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EX-13 — Exhibit 13 1995 Annual Report
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ST. JUDE MEDICAL
1995 ANNUAL REPORT
[Graphic]
GLOBAL LEADERSHIP IN MEDICAL TECHNOLOGY
[Graphic]
IMPROVING QUALITY OF LIFE
[Newspaper Clipping]
TABLE OF CONTENTS
1 FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
4 U.S. POLICY FORUM
6 REVIEW OF OPERATIONS
20 COMMUNITY PARTNERSHIPS
21 INVESTOR INFORMATION
22 MANAGEMENT'S DISCUSSION AND ANALYSIS
27 REPORT OF MANAGEMENT
27 REPORT OF INDEPENDENT AUDITORS
28 CONSOLIDATED FINANCIAL STATEMENTS
38 TEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
40 CORPORATE GOVERNANCE
41 LEADERSHIP AND BOARD OF DIRECTORS
ABOUT THE COMPANY--St. Jude Medical, Inc. is committed to assisting
health care providers worldwide to restore health and improve the
quality of their patients' lives through the design, manufacture and
distribution of high-quality, cost-effective and innovative medical
devices. Two divisions manufacture and market products: the St. Jude
Medical Division, the global leader in heart valves; and Pacesetter, a
leader in cardiac rhythm management. To foster growth and
diversification, St. Jude Medical has formed alliances with several
medical technology companies.
The Company's products are sold worldwide in more than 70 countries. St.
Jude Medical has nine operations and manufacturing facilities in the
U.S. and Europe and as of December 31, 1995, employed 2,315 people in 14
countries.
ON THE COVER--Scott MacIver of Airdrie, Lanarkshire, Scotland, recently
celebrated his second birthday. Pictured in traditional Scottish
national dress, Scott received a Pacesetter Microny-TM-, the world's
smallest pacemaker, in the summer of 1995. His is a story of how a
caring family, medical professionals and St. Jude Medical's global
resources saved the life of a young Scottish lad.
Scott had endured two open heart operations by the time he was barely
one year old, but his condition worsened. Scott was soon back in the
hospital in Glasgow with a falling heart rate and near complete heart
block. "We felt our world had caved in and we were about to lose our
baby son," his mother Caroline said later.
Scott desperately needed a pacemaker. Given his age and size, only a
very small device was possible. Cardiologists Dr. Neil Wilson and Dr.
Karen Macleod made an emergency call to St. Jude Medical U.K. in
Coventry, England. They specifed a Microny-TM- pacemaker--weighing just
12.8 grams, the size of a 50-pence coin (or a half-dollar). Scott was
clinging to life with a dangerously low heart rate.
The St. Jude team responded immediately to deliver the pacemaker to the
Royal Hospital for Sick Children. Too late in the day for mail or
courier service, U.K. Sales Manager Steve Parker bought an airline
ticket and flew the Microny-TM- to Glasgow. Met by Scotland Manager
Gordon Nelson, they received a police escort to the hospital. A fearful family,
medical team, and a very sick little boy waited. The pacemaker system was
quickly implanted in the 16 month old.
Scott improved immediately. He now leads the life of a normal,
rambunctious two year old. Proud father Terry says, "It's nothing short
of a miracle. Scott is now a healthy, happy child." Headlines throughout
the U.K. reported "The Smallest Miracle" and "Tiny Pacemaker Saves This
Tot."
Scott's story reflects St. Jude Medical's international resources. The
Microny-TM- was designed and built at Pacesetter AB in Stockholm using
components and software developed in the U.S. and Sweden. Clinical
advice for the Microny-TM- pacemaker's innovative AutoCapture-TM-
feature was provided by a worldwide team of respected cardiologists
including Dr. Malcolm Clarke (p. 14). Scott's pacemaker lead was
assembled in East Kilbride, just 20 kilometers from his home. And the
U.K. St. Jude Medical team worked overtime to deliver the Microny-TM- to
Scott's physicians.
Happy Birthday, Scott. SLAINTE--good health.
[Daily Mirror Logo]
NEWSPAPER CLIPPING REPRODUCED WITH PERMISSION FROM THE SEPTEMBER 25,
1995, EDITION OF THE DAILY MIRROR, SCOTLAND.
FINANCIAL HIGHLIGHTS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Download Table]
Year ended December 31 1995 1994 % Change
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INCOME STATEMENT
Net sales $ 723,513 $359,640 101%
Operating profit 194,178 99,299 96%
Net income 129,418 79,234 63%
Primary earnings per share 1.82 1.13 61%
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BALANCE SHEET
Cash and marketable securities $ 166,053 $136,968 21%
Property, plant and equipment, net 156,248 132,165 18%
Total assets 1,015,934 919,898 10%
Long-term debt 120,000 255,000 (53%)
Shareholders' equity 703,306 552,218 27%
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FINANCIAL CONDITION
Current ratio 2.7/1 3.9/1
Debt to cash flow from operations 0.7/1 2.9/1
Debt to total capital ratio 15% 32%
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NOTE: RESULTS BETWEEN 1995 AND 1994 ARE NOT DIRECTLY COMPARABLE DUE TO THE
PACESETTER ACQUISITION, WHICH WAS EFFECTIVE SEPTEMBER 30, 1994. RESULTS FOR
1994 INCLUDE A $40,800 PRE-TAX ($25,300, OR $0.36 PER SHARE, AFTER-TAX)
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT ASSOCIATED WITH THE PACESETTER
ACQUISITION. SEE NOTE 2 TO THE FINANCIAL STATEMENTS.
NET SALES
(DOLLARS IN MILLIONS)
[Bar Graph]
OPERATIONG PROFIT
(DOLLARS IN MILLIONS)
[Bar Graph]
NET INCOME
(DOLLARS IN MILLIONS)
[Bar Graph]
PRIMARY EARNINGS
PER SHARE (IN DOLLARS)
[Bar Graph]
ONE-TIME CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT ASSOCIATED WITH THE
PACESETTER ACQUISITION.
1
[Photo]
RON MATRICARIA IN A MECHANICAL HEART VALVE MACHINING AREA AT THE WOODRIDGE
CARBON TECHNOLOGY CENTER WITH MEMBERS OF A CELLULAR TEAM: LEFT TO RIGHT: ERIC
BANKS, SURFACE FINISH OPERATOR--LEAFLET CELL #1; JEAN WEST,
X-RAY/DIMENSIONAL--LEAFLET RESOURCE CELL; THOMAS DAT LE, MANUFACTURING
TECHNICIAN (STANDING NEXT TO RON).
TO OUR SHAREHOLDERS
St. Jude Medical made major strides during 1995 toward our goal of
global leadership in medical technology. Innovation, diversification and
globalization characterized our progress. We achieved superior financial
performance and positioned the Company for future growth and
profitability.
We are the world's most innovative heart valve disease management
business and intend to lead the way in less-invasive heart valve
surgery. Pacesetter, the cardiac rhythm management business acquired
from Siemens AG in 1994, has greatly exceeded our expectations. The
planned acquisition of Daig Corporation represents strategic
opportunities in the cardiac rhythm management and interventional
cardiology markets and catheter technology.
Financial results set records in 1995 with net sales growing to $723.5
million, a 101 percent increase from the previous year. In two years,
sales have almost tripled. Net income increased 24 percent to $129.4
million, or $1.82 per share, exclusive of a one-time 1994 charge
associated with the Pacesetter acquisition. We repaid more than half the
debt incurred to acquire Pacesetter, while spending nearly $69 million--
9.5 percent of sales--on research and development.
We continue to build shareholder value. After a 50 percent increase in
1994, the 62 percent stock price gain during 1995 again outpaced the S&P
500 and other major stock indices. We distributed a three-for-two stock
split in the form of a 50 percent stock dividend, the sixth stock split
in St. Jude Medical's history.
Terry Shepherd and his team made substantial progress in implementing a
comprehensive heart valve disease management strategy. Our heart valve
business grew faster than the overall mechanical market and continued
St. Jude Medical's undisputed market leadership. The new SJM-Registered
Trademark- Masters Series rotatable mechanical valve was introduced in
all major world markets in 15 months, reflecting our focus on quality
speed to market.
We signed a significant agreement with Heartport, Inc. to jointly pursue
less invasive heart valve repair and replacement surgery. Heartport's
Port-Access-TM- procedure is expected to significantly reduce pain,
recuperation time and health care costs. Heartport's approach is a
paradigm shift in the treatment of heart valve disease and represents an
important growth opportunity for the Company. We also licensed a unique
valve repair product, the SJM-Registered Trademark- Seguin annuloplasty
ring, which is compatible with the Heartport system.
In the tissue valve market, our stentless aortic product, the Toronto
SPV-Registered Trademark- valve, is the world's leading stentless tissue
valve. We purchased all assets of The Heart Valve Company from
Hancock/Jaffe Laboratories, which developed the SJM X-Cell-TM-
bioprosthesis. We continue to make progress on our BioXenoGraft-TM-
heart valve research program. And earlier this year we announced an
exclusive alliance with LifeNet Transplant Services for human donated
allograft heart valves.
In 1995, we made tremendous progress with the integration of Pacesetter
and these operations have been accretive to earnings since its
acquisition. Exciting new products are available to our customers and we
are investing in vertical integration and manufacturing resources to
further improve profitability.
2
We formed a tachycardia business unit at Pacesetter in preparation for
our entry this year into the ventricular tachycardia/defibrillation
(VT/VF) market. Our internal Implantable Cardioverter Defibrillator
(ICD) development program continues. An atrial defibrillation device
developed by InControl, Inc., a company in which we have a minority
equity position, successfully began international clinical trials.
We are committed to expand St. Jude Medical's global presence to better
support customers in all major geographic markets. We enhanced our
European management in 1995 by hiring Patrick Fourteau, who was
appointed president of St. Jude Medical Europe. Patrick recruited
several new members to his team. In Latin America, Ed Storch grew our
business substantially. In Asia, Terrie Ajamil is expanding St. Jude
Medical's presence in Hong Kong, China, India, Korea and Singapore. Gary
Jordan was named general manager of St. Jude Medical Canada as we moved
to a direct presence in Canada.
St. Jude Medical's long-term success depends upon recruiting and
retaining highly motivated and dedicated employees. We are expanding
training programs while making major investments in our information
technology infrastructure, based on a long-term agreement with EDS.
Our 1996 goals include entering the VT/VF market, advancing the
Heartport alliance, completing the integration of U.S. and European
Pacesetter operations, concluding the Daig transaction, and achieving
our financial objectives.
The global medical technology market continues to evolve as does the
nature of delivering and financing health care, whether from changes in
public policy or market forces. This environment is challenging but
represents substantial opportunity. To succeed in the years ahead, each
St. Jude Medical business must be a market or technology leader; provide
health care professionals with substantial value--the highest quality
products with demonstrated clinical and economic benefits; and operate
as the lowest cost manufacturer.
We extend our sincere appreciation to Larry Lehmkuhl who will be
retiring from the Board after 11 years of distinguished service. Larry's
decisive leadership as President and CEO from 1985 to 1993 resulted in
substantial growth and profitability for St. Jude Medical and positioned
the Company for diversification and continued success. We also
acknowledge the important contributions of Frank Ehmann who retired from
the Board after eight years of service. We wish Larry and Frank the best
in their future endeavors.
As we approach the 20th anniversary of St. Jude Medical, we thank you
for your support during another year of substantial progress and new
challenges. The 2,315 members of the St. Jude Medical team are committed
to improving the lives of people around the world, including Scott
MacIver, Jim Coburn, Rose Edison and Patrick Cuddy, whom you will meet
in this report.
For the Board of Directors,
/s/ Ronald A. Matricaria
Ronald A. Matricaria
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
March 7, 1996
"ST. JUDE MEDICAL MADE MAJOR STRIDES DURING 1995 TOWARD OUR GOAL OF GLOBAL
LEADERSHIP IN MEDICAL TECHNOLOGY. INNOVATION, DIVERSIFICATION AND
GLOBALIZATION CHARACTERIZED OUR PROGRESS. WE ACHIEVED SUPERIOR FINANCIAL
PERFORMANCE AND POSITIONED THE COMPANY FOR FUTURE GROWTH AND PROFITABILITY."
3
U.S. POLICY ISSUES AND THE MEDICAL DEVICE INDUSTRY
A FORUM WITH CEO RON MATRICARIA, U.S. REP. HOWARD BERMAN (D-CALIFORNIA), U.S.
REP. JIM RAMSTAD (R-MINNESOTA), AND GAIL WILENSKY, PH.D.
[Photo]
RON MATRICARIA
MR. MATRICARIA: St. Jude Medical is actively involved in monitoring U.S.
government policy initiatives that impact our customers, patients and
industry. We want to keep our shareholders, customers and employees informed
about these issues. With that in mind, I have asked a distinguished panel to
provide an update on three vitally important topics that affect all
constituents: FDA reform, biomaterials supply, and Medicare/ Medicaid reform.
All are before the 104th Congress.
Joining me are Congressman Jim Ramstad, who is chairman of the House Medical
Technology Caucus and has represented Minnesota's 3rd District since 1991;
Congressman Howard Berman, who has represented California's 26th District,
which includes our Pacesetter facility in Los Angeles, since 1983 and is a
member of a House-Senate conference committee on product liability and
biomaterials; and Dr. Gail Wilensky, a member of the St. Jude Medical Board
of Directors, who served as administrator of the Health Care Financing
Administration (HCFA) from 1990-92 and was also an advisor to President
George Bush. Dr. Wilensky is currently chair of the Physician Payment Review
Commission (PPRC), advising Congress about Medicare and Medicaid financing
policy.
Let's begin with legislative proposals to reform the FDA. In recent years the
increasing length of time required for U.S. companies to bring medical
products to market has become a major issue. The FDA is seen as not equally
focused on promoting and protecting public health. Product approval delays
make it difficult for patients whose lives depend on these new technologies
and clinicians who want to conduct research and clinical studies in the U.S.
Congress is considering legislation to shorten FDA review times and mandate
other changes in how the FDA operates. Congressman Ramstad, can you give us a
perspective on the prospects for FDA reform?
REP. RAMSTAD: In 1995, Congress focused primarily on efforts to balance the
federal budget and eliminate our nation's massive debt. Because of that
emphasis, other high-priority items--like FDA reform--were delayed.
While budget deliberations will continue this year, I expect we will find the
time for other key legislative priorities as well. Hearings on FDA reform
legislation have begun in the House and Senate. I am hopeful action will be
taken this year to address the regulatory problems that drive innovative
companies overseas and deny American patients access to the best available
health care technology. Legislation has also been introduced to address
concerns about the FDA's review of medical devices prior to export, even if
those products are approved by the importing nation.
[Photo]
CONGRESSMAN JIM RAMSTAD
The 104th Congress also demonstrated concern about payment and legal issues
facing the medical technology sector. Legislation was introduced in 1995 to
clarify the scope of coverage and amount of payment available under Medicare
for devices with an FDA Investigational Device Exemption (IDE). While
legislative language addressing the problem was included in the 1995 Medicare
Preservation Act, HCFA acted independently to resolve the problem.
It is encouraging to see the beginnings of a positive shift on policy matters
affecting medical technology. The need to preserve the strength of this
industry, for the health of all Americans and for the American economy, is
clear.
MR. MATRICARIA: Thank you, Jim, for giving us a sense of prospects for FDA
reform. Let's move on to the issue of biomaterials supply. Like FDA reform,
this topic deals with maintaining a proper balance of protection for
consumers, clinicians and suppliers. Because of the rapidly growing costs of
medical liability litigation, many large U.S. suppliers are phasing out sales
of critical raw materials and components to medical technology companies.
Consequently, we and other device companies find ourselves in a very
expensive worldwide search for non-U.S. substitutes for well-known materials
such as Teflon-Registered Trademark-, Dacron-Registered Trademark- and
silicone. This situation impacts our commitment to maintain the highest
quality products and support U.S. suppliers. Fortunately, congressmen like
Howard Berman are working to improve the availability of biomaterials.
Representative Berman, can you provide us an update on the progress of
biomaterials supply legislation in the 104th Congress?
4
[Photo]
CONGRESSMAN HOWARD BERMAN
REP. BERMAN: Last year, both the House and Senate approved product liability
reform bills that included sections to substantially improve the environment
for sales of biomaterials from U.S. suppliers to medical technology
companies. The biomaterials portions of these bills have broad support.
However, particularly in the House, certain product liability sections of
these bills were controversial and generated considerable debate.
I represent the House on a House-Senate conference committee working to
resolve differences between these bills. The biomaterials sections are
generally the same. My colleagues and I are negotiating the product liability
provisions while maintaining language to ensure the supply of biomaterials
from companies whose products represent a very small percentage of the cost
or content of a completed medical device, yet have repeatedly become the
target of litigation.
I expect we will resolve our differences on product liability and agree to a
conference committee report for ratification by the House and Senate.
Approval by the President is in doubt, however.
MR. MATRICARIA: Thank you, Howard. It's encouraging that Congress may take an
important step on biomaterials supply reform in 1996. Finally, let's get an
update from Dr. Gail Wilensky on the future of the Medicare and Medicaid
programs. The objective of current legislative proposals is to slow the
growth in the costs of Medicare and Medicaid and contribute to balancing the
federal budget.
Clearly, changes in Medicare and Medicaid will impact all sectors of the
health care industry in terms of managed care utilization and reimbursement
rates. Gail, given your unique perspective on this issue, where is Medicare
and Medicaid reform headed?
DR. WILENSKY: The debate between Congress and the President on the parameters
of Medicare and Medicaid reform has not resulted in an agreement for real
reform of these massive and important entitlement programs. And I doubt that
we will see a substantive bill approved until the 105th Congress convenes in
1997.
That's disappointing to me as one who is concerned about federal
policy and the increasing percentage these programs represent of the total
federal budget. There can be no realistic plan to balance the federal budget
by 2002 until Medicare and Medicaid funding levels are resolved.
The differences between the President and congressional leadership revolve
around the level of budget savings, impacts on providers and health care
choices available to beneficiaries. Regardless of disagreements over
financial assumptions, benefit levels and the role of managed care
organizations for beneficiaries, America must change its current course in
these huge spending programs. We have no choice, if for no other reason than
to not burden our children and grandchildren with paying the accumulated
costs of their parents' and grandparents' health care. I am convinced that
the next Congress will reform Medicare and Medicaid, regardless of the
outcome of this fall's national elections.
MR. MATRICARIA: What are the implications of Medicare and Medicaid reform,
once enacted, for medical technology companies?
[Photo]
GAIL WILENSKY, PH.D.
DR. WILENSKY: More Medicare and Medicaid beneficiaries will choose managed
care health care plans. And there will be cost pressures on hospitals,
physicians and suppliers for those beneficiaries who choose to remain in the
current system.
Consequently, device companies must demonstrate cost-effective-ness, total
therapy cost and the clinical benefits of their products. In addition, the
states will have more control over Medicaid funding and eligibility
requirements, which will require device companies to pay more attention to
state government policies.
MR. MATRICARIA: Thank you, Gail. We eagerly await the outcome of the current
debates on the future of Medicare and Medicaid.
My thanks to Jim Ramstad, Howard Berman and Gail Wilensky for providing an
inside view of federal policy issues.
5
[Photos]
HEART VALVE DISEASE MANAGEMENT
SINCE 1977, OVER 650,000 ST. JUDE MEDICAL-REGISTERED TRADEMARK- MECHANICAL
HEART VALVES HAVE SAVED LIVES AROUND THE WORLD. JIM COBURN OF GENOA CITY,
WISCONSIN, IS A RECENT RECIPIENT OF THE SJM-REGISTERED TRADEMARK- MASTERS
SERIES VALVE. MR. COBURN ENJOYS A BOARD GAME WITH HIS NEIGHBOR, ANNETTE
TOYNTON. PRIOR TO HIS VALVE REPLACEMENT SURGERY, MR. COBURN HAD CALCIFIC
AORTIC STENOSIS. JIM ON HIS RECENT SURGERY: "THE DOCTOR TOLD ME THAT I WILL
FEEL BETTER AND HAVE MORE ENERGY AFTER AWHILE, BUT I'M SURPRISED THAT I FEEL
SO GOOD SO SOON."
THE SJM-REGISTERED TRADEMARK- MASTERS SERIES ROTATABLE VALVE.
6
HEART VALVE DISEASE MANAGEMENT
Providing the best solutions to heart valve disease is the mission of St.
Jude Medical's heart valve business. Despite undisputed global market
leadership in mechanical heart valves, we actually participate in about half
of the 225,000 heart valve procedures performed each year, giving us
tremendous growth opportunities. We are making significant advances in four
areas--mechanical heart valves, tissue heart valves, valve repair and
specialty products.
Our mechanical heart valves, with over 650,000 implants, have long been
recognized as the industry's gold standard. Superior new products, such as
the SJM-Registered Trademark- Masters Series valve providing rotatability and
other enhancements, enable us to improve our leadership position. The
SJM-Registered Trademark- Masters Series valve was introduced in Europe in
1995 and recently in the United States and Japan. In just one year, over
2,800 of these enhanced valves have been implanted.
Other 1995 milestones include an expanded range of our Hemodynamic Plus (HP)
Series to fit most heart valve replacements. We are developing an exciting
array of future mechanical heart valve products that incorporate advances in
hemodynamic flow and implantability.
We entered into an alliance with the DuPont Merck Pharmaceutical Company
(DuPont Pharma) to jointly develop educational programs on using
anti-coagulant drugs with mechanical heart valves. This alliance, and others
we are developing, should improve the long-term management of patients with
heart valve disease, most of whom must follow anti-coagulation therapy.
We are expanding our focus in tissue heart valve technology. Our Toronto
SPV-Registered Trademark- valve received the CONFORMITE EUROPEENNE (CE) mark,
allowing commercial release in Europe. This valve is the world's leading
stentless aortic porcine valve. U.S. clinical trials are ongoing. The
performance characteristics of this valve to date have been impressive--in
many cases indistinguishable from a healthy, native aortic valve.
To accelerate our tissue valve work, we recently acquired the remaining 50
percent ownership of a 1992 joint venture with Hancock/Jaffe Laboratories to
develop the SJM X-Cell-TM- bioprosthesis. Early studies of this stented
porcine tissue valve are very encouraging. U.S. clinical trials are expected
to begin this year. The unique technologies embodied in the SJM X-Cell-TM-
bioprosthesis are highly relevant to other tissue development programs as
well.
We are also pursuing other advanced tissue valve technology programs, such as
unique antimineralization processes and design enhancements to improve
implantability and broaden clinical applications. We expect to disclose our
progress in this area later in 1996.
Research continues on our BioXenoGraft-TM- next-generation heart valve and
related tissue-engineering programs. While it is a long-range goal, St. Jude
Medical intends to be the first company to produce a durable replacement
heart valve that would function like a natural part of the human body and not
require anti-coagulation.
[Photo]
TERRY SHEPHERD, PRESIDENT, ST. JUDE MEDICAL DIVISION, LEADS A MEETING OF
SENIOR MANAGERS IN ST. PAUL TO REVIEW 1996 PLANS TO IMPLEMENT THE
ORGANIZATION'S COMPREHENSIVE HEART VALVE DISEASE MANAGEMENT STRATEGY.
[Photo]
WITH OVER 1,800 IMPLANTS IN EUROPE, THE TORONTO SPV-REGISTERED TRADEMARK-
STENTLESS BIOPROSTHETIC HEART VALVE IS THE LEADING PRODUCT OF ITS KIND. ROSE
EDISON OF BROMLEY, KENT, ENGLAND, IS ONE PATIENT WHO HAS BENEFITTED FROM THIS
TECHNOLOGY. SHE IS ONE OF MANY PATIENTS OF MR. JOHN R. PEPPER, MA, MCHIR,
FRCS, READER IN CARDIOTHORACIC SURGERY AND HONORARY CONSULTANT SURGEON AT THE
ROYAL BROMPTON HOSPITAL IN LONDON.
7
[Photo]
HEART VALVE REPAIR
ABOVE: PROF. JACQUES R. SEGUIN, M.D., PH.D., PROFESSOR OF CARDIAC SURGERY AT
THE CENTRE HOSPITALIER ET UNIVERSITAIRE DE MONTPELLIER IN MONTPELLIER,
FRANCE, INVENTOR OF THE SJM-REGISTERED TRADEMARK- SEGUIN ANNULOPLASTY RING,
NOW AVAILABLE EXCLUSIVELY TO ST. JUDE MEDICAL CUSTOMERS.
[Photo]
RIGHT: PROFESSOR SEGUIN WITH DR. C. WALTON LILLEHEI, THE "FATHER OF OPEN
HEART SURGERY" AND SJM MEDICAL DIRECTOR, AND MAGGIE WALLNER, MECHANICAL VALVE
PRODUCT MANAGER.
8
A growing number of tissue valves currently used are allografts, or
cryo-preserved human heart valves. We recently entered this area of heart
valve disease management through an alliance with LifeNet Transplant
Services, a leader in providing human tissue for many surgical specialties.
Valve repair is a fast-growing valve disease segment. Some surgeons prefer to
treat valvular disease through delicate surgical repair procedures instead of
valve replacement. We exclusively licensed a new annuloplasty ring developed
by Professor Jacques Seguin, M.D., Ph.D. The geometry and design of the
SJM-Registered Trademark- Seguin ring offers the dual benefits of rigidity to
help model the valve annulus, and tri-dimensional flexibility, to conform to
the contractions of the heart. The SJM-Registered Trademark- Seguin
annuloplasty ring is just the beginning of an array of valve repair products.
We also will offer innovative specialty products and services that improve
long-term outcomes for patients with heart valve disease. In September, we
entered into a significant alliance with Heartport, Inc., the pioneer of
Port-Access-TM- cardiovascular surgery. With this novel procedure, valve
surgery can be performed through small incisions, or "ports," in the chest
wall, eliminating the need to "crack" a patient's chest. Port-Access-TM-
surgery could dramatically reduce patient trauma, pain and debilitation,
recovery time, and hospital costs. International and U.S. clinical trials
will begin in the next few months.
While new technology is central to our mission, we are sensitive to the
demands of a changing marketplace in terms of clinical and economic outcomes.
We recently announced the results of a major cost of complications analysis,
which compares total cost over time for St. Jude Medical-Registered
Trademark- mechanical heart valves and a competitor's product. These results
translate into important economic advantages to the health care system.
Accordingly, the best valve and best value are from St. Jude Medical.
Quality without compromise, the absolute foundation of our success, sets new
benchmarks every day. At our Woodridge Carbon Technology Center, we will
increase production over the next several years, ensuring self-sufficiency in
manufacturing the highest quality mechanical valve in the world with
significant cost advantages.
Our team views our mission as a calling. It is an exciting time to be in the
heart valve disease management business. We expect significant growth from
new products, product enhancements and new markets. While some view the heart
valve business as relatively mature, we view it as young, dynamic and
receptive to innovation.
The problems of heart valve disease have not been solved. By bringing to
market the best solutions we and our partners can develop, we anticipate that
health care providers throughout the world will continue to turn to St. Jude
Medical for all of their heart valve disease management needs.
/s/ Terry L. Shepherd
Terry L. Shepherd
PRESIDENT, ST. JUDE MEDICAL DIVISION
[Photo]
THE COMPANY'S STATE-OF-THE-ART WOODRIDGE CARBON TECHNOLOGY CENTER IN LITTLE
CANADA, MINNESOTA, RECEIVED FDA CERTIFICATION IN 1995. IT WAS PREVIOUSLY ISO
9000/9001 CERTIFIED AND RECEIVED THE CE MARK. ARGUABLY THE FINEST PYROLYTIC
CARBON FACILITY IN THE WORLD, WOODRIDGE COMPLETES THE COMPANY'S STRATEGY TO
CONTROL ITS OWN MECHANICAL HEART VALVE MANUFACTURING RESOURCES.
9
HEART VALVE DISEASE MANAGEMENT PRODUCTS
MECHANICAL VALVE AND REPAIR PRODUCTS
[Photo]
TOP: ST. JUDE MEDICAL-REGISTERED TRADEMARK- AORTIC VALVED GRAFT WITH
MEADOX-REGISTERED TRADEMARK- HEMASHIELD-REGISTERED TRADEMARK- WOVEN DOUBLE
VELOUR GRAFT--THE IDEAL PRODUCT COMBINATIONS FOR THOSE PATIENTS REQUIRING
BOTH AORTIC VALVE AND ASCENDING AORTA REPLACEMENT.
SECOND ROW, LEFT TO RIGHT: ST. JUDE MEDICAL-REGISTERED TRADEMARK- MECHANICAL
HEART VALVE SJM-REGISTERED TRADEMARK- MASTERS SERIES--THE MOST POPULAR
MECHANICAL VALVE IN THE WORLD, WITH ADDITIONAL FEATURES SUCH AS ROTATABILITY,
RADIOPACITY, AND ADDITIONAL SUTURE MARKERS; ST. JUDE MEDICAL-REGISTERED
TRADEMARK- MECHANICAL HEART VALVE, STANDARD CUFFED VALVE--IMPLANTED SINCE
1977 IN 70 DIFFERENT COUNTRIES; ST. JUDE MEDICAL-REGISTERED TRADEMARK-
MECHANICAL HEART VALVE HEMODYNAMIC PLUS (HP) SERIES--IMPROVES THE HEMODYNAMIC
PERFORMANCE OF THE STANDARD VALVE, OFFERING UP TO 25% REDUCTION IN PRESSURE
GRADIENT ACROSS THE VALVE; SJM-REGISTERED TRADEMARK- SEGUIN ANNULOPLASTY
RING(1)--ANNULAR REMODELING AND TRI-DIMENSIONAL FLEXIBILITY IN A SEMI-RIGID
DESIGN.
TISSUE VALVES
[Photo]
[LIFENET Logo]
THIRD ROW, LEFT TO RIGHT: TORONTO SPV-REGISTERED TRADEMARK- VALVE(2); SJM
X-CELL-TM- BIOPROSTHESIS1; BIOIMPLANT-REGISTERED TRADEMARK- TISSUE VALVE(1);
AORTIC ALLOGRAFT HEART VALVE
DISEASE MANAGEMENT
[Photo]
[DUPONT PHARMA Logo]
[HEARTPORT Logo]
BOTTOM: ANTI-COAGULATION MANAGEMENT SERVICES OFFERED WITH DUPONT MERCK
PHARMACEUTICAL COMPANY (DUPONT PHARMA), ST. JUDE MEDICAL-REGISTERED
TRADEMARK- PORT-ACCESS-TM- MECHANICAL HEART VALVE SYSTEM INCORPORATING
HEARTPORT-TM- PORT-ACCESS-TM- TECHNOLOGY(2).
(1) NOT AVAILABLE IN U.S.
(2) NOT AVAILABLE IN U.S., PENDING FDA APPROVAL
10
CARDIAC RHYTHM MANAGEMENT PRODUCTS
PACEMAKER SYSTEMS
[Photos]
TOP: FOUR OF PACESETTER'S PACEMAKERS. LEFT TO RIGHT: THE TRILOGY-TM- DR+
PACEMAKER(2), WHICH RECEIVED THE CE MARK IN 1995 AND IS IN U.S. CLINICAL
TRIALS UNDER AN IDE (INVESTIGATIONAL DEVICE EXEMPTION); THE REGENCY-TM- SR+
PACEMAKER(1) WITH PROPRIETARY AUTOCAPTURE-TM- PACEMAKER ALGORITHM, THE MOST
SOPHISTICATED OF THE FIVE MODELS IN THE REGENCY-TM- FAMILY, RECEIVED CE MARK
APPROVAL IN LATE 1995; THE MICRONY-TM- SR+ PACEMAKER(1), THE WORLD'S FIRST
COMMERCIALLY RELEASED PACEMAKER WITH PACESETTER'S AUTOCAPTURE-TM- ALGORITHM
AND ALSO THE WORLD'S SMALLEST IMPLANTABLE PACEMAKER, INTRODUCED IN EUROPE IN
1995 AND EXPECTED TO BEGIN U.S. CLINICAL TRIALS IN 1996; AND THE SINGLE-LEAD
DUAL-CHAMBER ADDVENT-TM- PACEMAKER(2) , PACESETTER'S FIRST OFFERING FOR THE VDDR
MODE OF PACING THERAPY, WHICH ENTERED EUROPEAN CLINICAL TRIALS DURING 1994
AND 1995 IN THE U.S.
MIDDLE LEFT: CARDIAC PACING LEADS. LEFT TO RIGHT: THE PASSIVE PLUS-REGISTERED
TRADEMARK- TIN LEAD, RELEASED IN THE U.S. IN 1995, INCLUDES PACESETTER'S
PROPRIETARY TITANIUM NITRIDE COATING ON THE ELECTRODE TIP, THE MEMBRANEE-TM-
STEROID-ELUTING PACING LEAD(1) ENTERED THE EUROPEAN MARKET IN 1995 AND THE AV
PLUS-TM- PACING LEAD(2), DESIGNED EXCLUSIVELY FOR USE IN THE ADDVENT-TM-
PACEMAKER.
MIDDLE RIGHT: UNPARALLELED DIAGNOSTICS ARE THE HALLMARK OF PACESETTER PACING
SYSTEMS WITH PDX-TM- SOFTWARE AS SEEN HERE IN A PRINTED REPORT ON THE
TRILOGY-TM- DR+ AND THE NEW APSM-TM-(1) POCKET PROGRAMMER, WHICH RECEIVED CE
MARK APPROVAL IN 1995.
IMPLANTABLE CARDIOVERTER DEFIBRILLATOR (ICD) SYSTEMS
[Photos]
BOTTOM: THE AEGIS-TM- ICD (IMPLANTABLE CARDIOVERTER DEFIBRILLATOR) SYSTEM(1) IS
EXPECTED TO ENTER EUROPEAN AND U.S. CLINICAL TRIALS IN 1996, PENDING FDA
APPROVAL OF AN IDE APPLICATION.
(1) NOT AVAILABLE IN U.S.
(2) NOT AVAILABLE IN U.S., PENDING FDA APPROVAL
11
CARDIAC RHYTHM MANAGEMENT
[Photos]
PATRICK CUDDY, 18, A SENIOR AT C.E. KING HIGH SCHOOL IN THE SHELDON
INDEPENDENT SCHOOL DISTRICT IN HOUSTON, TEXAS, PLAYS IN THE MIGHTY PANTHER
MARCHING BAND AND IS LOOKING FORWARD TO COLLEGE. TWO YEARS AGO, HIS PROSPECTS
WERE VERY DIFFERENT. A CONGENITAL DEFECT IN HIS HEART ALONG WITH AN ABNORMAL
HEART RHYTHM AND A FAILING TRICUSPID VALVE WERE CAUSING HIS HEALTH TO DECLINE.
SURGERY WAS THE BEST OPTION. A CARDIAC CARE TEAM AT TEXAS CHILDREN'S
HOSPITAL IN HOUSTON IMPLANTED A ST. JUDE MEDICAL-REGISTERED TRADEMARK-
MECHANICAL HEART VALVE AND A PACESETTER SYNCHRONY-REGISTERED TRADEMARK- III
PACEMAKER.
PATRICK QUICKLY RECOVERED. BESIDES PLAYING IN THE BAND, PATRICK ENJOYS
SWIMMING AND OTHER ACTIVITIES AND IS PLANNING A CAREER IN CIVIL ENGINEERING.
IN JUNE 1995 PATRICK, HIS MOTHER ROXY AND SISTER SARAH (RIGHT) SPOKE AT A
PACESETTER EMPLOYEE GATHERING ABOUT HOW MEDICAL TECHNOLOGY HAS CHANGED
PATRICK'S LIFE.
12
CARDIAC RHYTHM MANAGEMENT
The global cardiac rhythm management (CRM) market is expected to reach $5
billion by the year 2000. St. Jude Medical is positioned to participate in
all segments of this large and growing health care arena. Pacesetter, St.
Jude Medical's cardiac rhythm management business, had a very successful
1995. We introduced more bradycardia products than in the previous four years
combined. These devices incorporate innovative and proprietary technologies
and include:
THE TRILOGY-TM- FAMILY OF IMPLANTABLE CARDIAC PACEMAKERS. Pacesetter's
pioneering contributions to cardiac pacing technology continue with the
introduction of the Trilogy-TM- family. The five dual- and single-chamber
Trilogy-TM- devices are designed with automated features to tailor pacing
therapy to individual patient requirements. Trilogy-TM- devices incorporate
enhanced PDx-TM- software to offer the potential for peak cardiac performance
for patients. The Trilogy-TM- DR, DC and SR were approved by the FDA in 1995
for U.S. market release, while the more sophisticated DR+ and SR+ are in U.S.
clinical trials. In Europe, the DR+, DR and DC have CE mark approval.
MICRONY-TM-, THE WORLD'S FIRST PACEMAKER WITH AUTOCAPTURE-TM- ALGORITHM.
Pacesetter's proprietary AutoCapture-TM- algorithm results in an
unprecedented level of patient safety. AutoCapture-TM- enables the pulse
generator to use the minimum amount of energy necessary to stimulate the
heart, allowing for greater device longevity and a smaller size. Weighing
only 12.8 grams, Microny-TM- is the world's smallest pacemaker. Microny-TM-
is available in the European market and is expected to enter U.S. clinical
trials in 1996.
THE REGENCY-TM- FAMILY OF SINGLE-CHAMBER PACEMAKERS. This product family
enhances Pacesetter's single-chamber offering in international markets.
Regency-TM- pacemakers combine intelligent operation with simplicity of use
to improve patient safety and physician efficiency. Two Regency-TM- models
incorporate the AutoCapture-TM- algorithm. All are designed with additional
diagnostic capabilities to address needs in the predominantly single-chamber
international market. Full international introduction is anticipated in 1996,
as are U.S. clinical trials of the Regency-TM- SR+.
SEVERAL NEW PACING LEADS. In the U.S., the Tendril-Registered Trademark- DX
steroid-eluting pacing lead and Passive PLUS-Registered Trademark- DX entered
clinical trials, while the Passive PLUS-Registered Trademark- TiN, containing
a proprietary titanium nitride coating on the electrode tip, was cleared for
market release. In Europe, the steroid-eluting MembraneE-TM- lead family
completed trials in preparation for 1996 international market release.
THE APSM-TM- POCKET PROGRAMMER. A pocket-sized, battery-operated programming
device with updated single-chamber diagnostics, the APSM-TM- programmer was
released in 1995 for international markets and will be submitted for FDA
review in early 1996.
The future for Pacesetter's bradycardia business is very bright given
extensive research and development programs, and prospects for new
applications for pacing. Our technology leadership position in bradycardia
supports the Company's entry into other segments of the CRM
market--ventricular tachycardia/ventricular fibrillation (VT/VF),
electrophysiology and atrial fibrillation.
Pacesetter made significant advances in 1995 in the VT/VF market, a large and
rapidly growing segment of CRM. The new tachycardia business unit led by Mark
W. Kroll, Ph.D., former vice president of research and product
[Photo]
PACESETTER'S GLOBAL HEADQUARTERS AND PRINCIPAL U.S. MANUFACTURING LOCATION IN
SYLMAR, JUST NORTH OF LOS ANGELES, CALIFORNIA.
[PACESETTER Logo]
ST. JUDE MEDICAL IS COMMITTED TO BECOMING A GLOBAL LEADER IN OFFERING
SOLUTIONS FOR ALL SEGMENTS OF THE CARDIAC RHYTHM MANAGEMENT MARKET. THE
ACQUISITION OF PACESETTER IN 1994 WAS THE FIRST STEP IN THE COMPANYS STRATEGY
FOR THIS IMPORTANT MARKET. PACESETTER'S GOALS ARE AGGRESSIVE, BUT REALISTIC.
THE TECHNOLOGY, INTELLECTUAL PROPERTY, PEOPLE, AND FUNANCIAL RESOURCES ARE IN
PLACE TO ACHIEVE LEADERSHIP IN THE CARDIAC RHYTHM MANAGEMENT MARKET.
13
[Photos]
AUTOCAPTURE-TM-
[CHART]
CONTINUING NEARLY FOUR DECADES OF TECHNOLOGY LEADERSHIP, PACESETTER'S
INNOVATIVE AND UNIQUE AUTOCAPTURETM FEATURE IS DESIGNED TO MINIMIZE THE
ENERGY REQUIRED TO STIMULATE THE HEART, USING A SMALLER BATTERY WITHOUT
COMPROMISING LONGEVITY.
DR. MALCOLM CLARKE, FRCP, FACC, A CONSULTANT CARDIOLOGIST AT CITY
GENERAL HOSPITAL, STOKE ON TRENT, A MEMBER OF PACESETTER'S MEDICAL ADVISORY
BOARD AND INVESTIGATOR IN THE EVALUATION OF AUTOCAPTURE-TM-, DISCUSSES ITS
IMPORTANCE FOR PATIENTS AND PHYSICIANS WITH MAGNUS OHMAN, MICRONY-TM- PROJECT
MANAGER AT PACESETTER AB WHICH DEVELOPED AUTOCAPTURE-TM-, AND ROY INGRAM, A
FIELD CLINICAL ENGINEER AT ST. JUDE MEDICAL U.K., LTD.
14
planning for Angeion Corporation, is developing implantable
cardioverter defibrillator (ICD) products. We expect initial
European and U.S. clinical implants during the first half of 1996 of the
Aegis-TM-, the world's smallest ICD, manufactured for Pacesetter by Angeion.
The tachycardia business unit also manages Pacesetter's internal ICD
development program. The first product in that family is expected to enter
clinical trials in 1997. To further progress in this field, an advanced
tachycardia technology research team is being established in St. Paul,
Minnesota.
Pacesetter will enter the third segment of the CRM market--electrophysiology
(EP)--as a result of St. Jude Medical's announced acquisition of Daig
Corporation. EP involves the treatment of an arrhythmia using catheters to
detect and correct electrically dysfunctional areas in the heart. Daig has
several innovative EP catheter products approved in Europe and the U.S.
Daig also has products in clinical trials that address the fourth CRM market
segment--atrial fibrillation (AF). AF is an arrhythmia in the upper chambers
of the heart estimated to affect more people than bradycardia and ventricular
tachycardia combined. St. Jude Medical has a minority equity position in
InControl, Inc., whose implantable atrial defibrillator, the METRIX-TM-,
began international clinical trials last year. U.S. clinical trials are
expected to begin this year.
Pacesetter's strategic direction revolves around one overriding goal--quality
speed to market. Achieving this goal will accelerate our performance by
enhancing:
- a global strategic marketing direction with local market tactical
capabilities,
- an integrated approach to be the lowest cost manufacturer,
- universal quality standards and procedures,
- a worldwide approach to clinical trials and expedited regulatory
cycles, and
- an intellectual property portfolio to protect critical inventions.
Vertical integration at Pacesetter will improve operational efficiency and
product profit margins. We are investing in a facility for European
operations near Stockholm, Sweden. A second facility being constructed in
Phoenix, Arizona, will produce hybrids, a critical electronic circuitry
component, in order to decrease reliance on outside suppliers and provide
manufacturing options for other products. Both facilities are expected to be
operational by mid-1997.
Ongoing marketplace changes have increased health care providers' emphasis on
efficient patient care and improved patient outcomes--areas in which
Pacesetter excels. Recent agreements with two large health care providers,
VHA, Inc. and Columbia/HCA, Inc., provide St. Jude Medical divisions the
opportunity to partner in delivering high-quality, cost-effective patient
care.
With Pacesetter's bradycardia market position, the introduction this year of
the Aegis-TM- ICD and Daig's capabilities in EP and AF, St. Jude Medical will
provide solutions for all heart arrhythmias. Few companies enjoy this
position, a strategy that will drive substantial growth in the future.
[Photo]
A DECEMBER 1995 GROUNDBREAKING CEREMONY FOR PACESETTER AB'S NEW R&D AND
MANUFACTURING FACILITY IN JARFALLA, JUST NORTH OF STOCKHOLM, SWEDEN. LEFT TO
RIGHT: BO JOHANSSON, MAYOR, CITY OF JARFALLA; FRED COLEN, MANAGING DIRECTOR,
PACESETTER AB; AND INGELA THALEN, SWEDISH MINISTER OF HEALTH AND SOCIAL
AFFAIRS.
[Photo]
LEFT TO RIGHT: WERNER HAFELFINGER, VICE PRESIDENT, MANUFACTURING; FRANK
KELLY, SR. VICE PRESIDENT, HYBRID OPERATIONS; AND DAVID MORLEY, SENIOR VICE
PRESIDENT, OPERATIONS, REVIEW PLANS FOR PACESETTER'S NEW HYBRID MANUFACTURING
FACILITY IN PHOENIX, ARIZONA.
15
[Photos]
A GLOBAL COMPANY
ST. JUDE MEDICAL'S INTERNATIONAL OPERATIONS EXECUTIVES ARE COMMITTED TO THE
COMPANY'S GLOBALIZATION OBJECTIVES AND TO EXPAND SALES AND SUPPORT IN ALL
MAJOR WORLD MARKETS. LEFT TO RIGHT: TERRIE AJAMIL, ASIA-PACIFIC; PATRICK
FOURTEAU, EUROPE; GARY JORDAN, CANADA; ED STORCH, LATIN AMERICA.
PATRICK FOURTEAU AND EUROPEAN MANAGING DIRECTORS MEETING AT ASHFORD
CASTLE, CONG, CO. MAYO, IRELAND TO REVIEW 1996 PLANS FOR EUROPE. LEFT TO
RIGHT: RUUD HELWIG, EASTERN EUROPE; ROGER OSBORNE, UNITED KINGDOM;
HUGUES D'ATHIS, PACESETTER FRANCE; STEN ELFVER, AUSTRIA, SWITZERLAND,
BENELUX AND NORDIC COUNTRIES; FOURTEAU; ANGELO RIVETTI, ITALY; JEAN-
LOUIS NORRE, HEART VALVE BUSINESS, FRANCE; JURGEN FUCHS, GERMANY; AND
DR. IGNACIO L. BALBOA, SPAIN AND PORTUGAL.
16
A GLOBAL COMPANY
Investments in globalization characterized St. Jude Medical's international
operations in 1995. Sales grew significantly from 1994, and all geographies
made substantila progress. The combined resources of our core businesses
provided a broader product portfolio and the critical mass required to expand
in all major world markets. While nearly 60 percent of all medical technology
sales occur outside the United States, less than half of St. Jude Medical's
1995 sales were international. This gap is an opportunity.
Our 1995 heart valve and pacing product introductions were very successful.
New products are expected to represent almost half of international sales in
1996. These new products--including the SJM-Registered Trademark- Masters
Series rotatable mechanica lheart valve and the Toronto SPV-Registered
Trademark- valve, and the Trilogy-TM-, Microny-TM- and Regency-TM- pacemaker
systems--will drive market share. The Aegis-TM- ICD allows us to enter the
international VT/VF market. And the European market potential of Daig's
products for interventional cardiology and cardiac rhythm management are
substantial.
A number of talented individuals with significant international business
experience are helping us build the business. Ruud Helwig, formerly with Eli
Lilly & Co., is directing our efforts in Eastern Europe, Middle East and
Africa, with an emphasis on the emerging markets of Russia, Poland, Hungary
and Czechoslovakia. Jurgen Fuchs is the managing director for Germany, coming
from Biotronik GmbH, the top German pacing company. In addition, Michel
Cavadini, formerly of Digital Equipment Corporation, is the director of
finance and administration, while Roland Gerard, formerly with Sulzer Medica,
S.p.A., is director of regulatory affairs and quality assurance.
Terrie Ajamil moved from the cardiac assist division to take responsibility
for Asia-Pacific Rim operations. Ed Storch continues to expand the Company's
business in Latin America. We consolidated our operations in Italy under
Angelo Rivetti. And Gary Jordan, previously responsible for heart valve sales
and marketing, is general manager of a new direct selling organization in
Canada.
International markets vary widely, and it is essential to understand specific
market requirements, regulatory systems, reimbursement policies and cultural
norms. European health care systems are similar to the U.S. managed care
market in terms of pricing and reimbursement policies. However, regulatory
differences generally enable new products to move through clinical trials
faster and to market earlier, which benefits European clinicians and patients.
With new products, the right people and a focus on implementation, we are
developing a stronger presence for St. Jude Medical. We are committed to
increasing the Company's international presence as a high-quality,
cost-effective provider of life-saving products.
/s/ Patrick P. Fourteau
Patrick P. Fourteau
PRESIDENT, ST. JUDE MEDICAL
EUROPE, MIDDLE EAST AND AFRICA
"IN ASIA AND THE PACIFIC RIM, LOCAL CUSTOMS INFLUENCE HOW WE DO BUSINESS.
COUNTRIES ARE EXTREMELY NATIONALISTIC. WE MUST UNDERSTAND THESE CULTURES TO
SUCCEED. THERE IS TREMENDOUS POTENTIAL IN THIS REGION AND SOME RISK, BUT THE
GROWTH OPPORTUNITIES ARE SUBSTANTIAL."
TERRIE M. AJAMIL
VICE PRESIDENT, ASIA-PACIFIC
/s/ Terrie M. Ajamil
"IN 1995 WE MADE SUBSTANTIAL PROGRESS EXPANDING ST. JUDE MEDICAL'S BUSINESS
IN LATIN AMERICA. OUR GOAL IS TO ESTABLISH A MORE ACTIVE AND CONSISTENT
PRESENCE THROUGHOUT THESE EMERGING GROWTH MARKETS."
EDWARD A. STORCH
VICE PRESIDENT, LATIN AMERICA
/s/ Edward A. Storch
"A CONSOLIDATED PRESENCE ALLOWS US TO BETTER ADDRESS THE CHANGING NEEDS OF
OUR CANADIAN CUSTOMERS. WITH THIS NEW BUSINESS UNIT, WE WILL MEET OUR
PHYSICIAN AND ADMINISTRATIVE CUSTOMERS' DEMANDS FOR CONTINUOUS IMPROVEMENT IN
THE HEART VALVE AND PACING MARKETS, AND ARE POSITIONED TO SUPPORT NEW
PRODUCTS."
J. GARY JORDAN
VICE PRESIDENT AND GENERAL MANAGER
ST. JUDE MEDICAL CANADA
/s/ J. Gary Jordan
17
[Photos]
NEW TECHNOLOGY PLATFORMS
IN JANUARY 1996, ST. JUDE MEDICAL ANNOUNCED A DEFINITIVE AGREEMENT TO
ACQUIRE DAIG CORPORATION, A LEADER IN THE DESIGN AND MANUFACTURING OF
SPECIALIZED MEDICAL DEVICES, LOCATED IN MINNETONKA, MINNESOTA.
LEFT TO RIGHT: NGUON CHHOY, GROUP LEADER; ANUSUIA SINGH,
ASSEMBLER; AND JOAN HAAG, GROUP LEADER, ARE PART OF DAIG'S CATHETER
MANUFACTURING TEAM.
MIKE COYLE, DIRECTOR, BUSINESS DEVELOPMENT AND PHIL PALMER, VICE
PRESIDENT, CORPORATE DEVELOPMENT WITH A DAIG CATHETER.
18
NEW TECHNOLOGY PLATFORMS
We continue to build St. Jude Medical as a broad-based medical
technology leader. During 1995 the Company achieved further
diversification within the cardiac rhythm management and heart valve
disease management businesses, and explored opportunities in
interventional cardiology, vascular/ endovascular repair and
interventional neurology. In December, following a year of analyzing
opportunities to create shareholder value at our cardiac assist
division, we concluded that the best alternative was to sell that
business. We are also reviewing opportunities in other therapeutic
classes to position St. Jude Medical for its next decade of continued
market leadership.
Completing the acquisition of Daig Corporation is a critical step in our
diversification plan. Daig positions the Company in additional segments
of cardiac rhythm management, represents an entry into interventional
cardiology, and adds important core competencies in catheter technology
that will be leveraged into our other targeted therapeutic classes. With
its presence in interventional cardiology, Daig offers St. Jude Medical
a strong platform from which to pursue new technologies which address
important unmet clinical needs such as restenosis.
Our 1994 minority equity investment in EndoVascular Technologies, Inc.
(EVT) provides St. Jude Medical the opportunity to closely monitor a
groundbreaking new technology for the repair of damaged or diseased
blood vessels. EVT's Endovascular Grafting System-TM-, currently in U.S.
clinical trials, may provide an alternative to major invasive surgery
and extended hospitalization associated with the repair of abdominal
aortic aneurysms.
In 1996 St. Jude Medical is implementing a comprehensive strategy that
is responsive to the economic environment of today's global medical
technology market.
We will also continue to analyze business development opportunities for
St. Jude Medical based on the Company's strategic diversification plan.
Our strong sales, marketing and clinical support organizations targeted
at cardiovascular surgeons, cardiologists, and electrophysiologists
along with our core competencies in heart valve, electrical stimulation
and catheter technologies are important assets that we will use to drive
future growth.
/s/ E. Phillip Palmer
E. Phillip Palmer
VICE PRESIDENT, CORPORATE DEVELOPMENT
[Photo]
AT A RECENT MEETING FOR INVESTORS AND FINANCIAL ANALYSTS, HEARTPORT
CO-FOUNDER AND CEO WESLEY D. STERMAN, M.D. AND TERRY L. SHEPHERD, PRESIDENT
OF THE ST. JUDE MEDICAL DIVISION, DEMONSTRATED HEARTPORT'S REVOLUTIONARY
"PORT-ACCESS-TM-" APPROACH TO HEART VALVE SURGERY.
IN SEPTEMBER 1995, ST. JUDE MEDICAL AND HEARTPORT ANNOUNCED AN AGREEMENT
FOR THE TWO COMPANIES TO PURSUE LESS-INVASIVE PORT-ACCESS-TM- HEART VALVE
SURGERY TO REPLACE AND REPAIR DISEASED HEART VALVES. THIS AGREEMENT WAS A
CRITICAL HEART VALVE DISEASE MANAGEMENT MILESTONE FOR ST. JUDE MEDICAL IN
1995.
19
COMMUNITY PARTNERSHIPS
[Photo]
ST. JUDE MEDICAL IS ACTIVELY INVOLVED IN SUPPORTING THE UNIVERSITY OF
MINNESOTA'S BIOMEDICAL ENGINEERING INSTITUTE. MINNESOTA'S MECHANICAL HEART
VALVE AND PACEMAKER INDUSTRIES BOTH TRACE THEIR ORIGINS TO THE UNIVERSITY OF
MINNESOTA AND TO DR. C. WALTON LILLEHEI. REVIEWING THE PROGRESS OF A
FUNDRAISING CAMPAIGN FOR THE BIOMEDICAL ENGINEERING INSTITUTE ARE: LEFT TO
RIGHT: C. WALTON LILLEHEI, M.D., Ph.D., WHO IS THE HONORARY CO-CHAIR OF THE
CAMPAIGN, ALONG WITH THE FOUNDER OF MEDTRONIC, EARL BAKKEN (NOT PICTURED);
BILL BRODY, M.D., Ph.D., PROVOST, HEALTH SCIENCES; RON MATRICARIA, CAMPAIGN
CHAIR; PROF. MATT TIRRELL, DIRECTOR OF BIOMEDICAL ENGINEERING INSTITUTE; AND
UNIVERSITY OF MINNESOTA PRESIDENT NILS HASSELMO.
St. Jude Medical is committed to good corporate citizenship and supporting
employees and their families, its health care customers and their patients
and the communities in which it does business. The examples listed illustrate
how the Company, its executives and employees contribute resources, time and
talents to worthy organizations and individuals. Related activities include:
participation in annual United Way campaigns; student mentoring and
internship programs; adopt-a-school initiatives including Pacesetter's
relationship with Sylmar High School; support of youth athletic teams;
matching grants for employee contributions to post-secondary institutions;
participation in boards of public companies, non-profit organizations and
industry associations; and sponsorship of fundraising events hosted by
cardiac care charities and medical societies.
In 1996, St. Jude Medical will establish a foundation to support medical
technology research, cardiac care, humanitarian missions, community
fundraising campaigns and employee volunteerism.
[Photo]
ST. JUDE MEDICAL'S HEART VALVE AND CARDIAC RHYTHM MANAGEMENT BUSINESSES
REGULARLY DONATE PRODUCTS TO PHYSICIANS AND ORGANIZATIONS WHO PERFORM
CARDIOVASCULAR SURGERY FOR PATIENTS IN NEED AROUND THE WORLD. HERE BARRY
FORWAND, VICE PRESIDENT, NORTH AMERICAN OPERATIONS, PACESETTER, AND DEBBIE
RAYBURN, SUPERVISOR, PRODUCT DISTRIBUTION, EXAMINE PRODUCTS FROM PACESETTER'S
LOS ANGELES MANUFACTURING FACILITY THAT ARE READY FOR SHIPMENT FOR
HUMANITARIAN USE AT INTERNATIONAL LOCATIONS. IN 1995, ST. JUDE MEDICAL
PRODUCTS WERE DONATED TO PHYSICIANS WORKING IN ARGENTINA, BOLIVIA, BOSNIA AND
HERZEGOVINA, CHINA, CROATIA, GUATEMALA, INDIA, PARAGUAY AND UZBEKISTAN, AMONG
OTHER COUNTRIES.
[Photo]
EMPLOYEE VOLUNTEER PROGRAMS FOCUS ON ASSISTING COMMUNITY ORGANIZATIONS. AT
THE COMPANY'S MINNESOTA HEADQUARTERS, EMPLOYEES COLLECT DONATED ITEMS TO
SUPPORT THOSE IN NEED. PICTURED LEFT TO RIGHT ARE: BARB KELM, BECKY KOEPP,
BARB VOJTECH AND SHARLA WILLIAMSON, SORTING GIFTS FOR DELIVERY FOR THE 1995
HOLIDAYS.
20
INVESTOR INFORMATION
-------------------------------------------------------------------------------
TRANSFER AGENT
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
718-921-8293
800-937-5449
Correspondence regarding stock holdings and changes of address should be
directed to the transfer agent.
When shares owned by one shareholder are held in different forms of the same
name (e.g., John Doe, J. Doe) or when new accounts are established for shares
purchased at different times, duplicate mailings of shareholder information
results. The Company, by law, is required to mail to each name on the
shareholder list unless the shareholder requests that duplicate mailings be
eliminated or consolidates all accounts. Such requests should be directed, in
writing, to American Stock Transfer, 6201 15th Avenue, Brooklyn, NY 11219.
ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be
held at 9:30 a.m. on Thursday, May 9, 1996, at the Lutheran Brotherhood
Building, 625 Fourth Avenue South, Minneapolis, MN.
INVESTOR INFORMATION A copy of the Company's annual report on Form 10-K or
other financial reports will be provided free of charge to any shareholder
upon written request to Investor Relations, St. Jude Medical, Inc., One
Lillehei Plaza, St. Paul, MN 55117-9983.
St. Jude Medical, Inc. does not issue quarterly shareholder reports.
Shareholders and security analysts can obtain the latest Company news
releases, including quarterly results, and other information by calling
Investor Relations at a toll-free number (1-800-552-7664). Company news
releases are also available through "Company News On-Call" by fax
(1-800-758-5804, ext. 816662) or at http://www.prnewswire.com on the
INTERNET. A St. Jude Medical home page on the INTERNET will be available in
1996.
DIVIDENDS St. Jude Medical, Inc. discontinued its cash dividend upon
completion of the acquisition of Pacesetter, which was finalized
September 30, 1994. The Company did not pay any cash dividends in 1995.
On November 16, 1995, the Company distributed a 50% common stock dividend to
shareholders of record as of November 2, 1995.
RESEARCH COVERAGE
The following firms currently provide research coverage of St. Jude
Medical, Inc.:
Bear, Stearns & Co., New York, NY
C.J. Lawrence/Deutsche Bank Securities Corporation, New York, NY
CS First Boston, New York, NY
Dain Bosworth Incorporated, Minneapolis, MN
Goldman Sachs & Co., New York, NY
Hambrecht & Quist Incorporated, New York, NY
John G. Kinnard & Co., Minneapolis, MN
JP Morgan Securities, New York, NY
Morgan Keegan & Company , Inc., Memphis, TN
Morgan Stanley & Co., Incorporated, New York, NY
Paine Webber Incorporated, New York, NY
Piper, Jaffray Incorporated, Minneapolis, MN
Raymond James & Associates, Inc., St. Petersburg, FL
Robert W. Baird Co., Incorporated, Milwaukee, WI
Salomon Brothers Inc., New York, NY
Sanford C. Bernstein, New York, NY
Schroder, Wertheim, New York, NY
UBS Securities, New York, NY
Vector Securities International, Inc., Deerfield, IL
Wasserstein Perella Securities, Inc, New York, NY
Wessels, Arnold & Henderson, Minneapolis, MN
SUPPLEMENTAL MARKET PRICE DATA The common stock of St. Jude Medical, Inc. is
traded on the Nasdaq National Market under the symbol STJM. The range of high
and low prices per share for the Company's common stock for fiscal 1995 and
1994 are set forth below. As of February 5, 1996, the Company had 4,539
shareholders of record.
Year Ended December 31
1995 1994
------------------------------------
Quarter High Low High Low
--------------------------------------------------------
First $28.83 $23.67 $20.33 $17.33
Second $35.67 $27.08 $21.67 $16.50
Third $42.67 $32.58 $24.17 $20.00
Fourth $43.25 $32.50 $27.33 $22.50
Price data reflect actual transactions. In all cases, prices shown are
inter-dealer prices and do not reflect mark-ups, mark-downs and commissions.
TRADEMARKS St. Jude Medical-Registered Trademark-, Toronto SPV-Registered
Trademark-, SJM X-Cell-TM-, SJM-Registered Trademark-, BioXenoGraft-TM-,
Synchrony-Registered Trademark-, AutoCapture-TM-, Addvent-TM-, Microny-TM-,
Passive PLUS-Registered Trademark-, Regency-TM-, Tendril-Registered
Trademark-, Trilogy-TM-, PDx-TM-, APSM-TM-, Aegis-TM-, MembraneE-TM-and AV
PLUS-TM-.
Heartport-TM- and Port-Access-TM- are trademarks of Heartport, Inc.
Meadox-Registered Trademark- and Hemashield-Registered Trademark- are
registered trademarks of Meadox Medicals, Inc. Teflon-Registered Trademark-
and Dacron-Registered Trademark- are registered trademarks of DuPont de
Nemours, E.I. & Co., Inc. Endovascular Grafting System-TM- is a trademark of
Endovascular Technologies, Inc. METRIX-TM- is a trademark of InControl, Inc.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
INTRODUCTION: The Company designs, manufactures and markets medical devices
and provides services primarily for the cardiovascular segment of the medical
device market. Principal products include the world's most frequently
implanted mechanical heart valves, tissue heart valves, bradycardia
pacemakers and pacemaker leads.
Management's principal objective is to increase shareholder value by focusing
on customer satisfaction, product innovation, continual product and process
improvement and investment in medical technologies. The Company has
implemented a long-term business strategy which focuses investment on
specific medical device technologies which will provide innovative solutions
to health care providers and patients.
Effective September 30, 1994, St. Jude Medical acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the
Company's product offerings and provided a medical technology platform for
potential further diversification of its business. The Company's 1994 fourth
quarter and full year 1995 financial results include Pacesetter's operations.
The commentary that follows should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages 28 to 37. The Company's fiscal year is the 52 or 53 week
period ending the Saturday nearest December 31. Fiscal years 1995, 1994 and
1993 consisted of 52 weeks.
Shown in the following table for the periods indicated are the percentage
relationships of certain items in the consolidated statements of income to
net sales and the percentage change of the dollar amounts of such items as
compared with the prior period. Due to the impact of the Pacesetter
acquisition, amounts are not directly comparable between years.
Year-to Year
Percent of Net Sales Increase/(Decrease)
-----------------------------------------------------------------------------
1995 1994
Year Ended December 31 Compared Compared
1995 1994 1993 to 1994 to 1993
-----------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 101% 42%
Cost of sales 30.8% 28.1% 24.3% 121% 65%
------------------------------------------------------
Gross profit 69.2% 71.9% 75.7% 94% 35%
Selling, general and
administrative 32.9% 27.1% 19.4% 143% 99%
Research and
development 9.5% 5.8% 4.3% 228% 91%
Purchased research
and development -- 11.4% -- (100%) --
------------------------------------------------------
Operating profit 26.8% 27.6% 52.0% 96% (24%)
Other income
(expense), net (.9%) 2.0% 5.5% (194%) (49%)
------------------------------------------------------
Income before taxes 25.9% 29.6% 57.5% 76% (27%)
Income tax provision 8.0% 7.6% 14.1% 114% (24%)
------------------------------------------------------
Net income 17.9% 22.0% 43.4% 63% (28%)
-----------------------------------------------------------------------------
NET SALES: Net sales totalled $723,513 in 1995, a $363,873, or 101%, increase
over 1994 net sales of $359,640. Approximately $349,000 of the increase was
attributable to the full year effect of the Pacesetter transaction and
increased Pacesetter sales. On a comparable business basis, net sales were
almost $269,000, which was approximately a 6% increase over 1994 net sales.
NET SALES
(IN MILLIONS)
[BAR GRAPH]
- HEART VALUES
- CARDIAC RHYTHM MANAGEMENT
- OTHER
Mechanical heart valve net sales increased in 1995 in all geographic markets
despite worldwide health care reform and increased competition which
continued to put pressure on the number of procedures performed as well as on
pricing flexibility. Domestic mechanical heart valve net sales increased
slightly in 1995 due to the full year availability of the St. Jude
Medical-Registered Trademark- Hemodynamic Plus Series valves and
collagen-impregnated aortic valved grafts and general price increases that
were partially offset by a slight reduction in unit sales. International
mechanical heart valve net sales in 1995 were more than 10% higher than 1994.
This resulted
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
mainly from increased unit sales in the developing markets of
Latin America and the Middle East. In Western Europe, net sales were
positively impacted by approximately $7,500 in 1995 due to the depreciation
of the U.S. dollar from 1994 levels.
Tissue heart valve net sales in 1995 increased significantly from 1994 levels
due to the continuing physician acceptance of the Toronto SPV-TM-valve.
Cardiac assist device 1995 net sales increased by almost 15% from 1994 levels
as a result of new product introductions and market share penetration.
Pacesetter net sales totalled almost $455,000. This represented an increase
of approximately $349,000 from 1994 levels which only included net sales
subsequent to the purchase of the business on September 30, 1994. The higher
sales level also resulted from the 1995 introduction of the Trilogy-TM- line
of bradycardia pacemakers and several advanced pacemaker leads.
NET SALES
(IN MILLIONS)
[BAR GRAPH]
- UNITED STATES
- INTERNATIONAL
International net sales were 42% of total net sales in 1995 which was
consistent with 1994.
Net sales in 1994 of $359,640 were 42% higher than 1993 net sales. The
increase principally resulted from the fourth quarter 1994 Pacesetter net
sales and higher mechanical heart valve sales in emerging international
markets. Domestic mechanical heart valve sales increased due to the
introduction of the collagen-impregnated aortic valved graft and general
price increases that were partially offset by a reduction in unit sales.
COST OF SALES: As a percentage of net sales, cost of sales in 1995 increased
to 30.8% from 28.1% in 1994 primarily as a result of Pacesetter operations.
Although Pacesetter margins are consistent with the industry, its margins are
not as high as the Company's heart valve margins. Cost of sales includes
royalties paid in connection with various license agreements. In addition,
cost of sales increased in 1995 due to a price increase from the Company's
supplier of pyrolytic carbon components, the major components of the
mechanical heart valve. Also, a higher percentage of mechanical heart valve
unit sales were generated in the lower margin markets of Latin America and
the Middle East. These increases were partially offset by reduced royalty
payments due to the expiration of a license agreement pertaining to
mechanical heart valve sales during the first quarter 1995.
In 1994, cost of sales as a percentage of sales increased to 28.1% from 24.3%
in 1993. The increase was principally attributable to lower margin Pacesetter
sales, a higher percentage of mechanical heart valve sales into lower margin
emerging markets and a price increase from the Company's supplier of
pyrolytic carbon components. These increases were partially offset by reduced
royalty payments to the Company's pyrolytic carbon supplier due to the
expiration of a contract during the first quarter 1994.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
(SG&A) expense increased in 1995 to $237,569 from $97,577 in 1994. As a
percentage of net sales, SG&A increased to 32.9% in 1995 from 27.1% in 1994.
The higher dollar amount and percentage of net sales increase were mainly due
to Pacesetter operations. Selling efforts for pacemakers are much more labor
intensive and the Company uses a commission-based independent contractor
sales force in the U.S. and distributors in all international markets except
Western Europe. Also, Pacesetter related goodwill amortization was recorded
for the full year in 1995 compared to only one quarter in 1994. In addition,
SG&A expenses increased due to additional marketing costs attributable to
expanded coverage in the Pacific Rim and Latin American markets and an
increased infrastructure in Western Europe as a result of the Pacesetter
acquisition. Operating expenses denominated in foreign currencies also
increased approximately $4,500 due to the depreciation of the U.S. dollar.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
During 1994, selling, general and administrative expense increased $48,537
over 1993 levels. The increase was mainly attributable to Pacesetter
operations, higher domestic mechanical heart valve marketing costs associated
with increased competition and ISO 9000 certification activities.
RESEARCH AND DEVELOPMENT: Research and development (R&D) expense in 1995
increased to $68,970 from $21,008 recorded in 1994 and as a percentage of net
sales increased to 9.5% from 5.8%. The increase was attributable to the full
year effect of Pacesetter operations. Pacesetter has major ongoing R&D
programs in the areas of bradycardia pacemakers and tachycardia
defibrillators as well as development of a new programmer. A slight decrease
in R&D for the heart valve business resulted from the completion of certain
phases of the development of the SJM-Registered Trademark- Masters Series
rotatable heart valve which was introduced in 1995.
RESEARCH AND DEVELOPMENT
(IN MILLIONS)
[BAR GRAPH]
In 1994, research and development expense increased to $21,008 from $10,972
recorded in 1993. The increase mainly resulted from Pacesetter's fourth
quarter operations. Other R&D expenses decreased from 1993 levels due to the
completion of certain phases of research and development which was offset by
increased spending for both mechanical and tissue heart valves.
PURCHASED RESEARCH AND DEVELOPMENT: The Pacesetter acquisition was accounted
for as a purchase and, on this basis, a pre-tax charge of $40,800 for
purchased research and development was incurred in 1994. Specifically,
purchased research and development was analyzed by an independent appraisal
firm through interviews and evaluation of identifiable developmental
projects. Anticipated future cash flows of certain projects were discounted
to present values considering risks associated with uncertainties and
obstacles in completing projects, technological innovations which could
decrease the expected cash flows and other potential market changes. Other
projects were valued using the cost approach which values projects based on
the buyer's ability to avoid previously incurred costs for projects with no
alternative future use.
OTHER INCOME (EXPENSE): Other expense totalled $6,615 in 1995 compared to
other income of $7,056 in 1994. The Pacesetter acquisition which was
effective September 30, 1994 decreased the Company's cash and marketable
securities position by $275,000 and increased debt by $255,000. During 1995,
$135,000 of debt was repaid; however, interest expense in 1995 increased
significantly over 1994 levels as a result of a full year of debt as opposed
to one quarter of debt. Due to fluctuations in the U.S. dollar and a shift in
the relationship between European currencies, foreign exchange contract gains
and foreign exchange transaction gains were recorded in 1995 compared to
losses recorded in 1994.
Net other income decreased to $7,056 in 1994 from $13,934 in 1993 mainly due
to the financing of the Pacesetter acquisition. Interest expense was $3,714
in 1994 and negligible in 1993 and interest income was significantly reduced.
Also partnership and joint venture losses were higher in 1994 as significant
costs were incurred with respect to The Heart Valve Company's development of
the SJM X-Cell-TM- bioprosthesis.
INCOME TAX PROVISION: The Company's 1995 effective income tax rate increased
to 31.0% which was 5.5 percentage points higher than the 1994 effective rate.
The higher rate resulted from lower tax advantaged investment income, income
from Pacesetter operations which is generally taxed at a higher rate than the
Company's previously existing business and reduced tax benefits derived from
the Company's Puerto Rican operations.
The Omnibus Budget Reconciliation Act of 1993 significantly reduced the tax
benefits which were previously available from income generated by the
Company's Puerto Rican operations under Internal Revenue Code (IRC) Section
936. As a result of this legislation, Puerto Rican tax benefits were reduced
by an additional 5% in 1995 on top of a 40% reduction in 1994.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OUTLOOK: The Company expects that market demands, government regulation and
societal pressures will continue to change the health care industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to pursue diversification
opportunities in the form of acquisitions, joint ventures, partnerships and
strategic business alliances. In addition, the Company will participate with
industry groups to promote the introduction and use of advanced medical
device technology within a cost conscious environment. Finally, customer
service in the form of cost effective clinical outcomes will continue to be a
primary focus for the Company.
In 1995, competition continued to increase in the Company's heart valve
business; however, the Company estimates it held its share of the worldwide
heart valve market. During 1995, domestic hospital inventory reduction
programs and increased competition resulted in a slight reduction in domestic
unit demand for the Company's products. International unit sales growth
exceeded 10% reflecting continued penetration of emerging markets.
Competition is anticipated to place downward pressure on pricing and health
care reform is expected to result in further hospital consolidations over
time.
The Company's cardiac rhythm management business is also in a highly
competitive market. During 1995, the Company introduced to the market a
number of new pulse generators and pacemaker lead products. The Company
estimates that it held its share of the worldwide bradycardia segment of the
cardiac rhythm market in 1995.
The Company has a goal to achieve 15% annual growth in earnings per share.
However, achievement of this goal could be materially affected by factors
including, but not limited to, the Company's inability to execute its
diversification strategy or successfully integrate acquired companies;
legislative or administrative reform of the U.S. Medicare and Medicaid
systems in a manner that would significantly reduce reimbursement for
procedures using the Company's medical devices; unexpected failures of the
Company's products or continuation of or increases in existing failure modes for
the Company's implanted products; unfavorable developments in the area of
product liability laws affecting medical devices; the acquisition of key patents
by competitors that would have the effect of excluding the Company from new
market segments; or a serious earthquake affecting the Company's Pacesetter
facility in Los Angeles.
The Company anticipates that its 1996 effective income tax rate will increase
due to a higher ratio of Pacesetter income which is generally taxed at a
higher rate, reduced Puerto Rican income as a percentage of total income and
a lower Puerto Rican tax benefit as IRC Section 936 tax benefits are reduced
by an additional 5% per year through 1998. There are additional changes to
IRC Section 936 regulations being proposed by the Internal Revenue Service
which, if finalized in its present form, would further negatively impact the
Company's effective tax rate. There are also legislative proposals to
eliminate the Section 936 tax benefit. The Company cannot predict when, or if
the regulation or legislative changes will be adopted.
Subsequent to December 31, 1995, the Company had several unusual transactions
which will be reflected in the first quarter 1996 financial statements. Sale
of the cardiac assist business for $25,000 will result in a gain of
approximately $10,000. Acquisition of The Heart Valve Company for $1,000 and
approximately 149,000 shares of Company common stock will result in a
purchased research and development charge of approximately $5,000. Settlement
of litigation related to an acquisition break up fee will result in a gain of
approximately $3,000. The planned acquisition of Daig Corporation for
approximately 10,000,000 shares of Company common stock will result in
transaction related expenses of approximately $5,500. In addition, the Daig
acquisition is expected to dilute net income by approximately 5% in 1996.
FINANCIAL CONDITION
SUMMARY: The financial condition of the Company was strengthened during 1995.
The debt incurred with respect to the Pacesetter acquisition was reduced in
1995 to $120,000 from $255,000 at the end of 1994. Cash and marketable
securities increased to $166,053 at December 31, 1995, from $136,968 at
December 31, 1994. Working capital, the difference between current assets and
current liabilities, was $327,526 at December 31, 1995, a $6,124 increase
from the prior year end level.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
LIQUIDITY: Company operations provide a strong, positive cash flow which is
more than sufficient to meet the Company's operational requirements. Cash
provided by operations in 1995 amounted to $175,478 compared to $88,933 in
1994. The current ratio was 2.7 to 1 at December 31, 1995.
The Company has a $260,000 long-term revolving line of credit through
September 1999 with an eleven member banking syndicate comprised of banks in
the United States and other countries where it conducts its business. At
December 31, 1995, the Company had $140,000 available under the line.
Accounts receivable increased approximately $18,400 in 1995 principally due
to a shift in sales to emerging markets with longer payment cycles.
Inventories increased about $28,400 primarily as a result of expanded product
offerings in both the heart valve and cardiac rhythm management businesses.
Net property, plant and equipment increased almost $24,100 due to Pacesetter
plant expansion, pacemaker programmer investments and further development of
the Company's Woodridge carbon technology center.
CASH FLOW FROM OPERATIONS
(IN MILLIONS)
[BAR GRAPH]
Cash flow from operations and access to additional capital will enable the
Company to pursue further diversification opportunities and to fund expected
capital additions. During 1996 and 1997, the Company will expand pacemaker
manufacturing capacity in both the U.S. and Sweden. In addition, the Company
will invest in its information systems and communications infrastructure.
CAPITAL: The Company's capital structure consists of equity and interest
bearing debt. Interest bearing debt as a percent of total capital was 14.6%
at December 31, 1995 a reduction from 31.6% at December 31, 1994. More
importantly, the ratio of debt to cash flow from operations was reduced from
2.9/1 to .7/1.
CAPITAL STRUCTURE
(IN MILLIONS)
[BAR GRAPH]
- EQUITY
- DEBT
Cash dividends paid to shareholders in 1994 were $13,935. The Company
discontinued its cash dividend subsequent to the third quarter 1994 in order
to accelerate debt repayment and to provide additional funds for investment
in new businesses. No repurchases of shares of common stock were made during
1995 or 1994. The Company may repurchase approximately 1,000,000 additional
shares under a currently outstanding Board of Directors authorization.
OUTLOOK: Management is unaware of any adverse business trends that would
materially affect the Company's strong financial position. Should suitable
investment opportunities arise that would require additional financing,
management believes that the Company's excellent earnings, strong cash flow
and solid balance sheet provide a substantial basis to obtain additional
financing at highly competitive rates and terms.
26
REPORT OF MANAGEMENT
-------------------------------------------------------------------------------
The management of St. Jude Medical, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements were prepared in accordance with generally accepted
accounting principles and include amounts which reflect management's best
estimates based on its informed judgement and consideration given to
materiality. Management is also responsible for the accuracy of the related
data in the annual report and its consistency with the financial statements.
In the opinion of management, the Company's accounting systems and
procedures, and related internal controls, provide reasonable assurance that
transactions are executed in accordance with management's intention and
authorization, that financial statements are prepared in accordance with
generally accepted accounting principles, and that assets are properly
accounted for and safeguarded. The concept of reasonable assurance is based
on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom. Management reviews and modifies the system
of internal controls to improve its effectiveness. The effectiveness of the
controls system is supported by the selection, retention and training of
qualified personnel, an organizational structure that provides an appropriate
division of responsibility and a strong budgeting system of control.
St. Jude Medical, Inc. also recognizes its responsibility for fostering a
strong ethical climate so that the Company's affairs are conducted according
to the highest standards of personal and business conduct. This
responsibility is reflected in the Company's business ethics policy.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent
and internal audits are reviewed by the Audit Committee of the Board of
Directors, consisting solely of outside directors. The independent auditors
and internal auditor meet with, and have confidential access to, the Audit
Committee to discuss the results of their audit work.
/s/ Ronald A. Matricaria
Ronald A. Matricaria
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ Stephen L. Wilson
Stephen L. Wilson
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
-------------------------------------------------------------------------------
Board of Directors
St. Jude Medical, Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude
Medical, Inc. and subsidiaries at December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MINNEAPOLIS, MINNESOTA
February 5, 1996
27
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Download Table]
Year Ended December 31 1995 1994 1993
-----------------------------------------------------------------------
Net sales $723,513 $359,640 $252,642
Cost of sales 222,796 100,956 61,342
-----------------------------------------------------------------------
Gross profit 500,717 258,684 191,300
Selling, general and
administrative expense 237,569 97,577 49,040
Research and development expense 68,970 21,008 10,972
Purchased research and
development charge 40,800
-----------------------------------------------------------------------
Operating profit 194,178 99,299 131,288
Other income (expense), net (6,615) 7,056 13,934
-----------------------------------------------------------------------
Income before taxes 187,563 106,355 145,222
Income tax provision 58,145 27,121 35,579
-----------------------------------------------------------------------
Net income $129,418 $ 79,234 $109,643
-----------------------------------------------------------------------
Earnings per share:
Primary $ 1.82 $ 1.13 $ 1.55
Fully diluted $ 1.81 $ 1.12 $ 1.55
-----------------------------------------------------------------------
Cash dividends paid per share $ -- $ 0.20 $ 0.27
-----------------------------------------------------------------------
Average shares outstanding:
Primary 71,067,000 70,169,000 70,834,000
Fully diluted 71,543,000 70,516,000 70,863,000
-----------------------------------------------------------------------
See notes to consolidated financial statements.
28
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Download Table]
December 31 1995 1994
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,438 $ 11,791
Marketable securities 152,615 125,177
Accounts receivable, less allowance 164,492 146,062
(1995 - $9,328, 1994 - $5,760)
Inventories:
Finished goods 79,638 59,534
Work in process 27,121 21,723
Raw materials 51,652 48,750
----------------------------------------------------------------------
Total inventories 158,411 130,007
Prepaid income taxes 15,930 4,448
Other current assets 15,268 16,597
----------------------------------------------------------------------
Total current assets 520,154 434,082
----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 9,949 12,049
Buildings and improvements 44,160 42,200
Machinery and equipment 130,998 89,957
Construction in progress 19,315 12,811
----------------------------------------------------------------------
Gross property, plant and equipment 204,422 157,017
Less accumulated depreciation (48,174) (24,852)
----------------------------------------------------------------------
Net property, plant and equipment 156,248 132,165
----------------------------------------------------------------------
OTHER ASSETS 339,532 353,651
----------------------------------------------------------------------
TOTAL ASSETS $1,015,934 $919,898
----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 78,364 $ 42,143
Accrued income taxes 38,965 20,240
Accrued employee compensation
and related taxes 44,684 32,377
Other accrued expenses 30,615 17,920
----------------------------------------------------------------------
Total current liabilities 192,628 112,680
----------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt 120,000 255,000
----------------------------------------------------------------------
CONTINGENCIES
----------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share - 25,000,000 shares authorized;
no shares issued
Common stock, par value $.10 per share -
100,000,000 shares authorized; issued
and outstanding 1995 - 69,991,700 shares;
1994 - 69,718,623 shares 6,999 6,972
Additional paid-in capital 31,782 25,947
Retained earnings 650,515 521,097
Cumulative translation adjustment 4,319 (2,484)
Unrealized gain on available-for-sale
securities 9,691 686
----------------------------------------------------------------------
Total shareholders' equity 703,306 552,218
----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,015,934 $919,898
----------------------------------------------------------------------
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
Common Stock
--------------------- Additional Cumulative Unrealized Total
Number of Paid-In Retained Translation Gain on Shareholders'
Shares Amount Capital Earnings Adjustment Investments Equity
--------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 71,276,319 $7,128 $ 58,455 $364,941 $(1,485) $ -- $429,039
--------------------------------------------------------------------------------------------------------------------------------
Net income 109,643 109,643
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 111,623 11 1,342 1,353
Tax benefit realized upon
exercise of stock options 355 355
Cash dividends
( .27 per share) (18,786) (18,786)
Purchase and retirement
of common shares (1,766,550) (177) (35,062) (35,239)
Translation adjustment (2,124) (2,124)
--------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 69,621,392 6,962 25,090 455,798 (3,609) -- 484,241
--------------------------------------------------------------------------------------------------------------------------------
Net income 79,234 79,234
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 97,231 10 634 644
Tax benefit realized upon
exercise of stock options 223 223
Cash dividends
( .20 per share) (13,935) (13,935)
Translation adjustment 1,125 1,125
Unrealized gain on
investments, net of taxes 686 686
--------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 69,718,623 6,972 25,947 521,097 (2,484) 686 552,218
--------------------------------------------------------------------------------------------------------------------------------
Net income 129,418 129,418
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 273,077 27 4,486 4,513
Tax benefit realized
upon exercise of stock options 1,349 1,349
Translation adjustment 6,803 6,803
Unrealized gain on
investments, net of taxes 9,005 9,005
--------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 69,991,700 $6,999 $31,782 $650,515 $ 4,319 $9,691 $703,306
--------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
[Download Table]
Year Ended December 31 1995 1994 1993
----------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $129,418 $ 79,234 $109,643
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 20,198 8,313 4,516
Amortization 20,102 7,816 4,458
Purchased research and development charge 40,800
Changes in operating assets and
liabilities net of acquisition:
Decrease (increase) in accounts
receivable (18,662) (23,079) 718
Increase in inventories (21,846) (4,024) (5,972)
Decrease (increase) in other current assets 1,643 (9,685) (1,920)
Increase (decrease) in accounts payable
and accrued expenses 37,273 7,193 (2,746)
Increase (decrease) in accrued income taxes 19,969 (3,227) 7,061
Increase in prepaid and deferred income
taxes (12,617) (14,408) (456)
----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 175,478 88,933 115,302
----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (42,961) (18,789) (16,422)
Purchases of marketable securities (26,524) (88,426) (153,290)
Proceeds from sale or maturity of
marketable securities 13,500 306,360 81,630
Investments in companies, joint ventures
and partnerships (3,701) (13,564) (12,253)
Acquisition of Pacesetter 13,000 (524,300)
Other investing activities 2,694 (7,686) (3,273)
----------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (43,992) (346,405) (103,608)
----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 4,514 644 1,353
Cash dividends paid (13,935) (18,786)
Common stock repurchased (35,239)
Proceeds from the issuance of long-term
debt 255,000
Repayment of long-term debt (135,000)
----------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (130,486) 241,709 (52,672)
----------------------------------------------------------------------------------
Effect of currency exchange rate changes
on cash 647 567 (381)
----------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,647 (15,196) (41,359)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 11,791 26,987 68,346
----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,438 $ 11,791 $ 26,987
----------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: St. Jude Medical, Inc. develops, manufactures and
distributes medical device products with an emphasis on cardiac care
products. The Company's products are sold in more than 70 countries.
Principal products sold are prosthetic heart valves and pacemakers. The main
markets for both products are the United States, Western Europe and Japan. In
the United States, the Company uses a direct employee-based sales
organization for its heart valve products and a combination of independent
contractors and employee-based sales organizations for its pacemaker
products. In Western Europe, the Company has a direct sales presence in
thirteen countries. Throughout the rest of the world the Company uses
distributor-based sales organizations.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform with the current year presentation.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period
ending the Saturday nearest December 31. Fiscal years 1995, 1994 and 1993
consist of 52 weeks.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates in effect on reporting
dates and differences due to changing exchange rates are recorded as
"cumulative translation adjustment" in shareholders' equity. Income and
expenses are translated at rates which approximate those in effect on
transaction dates.
CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
approximates market.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method. Allowances are made for
slow-moving, obsolete, unsalable or unusable inventories.
STOCK OPTIONS: The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for stock options. Pro forma information
regarding net income and earnings per share as calculated under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," will be disclosed in complete financial statements filed for
fiscal years beginning subsequent to December 15, 1995.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight line method over
their estimated useful lives ranging from three to 39 years. Accelerated
depreciation is used by the Company for tax accounting purposes only.
LONG-LIVED ASSETS: Statement of Financial Accounting Standards (FAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The Company will adopt FAS No. 121 which
was issued in March 1995 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
REVENUE RECOGNITION: The Company's general practice is to recognize revenues
from product sales as shipped and for services as performed.
RESEARCH AND DEVELOPMENT: Research and development expense includes all
expenditures for general research into scientific phenomena, development of
useful ideas into merchantable products and continuing support and upgrading
of various products. All such expense is charged to operations as incurred.
EARNINGS PER SHARE: Primary and fully diluted earnings per share are computed
by dividing net income for the year by the weighted average number of shares
of common stock and common stock equivalents outstanding.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 ACQUISITIONS
On September 30, 1994, the Company acquired substantially all of the Siemens
AG worldwide cardiac rhythm management business ("Pacesetter") for $511,300.
The acquisition was accounted for under the purchase accounting method.
Goodwill is amortized on a straight line basis over 20 years. The results of
Pacesetter's operations have been included in the consolidated results of
operations from the date of acquisition.
In conjunction with the acquisition, the Company recorded a non-cash pre-tax
charge of $40,800 ($25,300, or $.36 per share, after tax) relating to that
portion of the purchase price attributable to purchased research and
development. The purchased research and development charge represents the
appraised value of the in-process research and development that must be
expensed under generally accepted accounting principles.
Note 13 discusses the effects of the Pacesetter acquisition on the Company's
reported results.
NOTE 3 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
was adopted in 1993 on a prospective basis. The statement requires use of the
asset and liability approach for financial accounting and reporting for
income taxes. The cumulative effect of the accounting change was not material.
The components of income before taxes were as follows:
[Download Table]
1995 1994 1993
------------------------------------------------------------
Domestic $169,567 $ 97,304 $140,303
Foreign 17,996 9,051 4,919
------------------------------------------------------------
Income before taxes $187,563 $106,355 $145,222
------------------------------------------------------------
The components of the income tax provision were as follows:
[Download Table]
1995 1994 1993
------------------------------------------------------------
Current:
Federal $43,093 $ 32,958 $21,682
State and Puerto Rico 11,178 9,898 12,400
Foreign 6,226 3,107 1,953
------------------------------------------------------------
Total current 60,497 45,963 36,035
------------------------------------------------------------
Deferred:
Prepaid (7,329) (5,757) 274
Deferred 4,977 (13,085) (730)
------------------------------------------------------------
Total deferred (2,352) (18,842) (456)
------------------------------------------------------------
Income tax provision $58,145 $ 27,121 $35,579
------------------------------------------------------------
Deferred income tax assets (liabilities) were comprised of the following
at December 31:
[Download Table]
1995 1994
---------------------------------------------------------------------------
Net deferred income tax asset:
Inventory (intercompany profit in inventory
and excess of tax over book valuation) $ 16,590 $ 5,811
Intangibles 10,728 12,753
Accruals not currently deductible
and other 7,923 3,806
---------------------------------------------------------------------------
Deferred income tax asset 35,241 22,370
---------------------------------------------------------------------------
Net deferred income tax liability:
Accumulated depreciation (7,037) (1,927)
Unrealized gain on investments (5,830) (421)
---------------------------------------------------------------------------
Deferred income tax liability (12,867) (2,348)
---------------------------------------------------------------------------
Net deferred income tax asset $ 22,374 $20,022
---------------------------------------------------------------------------
The Company's effective income tax rate varied from the statutory U.S.
federal income tax rate of 35% as follows:
[Download Table]
1995 1994 1993
---------------------------------------------------------------------------
Income tax provision at
U.S. statutory rate $65,647 $37,224 $50,828
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 4,398 1,188 2,610
Tax benefits from
Foreign Sales Corporation (1,621) (1,433) (1,612)
Tax benefits from
Puerto Rican operations (8,442) (7,880) (13,782)
Tax exempt income -- (2,274) (3,403)
Foreign taxes at higher
(lower) rates (1,640) 194 358
Other (197) 102 580
---------------------------------------------------------------------------
Income tax provision $58,145 $27,121 $35,579
---------------------------------------------------------------------------
Effective income tax rate 31.0% 25.5% 24.5%
---------------------------------------------------------------------------
The Company's effective income tax rate is favorably affected by Puerto Rican
tax exemption grants which result in Puerto Rican earnings being partially
tax exempt through the year 2003.
Consolidated U.S. federal income tax returns filed by the Company have been
examined by the Internal Revenue Service through the year 1989. The Company's
1990 through 1994 federal income tax returns are presently under audit. Field
examiners have indicated that the IRS may assert substantial additional taxes
on Puerto Rican earnings. Management believes any additional taxes which may
ultimately result from the audit would not have a material adverse effect on
the Company's financial condition.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries ($17,967 at December 31, 1995)
because distribution of these earnings generally would not require additional
taxes due to available foreign tax credits.
The Company made income tax payments of $48,175, $45,737 and $28,385 in 1995,
1994 and 1993, respectively.
NOTE 4 STOCK PURCHASE AND OPTION PLANS
STOCK PURCHASE: The Company's employee stock purchase savings plan allows
participating employees to purchase, through payroll deductions, shares of
common stock at 85% of the fair market value at specified dates. Under the
terms of the plan, 750,000 shares of common stock have been reserved for
purchase by plan participants. Employees purchased 97,525 and 26,041 shares
in 1995 and 1994, respectively. At December 31, 1995, 603,237 shares were
available for purchase under the plan.
STOCK OPTIONS: Under the terms of the Company's various stock plans,
8,434,396 shares of common stock have been reserved for issuance to
directors, officers and employees upon the grant of restricted stock or the
exercise of stock options. Stock options are exercisable over periods up to
10 years from date of grant and may be "incentive stock options" or
"non-qualified stock options" and may have stock appreciation rights
attached. At December 31, 1995, there were a maximum of 5,190,595 shares
available for grant and 3,243,801 options outstanding, of which 2,507,524
were exercisable. Stock option activity was as follows:
[Download Table]
Options Price
Outstanding Per Share
---------------------------------------------------------------
Balance at December 31, 1993 1,930,677 $ 3.06 - 33.08
Granted 1,148,625 17.25 - 26.42
Cancelled (138,010) 18.59 - 32.17
Exercised (8,250) 7.20 - 14.63
--------------------------------------------
Balance at December 31, 1994 2,933,042 3.06 - 33.08
Granted 652,275 25.50 - 39.50
Cancelled (165,744) 17.83 - 32.25
Exercised (175,772) 3.56 - 32.25
--------------------------------------------
Balance at December 31, 1995 3,243,801 3.06 - 39.50
---------------------------------------------------------------
Pursuant to the terms of the Company's various stock plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related
tax liabilities. Shares are acquired from the optionee at the fair market
value of the stock on the transaction date.
All options have been granted at not less than fair market value at dates of
grant. When stock options are exercised, the par value of the shares issued
is credited to common stock and the excess of the proceeds over the par value
is credited to additional paid-in capital. When non-qualified options are
exercised, the Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and the stock
option exercise price. These tax benefits do not affect the income tax
provision, but rather are credited directly to additional paid-in capital.
Under the terms of the Company's shareholder rights agreement, upon the
occurrence of certain events which result in a change in control as defined
by the agreement, registered holders of common shares are entitled to
purchase one-tenth of a share of Series A Junior Participating Preferred
Stock at a stated price, or to purchase either the Company's shares or shares
of the acquiring entity at half their market value.
NOTE 5 FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included
in other income (expense).
The Company had contracts totalling $12,483 at December 31, 1995 and $4,215
at December 31, 1994, to exchange French Francs, German Marks and Italian
Lira into U.S. dollars. These instruments were recorded at their fair value
at each balance sheet date. The cumulative gain (loss) on these contracts
totalled $45 and ($128) at December 31, 1995 and December 31, 1994,
respectively and was recorded as other income (expense).
LONG-TERM DEBT: The Company has an unsecured $260,000 committed revolving
line of credit with a group of 11 banks that terminates in September 1999.
The rate of interest payable under this borrowing facility is a floating rate
and is a function of the London Interbank Offered Rate. The weighted average
rate at December 31, 1995 and December 31, 1994, was 6.1% and 5.9%,
respectively. A facility fee of .085% of the total commitment is paid
quarterly.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The credit agreement contains various covenants which require the Company to
maintain a specified financial ratio, limit liens, regulate asset disposition
and subsidiary indebtedness and restrict certain acquisitions and
investments. At December 31, 1995, the Company was in compliance with these
covenants.
OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity
instruments, bank certificates of deposit and Puerto Rico industrial
development bonds. Under Statement of Financial Accounting Standards (FAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
debt securities that the Company does not have the positive intent to hold to
maturity and all marketable equity securities are classified as
available-for-sale and are carried at fair value. Unrealized holding gains
and losses on securities classified as available-for-sale are carried as a
separate component of shareholders' equity. The Company adopted the
provisions of the new standard for investments held or acquired after January
1, 1994, and has classified all investments as available-for-sale and carried
them at fair value. In accordance with FAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. No net realized gains or losses were recorded in 1995. A net
realized loss of $419 was recorded on sales of available-for-sale securities
in 1994. The net unrealized holding gain on available-for-sale securities
included as a separate component of shareholders' equity was $9,691 (net of
$5,830 of current deferred income taxes) at December 31, 1995.
1995 1994
-----------------------------------------------------------------------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
-----------------------------------------------------------------------------
Assets:
Cash and
Cash Equivalents $ 13,438 $ 13,438 $11,791 $ 11,791
Marketable Securities $137,094 $152,615 $124,070 $125,177
-----------------------------------------------------------------------------
The Company also guarantees certain obligations of its subsidiaries. As
of December 31, 1995 and 1994, the maximum amounts of such guarantees
were $7,500 and $5,000, respectively.
CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable
securities and foreign exchange contracts are the financial instruments which
may subject the Company to concentration of credit risk.
Within the European Economic Union, payment of certain accounts receivable is
made by the national health care system within several countries. Although
the Company does not anticipate collection problems with these receivables,
payment is contingent to a certain extent upon the economic situation within
these countries. The credit risk associated with the balance of the trade
receivables is limited due to dispersion of the receivables over a large
number of customers in many geographic areas. The Company monitors the
credit worthiness of its customers to which it grants credit terms in the
normal course of business.
Marketable securities are placed with high credit qualified financial
institutions and Company policy limits the credit exposure to any one
financial institution. Counterparties to foreign exchange contracts are major
financial institutions; therefore, credit loss from counterparty
nonperformance is unlikely.
NOTE 6 RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS: The Company has a defined contribution profit
sharing plan, including features under section 401(k) of the Internal Revenue
Code, which provides retirement benefits to substantially all full-time U.S.
employees. Under the 401(k) portion of the plan, eligible employees may
contribute a maximum of 10% of their annual compensation with the Company
matching the first 3%. The Company's level of contribution to the profit
sharing portion of the plan is subject to Board of Directors approval and is
based on Company performance. The Company has additional defined contribution
programs for employees outside the United States. The benefits under these
plans are based primarily on compensation levels. Total retirement plan
expense was $6,558, $2,873 and $1,265 in 1995, 1994 and 1993, respectively.
DEFINED BENEFIT PLANS: In certain countries outside the United States,
the Company maintains defined benefit plans. At December 31, 1995, the
Company's obligations under these plans approximated $6,000.
NOTE 7 SUPPLY OF HEART VALVE COMPONENTS
The Company has a long-term contract for supply of pyrolytic carbon
components used in its mechanical heart valve prosthesis. Under the terms of
the contract,
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the Company has agreed to purchase decreasing percentages of
its component requirements from the supplier through 1998. After 1995, the
Company must purchase a minimum of 20% of its component needs from the
supplier through 1998 at negotiated prices. The contract may be renewed
annually subsequent to 1998. As part of this contract, the Company has
granted the supplier a license to produce and sell the supplier's bileaflet
mechanical heart valve in countries where patents have been issued covering
the St. Jude Medical-Registered Trademark- mechanical heart valve. Under this
portion of the contract, the supplier will pay royalties to the Company
through mid-1998. Under a separate agreement, the Company paid a royalty to
the supplier based on the number of mechanical heart valves the Company
produced from its self-manufactured carbon components through August 1993.
Amortization of these royalty amounts paid was completed in the second
quarter 1994.
NOTE 8 GEOGRAPHIC AREA
The Company operates in the medical products industry and is segmented into
two geographic areas -- the United States and Canada (including export sales
to unaffiliated customers except to customers in Europe, the Middle East and
Africa) and Europe (including export sales to unaffiliated customers in the
Middle East, Africa, Latin America and Asia Pacific).
Sales between geographic areas are made at transfer prices which approximate
prices to unaffiliated third parties. Export sales from the United States to
unaffiliated customers were $56,022, $44,050 and $29,926 for 1995, 1994 and
1993, respectively.
Net sales by geographic area were as follows:
[Download Table]
United States Europe Elimina- Net Sales
and Canada tions
----------------------------------------------------------------------
1995
Customer sales $474,677 $248,836 $ -- $723,513
Intercompany sales 97,550 -- (97,550) --
----------------------------------------------------------------------
$572,227 $248,836 $(97,550) 723,513
----------------------------------------------------------------------
1994
Customer sales $251,244 $108,396 $ -- $359,640
Intercompany sales 71,184 -- (71,184) --
----------------------------------------------------------------------
$322,428 $108,396 $(71,184) $359,640
----------------------------------------------------------------------
1993
Customer sales $172,713 $ 79,929 $ -- $252,642
Intercompany sales 59,908 -- (59,908) --
----------------------------------------------------------------------
$232,621 $ 79,929 $(59,908) $252,642
----------------------------------------------------------------------
Operating profit by geographic area was as follows:
United States
and Canada Europe Corporate Total
----------------------------------------------------------------------
1995 $156,536 $51,345 $(13,703) $194,178
1994 $ 74,026 $36,814 $(11,541) $ 99,299
1993 $ 99,092 $41,046 $ (8,850) $131,288
----------------------------------------------------------------------
Identifiable assets by geographic area were as follows:
United States
and Canada Europe Corporate Total
------------------------------------------------------------------------
1995 $588,963 $203,044 $223,927 $1,015,934
1994 $549,776 $181,470 $188,652 $ 919,898
1993 $ 92,083 $ 40,947 $393,787 $ 526,817
------------------------------------------------------------------------
Corporate expenses consist principally of non-allocable general and
administrative expenses. Corporate identifiable assets consist principally
of cash and cash equivalents and marketable securities.
NOTE 9 OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following:
[Download Table]
1995 1994 1993
----------------------------------------------------------------------
Interest income $ 7,242 $ 14,001 $ 14,635
Interest expense (12,936) (3,714) (5)
Foreign exchange gains (losses) 541 (1,937) (526)
Other (1,462) (1,294) (170)
----------------------------------------------------------------------
Other income (expense), net $ (6,615) $ 7,056 $ 13,934
----------------------------------------------------------------------
NOTE 10 OTHER ASSETS
Other assets as of December 31, 1995 and 1994, net of accumulated
amortization of $34,923 and $25,316, respectively consisted of the
following:
[Download Table]
1995 1994
----------------------------------------------------------------------
Investments in companies, joint ventures
and partnerships $ 22,356 $ 20,651
Intangibles and other 317,176 333,000
----------------------------------------------------------------------
Other assets $ 339,532 $ 353,651
----------------------------------------------------------------------
Investments in companies, joint ventures, and partnerships are stated at cost
which approximates market. Intangibles and other assets consist principally
of the excess of cost over net assets of certain acquired businesses and
technology. Intangibles and other assets are being amortized over periods
ranging from ten to 20 years.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11 CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. In connection with
two pacemaker lead models, the Company may be subject to future uninsured
claims. The Company's products lia-bility insurance carrier has denied
coverage for these models and has filed suit against the Company seeking
rescission of the policy covering Pacesetter's business retroactive to the
date the Company acquired Pacesetter. The Company was a codefendant in a
1995 class action suit with respect to these leads. This case was settled in
November 1995. The Company's share of the settle-ment was approximately
$7,000. Additional claims could be filed by patients with these leads who
were not class members. Further, claims may be filed in the future relative
to events currently unknown to management. Management believes losses that
might be sustained from such actions would not have a material adverse effect
on the Company's financial condition.
NOTE 12 SHAREHOLDERS' EQUITY
On October 17, 1995, the Board of Directors declared a three for two stock
split in the form of a 50% stock dividend to shareholders of record on
November 2, 1995. Earnings per share, dividends per share, shares outstanding
and weighted average shares outstanding have been restated to reflect the
stock dividend.
NOTE 13 SUBSEQUENT EVENTS
On January 5, 1996, the Company acquired The Heart Valve Company, previously
a 50% owned joint venture with Hancock Jaffee Laboratories (HJL). Under the
agreement, the Company will pay $1,000 and issue 149,153 shares of its common
stock to HJL. The acquisition will be accounted for under the purchase
accounting method and the resulting purchased research and development charge
of approximately $5,000 will be recorded in the first quarter 1996.
On January 19, 1996, the Company sold its cardiac assist division assets to
C.R. Bard, Inc. for approximately $25,000 in cash. The selling price exceeded
the net asset value of the assets and the resulting gain of approximately
$10,000 will be recorded in the first quarter 1996.
On January 29, 1996, the Company entered into a definitive agreement to
acquire Daig Corporation, a Minnetonka, Minnesota based manufacturer of
specialized cardiovascular devices for the electrophysiology, atrial
fibrillation and interventional cardiology markets. Each share of Daig common
stock will be converted into approximately .652 shares of St. Jude Medical
common stock. The Company expects to issue approximately 10,000,000 shares.
The transaction is expected to close in the second quarter 1996 and will be
accounted for as a pooling of interests.
The following unaudited pro forma information has been prepared assuming that
the Pacesetter and Daig acquisitions had occurred at the beginning of the
period presented. Permitted adjustments include amortization of goodwill,
increased interest expense, decreased interest income, the related income tax
effects and increased outstanding shares of common stock. Pro forma results
are not necessarily indicative of the results that would have occurred had
the acquisitions actually taken place at the beginning of 1993, or the
expected results of future operations. The 1993 pro forma results include a
$25,300, or $.36 per share after-tax, Pacesetter research and development
charge.
1995 1994 1993
----------------------------------------------------------------------
Net sales $761,835 $696,739 $639,686
Net income $138,848 $119,174 $ 98,429
----------------------------------------------------------------------
Earnings per share $ 1.71 $ 1.49 $ 1.22
----------------------------------------------------------------------
NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1995 and 1994 was as follows:
Quarter
----------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------
Year Ended
December 31, 1995:
Net sales $180,499 $185,551 $175,953 $181,510
Gross profit $121,393 $129,704 $122,687 $126,933
Net income $ 30,584 $ 33,124 $ 31,927 $ 33,783
Earnings per share $ .43 $ .47 $ .45 $ .47
Year Ended
December 31, 1994:
Net sales $ 66,685 $ 66,736 $ 62,468 $163,751
Gross profit $ 49,814 $ 50,277 $ 46,991 $111,602
Net income $ 26,537 $ 26,204 $ 24,489 $ 2,004*
Earnings per share $ .38 $ .37 $ .35 $ .03*
----------------------------------------------------------------------
*Includes a $25,300 ($.36 per share) charge for purchased research and
development associated with the Pacesetter acquisition.
Primary and fully diluted per share results are the same for all quarters in
1995 and 1994. The full year 1995 and 1994 primary earnings per share were
both $.01 higher than fully diluted earnings per share due to rounding.
37
[Enlarge/Download Table]
TEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994** 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS FOR THE
YEAR ENDED:
Net sales $723,513 $359,640 $252,642 $239,547 $209,837 $175,160 $147,981 $114,075
---------------------------------------------------------------------------------------------------------------------------------
Gross profit $500,717 $258,684 191,300 $179,297 $149,043 $114,730 $94,825 $71,754
---------------------------------------------------------------------------------------------------------------------------------
Percent of sales 69.2% 71.9% 75.7% 74.8% 71.0% 65.5% 64.1% 62.9%
---------------------------------------------------------------------------------------------------------------------------------
Operating profit $194,178 $99,299 $131,288 $122,258 $100,647 $77,315 $62,221 $45,697
---------------------------------------------------------------------------------------------------------------------------------
Percent of sales 26.8% 27.6% 52.0% 51.0% 48.0% 44.1% 42.0% 40.1%
---------------------------------------------------------------------------------------------------------------------------------
Net income $129,418 $79,234 $109,643 $101,658 $83,968 $64,680 $50,916 $33,473
---------------------------------------------------------------------------------------------------------------------------------
Percent of sales 17.9% 22.0% 43.4% 42.4% 40.0% 36.9% 34.4% 29.3%
---------------------------------------------------------------------------------------------------------------------------------
Primary earnings per share* $1.82 $1.13 $1.55 $1.41 $1.17 $.90 $.71 $.47
---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END:
---------------------------------------------------------------------------------------------------------------------------------
Cash and marketable securities $166,053 $136,968 $368,991 $338,690 $263,314 $179,059 $120,881 $85,688
---------------------------------------------------------------------------------------------------------------------------------
Working capital $327,526 $321,402 $408,998 $377,321 $301,094 $218,507 $157,063 $113,033
---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,015,934 $919,898 $526,817 $469,750 $375,093 $278,146 $201,735 $143,141
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt $120,000 $255,000
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $703,306 $552,218 $484,241 $429,039 $344,727 $254,405 $185,984 $129,742
---------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
---------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ .20 $ .27 $ .20
---------------------------------------------------------------------------------------------------------------------------------
Primary weighted average shares
outstanding 71,067,000 70,169,000 70,834,000 71,897,000 72,104,000 71,778,000 71,319,000 70,524,000
---------------------------------------------------------------------------------------------------------------------------------
Total employees 2,315 2,248 722 684 599 544 445 399
---------------------------------------------------------------------------------------------------------------------------------
1987 1986
---------------------------------------------------------------------
SUMMARY OF OPERATIONS
FOR THE YEAR ENDED:
Net sales $ 71,806 $ 60,473
---------------------------------------------------------------------
Gross profit $ 41,817 $ 32,567
---------------------------------------------------------------------
Percent of sales 58.2% 53.9%
---------------------------------------------------------------------
Operating profit $ 28,231 $ 21,477
---------------------------------------------------------------------
Percent of sales 39.3% 35.5%
---------------------------------------------------------------------
Net income $ 17,307 $ 12,031
---------------------------------------------------------------------
Percent of sales 24.1% 19.9%
---------------------------------------------------------------------
Primary earnings per share* $ .27 $ .20
---------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END:
---------------------------------------------------------------------
Cash and marketable securities $ 65,025 $ 52,526
---------------------------------------------------------------------
Working capital $ 80,883 $ 64,538
---------------------------------------------------------------------
Total assets $101,671 $ 85,817
---------------------------------------------------------------------
Long-term debt $ 508 $ 26,083
---------------------------------------------------------------------
Total shareholders' equity $ 92,293 $ 49,769
---------------------------------------------------------------------
OTHER DATA:
---------------------------------------------------------------------
Dividends declared per share
---------------------------------------------------------------------
Primary weighted average shares outstanding 64,218,000 59,916,000
---------------------------------------------------------------------
Total employees 296 262
---------------------------------------------------------------------
*Earnings per share and share data have been adjusted for a 50% stock dividend
paid in 1995 and 100% stock dividends paid in 1990, 1989 and 1986.
**Results for 1994 include a $40,800 pre-tax ($25,300, or $0.36 per share,
after-tax) charge for purchased research and development associated with the
Pacesetter acquisition.
PRIMARY EARNINGS PER SHARE*
[Bar Graph]
CLOSING STOCK PRICE*
[Bar Graph]
CASH FLOW PER SHARE*
[Bar Graph]
BOOK VALUE PER SHARE*
[Bar Graph]
38 39
CORPORATE GOVERNANCE
-------------------------------------------------------------------------------
The Board of Directors and the Company's senior management team recognize the
spirit of activism that defines corporate governance in the 1990s.
The Board performs its fiduciary duties to shareholders by reviewing
strategic and operating plans; analyzing monthly financial results of
operations; conducting senior management succession planning; ensuring fair
and competitive compensation programs; reviewing all diversification
initiatives; and consulting with the chief executive officer and other
executives on technology, financing, competitive and government policy
challenges facing St. Jude Medical.
Board structures that are integral to governance include the Audit,
Compensation and Nominating Committees. All committees are composed entirely
of non-employee directors.
The Board has undertaken a number of new initiatives to continuously improve
corporate governance. These programs are designed to ensure open
communications with management and improve the Board's capabilities to
discharge its responsibilities to shareholders.
These initiatives support the Company's guiding principles, which are:
- a strong focus on CUSTOMER SATISFACTION
- CORE VALUES that include integrity, honesty, respect for the individual
and good corporate citizenship
- a work ENVIRONMENT characterized by open communication and trust, and
allowing employees to take risks and enjoy what they do
- DECENTRALIZED decision-making with an emphasis on cross-functional teams
- ACCOUNTABILITY and a feeling of ownership.
The guiding principles are integral to St. Jude Medical, are regularly
communicated to all employees and are the basis of how the Company operates.
The Board of Directors designed in 1994 and implemented in 1995 an annual,
formal CEO evaluation process. This process began with the creation of a CEO
job description listing nine "principal CEO accountabilities."
Each year, the CEO develops specific goals under each accountability for the
Board's review and approval. These goals also form the basis for the
objectives of senior operations and staff executives.
At the end of each year, Board members complete a confidential written
evaluation of the CEO's performance consistent with this framework of
accountabilities and goals. An independent consultant, in conjunction with
the Board, prepares a summary of the evaluations and meets with the CEO and
the chairman of the Compensation Committee to present the report.
This process has focused discussion between the Board and CEO and facilitated
Board review of the Company's strategic and operating plans. A business
periodical has documented St. Jude Medical's CEO evaluation process.(1)
In support of the Board's fiduciary duties, an active shareholder relations
program is a critical component of the Company's communications strategy.
Financial information is distributed widely through various means, including
electronic media. Company executives participate in financial conferences
sponsored by investment firms, and meet regularly with investors. Also, the
Company annually hosts an investment community meeting at a St. Jude Medical
facility.
A recent corporate governance initiative focuses on the composition and
expertise of the Board of Directors. It is important that the Board be
diverse in its background and perspective. The Company believes the Board
should bring strong collective expertise in areas such as general management,
medical technology and health care, international business, corporate
development, strategic planning, public policy, capital markets and
information technology.
A self-evaluation process is being developed by the Board of Directors to
enhance its contributions to St. Jude Medical's success.
(1) Muschewske, Robert C., Ph.D., "CEO Evaluation: A Process That Worked,"
DIRECTORS AND BOARDS, Summer 1995.
[Recycle Symbol]
-Copyright- 1996 St. Jude Medical, Inc.
Printed in U.S.A. on recycled paper. Covers and pages 1-20 are printed on
paper that contains 40% preconsumer and 10% postconsumer material. Pages 21-40
are printed on paper that contains 30% preconsumer and 20% postconsumer
material.
LEADERSHIP
-------------------------------------------------------------------------------
ST. JUDE MEDICAL, INC.
ST. PAUL, MINNESOTA
---------------------------------------
Ronald A. Matricaria
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
John P. Berdusco
VICE PRESIDENT, ADMINISTRATION
Peter L. Gove
VICE PRESIDENT,
CORPORATE RELATIONS
Robert E. Helbling
VICE PRESIDENT,
CORPORATE DISTRIBUTION
Kevin T. O'Malley, Esq.
VICE PRESIDENT AND
GENERAL COUNSEL
E. Phillip Palmer
VICE PRESIDENT,
CORPORATE DEVELOPMENT
Stephen L. Wilson
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
Harold A. Bencic
CHIEF INFORMATION OFFICER
EDS
ST. JUDE MEDICAL DIVISION
ST. PAUL, MINNESOTA
---------------------------------------
Terry L. Shepherd
PRESIDENT
Darrin J. Bergman
DIRECTOR, MECHANICAL DEVELOPMENT PROGRAMS
Robert S. Elgin
VICE PRESIDENT, OPERATIONS
Alan R. Flory, DVM
DIRECTOR, CLINICAL AND
REGULATORY AFFAIRS
Donald S. Guzik
DIRECTOR, QUALITY SYSTEMS
Steven J. Healy
DIRECTOR, WORLDWIDE MARKETING
C. Walton Lillehei, Ph.D., M.D.
MEDICAL DIRECTOR
M. William Mirsch II
DIRECTOR, TISSUE
DEVELOPMENT PROGRAMS
Patrick J. O'Neill
DIRECTOR, FINANCE AND
CUSTOMER SERVICE
Jan M. Webster
DIRECTOR, HUMAN RESOURCES
PACESETTER DIVISION
LOS ANGELES, CALIFORNIA
---------------------------------------
David W. Adinolfi
VICE PRESIDENT, MARKETING
Andrew K. Balo
VICE PRESIDENT, WORLDWIDE QUALITY
ASSURANCE AND REGULATORY AFFAIRS
Fred A. Colen
MANAGING DIRECTOR, PACESETTER AB
Barry L. Forwand
VICE PRESIDENT,
NORTH AMERICAN OPERATIONS
Diane M. Johnson, Esq.
EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL
Mark W. Kroll, Ph.D.
VICE PRESIDENT, TACHYCARDIA
BUSINESS UNIT
Paul A. Levine, M.D., F.A.C.C.
VICE PRESIDENT, MEDICAL SERVICES
David R. Morley
SENIOR VICE PRESIDENT, OPERATIONS
Franklin R. Rick
VICE PRESIDENT, FINANCE
Mary C. Sutton, Esq.
VICE PRESIDENT, HUMAN RESOURCES
INTERNATIONAL OPERATIONS
---------------------------------------
Terrie M. Ajamil
VICE PRESIDENT, AREA OPERATIONS,
ASIA-PACIFIC
J. Gary Jordan
VICE PRESIDENT AND
GENERAL MANAGER,
ST. JUDE MEDICAL CANADA
Edward A. Storch
VICE PRESIDENT, AREA OPERATIONS,
LATIN AMERICA
ST. JUDE MEDICAL EUROPE,
MIDDLE EAST AND AFRICA
BRUSSELS, BELGIUM
---------------------------------------
Patrick P. Fourteau
PRESIDENT
Michel Cavadini
DIRECTOR, FINANCE AND ADMINISTRATION
Michael D. Dale
BUSINESS UNIT DIRECTOR, HEART
VALVE DISEASE MANAGEMENT
Roland Gerard
DIRECTOR, REGULATORY AFFAIRS AND
QUALITY ASSURANCE
Jon P. Hunt, Ph.D.
BUSINESS UNIT DIRECTOR,
CARDIAC RHYTHM MANAGEMENT
Tonni Bulow-Nielsen
DIRECTOR, TACHYCARDIA PRODUCTS
David L. Vied
DIRECTOR, HUMAN RESOURCES
Dr. Ignacio L. Balboa
MANAGING DIRECTOR,
SPAIN AND PORTUGAL,
ST. JUDE MEDICAL ESPANA S.A.
Hugues d'Athis
MANAGING DIRECTOR
PACESETTER FRANCE S.A.
Sten Elfver
MANAGING DIRECTOR, AUSTRIA,
SWITZERLAND, BENELUX AND NORDIC
COUNTRIES
Jurgen Fuchs
MANAGING DIRECTOR, GERMANY
ST. JUDE MEDICAL GMBH
Ruud Helwig
MANAGING DIRECTOR, EASTERN
EUROPE, MIDDLE EAST AND AFRICA
ST. JUDE MEDICAL MEDIZINTECHNIK
GES.M.B.H
Jean-Louis Norre
MANAGING DIRECTOR,
ST. JUDE MEDICAL FRANCE S.A.
Roger G. Osborne
MANAGING DIRECTOR,
UNITED KINGDOM
ST. JUDE MEDICAL U.K., LTD.
Angelo Rivetti
MANAGING DIRECTOR, ITALY
ST. JUDE MEDICAL ITALIA S.P.A.
BOARD OF DIRECTORS
[Photo]
Thomas H. Garrett, III (3)
ATTORNEY
Lindquist & Vennum P.L.L.P.
Minneapolis, Minnesota
[Photo]
Kenneth G. Langone (2)
MANAGING DIRECTOR
Invemed Associates, Inc.
New York, New York
[Photo]
Lawrence A. Lehmkuhl (3)
FORMER CHAIRMAN,
PRESIDENT AND CEO
St. Jude Medical, Inc.
Dellwood, Minnesota
[Photo]
Ronald A. Matricaria
CHAIRMAN, PRESIDENT
AND CEO
St. Jude Medical, Inc.
St. Paul, Minnesota
[Photo]
William R. Miller (2)
FORMER VICE CHAIRMAN
Bristol-Myers Squibb Co.
New York, New York
[Photo]
Charles V. Owens (3)
CHAIRMAN
Genesis Labs, Inc.
Minneapolis, Minnesota
[Photo]
Walter L. Sembrowich,
Ph.D. (1)
PRESIDENT
Aviex, Inc.
Minneapolis, Minnesota
[Photo]
Roger G. Stoll, Ph.D. (1)
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
Ohmeda, Inc.
Liberty Corner,
New Jersey
[Photo]
Gail R. Wilensky, Ph.D. (1)
SENIOR FELLOW
Project Hope
Washington, D.C.
(1) DENOTES MEMBERS OF NOMINATING COMMITTEE
(2) DENOTES MEMBERS OF THE COMPENSATION COMMITTEE
(3) DENOTES MEMBERS OF THE AUDIT COMMITTEE
[Logo]
ST. JUDE MEDICAL, INC.
ONE LILLEHEI PLAZA
ST. PAUL, MN 55117-9983
PHONE: 612-483-2000
TELEX: 298453
FAX: 612-490-4333
Dates Referenced Herein and Documents Incorporated by Reference
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