{"id":40584,"date":"2015-09-17T11:25:58","date_gmt":"2015-09-17T16:25:58","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/contracts\/uncategorized\/split-dollar-insurance-agreement-st-jude-medical-inc-phoenix.html"},"modified":"2015-09-17T11:25:58","modified_gmt":"2015-09-17T16:25:58","slug":"split-dollar-insurance-agreement-st-jude-medical-inc-phoenix","status":"publish","type":"corporate_contracts","link":"https:\/\/corporate.findlaw.com\/contracts\/compensation\/split-dollar-insurance-agreement-st-jude-medical-inc-phoenix.html","title":{"rendered":"Split-Dollar Insurance Agreement &#8211; St. Jude Medical Inc., Phoenix Home Life Mutual Insurance Co., and Ronald A. Matricaria"},"content":{"rendered":"<pre>                        SPLIT-DOLLAR INSURANCE AGREEMENT\n                            AS AMENDED APRIL 29, 1999\n\n      THIS AGREEMENT, originally effective as of this 10th day of January, 1997,\nis amended effective April 29, 1999 by agreement between the Company and the\nOwner:\n\nDEFINITIONS:\n\nA.    \"Company\": St. Jude Medical, Inc., a Minnesota corporation, of St. Paul,\n      Minnesota.\n\nB.    \"Executive\": Ronald A. Matricaria, the Chairman and Chief Executive\n      Officer of the Company, residing in North Oaks, Minnesota.\n\nC.    \"Insured\": Collectively, the Executive and Lucille E. Matricaria, his\n      spouse, and the survivor thereof.\n\nD.    \"Insurer\": The Phoenix Home Life Mutual Insurance Company.\n\nE.    \"Owner\": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable Life\n      Insurance Trust.\n\nF.    \"Policy\": The policy of insurance on the life of the Insured issued by the\n      Insurer and listed on Exhibit \"A\" annexed hereto together with any\n      supplementary contracts issued by the Insurer in conjunction therewith.\n\nG.    \"Policy Interest\": The Company's Policy Interest shall be an amount equal\n      to the lesser of the cumulative total of its share of the premiums paid on\n      the Policy or cash surrender value of the Policy. The existence of the\n      Company's Policy Interest shall be evidenced by filing with the Insurer an\n      assignment in substantially the form annexed hereto as Exhibit \"B\".\n\nRECITALS:\n\nA.    The Owner is the owner of the Policy, and was established by the Insured\n      to provide a benefit for the Insured's family in the event of the death of\n      the survivor of the Insured.\n\nB.    The Executive had been and is a valuable employee of the Company. As an\n      additional benefit to the Executive and his spouse, the Company wishes to\n      assist the Owner in the payment of premiums on the Policy as set forth in\n      this Agreement.\n\nC.    In exchange for such premium assistance, the Owner is willing to grant to\n      the Company an interest in the Policy as provided herein.\n\nD.    This Agreement is intended to qualify as a life insurance employee benefit\n      plan as described in Revenue Ruling 64-328.\n\n\n\n\nTHEREFORE, for value received, it is agreed:\n\n1.    PREMIUM PAYMENTS\n\n      (a)   Each annual premium on the Policy during the term of this Agreement\n            shall be paid as follows:\n\n            (1)   The Owner shall pay a portion of each annual premium due in an\n                  amount equal to the current term rate for the Insured's age\n                  multiplied by the excess of the current death benefit over the\n                  Company's current Policy Interest. For purposes of this\n                  Agreement, the \"current term rate\" shall mean:\n\n                  (A)   Prior to the death of one of the Insured, the lesser of\n                        the Insurer's annual term insurance rate or the rates\n                        specified in Revenue Rulings 64-328 and 66-110 based on\n                        the joint life expectancies of the Insured;\n\n                  (B)   In the event of the death of one of the Insured prior to\n                        the termination of this Agreement, thereafter, the\n                        lesser of the Insurer's annual term insurance rate or\n                        the rate specified in Revenue Rulings 64-328 and 66-110\n                        based on the life expectancy of the surviving Insured.\n\n            (2)   In connection with the amount described in (1) above, the\n                  Company shall pay in cash to the Executive, or in the event of\n                  Executive's death, the Executive's spouse, at least 30 days\n                  prior to the due date of any premium due under the Policy, an\n                  amount which, after payment by the Executive or spouse of any\n                  federal, state and local income (including FICA) tax\n                  liability, if any, will equal the amount of the Owner's\n                  premium described in (1) above. The Executive, the Executive's\n                  spouse or their tax advisor shall provide the Company with an\n                  estimate of the effective combined federal, state and local\n                  tax rate for the year in which the Owner's premium is due. The\n                  payment described in this paragraph (2) shall be deemed a\n                  bonus to the Executive during his employment, and thereafter,\n                  a retirement benefit to the Executive and\/or his spouse.\n\n            (3)   The Company shall pay all premium amounts not paid by the\n                  Owner.\n\n      (b)   The Owner's premium share and the Company's premium share (other\n            than that paid with policy loans) shall be remitted to the Insurer\n            before expiration of the grace period.\n\n      (c)   Dividends on the Policy shall be applied as elected by the Owner.\n\n      (d)   The Policy may, at the Company's discretion, provide for the waiver\n            of premium on the Executive's disability. If it does so provide, the\n            cost thereof shall be borne by the Company.\n\n\n                                        2\n\n\n\n2.    POLICY OWNERSHIP\n\n      (a)   Except as provided in subsection (b), the Owner shall be sole and\n            exclusive owner of the Policy. This includes all the rights of\n            \"owner\" under the terms of the Policy including, but not limited to,\n            the right to designate beneficiaries, select settlement and dividend\n            options and to surrender the Policy. All such rights may be\n            exercised by the Owner without the Company's consent.\n\n      (b)   In exchange for the Company's payment of its premium contribution\n            under Section 1, the Owner hereby assigns to the Company the\n            following rights in the Policy:\n\n            (1)   The right to realize against the cash value of the Policy, to\n                  the extent of its Policy Interest in the event of termination\n                  of this Agreement as provided in Section 4.\n\n            (2)   The right to realize against proceeds of the Policy, to the\n                  extent of its Policy Interest, in the event of the Insured's\n                  death.\n\n      (c)   It is agreed that benefits may be paid under the Policy by the\n            Insurer either by separate checks to the parties entitled thereto,\n            or by a joint check. In the later instance, the Owner and the\n            Company agree that the benefits shall be divided as provided herein.\n\n3.    THE OWNER - The Owner shall have the right to assign any part or all of\n      the Owner's retained interest in the Policy and this Agreement to any\n      person, entity or trust by execution of a written assignment delivered to\n      the Insurer.\n\n4.    TERMINATION OF AGREEMENT\n\n      (a)   This Agreement shall not terminate until, but shall terminate\n            immediately upon the first to occur of the following:\n\n            (1)   Surrender of the Policy by the Owner, who has the sole and\n                  exclusive right of surrender.\n\n            (2)   Lapse, failure to make premium contributions as required by\n                  Section 1 or other termination of the Policy by the Owner.\n\n            (3)   The death of the survivor of the Insured\n\n            (4)   The bankruptcy, receivership or dissolution of the Company.\n\n            (5)   Payment of the annual premium for the 15th policy year, which\n                  shall occur in January, 2012.\n\n\n                                        3\n\n\n\n      (b)   On any termination of this Agreement, the Owner shall pay to the\n            Company the Company's Policy Interest and the Company will release\n            its collateral assignment in the Policy to the Owner.\n\n5.    THE INSURER - The Insurer shall be bound only by the provisions of and\n      endorsements on the Policy, and any payments made or actions taken by it\n      in accordance therewith shall fully discharge it from all claims, suits\n      and demands of all persons whatsoever. It shall in no way be bound by or\n      be deemed to have notice of the provisions of this Agreement.\n\n6.    AMENDMENT OF AGREEMENT - This amended Agreement shall restate and replace\n      the Split Dollar Insurance Agreement between the Company and the Owner\n      dated January 10, 1997. The Owner and the Company can mutually agree to\n      further amend this Agreement and such amendment shall be in writing and\n      signed by the Owner and Company.\n\n7.    SUCCESSOR RIGHTS - Notwithstanding anything herein to the contrary, the\n      Company's rights and obligations under this Agreement shall not cease, but\n      shall continue and shall be enforceable in the event of the merger of the\n      Company in which it is not the survivor, or in the event of the sale of\n      all or substantially all of the assets of the Company, and said successor\n      shall assume such rights and obligations hereunder.\n\n8.    ADMINISTRATION AND FUNDING - The following provisions are part of this\n      Agreement and are intended to meet the requirements of the Employee\n      Retirement Income Security Act of 1974:\n\n      (a)   The named fiduciary: The Vice President, Finance\/Chief Financial\n            Officer.\n\n      (b)   The funding policy under this Agreement is that all premiums on the\n            Policy be remitted to the Insurer when due.\n\n      (c)   Direct payment by the Insurer is the basis of payment of benefits\n            under this Agreement, with those benefits in turn being based on the\n            payment of premiums as provided in the Agreement.\n\n      (d)   For claims procedure purposes, the \"Claims Manager\" shall be the\n            Vice President, Assistant Secretary\/General Counsel.\n\n            (1)   If for any reason a claim for benefits under this Agreement is\n                  denied by the Company, the Claims Manager shall deliver to the\n                  claimant a written explanation setting forth the specific\n                  reasons for the denial, pertinent references to the Agreement\n                  section on which the denial is based, such other data as may\n                  be pertinent and information on the procedures to be followed\n                  by the claimant in obtaining a review of his claim, written in\n                  a manner calculated to be understood by the claimant. For this\n                  purpose:\n\n                  (A)   The claimant's claim shall be deemed filed when\n                        presented orally or in writing to the Claims manager.\n\n\n                                        4\n\n\n\n                  (B)   The Claims Manager's explanation shall be in writing\n                        delivered to the Claimant within 90 days of the date the\n                        claim is filed.\n\n            (2)   The claimant shall have 60 days following his receipt of the\n                  denial of the claim to file with the Claims Manager a written\n                  request for review of the denial. For such review, the\n                  claimant or his representative may submit pertinent documents\n                  and written issues and comments.\n\n            (3)   The Claims Manager shall decide the issue on review and\n                  furnish the claimant with a copy within 60 days of receipt of\n                  the claimant's request for review of his claim. The decision\n                  on review shall be in writing and shall include specific\n                  reasons for the decision written in a manner calculated to be\n                  understood by the claimant, as well as specific references to\n                  the pertinent provisions of this Agreement on which the\n                  decision is based. If a copy of the decision is not so\n                  furnished to the claimant within such 60 days, the claim shall\n                  be deemed denied on review.\n\n      (e)   If any claim arising under this Agreement is not resolved under (d)\n            above or any other dispute arises under the terms of this Agreement,\n            the Company and Owner agree to submit the claim or dispute to\n            arbitration proceedings held in accordance with the rules of the\n            American Arbitration Association. Judgment upon the award rendered\n            by the arbitrators may be entered in any court having jurisdiction\n            thereof. Pending final resolution of the dispute, the parties shall\n            continue to comply with the provisions of this Agreement not in\n            dispute. The expenses of the arbitration shall be borne equally by\n            the parties to the arbitration, provided that each party shall pay\n            for and bear the costs of its own experts, evidence and legal\n            counsel. Such arbitration shall be held in Minneapolis, Minnesota.\n\n9.    MISCELLANEOUS\n\n      (a)   This Agreement shall be binding upon and inure to the benefit of the\n            Company and the Owner and their respective successors and assigns.\n\n      (b)   Any notice, consent or demand required or permitted to be given\n            under the provisions of this Agreement shall be in writing, and\n            shall be signed by the party giving or making the same. If such\n            notice, consent or demand is mailed to a party hereto, it shall be\n            sent by United States certified mail, postage prepaid, addressed to\n            such party's last known address as shown on the records of the\n            Company. The date of such mailing shall be deemed the date of\n            notice, consent or demand.\n\n      (c)   This Agreement, and the rights of the parties hereunder, shall be\n            governed by and construed in accordance with the laws of the State\n            of Minnesota, except to the extent preempted by federal law.\n\n\n                                        5\n\n\n\n      IN WITNESS WHEREOF the parties have signed this Agreement, as amended,\neffective as of this 29th day of April, 1999.\n\n\nIn the presence of                       COMPANY\n\n                                         St. Jude Medical, Inc.\n\n\n\/s\/ Karen M. Jurney                      By: \/s\/ Kevin  T. O'Malley\n----------------------------------          ------------------------------------\nKaren M. Jurney                             Kevin  T. O'Malley\n\n                                            Its: Vice President\n                                                --------------------------------\n\n\n                                         OWNER\n\n                                         The Ronald A. and Lucille E. Matricaria\n                                         1997 Irrevocable Life Insurance Trust\n\n\/s\/ Karen M. Jurney                      \/s\/ John P. Berdusco\n----------------------------------       ---------------------------------------\nKaren M. Jurney                          John P. Berdusco, Trustee\n\n\n                                        6\n\n\n\n\n                                   EXHIBIT \"A\"\n\n                                 LIFE INSURANCE\n\n\nPOLICY NUMBER                                                       FACE AMOUNT\n\n\n2,708,353                                                           $3,000,000\n\n\n\n\n                                   EXHIBIT \"B\"\n\n                             SPLIT DOLLAR ASSIGNMENT\n\n\nInsurer: The Phoenix Home Mutual Life Insurance Company.\n\nInsured: Ronald A. and Lucille Matricaria\n\n\n      THIS ASSIGNMENT, originally made January 10, 1997, is amended and affirmed\nby the undersigned Owner effective as of April 29, 1999.\n\nDEFINITIONS:\n\n      A.    \"Assignee\": St. Jude Medical, Inc., a Minnesota corporation, of St.\n            Paul, Minnesota.\n\n      B.    \"Owner\": The Ronald A. and Lucille E. Matricaria 1997 Irrevocable\n            Life Insurance Trust.\n\n      C.    \"Policy\": The following policy of insurance issued by the Insurer on\n            the life of the insured, together with any supplementary contracts\n            issued in conjunction therewith:\n\n                    POLICY NUMBER                    FACE AMOUNT\n\n                    2,708,353                        $3,000,000\n\n      D.    \"Policy Interest\": The Assignee's Policy Interest shall be as set\n            forth in the Split Dollar Agreement. The Insurer shall be entitled\n            to rely on the Assignee's certification of the amount of its Policy\n            Interest.\n\n      E.    \"Split Dollar Agreement\": That certain Agreement, dated January 10,\n            1997, as amended effective April 29, 1999, between the Owner and the\n            Assignee. The Insurer is not bound by nor deemed to have notice of\n            the provisions of the Split Dollar Agreement.\n\nRECITALS:\n\n      A.    Under the Split Dollar Agreement, the Assignee has agreed to assist\n            the Owner in payment of premiums on the Policy.\n\n      B.    In consideration of such premium payments by the Assignee, the Owner\n            here intends to grant the Assignee certain limited interests in the\n            Policy.\n\n\n\n\nTHEREFORE, for value received, it is agreed:\n\n1.    ASSIGNMENT - The Owner hereby assigns, transfers and sets over to the\n      Assignee, its successor and assigns, the following specific rights in the\n      Policy and subject to the following terms and conditions:\n\n      (a)   The right to realize against the cash value of the Policy, to the\n            extent of its Policy Interest, in the event of the Policy's\n            surrender by the Owner.\n\n      (b)   The right to realize against proceeds of the Policy, to the extent\n            of its Policy Interest, in the event of the Insured's death.\n\n      (c)   The right to borrow against the security of the Policy, but not\n            against the Policy itself.\n\n2.    RETAINED RIGHTS - Except as expressly provided in Section 1, the Owner\n      retains all rights under the Policy including, but not limited to, the\n      exclusive right to name beneficiaries, select settlement and dividend\n      options and to surrender the Policy without the consent of the Assignee.\n\n3.    INSURER - The Insurer is hereby authorized to recognize, and is fully\n      protected in recognizing:\n\n      (a)   The claims of the Assignee to rights hereunder, without\n            investigating the reasons for such action by the Assignee, or the\n            validity or the amount of such claims.\n\n      (b)   The Owner's request for surrender of the Policy without the consent\n            of the Assignee. Upon the surrender, the Policy shall be terminated\n            and of no further force or effect.\n\n4.    AMENDMENT - This Assignment shall not be altered or amended by the Owner\n      without the written consent of the Assignee.\n\n5.    RELEASE OF ASSIGNMENT - Upon payment to the Assignee of its Policy\n      Interest, the Assignee shall executive a written release of this\n      Assignment.\n\n      IN WITNESS WHEREOF the Owner has executed this Assignment on the date\nfirst above written.\n\nIn the presence of                       The Ronald A. and Lucille E. Matricaria\n                                         1997 Irrevocable Life Insurance Trust\n\n\/s\/ Karen M. Jurney                      \/s\/ John P. Berdusco\n----------------------------------       --------------------------------------\n                                         John P. Berdusco, Trustee\n\n<type>EX-13\n<sequence>3\n<description>1999 ANNUAL REPORT\n\n\n                                                                      EXHIBIT 13\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nRESULTS OF OPERATIONS\n\nINTRODUCTION\n\nSt. Jude Medical, Inc. (\"St. Jude Medical\" or the \"Company\") is a global leader\nin the development, manufacturing and distribution of medical device products\nfor the cardiac rhythm management, cardiology and vascular access, and heart\nvalve disease management markets. The Company has two reportable segments:\nCardiac Rhythm Management (CRM) and Heart Valve Disease Management (HVDM). The\nCRM segment, which includes the results from the Company's Cardiac Rhythm\nManagement Division and Daig Division, develops, manufactures and distributes\nbradycardia pulse generator and tachycardia implantable cardioverter\ndefibrillator (ICD) systems, electrophysiology and interventional cardiology\ncatheters, and vascular closure devices. The HVDM segment develops, manufactures\nand distributes mechanical and tissue heart valves and valve repair products,\nand is in the process of developing suture-free devices to facilitate coronary\nartery bypass graft anastomoses.\n\nThe Company utilizes a fifty-two, fifty-three week fiscal year ending on the\nSaturday nearest December 31, but for clarity of presentation, describes all\nperiods as if the year end is December 31. Fiscal years 1999 and 1998 each\nconsisted of fifty-two weeks and fiscal year 1997 consisted of fifty-three\nweeks.\n\nThe commentary that follows should be read in conjunction with the Company's\nconsolidated financial statements and related notes.\n\nACQUISITIONS\n\nFollowing is a discussion on the Company's business acquisitions during the last\nthree years:\n\nVASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the\noutstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus\nadditional contingent consideration related to product development milestones\nfor regulatory approvals and to future sales. VSI was a development-stage\ncompany focused on the development of suture-free devices to facilitate coronary\nartery bypass graft anastomoses.\n\nANGIO-SEAL(TM): On March 16, 1999, the Company purchased the\nAngio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash.\nAngio-Seal(TM)manufactures and markets hemostatic puncture closure devices.\n\nOTHER: During 1999, the Company acquired the assets of various businesses used\nin the distribution of the Company's products for $21,056 in cash and common\nstock.\n\nVENTRITEX, INC. (\"VENTRITEX\"): On May 15, 1997, the Company acquired Ventritex,\na manufacturer of ICDs and related products. St. Jude Medical issued 10,437,800\nshares of its common stock to the Ventritex shareholders at an exchange rate of\n0.5 shares of Company common stock for every one share of Ventritex common\nstock. The transaction qualified as a tax-free reorganization.\n\nThe 1999 acquisitions were recorded using the purchase method of accounting. The\noperating results of each of these acquisitions were included in the Company's\nconsolidated financial statements from the date of each acquisition. The\nVentritex acquisition was accounted for as a pooling of interests and as such,\nthe historical results of St. Jude Medical were restated at the time of the\nacquisition to include the historical operating results of Ventritex.\n\nNET SALES\n\nNet sales by geographic markets were as follows:\n\n                                          1999              1998            1997\n--------------------------------------------------------------------------------\nUnited States                       $  689,051        $  604,524        $581,514\nWestern Europe                         259,300           248,070         227,871\nOther foreign countries                166,198           163,400         185,011\n--------------------------------------------------------------------------------\n   Total net sales                  $1,114,549        $1,015,994        $994,396\n--------------------------------------------------------------------------------\n\nOverall, foreign exchange rate movements had an unfavorable year-to-year impact\nof $14,900 and $5,200 in 1999 and 1998, respectively, due primarily to the\nstrengthening of the U.S. dollar against the major Western European currencies.\nThis negative effect is not necessarily indicative of the impact on net earnings\ndue to partially offsetting favorable foreign currency changes on operating\ncosts and to the Company's hedging activities.\n\nSegment net sales were as follows:\n                                          1999              1998            1997\n--------------------------------------------------------------------------------\nCRM                                 $  843,117        $  735,123        $716,347\nHVDM                                   271,432           280,871         278,049\n--------------------------------------------------------------------------------\n   Total net sales                  $1,114,549        $1,015,994        $994,396\n--------------------------------------------------------------------------------\n\nCRM 1999 net sales increased 14.7% over 1998 due primarily to increased\nbradycardia net sales, increased electrophysiology (EP) catheter unit sales, and\nthe acquisition of Angio-Seal(TM).\n                                                                              23\n\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nThe bradycardia net sales increase relates to the Company's introduction of the\nAffinity(R) pacemaker family in the second quarter of 1999 and to an expanded\nU.S. sales force. CRM 1998 net sales increased 2.6% over 1997 due primarily to\nhigher ICD sales with the commercial release of the Angstrom(R) II and the\nAngstrom(R) MD ICDs during 1998, offset in part by lower bradycardia sales due\nto the effects of the stronger U.S. dollar, fewer domestic sales\nrepresentatives, the timing of certain distributor orders, and to a fifty-two\nweek year in 1998 versus a fifty-three week year in 1997. The impact of one\nless selling week in 1998 effectively reduced net sales by approximately $11,000\nas compared to 1997.\n\nHVDM 1999 net sales decreased 3.4% from 1998 due to the effects of the stronger\nU.S. dollar, reduced sales to certain distributors in emerging markets, and a\nslight clinical preference shift from mechanical valves to tissue valves in the\nU.S. market where HVDM holds significant mechanical valve market share and a\nsmaller share of the tissue valve market. HVDM 1998 net sales increased 1.0%\nfrom 1997 due the introduction of the Toronto SPV(R) valve in the U.S., offset\nin part by the effects of the stronger U.S. dollar, the timing of certain\ndistributor orders, curtailed marketing efforts in certain international\nmarkets, and to a fifty-two week year in 1998 versus a fifty-three week year\nin 1997. The impact of one less selling week in 1998 effectively reduced net\nsales by approximately $5,000 as compared to 1997.\n\nGROSS PROFIT\n\nGross profits were as follows:\n\n                                           1999            1998            1997\n-------------------------------------------------------------------------------\nGross profit                           $733,647        $643,054        $628,679\nPercentage of net sales                    65.8%           63.3%           63.2%\nz==============================================================================\n\nThe Company's 1999 gross profit margin increased 2.5 percentage points over\n1998 due primarily to CRM's manufacturing efficiencies and higher CRM unit\nsales that were partially offset by the impact of the stronger U.S. dollar and\nlower HVDM unit sales. The Company's 1998 gross profit percentage remained\nrelatively constant from 1997 due primarily to HVDM's manufacturing\nefficiencies, the elimination of certain acquired facilities, and increased ICD\nnet sales, offset in part by the impact of the stronger U.S. dollar and lower\nmechanical heart valve and bradycardia unit sales.\n\nOPERATING EXPENSES\n\nCertain operating expenses were as follows:\n\n                                           1999            1998            1997\n-------------------------------------------------------------------------------\nSelling, general\n   and administrative                  $394,418        $349,346        $378,500\nPercentage of net sales                    35.4%           34.4%           38.1%\n\nResearch and development               $125,059        $ 99,756        $104,693\nPercentage of net sales                    11.2%            9.8%           10.5%\nz==============================================================================\n\nSELLING, GENERAL AND ADMINISTRATIVE (SG&amp;A) EXPENSE: SG&amp;A expense increased in\n1999 due primarily to increased sales activities, increased litigation, Year\n2000 related expenses, and to higher intangible asset amortization related to\nthe Angio-Seal(TM) acquisition. SG&amp;A expense decreased in 1998 from 1997 due\nprimarily to the full year effect of the Company's 1997 integration and\nconsolidation efforts related to acquisitions, as well as to further\nconsolidation of certain other pre-existing CRM operations.\n\nRESEARCH AND DEVELOPMENT (R&amp;D) EXPENSE: R&amp;D expense increased in 1999 due to\nincreased CRM activities relating primarily to ICDs and products to treat\nemerging indications in atrial fibrillation and congestive heart failure, and\nto HVDM activities associated with the technology acquired in the VSI\nacquisition. R&amp;D expense decreased in 1998 from 1997 due primarily to the full\nyear effect of the Company's 1997 integration and consolidation efforts related\nto acquisitions.\n\nPURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE: In 1999, the Company\nrecorded purchased in-process research and development charges of $47,775 and\n$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI,\nrespectively. The purchased in-process research and development charges were\ncomputed by an independent third-party appraisal company and were expensed at\nclose, except as noted below, since technological feasibility had not been\nestablished and since there were no alternative future uses for the technology.\nThe values assigned to purchased in-process research and development were\ndetermined primarily by the income approach, utilizing discount rates ranging\nfrom 25% to 35%. Certain other factors considered in these valuations included\nthe stage of development of each project, which ranged from 35% to 90% complete,\ncomplexity of the work completed at the valuation date, and market introductions\nfor products resulting from the technology beginning in late 1999 for\nAngio-Seal(TM) and 2000 for VSI.\n\n24\n\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nThe purchased in-process technologies required additional development to create\ncommercially viable products. This development included completion of design,\nprototyping, and testing to ensure the technologies meet their design\nspecifications, including functional, technical and economic performance\nrequirements. In addition, the technology was required to undergo both\ninternational and domestic regulatory reviews and approvals prior to being\ncommercially released to the market.\n\nThe total appraised value of the VSI purchased in-process research and\ndevelopment was $95,500, of which $67,453 was expensed at close. The remaining\nbalance of the in-process research and development valuation ($28,047) will be\nrecorded in the Company's financial statements as purchased in-process research\nand development expense when payment of the contingent consideration is assured\nbeyond a reasonable doubt. All other contingent consideration payments in excess\nof the $28,047 will be capitalized as goodwill.\n\nSPECIAL CHARGES: The Company restructured its international operations during\nthe third quarter of 1999 to improve the effectiveness and efficiency of its\ninternational business by clarifying business unit accountabilities and focusing\nthe operations of its business units outside the U.S., and by removing\nadministrative redundancies in the Company's non-U.S. management structure. This\nrestructuring resulted in the elimination of certain administrative management\npositions. The Company recorded a $9,754 charge in the third quarter of 1999\nrelated primarily to this restructuring, of which $4,102 was used through\nDecember 31, 1999. The Company anticipates that substantially all of the\nremaining balance will be utilized during 2000.\n\nThe Company recorded special charges totaling $58,669 during 1997 related to\nVentritex merger transaction costs ($8,227), various distributor agreement\nterminations ($12,925), repositioning of Pacesetter manufacturing operations in\nconnection with the Ventritex integration ($18,139), and to the repositioning of\nVentritex operations ($19,378). The Company has utilized $56,090 of the special\ncharge reserves through December 31, 1999. The balance of the remaining special\ncharge accruals are expected to be utilized as the remaining contractual\nobligations come due.\n\nOTHER INCOME (EXPENSE)\n\nInterest expense was $28,104 in 1999, $23,667 in 1998 and $14,374 in 1997. The\nincreases in 1999 and 1998 were due to increased debt levels resulting primarily\nfrom the Company's acquisitions and share repurchases during 1999 and 1998.\n\nNet investment gains of $848 in 1999, $15,624 in 1998 and $6,768 in 1997\nresulted primarily from the periodic sales of the Company's marketable equity\nsecurity holdings.\n\nINCOME TAXES\n\nThe Company's reported effective income tax rate was 63.8% in 1999 as compared\nwith 30.5% in 1998. Exclusive of the purchased in-process research and\ndevelopment and special charges, the Company's effective income tax rate was\n25.0% in 1999. The decrease in the effective income tax rate from 30.5% in 1998\nto 25.0% in 1999 was primarily attributable to higher research and development\ncredits and foreign sales corporation benefits relative to pre-tax earnings in\n1999. The 1999 purchased in-process research and development charges were either\nnon-deductible for income tax purposes or were recorded in a taxing jurisdiction\nwith a low income tax rate.\n\nThe Company's effective income tax rate decreased from 38.0% in 1997 to 30.5% in\n1998 due primarily to a greater proportion of earnings in countries with lower\ntax rates and to the elimination of non-deductible merger costs related to the\n1997 Ventritex acquisition.\n\nThe Company has not recorded deferred income taxes on its foreign subsidiaries'\nundistributed earnings as such amounts are currently intended to be\nindefinitely reinvested.\n\nNET EARNINGS\n\nNet earnings, exclusive of purchased in-process research and development\ncharges, special charges and cumulative effect of accounting change, were\n$143,989 in 1999, $129,082 in 1998 and $97,692 in 1997. Reported net earnings\nand diluted net earnings per share were $24,227, or $0.29 per share, in 1999,\n$129,082, or $1.50 per share, in 1998, and $53,140, or $0.58 per share, in 1997.\n\n                                                                              25\n\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nOUTLOOK\n\nThe Company expects that market demand, government regulation and societal\npressures will continue to change the worldwide health care industry resulting\nin further business consolidations and alliances. The Company participates with\nindustry groups to promote the use of advanced medical device technology in a\ncost conscious environment. Customer service in the form of cost-effective\nclinical outcomes will continue to be a primary focus for the Company.\n\nThe Company's HVDM business is in a highly competitive market. The market is\nsegmented between mechanical heart valves, tissue heart valves, and repair\nproducts. During 1999, the U.S. market continued its slight shift to tissue\nvalve and repair products from mechanical heart valves resulting in a small\nmarket share loss. Competition is anticipated to place pressure on pricing and\nterms, and health care reform is expected to result in further hospital\nconsolidations over time.\n\nThe Company's CRM business is also in a highly competitive industry that is\nundergoing consolidation. The number of principal suppliers has decreased from\nfour to three. The Company's two principal competitors each have substantially\nmore assets, sales and sales personnel than the Company. In addition, the\nCompany's two principal competitors in the ICD market have dual-chamber ICDs on\nthe market that represent an increasing percentage of the overall ICD market.\nThe Company began clinical evaluation of a dual-chamber ICD in late 1999.\nHowever, until the Company commercially introduces a dual-chamber ICD into the\nmarket, the continued growth of dual-chamber ICDs at the expense of\nsingle-chamber ICDs could adversely affect the Company. Rapid technological\nchange is expected to continue, requiring the Company to invest heavily in R&amp;D\nand to effectively market its products.\n\nThe global medical device market is highly competitive. Competitors have\nhistorically employed litigation to gain a competitive advantage. In addition,\nthe Company's products must continually improve technologically and provide\nimproved clinical outcomes due to the competitive nature of the industry.\n\nGroup purchasing organizations (GPOs) in the U.S. continue to consolidate the\npurchasing for some of the Company's customers. Several such GPOs have executed\ncontracts with the Company's CRM market competitors which exclude the Company.\nThese contracts, if enforced, may adversely affect the Company's sales of CRM\nproducts to members of these GPOs.\n\nOn January 21, 2000, the Company initiated a worldwide voluntary recall of all\nfield inventory of heart valve replacement and repair products incorporating a\nproprietary Silzone(R) coating on the sewing cuff fabric. The Company also\nconcluded that it will no longer utilize the Silzone(R) coating. The Company\nexpects to record a non-recurring charge against first quarter 2000 earnings,\nwhich is currently estimated at $16,000 to $20,000, for the write-off of\ninventory and other costs related to this recall and product discontinuation.\nHowever, there can be no assurance that the final costs associated with this\nrecall will not exceed management's current estimates. Other than this\nnon-recurring charge, management believes that this recall will not materially\nimpact the Company's year 2000 earnings or cash flows based primarily on the\nfact that the Company's non-Silzone(R) coated products, which represent 75% of\nthe Company's heart valve shipments, are not affected by this recall.\n\nThe IRS has proposed adjustments of approximately $58,200 in additional taxes\nrelating primarily to the Company's Puerto Rican operations for the years 1990\nthrough 1994. Management believes that the IRS will propose similar\nadjustments of approximately $15,500 for 1995. Management is vigorously\ncontesting these adjustments and expects that the ultimate resolution will not\nhave material adverse effect on the Company's financial position or liquidity,\nbut could potentially be material to the net earnings of a particular future\nperiod if resolved unfavorably.\n\nMARKET RISK\n\nThe Company is exposed to foreign exchange rate fluctuations due to its\ntransactions denominated primarily in Euros, currencies tied to the Euro,\nCanadian Dollars, British Pounds, and Swedish Kroners. The Company is also\nexposed to interest rate risk on its interest-bearing debt and equity price risk\non its marketable equity security investments.\n\nThe Company attempts to minimize a portion of its foreign exchange rate risk\nthrough the use of forward exchange or option contracts. The gains or losses on\nthese contracts offset changes in the fair value of the anticipated foreign\ncurrency transactions. It is the Company's practice to not enter into contracts\nfor trading purposes.\n\n26\n\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nThe Company's forward exchange contracts had fair values of ($263) and ($422) at\nDecember 31, 1999 and 1998. Utilizing the Company's outstanding forward exchange\ncontracts at December 31, 1999 and 1998, a hypothetical 10% unfavorable change\nin the foreign currency spot rates would have negatively impacted the fair value\nof the Company's forward exchange contracts by $2,745 and $3,327. A majority of\nany gains or losses on the fair value of these contracts would ultimately be\noffset by gains or losses on the anticipated transactions. Such offsetting gains\nor losses are not reflected in the hypothetical 10% unfavorable change.\n\nA substantial portion of the Company's interest-bearing debt provides for\ninterest at variable rates tied to the London Interbank Offered Rate (\"LIBOR\").\nThe Company periodically enters into interest rate swap or option contracts to\nreduce its exposures to interest rate fluctuations. During the third quarter of\n1999, the Company entered into an interest rate swap contract to hedge a\nsubstantial portion of its variable interest rate risk through January 2000 on\n$138,000 of revolving credit facility borrowings. The fair market value of this\ncontract at December 31, 1999, and the impact of the contract on 1999 earnings\nwere not material. There were no interest rate contracts outstanding in 1998 or\n1997.\n\nThe Company periodically invests in marketable equity securities of emerging\ntechnology companies. The Company's investments in these companies had a fair\nvalue of $15,487 and $20,300 at December 31, 1999 and 1998, which is subject to\nthe underlying price risk of the public equity markets.\n\nOn January 1, 1999, eleven of the fifteen member countries of the European\nEconomic Community (EEC) established fixed conversion rates between their\nexisting sovereign currencies and the Euro, and adopted the Euro as the legal\ncommon currency for their countries. The sovereign currencies of these countries\nwill remain legal tender as denominations of the Euro between January 1, 1999\nand January 1, 2002. During this transition period, public and private parties\nmay pay for goods and services using either the Euro or the sovereign currency.\nBeginning January 1, 2002, these countries will issue new Euro-denominated bills\nand coins for use in cash transactions. The Company does not expect the Euro\nconversion to have a short-term material effect on the Company's operations.\nHowever, subsequent to the Year 2001, cross-country pricing in the EEC may\nbecome more transparent, which may impact the pricing of the Company's products.\nThe Company has modified its computer programs to accommodate the Euro, the\ncost of which was not material. The Company will continue to evaluate the need\nto make other changes to accommodate the conversion to the Euro.\n\nNEW ACCOUNTING PRONOUNCEMENT\n\nIn June 1998, the Financial Accounting Standards Board issued Statement of\nFinancial Accounting Standards No. 133, \"Accounting for Derivative Instruments\nand Hedging Activities\" (Statement 133), which is required to be adopted in\nyears beginning after June 15, 2000, although early adoption as of the beginning\nof any fiscal quarter is permitted. Statement 133 requires companies to\nrecognize all derivatives on the balance sheet at fair value. Derivatives not\nqualifying as hedges must be adjusted to fair value through earnings. If the\nderivative qualifies as a hedge, depending on the nature of the hedge, changes\nin the fair value of derivatives will either be offset against the change in\nfair value of the hedged assets, liabilities, or firm commitments through\nearnings, or recognized in other comprehensive income until the hedged item is\nrecognized in earnings. The ineffective portion of a derivative's change in fair\nvalue will be immediately recognized in earnings. Management is continuing to\nreview the impact of Statement 133 on the Company's financial statements.\n\nFINANCIAL CONDITION\n\nLIQUIDITY\n\nThe Company's liquidity and cash flows remained strong during 1999. Cash\nprovided by operating activities was $256,067 in 1999, a $147,598 increase over\n1998. The Company's current ratio was 2.4 to 1 at December 31, 1999.\n\nAccounts receivable increased $11,744 from December 31, 1998, due to higher\nsales, offset in part by a decrease in average days to collect the receivables.\nOther assets increased $147,070 due primarily to the addition of certain\nintangible assets from the Angio-Seal(TM) acquisition. Interest-bearing debt\nincreased $102,500 during 1999 due primarily to additional borrowings for the\nAngio-Seal(TM) and VSI acquisitions and the repurchase of common stock, offset\nin part by the repayment of debt with cash generated from operations. As of\nMarch 6, 2000, the Company had committed credit facilities totaling $500,000, of\nwhich $24,500 was unused.\n\n                                                                              27\n\n\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL\nCONDITION\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nManagement believes that cash generated from operations and cash available under\nits credit facilities will be sufficient to meet the Company's working capital\nand share repurchase plan needs in the near term. Should suitable investment\nopportunities arise, management believes that the Company's earnings, cash\nflows and balance sheet will permit the Company to obtain additional debt or\nequity capital, if necessary.\n\nCAPITAL STRUCTURE\n\nThe Company's capital structure consists of interest-bearing debt and equity.\nInterest-bearing debt as a percent of the Company's total capitalization\nincreased from 32% at December 31, 1998 to 38% at December 31, 1999 due\nprimarily to the Angio-Seal(TM) and VSI acquisitions.\n\nDuring 1999, the Company's Board of Directors authorized the repurchase of up to\n$250,000 of the Company's outstanding common stock over a three-year period. The\nCompany repurchased 977,500 shares of its common stock for $29,826 during 1999.\n\nDIVIDENDS\n\nThe Company has not declared or paid any dividends during 1999, 1998 or 1997.\nManagement currently intends to utilize the Company's earnings for operating and\ninvestment purposes, including the repurchase of its common stock.\n\nYEAR 2000 DISCLOSURE\n\nThe Company has not experienced any material disruptions related to the Year\n2000. The Company's products were effectively not impacted by the Year 2000.\nAlso, the Company was able to execute its plans to address any internal Year\n2000 issues related to its information technology and business systems, and to\nmake general inquiries of its business partners' readiness for Year 2000.\nHowever, because the Company is dependent on various business partners for\ncertain aspects of its business, the impact on the Company related to the Year\n2000 may still not be known. Management continues to monitor for potential\nissues related to the Year 2000 and will execute its contingency plans, if\nnecessary. However, based upon the Company's interactions with its business\npartners in 2000, management believes that any future, material event related to\nthe Year 2000 is unlikely.\n\nThe total cost associated with the Company's Year 2000 remediation was\napproximately $3,500 and was reflected in the Company's historical results of\noperations. The cost of implementing the Company's uniform worldwide business\nand accounting information system (approximately $45,000) has not been included\nin this figure since replacement of the previous systems was not accelerated due\nto Year 2000 issues.\n\nCAUTIONARY STATEMENTS\n\nAs provided for in the Private Securities Litigation Reform Act of 1995, the\nCompany cautions investors that a number of factors could cause actual future\nresults of operations to vary from those anticipated in previously made\nforward-looking statements and any other forward-looking statements made in this\ndocument and elsewhere by or on behalf of the Company. Net sales could be\nmaterially affected by legislative or administrative reforms to the U.S.\nMedicare and Medicaid systems and non-U.S. reimbursement systems in a manner\nthat would significantly reduce reimbursement for procedures using the\nCompany's medical devices, the acquisition of key patents by competitors that\nwould have the effect of excluding the Company from new market segments, health\ncare industry consolidation resulting in customer demands for price concessions,\nproducts introduced by competitors with advanced technology and better features\nand benefits or lower prices, fewer procedures performed in a cost-conscious\nenvironment, and the lengthy approval time by the FDA or other government\nauthorities to clear implantable medical devices for commercial release. Cost of\nsales could be materially affected by unfavorable developments in the area of\nproducts liability and price increases from the Company's suppliers of critical\ncomponents, a number of which are sole sourced. Operations could be affected by\nthe Company's ability to execute its diversification strategy or to integrate\nacquired companies, a serious earthquake affecting the Company's facilities in\nSylmar or Sunnyvale, California, adverse developments in the litigation arising\nfrom the acquisitions of Telectronics and Ventritex, unanticipated product\nfailures and attempts by competitors to gain market share through aggressive\nmarketing programs.\n\n28\n\n\nREPORT OF MANAGEMENT\n--------------------------------------------------------------------------------\n\nThe management of St. Jude Medical, Inc. is responsible for the preparation,\nintegrity and objectivity of the accompanying financial statements. The\nfinancial statements were prepared in accordance with accounting principles\ngenerally accepted in the United States and include amounts which reflect\nmanagement's best estimates based on its informed judgement and consideration\ngiven to materiality. Management is also responsible for the accuracy of the\nrelated data in the annual report and its consistency with the financial\nstatements.\n\nIn the opinion of management, the Company's accounting systems and procedures,\nand related internal controls, provide reasonable assurance that transactions\nare executed in accordance with management's intention and authorization, that\nfinancial statements are prepared in accordance with accounting principles\ngenerally accepted in the United States, and that assets are properly accounted\nfor and safeguarded. The concept of reasonable assurance is based on the\nrecognition that there are inherent limitations in all systems of internal\ncontrol, and that the cost of such systems should not exceed the benefits to be\nderived therefrom. Management reviews and modifies the system of internal\ncontrols to improve its effectiveness. The effectiveness of the controls system\nis supported by the selection, retention and training of qualified personnel,\nan organizational structure that provides an appropriate division of\nresponsibility and a strong budgeting system of control.\n\nSt. Jude Medical, Inc. also recognizes its responsibility for fostering a strong\nethical climate so that the Company's affairs are conducted according to the\nhighest standards of personal and business conduct. This responsibility is\nreflected in the Company's business ethics policy.\n\nThe adequacy of the Company's internal accounting controls, the accounting\nprinciples employed in its financial reporting and the scope of independent and\ninternal audits are reviewed by the Audit Committee of the Board of Directors,\nconsisting solely of outside directors. The independent auditors meet with, and\nhave confidential access to, the Audit Committee to discuss the results of\ntheir audit work.\n\n\/s\/ Terry L. Shepherd\n\nTERRY L. SHEPHERD\nPRESIDENT AND CHIEF EXECUTIVE OFFICER\n\n\/s\/ John C. Heinmiller\n\nJOHN C. HEINMILLER\nVICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER\n\n\n\nREPORT OF INDEPENDENT AUDITORS\n--------------------------------------------------------------------------------\nBoard of Directors and Shareholders\nSt. Jude Medical, Inc.\n\nWe have audited the accompanying consolidated balance sheets of St. Jude\nMedical, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related\nconsolidated statements of earnings, shareholders' equity, and cash flows for\neach of the three fiscal years in the period ended December 31, 1999. These\nfinancial statements are the responsibility of the Company's management. Our\nresponsibility is to express an opinion on these financial statements based on\nour audits.\n\nWe conducted our audits in accordance with auditing standards generally accepted\nin the United States. Those standards require that we plan and perform the audit\nto obtain reasonable assurance about whether the financial statements are free\nof material misstatement. An audit includes examining, on a test basis, evidence\nsupporting the amounts and disclosures in the financial statements. An audit\nalso includes assessing the accounting principles used and significant estimates\nmade by management, as well as evaluating the overall financial statement\npresentation. We believe that our audits provide a reasonable basis for our\nopinion.\n\nIn our opinion, the financial statements referred to above present fairly, in\nall material respects, the consolidated financial position of St. Jude Medical,\nInc. and subsidiaries at December 31, 1999 and 1998 and the consolidated results\nof their operations and their cash flows for each of the three fiscal years in\nthe period ended December 31, 1999 in conformity with accounting principles\ngenerally accepted in the United States.\n\n\n                                        \/s\/ Ernst &amp; Young LLP\n\n\nMinneapolis, Minnesota\nFebruary 9, 2000\n\n                                                                              29\n\n\nCONSOLIDATED STATEMENTS OF EARNINGS\n--------------------------------------------------------------------------------\n(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\n<table>\n<caption>\nFISCAL YEAR ENDED DECEMBER 31                                     1999              1998              1997\n----------------------------------------------------------------------------------------------------------\n<s>                                                       <c>               <c>               <c>         \nNet sales                                                 $  1,114,549      $  1,015,994      $    994,396\nCost of sales                                                  380,902           372,940           365,717\n----------------------------------------------------------------------------------------------------------\n   Gross profit                                                733,647           643,054           628,679\n\nSelling, general and administrative expense                    394,418           349,346           378,500\nResearch and development expense                               125,059            99,756           104,693\nPurchased in-process research and development expense          115,228                --                --\nSpecial charges                                                  9,754                --            58,669\n----------------------------------------------------------------------------------------------------------\n   Operating profit                                             89,188           193,952            86,817\n\nOther income (expense)                                         (22,184)           (8,222)            1,419\n----------------------------------------------------------------------------------------------------------\n   Earnings before income taxes and accounting change           67,004           185,730            88,236\n\nIncome tax expense                                              42,777            56,648            33,530\n----------------------------------------------------------------------------------------------------------\n   Net earnings before accounting change                        24,227           129,082            54,706\n\nCumulative effect of accounting change, net of taxes                --                --            (1,566)\n----------------------------------------------------------------------------------------------------------\n\nNet earnings                                              $     24,227      $    129,082      $     53,140\n==========================================================================================================\n\nBASIC EARNINGS PER SHARE:\n   Net earnings before accounting change                  $       0.29      $       1.51      $       0.60\n   Cumulative effect of accounting change                           --                --             (0.02)\n----------------------------------------------------------------------------------------------------------\n   Basic net earnings per share                           $       0.29      $       1.51      $       0.58\n==========================================================================================================\nDILUTED EARNINGS PER SHARE:\n   Net earnings before accounting change                  $       0.29      $       1.50      $       0.59\n   Cumulative effect of accounting change                           --                --             (0.01)\n----------------------------------------------------------------------------------------------------------\n   Diluted net earnings per share                         $       0.29      $       1.50      $       0.58\n==========================================================================================================\nWEIGHTED AVERAGE SHARES OUTSTANDING:\n   Basic                                                        84,274            85,714            91,426\n   Diluted                                                      84,735            86,145            92,052\n==========================================================================================================\n<\/c><\/c><\/c><\/s><\/caption><\/table>\n\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n\n30\n\n\nCONSOLIDATED BALANCE SHEETS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS)\n\n<table>\n<caption>\nDECEMBER 31                                                            1999              1998\n---------------------------------------------------------------------------------------------\n<s>                                                            <c>               <c>         \nASSETS\nCURRENT ASSETS\nCash and cash equivalents                                      $      9,655      $      3,775\nMarketable securities                                                79,238            84,215\nAccounts receivable, less allowances for doubtful accounts          293,815           282,071\nInventories                                                         235,407           245,579\nDeferred income taxes                                                36,609            34,187\nOther                                                                35,575            32,637\n---------------------------------------------------------------------------------------------\n   Total current assets                                             690,299           682,464\n\nPROPERTY, PLANT AND EQUIPMENT\nLand, buildings and improvements                                    111,746           111,016\nMachinery and equipment                                             286,706           270,246\nDiagnostic equipment                                                176,079           131,128\n---------------------------------------------------------------------------------------------\nProperty, plant and equipment at cost                               574,531           512,390\nLess accumulated depreciation                                      (231,751)         (184,131)\n---------------------------------------------------------------------------------------------\n   Net property, plant and equipment                                342,780           328,259\n\nOTHER ASSETS\nGoodwill and other intangible assets, net                           452,519           322,434\nDeferred income taxes                                                51,838            44,667\nOther                                                                16,602             6,788\n---------------------------------------------------------------------------------------------\n   Total other assets                                               520,959           373,889\n---------------------------------------------------------------------------------------------\nTOTAL ASSETS                                                   $  1,554,038      $  1,384,612\n=============================================================================================\n\nLIABILITIES AND SHAREHOLDERS' EQUITY\nCURRENT LIABILITIES\nAccounts payable                                               $     91,874      $     94,076\nIncome taxes payable                                                 43,700             2,461\nAccrued expenses\n   Employee compensation and related benefits                        67,046            45,370\n   Other                                                             79,902            61,490\n---------------------------------------------------------------------------------------------\n   Total current liabilities                                        282,522           203,397\n\nLONG-TERM DEBT                                                      477,495           374,995\n\nCOMMITMENTS AND CONTINGENCIES                                            --                --\n\nSHAREHOLDERS' EQUITY\nPreferred stock                                                          --                --\nCommon stock                                                          8,378             8,417\nAdditional paid-in capital                                              109             6,656\nRetained earnings                                                   833,223           816,940\nAccumulated other comprehensive income:\n   Cumulative translation adjustment                                (53,977)          (33,242)\n   Unrealized gain on available-for-sale securities                   6,288             7,449\n---------------------------------------------------------------------------------------------\n   Total shareholders' equity                                       794,021           806,220\n---------------------------------------------------------------------------------------------\nTOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                     $  1,554,038      $  1,384,612\n=============================================================================================\n<\/c><\/c><\/s><\/caption><\/table>\n\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n\n                                                                              31\n\n\nCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS)\n\n<table>\n<caption>\n                                                         Common Stock                             Accumulated                 Total\n                                                     -------------------  Additional                    Other  Receivable    Share-\n                                                      Number of              Paid-In  Retained  Comprehensive   for Stock  holders'\n                                                         Shares    Amount    Capital  Earnings   Income (Loss)     Issued    Equity\n-----------------------------------------------------------------------------------------------------------------------------------\n<s>                                                  <c>         <c>       <c>        <c>        <c>            <c>        <c>     \nBalance at January 1, 1997                           91,446,656  $  9,145  $ 228,106  $692,892   $    (7,642)   $   (440)  $922,061\nComprehensive income:\n   Net earnings                                                                         53,140                               53,140\n   Other comprehensive income (loss)\n      Unrealized gain (loss) on investments,\n         net of taxes ($12,031) and reclassification\n         adjustment (see below)                                                                       19,630                 19,630\n      Foreign currency translation adjustment                                                        (24,536)               (24,536)\n                                                                                                                           --------\n      Other comprehensive income (loss)                                                                                      (4,906)\n                                                                                                                           --------\nComprehensive income                                                                                                         48,234\n                                                                                                                           ========\nIssuance of common stock, including exercise of\n   stock options, net of shares surrendered for\n   exercise price and taxes                             400,651        40     12,112                                         12,152\nTax benefit from stock options                                                 2,006                                          2,006\nIssuance of common stock for business acquisition        64,189         6      2,123                                          2,129\nProceeds for stock issued                                                                                            440        440\n===================================================================================================================================\nBalance at December 31, 1997                         91,911,496     9,191    244,347   746,032       (12,548)         --    987,022\nComprehensive income:\n   Net earnings                                                                        129,082                              129,082\n   Other comprehensive income (loss)\n      Unrealized gain (loss) on investments,\n         net of taxes ($2,545) and reclassification\n         adjustment (see below)                                                                       (4,153)                (4,153)\n      Foreign currency translation adjustment                                                         (9,092)                (9,092)\n                                                                                                                           --------\n      Other comprehensive income                                                                                            (13,245)\n                                                                                                                           --------\nComprehensive income                                                                                                        115,837\n                                                                                                                           ========\nIssuance of common stock, including exercise\n   of stock options, net of shares surrendered\n   for exercise price and taxes                         263,203        26      7,054                                          7,080\nTax benefit from stock options                                                 1,070                                          1,070\nRepurchase of common stock                           (8,000,000)     (800)  (245,815)  (58,174)                            (304,789)\n===================================================================================================================================\nBalance at December 31, 1998                         84,174,699     8,417      6,656   816,940       (25,793)         --    806,220\nComprehensive income:\n   Net earnings                                                                         24,227                               24,227\n   Other comprehensive income (loss)\n      Unrealized gain (loss) on investments,\n         net of taxes ($712) and reclassification\n         adjustment (see below)                                                                       (1,161)                (1,161)\n   Foreign currency translation adjustment                                                           (20,735)               (20,735)\n                                                                                                                           --------\n   Other comprehensive income (loss)                                                                                        (21,896)\n                                                                                                                           --------\nComprehensive income                                                                                                          2,331\n                                                                                                                           ========\nIssuance of common stock, including exercise\n   of stock options, net of shares surrendered\n   for exercise price and taxes                         381,206        38      8,855                                          8,893\nTax benefit from stock options                                                   969                                            969\nIssuance of common stock for business acquisition       161,072        16      3,984                                          4,000\nIssuance of common stock in\n   settlement of obligation                              41,108         4      1,430                                          1,434\nRepurchase of common stock                             (977,500)      (97)   (21,785)   (7,944)                             (29,826)\n===================================================================================================================================\nBalance at December 31, 1999                         83,780,585  $  8,378  $     109  $833,223   $   (47,689)   $     --   $794,021\n===================================================================================================================================\n\nOther comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income\ntaxes\n\n1997                                                                                                                       $  1,285\n1998                                                                                                                          9,282\n1999                                                                                                                          2,875\n-----------------------------------------------------------------------------------------------------------------------------------\n<\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption><\/table>\n\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n\n32\n\n\nCONSOLIDATED STATEMENTS OF CASH FLOWS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS)\n\n<table>\n<caption>\n\nFISCAL YEAR ENDED DECEMBER 31                                        1999              1998              1997\n-------------------------------------------------------------------------------------------------------------\n<s>                                                          <c>               <c>               <c>         \nOPERATING ACTIVITIES\nNet earnings                                                 $     24,227      $    129,082      $     53,140\nAdjustments to reconcile net earnings to net cash\n   from operating activities:\n   Depreciation                                                    54,588            45,959            45,277\n   Amortization                                                    31,114            22,894            20,784\n   Purchased in-process research and development expense          115,228                --                --\n   Special charges                                                  9,754                --            58,669\n   Net investment gain                                               (848)          (15,624)           (6,768)\n   Deferred income taxes                                              369            15,459             6,624\n   Changes in operating assets and liabilities, net of\n   business acquisitions:\n      Accounts receivable                                         (26,319)          (35,236)          (41,731)\n      Inventories                                                  14,466            (7,458)          (36,929)\n      Other current assets                                         (6,722)            4,897            (1,892)\n      Accounts payable and accrued expenses                        (1,998)          (35,853)         (124,739)\n      Income taxes                                                 42,208           (15,651)           (4,059)\n-------------------------------------------------------------------------------------------------------------\n   Net cash provided by (used in) operating activities            256,067           108,469           (31,624)\n\nINVESTING ACTIVITIES\nPurchase of property, plant and equipment                         (69,419)          (74,197)          (84,638)\nPurchase of marketable securities                                      --                --            (7,000)\nProceeds from sale or maturity of marketable securities            17,552            82,879            80,363\nBusiness acquisitions, net of cash acquired                      (259,127)               --                --\nProceeds from sale of business, net of cash disposed                   --                --            24,626\nOther                                                             (19,438)              561            (3,867)\n-------------------------------------------------------------------------------------------------------------\n   Net cash provided by (used in) investing activities           (330,432)            9,243             9,484\n\nFINANCING ACTIVITIES\nProceeds from exercise of stock options and stock issued            8,893             7,080            12,592\nCommon stock repurchased                                          (29,826)         (304,789)               --\nBorrowings under revolving credit facilities                      989,500           785,036           498,500\nPayments under revolving credit facilities                       (887,000)         (602,536)         (508,000)\nRepurchase of convertible subordinated notes                           --           (27,505)               --\n-------------------------------------------------------------------------------------------------------------\n   Net cash provided by (used in) financing activities             81,567          (142,714)            3,092\n\nEffect of currency exchange rate changes on cash                   (1,322)              247            (1,810)\n-------------------------------------------------------------------------------------------------------------\n   Net increase (decrease) in cash and cash equivalents             5,880           (24,755)          (20,858)\nCash and cash equivalents at beginning of year                      3,775            28,530            49,388\n-------------------------------------------------------------------------------------------------------------\nCash and cash equivalents at end of year                     $      9,655      $      3,775      $     28,530\n=============================================================================================================\n\nSupplemental Cash Flow Information\n=============================================================================================================\n   Cash paid during the year for:\n      Interest                                               $     28,934      $     21,703      $     14,320\n      Income taxes                                                 21,200            55,031            33,755\n=============================================================================================================\n<\/c><\/c><\/c><\/s><\/caption><\/table>\n\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n\n                                                                              33\n\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nNOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n\nCOMPANY OVERVIEW: St. Jude Medical, Inc. (the \"Company\") is a global leader in\nthe development, manufacturing and distribution of medical technology products\nfor the cardiac rhythm management, cardiology and vascular access, and heart\nvalve disease management markets. The Company's principal products include\npacemaker and implantable cardioverter defibrillator (ICD) systems, prosthetic\nheart valve replacement and repair products, electrophysiology and\ninterventional cardiology catheters and vascular closure devices. The Company\nmarkets its products primarily in the United States, Western Europe and Japan\nthrough both a direct employee-based sales organization and independent\ndistributors.\n\nPRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the\naccounts of the Company and its wholly owned subsidiaries. Significant\nintercompany transactions and balances have been eliminated in consolidation.\nCertain reclassifications of previously reported amounts have been made to\nconform to the current year presentation.\n\nFISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year\nending on the Saturday nearest December 31, but for clarity of presentation,\ndescribes all periods as if the year end is December 31. Fiscal years 1999 and\n1998 each consisted of fifty-two weeks and fiscal year 1997 consisted of\nfifty-three weeks.\n\nCASH EQUIVALENTS: The Company considers highly liquid temporary investments with\nan original maturity of three months or less to be a cash equivalent. Cash\nequivalents are stated at cost, which approximates market.\n\nMARKETABLE SECURITIES: Marketable securities consist of equity securities, bank\ncertificates of deposit, U.S. government obligations, commercial paper, notes\nand bonds. Marketable securities are classified as available-for-sale and\nrecorded at fair market value, based upon quoted market prices. Gross unrealized\ngains totaling $10,142, $12,015 and $18,714, net of taxes of $3,854, $4,566 and\n$7,112, were recorded in shareholders' equity at December 31, 1999, 1998 and\n1997. Realized gains totaling $4,636, $15,624 and $6,768 in 1999, 1998, and 1997\nfrom the sale of marketable securities have been recorded in other income.\nRealized gains are computed using the specific identification method.\n\nINVENTORIES: Inventories are stated at the lower of cost or market with cost\ndetermined using the first-in, first-out method. Inventories consist of the\nfollowing:\n\n                                                         1999               1998\n--------------------------------------------------------------------------------\nFinished goods                                       $108,449           $126,927\nWork in process                                        41,466             35,130\nRaw materials                                          85,492             83,522\n--------------------------------------------------------------------------------\n                                                     $235,407           $245,579\n================================================================================\n\nPROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated\nusing the straight-line method over their estimated useful lives, ranging from\n31-to-39 years for buildings and improvements, three-to-seven years for\nmachinery and equipment and five-to-eight years for diagnostic equipment.\nAccelerated depreciation methods are used for income tax purposes.\n\nGOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost\nover the fair value of identifiable net assets of businesses acquired. Other\nintangible assets consist primarily of licensed and purchased technology,\npatents and customer lists. Goodwill and other intangible assets are amortized\nprimarily on a straight-line basis using lives ranging from 5-to-20 years.\nAccumulated amortization totaled $115,239 and $86,415 at December 31, 1999 and\n1998. The Company periodically reviews its long-lived assets, including fixed\nassets, for indicators of impairment using an estimate of the undiscounted cash\nflows generated by those assets. The Company's financial statements for 1997\nthrough 1999 reflect no such impairments.\n\nREVENUE RECOGNITION: The Company recognizes revenue when the products are\nshipped to the customer. For certain products, the Company maintains consigned\ninventory at customer locations. For these products, revenue is recognized at\nthe time the Company is notified that the customer has used the inventory. The\nallowance for doubtful accounts was $13,529 at December 31, 1999, and $12,352 at\nDecember 31, 1998.\n\nRESEARCH AND DEVELOPMENT: Research and development costs are charged to expense\nas incurred. Purchased in-process research and development is recognized in\npurchase business combinations for the portion of the purchase price allocated\nto the appraised value of in-process technologies. The portion assigned to\nin-process research and development technologies excludes the value of core and\ndeveloped technologies, which are recognized as intangible assets.\n\n34\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nSTOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of\naccounting for its employee stock-based compensation. Pro forma information\nrelated to the fair value method of accounting is provided in Note 5.\n\nEARNINGS PER SHARE: Basic earnings per share is computed by dividing net\nearnings by the weighted average number of outstanding common shares during the\nperiod. Diluted earnings per share is computed by dividing net earnings by the\nweighted average number of outstanding common shares and common share\nequivalents, when dilutive.\n\nThe table below sets forth the computation of basic and diluted net earnings per\nshare before accounting change:\n\n                                            1999            1998            1997\n--------------------------------------------------------------------------------\nNumerator:\n   Net earnings before\n      accounting change                  $24,227        $129,082         $54,706\nDenominator:\n   Basic-weighted average\n      shares outstanding              84,274,000      85,714,000      91,426,000\n   Effect of dilutive securities:\n      Employee stock options             414,000         401,000         574,000\n      Restricted shares                   47,000          30,000          52,000\n--------------------------------------------------------------------------------\n   Diluted-weighted average\n      shares outstanding              84,735,000      86,145,000      92,052,000\n================================================================================\nBasic earnings per share               $    0.29       $    1.51       $    0.60\n================================================================================\nDiluted earnings per share             $    0.29       $    1.50       $    0.59\n================================================================================\n\nNet earnings and diluted-weighted average shares outstanding have not been\nadjusted for the Company's convertible debentures and for certain employee stock\noptions and awards since the effect of these securities would have been\nanti-dilutive.\n\nFOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign\ncurrencies are translated at average exchange rates in effect throughout the\nyear. Assets and liabilities of foreign operations are translated at year-end\nexchange rates. Gains and losses from translation of net assets of foreign\noperations are recorded in other comprehensive income. Foreign currency\ntransaction gains and losses are included in other income (expense).\n\nFOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management\nperiodically utilizes derivative financial instruments to help manage a portion\nof the Company's exposure to foreign currencies and interest rates. Management\ngenerally utilizes forward exchange or option contracts to manage anticipated\nforeign currency exposures and interest rate swaps to manage interest rate\nexposures. Management does not enter into derivative financial instruments for\ntrading purposes. The Company records the fluctuation in the fair value of the\nforward exchange or option contracts in other income (expense) and the\nfluctuation in the fair value of the interest rate swaps in interest expense.\n\nUSE OF ESTIMATES: Preparation of the Company's consolidated financial statements\nin conformity with accounting principles generally accepted in the United States\nrequires management to make estimates and assumptions that affect the reported\namounts in the financial statements and accompanying notes. Actual results could\ndiffer from those estimates.\n\nNEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards\nBoard issued Statement of Financial Accounting Standards No. 133, \"Accounting\nfor Derivative Instruments and Hedging Activities\" (Statement 133), which is\nrequired to be adopted in years beginning after June 15, 2000, although early\nadoption as of the beginning of any fiscal quarter is permitted. Statement 133\nrequires companies to recognize all derivatives on the balance sheet at fair\nvalue. Derivatives not qualifying as hedges must be adjusted to fair value\nthrough earnings. If the derivative qualifies as a hedge, depending on the\nnature of the hedge, changes in the fair value of derivatives will either be\noffset against the change in fair value of the hedged assets, liabilities, or\nfirm commitments through earnings, or recognized in other comprehensive income\nuntil the hedged item is recognized in earnings. The ineffective portion of a\nderivative's change in fair value will be immediately recognized in earnings.\nManagement is continuing to review the impact of Statement 133 on the Company's\nfinancial statements.\n\n                                                                              35\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nNOTE 2 - ACQUISITIONS\n\nVASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the\noutstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus\nadditional contingent consideration related to product development milestones\nfor regulatory approvals and to future sales. VSI was a development-stage\ncompany focused on the development of suture-free devices to facilitate coronary\nartery bypass graft anastomoses.\n\nAn independent appraisal firm performed a valuation of VSI's identifiable\nintangible assets ($580) and in-process research and development ($95,500). The\nvalue assigned to in-process research and development was determined by the\nincome approach, utilizing discount rates ranging from 30% to 35% and\nassumptions on product introductions which begin in the year 2000. Total\nconsideration, including the net present value of future estimated contingent\nconsideration, is approximately $142,000. The total consideration paid at close\nwas allocated to the fair value of the net assets acquired ($7,618), and\nin-process research and development ($67,453). The remaining balance of the\nin-process research and development valuation ($28,047) will be recorded in the\nCompany's financial statements as purchased in-process research and development\nexpense when payment of the contingent consideration is assured beyond a\nreasonable doubt. All other contingent consideration payments in excess of the\n$28,047 will be capitalized as goodwill.\n\nANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)\nbusiness of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)\nmanufactures and markets hemostatic puncture closure devices. Total\nconsideration for Angio-Seal(TM), including the fair value of the net assets\nacquired and the acquisition accounting adjustments, was $177,714, which was\nallocated to in-process research and development ($47,775), various other\nidentifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of\nthe in-process research and development and other identifiable intangible assets\nwas based upon an independent appraisal. The values assigned to in-process\nresearch and development and other identifiable intangible assets were\ndetermined primarily by the income approach, utilizing discount rates of 25% for\nin-process research and development and 19.5% to 21.5% for the other intangible\nassets, and assumptions on product introductions which began in late 1999.\n\nOTHER: During 1999, the Company acquired the assets of various businesses used\nin the distribution of the Company's products. Aggregate consideration paid was\n$21,056 in cash and common stock.\n\nThe above acquisitions have been recorded using the purchase method of\naccounting. The operating results of each of these acquisitions are included in\nthe Company's consolidated statements of earnings from the date of each\nacquisition. The values assigned to in-process research and development were\nexpensed at close, except as note above, since technological feasibility had not\nbeen established and since there were no alternative future uses for the\ntechnology. Pro forma results of operations have not been presented for these\nacquisitions since the effects of these business acquisitions were not material\nto the Company either individually or in aggregate. Goodwill and other\nintangible assets associated with these acquisitions will be amortized using\nlives ranging from 5-to-20 years.\n\nVENTRITEX, INC. (VENTRITEX): On May 15, 1997, the Company acquired Ventritex, a\nmanufacturer of implantable cardioverter defibrillators and related products.\nThe Company issued 10,437,800 shares of its common stock to the Ventritex\nshareholders at an exchange rate of 0.5 shares of Company common stock for every\none share of Ventritex common stock. The transaction qualified as a tax-free\nreorganization and was accounted for as a pooling of interests. Net sales, net\nearnings and other changes in shareholders' equity for the separate companies\npreceding the acquisition from January 1, 1997 through March 31, 1997, were as\nfollows:\n\n                                                                  OTHER CHANGES\n                                                               IN SHAREHOLDERS'\n                                NET SALES     NET EARNINGS               EQUITY\n-------------------------------------------------------------------------------\nSt. Jude Medical                 $229,678          $27,791             $(14,550)\nVentritex                          20,712           (7,977)                 997\nAdjustments*                           --            3,063                   --\n-------------------------------------------------------------------------------\nCombined                         $250,390          $22,877             $(13,553)\n===============================================================================\n* TO REFLECT THE COMBINED TAX POSITION AS IF THE ACQUISITION HAD OCCURRED AT THE\n  BEGINNING OF 1997.\n\n36\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nNOTE 3 - LONG-TERM DEBT\n\nLong-term debt consisted of the following:\n\n                                                            1999            1998\n--------------------------------------------------------------------------------\nCommitted credit facility borrowings                    $299,000        $330,000\nUncommitted credit facility borrowings                   148,500          15,000\nConvertible subordinated debentures                       29,995          29,995\n--------------------------------------------------------------------------------\nTotal long-term debt                                    $477,495        $374,995\n================================================================================\n\nCOMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving\ncredit facility that expires in March 2003. At December 31, 1999, the Company\nalso had $300,000 of short-term, unsecured revolving credit facilities that\nexpire in March 2000. These credit facilities provide for variable interest tied\nto the London Interbank Offered Rate. The weighted-average interest rate on\nthese borrowings was 6.4% and 5.5% at December 31, 1999 and 1998.\n\nUNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under\nunsecured, due-on-demand credit facilities with various banks. These credit\nfacilities provide for variable interest tied to the London Interbank Offered\nRate. The weighted-average interest rate on these borrowings was 6.9% and 5.3%\nat December 31, 1999 and 1998.\n\nCONVERTIBLE SUBORDINATED DEBENTURES: The Company's convertible subordinated\ndebentures are due August 15, 2001, and bear interest at 5.75%. At the option of\nthe holder, the debentures are convertible into shares of common stock at a\nconversion rate of 29.0909 shares per thousand dollars principal, which equates\nto a conversion price of $34.375 per share. In addition, the Company can call\nthe debentures prior to maturity, requiring the debenture holder to either\nconvert their debentures to common stock or sell their debentures to the Company\nfor cash. During 1998, the Company repurchased $27,505 of these debentures in\nopen market transactions, recognizing an immaterial gain.\n\nOTHER: In March, 2000, the Company replaced its $300,000 short-term committed\ncredit facilities with a $150,000 committed credit facility. The new credit\nfacility is due in March 2001 and provides for variable interest tied to the\nLondon Interbank Offered Rate. In addition, during January 2000, the Company\nbegan issuing short-term, unsecured commercial paper with maturities up to 270\ndays. The commercial paper is fully backed by committed credit facilities and\nbears interest at varying market rates.\n\nThe Company's credit facility agreements contain various restrictive covenants\nincluding minimum financial ratios, limitations on additional liens or\nindebtedness, and limitations on certain acquisitions and investments, which the\nCompany was in compliance with at December 31, 1999.\n\nThe Company classifies all of its credit facility and commercial paper\nborrowings as long-term on its balance sheet as the Company has the ability to\nrepay any short-term maturity with available cash from an existing long-term,\ncommitted credit facility. Management continually reviews the Company's cash\nflow projections and may from time to time repay a portion of the Company's\nborrowings.\n\nThe fair value of the convertible subordinated debentures at December 31, 1999,\nwas estimated to be approximately $32,000, based upon quoted market prices.\n\nNOTE 4 - COMMITMENTS AND CONTINGENCIES\n\nLEASES: The Company leases various facilities under noncancelable operating\nlease arrangements. Future minimum lease payments under these leases are as\nfollows: $7,179 in 2000; $6,642 in 2001; $5,246 in 2002; $3,224 in 2003; and\n$3,516 in 2004 and thereafter. Rent expense under all operating leases was\n$7,397, $7,341 and $7,081 in 1999, 1998 and 1997.\n\nIRS MATTERS: The Company and the Internal Revenue Service (\"IRS\") are in Tax\nCourt over tax deficiency notices totaling $16,400 for the tax periods\n1990-1991. The Company is refuting the IRS deficiency and has asserted that in\nfact the Company is owed a refund. The trial for this matter is currently\nscheduled to begin in June 2000. In addition, the IRS has proposed adjustments\ntotaling $41,800 in additional taxes related to the Company's 1992-1994 income\ntax returns. The Company is disputing these adjustments, however, resolution of\nthese matters is stayed pending resolution of the 1990-1991 litigation.\nManagement believes that the IRS will propose a similar adjustment of\napproximately $15,500 for 1995. The issues raised by the IRS relate primarily to\nthe Company's Puerto Rican operations. Management is vigorously contesting these\nadjustments and expects that the ultimate resolution will not have material\nadverse effect on the Company's financial position or liquidity, but could\npotentially be material to the net earnings of a particular future period if\nresolved unfavorably.\n\n                                                                              37\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nLITIGATION: The Company is involved in various product liability lawsuits,\nclaims and proceedings of a nature considered normal to its business. Subject to\nself-insured retentions, management believes the Company has product liability\ninsurance sufficient to cover such claims and suits. The Company's product\nliability insurance policies exclude coverage for two discontinued Pacesetter\nlead models. These discontinued lead models were the subject of class action\nproduct liability suits that have been settled. Management believes losses that\nmight be sustained from any such future actions would not have a material\nadverse effect on the Company's liquidity or financial condition, but could\npotentially be material to the earnings of a particular future period if\nresolved unfavorably.\n\nNOTE 5 - SHAREHOLDERS' EQUITY\n\nCAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of\n$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per\nshare par value common stock. There were no shares of preferred stock issued or\noutstanding during 1999, 1998 or 1997.\n\nSHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the\nrepurchase of up to $250,000 of the Company's outstanding common stock over a\nthree-year period. The Company repurchased 977,500 shares of its common stock\nfor $29,826 during 1999. During 1998, the Company repurchased 8,000,000 shares\nof its common stock for $304,789 under a modified \"Dutch Auction\" self-tender\noffer.\n\nEMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase\nsavings plan allows participating employees to purchase, through payroll\ndeductions, shares of the Company's un-issued common stock at 85% of the fair\nmarket value at specified dates. Employees purchased 94,386, 107,545 and 112,469\nshares in 1999, 1998 and 1997 under this plan. At December 31, 1999, 180,042\nshares of additional un-issued common stock were available for purchase under\nthe plan.\n\nSTOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the\nissuance of stock-based awards, such as restricted stock or stock options, to\ndirectors, officers and employees. Stock option awards under these plans\ngenerally have a 10-year life, an exercise price equal to the fair market value\non the date of grant, and a four-year vesting term. At December 31, 1999, the\nCompany had 1,441,654 shares of common stock available for grant under these\nplans.\n\nStock option transactions under these plans during each of the three fiscal\nyears in the period ended December 31, 1999, are as follows:\n\n                                                      OPTIONS   WEIGHTED AVERAGE\n                                                  OUTSTANDING     EXERCISE PRICE\n--------------------------------------------------------------------------------\nBalance at January 1, 1997                          5,419,016            $ 31.27\n   Granted                                          5,049,875              34.03\n   Cancelled                                         (615,140)             38.39\n   Exercised                                         (296,893)             23.56\n--------------------------------------------------------------------------------\nBalance at December 31, 1997                        9,556,858              32.60\n   Granted                                          1,350,300              30.21\n   Cancelled                                         (979,284)             36.09\n   Exercised                                         (158,593)             20.36\n--------------------------------------------------------------------------------\nBalance at December 31, 1998                        9,769,281              32.12\n   Granted                                          3,046,880              28.10\n   Cancelled                                       (1,146,767)             35.39\n   Exercised                                         (257,781)             22.88\n--------------------------------------------------------------------------------\nBalance at December 31, 1999                       11,411,613            $ 30.93\n================================================================================\n\nStock options totaling 4,976,093, 3,961,943 and 3,362,361 were exercisable at\nDecember 31, 1999, 1998 and 1997.\n\nThe following table summarizes information concerning currently outstanding and\nexercisable stock options at December 31, 1999:\n\n<table>\n<caption>\n                       OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE\n---------------------------------------------------------------------------------------------\n                              WEIGHTED-AVERAGE       WEIGHTED-                      WEIGHTED-\n      RANGES OF       NUMBER   REMAINING YEARS         AVERAGE        NUMBER          AVERAGE\nEXERCISE PRICES  OUTSTANDING  CONTRACTUAL LIFE  EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE\n --------------------------------------------------------------------------------------------\n<s>                <c>                     <c>         <c>         <c>                <c>    \n   $ 8.77-17.55       40,688               0.8         $ 16.14        40,688          $ 16.14\n    17.55-26.32    1,442,387               4.1           21.91     1,333,180            21.69\n    26.32-35.10    7,246,388               8.2           29.51     2,328,928            30.26\n    35.10-43.87    2,495,496               7.3           38.79     1,090,378            38.77\n    43.87-52.64      141,912               4.3           49.43       138,177            49.50\n    52.64-87.74       44,742               3.5           68.49        44,742            68.49\n---------------------------------------------------------------------------------------------\n                  11,411,613               7.4         $ 30.93     4,976,093          $ 30.58\n=============================================================================================\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption><\/table>\n\nThe Company also granted 42,359 shares of restricted common stock during the\nthree years ended December 31, 1999, under the Company's stock compensation\nplans.\n\n38\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nThe Company's net earnings and diluted net earnings per share would have been\nreduced by $18,614, or $0.22 per share, in 1999, $11,822, or $0.14 per share, in\n1998 and $12,911, or $0.14 per share, in 1997 had the fair value based method of\naccounting been used for valuing the employee stock based awards. The impact on\nnet earnings from these stock based awards may not be representative of future\ndisclosures because they do not take into effect the pro forma compensation\nexpense related to grants made prior to 1995.\n\nThe weighted-average fair value of options granted and assumptions used in the\nBlack-Scholes options pricing model are as follows:\n\n                                               1999          1998          1997\n-------------------------------------------------------------------------------\nFair value of options granted                $11.12        $10.91        $13.22\nAssumptions used:\n   Expected life (years)                          5             5             6\n   Risk-free rate of return                     5.8%          4.5%          6.0%\n   Volatility                                  33.2%         33.4%         34.2%\n   Dividend yield                                 0%            0%            0%\n===============================================================================\n\nSHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that\nentitles shareholders to purchase one-tenth of a share of Series B Junior\nPreferred Stock at a stated price, or to purchase either the Company's shares or\nshares of an acquiring entity at half their market value, upon the occurrence of\ncertain events which result in a change in control, as defined by the Plan. The\nrights related to this plan expire in 2007.\n\nNOTE 6 - SPECIAL CHARGES\n\n1999 SPECIAL CHARGE: The Company restructured its international operations\nduring the third quarter of 1999 to improve the effectiveness and efficiency of\nits international business by clarifying business unit accountabilities and\nfocusing the operations of its business units outside the U.S. and by removing\nadministrative redundancies in the Company's non-U.S. management structure. This\nrestructuring resulted in the elimination of certain administrative management\npositions. The Company recorded a $9,754 charge in the third quarter of 1999\nrelated primarily to this restructuring, of which $4,102 was used through\nDecember 31, 1999. The Company anticipates that substantially all of the\nremaining balance will be utilized during 2000.\n\n1997 SPECIAL CHARGES: The Company recorded charges totaling $58,669 during 1997\nrelated to Ventritex merger transaction costs ($8,227), various distributor\nagreement terminations ($12,925), repositioning of Pacesetter manufacturing\noperations in connection with the Ventritex integration ($18,139), and to the\nrepositioning of Ventritex operations ($19,378). The Company has utilized\n$56,090 of the special charge reserves through December 31, 1999. The balance of\nthe remaining special charge accruals are expected to be utilized as the\nremaining contractual obligations come due.\n\nNOTE 7 - OTHER INCOME (EXPENSE)\n\nOther income (expense) consists of the following:\n\n                                           1999             1998           1997\n-------------------------------------------------------------------------------\nInterest expense                       $(28,104)        $(23,667)      $(14,374)\nInterest income                           2,726            4,125          6,365\nNet investment gain                         848           15,624          6,768\nForeign currency\n   transaction gain (loss)                2,666           (3,304)         2,078\nOther                                      (320)          (1,000)           582\n-------------------------------------------------------------------------------\nOther income (expense)                 $(22,184)        $ (8,222)      $  1,419\n===============================================================================\n\nNOTE 8 - INCOME TAXES\n\nThe Company's earnings before income taxes and accounting change were generated\nfrom domestic and foreign operations as follows:\n\n                                           1999             1998           1997\n-------------------------------------------------------------------------------\nDomestic                                $ 2,408         $132,574        $81,311\nForeign                                  64,596           53,156          6,925\n-------------------------------------------------------------------------------\nEarnings before income taxes\n   and accounting change                $67,004         $185,730        $88,236\n===============================================================================\n\nIncome tax expense consists of the following:\n\n                                           1999             1998           1997\n-------------------------------------------------------------------------------\nCurrent:\n   Federal                              $28,641          $28,409        $20,957\n   State and Puerto Rico\n      Section 936                         2,810            5,771          3,754\n   Foreign                               10,957            7,009          2,195\n-------------------------------------------------------------------------------\n   Total current                         42,408           41,189         26,906\n\nDeferred                                    369           15,459          6,624\n-------------------------------------------------------------------------------\nIncome tax expense                      $42,777          $56,648        $33,530\n===============================================================================\n\n                                                                              39\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nThe tax effects of the cumulative temporary differences between the tax bases of\nassets and liabilities and their carrying amount for financial statement\npurposes are as follows:\n\n                                                           1999            1998\n-------------------------------------------------------------------------------\nDeferred income tax assets:\n   Net operating loss carryforwards                     $46,399         $45,258\n   Tax credit carryforwards                              16,070           3,837\n   Inventories                                           25,678          23,302\n   Intangible assets                                     14,365          17,034\n   Accrued liabilities                                    7,913           6,456\n-------------------------------------------------------------------------------\n      Deferred income tax assets                        110,425          95,887\n-------------------------------------------------------------------------------\nDeferred income tax liabilities:\n   Unrealized gain on marketable securities              (3,854)         (4,566)\n   Property, plant and equipment                        (18,124)        (12,467)\n-------------------------------------------------------------------------------\n      Deferred income tax liabilities                   (21,978)        (17,033)\n-------------------------------------------------------------------------------\nNet deferred income tax asset                           $88,447         $78,854\n===============================================================================\n\nA reconciliation of the U.S. federal statutory income tax rate to the Company's\neffective income tax rate is as follows:\n\n                                             1999           1998           1997\n-------------------------------------------------------------------------------\nIncome tax expense at the\n   U.S. federal statutory rate            $23,451        $65,006        $30,883\nState income taxes, net of\n   federal benefit                          1,811          4,091          2,613\nForeign taxes at higher\n   (lower) rates                           (1,567)        (6,212)         1,023\nTax benefits from foreign\n   sales corporation                       (3,309)        (5,662)        (4,600)\nResearch and\n   development credits                     (3,679)        (2,906)        (2,890)\nNon-deductible purchased\n   in-process research and\n   development charge                      23,608             --             --\nNon-deductible acquisition costs               --             --          6,280\nOther                                       2,462          2,331            221\n-------------------------------------------------------------------------------\nIncome tax expense                        $42,777        $56,648        $33,530\n-------------------------------------------------------------------------------\nEffective income tax rate                    63.8%          30.5%          38.0%\n===============================================================================\n\nAt December 31, 1999, the Company has net operating loss and tax credit\ncarryforwards of $132,569 and $16,070, that will expire from 2002 through 2018\nif not utilized. Such amounts are subject to annual usage limitations.\n\nThe Company has not recorded deferred income taxes on $112,266 of its foreign\nsubsidiaries' undistributed earnings as such amounts are currently intended to\nbe indefinitely reinvested.\n\nNOTE 9 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE\n\nThe Company changed its accounting policy in the fourth quarter of 1997 relating\nto the capitalization of certain business process reengineering costs which were\nincurred in connection with the Company's ERP software implementation project.\nPursuant to Emerging Issues Task Force (EITF) Statement No. 97-13, the Company\nexpensed the unamortized balance of the business process reengineering costs\npreviously capitalized, net of $980 in taxes, as a cumulative effect of\naccounting change.\n\nNOTE 10 - RETIREMENT PLANS\n\nDEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that\nprovide retirement benefits to substantially all full-time U.S. employees.\nEligible employees may contribute a percentage of their annual compensation,\nsubject to IRS limitations, with the Company matching a portion of the\nemployees' contributions. The Company also contributes a portion of its profits\nto the plan, based upon Company performance. The Company's matching and profit\nsharing contributions are at the discretion of the Company's Board of Directors.\nIn addition, the Company has defined contribution programs for employees outside\nthe United States. The benefits under these plans are based primarily on\ncompensation levels. Company contributions under all defined contribution plans\ntotaled $11,416, $9,858 and $8,859 in 1999, 1998 and 1997.\n\nDEFINED BENEFIT PLANS: The Company has defined benefit plans for employees in\ncertain countries outside the U.S. The Company has an accrued liability totaling\napproximately $7,000 at December 31, 1999, which approximates the actuarially\ncalculated unfunded liability. The related pension expense was not material.\n\nNOTE 11 - MARKET AND CONCENTRATION RISK\n\nFOREIGN CURRENCY RISK: The Company had forward exchange contracts totaling\n$27,451 and $38,353 at December 31, 1999 and 1998, related primarily to the\nexchange of Canadian Dollars, British Pounds, Swedish Kroner and the U.S.\ndollar. These instruments typically have a maturity of one year or less.\n\n40\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nINTEREST RATE RISK: During the third quarter of 1999, the Company entered into\nan interest rate swap contract to hedge a substantial portion of its variable\ninterest rate risk through January 2000 on $138,000 of revolving credit facility\nborrowings. The fair market value of this contract was not material at December\n31, 1999. The impact of interest rate contracts on the Company's net earnings\nwas not material during 1999 and there were no interest rate contracts\noutstanding during 1998 and 1997.\n\nCONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the\nnormal course of business but generally does not require collateral or any other\nsecurity to support its receivables. Within the European Economic Union and in\nmany emerging markets, payment of certain accounts receivable balances are made\nby the national health care system within several countries. Although the\nCompany does not anticipate collection problems with these receivables, payment\nis dependent, to a certain extent, upon the economic situation within these\ncountries. The credit risk associated with the Company's other trade receivables\nis mitigated due to dispersion of the receivables over a large number of\ncustomers in many geographic areas.\n\nNOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION\n\nSEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm\nManagement (CRM) and Heart Valve Disease Management (HVDM). The CRM segment,\nwhich includes the results from the Company's Cardiac Rhythm Management Division\nand Daig Division, develops, manufactures and distributes bradycardia pulse\ngenerator and tachycardia implantable cardioverter defibrillator systems,\nelectrophysiology and interventional cardiology catheters and vascular closure\ndevices. The HVDM segment develops, manufactures and distributes mechanical and\ntissue heart valves and valve repair products and is in the process of\ndeveloping suture-free devices to facilitate coronary artery bypass graft\nanastomoses.\n\nThe following table presents certain financial information about the Company's\nreportable segments:\n\n                                          CRM      HVDM   ALL OTHER(1)     TOTAL\n--------------------------------------------------------------------------------\nFiscal Year Ended December 31, 1999\n   External net sales                $843,117  $271,432    $     --   $1,114,549\n   Operating profit(2)                 96,291   145,675    (152,778)      89,188\n   Depreciation and\n      amortization expense             74,626     9,581       1,495       85,702\n   Assets(3)                        1,174,672   211,424     167,942    1,554,038\n   Expenditures for\n      long-lived assets(4)             71,190     5,717       1,771       78,678\n--------------------------------------------------------------------------------\n\nFiscal Year Ended December 31, 1998\n   External net sales                $735,123  $280,871    $     --   $1,015,994\n   Operating profit                    70,024   147,832     (23,904)     193,952\n   Depreciation and\n      amortization expense             59,679     7,810       1,364       68,853\n   Assets(3)                          992,291   222,033     170,288    1,384,612\n   Expenditures for\n      long-lived assets(4)             58,323    14,546       1,328       74,197\n--------------------------------------------------------------------------------\n\nFiscal Year Ended December 31, 1997\n   External net sales                $716,347  $278,049    $     --   $  994,396\n   Operating profit(2)                 23,673   142,707     (79,563)      86,817\n   Depreciation and\n      amortization expense             55,704     8,136       2,221       66,061\n   Assets(3)                          988,977   184,246     279,893    1,453,116\n   Expenditures for\n      long-lived assets(4)             68,539    13,348       2,751       84,638\n================================================================================\n(1) AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND\n    PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.\n(2) ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $9,754 AND $58,669 IN\n    1999 AND 1997, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF\n    $115,228 IN 1999.\n(3) ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE\n    SEGMENT'S ASSETS WITH THE EXCEPTION OF CERTAIN HVDM OFFICE FACILITIES, WHICH\n    ARE INCLUDED IN CORPORATE'S ASSETS. HVDM IS ALLOCATED ITS PROPORTIONATE\n    SHARE OF DEPRECIATION. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH,\n    MARKETABLE SECURITIES, PROPERTY AND EQUIPMENT AND DEFERRED INCOME TAXES.\n(4) INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND\n    INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITIONS OF\n    ANGIO-SEAL(TM) AND VARIOUS DISTRIBUTION BUSINESSES, AND THE HVDM SEGMENT\n    ACQUISITION OF VSI IN 1999.\n\nGEOGRAPHIC INFORMATION: The following tables present certain geographical\nfinancial information:\n\nNET SALES                                1999              1998             1997\n--------------------------------------------------------------------------------\n   United States                   $  689,051        $  604,524         $581,514\n   Western Europe                     259,300           248,070          227,871\n   Other foreign countries            166,198           163,400          185,011\n--------------------------------------------------------------------------------\n                                   $1,114,549        $1,015,994         $994,396\n================================================================================\n\nLONG-LIVED ASSETS*                       1999              1998             1997\n--------------------------------------------------------------------------------\n   United States                   $  607,851        $  538,403         $532,381\n   Western Europe                      57,082            44,860           40,697\n   Other foreign countries            130,366            67,430           74,370\n--------------------------------------------------------------------------------\n                                   $  795,299        $  650,693         $647,448\n================================================================================\n* LONG-LIVED ASSETS INCLUDE PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND\n  OTHER INTANGIBLE ASSETS.\n                                                                              41\n\n\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n--------------------------------------------------------------------------------\n(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\nNOTE 13 - SUBSEQUENT EVENT\n\nOn January 21, 2000, the Company initiated a worldwide voluntary recall of all\nfield inventory of heart valve replacement and repair products incorporating a\nproprietary Silzone(R) coating on the sewing cuff fabric. The Company concluded\nthat it will no longer utilize the Silzone(R) coating. The Company expects to\nrecord a non-recurring charge against first quarter 2000 earnings, which is\ncurrently estimated at $16,000 to $20,000, for the write-off of inventory and\nother costs related to this recall and product discontinuation. However, there\ncan be no assurance that the final costs associated with this recall will not\nexceed management's current estimates.\n\nNOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)\n\nQuarterly financial data for 1999 and 1998 was as follows:\n\n<table>\n<caption>\n                                                             QUARTER\n                                            FIRST      SECOND       THIRD       FOURTH\n--------------------------------------------------------------------------------------\n<s>                                      <c>         <c>         <c>          <c>     \nFiscal Year Ended December 31, 1999\n   Net sales                             $266,734    $290,659    $275,814     $281,342\n   Gross profit                           173,273     190,910     181,529      187,935\n   Net earnings (loss)                    (12,057)*    37,205     (36,994)**    36,073\n   Diluted net earnings\n      (loss) per share                   $  (0.14)   $   0.44    $  (0.44)    $   0.43\n\nFiscal Year Ended December 31, 1998\n   Net sales                             $257,488    $261,232    $248,822     $248,452\n   Gross profit                           159,262     165,207     158,118      160,467\n   Net earnings                            29,175      40,034      29,450       30,423\n   Diluted net earnings\n      per share                          $   0.32    $   0.47    $   0.35     $   0.36\n======================================================================================\n<\/c><\/c><\/c><\/c><\/s><\/caption><\/table>\n\n * INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF\n   $47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION.\n\n** INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF\n   $67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL\n   CHARGE OF $9,754.\n\n42\n\n\n\nFIVE-YEAR SUMMARY FINANCIAL DATA\n--------------------------------------------------------------------------------\n(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\n\n<table>\n<caption>\n                                          1999*           1998            1997**          1996***         1995\n--------------------------------------------------------------------------------------------------------------\n<s>                                 <c>             <c>             <c>             <c>             <c>       \nSUMMARY OF OPERATIONS FOR THE FISCAL YEAR:\n\nNet sales                           $1,114,549      $1,015,994      $  994,396      $  876,747      $  848,078\n--------------------------------------------------------------------------------------------------------------\nGross profit                        $  733,647      $  643,054      $  628,679      $  581,859      $  555,290\n--------------------------------------------------------------------------------------------------------------\n   Percent of sales                      65.8%           63.3%           63.2%           66.4%           65.5%\n--------------------------------------------------------------------------------------------------------------\nOperating profit                    $   89,188      $  193,952      $   86,817      $   69,469      $  169,086\n--------------------------------------------------------------------------------------------------------------\n   Percent of sales                       8.0%           19.1%            8.7%            8.0%           19.9%\n--------------------------------------------------------------------------------------------------------------\nNet earnings                        $   24,227      $  129,082      $   53,140      $   60,637      $  117,116\n--------------------------------------------------------------------------------------------------------------\n   Percent of sales                       2.2%           12.7%            5.3%            6.9%           13.8%\n--------------------------------------------------------------------------------------------------------------\nDiluted earnings per share          $     0.29      $     1.50      $     0.58      $     0.66      $     1.28\n--------------------------------------------------------------------------------------------------------------\n\nFINANCIAL POSITION AT YEAR END:\n\nCash and marketable securities      $   88,893      $   87,990      $  184,536      $  235,395      $  239,621\n--------------------------------------------------------------------------------------------------------------\nWorking capital                        407,777         479,067         497,188         429,451         405,060\n--------------------------------------------------------------------------------------------------------------\nTotal assets                         1,554,038       1,384,612       1,453,116       1,469,994       1,192,235\n--------------------------------------------------------------------------------------------------------------\nLong-term debt                         477,495         374,995         220,000         229,500         120,000\n--------------------------------------------------------------------------------------------------------------\nShareholders' equity                   794,021         806,220         987,022         922,061         855,388\n--------------------------------------------------------------------------------------------------------------\n\nOTHER DATA:\n\nDiluted weighted average\n   shares outstanding                   84,735          86,145          92,052          92,372          91,335\n--------------------------------------------------------------------------------------------------------------\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption><\/table>\n\nTHE FIVE-YEAR SUMMARY FINANCIAL DATA INCLUDES THE RESULTS OF VENTRITEX, INC. FOR\nALL PERIODS PRESENTED. ALSO, THE COMPANY HAS NOT DECLARED OR PAID ANY DIVIDENDS\nDURING 1995 THROUGH 1999.\n\n  *RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS\n   RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228 RELATED TO THE \n   ANGIO-SEAL(TM) AND VASCULAR SCIENCE, INC. ACQUISITIONS.\n\n **RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES.\n\n***RESULTS FOR 1996 INCLUDE A $52,926 SPECIAL CHARGE AND PURCHASED IN-PROCESS \n   RESEARCH AND DEVELOPMENT CHARGES TOTALING $40,350 RELATED TO VARIOUS\n   ACQUISITIONS.\n\n                                                                              43\n\n\nINVESTOR INFORMATION\n--------------------------------------------------------------------------------\n\n\nTRANSFER AGENT\n\nRequests concerning the transfer or exchange of shares, lost stock certificates,\nduplicate mailings or change of address should be directed to the Company's\nTransfer Agent at:\n\nFirst Chicago Trust Company of New York\na division of EquiServe\nP.O. Box 2500\nJersey City, NJ 07303-2500\n1-800-317-4445\nwww.equiserve.com (Account Access Availability)\nHearing impaired # TDD: 201-222-4955\n\nANNUAL MEETING OF SHAREHOLDERS\n\nThe annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May\n10, 2000, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,\nMinneapolis, MN.\n\nINVESTOR CONTACTS\n\nLaura C. Merriam, Director of Investor Relations\nJohn M. Buske, Corporate Controller\nDennis J. McFadden, Treasurer\n\nTo obtain information about the Company call 1-800-552-7664, visit our Web site\nwww.sjm.com, or write to:\n\nInvestor Relations\nSt. Jude Medical, Inc.\nOne Lillehei Plaza\nSt. Paul, MN 55117-9983.\n\nLatest Company news releases, including quarterly results, and other information\ncan be received by calling Investor Relations at a toll-free number\n(1-800-552-7664) or on the St. Jude Medical home page. Company news releases are\nalso available through \"Company News On-Call\" by fax (1-800-758-5804, ext.\n816662) or at http:\/\/www.prnewswire.com on the Internet.\n\nCOMPANY STOCK SPLITS\n\n2:1 on 4\/27\/79, 1\/25\/80, 9\/30\/86, 3\/15\/89 and 4\/30\/90\n3:2 on 11\/16\/95\n\nSTOCK EXCHANGE LISTINGS\n\nNew York Stock Exchange\nChicago Board Options Exchange (CB)\nSymbol: STJ\n\n\nThe quarterly range of high and low prices per share for the Company's common\nstock for fiscal years 1999 and 1998 are set forth below. As of February 10,\n2000, the Company had 4,443 shareholders of record.\n\nYEAR ENDED DECEMBER 31                   1999                       1998\n--------------------------------------------------------------------------------\nQuarter                           High           Low          High           Low\n--------------------------------------------------------------------------------\nFirst                           $29.38        $22.94        $38.00        $29.06\nSecond                          $38.31        $23.88        $39.69        $33.06\nThird                           $40.75        $29.75        $36.63        $19.19\nFourth                          $30.69        $25.13        $31.88        $19.19\n\n\nTRADEMARKS\n\nAescula(TM), Affinity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R), Aortic\nConnector(TM), AutoCapture(TM), Contour(R), Daig Cardiac Ablation System(TM),\nDynamic Atrial Overdrive(TM), EnCap(TM), Entity(TM), Fast-Cath(TM),\nFrontier(TM), Genesis(TM), GuideRight(TM), Integrity(TM), Linx(TM), Livewire\nTC(TM), Livewire(TM), Maximum Xtra(TM), Microny(R), Photon(TM), Profile(TM),\nRAMP(TM), Regency(R), Seal-Away(TM), Silzone(R), SJM Biocor(TM), SJM Epic(TM),\nSJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), SJM(R), Spyglass(TM),\nSupreme(TM), Tendril(R), Toronto Duo(TM), Toronto SPV(R), Trilogy(R), TVL(R)\n\nCardima(R) is a trademark of Cardima, Inc.\nHousecall(TM) is a trademark of Raytel Cardiac Services.\n\n44\n\n<\/description><\/sequence><\/type><\/pre>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_contracts_companies":[8909],"corporate_contracts_industries":[9436],"corporate_contracts_types":[9539,9544],"class_list":["post-40584","corporate_contracts","type-corporate_contracts","status-publish","hentry","corporate_contracts_companies-st-jude-medical-inc","corporate_contracts_industries-health__instruments","corporate_contracts_types-compensation","corporate_contracts_types-compensation__employment"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts\/40584","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate_contracts"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=40584"}],"wp:term":[{"taxonomy":"corporate_contracts_companies","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_companies?post=40584"},{"taxonomy":"corporate_contracts_industries","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_industries?post=40584"},{"taxonomy":"corporate_contracts_types","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_types?post=40584"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}