1999 by agreement between the Company and the1362Owner:13631364DEFINITIONS:13651366A. "Company": St. Jude Medical, Inc., a Minnesota corporation, of St. Paul,1367Minnesota.13681369B. "Executive": Ronald A. Matricaria, the Chairman and Chief Executive1370Officer of the Company, residing in North Oaks, Minnesota.13711372C. "Insured": Collectively, the Executive and Lucille E. Matricaria, his1373spouse, and the survivor thereof.13741375D. "Insurer": The Phoenix Home Life Mutual Insurance Company.13761377E. "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable Life1378Insurance Trust.13791380F. "Policy": The policy of insurance on the life of the Insured issued by the1381Insurer and listed on Exhibit "A" annexed hereto together with any1382supplementary contracts issued by the Insurer in conjunction therewith.13831384G. "Policy Interest": The Company's Policy Interest shall be an amount equal1385to the lesser of the cumulative total of its share of the premiums paid on1386the Policy or cash surrender value of the Policy. The existence of the1387Company's Policy Interest shall be evidenced by filing with the Insurer an1388assignment in substantially the form annexed hereto as Exhibit "B".13891390RECITALS:13911392A. The Owner is the owner of the Policy, and was established by the Insured1393to provide a benefit for the Insured's family in the event of the death of1394the survivor of the Insured.13951396B. The Executive had been and is a valuable employee of the Company. As an1397additional benefit to the Executive and his spouse, the Company wishes to1398assist the Owner in the payment of premiums on the Policy as set forth in1399this Agreement.14001401C. In exchange for such premium assistance, the Owner is willing to grant to1402the Company an interest in the Policy as provided herein.14031404D. This Agreement is intended to qualify as a life insurance employee benefit1405plan as described in Revenue Ruling 64-328.14061407<PAGE>140814091410THEREFORE, for value received, it is agreed:141114121. PREMIUM PAYMENTS14131414(a) Each annual premium on the Policy during the term of this Agreement1415shall be paid as follows:14161417(1) The Owner shall pay a portion of each annual premium due in an1418amount equal to the current term rate for the Insured's age1419multiplied by the excess of the current death benefit over the1420Company's current Policy Interest. For purposes of this1421Agreement, the "current term rate" shall mean:14221423(A) Prior to the death of one of the Insured, the lesser of1424the Insurer's annual term insurance rate or the rates1425specified in Revenue Rulings 64-328 and 66-110 based on1426the joint life expectancies of the Insured;14271428(B) In the event of the death of one of the Insured prior to1429the termination of this Agreement, thereafter, the1430lesser of the Insurer's annual term insurance rate or1431the rate specified in Revenue Rulings 64-328 and 66-1101432based on the life expectancy of the surviving Insured.14331434(2) In connection with the amount described in (1) above, the1435Company shall pay in cash to the Executive, or in the event of1436Executive's death, the Executive's spouse, at least 30 days1437prior to the due date of any premium due under the Policy, an1438amount which, after payment by the Executive or spouse of any1439federal, state and local income (including FICA) tax1440liability, if any, will equal the amount of the Owner's1441premium described in (1) above. The Executive, the Executive's1442spouse or their tax advisor shall provide the Company with an1443estimate of the effective combined federal, state and local1444tax rate for the year in which the Owner's premium is due. The1445payment described in this paragraph (2) shall be deemed a1446bonus to the Executive during his employment, and thereafter,1447a retirement benefit to the Executive and/or his spouse.14481449(3) The Company shall pay all premium amounts not paid by the1450Owner.14511452(b) The Owner's premium share and the Company's premium share (other1453than that paid with policy loans) shall be remitted to the Insurer1454before expiration of the grace period.14551456(c) Dividends on the Policy shall be applied as elected by the Owner.14571458(d) The Policy may, at the Company's discretion, provide for the waiver1459of premium on the Executive's disability. If it does so provide, the1460cost thereof shall be borne by the Company.14611462146321464<PAGE>1465146614672. POLICY OWNERSHIP14681469(a) Except as provided in subsection (b), the Owner shall be sole and1470exclusive owner of the Policy. This includes all the rights of1471"owner" under the terms of the Policy including, but not limited to,1472the right to designate beneficiaries, select settlement and dividend1473options and to surrender the Policy. All such rights may be1474exercised by the Owner without the Company's consent.14751476(b) In exchange for the Company's payment of its premium contribution1477under Section 1, the Owner hereby assigns to the Company the1478following rights in the Policy:14791480(1) The right to realize against the cash value of the Policy, to1481the extent of its Policy Interest in the event of termination1482of this Agreement as provided in Section 4.14831484(2) The right to realize against proceeds of the Policy, to the1485extent of its Policy Interest, in the event of the Insured's1486death.14871488(c) It is agreed that benefits may be paid under the Policy by the1489Insurer either by separate checks to the parties entitled thereto,1490or by a joint check. In the later instance, the Owner and the1491Company agree that the benefits shall be divided as provided herein.149214933. THE OWNER - The Owner shall have the right to assign any part or all of1494the Owner's retained interest in the Policy and this Agreement to any1495person, entity or trust by execution of a written assignment delivered to1496the Insurer.149714984. TERMINATION OF AGREEMENT14991500(a) This Agreement shall not terminate until, but shall terminate1501immediately upon the first to occur of the following:15021503(1) Surrender of the Policy by the Owner, who has the sole and1504exclusive right of surrender.15051506(2) Lapse, failure to make premium contributions as required by1507Section 1 or other termination of the Policy by the Owner.15081509(3) The death of the survivor of the Insured15101511(4) The bankruptcy, receivership or dissolution of the Company.15121513(5) Payment of the annual premium for the 15th policy year, which1514shall occur in January, 2012.15151516151731518<PAGE>151915201521(b) On any termination of this Agreement, the Owner shall pay to the1522Company the Company's Policy Interest and the Company will release1523its collateral assignment in the Policy to the Owner.152415255. THE INSURER - The Insurer shall be bound only by the provisions of and1526endorsements on the Policy, and any payments made or actions taken by it1527in accordance therewith shall fully discharge it from all claims, suits1528and demands of all persons whatsoever. It shall in no way be bound by or1529be deemed to have notice of the provisions of this Agreement.153015316. AMENDMENT OF AGREEMENT - This amended Agreement shall restate and replace1532the Split Dollar Insurance Agreement between the Company and the Owner1533dated January 10, 1997. The Owner and the Company can mutually agree to1534further amend this Agreement and such amendment shall be in writing and1535signed by the Owner and Company.153615377. SUCCESSOR RIGHTS - Notwithstanding anything herein to the contrary, the1538Company's rights and obligations under this Agreement shall not cease, but1539shall continue and shall be enforceable in the event of the merger of the1540Company in which it is not the survivor, or in the event of the sale of1541all or substantially all of the assets of the Company, and said successor1542shall assume such rights and obligations hereunder.154315448. ADMINISTRATION AND FUNDING - The following provisions are part of this1545Agreement and are intended to meet the requirements of the Employee1546Retirement Income Security Act of 1974:15471548(a) The named fiduciary: The Vice President, Finance/Chief Financial1549Officer.15501551(b) The funding policy under this Agreement is that all premiums on the1552Policy be remitted to the Insurer when due.15531554(c) Direct payment by the Insurer is the basis of payment of benefits1555under this Agreement, with those benefits in turn being based on the1556payment of premiums as provided in the Agreement.15571558(d) For claims procedure purposes, the "Claims Manager" shall be the1559Vice President, Assistant Secretary/General Counsel.15601561(1) If for any reason a claim for benefits under this Agreement is1562denied by the Company, the Claims Manager shall deliver to the1563claimant a written explanation setting forth the specific1564reasons for the denial, pertinent references to the Agreement1565section on which the denial is based, such other data as may1566be pertinent and information on the procedures to be followed1567by the claimant in obtaining a review of his claim, written in1568a manner calculated to be understood by the claimant. For this1569purpose:15701571(A) The claimant's claim shall be deemed filed when1572presented orally or in writing to the Claims manager.15731574157541576<PAGE>157715781579(B) The Claims Manager's explanation shall be in writing1580delivered to the Claimant within 90 days of the date the1581claim is filed.15821583(2) The claimant shall have 60 days following his receipt of the1584denial of the claim to file with the Claims Manager a written1585request for review of the denial. For such review, the1586claimant or his representative may submit pertinent documents1587and written issues and comments.15881589(3) The Claims Manager shall decide the issue on review and1590furnish the claimant with a copy within 60 days of receipt of1591the claimant's request for review of his claim. The decision1592on review shall be in writing and shall include specific1593reasons for the decision written in a manner calculated to be1594understood by the claimant, as well as specific references to1595the pertinent provisions of this Agreement on which the1596decision is based. If a copy of the decision is not so1597furnished to the claimant within such 60 days, the claim shall1598be deemed denied on review.15991600(e) If any claim arising under this Agreement is not resolved under (d)1601above or any other dispute arises under the terms of this Agreement,1602the Company and Owner agree to submit the claim or dispute to1603arbitration proceedings held in accordance with the rules of the1604American Arbitration Association. Judgment upon the award rendered1605by the arbitrators may be entered in any court having jurisdiction1606thereof. Pending final resolution of the dispute, the parties shall1607continue to comply with the provisions of this Agreement not in1608dispute. The expenses of the arbitration shall be borne equally by1609the parties to the arbitration, provided that each party shall pay1610for and bear the costs of its own experts, evidence and legal1611counsel. Such arbitration shall be held in Minneapolis, Minnesota.161216139. MISCELLANEOUS16141615(a) This Agreement shall be binding upon and inure to the benefit of the1616Company and the Owner and their respective successors and assigns.16171618(b) Any notice, consent or demand required or permitted to be given1619under the provisions of this Agreement shall be in writing, and1620shall be signed by the party giving or making the same. If such1621notice, consent or demand is mailed to a party hereto, it shall be1622sent by United States certified mail, postage prepaid, addressed to1623such party's last known address as shown on the records of the1624Company. The date of such mailing shall be deemed the date of1625notice, consent or demand.16261627(c) This Agreement, and the rights of the parties hereunder, shall be1628governed by and construed in accordance with the laws of the State1629of Minnesota, except to the extent preempted by federal law.16301631163251633<PAGE>163416351636IN WITNESS WHEREOF the parties have signed this Agreement, as amended,1637effective as of this 29th day of April, 1999.163816391640In the presence of COMPANY16411642St. Jude Medical, Inc.164316441645/s/ Karen M. Jurney By: /s/ Kevin T. O'Malley1646- ---------------------------------- ------------------------------------1647Karen M. Jurney Kevin T. O'Malley16481649Its: Vice President1650--------------------------------165116521653OWNER16541655The Ronald A. and Lucille E. Matricaria16561997 Irrevocable Life Insurance Trust16571658/s/ Karen M. Jurney /s/ John P. Berdusco1659- ---------------------------------- ---------------------------------------1660Karen M. Jurney John P. Berdusco, Trustee166116621663616641665<PAGE>166616671668EXHIBIT "A"16691670LIFE INSURANCE167116721673POLICY NUMBER FACE AMOUNT1674167516762,708,353 $3,000,00016771678<PAGE>167916801681EXHIBIT "B"16821683SPLIT DOLLAR ASSIGNMENT168416851686Insurer: The Phoenix Home Mutual Life Insurance Company.16871688Insured: Ronald A. and Lucille Matricaria168916901691THIS ASSIGNMENT, originally made January 10, 1997, is amended and affirmed1692by the undersigned Owner effective as of April 29, 1999.16931694DEFINITIONS:16951696A. "Assignee": St. Jude Medical, Inc., a Minnesota corporation, of St.1697Paul, Minnesota.16981699B. "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable1700Life Insurance Trust.17011702C. "Policy": The following policy of insurance issued by the Insurer on1703the life of the insured, together with any supplementary contracts1704issued in conjunction therewith:17051706POLICY NUMBER FACE AMOUNT170717082,708,353 $3,000,00017091710D. "Policy Interest": The Assignee's Policy Interest shall be as set1711forth in the Split Dollar Agreement. The Insurer shall be entitled1712to rely on the Assignee's certification of the amount of its Policy1713Interest.17141715E. "Split Dollar Agreement": That certain Agreement, dated January 10,17161997, as amended effective April 29, 1999, between the Owner and the1717Assignee. The Insurer is not bound by nor deemed to have notice of1718the provisions of the Split Dollar Agreement.17191720RECITALS:17211722A. Under the Split Dollar Agreement, the Assignee has agreed to assist1723the Owner in payment of premiums on the Policy.17241725B. In consideration of such premium payments by the Assignee, the Owner1726here intends to grant the Assignee certain limited interests in the1727Policy.17281729<PAGE>173017311732THEREFORE, for value received, it is agreed:173317341. ASSIGNMENT - The Owner hereby assigns, transfers and sets over to the1735Assignee, its successor and assigns, the following specific rights in the1736Policy and subject to the following terms and conditions:17371738(a) The right to realize against the cash value of the Policy, to the1739extent of its Policy Interest, in the event of the Policy's1740surrender by the Owner.17411742(b) The right to realize against proceeds of the Policy, to the extent1743of its Policy Interest, in the event of the Insured's death.17441745(c) The right to borrow against the security of the Policy, but not1746against the Policy itself.174717482. RETAINED RIGHTS - Except as expressly provided in Section 1, the Owner1749retains all rights under the Policy including, but not limited to, the1750exclusive right to name beneficiaries, select settlement and dividend1751options and to surrender the Policy without the consent of the Assignee.175217533. INSURER - The Insurer is hereby authorized to recognize, and is fully1754protected in recognizing:17551756(a) The claims of the Assignee to rights hereunder, without1757investigating the reasons for such action by the Assignee, or the1758validity or the amount of such claims.17591760(b) The Owner's request for surrender of the Policy without the consent1761of the Assignee. Upon the surrender, the Policy shall be terminated1762and of no further force or effect.176317644. AMENDMENT - This Assignment shall not be altered or amended by the Owner1765without the written consent of the Assignee.176617675. RELEASE OF ASSIGNMENT - Upon payment to the Assignee of its Policy1768Interest, the Assignee shall executive a written release of this1769Assignment.17701771IN WITNESS WHEREOF the Owner has executed this Assignment on the date1772first above written.17731774In the presence of The Ronald A. and Lucille E. Matricaria17751997 Irrevocable Life Insurance Trust17761777/s/ Karen M. Jurney /s/ John P. Berdusco1778- ---------------------------------- --------------------------------------1779John P. Berdusco, Trustee17801781</TEXT>1782</DOCUMENT>1783<DOCUMENT>1784<TYPE>EX-131785<SEQUENCE>31786<DESCRIPTION>1999 ANNUAL REPORT1787<TEXT>178817891790EXHIBIT 1317911792MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL1793CONDITION1794- --------------------------------------------------------------------------------1795(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)17961797RESULTS OF OPERATIONS17981799INTRODUCTION18001801St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a global leader1802in the development, manufacturing and distribution of medical device products1803for the cardiac rhythm management, cardiology and vascular access, and heart1804valve disease management markets. The Company has two reportable segments:1805Cardiac Rhythm Management (CRM) and Heart Valve Disease Management (HVDM). The1806CRM segment, which includes the results from the Company's Cardiac Rhythm1807Management Division and Daig Division, develops, manufactures and distributes1808bradycardia pulse generator and tachycardia implantable cardioverter1809defibrillator (ICD) systems, electrophysiology and interventional cardiology1810catheters, and vascular closure devices. The HVDM segment develops, manufactures1811and distributes mechanical and tissue heart valves and valve repair products,1812and is in the process of developing suture-free devices to facilitate coronary1813artery bypass graft anastomoses.18141815The Company utilizes a fifty-two, fifty-three week fiscal year ending on the1816Saturday nearest December 31, but for clarity of presentation, describes all1817periods as if the year end is December 31. Fiscal years 1999 and 1998 each1818consisted of fifty-two weeks and fiscal year 1997 consisted of fifty-three1819weeks.18201821The commentary that follows should be read in conjunction with the Company's1822consolidated financial statements and related notes.18231824ACQUISITIONS18251826Following is a discussion on the Company's business acquisitions during the last1827three years:18281829VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the1830outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus1831additional contingent consideration related to product development milestones1832for regulatory approvals and to future sales. VSI was a development-stage1833company focused on the development of suture-free devices to facilitate coronary1834artery bypass graft anastomoses.18351836ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the1837Angio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash.1838Angio-Seal(TM)manufactures and markets hemostatic puncture closure devices.18391840OTHER: During 1999, the Company acquired the assets of various businesses used1841in the distribution of the Company's products for $21,056 in cash and common1842stock.18431844VENTRITEX, INC. ("VENTRITEX"): On May 15, 1997, the Company acquired Ventritex,1845a manufacturer of ICDs and related products. St. Jude Medical issued 10,437,8001846shares of its common stock to the Ventritex shareholders at an exchange rate of18470.5 shares of Company common stock for every one share of Ventritex common1848stock. The transaction qualified as a tax-free reorganization.18491850The 1999 acquisitions were recorded using the purchase method of accounting. The1851operating results of each of these acquisitions were included in the Company's1852consolidated financial statements from the date of each acquisition. The1853Ventritex acquisition was accounted for as a pooling of interests and as such,1854the historical results of St. Jude Medical were restated at the time of the1855acquisition to include the historical operating results of Ventritex.18561857NET SALES18581859Net sales by geographic markets were as follows:186018611999 1998 19971862- --------------------------------------------------------------------------------1863United States $ 689,051 $ 604,524 $581,5141864Western Europe 259,300 248,070 227,8711865Other foreign countries 166,198 163,400 185,0111866- --------------------------------------------------------------------------------1867Total net sales $1,114,549 $1,015,994 $994,3961868- --------------------------------------------------------------------------------18691870Overall, foreign exchange rate movements had an unfavorable year-to-year impact1871of $14,900 and $5,200 in 1999 and 1998, respectively, due primarily to the1872strengthening of the U.S. dollar against the major Western European currencies.1873This negative effect is not necessarily indicative of the impact on net earnings1874due to partially offsetting favorable foreign currency changes on operating1875costs and to the Company's hedging activities.18761877Segment net sales were as follows:18781999 1998 19971879- --------------------------------------------------------------------------------1880CRM $ 843,117 $ 735,123 $716,3471881HVDM 271,432 280,871 278,0491882- --------------------------------------------------------------------------------1883Total net sales $1,114,549 $1,015,994 $994,3961884- --------------------------------------------------------------------------------18851886CRM 1999 net sales increased 14.7% over 1998 due primarily to increased1887bradycardia net sales, increased electrophysiology (EP) catheter unit sales, and1888the acquisition of Angio-Seal(TM).1889231890<PAGE>18911892MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL1893CONDITION1894- --------------------------------------------------------------------------------1895(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)18961897The bradycardia net sales increase relates to the Company's introduction of the1898Affinity(R) pacemaker family in the second quarter of 1999 and to an expanded1899U.S. sales force. CRM 1998 net sales increased 2.6% over 1997 due primarily to1900higher ICD sales with the commercial release of the Angstrom(R) II and the1901Angstrom(R) MD ICDs during 1998, offset in part by lower bradycardia sales due1902to the effects of the stronger U.S. dollar, fewer domestic sales1903representatives, the timing of certain distributor orders, and to a fifty-two1904week year in 1998 versus a fifty-three week year in 1997. The impact of one1905less selling week in 1998 effectively reduced net sales by approximately $11,0001906as compared to 1997.19071908HVDM 1999 net sales decreased 3.4% from 1998 due to the effects of the stronger1909U.S. dollar, reduced sales to certain distributors in emerging markets, and a1910slight clinical preference shift from mechanical valves to tissue valves in the1911U.S. market where HVDM holds significant mechanical valve market share and a1912smaller share of the tissue valve market. HVDM 1998 net sales increased 1.0%1913from 1997 due the introduction of the Toronto SPV(R) valve in the U.S., offset1914in part by the effects of the stronger U.S. dollar, the timing of certain1915distributor orders, curtailed marketing efforts in certain international1916markets, and to a fifty-two week year in 1998 versus a fifty-three week year1917in 1997. The impact of one less selling week in 1998 effectively reduced net1918sales by approximately $5,000 as compared to 1997.19191920GROSS PROFIT19211922Gross profits were as follows:192319241999 1998 19971925- -------------------------------------------------------------------------------1926Gross profit $733,647 $643,054 $628,6791927Percentage of net sales 65.8% 63.3% 63.2%1928z==============================================================================19291930The Company's 1999 gross profit margin increased 2.5 percentage points over19311998 due primarily to CRM's manufacturing efficiencies and higher CRM unit1932sales that were partially offset by the impact of the stronger U.S. dollar and1933lower HVDM unit sales. The Company's 1998 gross profit percentage remained1934relatively constant from 1997 due primarily to HVDM's manufacturing1935efficiencies, the elimination of certain acquired facilities, and increased ICD1936net sales, offset in part by the impact of the stronger U.S. dollar and lower1937mechanical heart valve and bradycardia unit sales.19381939OPERATING EXPENSES19401941Certain operating expenses were as follows:194219431999 1998 19971944- -------------------------------------------------------------------------------1945Selling, general1946and administrative $394,418 $349,346 $378,5001947Percentage of net sales 35.4% 34.4% 38.1%19481949Research and development $125,059 $ 99,756 $104,6931950Percentage of net sales 11.2% 9.8% 10.5%1951z==============================================================================19521953SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense increased in19541999 due primarily to increased sales activities, increased litigation, Year19552000 related expenses, and to higher intangible asset amortization related to1956the Angio-Seal(TM) acquisition. SG&A expense decreased in 1998 from 1997 due1957primarily to the full year effect of the Company's 1997 integration and1958consolidation efforts related to acquisitions, as well as to further1959consolidation of certain other pre-existing CRM operations.19601961RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 1999 due to1962increased CRM activities relating primarily to ICDs and products to treat1963emerging indications in atrial fibrillation and congestive heart failure, and1964to HVDM activities associated with the technology acquired in the VSI1965acquisition. R&D expense decreased in 1998 from 1997 due primarily to the full1966year effect of the Company's 1997 integration and consolidation efforts related1967to acquisitions.19681969PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: In 1999, the Company1970recorded purchased in-process research and development charges of $47,775 and1971$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI,1972respectively. The purchased in-process research and development charges were1973computed by an independent third-party appraisal company and were expensed at1974close, except as noted below, since technological feasibility had not been1975established and since there were no alternative future uses for the technology.1976The values assigned to purchased in-process research and development were1977determined primarily by the income approach, utilizing discount rates ranging1978from 25% to 35%. Certain other factors considered in these valuations included1979the stage of development of each project, which ranged from 35% to 90% complete,1980complexity of the work completed at the valuation date, and market introductions1981for products resulting from the technology beginning in late 1999 for1982Angio-Seal(TM) and 2000 for VSI.19831984241985<PAGE>19861987MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL1988CONDITION1989- --------------------------------------------------------------------------------1990(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)19911992The purchased in-process technologies required additional development to create1993commercially viable products. This development included completion of design,1994prototyping, and testing to ensure the technologies meet their design1995specifications, including functional, technical and economic performance1996requirements. In addition, the technology was required to undergo both1997international and domestic regulatory reviews and approvals prior to being1998commercially released to the market.19992000The total appraised value of the VSI purchased in-process research and2001development was $95,500, of which $67,453 was expensed at close. The remaining2002balance of the in-process research and development valuation ($28,047) will be2003recorded in the Company's financial statements as purchased in-process research2004and development expense when payment of the contingent consideration is assured2005beyond a reasonable doubt. All other contingent consideration payments in excess2006of the $28,047 will be capitalized as goodwill.20072008SPECIAL CHARGES: The Company restructured its international operations during2009the third quarter of 1999 to improve the effectiveness and efficiency of its2010international business by clarifying business unit accountabilities and focusing2011the operations of its business units outside the U.S., and by removing2012administrative redundancies in the Company's non-U.S. management structure. This2013restructuring resulted in the elimination of certain administrative management2014positions. The Company recorded a $9,754 charge in the third quarter of 19992015related primarily to this restructuring, of which $4,102 was used through2016December 31, 1999. The Company anticipates that substantially all of the2017remaining balance will be utilized during 2000.20182019The Company recorded special charges totaling $58,669 during 1997 related to2020Ventritex merger transaction costs ($8,227), various distributor agreement2021terminations ($12,925), repositioning of Pacesetter manufacturing operations in2022connection with the Ventritex integration ($18,139), and to the repositioning of2023Ventritex operations ($19,378). The Company has utilized $56,090 of the special2024charge reserves through December 31, 1999. The balance of the remaining special2025charge accruals are expected to be utilized as the remaining contractual2026obligations come due.20272028OTHER INCOME (EXPENSE)20292030Interest expense was $28,104 in 1999, $23,667 in 1998 and $14,374 in 1997. The2031increases in 1999 and 1998 were due to increased debt levels resulting primarily2032from the Company's acquisitions and share repurchases during 1999 and 1998.20332034Net investment gains of $848 in 1999, $15,624 in 1998 and $6,768 in 19972035resulted primarily from the periodic sales of the Company's marketable equity2036security holdings.20372038INCOME TAXES20392040The Company's reported effective income tax rate was 63.8% in 1999 as compared2041with 30.5% in 1998. Exclusive of the purchased in-process research and2042development and special charges, the Company's effective income tax rate was204325.0% in 1999. The decrease in the effective income tax rate from 30.5% in 19982044to 25.0% in 1999 was primarily attributable to higher research and development2045credits and foreign sales corporation benefits relative to pre-tax earnings in20461999. The 1999 purchased in-process research and development charges were either2047non-deductible for income tax purposes or were recorded in a taxing jurisdiction2048with a low income tax rate.20492050The Company's effective income tax rate decreased from 38.0% in 1997 to 30.5% in20511998 due primarily to a greater proportion of earnings in countries with lower2052tax rates and to the elimination of non-deductible merger costs related to the20531997 Ventritex acquisition.20542055The Company has not recorded deferred income taxes on its foreign subsidiaries'2056undistributed earnings as such amounts are currently intended to be2057indefinitely reinvested.20582059NET EARNINGS20602061Net earnings, exclusive of purchased in-process research and development2062charges, special charges and cumulative effect of accounting change, were2063$143,989 in 1999, $129,082 in 1998 and $97,692 in 1997. Reported net earnings2064and diluted net earnings per share were $24,227, or $0.29 per share, in 1999,2065$129,082, or $1.50 per share, in 1998, and $53,140, or $0.58 per share, in 1997.20662067252068<PAGE>20692070MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL2071CONDITION2072- --------------------------------------------------------------------------------2073(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)20742075OUTLOOK20762077The Company expects that market demand, government regulation and societal2078pressures will continue to change the worldwide health care industry resulting2079in further business consolidations and alliances. The Company participates with2080industry groups to promote the use of advanced medical device technology in a2081cost conscious environment. Customer service in the form of cost-effective2082clinical outcomes will continue to be a primary focus for the Company.20832084The Company's HVDM business is in a highly competitive market. The market is2085segmented between mechanical heart valves, tissue heart valves, and repair2086products. During 1999, the U.S. market continued its slight shift to tissue2087valve and repair products from mechanical heart valves resulting in a small2088market share loss. Competition is anticipated to place pressure on pricing and2089terms, and health care reform is expected to result in further hospital2090consolidations over time.20912092The Company's CRM business is also in a highly competitive industry that is2093undergoing consolidation. The number of principal suppliers has decreased from2094four to three. The Company's two principal competitors each have substantially2095more assets, sales and sales personnel than the Company. In addition, the2096Company's two principal competitors in the ICD market have dual-chamber ICDs on2097the market that represent an increasing percentage of the overall ICD market.2098The Company began clinical evaluation of a dual-chamber ICD in late 1999.2099However, until the Company commercially introduces a dual-chamber ICD into the2100market, the continued growth of dual-chamber ICDs at the expense of2101single-chamber ICDs could adversely affect the Company. Rapid technological2102change is expected to continue, requiring the Company to invest heavily in R&D2103and to effectively market its products.21042105The global medical device market is highly competitive. Competitors have2106historically employed litigation to gain a competitive advantage. In addition,2107the Company's products must continually improve technologically and provide2108improved clinical outcomes due to the competitive nature of the industry.21092110Group purchasing organizations (GPOs) in the U.S. continue to consolidate the2111purchasing for some of the Company's customers. Several such GPOs have executed2112contracts with the Company's CRM market competitors which exclude the Company.2113These contracts, if enforced, may adversely affect the Company's sales of CRM2114products to members of these GPOs.21152116On January 21, 2000, the Company initiated a worldwide voluntary recall of all2117field inventory of heart valve replacement and repair products incorporating a2118proprietary Silzone(R) coating on the sewing cuff fabric. The Company also2119concluded that it will no longer utilize the Silzone(R) coating. The Company2120expects to record a non-recurring charge against first quarter 2000 earnings,2121which is currently estimated at $16,000 to $20,000, for the write-off of2122inventory and other costs related to this recall and product discontinuation.2123However, there can be no assurance that the final costs associated with this2124recall will not exceed management's current estimates. Other than this2125non-recurring charge, management believes that this recall will not materially2126impact the Company's year 2000 earnings or cash flows based primarily on the2127fact that the Company's non-Silzone(R) coated products, which represent 75% of2128the Company's heart valve shipments, are not affected by this recall.21292130The IRS has proposed adjustments of approximately $58,200 in additional taxes2131relating primarily to the Company's Puerto Rican operations for the years 19902132through 1994. Management believes that the IRS will propose similar2133adjustments of approximately $15,500 for 1995. Management is vigorously2134contesting these adjustments and expects that the ultimate resolution will not2135have material adverse effect on the Company's financial position or liquidity,2136but could potentially be material to the net earnings of a particular future2137period if resolved unfavorably.21382139MARKET RISK21402141The Company is exposed to foreign exchange rate fluctuations due to its2142transactions denominated primarily in Euros, currencies tied to the Euro,2143Canadian Dollars, British Pounds, and Swedish Kroners. The Company is also2144exposed to interest rate risk on its interest-bearing debt and equity price risk2145on its marketable equity security investments.21462147The Company attempts to minimize a portion of its foreign exchange rate risk2148through the use of forward exchange or option contracts. The gains or losses on2149these contracts offset changes in the fair value of the anticipated foreign2150currency transactions. It is the Company's practice to not enter into contracts2151for trading purposes.21522153262154<PAGE>21552156MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL2157CONDITION2158- --------------------------------------------------------------------------------2159(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)21602161The Company's forward exchange contracts had fair values of ($263) and ($422) at2162December 31, 1999 and 1998. Utilizing the Company's outstanding forward exchange2163contracts at December 31, 1999 and 1998, a hypothetical 10% unfavorable change2164in the foreign currency spot rates would have negatively impacted the fair value2165of the Company's forward exchange contracts by $2,745 and $3,327. A majority of2166any gains or losses on the fair value of these contracts would ultimately be2167offset by gains or losses on the anticipated transactions. Such offsetting gains2168or losses are not reflected in the hypothetical 10% unfavorable change.21692170A substantial portion of the Company's interest-bearing debt provides for2171interest at variable rates tied to the London Interbank Offered Rate ("LIBOR").2172The Company periodically enters into interest rate swap or option contracts to2173reduce its exposures to interest rate fluctuations. During the third quarter of21741999, the Company entered into an interest rate swap contract to hedge a2175substantial portion of its variable interest rate risk through January 2000 on2176$138,000 of revolving credit facility borrowings. The fair market value of this2177contract at December 31, 1999, and the impact of the contract on 1999 earnings2178were not material. There were no interest rate contracts outstanding in 1998 or21791997.21802181The Company periodically invests in marketable equity securities of emerging2182technology companies. The Company's investments in these companies had a fair2183value of $15,487 and $20,300 at December 31, 1999 and 1998, which is subject to2184the underlying price risk of the public equity markets.21852186On January 1, 1999, eleven of the fifteen member countries of the European2187Economic Community (EEC) established fixed conversion rates between their2188existing sovereign currencies and the Euro, and adopted the Euro as the legal2189common currency for their countries. The sovereign currencies of these countries2190will remain legal tender as denominations of the Euro between January 1, 19992191and January 1, 2002. During this transition period, public and private parties2192may pay for goods and services using either the Euro or the sovereign currency.2193Beginning January 1, 2002, these countries will issue new Euro-denominated bills2194and coins for use in cash transactions. The Company does not expect the Euro2195conversion to have a short-term material effect on the Company's operations.2196However, subsequent to the Year 2001, cross-country pricing in the EEC may2197become more transparent, which may impact the pricing of the Company's products.2198The Company has modified its computer programs to accommodate the Euro, the2199cost of which was not material. The Company will continue to evaluate the need2200to make other changes to accommodate the conversion to the Euro.22012202NEW ACCOUNTING PRONOUNCEMENT22032204In June 1998, the Financial Accounting Standards Board issued Statement of2205Financial Accounting Standards No. 133, "Accounting for Derivative Instruments2206and Hedging Activities" (Statement 133), which is required to be adopted in2207years beginning after June 15, 2000, although early adoption as of the beginning2208of any fiscal quarter is permitted. Statement 133 requires companies to2209recognize all derivatives on the balance sheet at fair value. Derivatives not2210qualifying as hedges must be adjusted to fair value through earnings. If the2211derivative qualifies as a hedge, depending on the nature of the hedge, changes2212in the fair value of derivatives will either be offset against the change in2213fair value of the hedged assets, liabilities, or firm commitments through2214earnings, or recognized in other comprehensive income until the hedged item is2215recognized in earnings. The ineffective portion of a derivative's change in fair2216value will be immediately recognized in earnings. Management is continuing to2217review the impact of Statement 133 on the Company's financial statements.22182219FINANCIAL CONDITION22202221LIQUIDITY22222223The Company's liquidity and cash flows remained strong during 1999. Cash2224provided by operating activities was $256,067 in 1999, a $147,598 increase over22251998. The Company's current ratio was 2.4 to 1 at December 31, 1999.22262227Accounts receivable increased $11,744 from December 31, 1998, due to higher2228sales, offset in part by a decrease in average days to collect the receivables.2229Other assets increased $147,070 due primarily to the addition of certain2230intangible assets from the Angio-Seal(TM) acquisition. Interest-bearing debt2231increased $102,500 during 1999 due primarily to additional borrowings for the2232Angio-Seal(TM) and VSI acquisitions and the repurchase of common stock, offset2233in part by the repayment of debt with cash generated from operations. As of2234March 6, 2000, the Company had committed credit facilities totaling $500,000, of2235which $24,500 was unused.22362237272238<PAGE>22392240MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL2241CONDITION2242- --------------------------------------------------------------------------------2243(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)22442245Management believes that cash generated from operations and cash available under2246its credit facilities will be sufficient to meet the Company's working capital2247and share repurchase plan needs in the near term. Should suitable investment2248opportunities arise, management believes that the Company's earnings, cash2249flows and balance sheet will permit the Company to obtain additional debt or2250equity capital, if necessary.22512252CAPITAL STRUCTURE22532254The Company's capital structure consists of interest-bearing debt and equity.2255Interest-bearing debt as a percent of the Company's total capitalization2256increased from 32% at December 31, 1998 to 38% at December 31, 1999 due2257primarily to the Angio-Seal(TM) and VSI acquisitions.22582259During 1999, the Company's Board of Directors authorized the repurchase of up to2260$250,000 of the Company's outstanding common stock over a three-year period. The2261Company repurchased 977,500 shares of its common stock for $29,826 during 1999.22622263DIVIDENDS22642265The Company has not declared or paid any dividends during 1999, 1998 or 1997.2266Management currently intends to utilize the Company's earnings for operating and2267investment purposes, including the repurchase of its common stock.22682269YEAR 2000 DISCLOSURE22702271The Company has not experienced any material disruptions related to the Year22722000. The Company's products were effectively not impacted by the Year 2000.2273Also, the Company was able to execute its plans to address any internal Year22742000 issues related to its information technology and business systems, and to2275make general inquiries of its business partners' readiness for Year 2000.2276However, because the Company is dependent on various business partners for2277certain aspects of its business, the impact on the Company related to the Year22782000 may still not be known. Management continues to monitor for potential2279issues related to the Year 2000 and will execute its contingency plans, if2280necessary. However, based upon the Company's interactions with its business2281partners in 2000, management believes that any future, material event related to2282the Year 2000 is unlikely.22832284The total cost associated with the Company's Year 2000 remediation was2285approximately $3,500 and was reflected in the Company's historical results of2286operations. The cost of implementing the Company's uniform worldwide business2287and accounting information system (approximately $45,000) has not been included2288in this figure since replacement of the previous systems was not accelerated due2289to Year 2000 issues.22902291CAUTIONARY STATEMENTS22922293As provided for in the Private Securities Litigation Reform Act of 1995, the2294Company cautions investors that a number of factors could cause actual future2295results of operations to vary from those anticipated in previously made2296forward-looking statements and any other forward-looking statements made in this2297document and elsewhere by or on behalf of the Company. Net sales could be2298materially affected by legislative or administrative reforms to the U.S.2299Medicare and Medicaid systems and non-U.S. reimbursement systems in a manner2300that would significantly reduce reimbursement for procedures using the2301Company's medical devices, the acquisition of key patents by competitors that2302would have the effect of excluding the Company from new market segments, health2303care industry consolidation resulting in customer demands for price concessions,2304products introduced by competitors with advanced technology and better features2305and benefits or lower prices, fewer procedures performed in a cost-conscious2306environment, and the lengthy approval time by the FDA or other government2307authorities to clear implantable medical devices for commercial release. Cost of2308sales could be materially affected by unfavorable developments in the area of2309products liability and price increases from the Company's suppliers of critical2310components, a number of which are sole sourced. Operations could be affected by2311the Company's ability to execute its diversification strategy or to integrate2312acquired companies, a serious earthquake affecting the Company's facilities in2313Sylmar or Sunnyvale, California, adverse developments in the litigation arising2314from the acquisitions of Telectronics and Ventritex, unanticipated product2315failures and attempts by competitors to gain market share through aggressive2316marketing programs.23172318282319<PAGE>23202321REPORT OF MANAGEMENT2322- --------------------------------------------------------------------------------23232324The management of St. Jude Medical, Inc. is responsible for the preparation,2325integrity and objectivity of the accompanying financial statements. The2326financial statements were prepared in accordance with accounting principles2327generally accepted in the United States and include amounts which reflect2328management's best estimates based on its informed judgement and consideration2329given to materiality. Management is also responsible for the accuracy of the2330related data in the annual report and its consistency with the financial2331statements.23322333In the opinion of management, the Company's accounting systems and procedures,2334and related internal controls, provide reasonable assurance that transactions2335are executed in accordance with management's intention and authorization, that2336financial statements are prepared in accordance with accounting principles2337generally accepted in the United States, and that assets are properly accounted2338for and safeguarded. The concept of reasonable assurance is based on the2339recognition that there are inherent limitations in all systems of internal2340control, and that the cost of such systems should not exceed the benefits to be2341derived therefrom. Management reviews and modifies the system of internal2342controls to improve its effectiveness. The effectiveness of the controls system2343is supported by the selection, retention and training of qualified personnel,2344an organizational structure that provides an appropriate division of2345responsibility and a strong budgeting system of control.23462347St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong2348ethical climate so that the Company's affairs are conducted according to the2349highest standards of personal and business conduct. This responsibility is2350reflected in the Company's business ethics policy.23512352The adequacy of the Company's internal accounting controls, the accounting2353principles employed in its financial reporting and the scope of independent and2354internal audits are reviewed by the Audit Committee of the Board of Directors,2355consisting solely of outside directors. The independent auditors meet with, and2356have confidential access to, the Audit Committee to discuss the results of2357their audit work.23582359/s/ Terry L. Shepherd23602361TERRY L. SHEPHERD2362PRESIDENT AND CHIEF EXECUTIVE OFFICER23632364/s/ John C. Heinmiller23652366JOHN C. HEINMILLER2367VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER2368236923702371REPORT OF INDEPENDENT AUDITORS2372- --------------------------------------------------------------------------------2373Board of Directors and Shareholders2374St. Jude Medical, Inc.23752376We have audited the accompanying consolidated balance sheets of St. Jude2377Medical, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related2378consolidated statements of earnings, shareholders' equity, and cash flows for2379each of the three fiscal years in the period ended December 31, 1999. These2380financial statements are the responsibility of the Company's management. Our2381responsibility is to express an opinion on these financial statements based on2382our audits.23832384We conducted our audits in accordance with auditing standards generally accepted2385in the United States. Those standards require that we plan and perform the audit2386to obtain reasonable assurance about whether the financial statements are free2387of material misstatement. An audit includes examining, on a test basis, evidence2388supporting the amounts and disclosures in the financial statements. An audit2389also includes assessing the accounting principles used and significant estimates2390made by management, as well as evaluating the overall financial statement2391presentation. We believe that our audits provide a reasonable basis for our2392opinion.23932394In our opinion, the financial statements referred to above present fairly, in2395all material respects, the consolidated financial position of St. Jude Medical,2396Inc. and subsidiaries at December 31, 1999 and 1998 and the consolidated results2397of their operations and their cash flows for each of the three fiscal years in2398the period ended December 31, 1999 in conformity with accounting principles2399generally accepted in the United States.240024012402/s/ Ernst & Young LLP240324042405Minneapolis, Minnesota2406February 9, 200024072408292409<PAGE>24102411CONSOLIDATED STATEMENTS OF EARNINGS2412- --------------------------------------------------------------------------------2413(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)24142415<TABLE>2416<CAPTION>2417FISCAL YEAR ENDED DECEMBER 31 1999 1998 19972418- ----------------------------------------------------------------------------------------------------------2419<S> <C> <C> <C>2420Net sales $ 1,114,549 $ 1,015,994 $ 994,3962421Cost of sales 380,902 372,940 365,7172422- ----------------------------------------------------------------------------------------------------------2423Gross profit 733,647 643,054 628,67924242425Selling, general and administrative expense 394,418 349,346 378,5002426Research and development expense 125,059 99,756 104,6932427Purchased in-process research and development expense 115,228 -- --2428Special charges 9,754 -- 58,6692429- ----------------------------------------------------------------------------------------------------------2430Operating profit 89,188 193,952 86,81724312432Other income (expense) (22,184) (8,222) 1,4192433- ----------------------------------------------------------------------------------------------------------2434Earnings before income taxes and accounting change 67,004 185,730 88,23624352436Income tax expense 42,777 56,648 33,5302437- ----------------------------------------------------------------------------------------------------------2438Net earnings before accounting change 24,227 129,082 54,70624392440Cumulative effect of accounting change, net of taxes -- -- (1,566)2441- ----------------------------------------------------------------------------------------------------------24422443Net earnings $ 24,227 $ 129,082 $ 53,1402444==========================================================================================================24452446BASIC EARNINGS PER SHARE:2447Net earnings before accounting change $ 0.29 $ 1.51 $ 0.602448Cumulative effect of accounting change -- -- (0.02)2449- ----------------------------------------------------------------------------------------------------------2450Basic net earnings per share $ 0.29 $ 1.51 $ 0.582451==========================================================================================================2452DILUTED EARNINGS PER SHARE:2453Net earnings before accounting change $ 0.29 $ 1.50 $ 0.592454Cumulative effect of accounting change -- -- (0.01)2455- ----------------------------------------------------------------------------------------------------------2456Diluted net earnings per share $ 0.29 $ 1.50 $ 0.582457==========================================================================================================2458WEIGHTED AVERAGE SHARES OUTSTANDING:2459Basic 84,274 85,714 91,4262460Diluted 84,735 86,145 92,0522461==========================================================================================================2462</TABLE>24632464SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.24652466302467<PAGE>24682469CONSOLIDATED BALANCE SHEETS2470- --------------------------------------------------------------------------------2471(DOLLARS IN THOUSANDS)24722473<TABLE>2474<CAPTION>2475DECEMBER 31 1999 19982476- ---------------------------------------------------------------------------------------------2477<S> <C> <C>2478ASSETS2479CURRENT ASSETS2480Cash and cash equivalents $ 9,655 $ 3,7752481Marketable securities 79,238 84,2152482Accounts receivable, less allowances for doubtful accounts 293,815 282,0712483Inventories 235,407 245,5792484Deferred income taxes 36,609 34,1872485Other 35,575 32,6372486- ---------------------------------------------------------------------------------------------2487Total current assets 690,299 682,46424882489PROPERTY, PLANT AND EQUIPMENT2490Land, buildings and improvements 111,746 111,0162491Machinery and equipment 286,706 270,2462492Diagnostic equipment 176,079 131,1282493- ---------------------------------------------------------------------------------------------2494Property, plant and equipment at cost 574,531 512,3902495Less accumulated depreciation (231,751) (184,131)2496- ---------------------------------------------------------------------------------------------2497Net property, plant and equipment 342,780 328,25924982499OTHER ASSETS2500Goodwill and other intangible assets, net 452,519 322,4342501Deferred income taxes 51,838 44,6672502Other 16,602 6,7882503- ---------------------------------------------------------------------------------------------2504Total other assets 520,959 373,8892505- ---------------------------------------------------------------------------------------------2506TOTAL ASSETS $ 1,554,038 $ 1,384,6122507=============================================================================================25082509LIABILITIES AND SHAREHOLDERS' EQUITY2510CURRENT LIABILITIES2511Accounts payable $ 91,874 $ 94,0762512Income taxes payable 43,700 2,4612513Accrued expenses2514Employee compensation and related benefits 67,046 45,3702515Other 79,902 61,4902516- ---------------------------------------------------------------------------------------------2517Total current liabilities 282,522 203,39725182519LONG-TERM DEBT 477,495 374,99525202521COMMITMENTS AND CONTINGENCIES -- --25222523SHAREHOLDERS' EQUITY2524Preferred stock -- --2525Common stock 8,378 8,4172526Additional paid-in capital 109 6,6562527Retained earnings 833,223 816,9402528Accumulated other comprehensive income:2529Cumulative translation adjustment (53,977) (33,242)2530Unrealized gain on available-for-sale securities 6,288 7,4492531- ---------------------------------------------------------------------------------------------2532Total shareholders' equity 794,021 806,2202533- ---------------------------------------------------------------------------------------------2534TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,554,038 $ 1,384,6122535=============================================================================================2536</TABLE>25372538SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.25392540312541<PAGE>25422543CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY2544- --------------------------------------------------------------------------------2545(DOLLARS IN THOUSANDS)25462547<TABLE>2548<CAPTION>2549Common Stock Accumulated Total2550------------------- Additional Other Receivable Share-2551Number of Paid-In Retained Comprehensive for Stock holders'2552Shares Amount Capital Earnings Income (Loss) Issued Equity2553- -----------------------------------------------------------------------------------------------------------------------------------2554<S> <C> <C> <C> <C> <C> <C> <C>2555Balance at January 1, 1997 91,446,656 $ 9,145 $ 228,106 $692,892 $ (7,642) $ (440) $922,0612556Comprehensive income:2557Net earnings 53,140 53,1402558Other comprehensive income (loss)2559Unrealized gain (loss) on investments,2560net of taxes ($12,031) and reclassification2561adjustment (see below) 19,630 19,6302562Foreign currency translation adjustment (24,536) (24,536)2563--------2564Other comprehensive income (loss) (4,906)2565--------2566Comprehensive income 48,2342567========2568Issuance of common stock, including exercise of2569stock options, net of shares surrendered for2570exercise price and taxes 400,651 40 12,112 12,1522571Tax benefit from stock options 2,006 2,0062572Issuance of common stock for business acquisition 64,189 6 2,123 2,1292573Proceeds for stock issued 440 4402574===================================================================================================================================2575Balance at December 31, 1997 91,911,496 9,191 244,347 746,032 (12,548) -- 987,0222576Comprehensive income:2577Net earnings 129,082 129,0822578Other comprehensive income (loss)2579Unrealized gain (loss) on investments,2580net of taxes ($2,545) and reclassification2581adjustment (see below) (4,153) (4,153)2582Foreign currency translation adjustment (9,092) (9,092)2583--------2584Other comprehensive income (13,245)2585--------2586Comprehensive income 115,8372587========2588Issuance of common stock, including exercise2589of stock options, net of shares surrendered2590for exercise price and taxes 263,203 26 7,054 7,0802591Tax benefit from stock options 1,070 1,0702592Repurchase of common stock (8,000,000) (800) (245,815) (58,174) (304,789)2593===================================================================================================================================2594Balance at December 31, 1998 84,174,699 8,417 6,656 816,940 (25,793) -- 806,2202595Comprehensive income:2596Net earnings 24,227 24,2272597Other comprehensive income (loss)2598Unrealized gain (loss) on investments,2599net of taxes ($712) and reclassification2600adjustment (see below) (1,161) (1,161)2601Foreign currency translation adjustment (20,735) (20,735)2602--------2603Other comprehensive income (loss) (21,896)2604--------2605Comprehensive income 2,3312606========2607Issuance of common stock, including exercise2608of stock options, net of shares surrendered2609for exercise price and taxes 381,206 38 8,855 8,8932610Tax benefit from stock options 969 9692611Issuance of common stock for business acquisition 161,072 16 3,984 4,0002612Issuance of common stock in2613settlement of obligation 41,108 4 1,430 1,4342614Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826)2615===================================================================================================================================2616Balance at December 31, 1999 83,780,585 $ 8,378 $ 109 $833,223 $ (47,689) $ -- $794,0212617===================================================================================================================================26182619Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income2620taxes262126221997 $ 1,28526231998 9,28226241999 2,8752625- -----------------------------------------------------------------------------------------------------------------------------------2626</TABLE>26272628SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.26292630322631<PAGE>26322633CONSOLIDATED STATEMENTS OF CASH FLOWS2634- --------------------------------------------------------------------------------2635(DOLLARS IN THOUSANDS)26362637<TABLE>2638<CAPTION>26392640FISCAL YEAR ENDED DECEMBER 31 1999 1998 19972641- -------------------------------------------------------------------------------------------------------------2642<S> <C> <C> <C>2643OPERATING ACTIVITIES2644Net earnings $ 24,227 $ 129,082 $ 53,1402645Adjustments to reconcile net earnings to net cash2646from operating activities:2647Depreciation 54,588 45,959 45,2772648Amortization 31,114 22,894 20,7842649Purchased in-process research and development expense 115,228 -- --2650Special charges 9,754 -- 58,6692651Net investment gain (848) (15,624) (6,768)2652Deferred income taxes 369 15,459 6,6242653Changes in operating assets and liabilities, net of2654business acquisitions:2655Accounts receivable (26,319) (35,236) (41,731)2656Inventories 14,466 (7,458) (36,929)2657Other current assets (6,722) 4,897 (1,892)2658Accounts payable and accrued expenses (1,998) (35,853) (124,739)2659Income taxes 42,208 (15,651) (4,059)2660- -------------------------------------------------------------------------------------------------------------2661Net cash provided by (used in) operating activities 256,067 108,469 (31,624)26622663INVESTING ACTIVITIES2664Purchase of property, plant and equipment (69,419) (74,197) (84,638)2665Purchase of marketable securities -- -- (7,000)2666Proceeds from sale or maturity of marketable securities 17,552 82,879 80,3632667Business acquisitions, net of cash acquired (259,127) -- --2668Proceeds from sale of business, net of cash disposed -- -- 24,6262669Other (19,438) 561 (3,867)2670- -------------------------------------------------------------------------------------------------------------2671Net cash provided by (used in) investing activities (330,432) 9,243 9,48426722673FINANCING ACTIVITIES2674Proceeds from exercise of stock options and stock issued 8,893 7,080 12,5922675Common stock repurchased (29,826) (304,789) --2676Borrowings under revolving credit facilities 989,500 785,036 498,5002677Payments under revolving credit facilities (887,000) (602,536) (508,000)2678Repurchase of convertible subordinated notes -- (27,505) --2679- -------------------------------------------------------------------------------------------------------------2680Net cash provided by (used in) financing activities 81,567 (142,714) 3,09226812682Effect of currency exchange rate changes on cash (1,322) 247 (1,810)2683- -------------------------------------------------------------------------------------------------------------2684Net increase (decrease) in cash and cash equivalents 5,880 (24,755) (20,858)2685Cash and cash equivalents at beginning of year 3,775 28,530 49,3882686- -------------------------------------------------------------------------------------------------------------2687Cash and cash equivalents at end of year $ 9,655 $ 3,775 $ 28,5302688=============================================================================================================26892690Supplemental Cash Flow Information2691=============================================================================================================2692Cash paid during the year for:2693Interest $ 28,934 $ 21,703 $ 14,3202694Income taxes 21,200 55,031 33,7552695=============================================================================================================2696</TABLE>26972698SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.269927003327012702<PAGE>27032704NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2705- --------------------------------------------------------------------------------2706(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)27072708NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES27092710COMPANY OVERVIEW: St. Jude Medical, Inc. (the "Company") is a global leader in2711the development, manufacturing and distribution of medical technology products2712for the cardiac rhythm management, cardiology and vascular access, and heart2713valve disease management markets. The Company's principal products include2714pacemaker and implantable cardioverter defibrillator (ICD) systems, prosthetic2715heart valve replacement and repair products, electrophysiology and2716interventional cardiology catheters and vascular closure devices. The Company2717markets its products primarily in the United States, Western Europe and Japan2718through both a direct employee-based sales organization and independent2719distributors.27202721PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the2722accounts of the Company and its wholly owned subsidiaries. Significant2723intercompany transactions and balances have been eliminated in consolidation.2724Certain reclassifications of previously reported amounts have been made to2725conform to the current year presentation.27262727FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year2728ending on the Saturday nearest December 31, but for clarity of presentation,2729describes all periods as if the year end is December 31. Fiscal years 1999 and27301998 each consisted of fifty-two weeks and fiscal year 1997 consisted of2731fifty-three weeks.27322733CASH EQUIVALENTS: The Company considers highly liquid temporary investments with2734an original maturity of three months or less to be a cash equivalent. Cash2735equivalents are stated at cost, which approximates market.27362737MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank2738certificates of deposit, U.S. government obligations, commercial paper, notes2739and bonds. Marketable securities are classified as available-for-sale and2740recorded at fair market value, based upon quoted market prices. Gross unrealized2741gains totaling $10,142, $12,015 and $18,714, net of taxes of $3,854, $4,566 and2742$7,112, were recorded in shareholders' equity at December 31, 1999, 1998 and27431997. Realized gains totaling $4,636, $15,624 and $6,768 in 1999, 1998, and 19972744from the sale of marketable securities have been recorded in other income.2745Realized gains are computed using the specific identification method.27462747INVENTORIES: Inventories are stated at the lower of cost or market with cost2748determined using the first-in, first-out method. Inventories consist of the2749following:275027511999 19982752- --------------------------------------------------------------------------------2753Finished goods $108,449 $126,9272754Work in process 41,466 35,1302755Raw materials 85,492 83,5222756- --------------------------------------------------------------------------------2757$235,407 $245,5792758================================================================================27592760PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated2761using the straight-line method over their estimated useful lives, ranging from276231-to-39 years for buildings and improvements, three-to-seven years for2763machinery and equipment and five-to-eight years for diagnostic equipment.2764Accelerated depreciation methods are used for income tax purposes.27652766GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost2767over the fair value of identifiable net assets of businesses acquired. Other2768intangible assets consist primarily of licensed and purchased technology,2769patents and customer lists. Goodwill and other intangible assets are amortized2770primarily on a straight-line basis using lives ranging from 5-to-20 years.2771Accumulated amortization totaled $115,239 and $86,415 at December 31, 1999 and27721998. The Company periodically reviews its long-lived assets, including fixed2773assets, for indicators of impairment using an estimate of the undiscounted cash2774flows generated by those assets. The Company's financial statements for 19972775through 1999 reflect no such impairments.27762777REVENUE RECOGNITION: The Company recognizes revenue when the products are2778shipped to the customer. For certain products, the Company maintains consigned2779inventory at customer locations. For these products, revenue is recognized at2780the time the Company is notified that the customer has used the inventory. The2781allowance for doubtful accounts was $13,529 at December 31, 1999, and $12,352 at2782December 31, 1998.27832784RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense2785as incurred. Purchased in-process research and development is recognized in2786purchase business combinations for the portion of the purchase price allocated2787to the appraised value of in-process technologies. The portion assigned to2788in-process research and development technologies excludes the value of core and2789developed technologies, which are recognized as intangible assets.27902791342792<PAGE>27932794NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2795- --------------------------------------------------------------------------------2796(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)27972798STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of2799accounting for its employee stock-based compensation. Pro forma information2800related to the fair value method of accounting is provided in Note 5.28012802EARNINGS PER SHARE: Basic earnings per share is computed by dividing net2803earnings by the weighted average number of outstanding common shares during the2804period. Diluted earnings per share is computed by dividing net earnings by the2805weighted average number of outstanding common shares and common share2806equivalents, when dilutive.28072808The table below sets forth the computation of basic and diluted net earnings per2809share before accounting change:281028111999 1998 19972812- --------------------------------------------------------------------------------2813Numerator:2814Net earnings before2815accounting change $24,227 $129,082 $54,7062816Denominator:2817Basic-weighted average2818shares outstanding 84,274,000 85,714,000 91,426,0002819Effect of dilutive securities:2820Employee stock options 414,000 401,000 574,0002821Restricted shares 47,000 30,000 52,0002822- --------------------------------------------------------------------------------2823Diluted-weighted average2824shares outstanding 84,735,000 86,145,000 92,052,0002825================================================================================2826Basic earnings per share $ 0.29 $ 1.51 $ 0.602827================================================================================2828Diluted earnings per share $ 0.29 $ 1.50 $ 0.592829================================================================================28302831Net earnings and diluted-weighted average shares outstanding have not been2832adjusted for the Company's convertible debentures and for certain employee stock2833options and awards since the effect of these securities would have been2834anti-dilutive.28352836FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign2837currencies are translated at average exchange rates in effect throughout the2838year. Assets and liabilities of foreign operations are translated at year-end2839exchange rates. Gains and losses from translation of net assets of foreign2840operations are recorded in other comprehensive income. Foreign currency2841transaction gains and losses are included in other income (expense).28422843FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management2844periodically utilizes derivative financial instruments to help manage a portion2845of the Company's exposure to foreign currencies and interest rates. Management2846generally utilizes forward exchange or option contracts to manage anticipated2847foreign currency exposures and interest rate swaps to manage interest rate2848exposures. Management does not enter into derivative financial instruments for2849trading purposes. The Company records the fluctuation in the fair value of the2850forward exchange or option contracts in other income (expense) and the2851fluctuation in the fair value of the interest rate swaps in interest expense.28522853USE OF ESTIMATES: Preparation of the Company's consolidated financial statements2854in conformity with accounting principles generally accepted in the United States2855requires management to make estimates and assumptions that affect the reported2856amounts in the financial statements and accompanying notes. Actual results could2857differ from those estimates.28582859NEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards2860Board issued Statement of Financial Accounting Standards No. 133, "Accounting2861for Derivative Instruments and Hedging Activities" (Statement 133), which is2862required to be adopted in years beginning after June 15, 2000, although early2863adoption as of the beginning of any fiscal quarter is permitted. Statement 1332864requires companies to recognize all derivatives on the balance sheet at fair2865value. Derivatives not qualifying as hedges must be adjusted to fair value2866through earnings. If the derivative qualifies as a hedge, depending on the2867nature of the hedge, changes in the fair value of derivatives will either be2868offset against the change in fair value of the hedged assets, liabilities, or2869firm commitments through earnings, or recognized in other comprehensive income2870until the hedged item is recognized in earnings. The ineffective portion of a2871derivative's change in fair value will be immediately recognized in earnings.2872Management is continuing to review the impact of Statement 133 on the Company's2873financial statements.28742875352876<PAGE>28772878NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2879- --------------------------------------------------------------------------------2880(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)28812882NOTE 2 - ACQUISITIONS28832884VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the2885outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus2886additional contingent consideration related to product development milestones2887for regulatory approvals and to future sales. VSI was a development-stage2888company focused on the development of suture-free devices to facilitate coronary2889artery bypass graft anastomoses.28902891An independent appraisal firm performed a valuation of VSI's identifiable2892intangible assets ($580) and in-process research and development ($95,500). The2893value assigned to in-process research and development was determined by the2894income approach, utilizing discount rates ranging from 30% to 35% and2895assumptions on product introductions which begin in the year 2000. Total2896consideration, including the net present value of future estimated contingent2897consideration, is approximately $142,000. The total consideration paid at close2898was allocated to the fair value of the net assets acquired ($7,618), and2899in-process research and development ($67,453). The remaining balance of the2900in-process research and development valuation ($28,047) will be recorded in the2901Company's financial statements as purchased in-process research and development2902expense when payment of the contingent consideration is assured beyond a2903reasonable doubt. All other contingent consideration payments in excess of the2904$28,047 will be capitalized as goodwill.29052906ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)2907business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)2908manufactures and markets hemostatic puncture closure devices. Total2909consideration for Angio-Seal(TM), including the fair value of the net assets2910acquired and the acquisition accounting adjustments, was $177,714, which was2911allocated to in-process research and development ($47,775), various other2912identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of2913the in-process research and development and other identifiable intangible assets2914was based upon an independent appraisal. The values assigned to in-process2915research and development and other identifiable intangible assets were2916determined primarily by the income approach, utilizing discount rates of 25% for2917in-process research and development and 19.5% to 21.5% for the other intangible2918assets, and assumptions on product introductions which began in late 1999.29192920OTHER: During 1999, the Company acquired the assets of various businesses used2921in the distribution of the Company's products. Aggregate consideration paid was2922$21,056 in cash and common stock.29232924The above acquisitions have been recorded using the purchase method of2925accounting. The operating results of each of these acquisitions are included in2926the Company's consolidated statements of earnings from the date of each2927acquisition. The values assigned to in-process research and development were2928expensed at close, except as note above, since technological feasibility had not2929been established and since there were no alternative future uses for the2930technology. Pro forma results of operations have not been presented for these2931acquisitions since the effects of these business acquisitions were not material2932to the Company either individually or in aggregate. Goodwill and other2933intangible assets associated with these acquisitions will be amortized using2934lives ranging from 5-to-20 years.29352936VENTRITEX, INC. (VENTRITEX): On May 15, 1997, the Company acquired Ventritex, a2937manufacturer of implantable cardioverter defibrillators and related products.2938The Company issued 10,437,800 shares of its common stock to the Ventritex2939shareholders at an exchange rate of 0.5 shares of Company common stock for every2940one share of Ventritex common stock. The transaction qualified as a tax-free2941reorganization and was accounted for as a pooling of interests. Net sales, net2942earnings and other changes in shareholders' equity for the separate companies2943preceding the acquisition from January 1, 1997 through March 31, 1997, were as2944follows:29452946OTHER CHANGES2947IN SHAREHOLDERS'2948NET SALES NET EARNINGS EQUITY2949- -------------------------------------------------------------------------------2950St. Jude Medical $229,678 $27,791 $(14,550)2951Ventritex 20,712 (7,977) 9972952Adjustments* -- 3,063 --2953- -------------------------------------------------------------------------------2954Combined $250,390 $22,877 $(13,553)2955===============================================================================2956* TO REFLECT THE COMBINED TAX POSITION AS IF THE ACQUISITION HAD OCCURRED AT THE2957BEGINNING OF 1997.29582959362960<PAGE>29612962NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2963- --------------------------------------------------------------------------------2964(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)29652966NOTE 3 - LONG-TERM DEBT29672968Long-term debt consisted of the following:296929701999 19982971- --------------------------------------------------------------------------------2972Committed credit facility borrowings $299,000 $330,0002973Uncommitted credit facility borrowings 148,500 15,0002974Convertible subordinated debentures 29,995 29,9952975- --------------------------------------------------------------------------------2976Total long-term debt $477,495 $374,9952977================================================================================29782979COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving2980credit facility that expires in March 2003. At December 31, 1999, the Company2981also had $300,000 of short-term, unsecured revolving credit facilities that2982expire in March 2000. These credit facilities provide for variable interest tied2983to the London Interbank Offered Rate. The weighted-average interest rate on2984these borrowings was 6.4% and 5.5% at December 31, 1999 and 1998.29852986UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under2987unsecured, due-on-demand credit facilities with various banks. These credit2988facilities provide for variable interest tied to the London Interbank Offered2989Rate. The weighted-average interest rate on these borrowings was 6.9% and 5.3%2990at December 31, 1999 and 1998.29912992CONVERTIBLE SUBORDINATED DEBENTURES: The Company's convertible subordinated2993debentures are due August 15, 2001, and bear interest at 5.75%. At the option of2994the holder, the debentures are convertible into shares of common stock at a2995conversion rate of 29.0909 shares per thousand dollars principal, which equates2996to a conversion price of $34.375 per share. In addition, the Company can call2997the debentures prior to maturity, requiring the debenture holder to either2998convert their debentures to common stock or sell their debentures to the Company2999for cash. During 1998, the Company repurchased $27,505 of these debentures in3000open market transactions, recognizing an immaterial gain.30013002OTHER: In March, 2000, the Company replaced its $300,000 short-term committed3003credit facilities with a $150,000 committed credit facility. The new credit3004facility is due in March 2001 and provides for variable interest tied to the3005London Interbank Offered Rate. In addition, during January 2000, the Company3006began issuing short-term, unsecured commercial paper with maturities up to 2703007days. The commercial paper is fully backed by committed credit facilities and3008bears interest at varying market rates.30093010The Company's credit facility agreements contain various restrictive covenants3011including minimum financial ratios, limitations on additional liens or3012indebtedness, and limitations on certain acquisitions and investments, which the3013Company was in compliance with at December 31, 1999.30143015The Company classifies all of its credit facility and commercial paper3016borrowings as long-term on its balance sheet as the Company has the ability to3017repay any short-term maturity with available cash from an existing long-term,3018committed credit facility. Management continually reviews the Company's cash3019flow projections and may from time to time repay a portion of the Company's3020borrowings.30213022The fair value of the convertible subordinated debentures at December 31, 1999,3023was estimated to be approximately $32,000, based upon quoted market prices.30243025NOTE 4 - COMMITMENTS AND CONTINGENCIES30263027LEASES: The Company leases various facilities under noncancelable operating3028lease arrangements. Future minimum lease payments under these leases are as3029follows: $7,179 in 2000; $6,642 in 2001; $5,246 in 2002; $3,224 in 2003; and3030$3,516 in 2004 and thereafter. Rent expense under all operating leases was3031$7,397, $7,341 and $7,081 in 1999, 1998 and 1997.30323033IRS MATTERS: The Company and the Internal Revenue Service ("IRS") are in Tax3034Court over tax deficiency notices totaling $16,400 for the tax periods30351990-1991. The Company is refuting the IRS deficiency and has asserted that in3036fact the Company is owed a refund. The trial for this matter is currently3037scheduled to begin in June 2000. In addition, the IRS has proposed adjustments3038totaling $41,800 in additional taxes related to the Company's 1992-1994 income3039tax returns. The Company is disputing these adjustments, however, resolution of3040these matters is stayed pending resolution of the 1990-1991 litigation.3041Management believes that the IRS will propose a similar adjustment of3042approximately $15,500 for 1995. The issues raised by the IRS relate primarily to3043the Company's Puerto Rican operations. Management is vigorously contesting these3044adjustments and expects that the ultimate resolution will not have material3045adverse effect on the Company's financial position or liquidity, but could3046potentially be material to the net earnings of a particular future period if3047resolved unfavorably.30483049373050<PAGE>30513052NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3053- --------------------------------------------------------------------------------3054(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)30553056LITIGATION: The Company is involved in various product liability lawsuits,3057claims and proceedings of a nature considered normal to its business. Subject to3058self-insured retentions, management believes the Company has product liability3059insurance sufficient to cover such claims and suits. The Company's product3060liability insurance policies exclude coverage for two discontinued Pacesetter3061lead models. These discontinued lead models were the subject of class action3062product liability suits that have been settled. Management believes losses that3063might be sustained from any such future actions would not have a material3064adverse effect on the Company's liquidity or financial condition, but could3065potentially be material to the earnings of a particular future period if3066resolved unfavorably.30673068NOTE 5 - SHAREHOLDERS' EQUITY30693070CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of3071$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per3072share par value common stock. There were no shares of preferred stock issued or3073outstanding during 1999, 1998 or 1997.30743075SHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the3076repurchase of up to $250,000 of the Company's outstanding common stock over a3077three-year period. The Company repurchased 977,500 shares of its common stock3078for $29,826 during 1999. During 1998, the Company repurchased 8,000,000 shares3079of its common stock for $304,789 under a modified "Dutch Auction" self-tender3080offer.30813082EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase3083savings plan allows participating employees to purchase, through payroll3084deductions, shares of the Company's un-issued common stock at 85% of the fair3085market value at specified dates. Employees purchased 94,386, 107,545 and 112,4693086shares in 1999, 1998 and 1997 under this plan. At December 31, 1999, 180,0423087shares of additional un-issued common stock were available for purchase under3088the plan.30893090STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the3091issuance of stock-based awards, such as restricted stock or stock options, to3092directors, officers and employees. Stock option awards under these plans3093generally have a 10-year life, an exercise price equal to the fair market value3094on the date of grant, and a four-year vesting term. At December 31, 1999, the3095Company had 1,441,654 shares of common stock available for grant under these3096plans.30973098Stock option transactions under these plans during each of the three fiscal3099years in the period ended December 31, 1999, are as follows:31003101OPTIONS WEIGHTED AVERAGE3102OUTSTANDING EXERCISE PRICE3103- --------------------------------------------------------------------------------3104Balance at January 1, 1997 5,419,016 $ 31.273105Granted 5,049,875 34.033106Cancelled (615,140) 38.393107Exercised (296,893) 23.563108- --------------------------------------------------------------------------------3109Balance at December 31, 1997 9,556,858 32.603110Granted 1,350,300 30.213111Cancelled (979,284) 36.093112Exercised (158,593) 20.363113- --------------------------------------------------------------------------------3114Balance at December 31, 1998 9,769,281 32.123115Granted 3,046,880 28.103116Cancelled (1,146,767) 35.393117Exercised (257,781) 22.883118- --------------------------------------------------------------------------------3119Balance at December 31, 1999 11,411,613 $ 30.933120================================================================================31213122Stock options totaling 4,976,093, 3,961,943 and 3,362,361 were exercisable at3123December 31, 1999, 1998 and 1997.31243125The following table summarizes information concerning currently outstanding and3126exercisable stock options at December 31, 1999:31273128<TABLE>3129<CAPTION>3130OPTIONS OUTSTANDING OPTIONS EXERCISABLE3131- ---------------------------------------------------------------------------------------------3132WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-3133RANGES OF NUMBER REMAINING YEARS AVERAGE NUMBER AVERAGE3134EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE3135--------------------------------------------------------------------------------------------3136<S> <C> <C> <C> <C> <C>3137$ 8.77-17.55 40,688 0.8 $ 16.14 40,688 $ 16.14313817.55-26.32 1,442,387 4.1 21.91 1,333,180 21.69313926.32-35.10 7,246,388 8.2 29.51 2,328,928 30.26314035.10-43.87 2,495,496 7.3 38.79 1,090,378 38.77314143.87-52.64 141,912 4.3 49.43 138,177 49.50314252.64-87.74 44,742 3.5 68.49 44,742 68.493143- ---------------------------------------------------------------------------------------------314411,411,613 7.4 $ 30.93 4,976,093 $ 30.583145=============================================================================================3146</TABLE>31473148The Company also granted 42,359 shares of restricted common stock during the3149three years ended December 31, 1999, under the Company's stock compensation3150plans.31513152383153<PAGE>31543155NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3156- --------------------------------------------------------------------------------3157(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)31583159The Company's net earnings and diluted net earnings per share would have been3160reduced by $18,614, or $0.22 per share, in 1999, $11,822, or $0.14 per share, in31611998 and $12,911, or $0.14 per share, in 1997 had the fair value based method of3162accounting been used for valuing the employee stock based awards. The impact on3163net earnings from these stock based awards may not be representative of future3164disclosures because they do not take into effect the pro forma compensation3165expense related to grants made prior to 1995.31663167The weighted-average fair value of options granted and assumptions used in the3168Black-Scholes options pricing model are as follows:316931701999 1998 19973171- -------------------------------------------------------------------------------3172Fair value of options granted $11.12 $10.91 $13.223173Assumptions used:3174Expected life (years) 5 5 63175Risk-free rate of return 5.8% 4.5% 6.0%3176Volatility 33.2% 33.4% 34.2%3177Dividend yield 0% 0% 0%3178===============================================================================31793180SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that3181entitles shareholders to purchase one-tenth of a share of Series B Junior3182Preferred Stock at a stated price, or to purchase either the Company's shares or3183shares of an acquiring entity at half their market value, upon the occurrence of3184certain events which result in a change in control, as defined by the Plan. The3185rights related to this plan expire in 2007.31863187NOTE 6 - SPECIAL CHARGES318831891999 SPECIAL CHARGE: The Company restructured its international operations3190during the third quarter of 1999 to improve the effectiveness and efficiency of3191its international business by clarifying business unit accountabilities and3192focusing the operations of its business units outside the U.S. and by removing3193administrative redundancies in the Company's non-U.S. management structure. This3194restructuring resulted in the elimination of certain administrative management3195positions. The Company recorded a $9,754 charge in the third quarter of 19993196related primarily to this restructuring, of which $4,102 was used through3197December 31, 1999. The Company anticipates that substantially all of the3198remaining balance will be utilized during 2000.319932001997 SPECIAL CHARGES: The Company recorded charges totaling $58,669 during 19973201related to Ventritex merger transaction costs ($8,227), various distributor3202agreement terminations ($12,925), repositioning of Pacesetter manufacturing3203operations in connection with the Ventritex integration ($18,139), and to the3204repositioning of Ventritex operations ($19,378). The Company has utilized3205$56,090 of the special charge reserves through December 31, 1999. The balance of3206the remaining special charge accruals are expected to be utilized as the3207remaining contractual obligations come due.32083209NOTE 7 - OTHER INCOME (EXPENSE)32103211Other income (expense) consists of the following:321232131999 1998 19973214- -------------------------------------------------------------------------------3215Interest expense $(28,104) $(23,667) $(14,374)3216Interest income 2,726 4,125 6,3653217Net investment gain 848 15,624 6,7683218Foreign currency3219transaction gain (loss) 2,666 (3,304) 2,0783220Other (320) (1,000) 5823221- -------------------------------------------------------------------------------3222Other income (expense) $(22,184) $ (8,222) $ 1,4193223===============================================================================32243225NOTE 8 - INCOME TAXES32263227The Company's earnings before income taxes and accounting change were generated3228from domestic and foreign operations as follows:322932301999 1998 19973231- -------------------------------------------------------------------------------3232Domestic $ 2,408 $132,574 $81,3113233Foreign 64,596 53,156 6,9253234- -------------------------------------------------------------------------------3235Earnings before income taxes3236and accounting change $67,004 $185,730 $88,2363237===============================================================================32383239Income tax expense consists of the following:324032411999 1998 19973242- -------------------------------------------------------------------------------3243Current:3244Federal $28,641 $28,409 $20,9573245State and Puerto Rico3246Section 936 2,810 5,771 3,7543247Foreign 10,957 7,009 2,1953248- -------------------------------------------------------------------------------3249Total current 42,408 41,189 26,90632503251Deferred 369 15,459 6,6243252- -------------------------------------------------------------------------------3253Income tax expense $42,777 $56,648 $33,5303254===============================================================================32553256393257<PAGE>32583259NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3260- --------------------------------------------------------------------------------3261(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)32623263The tax effects of the cumulative temporary differences between the tax bases of3264assets and liabilities and their carrying amount for financial statement3265purposes are as follows:326632671999 19983268- -------------------------------------------------------------------------------3269Deferred income tax assets:3270Net operating loss carryforwards $46,399 $45,2583271Tax credit carryforwards 16,070 3,8373272Inventories 25,678 23,3023273Intangible assets 14,365 17,0343274Accrued liabilities 7,913 6,4563275- -------------------------------------------------------------------------------3276Deferred income tax assets 110,425 95,8873277- -------------------------------------------------------------------------------3278Deferred income tax liabilities:3279Unrealized gain on marketable securities (3,854) (4,566)3280Property, plant and equipment (18,124) (12,467)3281- -------------------------------------------------------------------------------3282Deferred income tax liabilities (21,978) (17,033)3283- -------------------------------------------------------------------------------3284Net deferred income tax asset $88,447 $78,8543285===============================================================================32863287A reconciliation of the U.S. federal statutory income tax rate to the Company's3288effective income tax rate is as follows:328932901999 1998 19973291- -------------------------------------------------------------------------------3292Income tax expense at the3293U.S. federal statutory rate $23,451 $65,006 $30,8833294State income taxes, net of3295federal benefit 1,811 4,091 2,6133296Foreign taxes at higher3297(lower) rates (1,567) (6,212) 1,0233298Tax benefits from foreign3299sales corporation (3,309) (5,662) (4,600)3300Research and3301development credits (3,679) (2,906) (2,890)3302Non-deductible purchased3303in-process research and3304development charge 23,608 -- --3305Non-deductible acquisition costs -- -- 6,2803306Other 2,462 2,331 2213307- -------------------------------------------------------------------------------3308Income tax expense $42,777 $56,648 $33,5303309- -------------------------------------------------------------------------------3310Effective income tax rate 63.8% 30.5% 38.0%3311===============================================================================33123313At December 31, 1999, the Company has net operating loss and tax credit3314carryforwards of $132,569 and $16,070, that will expire from 2002 through 20183315if not utilized. Such amounts are subject to annual usage limitations.33163317The Company has not recorded deferred income taxes on $112,266 of its foreign3318subsidiaries' undistributed earnings as such amounts are currently intended to3319be indefinitely reinvested.33203321NOTE 9 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE33223323The Company changed its accounting policy in the fourth quarter of 1997 relating3324to the capitalization of certain business process reengineering costs which were3325incurred in connection with the Company's ERP software implementation project.3326Pursuant to Emerging Issues Task Force (EITF) Statement No. 97-13, the Company3327expensed the unamortized balance of the business process reengineering costs3328previously capitalized, net of $980 in taxes, as a cumulative effect of3329accounting change.33303331NOTE 10 - RETIREMENT PLANS33323333DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that3334provide retirement benefits to substantially all full-time U.S. employees.3335Eligible employees may contribute a percentage of their annual compensation,3336subject to IRS limitations, with the Company matching a portion of the3337employees' contributions. The Company also contributes a portion of its profits3338to the plan, based upon Company performance. The Company's matching and profit3339sharing contributions are at the discretion of the Company's Board of Directors.3340In addition, the Company has defined contribution programs for employees outside3341the United States. The benefits under these plans are based primarily on3342compensation levels. Company contributions under all defined contribution plans3343totaled $11,416, $9,858 and $8,859 in 1999, 1998 and 1997.33443345DEFINED BENEFIT PLANS: The Company has defined benefit plans for employees in3346certain countries outside the U.S. The Company has an accrued liability totaling3347approximately $7,000 at December 31, 1999, which approximates the actuarially3348calculated unfunded liability. The related pension expense was not material.33493350NOTE 11 - MARKET AND CONCENTRATION RISK33513352FOREIGN CURRENCY RISK: The Company had forward exchange contracts totaling3353$27,451 and $38,353 at December 31, 1999 and 1998, related primarily to the3354exchange of Canadian Dollars, British Pounds, Swedish Kroner and the U.S.3355dollar. These instruments typically have a maturity of one year or less.33563357403358<PAGE>33593360NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3361- --------------------------------------------------------------------------------3362(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)33633364INTEREST RATE RISK: During the third quarter of 1999, the Company entered into3365an interest rate swap contract to hedge a substantial portion of its variable3366interest rate risk through January 2000 on $138,000 of revolving credit facility3367borrowings. The fair market value of this contract was not material at December336831, 1999. The impact of interest rate contracts on the Company's net earnings3369was not material during 1999 and there were no interest rate contracts3370outstanding during 1998 and 1997.33713372CONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the3373normal course of business but generally does not require collateral or any other3374security to support its receivables. Within the European Economic Union and in3375many emerging markets, payment of certain accounts receivable balances are made3376by the national health care system within several countries. Although the3377Company does not anticipate collection problems with these receivables, payment3378is dependent, to a certain extent, upon the economic situation within these3379countries. The credit risk associated with the Company's other trade receivables3380is mitigated due to dispersion of the receivables over a large number of3381customers in many geographic areas.33823383NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION33843385SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm3386Management (CRM) and Heart Valve Disease Management (HVDM). The CRM segment,3387which includes the results from the Company's Cardiac Rhythm Management Division3388and Daig Division, develops, manufactures and distributes bradycardia pulse3389generator and tachycardia implantable cardioverter defibrillator systems,3390electrophysiology and interventional cardiology catheters and vascular closure3391devices. The HVDM segment develops, manufactures and distributes mechanical and3392tissue heart valves and valve repair products and is in the process of3393developing suture-free devices to facilitate coronary artery bypass graft3394anastomoses.33953396The following table presents certain financial information about the Company's3397reportable segments:33983399CRM HVDM ALL OTHER(1) TOTAL3400- --------------------------------------------------------------------------------3401Fiscal Year Ended December 31, 19993402External net sales $843,117 $271,432 $ -- $1,114,5493403Operating profit(2) 96,291 145,675 (152,778) 89,1883404Depreciation and3405amortization expense 74,626 9,581 1,495 85,7023406Assets(3) 1,174,672 211,424 167,942 1,554,0383407Expenditures for3408long-lived assets(4) 71,190 5,717 1,771 78,6783409- --------------------------------------------------------------------------------34103411Fiscal Year Ended December 31, 19983412External net sales $735,123 $280,871 $ -- $1,015,9943413Operating profit 70,024 147,832 (23,904) 193,9523414Depreciation and3415amortization expense 59,679 7,810 1,364 68,8533416Assets(3) 992,291 222,033 170,288 1,384,6123417Expenditures for3418long-lived assets(4) 58,323 14,546 1,328 74,1973419- --------------------------------------------------------------------------------34203421Fiscal Year Ended December 31, 19973422External net sales $716,347 $278,049 $ -- $ 994,3963423Operating profit(2) 23,673 142,707 (79,563) 86,8173424Depreciation and3425amortization expense 55,704 8,136 2,221 66,0613426Assets(3) 988,977 184,246 279,893 1,453,1163427Expenditures for3428long-lived assets(4) 68,539 13,348 2,751 84,6383429================================================================================3430(1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND3431PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.3432(2) ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $9,754 AND $58,669 IN34331999 AND 1997, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF3434$115,228 IN 1999.3435(3) ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE3436SEGMENT'S ASSETS WITH THE EXCEPTION OF CERTAIN HVDM OFFICE FACILITIES, WHICH3437ARE INCLUDED IN CORPORATE'S ASSETS. HVDM IS ALLOCATED ITS PROPORTIONATE3438SHARE OF DEPRECIATION. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH,3439MARKETABLE SECURITIES, PROPERTY AND EQUIPMENT AND DEFERRED INCOME TAXES.3440(4) INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND3441INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITIONS OF3442ANGIO-SEAL(TM) AND VARIOUS DISTRIBUTION BUSINESSES, AND THE HVDM SEGMENT3443ACQUISITION OF VSI IN 1999.34443445GEOGRAPHIC INFORMATION: The following tables present certain geographical3446financial information:34473448NET SALES 1999 1998 19973449- --------------------------------------------------------------------------------3450United States $ 689,051 $ 604,524 $581,5143451Western Europe 259,300 248,070 227,8713452Other foreign countries 166,198 163,400 185,0113453- --------------------------------------------------------------------------------3454$1,114,549 $1,015,994 $994,3963455================================================================================34563457LONG-LIVED ASSETS* 1999 1998 19973458- --------------------------------------------------------------------------------3459United States $ 607,851 $ 538,403 $532,3813460Western Europe 57,082 44,860 40,6973461Other foreign countries 130,366 67,430 74,3703462- --------------------------------------------------------------------------------3463$ 795,299 $ 650,693 $647,4483464================================================================================3465* LONG-LIVED ASSETS INCLUDE PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND3466OTHER INTANGIBLE ASSETS.3467413468<PAGE>34693470NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3471- --------------------------------------------------------------------------------3472(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)34733474NOTE 13 - SUBSEQUENT EVENT34753476On January 21, 2000, the Company initiated a worldwide voluntary recall of all3477field inventory of heart valve replacement and repair products incorporating a3478proprietary Silzone(R) coating on the sewing cuff fabric. The Company concluded3479that it will no longer utilize the Silzone(R) coating. The Company expects to3480record a non-recurring charge against first quarter 2000 earnings, which is3481currently estimated at $16,000 to $20,000, for the write-off of inventory and3482other costs related to this recall and product discontinuation. However, there3483can be no assurance that the final costs associated with this recall will not3484exceed management's current estimates.34853486NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)34873488Quarterly financial data for 1999 and 1998 was as follows:34893490<TABLE>3491<CAPTION>3492QUARTER3493FIRST SECOND THIRD FOURTH3494- --------------------------------------------------------------------------------------3495<S> <C> <C> <C> <C>3496Fiscal Year Ended December 31, 19993497Net sales $266,734 $290,659 $275,814 $281,3423498Gross profit 173,273 190,910 181,529 187,9353499Net earnings (loss) (12,057)* 37,205 (36,994)** 36,0733500Diluted net earnings3501(loss) per share $ (0.14) $ 0.44 $ (0.44) $ 0.4335023503Fiscal Year Ended December 31, 19983504Net sales $257,488 $261,232 $248,822 $248,4523505Gross profit 159,262 165,207 158,118 160,4673506Net earnings 29,175 40,034 29,450 30,4233507Diluted net earnings3508per share $ 0.32 $ 0.47 $ 0.35 $ 0.363509======================================================================================3510</TABLE>35113512* INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF3513$47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION.35143515** INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF3516$67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL3517CHARGE OF $9,754.35183519423520<PAGE>352135223523FIVE-YEAR SUMMARY FINANCIAL DATA3524- --------------------------------------------------------------------------------3525(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)35263527<TABLE>3528<CAPTION>35291999* 1998 1997** 1996*** 19953530- --------------------------------------------------------------------------------------------------------------3531<S> <C> <C> <C> <C> <C>3532SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:35333534Net sales $1,114,549 $1,015,994 $ 994,396 $ 876,747 $ 848,0783535- --------------------------------------------------------------------------------------------------------------3536Gross profit $ 733,647 $ 643,054 $ 628,679 $ 581,859 $ 555,2903537- --------------------------------------------------------------------------------------------------------------3538Percent of sales 65.8% 63.3% 63.2% 66.4% 65.5%3539- --------------------------------------------------------------------------------------------------------------3540Operating profit $ 89,188 $ 193,952 $ 86,817 $ 69,469 $ 169,0863541- --------------------------------------------------------------------------------------------------------------3542Percent of sales 8.0% 19.1% 8.7% 8.0% 19.9%3543- --------------------------------------------------------------------------------------------------------------3544Net earnings $ 24,227 $ 129,082 $ 53,140 $ 60,637 $ 117,1163545- --------------------------------------------------------------------------------------------------------------3546Percent of sales 2.2% 12.7% 5.3% 6.9% 13.8%3547- --------------------------------------------------------------------------------------------------------------3548Diluted earnings per share $ 0.29 $ 1.50 $ 0.58 $ 0.66 $ 1.283549- --------------------------------------------------------------------------------------------------------------35503551FINANCIAL POSITION AT YEAR END:35523553Cash and marketable securities $ 88,893 $ 87,990 $ 184,536 $ 235,395 $ 239,6213554- --------------------------------------------------------------------------------------------------------------3555Working capital 407,777 479,067 497,188 429,451 405,0603556- --------------------------------------------------------------------------------------------------------------3557Total assets 1,554,038 1,384,612 1,453,116 1,469,994 1,192,2353558- --------------------------------------------------------------------------------------------------------------3559Long-term debt 477,495 374,995 220,000 229,500 120,0003560- --------------------------------------------------------------------------------------------------------------3561Shareholders' equity 794,021 806,220 987,022 922,061 855,3883562- --------------------------------------------------------------------------------------------------------------35633564OTHER DATA:35653566Diluted weighted average3567shares outstanding 84,735 86,145 92,052 92,372 91,3353568- --------------------------------------------------------------------------------------------------------------3569</TABLE>35703571THE FIVE-YEAR SUMMARY FINANCIAL DATA INCLUDES THE RESULTS OF VENTRITEX, INC. FOR3572ALL PERIODS PRESENTED. ALSO, THE COMPANY HAS NOT DECLARED OR PAID ANY DIVIDENDS3573DURING 1995 THROUGH 1999.35743575*RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS3576RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228 RELATED TO THE3577ANGIO-SEAL(TM) AND VASCULAR SCIENCE, INC. ACQUISITIONS.35783579**RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES.35803581***RESULTS FOR 1996 INCLUDE A $52,926 SPECIAL CHARGE AND PURCHASED IN-PROCESS3582RESEARCH AND DEVELOPMENT CHARGES TOTALING $40,350 RELATED TO VARIOUS3583ACQUISITIONS.35843585433586<PAGE>35873588INVESTOR INFORMATION3589- --------------------------------------------------------------------------------359035913592TRANSFER AGENT35933594Requests concerning the transfer or exchange of shares, lost stock certificates,3595duplicate mailings or change of address should be directed to the Company's3596Transfer Agent at:35973598First Chicago Trust Company of New York3599a division of EquiServe3600P.O. Box 25003601Jersey City, NJ 07303-250036021-800-317-44453603www.equiserve.com (Account Access Availability)3604Hearing impaired # TDD: 201-222-495536053606ANNUAL MEETING OF SHAREHOLDERS36073608The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May360910, 2000, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,3610Minneapolis, MN.36113612INVESTOR CONTACTS36133614Laura C. Merriam, Director of Investor Relations3615John M. Buske, Corporate Controller3616Dennis J. McFadden, Treasurer36173618To obtain information about the Company call 1-800-552-7664, visit our Web site3619www.sjm.com, or write to:36203621Investor Relations3622St. Jude Medical, Inc.3623One Lillehei Plaza3624St. Paul, MN 55117-9983.36253626Latest Company news releases, including quarterly results, and other information3627can be received by calling Investor Relations at a toll-free number3628(1-800-552-7664) or on the St. Jude Medical home page. Company news releases are3629also available through "Company News On-Call" by fax (1-800-758-5804, ext.3630816662) or at http://www.prnewswire.com on the Internet.36313632COMPANY STOCK SPLITS363336342:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/9036353:2 on 11/16/9536363637STOCK EXCHANGE LISTINGS36383639New York Stock Exchange3640Chicago Board Options Exchange (CB)3641Symbol: STJ364236433644The quarterly range of high and low prices per share for the Company's common3645stock for fiscal years 1999 and 1998 are set forth below. As of February 10,36462000, the Company had 4,443 shareholders of record.36473648YEAR ENDED DECEMBER 31 1999 19983649- --------------------------------------------------------------------------------3650Quarter High Low High Low3651- --------------------------------------------------------------------------------3652First $29.38 $22.94 $38.00 $29.063653Second $38.31 $23.88 $39.69 $33.063654Third $40.75 $29.75 $36.63 $19.193655Fourth $30.69 $25.13 $31.88 $19.19365636573658TRADEMARKS36593660Aescula(TM), Affinity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R), Aortic3661Connector(TM), AutoCapture(TM), Contour(R), Daig Cardiac Ablation System(TM),3662Dynamic Atrial Overdrive(TM), EnCap(TM), Entity(TM), Fast-Cath(TM),3663Frontier(TM), Genesis(TM), GuideRight(TM), Integrity(TM), Linx(TM), Livewire3664TC(TM), Livewire(TM), Maximum Xtra(TM), Microny(R), Photon(TM), Profile(TM),3665RAMP(TM), Regency(R), Seal-Away(TM), Silzone(R), SJM Biocor(TM), SJM Epic(TM),3666SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), SJM(R), Spyglass(TM),3667Supreme(TM), Tendril(R), Toronto Duo(TM), Toronto SPV(R), Trilogy(R), TVL(R)36683669Cardima(R) is a trademark of Cardima, Inc.3670Housecall(TM) is a trademark of Raytel Cardiac Services.367136724436733674</TEXT>3675</DOCUMENT>3676<DOCUMENT>3677<TYPE>EX-213678<SEQUENCE>43679<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT3680<TEXT>368136823683EXHIBIT 21368436853686ST. JUDE MEDICAL, INC. AND SUBSIDIARIES36873688SUBSIDIARIES OF THE REGISTRANT36893690St. Jude Medical, Inc. Wholly Owned Subsidiaries:3691- -------------------------------------------------3692* Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,3693South Carolina (Delaware corporation) (doing business as St. Jude Medical3694Cardiac Rhythm Management Division)3695* St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation)3696* St. Jude Medical Sales Corporation - St. Paul, Minnesota (Barbados3697corporation)3698* St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation)3699- Brussels, Belgium branch3700* St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,3701Quebec (Ontario, Canada corporation)3702* 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation)3703* St. Jude Medical Hong Kong Ltd. - Kowloon, Hong Kong (Hong Kong3704corporation)3705- Shanghai and Beijing, China representative offices3706- Korean and Taiwan branch offices3707- India liaison office (in Mumbai and New Delhi)3708* St. Jude Medical Cardiac Assist Division - St. Paul, Minnesota (Delaware3709corporation), (Assets of St. Jude Medical, Inc., Cardiac Assist Division3710sold to Bard 1/19/96)3711* St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian3712corporation)3713* St. Jude Medical Brasil, Ltda. - Sao Paulo, Brazil (Brazilian corporation)3714- Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian3715corporation)3716* Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand3717corporation)3718* Daig Corporation - Minnetonka, Minnesota (Minnesota corporation)3719* St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian3720corporation)3721* St. Jude Medical Cardiovascular Group, Plymouth, Minnesota (Minnesota3722corporation) formerly known as Vascular Science, Inc.3723* SJM Europe, Inc. - St. Paul, Minnesota (Delaware corporation) (formerly3724known as St. Jude Medical, International)3725- Tokyo, Japan branch37263727<PAGE>372837293730SJM Europe Inc. Wholly Owned Subsidiaries3731- -----------------------------------------3732* St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware3733corporation)3734- St. Jude Medical Puerto Rico Holding, B.V. (Netherlands3735corporation) (wholly-owned subsidiary of St. Jude Medical3736Puerto Rico, Inc.)3737- St. Jude Medical B.V. (Netherlands corporation)3738(wholly-owned subsidiary of St. Jude Medical Puerto Rico3739Holding, B.V.)3740- Telectronics B.V. (Netherlands corporation)3741(wholly-owed subsidiary of St. Jude Medical B.V.)3742- St. Jude Medical Netherlands Distribution AB (Swedish3743corporation headquartered in the Netherlands)3744(wholly-owned subsidiary of St. Jude Medical Puerto Rico3745Holding, B.V.)3746- St. Jude Medical Puerto Rico B.V. (Netherlands)3747(wholly-owned subsidiary of St. Jude Medical3748Netherlands Distribution AB)3749- Puerto Rico branch of St. Jude Medical3750Puerto Rico B.V.3751- St. Jude Medical Coordination Center (Belgium branch of St.3752Jude Medical Netherlands Distribution AB)37533754* Pacesetter AB (Swedish corporation)3755* St. Jude Medical Sweden AB (Veddesta, Sweden) (Swedish corporation)3756* St. Jude Medical Denmark A/S (Danish corporation)3757- Telectronics Scandinavia Aps (Danish corporation)3758(wholly-owned subsidiary of St. Jude Medical Denmark A/S)3759* St. Jude Medical Pacesetter Sales AB (Swedish corporation)3760* St. Jude Medical (Portugal)- Distribuicao de Produtos Medicos, Lda.3761(Portuguese corporation)3762* St. Jude Medical Export Ges.m.b.H. (Austrian corporation)3763* St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)3764* St. Jude Medical Italia S.p.A. (Italian corporation)3765* N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)3766- Portugal branch3767* St. Jude Medical Espana, S.A. (Spanish corporation)3768* St. Jude Medical France S.A. (French corporation)3769* St. Jude Medical Finland O/y (Finnish corporation)3770* St. Jude Medical Sp.zo.o. (Polish corporation)3771* St. Jude Medical GmbH (German corporation)3772* St. Jude Medical UK Limited (United Kingdom corporation)3773* St. Jude Medical AG (Swiss corporation)37743775</TEXT>3776</DOCUMENT>3777<DOCUMENT>3778<TYPE>EX-233779<SEQUENCE>53780<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS3781<TEXT>378237833784EXHIBIT 23378537863787CONSENT OF INDEPENDENT AUDITORS37883789We consent to the incorporation by reference in this Annual Report on Form 10-K3790of St. Jude Medical, Inc. of our report dated February 9, 2000, included in the37911999 Annual Report to Shareholders of St. Jude Medical, Inc.37923793Our audits also included the financial statement schedule of St. Jude Medical,3794Inc. listed in Item 14(a). This schedule is the responsibility of the Company's3795management. Our responsibility is to express an opinion based on our audits. In3796our opinion, the financial statement schedule referred to above, when considered3797in relation to the basic financial statements taken as a whole, presents fairly3798in all material respects the information set forth therein.37993800We also consent to the incorporation by reference in Registration Statement No.380133-9262, Registration Statement No. 33-41459, Registration Statement No.380233-48502, Registration Statement No. 33-54435, and Registration Statement No.3803333-42945 on Form S-8 of our report dated February 9, 2000, with respect to the3804consolidated financial statements and schedule of St. Jude Medical, Inc.3805incorporated by reference in the Annual Report on Form 10-K for the fiscal year3806ended December 31, 1999.38073808/s/ ERNST & YOUNG LLP38093810Minneapolis, Minnesota3811March 23, 200038123813</TEXT>3814</DOCUMENT>3815<DOCUMENT>3816<TYPE>EX-273817<SEQUENCE>63818<DESCRIPTION>FINANCIAL DATA SCHEDULE3819<TEXT>38203821<TABLE> <S> <C>382238233824<ARTICLE> 53825<MULTIPLIER> 1,00038263827<S> <C>3828<PERIOD-TYPE> 12-MOS3829<FISCAL-YEAR-END> DEC-31-19993830<PERIOD-START> JAN-01-19993831<PERIOD-END> DEC-31-19993832<CASH> 9,6553833<SECURITIES> 79,2383834<RECEIVABLES> 307,3443835<ALLOWANCES> 13,5293836<INVENTORY> 235,4073837<CURRENT-ASSETS> 690,2993838<PP&E> 574,5313839<DEPRECIATION> 231,7513840<TOTAL-ASSETS> 1,554,0383841<CURRENT-LIABILITIES> 282,5223842<BONDS> 477,4953843<PREFERRED-MANDATORY> 03844<PREFERRED> 03845<COMMON> 8,3783846<OTHER-SE> 785,6433847<TOTAL-LIABILITY-AND-EQUITY> 1,554,0383848<SALES> 1,114,5493849<TOTAL-REVENUES> 1,114,5493850<CGS> 380,9023851<TOTAL-COSTS> 380,9023852<OTHER-EXPENSES> 03853<LOSS-PROVISION> 5,4213854<INTEREST-EXPENSE> 28,1043855<INCOME-PRETAX> 67,0043856<INCOME-TAX> 42,7773857<INCOME-CONTINUING> 24,2273858<DISCONTINUED> 03859<EXTRAORDINARY> 03860<CHANGES> 03861<NET-INCOME> 24,2273862<EPS-BASIC> .293863<EPS-DILUTED> .293864386538663867</TABLE>3868</TEXT>3869</DOCUMENT>3870</SEC-DOCUMENT>3871-----END PRIVACY-ENHANCED MESSAGE-----387238733874