Split-Dollar Insurance Agreement - St. Jude Medical Inc., Phoenix Home Life Mutual Insurance Co., and Ronald A. Matricaria


                        SPLIT-DOLLAR INSURANCE AGREEMENT
                            AS AMENDED APRIL 29, 1999

      THIS AGREEMENT, originally effective as of this 10th day of January, 1997,
is amended effective April 29, 1999 by agreement between the Company and the
Owner:

DEFINITIONS:

A.    "Company": St. Jude Medical, Inc., a Minnesota corporation, of St. Paul,
      Minnesota.

B.    "Executive": Ronald A. Matricaria, the Chairman and Chief Executive
      Officer of the Company, residing in North Oaks, Minnesota.

C.    "Insured": Collectively, the Executive and Lucille E. Matricaria, his
      spouse, and the survivor thereof.

D.    "Insurer": The Phoenix Home Life Mutual Insurance Company.

E.    "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable Life
      Insurance Trust.

F.    "Policy": The policy of insurance on the life of the Insured issued by the
      Insurer and listed on Exhibit "A" annexed hereto together with any
      supplementary contracts issued by the Insurer in conjunction therewith.

G.    "Policy Interest": The Company's Policy Interest shall be an amount equal
      to the lesser of the cumulative total of its share of the premiums paid on
      the Policy or cash surrender value of the Policy. The existence of the
      Company's Policy Interest shall be evidenced by filing with the Insurer an
      assignment in substantially the form annexed hereto as Exhibit "B".

RECITALS:

A.    The Owner is the owner of the Policy, and was established by the Insured
      to provide a benefit for the Insured's family in the event of the death of
      the survivor of the Insured.

B.    The Executive had been and is a valuable employee of the Company. As an
      additional benefit to the Executive and his spouse, the Company wishes to
      assist the Owner in the payment of premiums on the Policy as set forth in
      this Agreement.

C.    In exchange for such premium assistance, the Owner is willing to grant to
      the Company an interest in the Policy as provided herein.

D.    This Agreement is intended to qualify as a life insurance employee benefit
      plan as described in Revenue Ruling 64-328.




THEREFORE, for value received, it is agreed:

1.    PREMIUM PAYMENTS

      (a)   Each annual premium on the Policy during the term of this Agreement
            shall be paid as follows:

            (1)   The Owner shall pay a portion of each annual premium due in an
                  amount equal to the current term rate for the Insured's age
                  multiplied by the excess of the current death benefit over the
                  Company's current Policy Interest. For purposes of this
                  Agreement, the "current term rate" shall mean:

                  (A)   Prior to the death of one of the Insured, the lesser of
                        the Insurer's annual term insurance rate or the rates
                        specified in Revenue Rulings 64-328 and 66-110 based on
                        the joint life expectancies of the Insured;

                  (B)   In the event of the death of one of the Insured prior to
                        the termination of this Agreement, thereafter, the
                        lesser of the Insurer's annual term insurance rate or
                        the rate specified in Revenue Rulings 64-328 and 66-110
                        based on the life expectancy of the surviving Insured.

            (2)   In connection with the amount described in (1) above, the
                  Company shall pay in cash to the Executive, or in the event of
                  Executive's death, the Executive's spouse, at least 30 days
                  prior to the due date of any premium due under the Policy, an
                  amount which, after payment by the Executive or spouse of any
                  federal, state and local income (including FICA) tax
                  liability, if any, will equal the amount of the Owner's
                  premium described in (1) above. The Executive, the Executive's
                  spouse or their tax advisor shall provide the Company with an
                  estimate of the effective combined federal, state and local
                  tax rate for the year in which the Owner's premium is due. The
                  payment described in this paragraph (2) shall be deemed a
                  bonus to the Executive during his employment, and thereafter,
                  a retirement benefit to the Executive and/or his spouse.

            (3)   The Company shall pay all premium amounts not paid by the
                  Owner.

      (b)   The Owner's premium share and the Company's premium share (other
            than that paid with policy loans) shall be remitted to the Insurer
            before expiration of the grace period.

      (c)   Dividends on the Policy shall be applied as elected by the Owner.

      (d)   The Policy may, at the Company's discretion, provide for the waiver
            of premium on the Executive's disability. If it does so provide, the
            cost thereof shall be borne by the Company.


                                        2



2.    POLICY OWNERSHIP

      (a)   Except as provided in subsection (b), the Owner shall be sole and
            exclusive owner of the Policy. This includes all the rights of
            "owner" under the terms of the Policy including, but not limited to,
            the right to designate beneficiaries, select settlement and dividend
            options and to surrender the Policy. All such rights may be
            exercised by the Owner without the Company's consent.

      (b)   In exchange for the Company's payment of its premium contribution
            under Section 1, the Owner hereby assigns to the Company the
            following rights in the Policy:

            (1)   The right to realize against the cash value of the Policy, to
                  the extent of its Policy Interest in the event of termination
                  of this Agreement as provided in Section 4.

            (2)   The right to realize against proceeds of the Policy, to the
                  extent of its Policy Interest, in the event of the Insured's
                  death.

      (c)   It is agreed that benefits may be paid under the Policy by the
            Insurer either by separate checks to the parties entitled thereto,
            or by a joint check. In the later instance, the Owner and the
            Company agree that the benefits shall be divided as provided herein.

3.    THE OWNER - The Owner shall have the right to assign any part or all of
      the Owner's retained interest in the Policy and this Agreement to any
      person, entity or trust by execution of a written assignment delivered to
      the Insurer.

4.    TERMINATION OF AGREEMENT

      (a)   This Agreement shall not terminate until, but shall terminate
            immediately upon the first to occur of the following:

            (1)   Surrender of the Policy by the Owner, who has the sole and
                  exclusive right of surrender.

            (2)   Lapse, failure to make premium contributions as required by
                  Section 1 or other termination of the Policy by the Owner.

            (3)   The death of the survivor of the Insured

            (4)   The bankruptcy, receivership or dissolution of the Company.

            (5)   Payment of the annual premium for the 15th policy year, which
                  shall occur in January, 2012.


                                        3



      (b)   On any termination of this Agreement, the Owner shall pay to the
            Company the Company's Policy Interest and the Company will release
            its collateral assignment in the Policy to the Owner.

5.    THE INSURER - The Insurer shall be bound only by the provisions of and
      endorsements on the Policy, and any payments made or actions taken by it
      in accordance therewith shall fully discharge it from all claims, suits
      and demands of all persons whatsoever. It shall in no way be bound by or
      be deemed to have notice of the provisions of this Agreement.

6.    AMENDMENT OF AGREEMENT - This amended Agreement shall restate and replace
      the Split Dollar Insurance Agreement between the Company and the Owner
      dated January 10, 1997. The Owner and the Company can mutually agree to
      further amend this Agreement and such amendment shall be in writing and
      signed by the Owner and Company.

7.    SUCCESSOR RIGHTS - Notwithstanding anything herein to the contrary, the
      Company's rights and obligations under this Agreement shall not cease, but
      shall continue and shall be enforceable in the event of the merger of the
      Company in which it is not the survivor, or in the event of the sale of
      all or substantially all of the assets of the Company, and said successor
      shall assume such rights and obligations hereunder.

8.    ADMINISTRATION AND FUNDING - The following provisions are part of this
      Agreement and are intended to meet the requirements of the Employee
      Retirement Income Security Act of 1974:

      (a)   The named fiduciary: The Vice President, Finance/Chief Financial
            Officer.

      (b)   The funding policy under this Agreement is that all premiums on the
            Policy be remitted to the Insurer when due.

      (c)   Direct payment by the Insurer is the basis of payment of benefits
            under this Agreement, with those benefits in turn being based on the
            payment of premiums as provided in the Agreement.

      (d)   For claims procedure purposes, the "Claims Manager" shall be the
            Vice President, Assistant Secretary/General Counsel.

            (1)   If for any reason a claim for benefits under this Agreement is
                  denied by the Company, the Claims Manager shall deliver to the
                  claimant a written explanation setting forth the specific
                  reasons for the denial, pertinent references to the Agreement
                  section on which the denial is based, such other data as may
                  be pertinent and information on the procedures to be followed
                  by the claimant in obtaining a review of his claim, written in
                  a manner calculated to be understood by the claimant. For this
                  purpose:

                  (A)   The claimant's claim shall be deemed filed when
                        presented orally or in writing to the Claims manager.


                                        4



                  (B)   The Claims Manager's explanation shall be in writing
                        delivered to the Claimant within 90 days of the date the
                        claim is filed.

            (2)   The claimant shall have 60 days following his receipt of the
                  denial of the claim to file with the Claims Manager a written
                  request for review of the denial. For such review, the
                  claimant or his representative may submit pertinent documents
                  and written issues and comments.

            (3)   The Claims Manager shall decide the issue on review and
                  furnish the claimant with a copy within 60 days of receipt of
                  the claimant's request for review of his claim. The decision
                  on review shall be in writing and shall include specific
                  reasons for the decision written in a manner calculated to be
                  understood by the claimant, as well as specific references to
                  the pertinent provisions of this Agreement on which the
                  decision is based. If a copy of the decision is not so
                  furnished to the claimant within such 60 days, the claim shall
                  be deemed denied on review.

      (e)   If any claim arising under this Agreement is not resolved under (d)
            above or any other dispute arises under the terms of this Agreement,
            the Company and Owner agree to submit the claim or dispute to
            arbitration proceedings held in accordance with the rules of the
            American Arbitration Association. Judgment upon the award rendered
            by the arbitrators may be entered in any court having jurisdiction
            thereof. Pending final resolution of the dispute, the parties shall
            continue to comply with the provisions of this Agreement not in
            dispute. The expenses of the arbitration shall be borne equally by
            the parties to the arbitration, provided that each party shall pay
            for and bear the costs of its own experts, evidence and legal
            counsel. Such arbitration shall be held in Minneapolis, Minnesota.

9.    MISCELLANEOUS

      (a)   This Agreement shall be binding upon and inure to the benefit of the
            Company and the Owner and their respective successors and assigns.

      (b)   Any notice, consent or demand required or permitted to be given
            under the provisions of this Agreement shall be in writing, and
            shall be signed by the party giving or making the same. If such
            notice, consent or demand is mailed to a party hereto, it shall be
            sent by United States certified mail, postage prepaid, addressed to
            such party's last known address as shown on the records of the
            Company. The date of such mailing shall be deemed the date of
            notice, consent or demand.

      (c)   This Agreement, and the rights of the parties hereunder, shall be
            governed by and construed in accordance with the laws of the State
            of Minnesota, except to the extent preempted by federal law.


                                        5



      IN WITNESS WHEREOF the parties have signed this Agreement, as amended,
effective as of this 29th day of April, 1999.


In the presence of                       COMPANY

                                         St. Jude Medical, Inc.


/s/ Karen M. Jurney                      By: /s/ Kevin  T. O'Malley
----------------------------------          ------------------------------------
Karen M. Jurney                             Kevin  T. O'Malley

                                            Its: Vice President
                                                --------------------------------


                                         OWNER

                                         The Ronald A. and Lucille E. Matricaria
                                         1997 Irrevocable Life Insurance Trust

/s/ Karen M. Jurney                      /s/ John P. Berdusco
----------------------------------       ---------------------------------------
Karen M. Jurney                          John P. Berdusco, Trustee


                                        6




                                   EXHIBIT "A"

                                 LIFE INSURANCE


POLICY NUMBER                                                       FACE AMOUNT


2,708,353                                                           $3,000,000




                                   EXHIBIT "B"

                             SPLIT DOLLAR ASSIGNMENT


Insurer: The Phoenix Home Mutual Life Insurance Company.

Insured: Ronald A. and Lucille Matricaria


      THIS ASSIGNMENT, originally made January 10, 1997, is amended and affirmed
by the undersigned Owner effective as of April 29, 1999.

DEFINITIONS:

      A.    "Assignee": St. Jude Medical, Inc., a Minnesota corporation, of St.
            Paul, Minnesota.

      B.    "Owner": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable
            Life Insurance Trust.

      C.    "Policy": The following policy of insurance issued by the Insurer on
            the life of the insured, together with any supplementary contracts
            issued in conjunction therewith:

                    POLICY NUMBER                    FACE AMOUNT

                    2,708,353                        $3,000,000

      D.    "Policy Interest": The Assignee's Policy Interest shall be as set
            forth in the Split Dollar Agreement. The Insurer shall be entitled
            to rely on the Assignee's certification of the amount of its Policy
            Interest.

      E.    "Split Dollar Agreement": That certain Agreement, dated January 10,
            1997, as amended effective April 29, 1999, between the Owner and the
            Assignee. The Insurer is not bound by nor deemed to have notice of
            the provisions of the Split Dollar Agreement.

RECITALS:

      A.    Under the Split Dollar Agreement, the Assignee has agreed to assist
            the Owner in payment of premiums on the Policy.

      B.    In consideration of such premium payments by the Assignee, the Owner
            here intends to grant the Assignee certain limited interests in the
            Policy.




THEREFORE, for value received, it is agreed:

1.    ASSIGNMENT - The Owner hereby assigns, transfers and sets over to the
      Assignee, its successor and assigns, the following specific rights in the
      Policy and subject to the following terms and conditions:

      (a)   The right to realize against the cash value of the Policy, to the
            extent of its Policy Interest, in the event of the Policy's
            surrender by the Owner.

      (b)   The right to realize against proceeds of the Policy, to the extent
            of its Policy Interest, in the event of the Insured's death.

      (c)   The right to borrow against the security of the Policy, but not
            against the Policy itself.

2.    RETAINED RIGHTS - Except as expressly provided in Section 1, the Owner
      retains all rights under the Policy including, but not limited to, the
      exclusive right to name beneficiaries, select settlement and dividend
      options and to surrender the Policy without the consent of the Assignee.

3.    INSURER - The Insurer is hereby authorized to recognize, and is fully
      protected in recognizing:

      (a)   The claims of the Assignee to rights hereunder, without
            investigating the reasons for such action by the Assignee, or the
            validity or the amount of such claims.

      (b)   The Owner's request for surrender of the Policy without the consent
            of the Assignee. Upon the surrender, the Policy shall be terminated
            and of no further force or effect.

4.    AMENDMENT - This Assignment shall not be altered or amended by the Owner
      without the written consent of the Assignee.

5.    RELEASE OF ASSIGNMENT - Upon payment to the Assignee of its Policy
      Interest, the Assignee shall executive a written release of this
      Assignment.

      IN WITNESS WHEREOF the Owner has executed this Assignment on the date
first above written.

In the presence of                       The Ronald A. and Lucille E. Matricaria
                                         1997 Irrevocable Life Insurance Trust

/s/ Karen M. Jurney                      /s/ John P. Berdusco
----------------------------------       --------------------------------------
                                         John P. Berdusco, Trustee

EX-13
3
1999 ANNUAL REPORT


                                                                      EXHIBIT 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

RESULTS OF OPERATIONS

INTRODUCTION

St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a global leader
in the development, manufacturing and distribution of medical device products
for the cardiac rhythm management, cardiology and vascular access, and heart
valve disease management markets. The Company has two reportable segments:
Cardiac Rhythm Management (CRM) and Heart Valve Disease Management (HVDM). The
CRM segment, which includes the results from the Company's Cardiac Rhythm
Management Division and Daig Division, develops, manufactures and distributes
bradycardia pulse generator and tachycardia implantable cardioverter
defibrillator (ICD) systems, electrophysiology and interventional cardiology
catheters, and vascular closure devices. The HVDM segment develops, manufactures
and distributes mechanical and tissue heart valves and valve repair products,
and is in the process of developing suture-free devices to facilitate coronary
artery bypass graft anastomoses.

The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Saturday nearest December 31, but for clarity of presentation, describes all
periods as if the year end is December 31. Fiscal years 1999 and 1998 each
consisted of fifty-two weeks and fiscal year 1997 consisted of fifty-three
weeks.

The commentary that follows should be read in conjunction with the Company's
consolidated financial statements and related notes.

ACQUISITIONS

Following is a discussion on the Company's business acquisitions during the last
three years:

VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the
outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus
additional contingent consideration related to product development milestones
for regulatory approvals and to future sales. VSI was a development-stage
company focused on the development of suture-free devices to facilitate coronary
artery bypass graft anastomoses.

ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the
Angio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash.
Angio-Seal(TM)manufactures and markets hemostatic puncture closure devices.

OTHER: During 1999, the Company acquired the assets of various businesses used
in the distribution of the Company's products for $21,056 in cash and common
stock.

VENTRITEX, INC. ("VENTRITEX"): On May 15, 1997, the Company acquired Ventritex,
a manufacturer of ICDs and related products. St. Jude Medical issued 10,437,800
shares of its common stock to the Ventritex shareholders at an exchange rate of
0.5 shares of Company common stock for every one share of Ventritex common
stock. The transaction qualified as a tax-free reorganization.

The 1999 acquisitions were recorded using the purchase method of accounting. The
operating results of each of these acquisitions were included in the Company's
consolidated financial statements from the date of each acquisition. The
Ventritex acquisition was accounted for as a pooling of interests and as such,
the historical results of St. Jude Medical were restated at the time of the
acquisition to include the historical operating results of Ventritex.

NET SALES

Net sales by geographic markets were as follows:

                                          1999              1998            1997
--------------------------------------------------------------------------------
United States                       $  689,051        $  604,524        $581,514
Western Europe                         259,300           248,070         227,871
Other foreign countries                166,198           163,400         185,011
--------------------------------------------------------------------------------
   Total net sales                  $1,114,549        $1,015,994        $994,396
--------------------------------------------------------------------------------

Overall, foreign exchange rate movements had an unfavorable year-to-year impact
of $14,900 and $5,200 in 1999 and 1998, respectively, due primarily to the
strengthening of the U.S. dollar against the major Western European currencies.
This negative effect is not necessarily indicative of the impact on net earnings
due to partially offsetting favorable foreign currency changes on operating
costs and to the Company's hedging activities.

Segment net sales were as follows:
                                          1999              1998            1997
--------------------------------------------------------------------------------
CRM                                 $  843,117        $  735,123        $716,347
HVDM                                   271,432           280,871         278,049
--------------------------------------------------------------------------------
   Total net sales                  $1,114,549        $1,015,994        $994,396
--------------------------------------------------------------------------------

CRM 1999 net sales increased 14.7% over 1998 due primarily to increased
bradycardia net sales, increased electrophysiology (EP) catheter unit sales, and
the acquisition of Angio-Seal(TM).
                                                                              23


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The bradycardia net sales increase relates to the Company's introduction of the
Affinity(R) pacemaker family in the second quarter of 1999 and to an expanded
U.S. sales force. CRM 1998 net sales increased 2.6% over 1997 due primarily to
higher ICD sales with the commercial release of the Angstrom(R) II and the
Angstrom(R) MD ICDs during 1998, offset in part by lower bradycardia sales due
to the effects of the stronger U.S. dollar, fewer domestic sales
representatives, the timing of certain distributor orders, and to a fifty-two
week year in 1998 versus a fifty-three week year in 1997. The impact of one
less selling week in 1998 effectively reduced net sales by approximately $11,000
as compared to 1997.

HVDM 1999 net sales decreased 3.4% from 1998 due to the effects of the stronger
U.S. dollar, reduced sales to certain distributors in emerging markets, and a
slight clinical preference shift from mechanical valves to tissue valves in the
U.S. market where HVDM holds significant mechanical valve market share and a
smaller share of the tissue valve market. HVDM 1998 net sales increased 1.0%
from 1997 due the introduction of the Toronto SPV(R) valve in the U.S., offset
in part by the effects of the stronger U.S. dollar, the timing of certain
distributor orders, curtailed marketing efforts in certain international
markets, and to a fifty-two week year in 1998 versus a fifty-three week year
in 1997. The impact of one less selling week in 1998 effectively reduced net
sales by approximately $5,000 as compared to 1997.

GROSS PROFIT

Gross profits were as follows:

                                           1999            1998            1997
-------------------------------------------------------------------------------
Gross profit                           $733,647        $643,054        $628,679
Percentage of net sales                    65.8%           63.3%           63.2%
z==============================================================================

The Company's 1999 gross profit margin increased 2.5 percentage points over
1998 due primarily to CRM's manufacturing efficiencies and higher CRM unit
sales that were partially offset by the impact of the stronger U.S. dollar and
lower HVDM unit sales. The Company's 1998 gross profit percentage remained
relatively constant from 1997 due primarily to HVDM's manufacturing
efficiencies, the elimination of certain acquired facilities, and increased ICD
net sales, offset in part by the impact of the stronger U.S. dollar and lower
mechanical heart valve and bradycardia unit sales.

OPERATING EXPENSES

Certain operating expenses were as follows:

                                           1999            1998            1997
-------------------------------------------------------------------------------
Selling, general
   and administrative                  $394,418        $349,346        $378,500
Percentage of net sales                    35.4%           34.4%           38.1%

Research and development               $125,059        $ 99,756        $104,693
Percentage of net sales                    11.2%            9.8%           10.5%
z==============================================================================

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense increased in
1999 due primarily to increased sales activities, increased litigation, Year
2000 related expenses, and to higher intangible asset amortization related to
the Angio-Seal(TM) acquisition. SG&A expense decreased in 1998 from 1997 due
primarily to the full year effect of the Company's 1997 integration and
consolidation efforts related to acquisitions, as well as to further
consolidation of certain other pre-existing CRM operations.

RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 1999 due to
increased CRM activities relating primarily to ICDs and products to treat
emerging indications in atrial fibrillation and congestive heart failure, and
to HVDM activities associated with the technology acquired in the VSI
acquisition. R&D expense decreased in 1998 from 1997 due primarily to the full
year effect of the Company's 1997 integration and consolidation efforts related
to acquisitions.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: In 1999, the Company
recorded purchased in-process research and development charges of $47,775 and
$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI,
respectively. The purchased in-process research and development charges were
computed by an independent third-party appraisal company and were expensed at
close, except as noted below, since technological feasibility had not been
established and since there were no alternative future uses for the technology.
The values assigned to purchased in-process research and development were
determined primarily by the income approach, utilizing discount rates ranging
from 25% to 35%. Certain other factors considered in these valuations included
the stage of development of each project, which ranged from 35% to 90% complete,
complexity of the work completed at the valuation date, and market introductions
for products resulting from the technology beginning in late 1999 for
Angio-Seal(TM) and 2000 for VSI.

24


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The purchased in-process technologies required additional development to create
commercially viable products. This development included completion of design,
prototyping, and testing to ensure the technologies meet their design
specifications, including functional, technical and economic performance
requirements. In addition, the technology was required to undergo both
international and domestic regulatory reviews and approvals prior to being
commercially released to the market.

The total appraised value of the VSI purchased in-process research and
development was $95,500, of which $67,453 was expensed at close. The remaining
balance of the in-process research and development valuation ($28,047) will be
recorded in the Company's financial statements as purchased in-process research
and development expense when payment of the contingent consideration is assured
beyond a reasonable doubt. All other contingent consideration payments in excess
of the $28,047 will be capitalized as goodwill.

SPECIAL CHARGES: The Company restructured its international operations during
the third quarter of 1999 to improve the effectiveness and efficiency of its
international business by clarifying business unit accountabilities and focusing
the operations of its business units outside the U.S., and by removing
administrative redundancies in the Company's non-U.S. management structure. This
restructuring resulted in the elimination of certain administrative management
positions. The Company recorded a $9,754 charge in the third quarter of 1999
related primarily to this restructuring, of which $4,102 was used through
December 31, 1999. The Company anticipates that substantially all of the
remaining balance will be utilized during 2000.

The Company recorded special charges totaling $58,669 during 1997 related to
Ventritex merger transaction costs ($8,227), various distributor agreement
terminations ($12,925), repositioning of Pacesetter manufacturing operations in
connection with the Ventritex integration ($18,139), and to the repositioning of
Ventritex operations ($19,378). The Company has utilized $56,090 of the special
charge reserves through December 31, 1999. The balance of the remaining special
charge accruals are expected to be utilized as the remaining contractual
obligations come due.

OTHER INCOME (EXPENSE)

Interest expense was $28,104 in 1999, $23,667 in 1998 and $14,374 in 1997. The
increases in 1999 and 1998 were due to increased debt levels resulting primarily
from the Company's acquisitions and share repurchases during 1999 and 1998.

Net investment gains of $848 in 1999, $15,624 in 1998 and $6,768 in 1997
resulted primarily from the periodic sales of the Company's marketable equity
security holdings.

INCOME TAXES

The Company's reported effective income tax rate was 63.8% in 1999 as compared
with 30.5% in 1998. Exclusive of the purchased in-process research and
development and special charges, the Company's effective income tax rate was
25.0% in 1999. The decrease in the effective income tax rate from 30.5% in 1998
to 25.0% in 1999 was primarily attributable to higher research and development
credits and foreign sales corporation benefits relative to pre-tax earnings in
1999. The 1999 purchased in-process research and development charges were either
non-deductible for income tax purposes or were recorded in a taxing jurisdiction
with a low income tax rate.

The Company's effective income tax rate decreased from 38.0% in 1997 to 30.5% in
1998 due primarily to a greater proportion of earnings in countries with lower
tax rates and to the elimination of non-deductible merger costs related to the
1997 Ventritex acquisition.

The Company has not recorded deferred income taxes on its foreign subsidiaries'
undistributed earnings as such amounts are currently intended to be
indefinitely reinvested.

NET EARNINGS

Net earnings, exclusive of purchased in-process research and development
charges, special charges and cumulative effect of accounting change, were
$143,989 in 1999, $129,082 in 1998 and $97,692 in 1997. Reported net earnings
and diluted net earnings per share were $24,227, or $0.29 per share, in 1999,
$129,082, or $1.50 per share, in 1998, and $53,140, or $0.58 per share, in 1997.

                                                                              25


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

OUTLOOK

The Company expects that market demand, government regulation and societal
pressures will continue to change the worldwide health care industry resulting
in further business consolidations and alliances. The Company participates with
industry groups to promote the use of advanced medical device technology in a
cost conscious environment. Customer service in the form of cost-effective
clinical outcomes will continue to be a primary focus for the Company.

The Company's HVDM business is in a highly competitive market. The market is
segmented between mechanical heart valves, tissue heart valves, and repair
products. During 1999, the U.S. market continued its slight shift to tissue
valve and repair products from mechanical heart valves resulting in a small
market share loss. Competition is anticipated to place pressure on pricing and
terms, and health care reform is expected to result in further hospital
consolidations over time.

The Company's CRM business is also in a highly competitive industry that is
undergoing consolidation. The number of principal suppliers has decreased from
four to three. The Company's two principal competitors each have substantially
more assets, sales and sales personnel than the Company. In addition, the
Company's two principal competitors in the ICD market have dual-chamber ICDs on
the market that represent an increasing percentage of the overall ICD market.
The Company began clinical evaluation of a dual-chamber ICD in late 1999.
However, until the Company commercially introduces a dual-chamber ICD into the
market, the continued growth of dual-chamber ICDs at the expense of
single-chamber ICDs could adversely affect the Company. Rapid technological
change is expected to continue, requiring the Company to invest heavily in R&D
and to effectively market its products.

The global medical device market is highly competitive. Competitors have
historically employed litigation to gain a competitive advantage. In addition,
the Company's products must continually improve technologically and provide
improved clinical outcomes due to the competitive nature of the industry.

Group purchasing organizations (GPOs) in the U.S. continue to consolidate the
purchasing for some of the Company's customers. Several such GPOs have executed
contracts with the Company's CRM market competitors which exclude the Company.
These contracts, if enforced, may adversely affect the Company's sales of CRM
products to members of these GPOs.

On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventory of heart valve replacement and repair products incorporating a
proprietary Silzone(R) coating on the sewing cuff fabric. The Company also
concluded that it will no longer utilize the Silzone(R) coating. The Company
expects to record a non-recurring charge against first quarter 2000 earnings,
which is currently estimated at $16,000 to $20,000, for the write-off of
inventory and other costs related to this recall and product discontinuation.
However, there can be no assurance that the final costs associated with this
recall will not exceed management's current estimates. Other than this
non-recurring charge, management believes that this recall will not materially
impact the Company's year 2000 earnings or cash flows based primarily on the
fact that the Company's non-Silzone(R) coated products, which represent 75% of
the Company's heart valve shipments, are not affected by this recall.

The IRS has proposed adjustments of approximately $58,200 in additional taxes
relating primarily to the Company's Puerto Rican operations for the years 1990
through 1994. Management believes that the IRS will propose similar
adjustments of approximately $15,500 for 1995. Management is vigorously
contesting these adjustments and expects that the ultimate resolution will not
have material adverse effect on the Company's financial position or liquidity,
but could potentially be material to the net earnings of a particular future
period if resolved unfavorably.

MARKET RISK

The Company is exposed to foreign exchange rate fluctuations due to its
transactions denominated primarily in Euros, currencies tied to the Euro,
Canadian Dollars, British Pounds, and Swedish Kroners. The Company is also
exposed to interest rate risk on its interest-bearing debt and equity price risk
on its marketable equity security investments.

The Company attempts to minimize a portion of its foreign exchange rate risk
through the use of forward exchange or option contracts. The gains or losses on
these contracts offset changes in the fair value of the anticipated foreign
currency transactions. It is the Company's practice to not enter into contracts
for trading purposes.

26


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The Company's forward exchange contracts had fair values of ($263) and ($422) at
December 31, 1999 and 1998. Utilizing the Company's outstanding forward exchange
contracts at December 31, 1999 and 1998, a hypothetical 10% unfavorable change
in the foreign currency spot rates would have negatively impacted the fair value
of the Company's forward exchange contracts by $2,745 and $3,327. A majority of
any gains or losses on the fair value of these contracts would ultimately be
offset by gains or losses on the anticipated transactions. Such offsetting gains
or losses are not reflected in the hypothetical 10% unfavorable change.

A substantial portion of the Company's interest-bearing debt provides for
interest at variable rates tied to the London Interbank Offered Rate ("LIBOR").
The Company periodically enters into interest rate swap or option contracts to
reduce its exposures to interest rate fluctuations. During the third quarter of
1999, the Company entered into an interest rate swap contract to hedge a
substantial portion of its variable interest rate risk through January 2000 on
$138,000 of revolving credit facility borrowings. The fair market value of this
contract at December 31, 1999, and the impact of the contract on 1999 earnings
were not material. There were no interest rate contracts outstanding in 1998 or
1997.

The Company periodically invests in marketable equity securities of emerging
technology companies. The Company's investments in these companies had a fair
value of $15,487 and $20,300 at December 31, 1999 and 1998, which is subject to
the underlying price risk of the public equity markets.

On January 1, 1999, eleven of the fifteen member countries of the European
Economic Community (EEC) established fixed conversion rates between their
existing sovereign currencies and the Euro, and adopted the Euro as the legal
common currency for their countries. The sovereign currencies of these countries
will remain legal tender as denominations of the Euro between January 1, 1999
and January 1, 2002. During this transition period, public and private parties
may pay for goods and services using either the Euro or the sovereign currency.
Beginning January 1, 2002, these countries will issue new Euro-denominated bills
and coins for use in cash transactions. The Company does not expect the Euro
conversion to have a short-term material effect on the Company's operations.
However, subsequent to the Year 2001, cross-country pricing in the EEC may
become more transparent, which may impact the pricing of the Company's products.
The Company has modified its computer programs to accommodate the Euro, the
cost of which was not material. The Company will continue to evaluate the need
to make other changes to accommodate the conversion to the Euro.

NEW ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133), which is required to be adopted in
years beginning after June 15, 2000, although early adoption as of the beginning
of any fiscal quarter is permitted. Statement 133 requires companies to
recognize all derivatives on the balance sheet at fair value. Derivatives not
qualifying as hedges must be adjusted to fair value through earnings. If the
derivative qualifies as a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Management is continuing to
review the impact of Statement 133 on the Company's financial statements.

FINANCIAL CONDITION

LIQUIDITY

The Company's liquidity and cash flows remained strong during 1999. Cash
provided by operating activities was $256,067 in 1999, a $147,598 increase over
1998. The Company's current ratio was 2.4 to 1 at December 31, 1999.

Accounts receivable increased $11,744 from December 31, 1998, due to higher
sales, offset in part by a decrease in average days to collect the receivables.
Other assets increased $147,070 due primarily to the addition of certain
intangible assets from the Angio-Seal(TM) acquisition. Interest-bearing debt
increased $102,500 during 1999 due primarily to additional borrowings for the
Angio-Seal(TM) and VSI acquisitions and the repurchase of common stock, offset
in part by the repayment of debt with cash generated from operations. As of
March 6, 2000, the Company had committed credit facilities totaling $500,000, of
which $24,500 was unused.

                                                                              27


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Management believes that cash generated from operations and cash available under
its credit facilities will be sufficient to meet the Company's working capital
and share repurchase plan needs in the near term. Should suitable investment
opportunities arise, management believes that the Company's earnings, cash
flows and balance sheet will permit the Company to obtain additional debt or
equity capital, if necessary.

CAPITAL STRUCTURE

The Company's capital structure consists of interest-bearing debt and equity.
Interest-bearing debt as a percent of the Company's total capitalization
increased from 32% at December 31, 1998 to 38% at December 31, 1999 due
primarily to the Angio-Seal(TM) and VSI acquisitions.

During 1999, the Company's Board of Directors authorized the repurchase of up to
$250,000 of the Company's outstanding common stock over a three-year period. The
Company repurchased 977,500 shares of its common stock for $29,826 during 1999.

DIVIDENDS

The Company has not declared or paid any dividends during 1999, 1998 or 1997.
Management currently intends to utilize the Company's earnings for operating and
investment purposes, including the repurchase of its common stock.

YEAR 2000 DISCLOSURE

The Company has not experienced any material disruptions related to the Year
2000. The Company's products were effectively not impacted by the Year 2000.
Also, the Company was able to execute its plans to address any internal Year
2000 issues related to its information technology and business systems, and to
make general inquiries of its business partners' readiness for Year 2000.
However, because the Company is dependent on various business partners for
certain aspects of its business, the impact on the Company related to the Year
2000 may still not be known. Management continues to monitor for potential
issues related to the Year 2000 and will execute its contingency plans, if
necessary. However, based upon the Company's interactions with its business
partners in 2000, management believes that any future, material event related to
the Year 2000 is unlikely.

The total cost associated with the Company's Year 2000 remediation was
approximately $3,500 and was reflected in the Company's historical results of
operations. The cost of implementing the Company's uniform worldwide business
and accounting information system (approximately $45,000) has not been included
in this figure since replacement of the previous systems was not accelerated due
to Year 2000 issues.

CAUTIONARY STATEMENTS

As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in previously made
forward-looking statements and any other forward-looking statements made in this
document and elsewhere by or on behalf of the Company. Net sales could be
materially affected by legislative or administrative reforms to the U.S.
Medicare and Medicaid systems and non-U.S. reimbursement systems in a manner
that would significantly reduce reimbursement for procedures using the
Company's medical devices, the acquisition of key patents by competitors that
would have the effect of excluding the Company from new market segments, health
care industry consolidation resulting in customer demands for price concessions,
products introduced by competitors with advanced technology and better features
and benefits or lower prices, fewer procedures performed in a cost-conscious
environment, and the lengthy approval time by the FDA or other government
authorities to clear implantable medical devices for commercial release. Cost of
sales could be materially affected by unfavorable developments in the area of
products liability and price increases from the Company's suppliers of critical
components, a number of which are sole sourced. Operations could be affected by
the Company's ability to execute its diversification strategy or to integrate
acquired companies, a serious earthquake affecting the Company's facilities in
Sylmar or Sunnyvale, California, adverse developments in the litigation arising
from the acquisitions of Telectronics and Ventritex, unanticipated product
failures and attempts by competitors to gain market share through aggressive
marketing programs.

28


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 accounting principles
generally accepted in the United States 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 accounting principles
generally accepted in the United States, 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 meet with, and
have confidential access to, the Audit Committee to discuss the results of
their audit work.

/s/ Terry L. Shepherd

TERRY L. SHEPHERD
PRESIDENT AND CHIEF EXECUTIVE OFFICER

/s/ John C. Heinmiller

JOHN C. HEINMILLER
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER



REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
Board of Directors and Shareholders
St. Jude Medical, Inc.

We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.


                                        /s/ Ernst & Young LLP


Minneapolis, Minnesota
February 9, 2000

                                                                              29


CONSOLIDATED STATEMENTS OF EARNINGS
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FISCAL YEAR ENDED DECEMBER 31 1999 1998 1997 ---------------------------------------------------------------------------------------------------------- Net sales $ 1,114,549 $ 1,015,994 $ 994,396 Cost of sales 380,902 372,940 365,717 ---------------------------------------------------------------------------------------------------------- Gross profit 733,647 643,054 628,679 Selling, general and administrative expense 394,418 349,346 378,500 Research and development expense 125,059 99,756 104,693 Purchased in-process research and development expense 115,228 -- -- Special charges 9,754 -- 58,669 ---------------------------------------------------------------------------------------------------------- Operating profit 89,188 193,952 86,817 Other income (expense) (22,184) (8,222) 1,419 ---------------------------------------------------------------------------------------------------------- Earnings before income taxes and accounting change 67,004 185,730 88,236 Income tax expense 42,777 56,648 33,530 ---------------------------------------------------------------------------------------------------------- Net earnings before accounting change 24,227 129,082 54,706 Cumulative effect of accounting change, net of taxes -- -- (1,566) ---------------------------------------------------------------------------------------------------------- Net earnings $ 24,227 $ 129,082 $ 53,140 ========================================================================================================== BASIC EARNINGS PER SHARE: Net earnings before accounting change $ 0.29 $ 1.51 $ 0.60 Cumulative effect of accounting change -- -- (0.02) ---------------------------------------------------------------------------------------------------------- Basic net earnings per share $ 0.29 $ 1.51 $ 0.58 ========================================================================================================== DILUTED EARNINGS PER SHARE: Net earnings before accounting change $ 0.29 $ 1.50 $ 0.59 Cumulative effect of accounting change -- -- (0.01) ---------------------------------------------------------------------------------------------------------- Diluted net earnings per share $ 0.29 $ 1.50 $ 0.58 ========================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 84,274 85,714 91,426 Diluted 84,735 86,145 92,052 ==========================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 30 CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
DECEMBER 31 1999 1998 --------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,655 $ 3,775 Marketable securities 79,238 84,215 Accounts receivable, less allowances for doubtful accounts 293,815 282,071 Inventories 235,407 245,579 Deferred income taxes 36,609 34,187 Other 35,575 32,637 --------------------------------------------------------------------------------------------- Total current assets 690,299 682,464 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 111,746 111,016 Machinery and equipment 286,706 270,246 Diagnostic equipment 176,079 131,128 --------------------------------------------------------------------------------------------- Property, plant and equipment at cost 574,531 512,390 Less accumulated depreciation (231,751) (184,131) --------------------------------------------------------------------------------------------- Net property, plant and equipment 342,780 328,259 OTHER ASSETS Goodwill and other intangible assets, net 452,519 322,434 Deferred income taxes 51,838 44,667 Other 16,602 6,788 --------------------------------------------------------------------------------------------- Total other assets 520,959 373,889 --------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,554,038 $ 1,384,612 ============================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 91,874 $ 94,076 Income taxes payable 43,700 2,461 Accrued expenses Employee compensation and related benefits 67,046 45,370 Other 79,902 61,490 --------------------------------------------------------------------------------------------- Total current liabilities 282,522 203,397 LONG-TERM DEBT 477,495 374,995 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock -- -- Common stock 8,378 8,417 Additional paid-in capital 109 6,656 Retained earnings 833,223 816,940 Accumulated other comprehensive income: Cumulative translation adjustment (53,977) (33,242) Unrealized gain on available-for-sale securities 6,288 7,449 --------------------------------------------------------------------------------------------- Total shareholders' equity 794,021 806,220 --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,554,038 $ 1,384,612 =============================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
Common Stock Accumulated Total ------------------- Additional Other Receivable Share- Number of Paid-In Retained Comprehensive for Stock holders' Shares Amount Capital Earnings Income (Loss) Issued Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 91,446,656 $ 9,145 $ 228,106 $692,892 $ (7,642) $ (440) $922,061 Comprehensive income: Net earnings 53,140 53,140 Other comprehensive income (loss) Unrealized gain (loss) on investments, net of taxes ($12,031) and reclassification adjustment (see below) 19,630 19,630 Foreign currency translation adjustment (24,536) (24,536) -------- Other comprehensive income (loss) (4,906) -------- Comprehensive income 48,234 ======== Issuance of common stock, including exercise of stock options, net of shares surrendered for exercise price and taxes 400,651 40 12,112 12,152 Tax benefit from stock options 2,006 2,006 Issuance of common stock for business acquisition 64,189 6 2,123 2,129 Proceeds for stock issued 440 440 =================================================================================================================================== Balance at December 31, 1997 91,911,496 9,191 244,347 746,032 (12,548) -- 987,022 Comprehensive income: Net earnings 129,082 129,082 Other comprehensive income (loss) Unrealized gain (loss) on investments, net of taxes ($2,545) and reclassification adjustment (see below) (4,153) (4,153) Foreign currency translation adjustment (9,092) (9,092) -------- Other comprehensive income (13,245) -------- Comprehensive income 115,837 ======== Issuance of common stock, including exercise of stock options, net of shares surrendered for exercise price and taxes 263,203 26 7,054 7,080 Tax benefit from stock options 1,070 1,070 Repurchase of common stock (8,000,000) (800) (245,815) (58,174) (304,789) =================================================================================================================================== Balance at December 31, 1998 84,174,699 8,417 6,656 816,940 (25,793) -- 806,220 Comprehensive income: Net earnings 24,227 24,227 Other comprehensive income (loss) Unrealized gain (loss) on investments, net of taxes ($712) and reclassification adjustment (see below) (1,161) (1,161) Foreign currency translation adjustment (20,735) (20,735) -------- Other comprehensive income (loss) (21,896) -------- Comprehensive income 2,331 ======== Issuance of common stock, including exercise of stock options, net of shares surrendered for exercise price and taxes 381,206 38 8,855 8,893 Tax benefit from stock options 969 969 Issuance of common stock for business acquisition 161,072 16 3,984 4,000 Issuance of common stock in settlement of obligation 41,108 4 1,430 1,434 Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826) =================================================================================================================================== Balance at December 31, 1999 83,780,585 $ 8,378 $ 109 $833,223 $ (47,689) $ -- $794,021 =================================================================================================================================== Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income taxes 1997 $ 1,285 1998 9,282 1999 2,875 -----------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 24,227 $ 129,082 $ 53,140 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation 54,588 45,959 45,277 Amortization 31,114 22,894 20,784 Purchased in-process research and development expense 115,228 -- -- Special charges 9,754 -- 58,669 Net investment gain (848) (15,624) (6,768) Deferred income taxes 369 15,459 6,624 Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (26,319) (35,236) (41,731) Inventories 14,466 (7,458) (36,929) Other current assets (6,722) 4,897 (1,892) Accounts payable and accrued expenses (1,998) (35,853) (124,739) Income taxes 42,208 (15,651) (4,059) ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 256,067 108,469 (31,624) INVESTING ACTIVITIES Purchase of property, plant and equipment (69,419) (74,197) (84,638) Purchase of marketable securities -- -- (7,000) Proceeds from sale or maturity of marketable securities 17,552 82,879 80,363 Business acquisitions, net of cash acquired (259,127) -- -- Proceeds from sale of business, net of cash disposed -- -- 24,626 Other (19,438) 561 (3,867) ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (330,432) 9,243 9,484 FINANCING ACTIVITIES Proceeds from exercise of stock options and stock issued 8,893 7,080 12,592 Common stock repurchased (29,826) (304,789) -- Borrowings under revolving credit facilities 989,500 785,036 498,500 Payments under revolving credit facilities (887,000) (602,536) (508,000) Repurchase of convertible subordinated notes -- (27,505) -- ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 81,567 (142,714) 3,092 Effect of currency exchange rate changes on cash (1,322) 247 (1,810) ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 5,880 (24,755) (20,858) Cash and cash equivalents at beginning of year 3,775 28,530 49,388 ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 9,655 $ 3,775 $ 28,530 ============================================================================================================= Supplemental Cash Flow Information ============================================================================================================= Cash paid during the year for: Interest $ 28,934 $ 21,703 $ 14,320 Income taxes 21,200 55,031 33,755 =============================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY OVERVIEW: St. Jude Medical, Inc. (the "Company") is a global leader in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access, and heart valve disease management markets. The Company's principal products include pacemaker and implantable cardioverter defibrillator (ICD) systems, prosthetic heart valve replacement and repair products, electrophysiology and interventional cardiology catheters and vascular closure devices. The Company markets its products primarily in the United States, Western Europe and Japan through both a direct employee-based sales organization and independent distributors. 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 to the current year presentation. FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31, but for clarity of presentation, describes all periods as if the year end is December 31. Fiscal years 1999 and 1998 each consisted of fifty-two weeks and fiscal year 1997 consisted of fifty-three weeks. CASH EQUIVALENTS: The Company considers highly liquid temporary investments with an original maturity of three months or less to be a cash equivalent. Cash equivalents are stated at cost, which approximates market. MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank certificates of deposit, U.S. government obligations, commercial paper, notes and bonds. Marketable securities are classified as available-for-sale and recorded at fair market value, based upon quoted market prices. Gross unrealized gains totaling $10,142, $12,015 and $18,714, net of taxes of $3,854, $4,566 and $7,112, were recorded in shareholders' equity at December 31, 1999, 1998 and 1997. Realized gains totaling $4,636, $15,624 and $6,768 in 1999, 1998, and 1997 from the sale of marketable securities have been recorded in other income. Realized gains are computed using the specific identification method. INVENTORIES: Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consist of the following: 1999 1998 -------------------------------------------------------------------------------- Finished goods $108,449 $126,927 Work in process 41,466 35,130 Raw materials 85,492 83,522 -------------------------------------------------------------------------------- $235,407 $245,579 ================================================================================ PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives, ranging from 31-to-39 years for buildings and improvements, three-to-seven years for machinery and equipment and five-to-eight years for diagnostic equipment. Accelerated depreciation methods are used for income tax purposes. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Other intangible assets consist primarily of licensed and purchased technology, patents and customer lists. Goodwill and other intangible assets are amortized primarily on a straight-line basis using lives ranging from 5-to-20 years. Accumulated amortization totaled $115,239 and $86,415 at December 31, 1999 and 1998. The Company periodically reviews its long-lived assets, including fixed assets, for indicators of impairment using an estimate of the undiscounted cash flows generated by those assets. The Company's financial statements for 1997 through 1999 reflect no such impairments. REVENUE RECOGNITION: The Company recognizes revenue when the products are shipped to the customer. For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the Company is notified that the customer has used the inventory. The allowance for doubtful accounts was $13,529 at December 31, 1999, and $12,352 at December 31, 1998. RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense as incurred. Purchased in-process research and development is recognized in purchase business combinations for the portion of the purchase price allocated to the appraised value of in-process technologies. The portion assigned to in-process research and development technologies excludes the value of core and developed technologies, which are recognized as intangible assets. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation. Pro forma information related to the fair value method of accounting is provided in Note 5. EARNINGS PER SHARE: Basic earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents, when dilutive. The table below sets forth the computation of basic and diluted net earnings per share before accounting change: 1999 1998 1997 -------------------------------------------------------------------------------- Numerator: Net earnings before accounting change $24,227 $129,082 $54,706 Denominator: Basic-weighted average shares outstanding 84,274,000 85,714,000 91,426,000 Effect of dilutive securities: Employee stock options 414,000 401,000 574,000 Restricted shares 47,000 30,000 52,000 -------------------------------------------------------------------------------- Diluted-weighted average shares outstanding 84,735,000 86,145,000 92,052,000 ================================================================================ Basic earnings per share $ 0.29 $ 1.51 $ 0.60 ================================================================================ Diluted earnings per share $ 0.29 $ 1.50 $ 0.59 ================================================================================ Net earnings and diluted-weighted average shares outstanding have not been adjusted for the Company's convertible debentures and for certain employee stock options and awards since the effect of these securities would have been anti-dilutive. FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Assets and liabilities of foreign operations are translated at year-end exchange rates. Gains and losses from translation of net assets of foreign operations are recorded in other comprehensive income. Foreign currency transaction gains and losses are included in other income (expense). FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management periodically utilizes derivative financial instruments to help manage a portion of the Company's exposure to foreign currencies and interest rates. Management generally utilizes forward exchange or option contracts to manage anticipated foreign currency exposures and interest rate swaps to manage interest rate exposures. Management does not enter into derivative financial instruments for trading purposes. The Company records the fluctuation in the fair value of the forward exchange or option contracts in other income (expense) and the fluctuation in the fair value of the interest rate swaps in interest expense. USE OF ESTIMATES: Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), which is required to be adopted in years beginning after June 15, 2000, although early adoption as of the beginning of any fiscal quarter is permitted. Statement 133 requires companies to recognize all derivatives on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management is continuing to review the impact of Statement 133 on the Company's financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 - ACQUISITIONS VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. VSI was a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. An independent appraisal firm performed a valuation of VSI's identifiable intangible assets ($580) and in-process research and development ($95,500). The value assigned to in-process research and development was determined by the income approach, utilizing discount rates ranging from 30% to 35% and assumptions on product introductions which begin in the year 2000. Total consideration, including the net present value of future estimated contingent consideration, is approximately $142,000. The total consideration paid at close was allocated to the fair value of the net assets acquired ($7,618), and in-process research and development ($67,453). The remaining balance of the in-process research and development valuation ($28,047) will be recorded in the Company's financial statements as purchased in-process research and development expense when payment of the contingent consideration is assured beyond a reasonable doubt. All other contingent consideration payments in excess of the $28,047 will be capitalized as goodwill. ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM) manufactures and markets hemostatic puncture closure devices. Total consideration for Angio-Seal(TM), including the fair value of the net assets acquired and the acquisition accounting adjustments, was $177,714, which was allocated to in-process research and development ($47,775), various other identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of the in-process research and development and other identifiable intangible assets was based upon an independent appraisal. The values assigned to in-process research and development and other identifiable intangible assets were determined primarily by the income approach, utilizing discount rates of 25% for in-process research and development and 19.5% to 21.5% for the other intangible assets, and assumptions on product introductions which began in late 1999. OTHER: During 1999, the Company acquired the assets of various businesses used in the distribution of the Company's products. Aggregate consideration paid was $21,056 in cash and common stock. The above acquisitions have been recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated statements of earnings from the date of each acquisition. The values assigned to in-process research and development were expensed at close, except as note above, since technological feasibility had not been established and since there were no alternative future uses for the technology. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate. Goodwill and other intangible assets associated with these acquisitions will be amortized using lives ranging from 5-to-20 years. VENTRITEX, INC. (VENTRITEX): On May 15, 1997, the Company acquired Ventritex, a manufacturer of implantable cardioverter defibrillators and related products. The Company issued 10,437,800 shares of its common stock to the Ventritex shareholders at an exchange rate of 0.5 shares of Company common stock for every one share of Ventritex common stock. The transaction qualified as a tax-free reorganization and was accounted for as a pooling of interests. Net sales, net earnings and other changes in shareholders' equity for the separate companies preceding the acquisition from January 1, 1997 through March 31, 1997, were as follows: OTHER CHANGES IN SHAREHOLDERS' NET SALES NET EARNINGS EQUITY ------------------------------------------------------------------------------- St. Jude Medical $229,678 $27,791 $(14,550) Ventritex 20,712 (7,977) 997 Adjustments* -- 3,063 -- ------------------------------------------------------------------------------- Combined $250,390 $22,877 $(13,553) =============================================================================== * TO REFLECT THE COMBINED TAX POSITION AS IF THE ACQUISITION HAD OCCURRED AT THE BEGINNING OF 1997. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 3 - LONG-TERM DEBT Long-term debt consisted of the following: 1999 1998 -------------------------------------------------------------------------------- Committed credit facility borrowings $299,000 $330,000 Uncommitted credit facility borrowings 148,500 15,000 Convertible subordinated debentures 29,995 29,995 -------------------------------------------------------------------------------- Total long-term debt $477,495 $374,995 ================================================================================ COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. At December 31, 1999, the Company also had $300,000 of short-term, unsecured revolving credit facilities that expire in March 2000. These credit facilities provide for variable interest tied to the London Interbank Offered Rate. The weighted-average interest rate on these borrowings was 6.4% and 5.5% at December 31, 1999 and 1998. UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under unsecured, due-on-demand credit facilities with various banks. These credit facilities provide for variable interest tied to the London Interbank Offered Rate. The weighted-average interest rate on these borrowings was 6.9% and 5.3% at December 31, 1999 and 1998. CONVERTIBLE SUBORDINATED DEBENTURES: The Company's convertible subordinated debentures are due August 15, 2001, and bear interest at 5.75%. At the option of the holder, the debentures are convertible into shares of common stock at a conversion rate of 29.0909 shares per thousand dollars principal, which equates to a conversion price of $34.375 per share. In addition, the Company can call the debentures prior to maturity, requiring the debenture holder to either convert their debentures to common stock or sell their debentures to the Company for cash. During 1998, the Company repurchased $27,505 of these debentures in open market transactions, recognizing an immaterial gain. OTHER: In March, 2000, the Company replaced its $300,000 short-term committed credit facilities with a $150,000 committed credit facility. The new credit facility is due in March 2001 and provides for variable interest tied to the London Interbank Offered Rate. In addition, during January 2000, the Company began issuing short-term, unsecured commercial paper with maturities up to 270 days. The commercial paper is fully backed by committed credit facilities and bears interest at varying market rates. The Company's credit facility agreements contain various restrictive covenants including minimum financial ratios, limitations on additional liens or indebtedness, and limitations on certain acquisitions and investments, which the Company was in compliance with at December 31, 1999. The Company classifies all of its credit facility and commercial paper borrowings as long-term on its balance sheet as the Company has the ability to repay any short-term maturity with available cash from an existing long-term, committed credit facility. Management continually reviews the Company's cash flow projections and may from time to time repay a portion of the Company's borrowings. The fair value of the convertible subordinated debentures at December 31, 1999, was estimated to be approximately $32,000, based upon quoted market prices. NOTE 4 - COMMITMENTS AND CONTINGENCIES LEASES: The Company leases various facilities under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $7,179 in 2000; $6,642 in 2001; $5,246 in 2002; $3,224 in 2003; and $3,516 in 2004 and thereafter. Rent expense under all operating leases was $7,397, $7,341 and $7,081 in 1999, 1998 and 1997. IRS MATTERS: The Company and the Internal Revenue Service ("IRS") are in Tax Court over tax deficiency notices totaling $16,400 for the tax periods 1990-1991. The Company is refuting the IRS deficiency and has asserted that in fact the Company is owed a refund. The trial for this matter is currently scheduled to begin in June 2000. In addition, the IRS has proposed adjustments totaling $41,800 in additional taxes related to the Company's 1992-1994 income tax returns. The Company is disputing these adjustments, however, resolution of these matters is stayed pending resolution of the 1990-1991 litigation. Management believes that the IRS will propose a similar adjustment of approximately $15,500 for 1995. The issues raised by the IRS relate primarily to the Company's Puerto Rican operations. Management is vigorously contesting these adjustments and expects that the ultimate resolution will not have material adverse effect on the Company's financial position or liquidity, but could potentially be material to the net earnings of a particular future period if resolved unfavorably. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LITIGATION: The Company is involved in various product liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, management believes the Company has product liability insurance sufficient to cover such claims and suits. The Company's product liability insurance policies exclude coverage for two discontinued Pacesetter lead models. These discontinued lead models were the subject of class action product liability suits that have been settled. Management believes losses that might be sustained from any such future actions would not have a material adverse effect on the Company's liquidity or financial condition, but could potentially be material to the earnings of a particular future period if resolved unfavorably. NOTE 5 - SHAREHOLDERS' EQUITY CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of $1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 1999, 1998 or 1997. SHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company's outstanding common stock over a three-year period. The Company repurchased 977,500 shares of its common stock for $29,826 during 1999. During 1998, the Company repurchased 8,000,000 shares of its common stock for $304,789 under a modified "Dutch Auction" self-tender offer. EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, shares of the Company's un-issued common stock at 85% of the fair market value at specified dates. Employees purchased 94,386, 107,545 and 112,469 shares in 1999, 1998 and 1997 under this plan. At December 31, 1999, 180,042 shares of additional un-issued common stock were available for purchase under the plan. STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers and employees. Stock option awards under these plans generally have a 10-year life, an exercise price equal to the fair market value on the date of grant, and a four-year vesting term. At December 31, 1999, the Company had 1,441,654 shares of common stock available for grant under these plans. Stock option transactions under these plans during each of the three fiscal years in the period ended December 31, 1999, are as follows: OPTIONS WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE -------------------------------------------------------------------------------- Balance at January 1, 1997 5,419,016 $ 31.27 Granted 5,049,875 34.03 Cancelled (615,140) 38.39 Exercised (296,893) 23.56 -------------------------------------------------------------------------------- Balance at December 31, 1997 9,556,858 32.60 Granted 1,350,300 30.21 Cancelled (979,284) 36.09 Exercised (158,593) 20.36 -------------------------------------------------------------------------------- Balance at December 31, 1998 9,769,281 32.12 Granted 3,046,880 28.10 Cancelled (1,146,767) 35.39 Exercised (257,781) 22.88 -------------------------------------------------------------------------------- Balance at December 31, 1999 11,411,613 $ 30.93 ================================================================================ Stock options totaling 4,976,093, 3,961,943 and 3,362,361 were exercisable at December 31, 1999, 1998 and 1997. The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE WEIGHTED- WEIGHTED- RANGES OF NUMBER REMAINING YEARS AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE -------------------------------------------------------------------------------------------- $ 8.77-17.55 40,688 0.8 $ 16.14 40,688 $ 16.14 17.55-26.32 1,442,387 4.1 21.91 1,333,180 21.69 26.32-35.10 7,246,388 8.2 29.51 2,328,928 30.26 35.10-43.87 2,495,496 7.3 38.79 1,090,378 38.77 43.87-52.64 141,912 4.3 49.43 138,177 49.50 52.64-87.74 44,742 3.5 68.49 44,742 68.49 --------------------------------------------------------------------------------------------- 11,411,613 7.4 $ 30.93 4,976,093 $ 30.58 =============================================================================================
The Company also granted 42,359 shares of restricted common stock during the three years ended December 31, 1999, under the Company's stock compensation plans. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company's net earnings and diluted net earnings per share would have been reduced by $18,614, or $0.22 per share, in 1999, $11,822, or $0.14 per share, in 1998 and $12,911, or $0.14 per share, in 1997 had the fair value based method of accounting been used for valuing the employee stock based awards. The impact on net earnings from these stock based awards may not be representative of future disclosures because they do not take into effect the pro forma compensation expense related to grants made prior to 1995. The weighted-average fair value of options granted and assumptions used in the Black-Scholes options pricing model are as follows: 1999 1998 1997 ------------------------------------------------------------------------------- Fair value of options granted $11.12 $10.91 $13.22 Assumptions used: Expected life (years) 5 5 6 Risk-free rate of return 5.8% 4.5% 6.0% Volatility 33.2% 33.4% 34.2% Dividend yield 0% 0% 0% =============================================================================== SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company's shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in 2007. NOTE 6 - SPECIAL CHARGES 1999 SPECIAL CHARGE: The Company restructured its international operations during the third quarter of 1999 to improve the effectiveness and efficiency of its international business by clarifying business unit accountabilities and focusing the operations of its business units outside the U.S. and by removing administrative redundancies in the Company's non-U.S. management structure. This restructuring resulted in the elimination of certain administrative management positions. The Company recorded a $9,754 charge in the third quarter of 1999 related primarily to this restructuring, of which $4,102 was used through December 31, 1999. The Company anticipates that substantially all of the remaining balance will be utilized during 2000. 1997 SPECIAL CHARGES: The Company recorded charges totaling $58,669 during 1997 related to Ventritex merger transaction costs ($8,227), various distributor agreement terminations ($12,925), repositioning of Pacesetter manufacturing operations in connection with the Ventritex integration ($18,139), and to the repositioning of Ventritex operations ($19,378). The Company has utilized $56,090 of the special charge reserves through December 31, 1999. The balance of the remaining special charge accruals are expected to be utilized as the remaining contractual obligations come due. NOTE 7 - OTHER INCOME (EXPENSE) Other income (expense) consists of the following: 1999 1998 1997 ------------------------------------------------------------------------------- Interest expense $(28,104) $(23,667) $(14,374) Interest income 2,726 4,125 6,365 Net investment gain 848 15,624 6,768 Foreign currency transaction gain (loss) 2,666 (3,304) 2,078 Other (320) (1,000) 582 ------------------------------------------------------------------------------- Other income (expense) $(22,184) $ (8,222) $ 1,419 =============================================================================== NOTE 8 - INCOME TAXES The Company's earnings before income taxes and accounting change were generated from domestic and foreign operations as follows: 1999 1998 1997 ------------------------------------------------------------------------------- Domestic $ 2,408 $132,574 $81,311 Foreign 64,596 53,156 6,925 ------------------------------------------------------------------------------- Earnings before income taxes and accounting change $67,004 $185,730 $88,236 =============================================================================== Income tax expense consists of the following: 1999 1998 1997 ------------------------------------------------------------------------------- Current: Federal $28,641 $28,409 $20,957 State and Puerto Rico Section 936 2,810 5,771 3,754 Foreign 10,957 7,009 2,195 ------------------------------------------------------------------------------- Total current 42,408 41,189 26,906 Deferred 369 15,459 6,624 ------------------------------------------------------------------------------- Income tax expense $42,777 $56,648 $33,530 =============================================================================== 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amount for financial statement purposes are as follows: 1999 1998 ------------------------------------------------------------------------------- Deferred income tax assets: Net operating loss carryforwards $46,399 $45,258 Tax credit carryforwards 16,070 3,837 Inventories 25,678 23,302 Intangible assets 14,365 17,034 Accrued liabilities 7,913 6,456 ------------------------------------------------------------------------------- Deferred income tax assets 110,425 95,887 ------------------------------------------------------------------------------- Deferred income tax liabilities: Unrealized gain on marketable securities (3,854) (4,566) Property, plant and equipment (18,124) (12,467) ------------------------------------------------------------------------------- Deferred income tax liabilities (21,978) (17,033) ------------------------------------------------------------------------------- Net deferred income tax asset $88,447 $78,854 =============================================================================== A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows: 1999 1998 1997 ------------------------------------------------------------------------------- Income tax expense at the U.S. federal statutory rate $23,451 $65,006 $30,883 State income taxes, net of federal benefit 1,811 4,091 2,613 Foreign taxes at higher (lower) rates (1,567) (6,212) 1,023 Tax benefits from foreign sales corporation (3,309) (5,662) (4,600) Research and development credits (3,679) (2,906) (2,890) Non-deductible purchased in-process research and development charge 23,608 -- -- Non-deductible acquisition costs -- -- 6,280 Other 2,462 2,331 221 ------------------------------------------------------------------------------- Income tax expense $42,777 $56,648 $33,530 ------------------------------------------------------------------------------- Effective income tax rate 63.8% 30.5% 38.0% =============================================================================== At December 31, 1999, the Company has net operating loss and tax credit carryforwards of $132,569 and $16,070, that will expire from 2002 through 2018 if not utilized. Such amounts are subject to annual usage limitations. The Company has not recorded deferred income taxes on $112,266 of its foreign subsidiaries' undistributed earnings as such amounts are currently intended to be indefinitely reinvested. NOTE 9 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE The Company changed its accounting policy in the fourth quarter of 1997 relating to the capitalization of certain business process reengineering costs which were incurred in connection with the Company's ERP software implementation project. Pursuant to Emerging Issues Task Force (EITF) Statement No. 97-13, the Company expensed the unamortized balance of the business process reengineering costs previously capitalized, net of $980 in taxes, as a cumulative effect of accounting change. NOTE 10 - RETIREMENT PLANS DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that provide retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to IRS limitations, with the Company matching a portion of the employees' contributions. The Company also contributes a portion of its profits to the plan, based upon Company performance. The Company's matching and profit sharing contributions are at the discretion of the Company's Board of Directors. In addition, the Company has defined contribution programs for employees outside the United States. The benefits under these plans are based primarily on compensation levels. Company contributions under all defined contribution plans totaled $11,416, $9,858 and $8,859 in 1999, 1998 and 1997. DEFINED BENEFIT PLANS: The Company has defined benefit plans for employees in certain countries outside the U.S. The Company has an accrued liability totaling approximately $7,000 at December 31, 1999, which approximates the actuarially calculated unfunded liability. The related pension expense was not material. NOTE 11 - MARKET AND CONCENTRATION RISK FOREIGN CURRENCY RISK: The Company had forward exchange contracts totaling $27,451 and $38,353 at December 31, 1999 and 1998, related primarily to the exchange of Canadian Dollars, British Pounds, Swedish Kroner and the U.S. dollar. These instruments typically have a maturity of one year or less. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST RATE RISK: During the third quarter of 1999, the Company entered into an interest rate swap contract to hedge a substantial portion of its variable interest rate risk through January 2000 on $138,000 of revolving credit facility borrowings. The fair market value of this contract was not material at December 31, 1999. The impact of interest rate contracts on the Company's net earnings was not material during 1999 and there were no interest rate contracts outstanding during 1998 and 1997. CONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the normal course of business but generally does not require collateral or any other security to support its receivables. Within the European Economic Union and in many emerging markets, payment of certain accounts receivable balances are made by the national health care system within several countries. Although the Company does not anticipate collection problems with these receivables, payment is dependent, to a certain extent, upon the economic situation within these countries. The credit risk associated with the Company's other trade receivables is mitigated due to dispersion of the receivables over a large number of customers in many geographic areas. NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm Management (CRM) and Heart Valve Disease Management (HVDM). The CRM segment, which includes the results from the Company's Cardiac Rhythm Management Division and Daig Division, develops, manufactures and distributes bradycardia pulse generator and tachycardia implantable cardioverter defibrillator systems, electrophysiology and interventional cardiology catheters and vascular closure devices. The HVDM segment develops, manufactures and distributes mechanical and tissue heart valves and valve repair products and is in the process of developing suture-free devices to facilitate coronary artery bypass graft anastomoses. The following table presents certain financial information about the Company's reportable segments: CRM HVDM ALL OTHER(1) TOTAL -------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1999 External net sales $843,117 $271,432 $ -- $1,114,549 Operating profit(2) 96,291 145,675 (152,778) 89,188 Depreciation and amortization expense 74,626 9,581 1,495 85,702 Assets(3) 1,174,672 211,424 167,942 1,554,038 Expenditures for long-lived assets(4) 71,190 5,717 1,771 78,678 -------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1998 External net sales $735,123 $280,871 $ -- $1,015,994 Operating profit 70,024 147,832 (23,904) 193,952 Depreciation and amortization expense 59,679 7,810 1,364 68,853 Assets(3) 992,291 222,033 170,288 1,384,612 Expenditures for long-lived assets(4) 58,323 14,546 1,328 74,197 -------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1997 External net sales $716,347 $278,049 $ -- $ 994,396 Operating profit(2) 23,673 142,707 (79,563) 86,817 Depreciation and amortization expense 55,704 8,136 2,221 66,061 Assets(3) 988,977 184,246 279,893 1,453,116 Expenditures for long-lived assets(4) 68,539 13,348 2,751 84,638 ================================================================================ (1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. (2) ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $9,754 AND $58,669 IN 1999 AND 1997, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $115,228 IN 1999. (3) ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE SEGMENT'S ASSETS WITH THE EXCEPTION OF CERTAIN HVDM OFFICE FACILITIES, WHICH ARE INCLUDED IN CORPORATE'S ASSETS. HVDM IS ALLOCATED ITS PROPORTIONATE SHARE OF DEPRECIATION. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH, MARKETABLE SECURITIES, PROPERTY AND EQUIPMENT AND DEFERRED INCOME TAXES. (4) INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITIONS OF ANGIO-SEAL(TM) AND VARIOUS DISTRIBUTION BUSINESSES, AND THE HVDM SEGMENT ACQUISITION OF VSI IN 1999. GEOGRAPHIC INFORMATION: The following tables present certain geographical financial information: NET SALES 1999 1998 1997 -------------------------------------------------------------------------------- United States $ 689,051 $ 604,524 $581,514 Western Europe 259,300 248,070 227,871 Other foreign countries 166,198 163,400 185,011 -------------------------------------------------------------------------------- $1,114,549 $1,015,994 $994,396 ================================================================================ LONG-LIVED ASSETS* 1999 1998 1997 -------------------------------------------------------------------------------- United States $ 607,851 $ 538,403 $532,381 Western Europe 57,082 44,860 40,697 Other foreign countries 130,366 67,430 74,370 -------------------------------------------------------------------------------- $ 795,299 $ 650,693 $647,448 ================================================================================ * LONG-LIVED ASSETS INCLUDE PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND OTHER INTANGIBLE ASSETS. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 13 - SUBSEQUENT EVENT On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating a proprietary Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will no longer utilize the Silzone(R) coating. The Company expects to record a non-recurring charge against first quarter 2000 earnings, which is currently estimated at $16,000 to $20,000, for the write-off of inventory and other costs related to this recall and product discontinuation. However, there can be no assurance that the final costs associated with this recall will not exceed management's current estimates. NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 1999 and 1998 was as follows:
QUARTER FIRST SECOND THIRD FOURTH -------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1999 Net sales $266,734 $290,659 $275,814 $281,342 Gross profit 173,273 190,910 181,529 187,935 Net earnings (loss) (12,057)* 37,205 (36,994)** 36,073 Diluted net earnings (loss) per share $ (0.14) $ 0.44 $ (0.44) $ 0.43 Fiscal Year Ended December 31, 1998 Net sales $257,488 $261,232 $248,822 $248,452 Gross profit 159,262 165,207 158,118 160,467 Net earnings 29,175 40,034 29,450 30,423 Diluted net earnings per share $ 0.32 $ 0.47 $ 0.35 $ 0.36 ======================================================================================
* INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION. ** INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL CHARGE OF $9,754. 42 FIVE-YEAR SUMMARY FINANCIAL DATA -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999* 1998 1997** 1996*** 1995 -------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS FOR THE FISCAL YEAR: Net sales $1,114,549 $1,015,994 $ 994,396 $ 876,747 $ 848,078 -------------------------------------------------------------------------------------------------------------- Gross profit $ 733,647 $ 643,054 $ 628,679 $ 581,859 $ 555,290 -------------------------------------------------------------------------------------------------------------- Percent of sales 65.8% 63.3% 63.2% 66.4% 65.5% -------------------------------------------------------------------------------------------------------------- Operating profit $ 89,188 $ 193,952 $ 86,817 $ 69,469 $ 169,086 -------------------------------------------------------------------------------------------------------------- Percent of sales 8.0% 19.1% 8.7% 8.0% 19.9% -------------------------------------------------------------------------------------------------------------- Net earnings $ 24,227 $ 129,082 $ 53,140 $ 60,637 $ 117,116 -------------------------------------------------------------------------------------------------------------- Percent of sales 2.2% 12.7% 5.3% 6.9% 13.8% -------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.29 $ 1.50 $ 0.58 $ 0.66 $ 1.28 -------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT YEAR END: Cash and marketable securities $ 88,893 $ 87,990 $ 184,536 $ 235,395 $ 239,621 -------------------------------------------------------------------------------------------------------------- Working capital 407,777 479,067 497,188 429,451 405,060 -------------------------------------------------------------------------------------------------------------- Total assets 1,554,038 1,384,612 1,453,116 1,469,994 1,192,235 -------------------------------------------------------------------------------------------------------------- Long-term debt 477,495 374,995 220,000 229,500 120,000 -------------------------------------------------------------------------------------------------------------- Shareholders' equity 794,021 806,220 987,022 922,061 855,388 -------------------------------------------------------------------------------------------------------------- OTHER DATA: Diluted weighted average shares outstanding 84,735 86,145 92,052 92,372 91,335 --------------------------------------------------------------------------------------------------------------
THE FIVE-YEAR SUMMARY FINANCIAL DATA INCLUDES THE RESULTS OF VENTRITEX, INC. FOR ALL PERIODS PRESENTED. ALSO, THE COMPANY HAS NOT DECLARED OR PAID ANY DIVIDENDS DURING 1995 THROUGH 1999. *RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228 RELATED TO THE ANGIO-SEAL(TM) AND VASCULAR SCIENCE, INC. ACQUISITIONS. **RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES. ***RESULTS FOR 1996 INCLUDE A $52,926 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES TOTALING $40,350 RELATED TO VARIOUS ACQUISITIONS. 43 INVESTOR INFORMATION -------------------------------------------------------------------------------- TRANSFER AGENT Requests concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings or change of address should be directed to the Company's Transfer Agent at: First Chicago Trust Company of New York a division of EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 1-800-317-4445 www.equiserve.com (Account Access Availability) Hearing impaired # TDD: 201-222-4955 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May 10, 2000, at the Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, MN. INVESTOR CONTACTS Laura C. Merriam, Director of Investor Relations John M. Buske, Corporate Controller Dennis J. McFadden, Treasurer To obtain information about the Company call 1-800-552-7664, visit our Web site www.sjm.com, or write to: Investor Relations St. Jude Medical, Inc. One Lillehei Plaza St. Paul, MN 55117-9983. Latest Company news releases, including quarterly results, and other information can be received by calling Investor Relations at a toll-free number (1-800-552-7664) or on the St. Jude Medical home page. 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. COMPANY STOCK SPLITS 2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90 3:2 on 11/16/95 STOCK EXCHANGE LISTINGS New York Stock Exchange Chicago Board Options Exchange (CB) Symbol: STJ The quarterly range of high and low prices per share for the Company's common stock for fiscal years 1999 and 1998 are set forth below. As of February 10, 2000, the Company had 4,443 shareholders of record. YEAR ENDED DECEMBER 31 1999 1998 -------------------------------------------------------------------------------- Quarter High Low High Low -------------------------------------------------------------------------------- First $29.38 $22.94 $38.00 $29.06 Second $38.31 $23.88 $39.69 $33.06 Third $40.75 $29.75 $36.63 $19.19 Fourth $30.69 $25.13 $31.88 $19.19 TRADEMARKS Aescula(TM), Affinity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R), Aortic Connector(TM), AutoCapture(TM), Contour(R), Daig Cardiac Ablation System(TM), Dynamic Atrial Overdrive(TM), EnCap(TM), Entity(TM), Fast-Cath(TM), Frontier(TM), Genesis(TM), GuideRight(TM), Integrity(TM), Linx(TM), Livewire TC(TM), Livewire(TM), Maximum Xtra(TM), Microny(R), Photon(TM), Profile(TM), RAMP(TM), Regency(R), Seal-Away(TM), Silzone(R), SJM Biocor(TM), SJM Epic(TM), SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), SJM(R), Spyglass(TM), Supreme(TM), Tendril(R), Toronto Duo(TM), Toronto SPV(R), Trilogy(R), TVL(R) Cardima(R) is a trademark of Cardima, Inc. Housecall(TM) is a trademark of Raytel Cardiac Services. 44