SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K ANNUAL REPORT
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
COMMISSION FILE NO. 0-8672
ST. JUDE MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1276891
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE LILLEHEI PLAZA
ST. PAUL, MINNESOTA 55117
(Address of principal executive office)
(612) 483-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS
(Title of class) (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, or will not be contained, to the
best of the Registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days. * YES ___ NO _x_
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $1.73 billion at March 9, 1995, when the
closing sale price of such stock, as reported on the NASDAQ National Market
System, was $37.50.
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of March 9, 1995, was 46,491,032 shares.
Portions of the Annual Report to Shareholders for the year ended December
31, 1994, are incorporated by reference in Parts I, II and IV. Portions of the
Proxy Statement dated March 27, 1995, are incorporated by reference in Part III.
*The Form 8K for the Pacesetter acquisition was filed without financials.
Those financials are filed with this 10K.
The exhibit index is set forth on pages 16, 17, 18 and 19. This Form 10-K
consists of 161 pages, consecutively numbered 1 through 161.
ST. JUDE MEDICAL, INC.
1994 10-K
PART I
Item 1. BUSINESS
GENERAL
St. Jude Medical, Inc. (the "Company") develops, manufactures and markets
medical device products for cardiovascular applications. The Company's products
are distributed worldwide through a combination of direct sales personnel and
independent manufacturers' representatives.
Effective September 30, 1994, St. Jude Medical acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the Company's
product offerings and provided a platform for potential further diversification
of its business.
The Company operates through four divisions to focus on the management and
growth of its operations. The St. Jude Medical Division is responsible for the
Company's mechanical and tissue heart valves and annuloplasty ring products.
Pacesetter Division products include bradycardia pulse generators, leads and
programmers. The Cardiac Assist Division is responsible for the Company's
intra-aortic balloon pump and centrifugal pump systems. The International
Division is responsible for marketing, sales and distribution of the Company's
products in Europe, Africa and the Middle East.
Typically, the Company's net sales are somewhat stronger in the first and
second quarters and weaker in the third quarter. This results from a tendency by
patients to defer, if possible, cardiac procedures during the summer months and
from the seasonality of the Western European market where summer vacation
schedules normally result in lower orders. Manufacturers' representatives place
large orders randomly which can distort the net sales pattern noted above. In
addition, new product introductions and regulatory approvals can modify the
expected net sales pattern.
PACEMAKERS
In September 1994, the Company acquired the worldwide cardiac rhythm
management operations of Siemens AG ("Pacesetter"). Pacesetter is headquartered
in Sylmar, California and has additional manufacturing facilities in Solna,
Sweden and East Kilbride, Scotland. The pulse generators and leads produced by
Pacesetter treat heart beats that are too slow or irregular; a condition known
as bradycardia. Pacesetter produces various models of bradycardia pulse
generators and leads. Pulse generators can sense and produce impulses in both
the upper and lower chambers of the heart, in appropriate relation to heart
activity, and can be non-invasively programmed by the physician to adjust
sensing, electrical pulse intensity, duration, rate, and other characteristics.
The pulse generator, generally referred to as a pacemaker, contains a
battery and electronic circuitry. It generates the pacing pulses and monitors
the heart activity to sense abnormalities requiring correction. It is most often
implanted in the upper chest just below the collarbone. The leads are insulated
wires that carry the pulses to the heart and information from the heart back to
the pacemaker. A pacemaker uses electrical currents equivalent to those in a
healthy heart.
Pacesetter manufacturers a full line of premium pulse generators for the
common modes of cardiac pacing therapy, state-of-the-art active and passive
fixation endocardial pacing leads and an external programming unit that utilizes
the Company's unique and exclusive PDx(TM) ROM software.
Dual chamber rate responsive ("DDDR") pacing is the most sophisticated
pacing therapy, allowing for pacing and sensing in both chambers of the heart as
well as adjusting for patient activity levels. The Pacesetter DDDR product line
includes the Synchrony(R) II and the Synchrony(R) III. These products alter
their rate based on the patients' intrinsic heart rate or the patient's
"activity" as measured by a sensor. These products are the most powerful pulse
generators in the market for patient diagnostics, pacing system diagnostics and
technical sophistication.
Dual chamber conventional ("DDDC") pacing allows for both the atrium and
ventricle to be sensed and paced and thus offers the patient atrial-ventricular
(AV) synchrony or optimum timing of the movement of blood from the atrium to the
ventricle. The DDDC product line consists of various models under the
Paragon(TM) name. Paragon(TM) III offers superior patient and pacing system
diagnostics, DDI hysteresis, base rates to 160 ppm in single-chamber modes,
polarity lock-out based on lead type, ICD compatibility and radio frequency (RF)
coupled non-invasive electrophysiologic (EP) test capability.
Single chamber rate responsive ("SSIR") pacing allows for pacing and
sensing in one chamber only. This product line also adjusts pacing to the
activity level of the patient. The SSIR product line is made up of various
models under the Solus(R) name. The Solus(R) pulse generators are marketed as
having the broadest range of flexibility for customized individual patient
titration of pacing therapy and the most complete diagnostics of any SSIR in the
market.
Single chamber conventional pacing ("SSIC") is the simplest pacing
technology. Traditionally, it has represented the majority of worldwide pulse
generator sales. Phoenix(R) III gives many competitive advantages to Pacesetter
in this product line. The key product features are patient diagnostis,
hysteresis, choice of RF coupled pacing to 600 ppm or triggered mode pacing to
480 ppm for non-invasive EP studies, polarity lock-out based on lead type and an
increase in base pacing rates to 160 ppm.
Microny(TM), a single chamber pacemaker which is the first pacemaker in the
world to incorporate the automatic functions with autocapture, was recently
introduced in international markets. Autocapture is capable of adjusting the
pulse generator's output to provide capture and an appropriate safety margin
test on a beat by beat basis. It is the world's smallest pacemaker weighing only
14 grams. The sensor is an accelerometer, a new "ball in a cage" sensor which
has excellent sensitivity between the intensity of the patient's body movement
and the proper pacing rate.
Pacesetter is currently introducing a new enhanced platform of DDDR, SSIR,
DDDC and SSIC pacing systems called the Trilogy(TM) series. The series is an
outgrowth of the highly successful Synchrony(R) platform circuitry and is
designed with the philosophy of cardiac optimization. Trilogy has an ovoid
shape, initiates automaticity, doubles memory and adds new diagnostics.
HEART VALVES
General. The Company manufactures and markets a bileaflet pyrolytic carbon
coated prosthetic heart valve which it designed and first sold in 1977. A heart
valve facilitates the one-way flow of blood through the arteries and heart and
prevents significant back flow of blood into the heart. Heart valve replacement
may be required because the natural heart valve has congenital defects, is
diseased or is malfunctioning. To-date, over 570,000 St. Jude Medical(R)
mechanical heart valves have been implanted worldwide.
The first prosthetic heart valves were used in the 1960s and were
mechanical valves made primarily of inert materials, such as plastics and
fabrics. Mechanical valves were followed by the development of tissue valves
made from the heart valve of a pig or the pericardial tissue of a calf.
Mechanical valves, especially those utilizing pyrolytic carbon, offer the
advantage of longevity because of the durable nature of pyrolytic carbon. These
valves also are less susceptible than tissue valves to calcium build-up which
may cause valve malfunctions. The primary advantage of tissue valves is that
they generally require little or no patient anticoagulant drug therapy to reduce
the possibility of clotting. Such therapy is presently indicated for mechanical
valves. Physicians will select either a tissue or a mechanical valve depending
upon the patient's requirements and the physician's preference. In the early
1980s, the heart valve market was evenly split between mechanical valves and
tissue valves. In 1994, the Company estimates that mechanical valves were
approximately 70% of the market, which is consistent with the 1993 mechanical
heart valve share of the total heart valve market.
Mechanical Valves. The Company's mechanical heart valve consists of four
basic components: two leaflets; the valve body or orifice; and the sewing cuff.
St. Jude Medical(R) mechanical heart valves are sold in sizes ranging from 17mm
to 33mm in diameter with nine sizes available for the mitral position and eight
for the aortic position. The two leaflets and the valve body are fabricated from
a graphite substrate, coated with pyrolytic carbon and then polished. Pyrolytic
carbon is utilized because of its extremely hard and durable nature and
excellent compatibility with blood.
The Company provides a wide range of mechanical heart valve products.
Depending upon physician preference, sewing cuffs are made from either polyester
fiber or polytetrafluoroethylene fiber. In November 1992, the Company received
Food and Drug Administration ("FDA") approval to market its St. Jude Medical(R)
mechanical heart valve Hemodynamic Plus Series which provides optimum
hemodynamics in patients with a small valvular annulus. In February 1994, the
Company received FDA approval to market its collagen impregnated aortic valved
graft which combines its aortic heart valve with a collagen impregnated graft
and is utilized to replace the aortic heart valve and reconstruct the ascending
aorta. The SJM(R) Masters Series Rotatable Valve(TM), a mechanical heart valve
with a rotatable cuff, was first implanted in Europe in February 1995.
Until 1986 all pyrolytic carbon components for the mechanical heart valve
were purchased from CarboMedics, Inc. ("CMI"). In 1986, the Company began
selling mechanical heart valves internationally utilizing self-manufactured
pyrolytic carbon coated components. Since then, the Company has sold over
130,000 valves made from its own pyrolytic carbon coated components. In May
1991, the Company received FDA approval to domestically market the St. Jude
Medical(R) mechanical heart valve as assembled with self-manufactured pyrolytic
carbon coated components.
Tissue Valves. In late 1992, the Company introduced in the Canadian and
selected Western European markets the Toronto SPV(TM) tissue heart valve. This
is a stentless heart valve that offers the potential for superior hemodynamic
performance and increased durability as compared to current stented designs. The
Company filed with the FDA an Investigational Device Exemption("IDE")
application for this valve in 1993 and received FDA approval to begin clinical
trials under an IDE in the United States in February 1994. The U.S. clinical
trials have been suspended because the Health Care Financing Administration
("HCFA") ceased Medicare and Medicaid funding for "experimental devices." See
"Government Regulation."
Also in 1992, the Company, in a joint venture with Hancock/Jaffe
Laboratories, initiated a program to develop a stented tissue heart valve. The
first human implant of the SJM X-Cell(TM) bioprosthesis took place in Europe in
mid-1994. The joint venture expects to file an IDE application with the FDA by
the middle of 1995. The Company cannot presently predict the timing or
likelihood of obtaining IDE approval for this product.
A Pre-Market Approval ("PMA") application for these tissue valve products
is expected to be filed with the FDA approximately two years following receipt
of IDE approval. See "Government Regulation."
The Company acquired the assets and business of BioImplant Canada, Inc., a
Canadian manufacturer of tissue heart valves, in 1986. The BioImplant(R) tissue
valve incorporates a flexible medical grade plastic stent to provide tissue
support and improve handling characteristics during implantation. It is sold
outside the United States and is not approved for commercial marketing in the
United States.
ANNULOPLASTY RINGS
Annuloplasty rings are prosthetic devices used to repair diseased or
damaged mitral heart valves. The BiFlex(TM) annuloplasty ring is made from
tubular, knitted polyester fabric. The ring can be adjusted either symmetrically
or asymmetrically before, during or after placement to produce the desired valve
annulus size and configuration.
INTRA-AORTIC BALLOON PUMP SYSTEM
In 1988, the Company acquired the assets and operations of Aries Medical,
Inc., a manufacturer of an intra-aortic balloon pump ("IABP") system. The IABP
is a cardiac assist device used to provide temporary support to a weakened or
unstable heart generally before and after open-heart surgery and certain
angioplasty procedures.
The Model 700 IABP system consists of a control console and a single-use,
balloon-tipped catheter. In IABP therapy, the catheter is inserted
percutaneously and is threaded through the circulatory system to position the
balloon in the descending thoracic aorta. Once the balloon is properly
positioned, the control console is used to adjust the function of a pump that
synchronizes the balloon's inflation and deflation with the contraction and
relaxation of the heart's left ventricle. This therapy increases the heart's
output and the supply of blood to the heart while reducing the heart muscle's
workload.
Over three quarters of annual expenditures on IABP products are for the
single-use balloon catheters used with the control consoles. To take advantage
of the higher volume portion of the IABP market, the Company's catheters are
adaptable for use on competitive IABP consoles. In 1993, the Company introduced
its RediGuard(TM) catheter which eases the guiding and placement process. In
early 1995, the Company received FDA authorization to market, under the 510(k)
pre-market notification procedure, a hydromer coating on its catheters which
provides for a lubricous surface designed for ease of placement and guidance.
CENTRIFUGAL PUMP SYSTEM
In 1989, the Company acquired technology relating to a centrifugal pump
system from Symbion, Inc. Centrifugal pumps are used to replace a patient's
cardiac function during open heart surgery. Centrifugal pumps are less traumatic
to the blood than conventional roller pumps and centrifugal designs reduce the
risk of air and tubing emboli entering the blood stream. The Company's
Lifestream(TM) centrifugal pump system consists of a single-use pump, a control
console, a motor drive, flow transducer and probe.
The Company entered into a distribution agreement with COBE Cardiovascular
Inc. (COBE) late in 1992 which was amended in late 1993. This three-year
agreement requires COBE to purchase from the Company specified minimum amounts
of pumps and flow probes for the domestic, Canadian and Australian markets. Late
in 1993, the Company entered into a non-exclusive distribution agreement with
COBE for selected European markets. These agreements allow COBE to include the
Company's pumps and flow probes in COBE's sterile custom pack units for use in
various surgical procedures.
SUPPLIERS
In 1990, the Company entered into an agreement with CarboMedics, Inc.
("CMI") which covers the supply of pyrolytic carbon heart valve components from
1991 through 1998. Under the agreement, the Company must purchase certain of its
carbon component requirements from CMI ranging downward to 48% of its needs in
1995 and, thereafter, 20% of its needs through 1998. Prices are fixed under the
agreement and escalate through 1995, whereupon the parties have agreed to
negotiate prices for the years 1996 through 1998. If CMI is unable or fails to
perform under the agreement, the license permits the Company to meet its own
requirements during the supply interruption. The agreement can be extended for
additional one year terms after 1998 and the prices the Company would pay in
1999 and beyond will be adjusted annually by a formula established in the
agreement. The formula is based upon certain components of the producer price
index for intermediate goods published by the United States Department of Labor.
In addition, CMI has agreed that it will not discriminate against the Company in
the setting of future prices and terms for its supply of heart valve components.
See "Patents and Licenses."
The Company purchases raw material and other items from numerous suppliers
for use in its products. The Company maintains sizeable inventories of up to
three years of its projected requirements for certain materials, some of which
are available only from single source vendors. The Company has been advised from
time to time that certain of these vendors may terminate sales of products to
customers that manufacture implantable medical devices in an effort to reduce
their potential product liability exposure. Some of these vendors have modified
their positions and have indicated a willingness to either temporarily continue
to provide product until such time as an alternative vendor or product can be
qualified or to reconsider the supply relationship. While the Company believes
that alternative sources of raw materials are available and that there is
sufficient lead time in which to qualify such other sources, any supply
interruption could have a material adverse effect on the Company's ability to
manufacture its products.
COMPETITION
Within the medical device industry, competitors range from small start-up
companies to companies with significant resources. The Company's customers
consider many factors when choosing supplier partners including product
reliability, clinical outcomes, product availability, price and product services
provided by the manufacturer. Market share can shift as a result of
technological innovation, product recalls and physician alerts. This emphasizes
the need for the highest quality products and services.
The Company is the world's leading manufacturer and supplier of prosthetic
heart valves. In addition to the Company, there are three other principal and
many smaller competitors in the heart valve market. In the United States and
most developed markets throughout the world, the Company is the market share
leader.
St. Jude Medical is a technological leader in the bradycardia pacemaker
market. Worldwide there are eight primary manufacturers and suppliers of
bradycardia pacemakers, including the Company. One other company and St. Jude
Medical account for well over half of the worldwide pacemaker net sales. The
Company has strong market share positions in all major developed markets.
In the intra-aortic balloon pump market there are four competitors
worldwide. Two of these competitors account for a significant portion of net
sales of intra-aortic balloon pump systems both in the United States and abroad.
There are five principal manufacturers of blood pump systems, including the
Company. One competitor accounts for a significant portion of centrifugal pump
system net sales and a different competitor accounts for the majority of roller
pump net sales.
The cardiovascular segment of the medical device market is a dynamic market
currently undergoing significant change due to cost containment considerations,
regulatory reform, industry consolidation and customer consolidations.
Technological competency and effective clinical outcomes are becoming
increasingly more important factors for medical device manufacturers.
MARKETING
The Company sells its products directly to customers and through
independent manufacturers' representative (distributor based) organizations in
the United States and throughout the world. No representative organization or
single customer accounted for more than 10% of 1994 net sales.
In the United States, the Company uses a direct employee based sales
organization for its heart valve products and a combination of a distributor
based and employee based sales organizations for its pacemaker and cardiac
assist products. In Western Europe, the Company has a direct sales presence in
thirteen countries. Throughout the rest of the world the Company uses
distributor based sales organizations.
Payment terms worldwide are consistent with local practice. Orders are
shipped as they are received and, therefore, no material back orders exist.
RESEARCH AND DEVELOPMENT
The Company is focusing on the development of new products and improvements
to existing products. In addition, research and development expense reflects the
Company's efforts to obtain FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses were $21,008,000 (5.8% of net sales),
$10,972,000 (4.3%) and $11,478,000 (4.8%) in 1994, 1993 and 1992, respectively.
The increase in research and development expense in 1994 resulted directly from
the Pacesetter acquisition which has a higher level of research and development
spending than the previously existing business.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in some instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which requires the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's
mechanical and tissue heart valves and certain pacemakers and leads were subject
to this level of approval. Other pacemakers and leads, the annuloplasty ring,
IABP and the centrifugal pump are currently marketed under the 510(k) pre-market
notification procedure of the Act. The FDA has advised that companies marketing
IABPs will be required to make PMA filings in the future. The Company is
preparing to make such a filing and cannot predict when the FDA will call for
PMA submission. The FDA has called for a PMA submission for centrifugal pumps.
The Company has petitioned the FDA to downclass centrifugal pumps to Class II
which, if successful, would eliminate the need to file a PMA. If unsuccessful,
the Company is prepared to make a PMA filing.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government will reimburse hospitals for the inpatient
care of persons covered by Medicare. While the Company has not been aware of
significant domestic price resistance directly as a result of DRG reimbursement
policies, changes in current DRG reimbursement levels could have an adverse
effect on its domestic pricing flexibility.
St. Jude Medical conducts business in several countries outside the United
States and is subject to medical device laws in these countries. These laws
range from extensive device approval requirements in some countries for all or
some of the Company's products to requests for data or certifications in other
countries. Generally, regulatory requirements are increasing in these countries.
In the European Economic Community efforts are underway to harmonize the
regulatory systems.
Pacesetter's facilities in California and Sweden are subject to a Consent
Decree with the FDA which was entered in February, 1994. The Consent Decree
requires that Pacesetter comply with FDA regulations and in particular, Good
Manufacturing Practice (GMP) Regulations. The Company is obligated to reimburse
the FDA for certain expenses related to inspection of Pacesetter facilities
pursuant to the Consent Decree. The Consent Decree has an indefinite term.
In mid-1994, the Health Care Financing Administration notified health care
providers that it would discontinue reimbursing such providers for either the
direct or associated patient care costs of "investigational devices" that have
not received final FDA market clearance. This action affected all Medicare and
Medicaid reimbursed procedures. As a result of this action, providers have
discontinued many clinical trials using investigational devices, including those
of the Company. The Company cannot predict if or when HCFA will amend this
reimbursement policy.
PATENTS AND LICENSES
The Company's policy is to protect the intellectual property rights in its
work on heart valves, pacemakers, and other biomedical devices. Where
appropriate, the Company applies for United States and foreign patents. In those
instances where the Company has acquired technology from third parties, it has
sought to obtain rights of ownership to the technology through the acquisition
of underlying patents or licenses.
While the Company believes design, development, regulatory and marketing
aspects of the medical device business represent the principal barriers to entry
into such business, it also recognizes that its patents and license rights may
make it more difficult for its competitors to market products similar to those
produced by the Company. The Company can give no assurance that any of its
patent rights, whether issued, subject to license or in process, will not be
circumvented or invalidated. Further, there are numerous existing and pending
patents on medical products and biomaterials. Although the Company is unaware of
any violation by it of the patent or proprietary rights of others, there can be
no assurance that the Company's existing or planned products do not or will not
infringe such rights or that others will not claim such infringement. The
Company believes it would be able to maintain, against future challenges, the
validity of its mechanical heart valve and pacemaker patents and its rights
thereto. No assurance can be given that the Company will be able to prevent
competitors from challenging the Company's patents or from entry into the
marketplace.
INSURANCE
The Company carries insurance coverage for both domestic and international
products liability occurrences in amounts which it believes are adequate. The
Company would be financially responsible for any claims which exceed its
insurance coverage. The Company's products are not marketed with any express
warranty provisions. Suppliers of components generally make no warranty on the
components they supply to the Company and the Company has agreed to hold certain
of its suppliers harmless in the event claims are made or damages are assessed
against them as a result of any products liability related litigation.
The Company did not assume any liability for Pacesetter products liability
losses prior to September 30, 1994. These losses include any products liability
claims for products implanted or otherwise used with a patient on or before
September 30, 1994, arising from a death, injury, explant or other occurrence
happening or alleged to have happened prior to September 30, 1994.
From time to time, the Company receives communications from persons who
have received heart valve or pacemaker implants concerning various claims. Also,
claims relating to the Company's other products have been received. On occasion,
these claims evolve into litigation. The Company has insurance coverage that
management considers adequate to protect the Company against product liability
losses and management believes the losses that might be sustained from such
actions would not have a material adverse effect on the Company's financial
condition.
Due to the January 1994 California earthquake, earthquake insurance is
currently difficult to procure, extremely costly, and restrictive in terms of
coverage. For these reasons, the Company has not procured earthquake and related
business interruption insurance for its operations located in Los Angeles
County, California. Although certain losses resulting from an earthquake would
be covered under other insurance policies owned by the Company, the absence of
earthquake insurance represents a potential exposure for the Company. While the
Company is unable to predict the potential impact of the absence of earthquake
insurance, it is the opinion of management that any uninsured loss that might be
sustained from an earthquake would not have a material adverse impact on the
Company's financial condition.
EMPLOYEES
As of December 31, 1994, the Company had 2,248 full-time employees. It has
never experienced a work stoppage as a result of labor disputes and none of its
employees is represented by a labor organization, with the exception of the
Company's Swedish employees.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical products and service industry is the single industry segment in
which the Company operates. The Company's domestic and foreign net sales,
operating profit and identifiable assets, and its export sales to customers are
described in Note 8 to the consolidated financial statements on pages 36 and 37
of the 1994 Annual Report to Shareholders and are incorporated by reference
herein.
The Company's foreign business is subject to such special risks as exchange
controls, currency devaluation, dividend restrictions, the imposition or
increase of import or export duties and surtaxes, and international credit or
financial problems. Since its international operations require the Company to
hold assets in foreign countries denominated in local currencies, many assets
are dependent for their U.S. dollar valuation on the values of a number of
foreign currencies in relation to the U.S. dollar. The Company may from time to
time enter into purchase and sales contracts in the forward markets for various
foreign currencies with the objective of protecting U.S. dollar values of assets
and commitments denominated in foreign currencies.
Item 2. PROPERTIES
St. Jude Medical's principal executive offices are owned and are located in
St. Paul, Minnesota. Manufacturing facilities are located in California,
Massachusetts, Minnesota, Canada, Puerto Rico, Scotland and Sweden.
Approximately 54%, or 296,000 square feet, of the total manufacturing space is
owned by the Company and the balance is leased.
The Company also maintains sales and administrative offices inside the
United States at 16 locations in 7 states and outside the United States at 18
locations in 15 countries. All of these locations are leased.
In management's opinion, all buildings and machinery and equipment are in
good condition and suitable for their purposes and are maintained and repaired
on a basis consistent with sound operations.
Item 3. LEGAL PROCEEDINGS
The Company is a named defendant in a purported class action captioned
Weisburgh, et al. v. St. Jude Medical, Inc. et al. filed July 2, 1992 in the
United States District Court for the District of Minnesota, and later amended.
The second amended complaint also names as defendants certain officers and
directors alleged to control the Company. The plaintiff purports to represent a
class consisting of all persons who purchased common stock of the Company during
the period from December 17, 1991 through July 2, 1992. The second amended
complaint alleges that the defendants deceived the investing public regarding
the Company's finances, financial condition and present and future prospects and
induced the plaintiff class to purchase the Company's common stock during the
period prior to July 2, 1992 at inflated prices. The second amended complaint
asserts claims for federal securities fraud, common law fraud and negligent
misrepresentation. The second amended complaint seeks damages (including
punitive damages) in an unspecified amount, attorney's fees, costs and expenses.
The district court has dismissed the complaint and the plaintiff has filed an
appeal which is pending.
The Company is unaware of any other pending legal proceedings which it
regards as likely to have a material adverse effect on its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION*
Ronald A. Matricaria 52 Chairman (1995), President and
Chief Executive Officer (1993)
Eric W. Sivertson 44 President, Pacesetter (1994)
Stephen L. Wilson 42 Vice President, Finance and
Chief Financial Officer (1990)
John P. Berdusco 58 Vice President, Administration (1993)
Todd F. Davenport 44 President, St. Jude Medical
International Division (1992)
*Dates in brackets indicate period during which officers began serving in such
capacity. Executive officers serve at the pleasure of the Board of Directors and
are elected annually for one year terms.
Mr. Matricaria's business experience is set forth in the Company's
definitive Proxy Statement dated March 27, 1995 under the Section "Election of
Directors." The information is incorporated herein by reference.
Mr. Sivertson joined the Company in 1985 as Director of Marketing. In 1986,
he became Director of International Sales and was appointed Vice President,
Sales and Marketing in 1988, President of the International Division in 1990,
and President, St. Jude Medical Division in 1992. Mr. Sivertson was appointed
President, Pacesetter in October 1994. Prior to joining the Company, Mr.
Sivertson spent eight years with American Hospital Supply Corporation in various
management positions, including Vice President of Marketing for the Converters
Division.
Mr. Wilson joined the Company in 1990 as Vice President, Finance and Chief
Financial Officer. Prior to joining the Company, Mr. Wilson was Vice President
and Controller of The Foxboro Company, a process automation company, where he
had been employed for five years. Prior to that, Mr. Wilson was the Controller
of Brown & Sharpe Manufacturing Company, a metrology products and machine tools
company, and previously was with Coopers & Lybrand.
Mr. Berdusco joined the Company in 1993 as Vice President, Administration.
Prior to joining the Company, Mr. Berdusco was Executive Director Corporate
Facilities Planning, Manufacturing Strategy Development and Sourcing for Eli
Lilly & Company, a global pharmaceutical company. From 1962 to 1993, Mr.
Berdusco held various management positions with Eli Lilly & Company in both
domestic and international operations.
Mr. Davenport joined the Company in 1992 as President, St. Jude Medical
International Division. Prior to joining the Company, Mr. Davenport served for
two years as Vice President, Marketing and Sales for the Edwards Critical-Care
Division of Baxter International, Inc., a hospital supply company. From 1986 to
1990, Mr. Davenport was employed by Abiomed, Inc., a medical products company,
and most recently was that company's Vice President and General Manager. Prior
to joining Abiomed, he spent eleven years in various management positions with
Cordis Corporation, a medical device company. Mr. Davenport resigned from the
Company effective February 28, 1995.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The information set forth under the captions "Supplemental Market Price
Data" and "Cash Dividends" on page 40 of the Company's 1994 Annual Report to
Shareholders is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Ten Year Summary of Selected
Financial Data" on pages 38 and 39 of the Company's 1994 Annual Report to
Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 22 through
26 of the Company's 1994 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and Report
of Independent Auditors set forth on pages 27 through 37 of the Company's 1994
Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1994, 1993 and
1992
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1994, 1993 and 1992 Consolidated Statements of Cash Flows - Years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement dated March 27, 1995, is incorporated
herein by reference. Information on executive officers is set forth in Part I,
Item 4A hereto.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Information" and "Election of Directors" in the Company's definitive Proxy
Statement dated March 27, 1995, is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the Company's
definitive Proxy Statement dated March 27, 1995, is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement dated March 27, 1995, is incorporated
herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) List of documents filed as part of this Report
(1) Financial Statements
The following consolidated financial statements of the Company and
Report of Independent Auditors as set forth on pages 27 through 37 of
the Company's 1994 Annual Report to Shareholders are incorporated
herein by reference:
Consolidated Statements of Income - Years ended December 31, 1994,
1993 and 1992
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years ended December 31, 1994,
1993 and 1992
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedule is filed as part of this
Form 1O-K Report:
SCHEDULE
NUMBER DESCRIPTION PAGE NUMBER
II Valuation and Qualifying 24
Accounts
The report of the Company's Independent Auditors with respect to the
above-listed financial statements and financial statement schedules
appears on page 23 of this Report.
All other financial statements and schedules not listed have been
omitted because the required information is included in the
Consolidated Financial Statements or the Notes thereto, or is not
applicable.
(3) Exhibits
EXHIBIT INDEX PAGE NUMBER
2.1 Asset Purchase Agreement and Non-U.S. Asset Purchase ---
Agreement, both related to the Pacesetter acquisition
and dated June 26, 1994, are incorporated by reference
to Exhibits 2.1 and 2.2 of the Company's Form 8-K filed
October 19, 1994
2.2 Siemens Pacesetter, Inc. and Affiliate and Siemens 25
Non-U.S. Cardiac Systems and Affiliates ("Pacesetter")
audited balance sheets as of September 30, 1994, 1993,
and 1992 audited income statements and statements of
cash flows for each of the three years ended September
30, 1994, and related notes thereto.
2.3 Unaudited pro forma combined statements of income for 76
the Company and Pacesetter for the nine months ended
September 30, 1994, and the year-ended December 31,
1993.
3.1 Articles of Incorporation are incorporated by reference ---
to Exhibit 3(a) of the Company's Form 8 filed on August
20, 1987, amending the Company's quarterly report on
Form 1O-Q for the quarter ended June 30, 1987
3.2 Bylaws are incorporated by reference to Exhibit 3B of ---
the Company's Form S-3 Registration Statement dated
September 25, 1986 (Commission File No. 33-8308)
4.1 Amended and Restated Rights Agreement dated as of June ---
26, 1990, between the Company and Norwest Bank
Minneapolis, N.A., as Rights Agent including the
Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock is
incorporated by reference to Exhibit 1 of the Company's
Form 8 Amendment 2 to Form 8-A dated July 6, 1990
10.1 Employment letter dated as of March 9, 1993, between ---
the Company and Ronald A. Matricaria is incorporated by
reference to Exhibit 10.1 of the Company's Form 10-K
Annual Report for the year ended December 31, 1993*
10.2 Supplemental Executive Retirement Plan and Trust ---
agreement dated April 12, 1993, between the Company and
Ronald A. Matricaria is incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K Annual Report
for the year ended December 31, 1993*
10.3 Supply Contract and Patent License Agreement dated ---
September 6, 1985, between the Company and CarboMedics,
Inc. is incorporated by reference to the Company's 8-K
Report dated September 20, 1985 Exhibit Page Number
10.4 Form of Indemnification Agreement that the Company has ---
entered into with officers and directors. Such
agreement recites the provisions of Minnesota Statutes
Section 302A.521 and the Company's Bylaw provisions
(which are substantially identical to the Statute) and
is incorporated by reference to Exhibit 1O(d) of the
Company's Form 1O-K Annual Report for the year ended
December 31, 1986*
10.5 Form of Employment Agreement that the Company has ---
entered into with officers relating to severance
matters in connection with a change in control is
incorporated by reference to Exhibit 10(f) of the
Company's Form 10-K Annual Report for the year ended
December 31, 1987*
10.6 Retirement Plan for members of the Board of Directors, 80
as amended on March 15, 1995.*
10.7 Management Savings Plan dated February 1, 1995* 87
10.8 Supplemental Executive Retirement Plan agreement dated ---
September 30, 1988, and as restated on April 9, 1993,
between the Company and Lawrence A. Lehmkuhl is
incorporated by reference to Exhibit 10.8 of the
Company's Form 10-K Annual Report for the year ended
December 31, 1993*
10.9 1989 Restricted Stock Plan is incorporated by reference ---
to the Company's Form S-8 Registration Statement dated
June 6, 1989 (Commission File No. 33-29085)*
10.10 The Management Incentive Compensation Plan is ---
incorporated by reference to Appendix A of the
Company's definitive Proxy Statement dated March 27,
1995*
10.11 Supply Contract dated April 17, 1990, between the ---
Company and CarboMedics, Inc. is incorporated by
reference to the Company's Form 8 filed on April 19,
1990 amending the Company's Form 10-K Annual Report for
the year ended December 31, 1989 (portions of this
exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to Rule
24b-2)
11 Computation of Earnings Per Share 115
13 1994 Annual Report to Shareholders. Except for those 116
portions of such report expressly incorporated by
reference in this Form 1O-K Annual Report, the Annual
Report to Shareholders is not deemed to be "filed" with
the Securities and Exchange Commission
21 Subsidiaries of the Company 160
23 Consent of Independent Auditors 161
27 Financial Data Schedule (For SEC use)
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K during the quarter ended December 31, 1994
Reports on Form 8-K filed by the Company during the fourth quarter
1994:
Form 8-K dated October 19, 1994
Item 2. Acquisition or Disposition of Assets - Acquisition of
Pacesetter
(c) Exhibits: Reference is made to Item 14(a)(3).
(d) Schedules: Reference is made to Item 14(a)(2).
For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned
Company hereby undertakes as follows, which undertaking shall be
incorporated by reference into Company's Registration Statements on
Form S-8 Nos. 33-9262 (filed October 3, 1986), 33-29085 (filed June 6,
1989), 33-41459 (filed June 28, 1991), 33-48502 (filed June 10, 1992)
and 33-54435 (filed July 1, 1994):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that, in
the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Company
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ST. JUDE MEDICAL, INC.
Date: March 27, 1995 By /s/ Ronald A. Matricaria
Ronald A. Matricaria
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ Stephen L. Wilson
Stephen L. Wilson
Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Ronald A. Matricaria Chairman of the March 27, 1995
Ronald A. Matricaria Board of Directors
/s/ Frank A. Ehmann Director March 27, 1995
Frank A. Ehmann
/s/ Thomas H. Garrett III Director March 27, 1995
Thomas H. Garrett III
/s/ Kenneth G. Langone Director March 27, 1995
Kenneth G. Langone
/s/ Lawrence A. Lehmkuhl Director March 27, 1995
Lawrence A. Lehmkuhl
/s/ William R. Miller Director March 27, 1995
William R. Miller
/s/ Charles V. Owens, Jr. Director March 27, 1995
Charles V. Owens, Jr.
/s/ Walter L. Sembrowich Director March 27, 1995
Walter L. Sembrowich
/s/ Roger G. Stoll Director March 27, 1995
Roger G. Stoll
/s/ Gail R. Wilensky Director March 27, 1995
Gail R. Wilensky
Report of Independent Auditors
We have audited the consolidated financial statements of St. Jude Medical, Inc.
as of December 31, 1994 and 1993, and for each of the three years in the period
ended December 31, 1994, and have issued our report thereon dated February 9,
1995. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young, LLP
February 9, 1995
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1994
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Balance at Beginning Additions Charged to Balance at End
Description of Period Expense Other Deductions of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts (3) $1,856 $ 715 $3,675(5) $486(1) $ 5,760
Products liability claims reserve (4) 401 1,181 ---- 82(2) 1,500
Year ended December 31, 1993
Allowance for doubtful accounts (3) 1,413 583 ---- 140(1) 1,856
Products liability claims reserve (4) 601 ---- ---- 200(2) 401
Year ended December 31, 1992
Allowance for doubtful accounts (3) 802 650 ---- 39(1) 1,413
Products liability claims reserve (4) 910 ---- ---- 309(2) 601
</TABLE>
(1) Reserve adjustments or uncollectible accounts written off, net of
recoveries.
(2) Settlements paid.
(3) Deducted from accounts receivable on the balance sheet.
(4) Included in accrued expenses on the balance sheet.
(5) Balance assumed in the Pacesetter acquisition.
EXHIBIT 2.2
Table of Contents
1. Siemens Pacesetter, Inc. and Affiliate
Report and Combined Financial Statements
September 30, 1994
2. Siemens Pacesetter, Inc.
Report and Financial Statements
September 30, 1992 and 1993
3. Non-U.S. Operations of Siemens Cardiac Systems
U.S. GAAP Financial Statements
Year Ended September 30, 1994
4. European Operations of Siemens Cardiac Systems
U.S. GAAP Financial Statements
For the Years Ended September 30, 1993 and 1992
The Company has been provided with these financial statements by Siemens.
These financial statements were the responsibility of Siemens management. The
auditors' reports relating to these financial statements are not included
because the Siemens' auditors have not granted the Company the necessary
consents to use them. The consents were withheld due to an ongoing dispute
between the Company and Siemens over final adjustments to the purchase price of
Pacesetter. The resolution of this dispute could possibly affect these financial
statements.
The Company intends to file Form 12b-25 "Notification of Late Filing" on
April 3, 1995, due to the omission of these auditors' reports in this Annual
Report on Form 10-K.
SIEMENS PACESETTER, INC.
AND AFFILIATE
REPORT AND COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
SIEMENS PACESETTER, INC. AND AFFILIATE
COMBINED BALANCE SHEET ($ IN THOUSANDS)
SEPTEMBER 30, 1994
ASSETS
Cash $ 605
Accounts receivable (net of allowance
for doubtful accounts of $611) 42,983
Inventories (Note 3) 62,164
Due from affiliates 12,500
Deferred taxes (Note 5) 6,884
Prepaid expenses 627
Total current assets 125,763
Property and equipment, net (Note 4) 32,110
Intangible assets, net 45,734
Deferred taxes (Note 5) 1,049
Other assets 5,000
Net intercompany receivable (Note 7) 79,300
Total assets $ 288,956
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable $ 28,466
Accrued expenses 31,852
Income taxes payable (Note 5) 23,134
Due to affiliates (Note 7) 8,627
Total current liabilities 92,079
Other noncurrent liabilities (Note 8) 2,381
Commitments and contingencies (Notes 6 and 10)
Common stock, $1.00 par value, 1,000
shares authorized, issued and outstanding 1
Additional paid-in capital 98,642
Retained earnings 95,853
Total shareholder's equity 194,496
Total liabilities and shareholder's equity $ 288,956
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS ($ IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Net sales $ 294,549
Cost of products sold 82,422
GROSS PROFIT 212,127
Operating expenses
Selling 75,768
General and administrative 28,668
Research and development 24,988
Royalties 17,438
Depreciation and amortization 11,086
TOTAL OPERATING EXPENSES 157,948
Operating income 54,179
Interest income 2,344
Other expense (162)
INCOME BEFORE INCOME TAXES 56,361
Provision for income taxes 22,013
NET INCOME 34,348
Retained earnings, beginning of year 61,505
RETAINED EARNINGS, END OF YEAR $ 95,853
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Cash flows from operating activities:
Net income $ 34,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,215
Deferred income taxes 5,215
Changes in assets and liabilities:
Accounts receivable, net (10,922)
Inventories (6,519)
Due from affiliates 1,471
Prepaid expenses 342
Other assets 94
Accounts payable 13,226
Accrued expenses (12,203)
Income taxes payable 22,265
Other noncurrent liabilities (3,431)
NET CASH PROVIDED BY OPERATING ACTIVITIES 57,101
Cash flows from investing activities:
Net capital additions (18,589)
NET CASH USED IN INVESTING ACTIVITIES (18,589)
Cash flows from financing activities:
Net intercompany receivable (38,240)
NET CASH USED IN FINANCING ACTIVITIES (38,240)
Net increase in cash 272
Cash at beginning of year 333
Cash at end of year $ 605
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS)
SEPTEMBER 30, 1994
1. BASIS OF PRESENTATION
Siemens Pacesetter, Inc. (the "Company"), a Delaware corporation, is engaged in
the design, manufacture and sale of cardiac pacing systems. The Company is a
wholly owned subsidiary of Siemens Corporation ("Siemens"). The accompanying
financial statements have been prepared as if the Company had operated as an
independent stand alone entity for the period presented.
These financial statements also include the pacing operations of Siemens
Electric, Limited, (a wholly owned subsidiary of Siemens AG) the Company's
Canadian affiliate. All material intercompany accounts and transactions have
been eliminated.
The Company has been sold to a public company effective September 30, 1994. The
accompanying financial statements do not include any adjustments which may
result from this change in ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the more significant accounting policies followed by the Company in
preparing these financial statements is as follows:
REVENUES AND RECEIVABLES
The Company sells its products primarily to hospitals and distributors, both
domestically and internationally. Revenues and receivables are generally
recorded when products are implanted in patients. The Company's sales are
concentrated primarily in North America. Concentration of credit risk with
respect to trade receivables is limited due to the large number of customers
comprising the Company's customer base and their geographic dispersion. The
Company does not require collateral and maintains reserves for potential credit
losses which historically have been consistent with management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from three to
eight years. Additions and betterments are capitalized. Maintenance and repairs
are charged to expense as incurred. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the term of the lease. When
property or equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts. Gains or losses from
retirements and disposals are recorded as other income or expense.
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets, which arise principally from the acquisition of the Company's
predecessor by Siemens in 1985, are recorded at cost, less accumulated
amortization. The excess of cost over the fair value of net assets acquired at
the date of acquisition is amortized over a period not exceeding 30 years. Other
intangible assets, including licensing agreements, are amortized over the
shorter of the term of the agreement or their estimated useful lives.
Amortization is recorded using the straight-line method. Accumulated
amortization totalled $39,080 at September 30, 1994.
The Company monitors its goodwill and other intangibles to determine whether any
impairment of these assets has occurred. In making such determination with
respect to goodwill, the Company evaluates the operating performance of the
underlying product lines and business which gave rise to such amount. With
respect to other intangibles, the Company bases its determination on the
performance of the related products.
PROVISION FOR WARRANTY CLAIMS
Provision for warranty costs are recorded at the time products are sold and are
reviewed and adjusted by management periodically to reflect actual and
anticipated experience.
INCOME TAXES
Siemens' consolidated income tax provision has generally been allocated to the
Company as if the Company filed separate income tax returns.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) during fiscal
1994. Under the provisions of SFAS No. 109, deferred tax liabilities or assets
reflect the tax effects of temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities. In estimating
deferred tax balances, the Company considers all expected future events other
than enactments of changes in the tax law or rates. The cumulative and current
year impact effect of this accounting change was not material to the financial
position and operating results of the Company.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
3. INVENTORIES
Inventories consist of the following:
Raw materials $25,235
Work in process 18,142
Finished goods 18,787
$62,164
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Programmers $30,222
Test equipment 16,615
Computer equipment 15,620
Machinery and equipment 6,652
Furniture and fixtures 4,983
Tooling and molds 4,396
Building 6,008
Land 2,841
87,337
Less - Accumulated depreciation (55,227)
$32,110
Depreciation expense for the year ended September 30, 1994 aggregated $9,771.
SIEMENS PACESETTER, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS)
SEPTEMBER 30, 1994
5. INCOME TAXES
The provision for income taxes for the year ended September 30, 1994 is
comprised of the following:
Current provision:
Federal $ 14,751
State 2,047
16,798
Deferred provision:
Federal $ 3,752
State 1,463
Total provision for income taxes $ 22,013
The difference between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate are as follows:
Amount computed using the statutory rate $ 19,726
Increase in taxes resulting from:
State and other income taxes, net of federal benefit 2,281
Amortization of intangibles 575
Research and development credit (780)
Other, net 211
Provision for income taxes $ 22,013
Deferred tax liabilities and assets at September 30, 1994 comprised the
following items:
Deferred tax liabilities:
Depreciation $ 834
Subtotal 834
Deferred tax assets:
Payroll and related items 3,723
Warranties 1,858
Inventories 1,907
Pension 975
Other 304
Subtotal 8,767
Net deferred tax assets $ 7,933
SIEMENS PACESETTER, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS)
SEPTEMBER 30, 1994
6. COMMITMENTS
On August 26, 1992, the Company entered into a cross licensing agreement which
requires royalty payments at varying rates on future sales of cardiac
stimulation devices for a period of ten years.
The Company has entered into employment and severance agreements with six key
executive employees which expire at various dates through October 1998. The
aggregate commitment for future salaries under these employment agreements is
approximately $7,967.
In November 1993, the Company established a supplemental executive retirement
plan for the purposes of attracting and retaining key executives by providing
selected executives with supplemental pension benefits. This plan also provides
certain enhanced retirement benefits, based principally upon years of service,
in the event of a sale of the Company prior to the executive's retirement.
The Company leases its principal facility from a related party. In addition, the
Company has entered into various other leases for certain facilities and
equipment. Some leases require, in addition to rental payments, the payment of
property taxes and maintenance costs. Net rental expense under all operating
leases for the year ended September 30, 1994 were $3,644. Total minimum rental
payments in each of the following five fiscal years are as follows:
1995 $ 3,729
1996 3,677
1997 3,601
1998 3,467
1999 3,338
Thereafter 3,750
7. TRANSACTIONS WITH AFFILIATES
Effective October 1, 1994, the Company purchased certain facilities from an
affiliate for an aggregate total purchase price of $8,800, which approximated
the affiliate's net book value as of the date of sale.
The Company is allocated an amount for Siemens' general corporate expenses. In
addition, the Company is charged for certain other amounts incurred by Siemens
that directly benefit or are specifically related to the Company, such as
insurance premiums, employee benefits costs, tax services and legal fees.
Corporate charges totalled $2,745 for the year ended September 30, 1994. In the
opinion of management, the allocation methods used to allocate general corporate
and other expense are reasonable and adequate, but not excessive, as compared to
the services provided.
Pursuant to an intercompany tax sharing agreement, the Company pays Siemens an
amount equal to the Company's income tax liability as calculated on a separate
return basis.
The Company also participates in Siemens' centralized cash management system.
Under this system, cash received from the Company's operations is transferred to
Siemens' centralized cash accounts and cash disbursements are funded from the
centralized accounts.
8. EMPLOYEE BENEFIT PLANS
SIEMENS U.S. DEFINED BENEFIT PLAN
The Company has a pension plan for its employees. Employees are included in
Siemens Retirement Plan and, accordingly, $1,374 was allocated to the Company by
Siemens for its share of salaried employees' pension expense for the year ended
September 30, 1994. At September 30, 1994, accrued pension costs relating to the
Company's participation in the pension plan were $2,381. This amount is reported
as other noncurrent liabilities in the accompanying balance sheet.
DEFINED CONTRIBUTION PLAN
The Company also maintains a defined contribution plan for the benefit of its
employees. This plan enables employees to contribute up to the maximum limits
allowed by Internal Revenue Code Section 401(k). The Company also matches a
portion of the employee's contribution. Such contributions are made in
accordance with the provisions of the plan. The Company's has accrued a
contribution of $1,050 related to the year ended September 30, 1994.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 107, "Disclosures About Fair Value of
Financial Statements." This Statement requires companies to disclose an estimate
of the fair value of financial instruments, both on and off balance sheet, if it
is practical to do so. Fair value is defined as the amount at which an
instrument could be exchanged in a current transaction. The recorded amounts of
the Company's financial instruments, principally cash, accounts receivable and
accounts payable, approximate their fair values.
10. CONTINGENCIES
The Company is a defendant in a class action lawsuit filed by recipients of
certain of its cardiac pacing products. The matter is currently in pretrial
discovery. Management is unable to predict the ultimate outcome of this action
or its effect on the Company's results of operations and financial position.
The Company is a defendant in various other lawsuits which are normal to the
nature of its business. In addition, the Company is the subject of examinations
being conducted by certain local tax authorities regarding both property taxes
and sales and use taxes. At the present time, the examinations are not yet
completed and an assessment, if any, has not yet been made. Management believes
that the ultimate resolution of these matters will not have a materially adverse
effect on the Company's financial position or results of operations.
In January 1994, the Company's principal manufacturing facility in Sylmar,
California was damaged in the Northridge Earthquake. The Company has filed
insurance claims in the amount of $13,500 of which $6,500 has been collected to
date. Management anticipates filing additional claims.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the year ended September 30, 1994, the Company paid $2,120 and $527 for
interest and income taxes, respectively.
SIEMENS PACESETTER, INC.
REPORT AND FINANCIAL STATEMENTS
SEPTEMBER 30, 1992 AND 1993
SIEMENS PACESETTER, INC.
BALANCE SHEET ($ IN THOUSANDS)
SEPTEMBER 30,
1992 1993
ASSETS
Cash $ 4,933 $ 333
Accounts receivable (net of allowance
for doubtful accounts of $385 and $457) 33,898 32,061
Inventories (Note 3) 66,507 55,645
Deferred taxes (Note 5) 8,261 9,558
Due from affiliates 5,345 6,321
Prepaid expenses 988 969
TOTAL CURRENT ASSETS 119,932 104,887
Property and equipment, net (Note 4) 25,814 23,377
Intangible assets, net 52,402 49,093
Deferred taxes (Note 5) 4,513 3,590
Other assets 1 5,094
Net intercompany receivable (Note 7) 40,404
TOTAL ASSETS $202,662 $226,445
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable $ 13,387 $ 15,930
Accrued expenses 25,174 44,924
Due to affiliates (Note 7) 3,682 287
Net intercompany payable (Note 7) 11,232
TOTAL CURRENT LIABILITIES 53,475 61,141
Other noncurrent liabilities (Note 8) 4,258 5,812
Commitments and contingencies (Notes 6, 10 and 12)
Common stock, $1 per share par value, 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 98,642 98,642
Retained earnings 46,286 60,849
TOTAL SHAREHOLDER'S EQUITY 144,929 159,492
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $202,662 $226,445
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS ($ IN THOUSANDS)
FOR THE YEAR ENDED
SEPTEMBER 30,
1992 1993
Net sales $ 255,796 $ 254,701
Cost of products sold 66,861 77,374
GROSS PROFIT 188,935 177,327
Operating expenses
Selling 67,810 67,991
General and administrative 35,741 21,736
Research and development 20,913 23,429
Royalties 3,565 13,663
Depreciation and amortization 11,293 11,477
TOTAL OPERATING EXPENSES 139,322 138,296
Operating income 49,613 39,031
Settlement of litigation (Note 10) 50,700
Interest income (2,081) (4,086)
Interest expense 1,742 3,390
Other expense 1,352 750
INCOME (LOSS) BEFORE INCOME TAXES (2,100) 38,977
Provision for income taxes 898 15,275
NET INCOME (LOSS) (2,998) 23,702
Retained earnings, beginning of year 52,483 46,286
Less: dividends paid (3,199) (9,139)
RETAINED EARNINGS, END OF YEAR $ 46,286 $ 60,849
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC.
STATEMENT OF CASH FLOWS ($ IN THOUSANDS)
FOR THE YEAR ENDED
SEPTEMBER 30,
1992 1993
Cash flows from operating activities:
Net income (loss) $ (2,998) $ 23,702
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 13,733 13,607
Deferred income taxes (1,661) (374)
Changes in assets and liabilities
Accounts receivable, net (1,434) 1,837
Inventories (14,547) 10,862
Prepaid expenses 456 19
Due from affiliates (1,983) (4,371)
Other assets 317 (5,093)
Accounts payable (5,267) 2,543
Accrued expenses (24,907) 8,512
Other noncurrent liabilities 1,238 1,554
NET CASH PROVIDED BY OPERATING ACTIVITIES (37,052) 52,798
Cash flows from investing activities:
Net capital additions (14,182) (7,855)
NET CASH USED IN INVESTING ACTIVITIES (14,182) (7,855)
Cash flows from financing activities:
Dividends paid (3,199) (9,139)
Net intercompany receivable 55,552 (40,404)
NET CASH USED IN FINANCING ACTIVITIES 52,353 (49,543)
NET INCREASE (DECREASE) IN CASH 1,119 (4,600)
Cash at beginning of year 3,814 4,933
Cash at end of year $ 4,933 $ 333
The accompanying notes are an integral part of these financial statements.
SIEMENS PACESETTER, INC.
NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS)
1. BASIS OF PRESENTATION
Siemens Pacesetter, Inc. (the "Company"), a Delaware corporation, is engaged
in the design, manufacture and sale of cardiac pacing systems. The Company is
a wholly owned subsidiary of Siemens Corporation ("Siemens"). The
accompanying financial statements have been prepared as if the Company had
operated as an independent stand alone entity for the period presented.
These financial statements exclude the assets, liabilities, revenues and
expenses of Siemens Infusion Systems, Inc. (including its predecessor Minimed
Technologies) and Siemens Infusion Systems, Ltd., a California limited
partnership, both of which are affiliates of the Company but which are not
engaged in the cardiac pacing business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the more significant accounting policies followed by the Company
in preparing these financial statements is as follows:
REVENUES AND RECEIVABLES
The Company sells its products primarily to hospitals and distributors, both
domestically and internationally. Revenues and receivables are generally
recorded when products are implanted in patients. The Company's sales are
concentrated primarily in North America. Concentration of credit risk with
respect to trade receivables is limited due to the large number of customers
comprising the Company's customer base and their geographic dispersion. The
Company does not require collateral and maintains reserves for potential
credit losses which historically have been consistent with management's
expectations.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from three to
eight years. Additions and betterments are capitalized. Maintenance and
repairs are charged to expense as incurred. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the
lease. When property or equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts.
Gains or losses from retirements and disposals are recorded as other income
or expense.
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets, which arise principally from the acquisition of the
Company's predecessor by Siemens in 1985, are recorded at cost, less
accumulated amortization. The excess of cost over the fair value of net
assets acquired at the date of acquisition is amortized over a period not
exceeding 30 years. Other intangible assets, including licensing agreements,
are amortized over the shorter of the term of the agreement or their
estimated useful lives. Amortization is recorded using the straight-line
method. Accumulated amortization totalled $32,434, and $35,731 at September
30, 1992 and 1993, respectively.
The Company monitors its goodwill and other intangibles to determine whether
any impairment of these assets has occurred. In making such determination
with respect to goodwill, the Company evaluates the performance of the
underlying entity which gave rise to such amount. With respect to other
intangibles, the Company bases its determination on the performance of the
related products.
PROVISION FOR WARRANTY CLAIMS
Provision for warranty costs are recorded at the time products are sold and
are reviewed and adjusted by management periodically to reflect actual and
anticipated experience.
INCOME TAXES
Siemens' consolidated income tax provision has generally been allocated to
the Company as if the Company filed separate income tax returns.
Income taxes have been determined under Statement of Financial Accounting
Standards No. 96, "Accounting for Income Taxes", which requires that any
deferred tax liability or asset be determined based upon the differences
between the financial statement and tax bases of assets and liabilities as
measured by enacted tax rates in effect in the years in which the differences
are expected to reverse. The total tax expense is the amount of income taxes
expected to be payable for the current year plus (or minus) the change from
the beginning of the year in the deferred tax liability or asset established
for the expected future tax consequences resulting from differences in the
financial reporting and tax bases of assets and liabilities.
In February 1992, the Financial Accounting Standards Boards released
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The Company expects to adopt this standard in fiscal 1994. The impact
on the Company's financial statements which will result from the adoption of
this standard has not been determined.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
3. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30,
1992 1993
Raw materials $16,461 $15,456
Work in process 18,245 14,975
Consigned inventory 15,915 16,661
Finished goods 15,886 8,553
$66,507 $55,645
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
1992 1993
Programmers $26,452 $28,023
Test equipment 13,360 14,532
Computer equipment 9,976 12,902
Machinery and equipment 4,376 5,944
Furniture and fixtures 7,819 4,844
Tooling and molds 2,796 3,861
64,779 70,106
Less - Accumulated depreciation 38,965 46,729
$25,814 $23,377
Depreciation expense for the years ended September 30, 1992 and 1993
aggregated $9,873 and $10,298, respectively.
5. INCOME TAXES
The provision for income taxes is as follows:
SEPTEMBER 30,
1992 1993
Federal income taxes:
Current provision $ 1,802 $ 13,454
Deferred provision (1,661) (374)
State income taxes:
Current provision 757 2,195
$ 898 $ 15,275
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate are as follows:
SEPTEMBER 30,
1992 1993
Amount computed using the statutory rate $ (714) $ 13,642
Increase in taxes resulting from:
State and other income taxes, net of federal benefit 500 1,466
Amortization of intangibles 703 588
Research and development credit (339) (876)
Change in tax rates 347
Other permanent items 514 157
Other, net 234 (49)
Provision for income taxes $ 898 $ 15,275
The significant components of the Company's deferred tax assets are as
follows:
SEPTEMBER 30,
1992 1993
Payroll and related items $ 3,959 $ 3,840
Warranties 1,780 1,909
Inventories 2,613 2,272
Pension 1,822 2,379
Accrued expenses 1,498 1,349
Other, net 1,102 1,399
TOTAL DEFERRED TAX ASSETS $ 12,774 $ 13,148
6. COMMITMENTS
On August 26, 1992, the Company entered into a cross licensing agreement
which requires royalty payments at varying rates on future sales of cardiac
stimulation devices for a period of ten years (See Note 10).
The Company has entered into employment and severance agreements with six key
executive employees which expire at various dates through October 1998. The
aggregate commitment for future salaries under these employment agreements is
approximately $10,144.
In November 1993, the Company established a supplemental executive retirement
plan for the purposes of attracting and retaining key executives by providing
selected executives with supplemental pension benefits. This plan also
provides certain enhanced retirement benefits, based principally upon years
of service, in the event of a sale of the Company prior to the executive's
retirement.
The Company leases its principal facility from a related party. In addition,
the Company has entered into various other leases for certain facilities and
equipment. Some leases require, in addition to rental payments, the payment
of property taxes, and maintenance costs. Net rental expense under all
operating leases for the years ended September 30, 1992 and 1993 were $3,795
and $3,780, respectively. Total minimum rental payments in each of the
following five fiscal years are as follows:
1994 $ 3,788
1995 3,774
1996 3,703
1997 3,475
1998 3,398
Thereafter 3,329
7. TRANSACTIONS WITH PARENT
The Company is allocated an amount for Siemens' general corporate expenses.
In addition, the Company is charged for certain other amounts incurred by
Siemens that directly benefit or are specifically related to the Company,
such as insurance premiums, employee benefits costs, tax services and legal
fees. Corporate charges totalled $1,857 and $2,220 for the years ended
September 30, 1992 and 1993, respectively. In the opinion of management, the
allocation methods used to allocate general corporate and other expense are
reasonable and adequate, but not excessive, as compared to the services
provided.
The Company both purchases and sells cardiac pacing devices to an affiliate
in Europe. At September 30, 1992 and 1993, the Company has amounts due from
this affiliate of $5,345 and $5,923, respectively. Sales made to this
affiliate for the years ended September 30, 1992 and 1993 aggregated $32,666
and $30,584, respectively. In addition, the Company had purchases of $2,254
and $2,910 for the years ended September 30, 1992 and 1993, respectively,
from the affiliate.
Pursuant to an intercompany tax sharing agreement, the Company pays Siemens
an amount equal to the Company's liability on a separate return basis.
The Company also participates in Siemens' centralized cash management system.
Under this system, cash received from the Company's operations is transferred
to Siemens' centralized cash accounts and cash disbursements are funded from
the centralized accounts.
8. EMPLOYEE BENEFIT PLANS
SIEMENS U.S. DEFINED BENEFIT PLAN
The Company has a pension plan for its employees. Employees are included in
Siemens Retirement Plan and, accordingly, $1,657 and $1,554 was allocated to
the Company by Siemens for its share of salaried employees' pension expense
for the years ended September 30, 1992 and 1993, respectively. At September
30, 1992 and 1993 accrued pension costs relating to the Company's
participation in the pension plan were $4,258 and $5,812, respectively. This
amount is reported as other noncurrent liabilities in the accompanying
balance sheet.
DEFINED CONTRIBUTION PLAN
The Company also maintains a defined contribution plan for the benefit of its
employees in the United States. This plan enables employees to contribute up
to the maximum limits allowed by Internal Revenue Code Section 401(k). The
Company also matches a portion of the employee's contribution. Such
contributions are made in accordance with the provisions of the plan. The
Company's contribution amounted to $842 and $885 during the years ended
September 30, 1992 and 1993, respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 107, "Disclosures About Fair Value of
Financial Statements." This Statement requires companies to disclose an
estimate of the fair value of financial instruments, both on and off balance
sheet, if it is practical to do so. Fair value is defined as the amount at
which an instrument could be exchanged in a current transaction. The recorded
amounts of the Company's financial instruments, principally cash, accounts
receivable and accounts payable, approximate their fair values.
10. LEGAL MATTERS
On August 26, 1992, a patent infringement dispute with a publicly held
company was settled. The settlement resulted in the Company making a $50
million nonrefundable payment, a $25 million payment which is refundable
under specific conditions and payment of royalties based upon future sales
of pacemakers beginning August 1, 1992 for a period of ten years.
The Company is a defendant in a class action lawsuit filed by recipients of
certain of its cardiac pacing products. The matter is currently in pretrial
discovery. Management is unable to predict the ultimate outcome of this
action or its effect on the Company's results of operations and financial
position.
In February 1994, Siemens Medical System, Inc., the immediate parent of the
Company, entered into a Consent Order with the United States Food and Drug
Administration ("FDA"). Pursuant to its terms, the Company is obligated to
correct all deficiencies, if any, in the area of good manufacturing
practices ("GMP") alleged by the FDA since January 1, 1992, to comply with
such GMP regulations, and to certify to the FDA the actions taken to ensure
such compliance. No fines, penalties or recalls were imposed as a result of
this action. The certification called for by the Consent Order was submitted
on April 18, 1994. Management does not believe the ultimate resolution of
this matter will have a material adverse effect on the Company's financial
position or results of operations.
The Company is a defendant in various other lawsuits which are normal to the
nature of its business. Management believes that the ultimate resolution of
these matters will not have a materially adverse effect on the Company's
financial position or results of operations.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the year ended September 30, 1992, the Company paid $1,742 and $21,899
for interest and income taxes, respectively.
For the year ended September 30, 1993, the Company paid $3,390 and $2,559
for interest and income taxes, respectively.
12. SUBSEQUENT EVENTS
In January 1994, the Company's principal manufacturing facility in Sylmar,
California was damaged in the Northridge earthquake. The Company has filed
insurance claims which are subject to the insurer's audit.
In October 1993, the Company agreed to purchase certain real property and
buildings located near its principal facility from an affiliated company.
The total purchase price approximated $9 million.
Subsequent to September 30, 1993, Siemens Medical Systems, Inc. retained an
investment advisor in order to pursue the sale of the Company. On June 26,
1994 an agreement was reached to sell the Company subject to the fulfillment
of certain conditions precedent to the closing, including approval by
certain regulatory authorities.
NON-US OPERATIONS OF
SIEMENS CARDIAC SYSTEMS
US GAAP FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1994
NON-US OPERATIONS OF SIEMENS CARDIAC SYSTEMS
COMBINED BALANCE SHEET ($ IN THOUSANDS)
September 30, 1994
ASSETS
Cash $ 1,038
Accounts receivable, net 42,621
Inventories, net 30,848
Due from affiliates 1,030
Deferred income taxes 3,754
Prepaid expenses 430
Total current assets 79,721
Property and equipment, net 6,734
Other assets 47
TOTAL ASSETS $ 86,502
LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY
Accounts payable - to affiliates $ 12,399
Accounts payable - other 3,586
Accrued expenses 6,908
Notes payable - Siemens 3,401
Current deferred income taxes 1,067
Total current liabilities 27,361
Pension and employee termination obligations 0
Deferred income taxes 2,883
Common stock 1,684
Division equity and paid in capital 66,157
Cumulative translation adjustment - 11,583
Total shareholder's and division equity 56,258
TOTAL LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY $ 86,502
COMBINED STATEMENT OF INCOME ($ IN THOUSANDS)
Year ended September 30, 1994
Net sales $152,906
Cost of products sold 74,940
Gross profit 77,966
Operating expenses
Selling expenses 37,638
General and administrative 9,047
Research and development 9,282
Royalties 5,486
Other expense (income) 15
Total operating expenses 61,468
Operating income 16,498
Interest expense (income) 952
Income before income taxes 15,546
Provision for income taxes 5,575
NET INCOME $ 9,971
COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS)
Year ended September 30, 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,971
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Depreciation and amortization 2,790
Provision for deferred income taxes 1,321
Changes in assets and liabilities:
Accounts receivable, net 10,856
Inventories, net -2,927
Other -9,896
Accounts payable and accrued expenses -2,846
Net cash provided by operating activities 9,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -2,640
Net cash (used) for investing activities -2,640
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease / increase in amounts due parent -6,520
Net cash (used in) financing activities -6,520
Effect of exchange rate changes on cash 65
Net increase (decrease) in cash 174
Cash at beginning of year 864
Cash at end of year $ 1,038
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company's primary business is the design, manufacture and sale of
cardiac pacemakers. The accompanying financial statements include the
accounts of the following entities which comprise the Non-US Operations of
the Company:
- Siemens Cardiac Systems Business in Sweden, a division of Siemens-Elema
AB.
- Siemens Cardiac Systems Business in Germany, a part of the Siemens
Medical Division of Siemens AG.
- Siemens Cardiac Systems Business in Italy, a part of Siemens S.P.A.
- Siemens Pacesetter S.A. in France, a wholly-owned subsidiary of Siemens
S.A.
- Siemens Cardiac Systems Business in Spain, a part of Siemens S.A..
- Medical Production Ltd., in the United Kingdom, a subsidiary of Siemens
plc.
The combined financial statements also include sales of affiliated cardiac
systems products in the United Kingdom, Denmark, Belgium, Finland, Austria,
Netherlands, Portugal, Venezuela, Croatia and South Africa, and will in the
following be referred to as "the Company" or "Non-US Operations".
The accompanying combined financial statements have been prepared as if the
Non-US Operations of the Company, described above, had operated as a stand
alone entity for the period presented. These combined financial statements
include substantially all of the combined assets, liabilities, revenues and
expenses of certain divisions and subsidiaries of Siemens which comprise
Siemens' Non-US Cardiac Pacing Operations. All material transactions
between entities included in the combined financial statements have been
eliminated.
As further discussed in note 10, in connection with the sale of the
business (see note 14), certain employee related benefit liabilities, that
are the direct responsibility of Siemens-Elema AB and certain other parent
companies, have been excluded from liabilities in this presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the more significant accounting policies followed by the
Non-US Operations in preparing these financial statements is as follows:
Revenues and receivables
The Non-US Operations sell their products primarily to hospitals and
distributors. Sales are concentrated primarily in Europe and Japan.
Revenues and receivables are generally recorded when products are implanted
in patients. Concentration of credit risk with respect to trade receivables
is limited due to the large number of customers comprising the Non-US
Operations' customer base and their dispersion across many different
geographies. The Non-US Operations do not require collateral and maintain
reserves for potential credit losses which historically have been
consistent with management's expectations.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Property and equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from three to eight years. Additions and betterments are capitalized.
Maintenance and repairs are charged to operations as incurred. Leasehold
improvements are amortized over the lesser of the useful lives of the
assets or the term of the lease. When property or equipment is retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts. Gains or losses from retirements and disposals
are recorded as other income or expense.
Provision for warranty claims
Provision for warranty costs are recorded at the time products are sold and
are reviewed and adjusted by management periodically to reflect actual and
anticipated experience.
Translation of currency
Each of the divisions, parts of divisions and subsidiaries that comprise
the Non-US Operations operate in their local currency environment. Assets
and liabilities are translated to U.S. dollars at year-end exchange rates.
Income and expense items are translated at average rates of exchange
prevailing during the year. Translation gains and losses are accumulated in
a separate component of Stockholders' Equity. Foreign currency transaction
gains and losses affecting cash flows are included in current earnings.
Transaction losses totalled $ 1,251 in 1994, and the gains amounted to
$ 924.
Income taxes
Income taxes have been determined under Statement of Financial Accounting
Standards No. 96, "Accounting of Income Taxes" which requires that any
deferred tax liability or asset be determined based upon the differences
between the financial statement tax basis of assets and liabilities as
measured by enacted tax rates in effect when these differences are expected
to reverse. The total tax expense is the amount of income taxes expected to
be payable for the current year plus (or minus) the change from the
beginning of the year in the deferred tax liability or asset established
for the expected future tax consequences resulting from differences in the
financial reporting and tax bases of assets and liabilities.
In February 1992, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The impact of this standard on the Operations' results of
operations and financial position is not expected to be material.
The Non-US Operations have operated as various divisions, parts of
divisions and subsidiaries of Siemens AG and its subsidiaries. Generally,
no allocations of tax have been made to the entities comprising most of the
Non-US Operations. Therefore, the income tax provision has been calculated
as if the divisions had filed separate tax returns. Resulting current
income taxes payable have been recorded as division equity except for
certain subsidiaries which are direct taxpaying entities.
Research and development
Research and development costs are expensed as incurred and amounted to
$ 9,282 for the year ended September 30, 1994.
Cash flow information
Cash paid for interest and income taxes was $ 889 and $ 5,766,
respectively, for the year ended September 30, 1994.
Substantially all of the Non-US Operations cash payments for income taxes
are made to the parent companies in the various countries.
Carve-out assumptions
The Company has not historically accounted for the divisions and parts of
divisions in its Non-US Operations separately. Generally, all assets,
liabilities, revenue and expense associated with these divisions have been
identified and reported herein. The components of beginning equity and
intercompany balances cannot be identified as there has never been any
specific identification of these amounts with the divisions. These amounts
are aggregated and reported as division equity. Generally, the divisions
have no debt and no related interest expense. This is consistent with the
historical trend that most of the divisions have generated cash rather than
used cash. One of the divisions has been a historical user of capital and
pays interest to its parent company based on its working capital needs.
This allocation is reported as interest expense of $ 454. The hypothetical
debt is included in division equity. Debt and related interest and equity
of subsidiary companies (rather than divisions) is reported herein as it
specifically relates to the subsidiary companies.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
September 30, 1994
Accounts receivable 46,190
Less - allowance for doubtful accounts - 3,569
$ 42,621
4. INVENTORIES
Inventories consist of the following:
September 30, 1993
Raw materials $ 5,872
Work in process 5,684
Consigned inventory 9,833
Finished goods 11,739
Less - obsolescence reserve - 2,280
$ 30,848
Consigned inventory consists of finished goods held by hospitals.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, 1993
Programmers $ 5,369
Test equipment 3,484
Computer equipment 4,355
Machinery and equipment 4,887
Furniture and fixtures 1,760
Tooling and molds 1,213
21,068
Less - accum. depreciation & amortization - 14,336
$ 6,734
6. INCOME TAXES
The provision for income taxes consists of the following:
Current 5,388
Deferred 187
5,575
The significant components of deferred tax assets and liabilities were as
follows:
Deferred tax Deferred tax
assets liabilities
Temporary differences 1,067
Statutory deferral 2,847
Warranty and accruals 92
Intercompany profit elimination 3,662
Other 36
3,754 3,950
For presentation purposes, deferred tax assets and liabilities are offset
within taxing jurisdictions but not between jurisdictions.
Division equity and retained earnings of the Operations are generally
considered to be permanently reinvested except in certain countries where
lack of dividends would result in additional taxes. If earnings were
remitted assuming a U.S. parent, the remittance would be substantially free
of additional U.S. tax assuming the foreign tax credits generated could be
utilized in the tax return of the parent.
7. RENTAL AND LEASE COMMITMENTS
The approximate amounts of noncancellable operating lease commitments with
terms of greater than one year, principally for the rental of buildings in
France and the United Kingdom are as follows:
Fiscal year ending September 30
1994 $ 690
1995 676
1996 596
1997 552
1998 445
Thereafter 445
$ 3,404
8. ACCRUED EXPENSES
Accrued liabilities consist of the following:
Licence fees $ 1,530
Employee withholding taxes 329
Warranty provision 1,028
Social fees 275
Commissions 139
Other 3,607
$ 6,908
9. TRANSACTIONS WITH PARENT AND AFFILIATES
In determining the operating expenses of the entities included herein which
are not stand alone entities, allocations were made of the general
corporate expenses of the respective parent companies and divisions based
on employees, sales and square footage as appropriate. These allocations
comprise most of the operating expenses. These charges included $ 1,115 for
rent of facilities.
Most of the Non-US Operations are divisions of companies within their
respective countries which take part in a cash management system
administered by the parent company in each country. As such, the divisions
have no cash and payables, and receivables are settled through division
equity. Accounts payable in the financial statements consist generally of
invoices which have not been forwarded to the system for payment. Accrued
expenses are generally estimates of the amounts which remain unpaid through
the system. From the division's perspective, these amounts are settled when
forwarded to the payment system.
Included in net sales is approximately $ 4,000 of sales (2.6 % of total
sales) made through Siemens affiliates whose operations are not included in
this presentation. These affiliates generally mark up the product
additionally for sales to third parties. The additional revenues, costs and
effect of any inventory held at September 30 are not reflected in these
financial statements. The most significant of these arrangements involves
sales to affiliates in India, Argentina, Norway and in the Czech Republic.
The French subsidiary has until September 30, 1994, participated in a
central foreign exchange clearing house sponsored by Siemens AG. The
clearing house has allowed for short term borrowings at interest rates
which range from 7.4 % to 7.8 %. The amount related to these borrowings are
presented in the financial statement as "Notes payable - Siemens".
The Company both purchases and sells cardiac pacing devices to an affiliate
in the United States. At September 30, 1994, the Company owed $ 12,333 to
this affiliate. Sales made to this affiliate for the year ended September
30, 1994 aggregated $ 233. In addition, the Company had purchases of
$ 39,990 from this affiliate.
10. EMPLOYEE BENEFIT PLANS
The Non-US Operations participate in various defined benefit and government
sponsored plans. The benefits are generally based on years of service and
employees' compensation. The required contributions vary with the legal
requirements in each jurisdiction. The Non-US Operations' largest employee
group is located in Sweden and participates in the Siemens-Elema AB defined
benefit pension plan. Net allocated pension cost for the year ended
September 30, 1994 was $ 560.
The net pension cost allocated to Cardiac Systems Solna by Siemens-Elema AB
which compares to $319 if pension expenses were determined in accordance
with FAS 87. The plan is non-contributory and provides benefits based on
salary levels and length of service. A portion of the benefits are paid up
and fully insured and are therefore excluded from the analysis. The
remaining benefits are the responsibility of Siemens-Elema AB, and although
insured with the Pension Guarantee Mutual Insurance Company, are payable
out of the assets of the company.
In connection with the sale of the Non-US Operations, see note 14, the
obligation of Siemens-Elema AB and the other parent companies of the Non-US
Operations are to be assumed by the Buyer. In that connection,
Siemens-Elema AB provided funds of approximately $7 million to the Buyer
for this and certain other employee related liabilities assumed by the
Buyer.
Given that the Non-US Operations are only participants in the
aforementioned defined benefit plans of their parent companies, i.e.
multiemployer plans, and the parent company obligations were paid by
Siemens-Elema AB to the buyer in connection with the sale, unfunded pension
and employee termination obligations of approximately $5 million and
approximately $2 million of certain other employee related obligations are
not recorded in these financial statements of the Non-US Operations of
Siemens Cardiac Systems at September 30, 1994.
The Swedish company's pension expense is related to multiemployer pension
plans agreed upon in union agreements for blue- and whitecollar employees.
These could also be supplementary plans for senior management personnel.
The company fulfills its obligations regarding the plan by providing for
the liability in the accounting in combination with a credit insurance with
FPG (a pension guarantee, mutual insurance company). The company is
responsible for the pension commitment until the final payment to the
employee has been made. The administrative procedure of pension payment is
handled by PRI (Pension Registration Institute), which levies the
corresponding amounts from the employer. PRI also calculates the pension
liability each year. In order to use this pension plan system, the company
must be granted the credit insurance with FPG. The transfer of the pension
liability to another company is only permitted after an approval by FPG.
Approximately 70 employees are participants of two other defined benefit
pension plans.
11. COMMITMENTS AND CONTINGENCIES
There are no material law suits pending involving the Non-US Operations. On
August 26, 1992, the Company has entered into a cross licensing agreement
which requires royalty payments at varying rates on future sales of cardiac
stimulation devices for a period of ten years.
The French subsidiary has an obligation not to terminate employees over 50
years old. In the event of termination, the Company is obligated to pay the
government FF 400,000 or approximately $ 75,700 per employee.
The French subsidiary is committed to deliver pacemakers at a fixed price
for a fixed period. It is not anticipated that any losses will be incurred
resulting from this commitment.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Statements". This Statement requires companies to disclose an
estimate of the fair value of financial instruments, both on and off
balance sheet, if it is practical to do so. Fair value is defined as the
amount at which an instrument could be exchanged in a current transaction.
The recorded amounts of the Non-US Operations' financial instruments,
approximate the fair values.
13. DIVISION EQUITY
The following schedule reflects the changes in division equity for the year
ended September 30, 1994:
Division equity September 30, 1993 48,804
Reclassification of employee pension
obligations, see note 10 7,138
Net income 9,971
Advances (repayments) - 13,658
Net assets of entities added in 1994 955
Change in cumulative translation adjustment 3,048
Division equity September 30, 1994 $ 56,258
14. SUBSEQUENT EVENT
The Non-US Operations along with the US Operations were sold by Siemens AG
to the US company St. Jude Medical Incorporated, effected on September 30,
1994.
Solna, December 16, 1994
SIEMENS-ELEMA AB
/s/ C-G Myrin
C-G Myrin
Managing Director
EUROPEAN OPERATIONS OF
SIEMENS CARDIAC SYSTEMS
US GAAP FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1993 AND 1992
EUROPEAN OPERATIONS OF SIEMENS CARDIAC SYSTEMS
COMBINED BALANCE SHEET ($ IN THOUSANDS)
Sept. 30, Sept. 30,
1993 1992
ASSETS
Cash $ 864 $ 551
Accounts receivable, net 48,969 53,392
Inventories, net 25,602 39,066
Due from affiliates 1,850 4,342
Deferred income taxes 2,563 3,211
Prepaid expenses 316 668
Total current assets 80,164 101,230
Property and equipment, net 6,181 6,867
Other assets 60
TOTAL ASSETS $86,405 $108,097
LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY
Accounts payable - to affiliates $ 5,662 $ 5,540
Accounts payable - other 2,780 6,373
Accrued expenses 14,274 16,026
Notes payable - Siemens 6,952 1,966
Current deferred income taxes 337 138
Total current liabilities 30,005 30,043
Pension and employee termination obligations 5,970 6,792
Deferred income taxes 1,626 1,356
Common stock 1,684 1,684
Division equity and paid in capital 61,750 64,592
Cumulative translation adjustment - 14,630 3,630
Total shareholder's and division equity 48,804 69,906
TOTAL LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY $ 86,405 $108,097
See accompanying notes
COMBINED STATEMENT OF INCOME ($ IN THOUSANDS)
Year Year
ended ended
Sept. 30, Sept. 30,
1993 1992
Net sales $140,159 $145,109
Cost of products sold 66,479 73,924
Gross profit 73,680 71,185
Operating expenses
Selling expenses 31,635 39,342
General and administrative 8,915 10,518
Research and development 10,285 9,460
Royalties 4,200 2,744
Other expense (income) 2,742 - 228
Total operating expenses 57,777 61,836
Operating income 15,903 9,349
Interest expense 1,911 1,321
Interest income - 1,063 - 987
Income before income taxes 15,055 9,015
Provision for income taxes 4,984 4,215
NET INCOME $ 10,071 $ 4,800
See accompanying notes
COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS)
Year ended Year ended
Sept. 30, Sept. 30,
1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,071 $ 4,800
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Depreciation and amortization 2,641 3,368
Provision for deferred income taxes 1,680 - 20
Loss on sale of assets 98 35
Changes in assets and liabilities:
Accounts receivable, net - 5,301 961
Inventories, net 1,697 2,121
Other assets - 60 34
Other 189 - 3
Accounts payable and accrued expenses 4,478 2,079
Dividends payable 131 20
Due to affiliates - 4,239 1,582
Other liabilities 497 253
Net cash provided by operating activities 11,882 15,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - 4,166 - 3,957
Proceeds from sales of assets 248 40
Net cash (used) for investing activities - 3,918 - 3,917
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings - notes payable Siemens 11,075 379
Repayments - notes payable Siemens - 5,921 - 385
Dividends paid - 133 - 103
Decrease / increase in amounts due parent - 12,645 - 11,152
Net cash (used in) financing activities - 7,624 - 11,261
Effect of exchange rate changes on cash - 27 - 43
Net increase in cash 313 9
Cash at beginning of year 551 542
Cash at end of year $ 864 $ 551
See accompanying notes
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company's primary business is the design, manufacture and sale of cardiac
pacemakers. The accompanying financial statements include the accounts of the
following entities which comprise the European Operations of the Company:
- Siemens Cardiac Systems Business in Sweden, a division of Siemens-Elema AB.
- Siemens Cardiac Systems Business in Germany, a part of the Siemens Medical
Division of Siemens AG.
- Siemens Cardiac Systems Business in Italy, a part of Siemens S.P.A.
- Siemens Pacesetter S.A. in France, a wholly-owned subsidiary of Siemens S.A.
- Siemens Cardiac Systems Business in Spain, a part of Siemens S.A..
- Medical Production Ltd., in the United Kingdom, a subsidiary of Siemens plc.
The combined financial statements also include sales of affiliated cardiac
systems products in the United Kingdom, Denmark, Belgium, Finland, Austria,
Netherlands, Norway, Portugal, Venezuela and South Africa, and will in the
following be referred to as "the Company" or "European Operations".
The accompanying combined financial statements have been prepared as if the
European Operations of the Company, described above, had operated as a stand
alone entity for the periods presented. These combined financial statements
include substantially all of the combined assets, liabilities, revenues and
expenses of certain divisions and subsidiaries of Siemens which comprise
Siemens' European Cardiac Pacing Operations. All material transactions between
entities included in the combined financial statements have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the more significant accounting policies followed by the European
Operations in preparing these financial statements is as follows:
Revenues and receivables
The European Operations sell their products primarily to hospitals and
distributors. Sales are concentrated primarily in Europe and Japan. Revenues and
receivables are generally recorded when products are implanted in patients.
Concentration of credit risk with respect to trade receivables is limited due to
the large number of customers comprising the European Operations' customer base
and their dispersion across many different geographies. The European Operations
do not require collateral and maintain reserves for potential credit losses
which historically have been consistent with management's expectations.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
Property and equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to ten years. Additions and betterments are capitalized. Maintenance and
repairs are charged to operations as incurred. Leasehold improvements are
amortized over the lesser of the useful lives of the assets or the term of the
lease. When property or equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts. Gains
or losses from retirements and disposals are recorded as other income or
expense.
Provision for warranty claims
Provision for warranty costs are recorded at the time products are sold and are
reviewed and adjusted by management periodically to reflect actual and
anticipated experience.
Translation of currency
Each of the divisions, parts of divisions and subsidiaries that comprise the
European Operations operate in their local currency environment. Assets and
liabilities are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the year. Translation gains and losses are accumulated in a separate component
of Stockholders' Equity. Foreign currency transaction gains and losses affecting
cash flows are included in current earnings. Transaction losses totalled $ 245
in 1993 and transaction gains of $ 476 occurred in 1992.
Income taxes
Income taxes have been determined under Statement of Financial Accounting
Standards No. 96, "Accounting of Income Taxes" which requires that any deferred
tax liability or asset be determined based upon the differences between the
financial statement tax basis of assets and liabilities as measured by enacted
tax rates in effect when these differences are expected to reverse. The total
tax expense is the amount of income taxes expected to be payable for the current
year plus (or minus) the change from the beginning of the year in the deferred
tax liability or asset established for the expected future tax consequences
resulting from differences in the financial reporting and tax bases of assets
and liabilities.
In February 1992, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
European Operations expect to adopt this standard in fiscal 1994. The impact of
this standard on the Operations' results of operations and financial position is
not expected to be material.
The European Operations have operated as various divisions, parts of divisions
and subsidiaries of Siemens AG and its subsidiaries. Generally, no allocations
of tax have been made to the entities comprising most of the European
Operations. Therefore, the income tax provision has been calculated as if the
divisions had filed separate tax returns. Resulting current income taxes payable
have been recorded as division equity except for certain subsidiaries which are
direct taxpaying entities.
Research and development
Research and development costs are expensed as incurred and amounted to $ 10,285
for 1993 and $ 9,460 for 1992.
Cash flow information
Cash paid for interest and income taxes was $ 1,931 and $ 3,250, respectively,
for the year ended September 30, 1993, and $ 1,271 and $ 4,172 respectively for
the year ended September 30, 1992.
Substantially all of the European Operations cash payments for income taxes are
made to the parent companies in the various countries.
Carve-out assumptions
The Company has not historically accounted for the divisions and parts of
divisions in its European Operations separately. Generally, all assets,
liabilities, revenue and expense associated with these divisions have been
identified and reported herein. The components of beginning equity and
intercompany balances cannot be identified as there has never been any specific
identification of these amounts with the divisions. These amounts are aggregated
and reported as division equity. Generally, the divisions have no debt and no
related interest expense. This is consistent with the historical trend that most
of the divisions have generated cash rather than used cash. One of the divisions
has been a historical user of capital and pays interest to its parent company
based on its working capital needs. This allocation is reported as interest
expense of $ 1,454 in 1993 and $ 890 in 1992. The hypothetical debt is included
in division equity. Debt and related interest and equity of subsidiary companies
(rather than divisions) is reported herein as it specifically relates to the
subsidiary companies.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Sept. 30, 1993 Sept. 30, 1992
Accounts receivable $ 52,304 $ 57,101
Less - allowance for doubtful accounts - 3,335 -3,709
$ 48,969 $ 53,392
Certain accounts receivable expected to be collected in greater than one year
have been discounted to their present value. At September 30, 1993 and 1992,
receivables are presented net of discounts of $ 1,012 and $ 957 respectively.
During 1993 and 1992 $ 957 and $ 856 of interest income was recognized
respectively.
4. INVENTORIES
Inventories consist of the following:
Sept. 30, 1993 Sept. 30, 1992
Raw materials $ 3,364 $ 6,847
Work in process 3,114 5,549
Consigned inventory 9,707 9,353
Finished goods 11,705 21,829
Less - obsolescence reserve - 2,288 - 4,512
$ 25,602 $ 39,066
Consigned inventory consists of finished goods held by hospitals.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Programmers $ 5,748 $ 6,480
Test equipment 3,253 3,895
Computer equipment 4,769 5,814
Machinery and equipment 4,817 5,570
Furniture and fixtures 1,091 1,444
Tooling and molds 1,042 1,265
20,720 24,468
Less - accum. depreciation & amortization - 14,539 $ - 17,601
$ 6,181 $ 6,867
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1993 1992
Current $ 3,304 $ 4,210
Deferred 1,680 5
$ 4,984 $ 4,215
The significant components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
September 30, 1993 September 30, 1992
Deferred tax Deferred tax Deferred tax Deferred tax
assets liabilities assets liabilities
<S> <C> <C> <C> <C>
ACT tax recoverable $ $ -33 $ $ -97
Inventory 540 96 131
Statutory deferral 1,574 1,591
Warranty and accruals 87 -481 5 -308
Fixed assets 429 102
NOL carry forwards -155
Intercompany profit elimination 2,476 3,110
Other 89 75
$2,563 $1,963 $3,211 $ 1,494
</TABLE>
For presentation purposes, deferred tax assets and liabilities are offset within
taxing jurisdictions but not between jurisdictions.
Division equity and retained earnings of the Operations are generally considered
to be permanently reinvested except in certain countries where lack of dividends
would result in additional taxes. If earnings were remitted assuming a U.S.
parent, the remittance would be substantially free of additional U.S. tax
assuming the foreign tax credits generated could be utilized in the tax return
of the parent.
7. RENTAL AND LEASE COMMITMENTS
The approximate amounts of noncancellable operating lease commitments with terms
of greater than one year, principally for the rental of buildings in France and
the United Kingdom are as follows:
Fiscal year ending September 30
1994 $ 618
1995 600
1996 583
1997 583
1998 583
Thereafter 867
$ 3,834
Net rental expense for the year to third parties was $ 520 in 1993 and $ 825 in
1992 under all operating leases.
8. ACCRUED EXPENSES
Accrued liabilities consist of the following:
Sept. 30, 1993 Sept. 30, 1992
Loss on forward exchange contract $ 2,569
Vacation 2,518 $ 3,715
Other employee benefits 1,112 1,833
Salaries and wages 1,660 1,088
Royalties 1,258 3,174
Commissions 1,379 1,876
Warranty 831 1,154
Value added tax 993 1,171
Other 1,954 2,015
$ 14,274 $ 16,026
9. TRANSACTIONS WITH PARENT AND AFFILIATES
In determining the operating expenses of the entities included herein which are
not stand alone entities, allocations were made of the general corporate
expenses of the respective parent companies and divisions based on employees,
sales and square footage as appropriate. These allocations comprise most of the
operating expenses. These charges included $ 1,454 in 1993 and $ 2,104 in 1992
for rent of facilities. Operating expenses include $ 1,473 in 1993 and $ 1,069
in 1992 of corporate charges (management and overhead fees) which do not relate
to specific services provided.
Most of the European Operations are divisions of companies within their
respective countries which take part in a cash management system administered by
the parent company in each country. As such, the divisions have no cash and
payables, and receivables are settled through division equity. Accounts payable
in the financial statements consist generally of invoices which have not been
forwarded to the system for payment. Accrued expenses are generally estimates of
the amounts which remain unpaid through the system. From the division's
perspective, these amounts are settled when forwarded to the payment system.
Included in 1993 net sales is approximately $ 2,500 of sales (1.8 % of total
sales) made through Siemens affiliates whose operations are not included in this
presentation. These affiliates generally mark up the product additionally for
sales to third parties. The additional revenues, costs and effect of any
inventory held at September 30 are not reflected in these financial statements.
The most significant of these arrangements involves sales to affiliates China,
India and the Czech Republic. In 1992 sales to these affiliates were
approximately $ 2,540 (1.8 % of total sales).
The French subsidiary participates in a central foreign exchange clearing house
sponsored by Siemens AG. The clearing house allows for short term borrowings at
interest rates which range from 7.4 % to 7.8 %. The subsidiary's participation
in this arrangement commenced during the year ended September 30, 1993 and
replaced the previous overdraft borrowing arrangement with Siemens AG which also
charged interest at similar rates. The amount related to these borrowings is
presented in the financial statement as "Notes payable - Siemens".
The Company both purchases and sells cardiac pacing devices to an affiliate in
the United States. At September 30, 1993 and 1992, the Company owed $ 5,923 and
$ 5,345 respectively to this affiliate. Sales made to this affiliate for the
year ended September 30, 1993 and 1992 aggregated $ 2,910 and $ 2,254
respectively. In addition, the Company had purchases of $ 30,584 from this
affiliate in 1993 and $ 32,666 in 1992.
10. EMPLOYEE BENEFIT PLANS
The European Operations participate in various defined benefit and government
sponsored plans. The benefits are generally based on years of service and
employees' compensation. The required contributions vary with the legal
requirements in each jurisdiction. The European Operations' largest employee
group is located in Sweden and participates in the Siemens-Elema AB defined
benefit pension plan. Net allocated pension cost 1993 was $ 1,080 and $ 619 for
1992.
The net pension cost allocated to Cardiac Systems Solna by Siemens-Elema AB
compares to $ 367 in 1993 and $ 489 in 1992 if pension expenses were determined
in accordance with FAS 87. The plan is non-contributory and provides benefits
based on salary levels and length of service. A portion of the benefits are paid
up and fully insured and are therefore excluded from the analysis. The remaining
benefits are the responsibility of Siemens-Elema AB, and although insured with
the Pension Guarantee Mutual Insurance Company, are payable out of the assets of
the company.
The following table reflects the amounts recognized in the balance sheet at
September 30, 1993 and 1992. The actuarial valuation was done based on the
identification of employees specific to Cardiac Systems Solna that have worked
in the business during 1992 and 1993 as complete historical employee records are
not available by business within Siemens-Elema AB. Based on the actuarial
report, Cardiac Systems Solna represents approximately 7% of the accrued
liability. Cardiac Systems Solna represents approximately 17% of the active
employees of Siemens-Elema AB.
Actuarial present value of benefit obligation: 1993 1992
Vested $1,923 $2,752
Non vested 0 0
Accumulated Benefit Obligation 1,923 2,752
Additional Benefit due to salary increases 677 1,173
Projected Benefit Obligation 2,600 3,925
Fair Value of Plan Assets 0 0
Projected Benefit Obligation in Excess of Plan Assets 2,600 3,925
Unrecognized Actuarial Gain 313 0
Unrecognized Transition Loss - 187 - 305
Pension Liability Included in Balance Sheet $2,726 $3.620
Net Pension Cost Includes the Following:
Service Cost $ 159 215
Interest Cost 198 254
Amortization 10 20
Net Periodic Pension Cost $ 367 $ 489
The following assumptions were used to develop the projected benefit obligation:
Discount rate 7%
Salary increase rate 4.5%
Inflation 3.5%
Approximately 70 employees are participants of two other defined benefit pension
plans. Net pension cost under these plans totalled $ 185 in 1993 and $ 186 in
1992. One of the plans is unfunded, resulting in a liability of $ 1,278 computed
under FAS 87 ($ 1,291 at September 30, 1992). The other plan is believed to be
overfunded, based on an actuarial evaluation completed in 1992 which was not
prepared in accordance with FAS 87.
Actuarial assumptions used in developing the plan information included projected
salary increase rates of 4 to 7.5 %, discount rates of 7 % and projected
investment returns of 9 % for the funded plan.
In certain countries, the divisions may be obliged to pay certain anniversary,
service and termination benefits upon the retirement or termination of
employees. The estimated obligations have been accrued based on the divisions'
experience. Such amounts are classified as non-current liabilities.
11. COMMITMENTS AND CONTINGENCIES
There are no material lawsuits pending involving the European Operations. On
August 26, 1992, the Company has entered into a cross licensing agreement which
requires royalty payments at varying rates on future sales of cardiac
stimulation devices for a period of ten years.
The French subsidiary has an obligation not to terminate employees over 50 years
old. In the event of termination, the Company is obligated to pay the government
FF 400,000 or approximately $ 71,000 per employee.
The French subsidiary is committed to deliver pacemakers at a fixed price for a
fixed period. It is not anticipated that any losses will be incurred resulting
from this commitment.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Statements". This Statement requires companies to disclose an estimate
of the fair value of financial instruments, both on and off balance sheet, if it
is practical to do so. Fair value is defined as the amount at which an
instrument could be exchanged in a current transaction. The recorded amounts of
the European Operations' financial instruments, approximate the fair values.
The European Operations have entered into foreign currency forward contracts in
anticipation of export sales transactions. As these transactions are not based
on firm commitments, the forward contracts are treated as speculative.
Consequently, a reserve is established as of September 30, 1993, calculated by
multiplying the foreign currency amount by the difference between the forward
rate available and the contract forward rates. The resulting loss of $ 2,569 is
included in accrued liabilities.
13. DIVISION EQUITY
The following schedule reflects the changes in division equity for the two years
in the period ended September 30, 1993:
1993 1992
Division equity, beginning $69,906 $72,793
Net income 10,071 4,800
Dividends - 268 - 133
Advances (repayments) - 12,645 - 11,152
Change in cumulative translation adjustment - 18,260 3,598
Division equity, ending $48,804 $69,906
14. SUBSEQUENT EVENT
During 1994, Siemens Corporation retained investment counsel in order to pursue
the sale of its cardiac pacemaker business which includes the European
Operations. On June 26, 1994, an agreement was reached to sell the business
subject to the fulfillment of standard conditions precedent to closing including
approval by certain regulatory authorities.
Solna, July 25, 1994
SIEMENS-ELEMA AB
Cardiac Systems Division, Solna
/s/ Knut Ekdahl
Knut Ekdahl
Controller
EXHIBIT 2.3
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
AND PACESETTER
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Effective September 30, 1994, St. Jude Medical, Inc. acquired
substantially all of the assets (the "Acquisition") of the worldwide cardiac
rhythm management business of Siemens AG, pursuant to two asset purchase
agreements: (i) the Asset Purchase Agreement dated as of June 26, 1994 among St.
Jude Medical, Inc. (the "Company"), SJM Acquisition Corp., Siemens-Pacesetter,
Inc. and Siemens Medical Systems, Inc., and (ii) the [Non-U.S.] Asset Purchase
Agreement dated as of June 26, 1994 among the Company, St. Jude Medical
International, Inc. and Siemens-Elema AB (collectively, "Pacesetter").
The Acquisition consisted of the tangible and intangible assets,
properties, rights and goodwill of Siemens-Pacesetter, Inc. and the Cardiac
Systems Division of Siemens-Elema AB used in their cardiac rhythm management
business, excluding cash and certain other assets. In consideration for the
Acquisition, the Company paid $524.3 million, of which $13.0 million was placed
into an escrow account pending final adjustments based on the net book value of
the net assets transferred to the Company. The terms of the Acquisition were the
result of an arms-length negotiation between the parties, and the Acquisition
will be accounted for as a purchase.
The accompanying unaudited pro forma combined financial statements were
prepared as a result of the purchase by the Company of Pacesetter. These
unaudited pro forma combined financial statements have been included as required
by the rules of the Securities and Exchange Commission ("SEC"). Such pro forma
financial statements do not purport to be indicative of the results of future
combined operations. The pro forma combined financial statements are based upon
the historical financial statements of the Company and Pacesetter and should be
read in conjunction with those historical financial statements as they appear
elsewhere in this filing or previous filings with the SEC.
The unaudited pro forma combined balance sheet has been omitted because
the transaction was recorded in the Company's September 30, 1994 balance sheet.
The unaudited pro forma combined statements of income for the year ended
December 31, 1993 (the Company) and September 30, 1993 (Pacesetter) and for the
nine months ended September 30, 1994 present the pro forma statements of income
of the Company combined with Pacesetter, assuming the acquisition had been
consummated as of January 1, 1993.
The pro forma combination of the Company and Pacesetter has been
prepared under the purchase method of accounting. Therefore, the purchase price
of $524.3 million has been allocated to the fair values of the net assets
acquired. The excess purchase price over the fair value of net assets acquired
has been recorded as goodwill in the accompanying pro forma financial statements
and amortized over a period of twenty years. In connection with the acquisition
and the allocation of the purchase price, $40.8 million of purchased research
and development was charged against earnings in the fourth quarter of 1994 in
accordance with generally accepted accounting principles.
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
AND SIEMENS PACESETTER INC. AND AFFILIATES
(Dollars in thousands)
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
------------------------------------------------------------------------------------------------------------------ -
Pacesetter Eliminations &
St. Jude U.S. Non-U.S. Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net sales $195,889 $226,803 $117,738 (1)(25,737) $514,693
Cost of sales 48,807 76,892 61,928 (1)(17,218) 170,409
Gross profit 147,082 149,911 55,810 (8,519) 344,284
Selling, general and administrative 41,647 88,952 35,959 (2)3,080 169,638
Research and development 7,786 19,241 7,147 34,174
Goodwill amortization 0 0 0 (3)11,904 11,904
Total operating expenses 49,433 108,193 43,106 14,984 215,716
Operating profit 97,649 41,718 12,704 (23,503) 128,568
Interest income 10,365 1,805 (4)(10,275) 1,895
Interest expense 0 125 733 (5)8,093 8,951
Income before taxes 108,014 43,398 11,971 (41,871) 121,512
Income tax provision 30,784 16,950 4,293 (6)(15,573) 36,454
Net income $ 77,230 $ 26,448 $ 7,678 $ (26,298) $ 85,058
</TABLE>
See notes to unaudited pro forma combined financial statements.
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
AND SIEMENS PACESETTER INC. AND AFFILIATES
(Dollars in thousands)
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993
------------------------------------------------------------------------------------------------------------------ -
Pacesetter Eliminations &
St. Jude U.S. Non-U.S. Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net sales $252,642 $254,701 $140,159 (1)(33,494) $614,008
Cost of sales 61,342 91,037 70,679 (1)(33,520) 189,538
Gross profit 191,300 163,664 69,480 26 424,470
Selling, general and administrative 49,040 101,204 43,292 (2)3,000 196,536
Research and development 10,972 23,429 10,285 44,686
Goodwill amortization 0 0 0 (3)15,460 15,460
Total operating expenses 60,012 124,633 53,577 18,460 256,682
Operating profit 131,288 39,031 15,903 (18,434) 167,788
Interest income 13,934 4,086 1,063 (4)(11,385) 7,698
Interest expense 0 4,140 1,911 (5)12,150 18,201
Income before taxes 145,222 38,977 15,055 (41,969) 157,285
Income tax provision 35,579 15,275 4,984 (6)(15,556) 40,282
Net income $109,693 $ 23,702 $ 10,071 $(26,413) $117,003
</TABLE>
See notes to unaudited pro forma combined financial statements.
EXHIBIT 10.6
ST. JUDE MEDICAL, INC.
RETIREMENT PLAN FOR MEMBERS OF THE BOARD OF DIRECTORS
St. Jude Medical, Inc. ("St. Jude"), a Minnesota corporation, hereby
establishes this Retirement Plan (the "Plan"), effective as of January 1, 1988,
for the purpose of rewarding members of the Board of Directors of St. Jude (the
"Board") for their efforts in making St. Jude's business successful, and to
provide benefits to them upon retirement, disability or death.
1. Definitions.
1.1 "Administrative Committee" shall mean the committee appointed
pursuant to Section 7 hereof.
1.2 "Effective Date" shall mean January 1, 1988.
1.3 "Normal Retirement Benefit" shall equal the Participant's average
annual retainer fee during his or her period of Board membership
calculated by dividing the Participant's total retainer fees by
the number of years of service, or fraction thereof based on
completed months of service, for which the Participant received
such retainer fees. Solely for purposes of this definition and
notwithstanding anything in Section 1.7 to the contrary, all
completed years and months of service prior to and after 1988
shall be counted in full. In no event shall the average retainer
fee for any Board member on March 1, 1995 be less than $24,000.
1.4 "Normal Retirement Date" shall mean the later of:
1.4.1 the day following the Participant's 60th birthday, or
1.4.2 the day on which the Participant is no longer a member of
the Board.
1.5 "Participant" shall mean a member of the Board of St. Jude who is
not a full-time employee of St. Jude.
1.6 "Totally Disabled" or "Total Disability" shall mean (a) the
inability of an injured or ill Participant to engage in or
perform the duties of his regular occupation or employment within
the first two years of such disability; and (b) after the first
two years of such disability, the inability of the Participant to
engage in any paid employment or work for which he may, by
education and training, including rehabilitative training, be or
reasonably become qualified.
1.7 "Year Of Service" shall mean the following:
1.7.1 For purposes of vesting under paragraph 3.1, Year of
Service shall mean a twelve consecutive month period
during which the Participant serves as a member of the
Board. In addition, the twelve consecutive month period,
which includes the Participant's Normal Retirement Date,
shall constitute one Year of Service under paragraph 3.1,
notwithstanding the fact that the Participant may not have
served on the Board for the entire twelve months.
1.7.2 Year of Service for purposes of payment of benefits under
Article 4 shall mean a twelve consecutive month period
beginning on or after the Effective Date, during which the
Participant serves as a member of the Board. In addition,
1.7.2.1 Each twelve consecutive month period served by a
Board member prior to the Effective Date shall
count as six months towards a Year of Service,
so that two twelve consecutive month periods
served prior to January 1, 1988 count as one
Year of Service under the Plan.
1.7.2.2 With respect to the twelve-month period which
includes the Participant's Normal Retirement
Date, a Participant shall be credited with
one-twelfth of his Normal Retirement Benefit for
each month during which he serves on the Board
following his last complete Year of Service.
1.7.2.3 If a Participant has six months of credit toward
a Year of Service under subparagraph 1.7.2.1 and
a number of months' credit under 1.7.2.2, such
credited months may be aggregated to provide the
Participant with a Normal Retirement Benefit for
the final year in which he or his beneficiary
receives benefits which equals his Normal
Retirement Benefit multiplied by a fraction, the
numerator of which equals the aggregated number
of months credited under subparagraphs 1.7.2.1
and 1.7.2.2 (or the non-aggregated months
credited under either such subparagraph) and the
denominator of which equals twelve.
2. Eligibility. Board members who qualify as Participants and who are
acting as such on the Effective Date shall automatically be Participants in the
Plan as of the Effective Date. Thereafter, each other Board member who qualifies
as a Participant shall become a Plan Participant effective with his first day of
service as a non-employee Board member.
3. Vesting.
3.1 Service. Payment of benefits under the Plan is conditioned upon
the Participant completing five Years of Service. Years of
Service need not be consecutive. After the five-year service
condition is met, the Participant's benefit shall be fully vested
and nonforfeitable, subject to paragraph 3.2.
3.2 Fidelity. The payment of benefits under the Plan is conditioned
upon the Participant not committing fraud or dishonesty against
or going into competition with St. Jude. If the Board determines
that a Participant has breached the condition set forth in the
previous sentence, either before or after he has completed five
Years of Service, all of the Participant's benefits under the
Plan shall be immediately forfeitable and forfeited. However, all
Plan benefits with respect to all Plan Participants who have not
breached the condition set forth above shall become
nonforfeitable and this provision shall no longer be effective on
the later of the last day of the calendar year during which the
Participant terminates (a) employment or (b) membership in the
Board, provided the Participant satisfies the requirement of
paragraph 3.1.
3.3 Termination of plan. If the Board elects to terminate the Plan,
the benefits of all current Participants who have satisfied the
requirements of paragraphs 3.1 and 3.2 and who continue to
satisfy 3.2 as long as required by the terms of that paragraph,
shall be fully vested. Such Participants shall receive their
benefits at the times specified in Article 4 below.
3.4 Change in control. In the event of a Change in Control, the
benefits of all current Participants shall become immediately
fully vested, whether or not such Participants have completed
five Years of Service. Such Participants shall be deemed to have
satisfied the requirements of paragraph 3.1, shall not be subject
to the conditions of paragraph 3.2 and shall be entitled to
receive benefits under the Plan in accordance with Article 4.
3.4.1 "Change in control" shall mean a change in control which
would be required to be reported in response to Item 5(f)
on Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not St. Jude is then subject to such
reporting requirement, including, without limitation, if:
3.4.1.1 Any "Person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) becomes a
"beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly,
of securities of St. Jude representing 40% or
more of the combined voting power of St. Jude's
then outstanding securities; or
3.4.1.2 There ceases to be a majority of the Board of
Directors comprised of individuals described in
3.4.1.3 below.
3.4.1.3 For purposes of this paragraph 3.4.1.3, "Board
of Directors" shall mean: (a) individuals who,
on the effective date hereof, constituted the
Board of St. Jude; and (b) any new director who
subsequently was elected or nominated for
election by a majority of the directors who held
such office immediately prior to a Change in
Control.
Change in control shall also mean the
commencement of any insolvency proceeding by or
against St. Jude, including the appointment of a
receiver.
4. Payment Of Benefits.
4.1 Normal Retirement Benefit. A Participant who is fully vested
shall be entitled to receive a Normal Retirement Benefit on the
first business day of the calendar year following the
Participant's retirement from full-time employment after his
Normal Retirement Date and such payments shall continue to be
paid on the first business day of each calendar year thereafter
until the number of payments equals the Participant's Years of
Service, at which time payments under the Plan shall cease. If
the Participant is credited with a final, fractional Year of
Service under paragraph 1.7.2.3, the Participant's Normal
Retirement Benefit for the final year in which he receives
benefits shall equal his Normal Retirement Benefit multiplied by
the fraction described in subparagraph 1.7.2.3.
4.2 Reappointment To The Board After Commencement Of Normal
Retirement Benefits. No Participant shall receive benefits while
serving as a member of the Board. If a Participant is receiving
his Normal Retirement Benefit and is reappointed to the Board,
all payments to the Participant under the Plan shall cease during
his term and shall recommence on the first business day of the
first calendar year commencing after his term expires. The number
of years during which such a Participant or his survivors may
receive benefits shall equal all of his Years of Service, both
before and after his reappointment to the Board, minus Years of
Service for which benefits had been paid prior to the
Participant's reappointment to the Board.
4.3 Disability Benefit. A Participant whose full-time employment
terminates prior to his Normal Retirement Date due to Total
Disability but who has completed five Years of Service shall be
entitled to receive a benefit equal to a Normal Retirement
Benefit commencing on the first business day of the calendar year
following the onset of the Participant's Total Disability,
provided he has not violated paragraph 3.2. Such payments shall
continue to be paid on the first business day of each calendar
year thereafter until the number of payments equals the
Participant's Years of Service, at which time payments under the
Plan shall cease.
4.4 Survivor's Benefit. If the Participant dies before receiving all
benefits due him under the Plan, St. Jude shall continue to pay
to the Participant's designated beneficiary the benefit the
Participant had been receiving at the date of his death under
paragraph 4.1. If the Participant had not yet commenced receipt
of benefits under the Plan, St. Jude shall pay to his designated
beneficiary the benefits he would have received under paragraph
4.1, provided the Participant completed five Years of Service
prior to his death and had not breached the condition set forth
in paragraph 3.2. Benefit payments to the Participant's
beneficiary shall commence (or continue) on the first business
day of the year following the Participant's death and shall
continue to be paid on each anniversary date thereof until the
number of payments, including any payments to the Participant
prior to his death, equals the number of the Participant's Years
of Service, including any final, fractional Year of Service under
paragraph 1.7.2.3, at which time payments under the Plan shall
cease. Notwithstanding the foregoing, a survivor's benefit shall
not be paid if the Participant has earned fewer than five Years
of Service.
4.5 Benefit Personal To Participant. If the Participant is or becomes
obligated to turn over all or part of any Plan benefit to his
current or former employer, such benefit shall not be paid, it
being the intent of the Plan that benefits be paid only to the
Participant or pursuant to paragraph 4.4 hereof.
5. Designation Of Beneficiary. All payments to be made by St. Jude shall be
made to the Participant, if living. In the event of a Participant's death prior
to the receipt of all benefit payments, all subsequent payments to be made under
the Plan shall be made to the Participant's beneficiary. In the event a
beneficiary dies before receiving all the payments due to such beneficiary, the
then-remaining payments shall be paid to the legal representatives of the
beneficiary's estate. The Participant shall designate a beneficiary by filing a
written notice of such designation with St. Jude in such form as St. Jude may
prescribe. The Participant may revoke or modify said designation at any time by
a further written designation. The Participant's beneficiary designation shall
be deemed automatically revoked in the event of the death of the beneficiary or,
if the beneficiary is the Participant's spouse, in the event of dissolution of
marriage. If no designation shall be in effect at the time when any benefits
payable under this Plan shall become due, the beneficiary shall be the spouse of
the Participant or, if no spouse is then living, the Participant's children or
their issue by right of representation or, if none, the legal representatives of
the Participant's estate.
6. Facility Of Payment. In the event a benefit is payable to a minor or a
person incapable of handling the disposition of his property, the Administrative
Committee may pay such benefit to the guardian, legal representative or person
having the care or custody of such minor or incompetent person. The
Administrative Committee may require proof of incompetency, minority or
guardianship as it may deem appropriate prior to distribution of the benefit.
Such distribution shall completely discharge the Administrative Committee and
St. Jude from all liability with respect to such benefit.
7. Administration And Interpretation Of The Plan. The Board shall appoint
an Administrative Committee consisting of two or more senior managers of St.
Jude to administer and interpret the Plan. Interpretation by the Administrative
Committee shall be final and binding upon a Participant. The Administrative
Committee shall adopt rules and regulations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan.
8. Claims Procedure. If the Participant or the Participant's beneficiary
(the "Claimant") is denied all or a portion of an expected benefit under this
Plan for any reason, he may file a claim with the Administrative Committee. The
Administrative Committee shall notify the Claimant within 60 days of allowance
or denial of the claim, unless the Claimant receives written notice from the
Administrative Committee prior to the end of the 60-day period stating that
special circumstances require an extension of the time for decision. The notice
of the Administrative Committee's decision shall be in writing, sent by mail to
Claimant's last known address and, if a denial of the claim, must contain the
following information:
a. the specific reasons for the denial;
b. specific reference to pertinent provisions of the Plan on which
the denial is based; and
c. if applicable, a description of any additional information or
material necessary to perfect the claim, an explanation of why
such information or material is necessary, and an explanation of
the claims review procedure.
9. Review Procedure. A Claimant is entitled to request a review of any
denial of his claim by the Administrative Committee. The request for review must
be submitted in writing within 60 days of mailing of notice of the denial.
Absent a request for review within the 60-day period, the claim will be deemed
to be conclusively denied. The Claimant or his representative shall be entitled
to review all pertinent documents, and to submit issues and comments orally and
in writing.
If the request for review by a Claimant concerns the interpretation and
application of the provisions of this Plan and St. Jude's obligations, then the
review shall be conducted by a separate committee consisting of three persons
designated or appointed by the Administrative Committee. The separate committee
shall afford the Claimant a hearing and the opportunity to review all pertinent
documents and submit issues and comments, orally and in writing, and shall
render a review decision in writing, all within 60 days after receipt of a
request for a review, provided that in special circumstances (such as the
necessity of holding a hearing) the Committee may extend the time for decision
by not more than 60 days upon written notice to the Claimant. The Claimant shall
receive written notice of the separate committee's review decision, together
with specific reasons for the decision and reference to the pertinent provisions
of the Plan. If the Claimant's claim is denied by the separate committee, the
Claimant may request arbitration of the claim, as follows: The American
Arbitration Association shall be asked to appoint an arbitrator to rule on the
matter in accordance with its Commercial Arbitration Rules, as then in effect.
The decision of the Arbitrator shall be binding and conclusive upon the parties
and St. Jude and the Claimant shall divide equally the costs of the arbitration.
10. Unsecured Creditor. The rights of the Participant, his beneficiary or
estate to benefits under the Plan shall be solely those of an unsecured creditor
of St. Jude. Any insurance policy or other assets acquired by or held by St.
Jude in connection with the liabilities assumed by it pursuant to the Plan shall
not be deemed to be held under any trust for the benefit of the Participant, his
beneficiary, or his estate, or to be security for the performance of the
obligations of St. Jude but shall be, and remain, a general, unpledged, and
unrestricted asset of St. Jude.
11. Assignment Of Benefits. Neither the Participant nor any beneficiary
under the Plan shall have any right to assign the right to receive any benefits
under the Plan, and any such assignment shall be invalid.
12. Board Membership Not Guaranteed By Plan. Neither this Plan nor any
action taken hereunder shall be construed as giving a Participant the right to
be retained or continue as a member of the Board of Directors.
13. Taxes. St. Jude shall deduct from all payments made hereunder all
applicable federal or state taxes required by law to be withheld from such
payments.
14. Amendment And Termination. The Board of St. Jude may, at any time,
amend or terminate the Plan, provided that the Board may not reduce or modify
any benefit payable to a Participant without the prior consent of the
Participant.
15. Construction. The Plan shall be construed according to the laws of the
State of Minnesota.
16. Form Of Communication. Any election, application, claim, notice or
other communication required or permitted hereunder shall be made in writing and
in such form as St. Jude may prescribe. Such communication shall be effective
upon mailing, if sent by first class mail, postage prepaid, and addressed to St.
Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117, or to the
Participant at the address which he files with the Administrative Committee. The
Participant shall notify the Administrative Committee in writing of any change
of address.
17. Captions And Interpretation. The captions at the head of a section or a
paragraph of this Plan are designed for convenience of reference only and are
not to be resorted to for the purpose of interpreting any provision of this
Plan. Where appropriate, the masculine includes the feminine, the singular
includes the plural, and vice versa.
18. Severability. The invalidity of any portion of this Plan shall not
invalidate the remainder thereof, and said remainder shall continue in full
force and effect.
19. Binding Agreement. The provisions of this Plan shall be binding upon
the Participant and St. Jude and their successors, assigns, heirs, executors and
beneficiaries.
ST. JUDE MEDICAL, INC.
By:____________________________
Its:___________________________
AS AMENDED THROUGH MARCH 15, 1995.
EXHIBIT 10.7
ST. JUDE MEDICAL
MANAGEMENT SAVINGS PLAN
ST. JUDE MEDICAL
MANAGEMENT SAVINGS PLAN
TABLE OF CONTENTS
Page
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 - Definitions. . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
PARTICIPATION
2.1 - Participation. . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation. . . . . . . . . . . . . . 7
3.2 - Investment Elections . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV
ACCOUNTS
4.1 - Deferral Account . . . . . . . . . . . . . . . . . . . . . 10
4.2 - Company Contribution Account . . . . . . . . . . . . . . . 11
ARTICLE V
VESTING
5.1 - Deferral Account . . . . . . . . . . . . . . . . . . . . . 12
5.2 - Company Contribution Account . . . . . . . . . . . . . . . 12
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation. . . . . . . . . . . 13
6.2 - Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . 15
6.3 - Early Distributions. . . . . . . . . . . . . . . . . . . . 15
6.4 - Inability to Locate Participant. . . . . . . . . . . . . . 16
6.5 - Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Page i
<PAGE>
ARTICLE VII
ADMINISTRATION
7.1 - Committee. . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2 - Committee Action . . . . . . . . . . . . . . . . . . . . . 18
7.3 - Powers and Duties of the Committee . . . . . . . . . . . . 18
7.4 - Construction and Interpretation. . . . . . . . . . . . . . 19
7.5 - Information. . . . . . . . . . . . . . . . . . . . . . . . 19
7.6 - Compensation, Expenses and Indemnity . . . . . . . . . . . 20
7.7 - Quarterly Statements . . . . . . . . . . . . . . . . . . . 20
7.8 - Disputes . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII
MISCELLANEOUS
8.1 - Unsecured General Creditor . . . . . . . . . . . . . . . . 22
8.2 - Restriction Against Assignment . . . . . . . . . . . . . . 22
8.3 - Withholding. . . . . . . . . . . . . . . . . . . . . . . . 23
8.4 - Amendment, Modification, Suspension or Termination . . . . 23
8.5 - Governing Law. . . . . . . . . . . . . . . . . . . . . . . 23
8.6 - Receipt or Release . . . . . . . . . . . . . . . . . . . . 23
8.7 - Payments on Behalf of Persons Under Incapacity . . . . . . 24
8.8 - Headings, etc. Not Part of Agreement . . . . . . . . . . . 24
Page ii
<PAGE>
ST. JUDE MEDICAL
MANAGEMENT SAVINGS PLAN
WHEREAS, St. Jude Medical, Inc. (the "Company") desires to establish a
deferred compensation plan to provide supplemental retirement income benefits
for a select group of management and highly compensated employees through
deferrals of salary and bonuses, effective as of February 1, 1995; and
WHEREAS, it is believed that the adoption of this plan providing for
deferred compensation at the election of each executive will be in the best
interests of the Company;
NOW, THEREFORE, it is hereby declared as follows:
ARTICLE I
TITLE AND DEFINITIONS
1.1 - TITLE.
This Plan shall be known as the St. Jude Medical Management Savings Plan.
1.2 - DEFINITIONS.
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
"Account" or "Accounts" shall mean a Participant's Deferral Account and/or
Company Contribution Account.
"Beneficiary" or "Beneficiaries" shall mean the person or persons,
including a trustee, personal representative or other fiduciary, last designated
in writing by a Participant in accordance with procedures established by the
Committee to receive the benefits specified hereunder in the event of the
Participant's death (other than the death benefits described in Section
6.1(c)(1) unless such person is designated as a beneficiary under the Policy
described therein). No beneficiary designation shall become effective until it
is filed with the Committee. If there is no Beneficiary designation in effect,
then the person designated to receive the death benefit specified in Section
6(c)(1) shall be the Beneficiary. If there is no such designation or if there is
no surviving designated Beneficiary, then the Participant's surviving spouse
Page 1
<PAGE>
shall be the Beneficiary. If there is no surviving spouse to receive any
benefits payable in accordance with the preceding sentence, the duly appointed
and currently acting personal representative of the participant's estate (which
shall include either the Participant's probate estate or living trust) shall be
the Beneficiary. In any case where there is no such personal representative of
the Participant's estate duly appointed and acting in that capacity within 90
days after the Participant's death (or such extended period as the Committee
determines is reasonably necessary to allow such personal representative to be
appointed, but not to exceed 180 days after the Participant's death), then
Beneficiary shall mean the person or persons who can verify by affidavit or
court order to the satisfaction of the Committee that they are legally entitled
to receive the benefits specified hereunder. In the event any amount is payable
under the Plan to a minor, payment shall not be made to the minor, but instead
be paid (a) to that person's living parent(s) to act as custodian, (b) if that
person's parents are then divorced, and one parent is the sole custodial parent,
to such custodial parent, or (c) if no parent of that person is then living, to
a custodian selected by the Committee to hold the funds for the minor under the
Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which
the minor resides. If no parent is living and the Committee decides not to
select another custodian to hold the funds for the minor, then payment shall be
made to the duly appointed and currently acting guardian of the estate for the
minor or, if no guardian of the estate for the minor is duly appointed and
currently acting within 60 days after the date the amount becomes payable,
payment shall be deposited with the court having jurisdiction over the estate of
the minor.
"Board of Directors" or "Board" shall mean the Board of Directors of St.
Jude Medical, Inc.
"Bonus" shall mean any cash incentive compensation payable to a Participant
in addition to the Participant's Salary prior to reduction for any salary
deferral contributions to a plan qualified under Section 125 or Section 401(k)
of the Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to administer
the Plan in accordance with Article VII.
"Company" shall mean St. Jude Medical, Inc., and, effective April 1, 1995,
Pacesetter, Inc. and any successor corporations. Company shall include each
corporation which is a member of a controlled group of corporations (within the
meaning of Section 414(b) of the Code) of which St. Jude Medical is a component
member, if the Board provides that such corporation shall participate in the
Plan.
Page 2
<PAGE>
"Company Contribution Account" shall mean the bookkeeping account
maintained by the Committee for each Participant that is credited with an amount
equal to the Company Contribution Amount, if any, and earnings or losses
pursuant to Section 4.2.
"Company Contribution Amount" shall mean, for each Participant for a Plan
Year the sum of the following amounts:
(1) An amount equal to the Participant's Compensation deferred under
this Plan for a Plan Year, provided that the maximum amount under this
clause (1) shall not exceed the excess of 3% of the Participant's
Compensation paid that Plan Year over the Company's matching contribution
that would have been made under the Profit Sharing Plan for the Participant
if the Participant made the maximum Section 401(k) deferral permitted to
highly compensated employees under the Profit Sharing Plan. For purposes of
this 3% limitation, Compensation shall mean the Salary paid during a Plan
Year plus the Bonus paid in that Plan Year, even though such Bonus is paid
with respect to services performed in a prior Plan Year.
(2) An amount equal to A multiplied by B where:
A equals the excess of the Participant's Compensation for the Plan
Year over the Code Section 401(a)(17) limit for the Plan Year, and
B equals the rate of contributions made by the Company, if any,
with respect to compensation in excess of the social security wage
base under the Profit Sharing Plan.
Page 3
<PAGE>
By way of example, assume a Participant has Compensation of
$180,000 in 1995 and the Employer contribution to the Profit
Sharing Plan equals 5% of compensation (below the social security
wage base) and 10% of compensation in excess of the social
security wage base. The Company Contribution Amount shall equal
10% of ($180,000 minus $150,000), or $3,000.
(3) An additional discretionary amount allocated to Participants under
this Plan, as determined by the Board. Such amount may differ from
Participant to Participant (both in dollar amount and as a percentage of
compensation).
Notwithstanding the above, in the case of a Participant who is not eligible to
participate in the Profit Sharing Plan, the amounts set forth in clause (1) and
(2) above shall be zero.
"Compensation" shall mean the Salary and Bonus that the Participant is
entitled to for services rendered to the Company.
"Deferral Account" shall mean the bookkeeping account maintained by the
Committee for each Participant that is credited with amounts equal to (1) the
portion of the Participant's Salary that he or she elects to defer, (2) the
portion of the Participant's Bonus that he or she elects to defer, and (3)
interest pursuant to Section 4.1.
"Distributable Amount" shall mean the amount credited to a Participant's
Deferral Account and the vested portion of the amount credited to his or her
Company Contribution Account.
"Effective Date" shall mean February 1, 1995.
"Eligible Employee" shall mean each executive officer of the Company whose
Compensation (as described in the next sentence) exceeds $150,000. For this
purpose, Compensation shall mean the Salary payable for the current Plan Year
plus the Bonus paid in the prior Plan Year (with respect to services performed
in the second preceding Plan Year). Once an executive officer becomes an
Eligible Employee, such individual shall remain an Eligible Employee as long as
he or she remains an executive officer unless the individual's Compensation for
a subsequent Plan Year does not exceed $100,000.
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"Fund" or "Funds" shall mean one or more of the mutual funds or contracts
selected by the Committee pursuant to Section 3.2(b).
"Initial Election Period" for an Eligible Employee shall mean the 30-day
period following the later of January 1, 1995 (April 1, 1995, for employees of
Pacesetter, Inc.) or the Eligible Employee's date of hire.
"Interest Rate" shall mean, for each Fund, an amount equal to the net rate
of gain or loss on the assets of such Fund during each month.
"Participant" shall mean any Eligible Employee who becomes a Participant in
accordance with Section 2.1.
"Payment Eligibility Date" shall mean the first day of the month following
the end of the calendar quarter in which a Participant terminates employment or
dies.
"Plan" shall mean the St. Jude Medical Management Savings Plan set forth
herein, now in effect, or as amended from time to time.
"Plan Year" shall mean the 12 consecutive month period beginning on January
1, provided, however, that the first Plan Year shall be a short year beginning
on February 1, 1995 and ending on December 31, 1995.
"Profit Sharing Plan" shall mean the St. Jude Medical Profit Sharing
Employee Savings Plan.
"Salary" shall mean the Participant's base salary prior to reduction for
any salary deferral contributions to a plan qualified under Section 125 or
Section 401(k) of the Code.
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ARTICLE II
PARTICIPATION
2.1 - PARTICIPATION.
An Eligible Employee shall become a Participant in the Plan by (1) electing
to defer a portion of his or her Compensation in accordance with Section 3.1,
and (2) filing a life insurance application form along with his or her deferral
election form.
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ARTICLE III
DEFERRAL ELECTIONS
3.1 - ELECTIONS TO DEFER COMPENSATION.
(a) Initial Election Period. Subject to Section 2.1, each Eligible Employee
may elect to defer Compensation by filing with the Committee an election that
conforms to the requirements of this Section 3.1, on a form provided by the
Committee, no later than the last day of his or her Initial Election Period.
(b) General Rule. The amount of Compensation which an Eligible Employee may
elect to defer is as follows:
(1) Any percentage of Salary up to 50%; and/or
(2) Any percentage or dollar amount of Bonus up to 100%;
provided, however, that no election shall be effective to reduce the
Compensation paid to an Eligible Employee for a calendar year to an amount which
is less than the Social Security Wage Base for such calendar year.
(c) Minimum Deferrals. For each year during which an Eligible Employee is a
Participant, the minimum amount that may be elected under Section 3.1(b) is 5%
of the Participant's Salary. Such minimum may be satisfied by deferring Salary
and/or the Bonus payable for services rendered for such Plan Year (even though
it is not paid until the next Plan Year); provided that if Salary is deferred,
the minimum deferral is 5%. Accordingly, if no Salary is deferred for a Plan
Year and the total amount of the Bonus elected to be deferred with respect to
that Plan Year is in fact less than 5% of the Participant's Salary, then no
portion of the Bonus shall be deferred.
(d) Effect of Initial Election. An election to defer Compensation during an
Initial Election Period shall be effective with respect to Salary earned during
the first pay period beginning after the end of the Initial Election Period.
Notwithstanding anything in paragraphs (a), (d), (g) or (f) of this Section 3.1
to the contrary, for the first Plan Year only, an Eligible Employee may elect,
no later than January 31, 1995 (March 31, for Pacesetter, Inc. employees), to
defer any Bonus which is subsequently declared and paid for services performed
during the Company's fiscal year ending on December 31, 1995.
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(e) Duration of Salary Deferral Election. Any Salary deferral election made
under paragraph (a) or paragraph (g) of this Section 3.1 shall remain in effect,
notwithstanding any change in the Participant's Salary, until changed or
terminated in accordance with the terms of this paragraph (e); provided,
however, that such election shall terminate for any Plan Year for which the
Participant is not an Eligible Employee. Subject to the minimum deferral
requirement of Section 3.1(c) and the limitations of Section 3.1(b), a
Participant may increase, decrease or terminate his or her Salary deferral
election, effective for Salary earned during pay periods beginning after any
January 1, by filing a new election, in accordance with the terms of this
Section 3.1, with the Committee on or before the preceding December 1.
(f) Duration of Bonus Deferral Election. Any Bonus deferral election made
under paragraph (a) or paragraph (g) of this Section 3.1 shall be irrevocable
and, except as provided in paragraph (a), shall apply only to the Bonus payable
with respect to services performed during the Plan Year for which the election
is made. For each subsequent Plan Year, an Eligible Employee may make a new
election, subject to the limitations set forth in this Section 3.1, to defer a
percentage of his or her Bonus. Such election shall be on forms provided by the
Committee and shall be made on or before the December 1 preceding the Plan Year
for which the election is to apply.
(g) Elections other than Elections during the Initial Election Period.
Subject to the minimum deferral requirement of paragraph (c) above, any Eligible
Employee who fails to elect to defer compensation during his or her Initial
Election Period may subsequently become a Participant, and any Eligible Employee
who has terminated a prior Salary deferral election may elect to again defer
Salary, by filing an election, on a form provided by the Committee, to defer
Compensation as described in paragraph (b) above. An election to defer Salary
and/or Bonus must be filed on or before December 1 and will be effective for
Salary earned during pay periods beginning after the following January 1 and the
Bonus paid with respect to services performed in the Plan Year beginning on the
following January 1.
3.2 - INVESTMENT ELECTIONS.
(a) At the time of making the deferral elections described in Section 3.1,
the Participant shall designate, on a form provided by the Committee, which of
the following types of mutual funds or contracts the Participant's Account will
be deemed to be invested in for purposes of determining the amount of earnings
to be credited to that Account:
1) Money Market Fund
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2) Common Stock Fund
3) International Equity Fund
4) Balanced Fund
In making the designation pursuant to this Section 3.2, the Participant may
specify that all or any multiple of his Deferral Account (in excess of 10%) be
deemed to be invested in one or more of the types of mutual funds or contracts
listed above. Effective as of the end of any calendar quarter, a Participant may
change the designation made under this Section 3.2 by filing an election, on a
form provided by the Committee, at least 30 days prior to the end of such
quarter. If a Participant fails to elect a type of fund under this Section 3.2,
he or she shall be deemed to have elected the Money Market Fund.
(b) Although the Participant may designate the type of mutual funds or
contracts in paragraph (a) above, the Committee shall select from time to time,
in its sole discretion, a commercially available fund or contract of each of the
types described in paragraph (a) above to be the Funds. The Interest Rate of
each such commercially available fund or contract shall be used to determine the
amount of earnings or losses to be credited to Participants' Accounts under
Article IV.
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ARTICLE IV
ACCOUNTS
4.1 - DEFERRAL ACCOUNT.
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. Each Participant's Deferral Account shall be further
divided into separate subaccounts ("mutual fund subaccounts"), each of which
corresponds to a mutual fund or contract elected by the Participant pursuant to
Section 3.2(a). A Participant's Deferral Account shall be credited as follows:
(a) As of the last day of each month, the Committee shall credit the mutual
fund subaccounts of the Participant's Deferral Account with an amount equal to
Salary deferred by the Participant during each pay period ending in that month
in accordance with the Participant's election under Section 3.2(a); that is, the
portion of the Participant's deferred Salary that the Participant has elected to
be deemed to be invested in a certain type of mutual fund shall be credited to
the mutual fund subaccount corresponding to that mutual fund;
(b) As of the last day of the month in which the Bonus or partial Bonus
would have been paid, the Committee shall credit the mutual fund subaccounts of
the Participant's Deferral Account with an amount equal to the portion of the
Bonus deferred by the Participant's election under Section 3.2(a); that is, the
portion of the Participant's deferred Bonus that the Participant has elected to
be deemed to be invested in a particular type of mutual fund shall be credited
to the mutual fund subaccount corresponding to that mutual fund; and
(c) As of the last day of each month, each mutual fund subaccount of a
Participant's Deferral Account shall be credited with earnings or losses in an
amount equal to that determined by multiplying the balance credited to such
mutual fund subaccount as of the last day of the preceding month by the Interest
Rate for the corresponding Fund selected by the Company pursuant to Section
3.2(b).
4.2 - COMPANY CONTRIBUTION ACCOUNT.
The Committee shall establish and maintain a Company Contribution Account
for each Participant under the Plan. Each Participant's Company Contribution
Account shall be further divided into separate mutual fund subaccounts
corresponding to the mutual fund or contract elected by the Participant pursuant
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to Section 3.2(a). A Participant's Company Contribution Account shall be
credited as follows:
(a) As of the last day of each Plan Year, the Committee shall credit the
mutual fund subaccounts of the Participant's Company Contribution Account with
an amount equal to the Company Contribution Amount, if any, applicable to that
Participant; that is, the portion of the Company Contribution Amount, if any,
which the Participant elected to be deemed to be invested in a certain type of
mutual fund shall be credited to the corresponding mutual fund subaccount; and
(b) As of the last day of each month, each mutual fund subaccount of a
Participant's Company Contribution Account shall be credited with earnings or
losses in an amount equal to that determined by multiplying the balance credited
to such mutual fund subaccount as of the last day of the preceding month by the
Interest Rate for the corresponding Fund selected by the Company pursuant to
Section 3.2(b).
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ARTICLE V
VESTING
5.1 - DEFERRAL ACCOUNT.
A Participant's Deferral Account shall be 100% vested at all times.
5.2 - COMPANY CONTRIBUTION ACCOUNT.
(a) A Participant's Company Contribution Account shall vest and become
nonforfeitable as follows:
Years of Vesting Service Earned
by the Participant Under the Profit
Sharing Plan (Including Vesting
Service Earned Prior to 1995) Percentage Vested
Less than 2 0%
2 25%
3 50%
4 75%
5 or more 100%
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ARTICLE VI
DISTRIBUTIONS
6.1 - DISTRIBUTION OF DEFERRED COMPENSATION.
(a) In the case of a Participant who terminates employment with the Company
and who either (i) terminates as a result of a long-term disability (as defined
in the Company's long-term disability plan for executives), or (ii) who is 100%
vested in his or her Company Contribution Account under this Plan, the
Distributable Amount shall be paid to the Participant (and after his death to
his or her Beneficiary) in the form of a substantially equal quarterly
installments over 15 years beginning on his or her Payment Eligibility Date.
Notwithstanding the foregoing, a Participant described in the preceding sentence
may elect one of the following optional forms of distribution provided that his
or her election is filed with the Committee at least one year prior to his or
her termination of employment or, if later, January 31, 1995 (March 31 for
Pacesetter, Inc. employees):
(1) a cash lump sum payable on the Participant's Payment Eligibility
Date, and
(2) substantially equal quarterly installments over five or ten years
beginning on the Participant's Payment Eligibility Date.
Notwithstanding this subsection, if the Distributable Amount is $25,000 or less,
the Distributable Amount shall automatically be distributed in the form of a
cash lump sum on the Participant's Payment Eligibility Date. The Participant's
Accounts shall continue to be credited monthly with earnings pursuant to Section
4.1 of the Plan until all amounts credited to his or her Accounts under the Plan
have been distributed. For all purposes under this Plan, a Participant shall not
be considered terminated from employment if the Participant remains employed by
a member of the Company's controlled group of corporations (within the meaning
of Section 414(b) of the Code), even if such member is not a Company. However,
if the Employee is employed by a Company or a member of its controlled group and
such entity ceases to be a member of such controlled group as a result of a sale
or other corporate reorganization, such sale or other corporate reorganization
shall be treated as termination of employment unless immediately following such
event and without any break in employment the Participant remains employed by
Company or another corporation which is a member of its controlled group of
corporations or the former member of the controlled group assumes liability for
the benefit of the Participant.
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(b) In the case of a Participant who terminates employment prior to 100%
vesting in his or her Company Contribution Account and for reasons other than a
long-term disability or death, the Distributable Amount shall be paid to the
Participant in the form of a cash lump sum on the Participant's Payment
Eligibility Date.
(c) In the case of a Participant who dies while employed by the Company,
the following benefits shall be provided:
(1) That portion of the death benefit of any life insurance policy
purchased by the trustee of the Trust described in Section 6.5 to insure
the life of the Participant (the "Policy") which is equal to:
(x) in the case of Participants not employed by Pacesetter, Inc.
two times the sum of the Participant's Salary in effect at the
time the Participant dies plus the Participant's Bonus paid or
payable for services performed in the Plan Year prior to the Plan
Year in which Participant dies or (y) in the case of Participants
employed by Pacesetter, Inc., three times the Salary in effect at
the time the Participant dies,
shall be paid to Participant's beneficiary under the Policy by the
insurance company which issued the Policy. Any such Policy shall be subject
to certain conditions set forth in a "Split-Dollar Life Insurance
Agreement" between the Participant and the Company, pursuant to which the
Participant may designate a beneficiary with respect to the portion of the
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Policy proceeds described in the preceding sentence in the event the
Participant dies prior to terminating employment with the Company. The
Participant shall have the right to designate and change such beneficiary
(which need not be his Beneficiary) at any time on a form provided by and
filed with the insurance company. If no such form is on file with the
insurance company, the insurance proceeds designated in this paragraph (1)
shall be paid to the Beneficiary. The benefit payable pursuant to this
paragraph (1) shall only be paid if the insurance company agrees that the
Participant is insurable and shall be subject to all conditions and
exceptions set forth in the applicable insurance policy. Notwithstanding
the foregoing, no benefit shall be payable pursuant to this paragraph (1)
if the Participant dies within sixty days of the first day of the month in
which Compensation is first credited to the Participant's Account. A
Participant who is entitled to a death benefit pursuant to this paragraph
(1) shall not be entitled to any other group term life insurance benefits
from the Company under this Plan or any other policy provided by the
Company. Notwithstanding any provision of this Plan or any other document
to the contrary, neither the Trust nor Company shall have any obligation to
pay the Participant or his beneficiary any amounts described in this
Section 6.1(c)(1); all such amounts due pursuant to Section 6.1(c)(1) shall
be payable solely from the proceeds of the Policy, if any. Furthermore,
neither the Trust nor the Company is obligated to maintain the Policies; no
death benefit shall be payable hereunder if the Trust has been notified by
the Committee to discontinue the Policy for the Participant. In addition,
no Policy shall be allocated to any Account.
(2) The Distributable Amount shall be paid to the Participant's
Beneficiary in a lump sum.
6.2 - FORFEITURES.
When a Participant (or, in the case of his or her death, the Participant's
Beneficiary) receives a distribution of benefits under this Plan, the portion of
his or her Company Contribution Account which is not vested shall be forfeited,
and the Company shall have no obligation to the Participant (or Beneficiary)
with respect to such forfeited amount.
6.3 - EARLY DISTRIBUTIONS.
Participant shall be permitted to elect to withdraw amounts from their
Accounts prior to termination of employment with the Company ("Early
Distributions"), subject to the following restrictions:
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(a) The election to take an Early Distribution shall be made by filing a
form provided by and filed with the Committee prior to the end of any calendar
month.
(b) The amount of the Early Distribution shall in all cases equal 90% of
the Distributable Amount as of the end of the calendar month as of which the
distribution is to be made.
(c) The amount described in subsection (b) above shall be paid in a single
cash lump sum as soon as practicable after the end of the calendar month in
which the Early Distribution election is made.
(d) If a Participant receives an Early Distribution, the remaining balance
of his or her Accounts (including both the portion, if any, which is not vested
and 10% of the Distributable Amount) shall be permanently forfeited and the
Company shall have no obligation to the Participant or his Beneficiary with
respect to such forfeited amount.
(e) If a Participant receives an Early Distribution, the following rules
will apply for the balance of the Plan Year and for the following Plan Year: (i)
the Participant will be ineligible to participate in the Plan, (ii) the
Participant will not receive any allocations of Company Contribution Amounts and
(iii) neither the Participant (nor his Beneficiary or beneficiaries) shall be
entitled to death benefits under Section 6.1(c)(1) or (2).
6.4 - INABILITY TO LOCATE PARTICIPANT.
In the event that the Committee is unable to locate a Participant or
Beneficiary within two years following the Participant's Payment Eligibility
Date, the amount allocated to the Participant's Deferral Account and Company
Contribution Amounts shall be forfeited. If, after such forfeiture, the
Participant or Beneficiary later claims such benefit, such benefit shall be
reinstated without interest or earnings, provided that Section 6.2 shall still
apply.
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6.5 - TRUST.
(a) The Company shall cause the payment of benefits under this Plan
(excluding amounts described in Section 6.1(c)(1)) to be made in whole or in
part by the Trustee of the St. Jude Medical Management Savings Plan Rabbi Trust
(the "Trust") in accordance with the provisions of this Section 6.5. As soon as
practicable after the end of each Plan Year (but no later than the tax return
due date of the Company for such year), the Company shall contribute to the
Trust for each Participant an amount equal to the amount deferred by the
Participant for the Plan Year and the Company Contribution Amount for the
Participant for the Plan Year. The Company shall also contribute cash in amounts
approximately equal to the "cost of insurance" (as defined in each Policy)
needed to fund the death benefits described in Section 6.1(c)(1); provided that
such obligation shall not apply with respect to a Policy if (1) the Committee
has directed to the Trust to discontinue the Policy, (2) the Participant is no
longer employed by the Employer, or (3) the Participant is not entitled to a
death benefit under the Policy because he has taken an early distribution (as
described in Section 6.4 of the Plan). Notwithstanding the foregoing, prior to
the date the Policies are contributed to the Trust, the amounts described in the
preceding two sentences shall be used to pay premiums on the Policy, rather than
contributed to the Trust.
(b) The Committee shall direct the Trustee to pay the Participant or his
Beneficiary at the time and in the amount described in Article VI (excluding
amounts described in Section 6.1(c)(1)). In the event the amounts held under the
Trust are not sufficient to provide the full amount (excluding amounts described
in Section 6.1(c)(1)) payable to the Participant, the Company shall pay for the
remainder of such amount at the time set forth in Article VI (excluding amounts
described in Section 6.1(c)(1)).
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ARTICLE VII
ADMINISTRATION
7.1 - COMMITTEE.
A committee shall be appointed by, and serve at the pleasure of, the Board
of Directors. The number of members comprising the Committee shall be determined
by the Board which may from time to time vary the number of members. A member of
the Committee may resign by delivering a written notice of resignation to the
Board. The Board may remove any member by delivering a certified copy of its
resolution of removal to such member. Vacancies in the membership of the
Committee shall be filled promptly by the Board.
7.2 - COMMITTEE ACTION.
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. The Chairman or any other member or members of the
Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.
7.3 - POWERS AND DUTIES OF THE COMMITTEE.
(a) The Committee, on behalf of the Participants and their Beneficiaries,
shall enforce the Plan in accordance with its terms, shall be charged with the
general administration of the Plan, and shall have all powers necessary to
accomplish its purposes, including, but not by way of limitation, the following:
(1) To select the funds or contracts to be the Funds in accordance
with Section 3.2(b) hereof;
(2) To construe and interpret the terms and provisions of this Plan;
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(3) To compute and certify to the amount and kind of benefits payable
to Participants and their Beneficiaries;
(4) To maintain all records that may be necessary for the
administration of the Plan;
(5) To provide for the disclosure of all information and the filing or
provision of all reports and statements to Participants,
Beneficiaries or governmental agencies as shall be required by
law;
(6) To make and publish such rules for the regulation of the Plan and
procedures for the administration of the Plan as are not
inconsistent with the terms hereof;
(7) To appoint a plan administrator or any other agent, and to
delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time
prescribe; and
(8) To take all actions set forth in the Trust agreement, including
determining whether to hold or discontinue the Policies.
7.4 - CONSTRUCTION AND INTERPRETATION.
The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and
any Participant or Beneficiary. The Committee shall administer such terms and
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan.
7.5 - INFORMATION.
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other cause of termination, and
such other pertinent facts as the Committee may require.
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7.6 - COMPENSATION, EXPENSES AND INDEMNITY.
(a) The members of the Committee shall serve without compensation for their
services hereunder.
(b) The Committee is authorized at the expense of the Company to employ
such legal counsel as it may deem advisable to assist in the performance of its
duties hereunder. Expenses and fees in connection with the administration of the
Plan shall be paid by the Company.
(c) To the extent permitted by applicable state law, the Company shall
indemnify and save harmless the Committee and each member thereof, the Board of
Directors and any delegate of the Committee who is an employee of the Company
against any and all expenses, liabilities and claims, including legal fees to
defend against such liabilities and claims arising out of their discharge in
good faith of responsibilities under or incident to the Plan, other than
expenses and liabilities arising out of willful misconduct. This indemnity shall
not preclude such further indemnities as may be available under insurance
purchased by the Company or provided by the Company under any bylaw, agreement
or otherwise, as such indemnities are permitted under state law.
7.7 - QUARTERLY STATEMENTS.
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Accounts on a quarterly basis as
of each March 31, June 30, September 30 and December 31.
7.8 - DISPUTES.
(a) Claim.
A person who believes that he or she is being denied a benefit to which he
or she is entitled under this Agreement (hereinafter referred to as "Claimant")
may file a written request for such benefit with the Employer, setting forth his
or her claim. The request must be addressed to the President of the Employer at
its then principal place of business.
(b) Claim Decision.
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Upon receipt of a claim, the Employer shall advise the Claimant that a
reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Employer may, however, extend the reply
period for an additional ninety (90) days for special circumstances.
If the claim is denied in whole or in part, the Employer shall inform the
Claimant in writing, using language calculated to be understood by the Claimant,
setting forth: (A) the specified reason or reasons for such denial; (B) the
specific reference to pertinent provisions of this Agreement on which such
denial is based; (C) a description of any additional material or information
necessary for the Claimant to perfect his or her claim and an explanation why
such material or such information is necessary; (D) appropriate information as
to the steps to be taken if the Claimant wishes to submit the claim for review;
and (E) the time limits for requesting a review under subsection (c).
(c) Request for Review.
Within sixty (60) days after the receipt by the Claimant of the written
opinion described above, the Claimant may request in writing that the Committee
review the determination of the Employer. Such request must be addressed to the
Secretary of the employer, at its then principal place of business. The Claimant
or his or her duly authorized representative may, but need not, review the
pertinent documents and submit issues and comments in writing for consideration
by the Committee. If the Claimant does not request a review within such sixty
(60) day period, he or she shall be barred and estopped from challenging the
Employer's determination.
(d) Review of Decision.
Within sixty (60) days after the Committee's receipt of a request for
review, after considering all materials presented by the Claimant, the Committee
will inform the Participant in writing, in a manner calculated to be understood
by the Claimant, of its decision setting forth the specific reasons for the
decision and containing specific references to the pertinent provisions of this
Agreement on which the decision is based. If special circumstances require that
the sixty (60) day time period be extended, the Committee will so notify the
Claimant and will render the decision as soon as possible, but no later than one
hundred twenty (120) days after receipt of the request for review.
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ARTICLE VIII
MISCELLANEOUS
8.1 - UNSECURED GENERAL CREDITOR.
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interest in any specific property
or assets of the Company. No assets of the Company shall be held under any
trust, or held in any way as collateral security for the fulfilling of the
obligations of the Company under this Plan. Any and all of the Company's assets
shall be, and remain, the general unpledged, unrestricted assets of the Company.
The Company's obligation under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay money in the future, and the rights of
the Participants and Beneficiaries shall be no greater than those of unsecured
general creditors. It is the intention of the Company that this Plan (and the
Trust described in Section 6.5) be unfunded for purposes of the Code and for
purposes of Title I of ERISA.
8.2 - RESTRICTION AGAINST ASSIGNMENT.
The Company shall pay all amounts payable hereunder only to the person or
persons designated by the Plan and not to any other person or corporation. No
part of a Participant's Accounts shall be liable for the debts, contracts, or
engagements of any Participant, his or her Beneficiary, or successors in
interest, nor shall a Participant's Accounts be subject to execution by levy,
attachment, or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any right to alienate, anticipate, sell, transfer,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever. If any Participant, Beneficiary or successor in interest is
adjudicated bankrupt or purports to anticipate, alienate, sell, transfer,
commute, assign, pledge, encumber or charge any distribution or payment from the
Plan, voluntarily or involuntarily, the Committee, in its discretion, may cancel
such distribution or payment (or any part thereof) to or for the benefit of such
Participant, Beneficiary or successor in interest in such manner as the
Committee shall direct.
8.3 - WITHHOLDING.
There shall be deducted from each payment made under the Plan or any other
compensation payable to the Participant (or Beneficiary) all taxes which are
required to be withheld by the Company in respect to such payment or this Plan.
The Company shall have the right to reduce any payment (or compensation) by the
amount of cash sufficient to provide the amount of said taxes.
Page 22
<PAGE>
8.4 - AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION.
The Chief Executive Officer of St. Jude Medical, Inc. may amend, modify,
suspend or terminate the Plan in whole or in part, except that no amendment,
modification, suspension or termination shall have any retroactive effect to
reduce any amounts allocated to a Participant's Accounts (neither the Policies
themselves, nor the death benefit described in Section 6.1(c)(1) shall be
treated as allocated to Accounts). In addition, the Chief Executive Officer has
the right to amend or terminate Section 6.1(c)(1). In the event that this Plan
is terminated, the amounts allocated to a Participant's Accounts (regardless of
whether such amounts had become vested) shall be distributed to the Participant
or, in the event of his or her death, his or her Beneficiary in a lump sum
within thirty (30) days following the date of termination.
8.5 - GOVERNING LAW.
This Plan shall be construed, governed and administered in accordance with
the laws of the State of Minnesota.
8.6 - RECEIPT OR RELEASE.
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company. The Committee
may require such Participant or Beneficiary, as a condition precedent to such
payment, to execute a receipt and release to such effect.
8.7 - PAYMENTS ON BEHALF OF PERSONS UNDER INCAPACITY.
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgement of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefore, the
Committee may direct that such payment be made to any person found by the
Committee, in its sole judgement, to have assumed the care of such person. Any
payment made pursuant to such determination shall constitute a full release and
discharge of the Committee and the Company.
Page 23
<PAGE>
8.8 - HEADINGS, ETC. NOT PART OF AGREEMENT.
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
IN WITNESS WHEREOF, the Company has caused this document to be executed by
its duly authorized officer on this ________ day of __________, 1995.
ST. JUDE MEDICAL, INC.
By _______________________________________
By _______________________________________
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1994
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
1994 1993 1992
PRIMARY
Average shares outstanding 46,467,325 46,963,158 47,521,510
Net effect of dilutive stock options, based on the
treasury stock method using average market price 311,929 259,195 409,525
TOTAL 46,779,254 47,222,353 47,931,035
Net Income $79,234,001 $109,643,072 $101,658,327
Earnings Per Share $1.69 $2.32 $2.12
FULLY DILUTED
Average shares outstanding 46,467,325 46,963,158 47,521,510
Net effect of dilutive stock options, based on the
treasury stock method using year-end market price,
if higher than average market price 543,085 278,523 424,167
TOTAL 47,010,410 47,241,681 47,945,677
Net Income $79,234,001 $109,643,072 $101,658,327
Earnings Per Share $1.69 $2.32 $2.12
</TABLE>
EXHIBIT 13
ST. JUDE MEDICAL, INC.
1994 ANNUAL REPORT
Page - Cover Page
<PAGE>
Leader in Quality Products for Tomorrow's Health Care
Table of Contents
1 Financial Highlights
2 Letter to Shareholders
4 Q&A with the CEO
6 Review of Operations
20 Corporate Citizenship and Community Involvement
22 Management's Discussion and Analysis
27 Report of Management
27 Report of Independent Auditors
28 Consolidated Financial Statements
32 Notes to Consolidated Financial Statements
38 Ten-Year Summary of Selected Financial Data
40 Investor Information
41 Leadership and Directors
About the Company St. Jude Medical, Inc., is a global, diversified medical
device company with an emphasis on cardiac care products. The Company has three
divisions that manufacture and market products: the St. Jude Medical Division,
the global leader in heart valves; Pacesetter, Inc., a leader in cardiac rhythm
management; and Cardiac Assist, a supplier of open heart surgery assist
products. In addition, to foster growth and innovation, the Company has formed
alliances with other technology-based medical companies.
The Company's products are sold worldwide in more than 70 countries. St. Jude
Medical has eight sales and manufacturing facilities - headquarters and
manufacturing in St. Paul, Minnesota; international headquarters in Brussels,
Belgium; and other operations located in Los Angeles, California; Chelmsford,
Massachusetts; Caguas, Puerto Rico; St. Hyacinthe, Canada; Stockholm, Sweden;
and East Kilbride, Scotland. At December 31, 1994, St. Jude Medical employed
2,248 people in 14 countries.
St. Jude Medical, Inc., common stock is traded on the Nasdaq National Market
under the symbol STJM. Listed options are traded on the Chicago Board Options
Exchange under the symbol SJQ.
On the Cover Pictured on the cover at a recent reunion in Lund, Sweden are, left
to right, Dr. Rune Elmqvist, 89, Arne Larsson, age 80, and Dr. Ake Senning, also
80. In 1958, these three men made medical history.
External pacemakers were being used in the late 1950s, but many patients died or
experienced complications from ascending infections along the leads. Dr.
Senning, a heart surgeon at the Karolinska Hospital in Solna, near Stockholm,
Sweden, and Dr. Elmqvist, a medical technician at the Elema operations of the
company that became Pacesetter, were collaborating, using newly invented silicon
transistor batteries to design a long-lasting implantable pacemaker. They were
consulted when Mr. Larsson was admitted to the hospital with advanced
bradycardia. He was losing consciousness up to 20 times a day, and an
implantable pacemaker was his only hope. Relying on preliminary animal research
to determine the proper specifications, Dr. Elmqvist hastened his development
efforts and Dr. Senning successfully implanted the new pacemaker in Mr. Larsson
on October 8, 1958. Pictured at the top left, Mr. Larsson holds the world's
first implantable pacemaker, which saved his life in 1958.
That first implantable pacemaker served as the basis for future generations of
pacemakers. The three men often reflect on their roles in the development of a
technology that would eventually improve the quality of life of hundreds of
thousands of people around the world.
Today, St. Jude Medical is building on leadership positions in both the heart
valve market and the cardiac rhythm management market, which has evolved
dramatically from that first implantable device that helped Mr. Larsson. Denise
Opland, in the picture on the bottom left, is one of the many people whose life
has improved dramatically after receiving a St. Jude Medical(R) mechanical heart
valve. (For more on Denise Opland, please see page 6.)
Page - Inside Front Cover
<PAGE>
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
Year ended December 31 1994 1993 % Change
Income Statement
Net sales $359,640 $252,642 42
Operating profit 99,299 131,288 (24)
Net income 79,234 109,643 (28)
Earnings per share 1.69 2.32 (27)
Profit Margins
Gross 71.9% 75.7%
Operating 27.6 52.0
Net 22.0 43.4
Balance Sheet
Cash and marketable securities $136,968 $368,991 (63)
Property, plant and equipment, net 132,165 47,185 180
Total assets 919,898 526,817 75
Long-term debt 255,000 -- NM
Shareholders' equity 552,218 484,241 14
Financial Condition
Current ratio 3.9/1 11.0/1
Debt to total capital ratio 32% --
Note: Results between 1994 and 1993 are not directly comparable due to the
Pacesetter acquisition. Results for 1994 include a $40,800 pre-tax and a
$25,300, or $.54 per share, after-tax one-time charge for purchased research and
development associated with the Pacesetter acquisition. See Note 2 to the
financial statements.
[GRAPH]
NET SALES
(Dollars in millions)
1990 $175
1991 210
1992 240
1993 253
1994 360
[GRAPH]
OPERATING PROFIT
(Dollars in millions)
1990 $ 77
1991 101
1992 122
1993 131
1994 99 - *140 (estimated from graphic)
[GRAPH]
NET INCOME
(Dollars in millions)
1990 $ 65
1991 84
1992 102
1993 110
1994 79 - *105 (estimated from graphic)
[GRAPH]
EARNINGS PER SHARE
(In dollars)
1990 $1.35
1991 1.75
1992 2.42
1993 2.32
1994 1.69 - *2.27 (estimated from graphic)
(*) One-time charge for purchased research and development associated with the
Pacesetter acquisition
Page 1
<PAGE>
TO OUR SHAREHOLDERS
Growth, diversification and solid accomplishments on many fronts characterized
St. Jude Medical's performance in 1994. It was truly a momentous year for our
company.
We began implementing our long-term strategic diversification plan, taking the
first major step to transform St. Jude Medical into a broad-based global leader
in the medical device industry. We acquired Siemens Pacesetter and the pacing
operations of Siemens-Elema, which constituted the worldwide cardiac rhythm
management business of Siemens AG. It was also a year in which St. Jude
Medical's heart valve business introduced more new products than in the
Company's entire history and continued its unequaled market leadership.
[PHOTO]
In January 1995, President and CEO Ronald A. Matricaria (left) was named
Chairman of St. Jude Medical's board of directors. He and other board members
continue to rely on the expertise of board member Lawrence A. Lehmkuhl (right),
who served as the Company's President and CEO from 1986 to 1993 and retired as
Chairman in January.
Our actions clearly buoyed shareholder confidence, as St. Jude Medical's stock
price appreciated by 50 percent during the year. This was particularly
gratifying, since our most critical priority is creating shareholder value.
Net sales for 1994, which included one full quarter of Pacesetter operations,
reached a record $359.6 million. Net income of $79.2 million, or $1.69 per
share, compared with $109.6 million, or $2.32 per share, in 1993.
In the fourth quarter, we took a non-cash, after-tax charge to earnings of $25.3
million, or $.54 per share, related to purchased research and development in
connection with the Pacesetter acquisition. The one-time charge, which was
required by generally accepted accounting principles, will benefit future
earnings by reducing goodwill amortization. Without the charge and the negative
impact of increased taxes on Puerto Rican income, earnings for 1994 would have
been $2.33 per share. We expect the operating results from Pacesetter to be
additive to earnings 1995, as they were in the fourth quarter 1994.
We financed the $525 million transaction with Siemens, which was completed
September 30, 1994, with a combination of cash and bank debt. We established a
$260 million revolving credit line with an 11-bank syndicate. We believe we will
be able to pay off the debt within three years from the strong cash flow of the
combined Company.
Cardiac rhythm management represents our second major medical technology
platform. The Pacesetter acquisition has established a leadership position for
us in the $2.4 billion cardiac rhythm management market, which is expected to
grow to $4 billion over the next five years. During the fourth quarter 1994, a
number of Pacesetter products received FDA clearance for U.S. marketing. Several
others recently entered clinical evaluation as Pacesetter strengthens its
technological leadership position in the treatment of bradycardia.
For our heart valve technology platform, we minimized the competitive impact
from the entry of a competitor into the U.S. market in 1994. We also received
International Standards Organization (ISO) certification for our mechanical
heart valve facilities and became the first heart valve manufacturer to have the
right to use the Commission Europeen (CE) mark on our products.
Page 2
<PAGE>
St. Jude Medical expanded programs to develop and market tissue heart valves
during 1994, signing an agreement with Advanced Tissue Sciences, Inc. to pursue
joint development of tissue-engineered heart valves and beginning clinical
evaluation of two new tissue valve products, the Toronto SPV(TM) and the SJM
X-Cell(TM). In addition, we began collaborating with SRI International to
develop a next-generation heart valve which could have the ability to grow and
change like a natural part of the human body.
It also was an important year for maximizing the talents and contributions of
our executives. Eric W. Sivertson, who had managed our heart valve business
since 1992 and previously managed our international business, was named
president of Pacesetter. Terry L. Shepherd, formerly CEO of the Eli Lilly and
Company subsidiary, Hybritech, Inc., joined us to lead our heart valve
operations as the new president of the St. Jude Medical Division.
Over the past year, three exceptional individuals joined our board of directors.
Walter L. Sembrowich, Ph.D., a founder and co-chairman of Diametrics Medical,
Inc., has a strong medical research and technical background. Kenneth G.
Langone, founder and managing director of the New York investment banking firm,
Invemed Associates, Inc., has extensive financial and technology industry
experience. Gail R. Wilensky, Ph.D., who joined the board of directors in
January 1995, was deputy assistant to President George Bush for policy
development and directed the Medicare and Medicaid programs of the Health Care
Financing Administration (HCFA). Lawrence A. Lehmkuhl recently retired from his
position as chairman. We deeply appreciate his many years of service to the
Company, as well as his continuing role as a director.
In 1995, we are integrating Pacesetter into St. Jude Medical and clearly
communicating our five guiding principles to all employees. Those principles
are: a strong focus on customer satisfaction; core values that include
integrity, honesty, respect for the individual and good corporate citizenship; a
work environment characterized by open communication, trust, the ability to take
risks and enjoy what we do; decentralized decision-making with an emphasis on
cross-functional teams; and accountability and a feeling of ownership.
In 1995, our heart valve business is focused on maintaining leadership in
mechanical heart valves, and on innovation. We recently introduced in Europe the
new St. Jude Medical(R) mechanical heart valve SJM(R) Masters Series rotatable
valve. We expect to receive FDA certification in 1995 for our new Woodridge
Carbon Technology Center in St. Paul, Minnesota, which will enable us to
internally produce most, if not all, of our pyrolytic carbon mechanical heart
valve components. Continued progress in tissue valve clinical trials and
next-generation heart valve research are also being emphasized.
Our 1995 expectations for Pacesetter are to maintain technology leadership and
to continue to improve its competitive position in bradycardia, while
accelerating efforts to enter the tachycardia, electrophysiology and atrial
fibrillation segments of the market. During 1995, we will begin global release
of many new products including the Trilogy(TM) family of pulse generators.
It is a busy time, and a crucial one for our Company in a changing global
marketplace for health care goods and services. We are confident about the
future as we focus on market leadership, on being the lowest cost producer and
on providing superior therapeutic outcomes and value.
Thank you for your support of St. Jude Medical.
Sincerely,
/s/ Ronald A. Matricaria
Ronald A. Matricaria
Chairman, President and Chief Executive Officer
March 10, 1995
Page 3
<PAGE>
GLOBAL COMPETITIVENESS:
RON MATRICARIA ON THE U.S. MEDICAL DEVICE INDUSTRY AND ST. JUDE MEDICAL
Q: HOW WELL IS THE MEDICAL DEVICE INDUSTRY POSITIONED TO COMPETE IN TODAY'S
GLOBAL MARKETPLACE?
A: Under the growing influence of managed care, our industry is becoming more
efficient. Cost containment pressures will continue to increase, and we are
responding. In fact, I would argue that we are responding much better on our own
than if Congress had opted for a government-run single payor system or the
complexities of the health care reform plan proposed by the Clinton
administration.
[PHOTO]
"As a medical device company executive, I know we will continue to find
effective ways to compete. However, as an American I am worried about some of
the policies and trends that threaten U.S. competitiveness."
Our industry has become quite nimble and creative in finding the best avenues to
compete effectively and efficiently. Health care technology purchases, including
medical devices, are a very small part of overall health care spending. The U.S.
government's own data shows that technology spending actually declined from 4.7
percent to 4.0 percent of total health care expenditures between 1987 and 1992.
Also, federal government statistics indicate that annual health care technology
inflation averaged just 2.9 percent between 1985 and 1992 - less than the 3.1
percent annual average increase for the overall Producer Price Index.
Health care technology companies are an extremely important part of our economy.
In the early 1990s, U.S. production of health care technology exceeded $40
billion and employment in our industry reached 280,000. In 1993, we had a $4.6
billion trade surplus in the health care technology area, up from $1.6 billion
in 1988.
With the changes that are occurring in the U.S. political environment, we are
confident that this kind of progress will continue. But it is very important for
government and business leaders to understand the contribution of medical
technology to the economy and global competitiveness, as well as the need to
make changes that will make health care more affordable.
Q: DOES THE UNITED STATES AS A NATION HAVE A COMPETITIVE ADVANTAGE IN THE
WORLDWIDE HEALTH CARE MARKET?
A: Frankly, I am increasingly concerned about the domestic medical device
industry's global competitiveness. This is particularly bothersome given that
this industry is very much a U.S. phenomenon. As a medical device company
executive, I know we will continue to find effective ways to compete. However,
as an American I am worried about some of the policies and trends that threaten
U.S. competitiveness, and I continue to meet with Congressional leaders to
express my opinions about these issues.
First, the substantial and growing costs we face because of burdensome product
liability laws and the current litigious environment in the United States are
serious risks for medical device businesses. We need fundamental tort reform
that gives U.S. industry a fair shake, yet still provides protection for the
consumer.
Page 4
<PAGE>
We are also at a distinct disadvantage in terms of the time it takes to get new
medical products to market in the United States. The main reason for this is the
extreme risk-avoidance mentality at the Food and Drug Administration (FDA),
which is responsible for determining the safety and efficacy of all medical
products. The FDA leadership actually is depriving U.S. patients of new
life-saving technologies by significantly lengthening approval processes and
impacting the industry by greatly increasing the costs associated with
developing new and innovative products.
In addition, the Health Care Financing Administration (HCFA) has terminated
Medicare reimbursement for procedures using medical devices that are in
FDA-supervised clinical trials. This action is denying many U.S. patients access
to advanced medical technology and is forcing health care companies to do
clinical trials overseas, depriving our country of its technology leadership
status.
The industry's export situation is also deteriorating. While we still have a
positive balance of trade in medical devices, the FDA is endangering this
position as well. Even after a U.S. medical device is approved for use in
another country, an FDA procedure can prohibit exports to those markets. As a
result, U.S. companies that want to remain competitive must not only do their
clinical work in Europe, but are also forced to move manufacturing offshore in
order to enter those markets as effectively as possible. This results in
well-paying jobs being driven out of the United States. It just does not make
sense.
These attitudes and policies need to be changed to improve our nation's ability
to compete internationally. However, I am encouraged that change is beginning to
occur in Washington, D.C., as a result of the November 1994 elections. Many new
people were elected to Congress whom I believe will support efforts to improve
the competitive environment for the medical device industry. We are hopeful that
most of the actions to resolve issues - including the power to reform health
care - will return to the private sector and state governments. Also, passage of
the General Agreement on Tariffs and Trade (GATT) and the North American Free
Trade Agreement (NAFTA) are important in terms of expanding our export
opportunities and removing trade barriers worldwide.
Q: WHERE DOES ST. JUDE MEDICAL STAND IN THE SCENARIO YOU HAVE DESCRIBED? WHAT
ARE YOU DOING TO INCREASE YOUR COMPETITIVE EDGE IN MARKETS AROUND THE WORLD?
A: St. Jude Medical has employees in 14 countries. We have seven manufacturing
locations in North America and Europe. We sell medical products all over the
world. In order to keep our product development and market launch timelines as
short as possible, we need to constantly monitor and adjust to changing
international market conditions. Every business decision - whether it involves
research and development, manufacturing, marketing or finance - is now made with
global competitiveness in mind.
It is important to point out that, while we strongly opposed health care reform
proposals that would have created a more bureaucratic, government-run system, we
support managed care, including the philosophy of giving consumers the best
possible data so that they can make informed health care decisions.
At St. Jude Medical, our goal is to be the lowest-cost producer of products that
deliver the greatest clinical value and therapeutic outcomes. As we continue to
grow and diversify our business, we will enter areas where we can be a market or
technology leader. Successful execution of these strategies is the key to our
performance around the world. Because we are embracing change in the
marketplace, we believe we are well positioned to capitalize on growth
opportunities.
Page 5
<PAGE>
[PHOTO]
Denise Opland, a 9th grader who lives in Stillwater, Minnesota, received a St.
Jude Medical(R) mechanical heart valve in 1993. Today, she has the endurance to
ride her bike and play bass clarinet in a school jazz ensemble. She recently
told St. Jude Medical employees: "You have given me the opportunity to live my
life as other teenagers do, with the hope of a normal life span... Thank you,
from the bottom of my heart."
Page 6
<PAGE>
HEART VALVES: CONTINUED LEADERSHIP
Undisputed leadership in the mechanical heart valve market is inextricably tied
to St. Jude Medical's success - past, present and future. Our bileaflet St. Jude
Medical(R) mechanical heart valve, implanted in more than 570,000 patients, has
served as the industry's gold standard for nearly two decades. As a new century
approaches, we are focused on enhancing that leadership position and growing
market share in an increasingly competitive environment. We are executing
strategies to become the premier innovator in all areas of the heart valve
market, today valued at over $500 million.
[PHOTO]
Guy Vanney (right), is a St. Jude Medical research engineer and the primary
inventor of the new SJM(R) Masters Series rotatable mechanical heart valve. In
April 1994, to overcome a congenital heart problem, Vanney received a St. Jude
Medical(R) mechanical heart valve. Within weeks he was able to resume his work
with fellow research engineer Averdon DeLeon (left), and to play with his two
daughters at home.
Our objective is to provide the best solutions in the world to the problems of
heart valve disease. This will mean expanding our presence in several
international markets. It will mean improving certain performance features of
our mechanical valve and maintaining the strong leadership position we have
established in the market by nullifying competitive threats. It will mean
offering improved bioprosthetic tissue heart valves. It will mean accelerating
work with researchers around the world on future generation products. We will do
all of these things in a way that creates value for all stakeholders in an
evolving health care environment.
1994 milestones:
* We achieved continuing success with our St. Jude Medical(R) Mechanical Heart
Valve Hemodynamic Plus (HP) Series, which was introduced in 1993. We added
several new sizes in 1994 and will continue to expand this product line to
fit the complete range of heart valve replacement patients.
* We successfully launched our new collagen-impregnated aortic valved graft
(CAVG) in the U.S. market, following FDA approval in March 1994.
* We gained approval to use the Commission Europeen (CE) mark on our mechanical
heart valve product line, beginning January 1, 1995. The CE mark certifies
that our heart valve manufacturing facilities and products meet European and
International Standards Organization (ISO) Quality System standards. We were
the first heart valve manufacturer to receive this certification. The CE mark
will be required to market heart valve products in Europe beginning in June
1998.
* U. S. clinical evaluation began in April 1994 for our stentless aortic tissue
valve product, the Toronto SPV(TM). Stentless valves do not have frames and
are designed to offer potentially superior hemodynamic performance in the
aortic position. At year end, we had completed more than four years of
favorable results with international implants of the Toronto SPV(TM) in more
than 800 Canadian and European patients. The Toronto SPV(TM) has been chosen
for more European implants than any other stentless tissue heart valve.
However, U.S. clinical trials were impacted in mid-1994, when HCFA refused to
reimburse Medicare procedures involving medical devices used in FDA-approved
clinical trials. We also began international clinical trials of our new SJM
X-Cell(TM) heart valve bioprosthesis. This valve was developed by The Heart
Valve Company, our joint venture with Hancock/Jaffe Laboratories.
Page 7
<PAGE>
* We extended an agreement with Advanced Tissue Sciences, Inc., of San Diego,
California, to pursue joint development of tissue-engineered heart valves. We
conducted feasibility studies to evaluate applications of Advanced Tissue
Sciences' tissue engineering technology, have obtained rights to license such
technology and are providing financial support for additional research in
1995.
* A cross-functional team focused specifically on managed care and clinical
outcomes research was formed.
[PHOTO]
A key product in St. Jude Medical's leadership strategy for tissue-engineered
heart valves is the Toronto SPV(TM), which entered U.S. clinical trials in 1994.
The product team includes (from left): Daniel D. Jungwirth, manager of St. Jude
Medical's manufacturing plant in St. Hyacinthe, Quebec, Canada; M. William
Mirsch, manager of tissue valve technology; and Peggy A. Malikowski, marketing
manager.
As we move into 1995, the St. Jude Medical Division is working on many fronts to
enhance our leadership position in the international heart valve market.
We are developing the ability to manufacture most, if not all, of the carbon
components for our mechanical heart valves and to clearly become the lowest cost
producer of those products. We are working to obtain FDA certification of our
new 65,000-square-foot Woodridge carbon component manufacturing facility during
1995. The Woodridge Carbon Technology Center, located in St. Paul, Minnesota,
will give us production efficiencies, improved quality control and cellular
manufacturing capabilities. Woodridge has already received ISO 9000/9001
certification. The transition from our existing facility to Woodridge will
continue into 1996.
Another goal for 1995 is a successful global market launch of our SJM(R) Masters
Series rotatable mechanical heart valve. Some surgeons prefer a rotatable design
in certain procedures. This product line is already in use in Europe, and we
anticipate submission to the FDA shortly.
Finally, we will continue next-generation heart valve work on our
BioXenoGraft(TM) recellularization program, with research assistance from SRI
International, Advanced Tissue Sciences, Inc. and other advisers. While it is a
long-range goal, St. Jude Medical wants to be the first company to produce a
durable replacement heart valve which would function like a natural part of the
human body and would not require anticoagulant medication. Meeting this complex
challenge is consistent with St. Jude Medical's mission of global heart valve
leadership and innovation.
Page 8
<PAGE>
Roy Wood of Madisonville, Kentucky, is a retired coal miner. In 1994, at age 70,
he learned that heart valve replacement surgery could ease his breathing and
sleeping problems. In April, Roy became one of the first U.S. recipients of a
Toronto SPV(TM) tissue heart valve, which was implanted by Dr. Michael R.
Petracek at St. Thomas Hospital in Nashville, Tennessee. Today, he is enjoying
life again with his wife, Patricia.
Page 9
<PAGE>
HEART VALVE AND CARDIAC ASSIST PRODUCTS
St. Jude Medical is dedicated to providing innovative solutions for heart valve
disease. These include mechanical heart valves, tissue-engineered heart valves
and work to develop next-generation heart valve products.
Heart Valve Products
[PHOTO GRAPHIC]
St. Jude Medical(R) Mechanical Heart Valve
[PHOTO GRAPHIC]
St. Jude Medical(R) Mechanical Heart Valve Hemodynamic Plus Series
[PHOTO GRAPHIC]
St. Jude Medical(R) Mechanical Heart Valve SJM(R) Masters Series Rotatable
Valve*
[PHOTO GRAPHIC]
Collagen-
Impregnated Aortic Valved Graft
[PHOTO GRAPHIC]
Toronto SPV(TM) Valve**
[PHOTO GRAPHIC]
SJM X-Cell(TM) Bioprosthesis*
[PHOTO GRAPHIC]
BioImplant(R) Tissue Valve*
[PHOTO GRAPHIC]
BiFlex(R) Annuloplasty Ring
* Not available in the United States
** Pending U.S. FDA clearance to market
Cardiac Assist Products
St. Jude Medical's Cardiac Assist Products include intra-aortic balloon pump
systems, which assist the heart before and after open heart surgery and complex
balloon angioplasty procedures, and centrifugal pump systems, which take over
for the heart during open heart surgery.
[PHOTO GRAPHIC]
Model 700 Intra-Aortic Balloon Pump (IABP)System
[PHOTO GRAPHIC]
RediFurl(R), RediGuard(R), and TaperSeal(R) Intra-Aortic Balloon Catheters
[PHOTO GRAPHIC]
Lifestream(R) Centrifugal Blood Pump System
[PHOTO GRAPHIC]
Isoflow(R) Centrifugal Blood Pump
Page 10
<PAGE>
CARDIAC RHYTHM MANAGEMENT PRODUCTS
Single Chamber
Pacesetter, a recognized leader in cardiac pacing system technology, is focused
on developing products to address the cardiac rhythm management market.
Pacesetter manufactures all pacing system components: pulse generators, leads,
programmers and ancillary products.
[PHOTO GRAPHIC]
Microny(TM) SR+*
[PHOTO GRAPHIC]
Solus(R) II SSIR
[PHOTO GRAPHIC]
Phoenix(R) III SSIC
[PHOTO GRAPHIC]
Trilogy(TM) SR+ SSIR**
Dual Chamber
[PHOTO GRAPHIC]
Trilogy(TM) DR+ DDDR**
[PHOTO GRAPHIC]
Synchrony(R) III DDDR
[PHOTO GRAPHIC]
Paragon(TM) III DDDC
[PHOTO GRAPHIC]
AddVent(TM) VDDR**
Leads and PDx(TM) Software
[PHOTO GRAPHIC]
Membrane Leads
[PHOTO GRAPHIC]
Tendril(TM) Leads
[PHOTO GRAPHIC]
Passive PLUS(TM) Leads
[PHOTO GRAPHIC]
PDx(TM) Pacing System Software
* Not available in the United States
** Pending U.S. FDA clearance to market
Page 11
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[PHOTO]
Six-year old Jake Manderfield of Burnsville, Minnesota, enjoys outdoor
activities such as skating with his parents, Catherine and Mark. At age 3, Jake
received a Solus(R) pacemaker manufactured by Pacesetter. The device corrected a
potentially life threatening heart condition.
Page 12
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PACESETTER: THE CARDIAC RHYTHM MANAGEMENT PLATFORM
Pacesetter has long been considered one of the leaders in the rapidly growing
cardiac rhythm management market. Since Siemens-Elema produced the first
implantable pacemaker in 1958, the Company continually demonstrated its
technology leadership in treating bradycardia, an unusually slow or erratic
heartbeat. In fact, Pacesetter's share of the $1.9 billion bradycardia market
has more than tripled over the past decade through the development and continual
improvement of a full line of cardiac pacing products in various dual and single
chamber configurations with features such as rate responsiveness.
[PHOTO]
Dr. Hans Schuller, associate professor of thoracic surgery at Lunds University
Hospital near Malmo, Sweden, implanted Pacesetter's first Microny(TM) SR+
cardiac pulse generator, the world's smallest pacemaker. The product is the size
of two quarters and weighs 14 grams.
Pacesetter manufactures all the components of its pacing systems: the pulse
generator, pacing leads and the programmer. The pulse generator, which is
implanted in a patient's upper torso, contains a battery, capacitor and
microcomputer components that serve as the pacemaker's "brain," sensing heart
rhythms and producing electrical impulses when needed. Pacing leads are
specially insulated wires that connect the pulse generator to the heart through
a nearby vein and carry information between the pulse generator and the heart.
The external programmer is used to interrogate the pulse generator memory,
allowing physicians to assess pacing performance and noninvasively reprogram the
implanted pacemaker for specific patient requirements using Pacesetter's
innovative PDx(TM) software.
Pacesetter's technology leadership stems in large part from a commitment to
designing its own integrated circuitry and software. This capability enabled
Pacesetter to introduce innovative products, such as the first rechargeable,
long-life pacemaker, the first single-chip pacemaker and the first pacemaker
capable of providing real-time measured data. In 1981, Pacesetter became the
first U.S. pacing company to use microprocessor technology in pulse generator
products.
Future growth strategies include enhancing Pacesetter's leadership position in
the bradycardia market, while accelerating entry into other major and
fast-growing segments: the $400 million tachycardia market, and the emerging
atrial fibrillation and electrophysiology markets. Tachycardia is the condition
in which a heart races and beats too rapidly. Atrial fibrillation, for which
current drug therapy is relatively ineffective, is characterized by an
arrhythmia in the heart's upper chambers which can deteriorate into an
ineffective fluttering or quivering of the heart muscle. Electrophysiology, a
new area of specialization within the field of cardiology, focuses on the
treatment of arrhythmias through the use of catheters to detect and correct weak
or dysfunctional areas in the heart.
Pacesetter also is focusing on providing the clinical outcomes data required by
managed health care systems, and developing more cost-effective treatment
methods and even higher quality products. Each new generation of implantable
products is designed to improve device longevity, diagnostic capability and
therapeutic value while minimizing size.
During 1994, a number of Pacesetter products received FDA clearance for U.S.
market release. Several others are undergoing the requisite clinical
investigations for FDA clearance and for international market approvals.
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PACESETTER: THE CARDIAC RHYTHM MANAGEMENT PLATFORM
Two new cardiac pacing leads - the Tendril(TM), an active fixation lead, and the
Passive PLUS(TM), a passive fixation lead - received FDA clearance. Both
products feature FAST-PASS(R), a unique coating which eases navigation through a
patient's veins.
Two pacemakers - the Paragon(TM) III, a conventional, dual-chamber system, and
the Phoenix(R) III, a conventional, single-chamber system - also received FDA
market release. Both of these small, lightweight pacemakers incorporate
innovative, sophisticated software that works in conjunction with our
proprietary PDx(TM) programmer software to enable physicians to immediately
access crucial data on patient cardiac status and pacing system performance.
This software allows patients to use a simple magnetic device to make their own
notations in the pacemaker memory when they feel unusual symptoms or
arrhythmias. Physicians are able to retrieve this information during a
subsequent interrogation to diagnose patient symptoms, often avoiding costly
diagnostic tests.
[PHOTO]
Clinical evaluation of the Trilogy(TM) DR+, the first pacemaker to provide full
"automaticity," has begun in the U.S. and Europe. The pacemaker collects and
analyzes information, then automatically adapts certain settings. The
Trilogy(TM) team includes (left to right): Alan B. Vogel, senior electrical
engineer; Gary D. Young, dual chamber product manager; and Ada Kan, senior
software engineer.
Pacesetter began European clinical trials in January 1995 for the Microny(TM)
SR+ cardiac pulse generator, the world's smallest pacemaker. Weighing 14 grams
(approximately the weight of two quarters), the Microny's(TM) "autocapture"
technology ensures that the smallest possible amount of energy is used to
stimulate a heart, maximizing pacemaker longevity and enhancing patient safety.
Pacemaker products undergoing clinical trials include the AddVent(TM), a
dual-chamber, single-lead pacing system that has been implanted in a number of
European patients. This mode of pacing therapy uses a single lead to sense
electrical activity in the heart's atrial and ventricular chambers and to
provide pacing stimulus to the ventricles. An application has been filed with
the FDA to begin U.S. clinical investigation of AddVent(TM).
The Trilogy(TM) DR+ dual-chamber rate responsive pacemaker, the first to offer
true "automaticity," began U.S. clinical investigation in December 1994. The
Trilogy(TM) DR+ and SR+ pacemakers can automatically adapt settings based on
information they collect and analyze about the patient's heart and its
interaction with the pacing system. The U.S. rollout of the Trilogy(TM) product
family is expected to begin in 1995.
PACESETTER'S GOALS FOR 1995 ARE TO:
* Enhance technology leadership in bradycardia;
* Participate in clinical studies and seek FDA approval of emerging indications
for pacing;
* Accelerate the development of products for the ventricular tachycardia and
defibrillation market, in part through Pacesetter's alliance with Angeion
Corporation;
Page 14
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[PHOTO]
Husband and wife Hank Buikema and Linn Eisen work together at Pacesetter's Los
Angeles, California, facility, and both are recent Pacesetter pacemaker
recipients. Linn's tachycardia was treated in 1992 with ablation surgery and a
pacemaker. In June 1993, Hank passed out, then was diagnosed with bradycardia
and received a pacemaker. Hank and Linn have personally thanked each of the
co-workers who made the devices that enhanced their lives.
Page 15
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PACESETTER: THE CARDIAC RHYTHM MANAGEMENT PLATFORM
* Leverage an existing investment in InControl by exploring ways to develop new
products through collaborative research and development programs for the
rapidly developing atrial fibrillation market; and
* Implement a strategy to enter the electrophysiology market.
[PHOTO]
Pacesetter's international headquarters is located in Los Angeles, California.
St. Jude Medical's goal is to maximize efficiencies and communication between
Pacesetter manufacturing and product development operations in Los Angeles,
Sweden and Scotland.
Pacesetter is developing a next-generation pacemaker family, Affinity(TM), which
reduces the number of integrated circuitry components found in current
pacemakers by half, yet incorporates automaticity, additional data memory and a
sophisticated, hand-held PC-based programmer. Plans include submitting an FDA
application seeking to begin clinical evaluation in 1996 of this elegantly
simplified yet powerful family of devices.
Work also is under way on a family of products to control tachycardia. These new
implantable cardiovertor defibrillators (ICD) are capable of treating many
different ventricular tachycardia and fibrillation conditions. The Eagle(TM) ICD
product line is expected to enter clinical trials by late 1995.
St. Jude Medical's investment in InControl enables the Company to participate in
the success of InControl which is developing devices to treat atrial
fibrillation, the most common form of cardiac arrhythmia. Occurring in nearly
two million people in the United States alone, atrial fibrillation is frequently
difficult to diagnose, and current therapies treat only the symptoms. InControl
is developing a product that would be the first device to effectively treat
atrial fibrillation. In September 1994, St. Jude Medical made an additional
investment in InControl, becoming one of its largest shareholders.
As a part of St. Jude Medical, an organization focused on global leadership in
cardiovascular medical devices, Pacesetter is pursuing opportunities in all
areas of cardiac rhythm management.
Page 16
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MAKING THE MOST OF WORLDWIDE MARKET OPPORTUNITIES
St. Jude Medical is capitalizing on opportunities to leverage our product lines
in markets around the world through the addition of Pacesetter's cardiac rhythm
management business. We currently sell products in more than 70 countries
worldwide. For effectiveness and efficiency, we are centralizing sales support
functions while maintaining independent cardiac rhythm management and heart
valve sales forces.
[PHOTO]
Per-Erik Elgan (left) and Robert Lund (right) inspect Microny(TM) pacemakers
manufactured for distribution to the European market in Stockholm, Sweden.
Quality leadership is a top priority for St. Jude Medical employees, who are
producing increasingly sophisticated products for the global heart valve and
cardiac rhythm management markets.
During 1994, we analyzed and established organizational structures and
procedures to manage our new cardiac rhythm management business, country by
country.
OTHER 1994 ACCOMPLISHMENTS INCLUDED:
* Continuing to form strategic marketing partnerships, including a highly
successful relationship with a cardiovascular products supplier in Spain and
alliances with Baxter International in Brazil and Argentina.
* Making significant international marketing progress with our Toronto SPV(TM)
stentless tissue heart valve.
* Introducing a number of new products internationally, including the SJM
X-Cell(TM) bioprosthesis heart valve and two new sizes for our HP series
mechanical heart valves.
We have international marketing strengths in Europe and Canada, but there
remains considerable room for growth in those regions and in emerging markets in
Asia and the Pacific Rim, Latin America, the Middle East and Africa. Around the
world, we are educating and building relationships with cardiac surgeons and
cardiologists, and completing and publishing clinical studies to demonstrate our
products' value to physicians, payors and patients. We are emphasizing
Pacesetter revenue growth in fast-growing Latin American markets.
During 1994, St. Jude Medical sponsored a number of international education
forums, including a satellite symposium viewed by 80 surgeons from Latin America
and the Pacific Rim, a cardiac care seminar in Chile, a clinical education
symposium in Egypt and a print and broadcast program to inform consumers in
Thailand about cardiac care.
INTERNATIONAL GOALS FOR 1995 INCLUDE:
* Managing the growth of our international operations, which have tripled in
size with the Pacesetter acquisition.
* Achieving significant growth in our worldwide share of the heart valve
market, with particularly aggressive goals for tissue-engineered heart
valves.
* Creating a strong, independent image for Pacesetter.
We are focusing on seven products that will be available in the European
marketplace for the first time in 1995. These include the new SJM(R) Masters
Series rotatable mechanical heart valves, the new ArmorGlide(TM) coated cardiac
assist catheters, the new Model 800 intra-aortic balloon pump console, and four
new Pacesetter products - the Trilogy(TM) family, AddVent(TM), Microny(TM) and
Regency(TM) pacemakers.
Page 17
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[PHOTO]
St. Jude Medical's CEO, Ronald A. Matricaria (left) and W. James Fitzsimmons,
CEO of EndoVascular Technologies, Inc. (EVT) have formed an alliance based on
their mutual interest in EVT's new Endovascular Grafting System(TM).
Page 18
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LAYING THE GROUNDWORK FOR NEW TECHNOLOGY PLATFORMS
St. Jude Medical will continue to diversify by creating new technology platforms
and identifying incremental products and technologies to expand our existing
businesses. We expect to find these opportunities in the cardiovascular devices
arena.
We continually analyze evolving therapeutic medical device classes and explore
specific opportunities, looking for synergies with our current business and the
core competencies we defined during our diversification planning process. Those
core competencies include blood handling and processing, implantable device
development and manufacturing, clinical trials, regulatory approval processes,
and biostructure and materials application.
[PHOTO]
Robert J. Helbling, President of the Cardiac Assist Division, is encouraged with
cardiologists' and perfusionists' response to the 1994 introduction of the
division's improved RediGuard(R) intra-aortic balloon catheter product which
offers several unique and advanced features designed by our customers.
One 1994 investment illustrates our interest in exploring wide-ranging
technologies that could improve quality of life and reduce health care costs. In
August, St. Jude Medical invested $12 million in EndoVascular Technologies, Inc.
(EVT), a developer of products which are designed to repair damaged or diseased
blood vessels.
EVT's first product is a device to repair abdominal aortic aneurysms, in which
the major artery carrying blood from the heart to the lower body is weakened and
can rupture, resulting in death. An estimated 1.7 million Americans have this
disease, and 190,000 new cases are diagnosed each year. EVT's Endovascular
Grafting System(TM) offers a possible alternative to major invasive surgery,
long recovery times and extended hospitalization. The system consists of a
disposable delivery catheter and a proprietary vascular prosthesis that is
permanently implanted into the patient's aorta to strengthen the weakened
vessel.
During 1995, we are evaluating our existing Cardiac Assist Division's (CAD)
potential to become a third technology platform. The division currently markets
two categories of products: intra-aortic balloon pump (IABP) systems, which
assist the heart before and after open heart surgery and complex coronary
balloon angioplasty procedures; and centrifugal pump systems, which take over
for the heart during open heart surgery. During 1994, based on input from
physicians and nurses, we introduced an improved intra-aortic balloon catheter
product which is easier to use and which has been well accepted by our
customers.
We will add both domestic and international CAD distributors in 1995. Some of
these representatives, who call on cardiologists, sell Pacesetter products.
Other goals include the U.S. introduction of our coated ArmorGlide(TM) catheter
to ease catheter insertion, which recently received FDA clearance, and our new
Model 800 IABP console. We also anticipate the completion of a multi-center
clinical study designed to measure IABP's role in reducing deaths during
high-risk angioplasty procedures by delivering counterpulsation that helps keep
the blood vessel open during the procedure.
As St. Jude Medical moves forward to add technology platforms, we continue to
follow our diversification plan blueprint in order to maximize shareholder
value.
Page 19
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CORPORATE CITIZENSHIP AND COMMUNITY INVOLVEMENT
[PHOTO]
In Memphis, Tennessee, the Company has donated St. Jude Medical(R) mechanical
heart valves for Dr. William Novick, a heart surgeon at Le Bonheur Children's
Medical Center and the president of the International Children's Heart
Foundation. Dr. Novick donates a significant amount of his time to help children
from around the world who otherwise would not have access to the heart surgery
they need. Recently, Dr. Novick operated on Martina Kupinic, a 7-year old girl
from war-torn Croatia.
[PHOTO]
In June 1994, St. Jude Medical celebrated "Anniversary Week" to communicate the
Company's mission, guiding principles and strategies for growth with important
audiences. Throughout that week, investors, customers, suppliers, patients,
employees and their families and other guests participated in on-site dialogue
and activities related to the dedication of the Woodridge Carbon Technology
Center. Shown are St. Jude Medical's St. Paul-based employees in front of the
new Woodridge facility.
[PHOTO]
Part of Pacesetter's community outreach program includes involvement with area
schools and universities. Employees have adopted Sylmar High School, providing
guest lecturers, materials and equipment and career counseling. Dr. David Vachon
of Pacesetter's materials lab conducts a chemistry experiment for Sylmar High
School students who toured the Pacesetter facility on career day.
Page 20
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CORPORATE CITIZENSHIP AND COMMUNITY INVOLVEMENT
We seek a challenging and rewarding work environment that encourages
accountability, creates a feeling of ownership and supports risk-taking while
enabling our employees to reach their full potential and enjoy what they do.
In addition to achieving our growth and diversification objectives, we donate
life-saving medical products to those in need and are identifying other ways to
give something back to the individuals and organizations that comprise St. Jude
Medical's many communities.
St. Jude Medical's mission and guiding principles emphasize the development of
long-term, meaningful and mutually respectful relationships with our customers,
employees, shareholders and communities. This philosophy is consistent with our
core values: integrity, honesty, respect for the individual and good corporate
citizenship.
A special highlight of our 1994 community activities was the decision to pledge
$500,000 to the University of Minnesota's Biomedical Engineering Center. This
gift will be combined with matching funds from the University of Minnesota
Foundation to create the St. Jude Medical Professorship in Biomedical
Engineering. St. Jude Medical's CEO, Ronald A. Matricaria, is chairman of a
campaign to raise a $12 million endowment for the Biomedical Engineering Center.
Page 21
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Management's Discussion and Analysis of
Results of Operations and Financial Condition
(Dollars in thousands)
RESULTS OF OPERATIONS
INTRODUCTION: The Company designs, manufactures and markets medical devices and
services to improve cardiovascular health worldwide. Principal products include
the world's most frequently implanted mechanical heart valves; tissue heart
valves; bradycardia pacemakers, leads, and programmers; intra-aortic balloon
pump systems; and centrifugal pump systems.
The principal objective for management is to increase shareholder value. This is
accomplished through a focus on customer satisfaction, product innovation,
continual process improvement and investment in medical technologies. The
Company has implemented a long-term business strategy which focuses investment
on specific cardiovascular technologies which will provide innovative solutions
to health care professionals and patients.
Effective September 30, 1994, St. Jude Medical acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the Company's
product offerings and provided a platform for potential further diversification
of its business. The Company's 1994 fourth quarter financial results include
Pacesetter's operations.
The commentary that follows should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements on
pages 28 to 37. The Company's fiscal year is the 52 or 53 week period ending the
Saturday nearest December 31. Fiscal years 1994 and 1993 included 52 weeks and
1992 included 53 weeks.
Shown in the following table for the periods indicated are the percentage
relationships of certain items in the consolidated statements of income to net
sales and the percentage change of the dollar amounts of such items as compared
with the prior period. Due to the impact of the Pacesetter acquisition, the 1994
amounts are not directly comparable to 1993. Footnote 2 to the Consolidated
Financial Statements discusses the effects of the Pacesetter acquisition on the
Company's reported results.
Year-to Year
Percent of Net Sales Increase/(Decrease)
1994 1993
Year Ended December 31 COMPARED Compared
1994 1993 1992 TO 1993 to 1992
Net sales 100.0% 100.0% 100.0% 42% 5%
Cost of sales 28.1% 24.3% 25.2% 65% 2%
Gross profit 71.9% 75.7% 74.8% 35% 7%
Selling, general and
administrative 27.1% 19.4% 19.0% 99% 8%
Research and
development 5.8% 4.3% 4.8% 91% (4%)
Purchased research
and development 11.4% -- --
Total operating
expense 44.3% 23.7% 23.8% 166% 5%
Operating profit 27.6% 52.0% 51.0% (24%) 7%
Other income, net 2.0% 5.5% 5.9% (49%) (2%)
Income before taxes 29.6% 57.5% 56.9% (27%) 6%
Income tax provision 7.6% 14.1% 14.5% (24%) 2%
Net income 22.0% 43.4% 42.4% (28%) 8%
NET SALES: Net sales totalled $359,640 in 1994, including more than $105,000
attributable to Pacesetter. This was a $106,998, or 42%, increase over 1993 net
sales of $252,642. On a comparable business basis, net sales exceeded $254,000
in 1994, approximately a $1,800, or .7%, increase from 1993 net sales.
[GRAPH]
NET SALES (In millions)
92 $239,547
93 $252,642
94 $359,640
Higher mechanical heart valve net sales were experienced in most geographic
markets. This was achieved despite worldwide health care reform and increased
competition which continued to reduce the number of open heart procedures
performed and put downward pressure on pricing. Domestic mechanical heart valve
net sales increased in 1994 primarily due to the introduction of the
collagen-impregnated aortic valve graft and general price increases that were
partially offset by a reduction in unit sales as the number of heart valve
procedures performed continued to decline. International mechanical heart valve
net sales in 1994 were slightly higher than 1993. Increased unit sales in the
developing markets of South America, Asia and the Pacific
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<PAGE>
Rim were partially offset by a slight unit sales decline in Japan due to the
initiation of competitive clinical trials and distributor inventory management.
In Western Europe, declines in unit sales in certain countries were offset by
gains in unit sales in other countries. In addition, net sales were positively
impacted by almost $600 in 1994 due to the depreciation of the U.S. dollar from
1993 levels in relation to the foreign currencies in which the Company markets
its products.
Tissue heart valve net sales in 1994 increased slightly from 1993 levels due to
the market acceptance of the Toronto SPV(TM) valve, partially offset by a
decline in net sales of the BioImplant(TM) tissue valve. Cardiac assist device
net sales were slightly lower than 1993 levels as a result of introduction
delays of advanced intra-aortic balloons and console.
Pacesetter net sales for the fourth quarter exceeded $105,000, 59% of which were
generated in the domestic market. Only net sales subsequent to the purchase on
September 30, 1994, were included in the Company's 1994 results. Fourth quarter
net sales benefitted from FDA clearance to market two pacemaker leads and two
advanced pacemakers. In addition, clinical trials were initiated in Europe
during the quarter for three new pacemaker models.
[GRAPH]
NET SALES (In Millions)
92 $239,547
93 $252,642
94 $359,640
Since Pacesetter's mix of domestic to international net sales was higher than
the Company's previously existing business, international net sales declined to
42% of total net sales in 1994 from 43% in 1993.
Net sales in 1993 of $252,642 were 5% higher than 1992 net sales. The increase
principally resulted from higher international mechanical heart valve unit sales
which were partially offset by lower domestic unit sales. The domestic unit
sales decline was attributable to one less operating week in 1993 as compared to
1992, as well as hospital inventory contractions and fewer procedures performed.
Net sales of all other Company products increased over 1992 levels.
COST OF SALES: As a percentage of net sales, cost of sales in 1994 increased to
28.1% from 24.3% in 1993 primarily as a result of Pacesetter operations.
Although Pacesetter margins are consistent with the industry, its margins are
not as high as the Company's heart valve margins. Pacesetter cost of sales
includes royalties paid in connection with various license agreements. In
addition, cost of sales increased in 1994 due to a price increase from the
Company's supplier of pyrolytic carbon components, the principal components of
the heart valve. Also, a higher percentage of mechanical heart valve unit sales
were generated in the lower margin countries of South America, the Middle East
and Asia. These increases were partially offset by reduced royalty payments to
the Company's supplier of pyrolytic carbon because royalties expensed under an
expired license agreement ceased at the end of the first quarter 1994.
In 1993, cost of sales as a percentage of sales decreased to 24.3% from 25.2% in
1992. The improvement was principally attributable to higher levels of lower
cost self-manufactured pyrolytic carbon components for the mechanical heart
valve. In addition, cessation of royalty payments associated with the
acquisition of the intra-aortic balloon pump system and increased manufacturing
efficiencies associated with higher levels of cardiac assist device production,
reduced cost of sales in 1993. These improvements were partially offset by a
lower 1993 mechanical heart valve average selling price compared to 1992 which
resulted from unfavorable foreign currency translation and from a higher level
of lower margin sales into emerging country markets.
The Company expects cost of sales as a percentage of net sales to continue to
increase in 1995 because of the full-year effect of Pacesetter and a price
increase from the Company's supplier of pyrolytic carbon components. These
increases are anticipated to be partially offset by the termination of royalty
payments related to the sale of all mechanical heart valves. In addition, the
Company expects the level of lower margin international net sales to increase
more rapidly than domestic and Western European net sales.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative (SG&A)
expense increased in 1994 to $97,577 from $49,040 in 1993. As a percentage of
net sales, SG&A increased to 27.1% in 1994 from 19.4% in 1993. The higher levels
were mainly due to Pacesetter operations. Selling efforts for pacemakers are
much more labor intensive and Pacesetter uses a commission-based third party
distributor sales force in the U.S. and international markets except Western
Europe. Also, amortization of goodwill of $3,709 was recorded in fourth quarter
1994 as a result of the Pacesetter acquisition. In addition, SG&A expenses
increased due to additional marketing costs attributable to greater domestic
mechanical heart valve competition, a full year of expanded domestic and Western
European direct sales forces, costs related to obtaining ISO 9000 certification
for the heart valve operations and an expanded infrastructure as a result of
the Pacesetter acquisition.
During 1993, SG&A expense increased $3,479, or 8%, over 1992. The increase was
mainly attributable to an expanded direct domestic sales force, increased
marketing support of clinical outcome studies and ISO 9000 certification
activities. The increase was partially mitigated by lower foreign SG&A expense
as a result of the appreciation of the U.S. dollar.
RESEARCH AND DEVELOPMENT: Research and development (R&D) expense in 1994
increased $10,036 from the $10,972 recorded in 1993 and as a percentage of net
sales increased to 5.8% from 4.3%. The increase was attributable to Pacesetter
operations where R&D expenses are significantly greater in amounts and as a
percentage of net sales than in heart valve operations. A slight decrease in R&D
for the comparable business resulted from the completion of certain phases of
the development of an advanced intra-aortic balloon pump console which was
offset by increased investments in tissue heart valve projects and various
mechanical heart valve projects, including the rotatable heart valve which was
introduced in early 1995.
[GRAPH]
RESEARCH AND DEVELOPMENT (In millions)
92 $11,478
93 $10,972
94 $21,008
In 1993, R&D expense decreased $506, or 4%, from 1992. During 1993, funding of
the Hancock/Jaffe Laboratories joint venture development of a tissue heart valve
decreased from the 1992 level due to the completion of certain phases of the
project. Expenditures in 1993 were principally associated with mechanical heart
valve line expansion, tissue heart valve development, a new intra-aortic balloon
pump console and intra-aortic balloon catheter product improvement.
PURCHASED RESEARCH AND DEVELOPMENT: The Pacesetter acquisition was accounted for
as a purchase and, under generally accepted accounting principles for purchase
accounting, a one-time pre-tax charge of $40,800 representing the value of
purchased research and development was recorded in the fourth quarter 1994. The
value of the purchased R&D was derived from an independent appraisal which
estimated future cash flows of major R&D projects and then discounted those cash
flows to present values at assumed interest rates which allowed for risks,
uncertainties and obstacles in completing the various projects, technological
innovations and other potential market changes which could affect the estimated
future cash flows.
OTHER INCOME: Net other income decreased to $7,056 in 1994 from $13,934 in 1993
mainly due to the financing of the Pacesetter acquisition. Interest expense was
$3,714 in 1994 and negligible in 1993 and interest income was significantly
reduced. The Pacesetter transaction decreased the Company's cash and marketable
securities position by $275,000 and increased debt by $255,000. Due to a
significant weakening in the U.S. dollar and a shift in the relationship between
European currencies, foreign exchange contract losses and foreign exchange
transaction losses were larger in 1994 than 1993. Also, partnership and joint
venture losses were higher in 1994 as significant costs were incurred with
respect to the Hancock/Jaffe Laboratories development of the SJM X-Cell(TM)
bioprosthesis.
In 1993, net other income decreased from 1992 by $262 as a result of lower
average investment rates of return on investment balances, higher foreign
currency transaction losses associated with European currency correlation
changes and increased joint venture and partnership losses.
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INCOME TAX PROVISION: The Company's 1994 effective income tax rate increased to
25.5% which was one percentage point higher than the 1993 effective rate. The
higher rate resulted from lower tax advantaged investment income and reduced tax
benefits derived from the Company's Puerto Rican operations. The Omnibus Budget
Reconciliation Act of 1993 (the "Act") significantly reduced the tax benefits
which were previously available from income generated by the Company's Puerto
Rican operations under Internal Revenue Code (IRC) Section 936. Because of this
legislation, the 1994 Puerto Rican tax benefit was reduced by 40% from the 1993
level.
The relatively low tax rate in 1994, as compared to the U.S. statutory rate,
stems principally from the reduced taxes on income generated by the Company's
Puerto Rican operations as well as other income generated by the Company's tax
advantaged investments.
OUTLOOK: The Company expects the health care industry worldwide to continue to
dramatically change as a result of market demands, societal pressures,
government regulation, and business consolidation and alliances. The Company's
willingness to embrace change is essential to its future success. The Company
intends to continue to pursue diversification opportunities in the form of
acquisitions, joint ventures, partnerships and strategic business alliances. In
addition, the Company will participate with industry groups to promote the
introduction and use of advanced medical device technologies within a cost
conscious environment. Finally, customer service in the form of cost-effective
clinical outcomes will continue to be a primary focus for the Company.
In the Company's core heart valve business, competition continues to increase;
however, the Company estimates it held its 48% share of the worldwide heart
valve market in 1994. During 1994, domestic hospital inventory reduction
programs together with a lower number of heart valve replacement procedures
reduced the domestic unit demand for the Company's products. The cardiac rhythm
management market that the Company entered through its Pacesetter acquisition is
also highly competitive. The Company estimates that it holds approximately 23%
of the worldwide bradycardia segment of cardiac rhythm market, an improvement
from the prior year market share level. Competition is anticipated to place
downward pressure on pricing, and health care reform is expected to result in
further hospital and other provider consolidations.
The Company anticipates that its 1995 effective income tax rate will increase by
as much as six percentage points due to reduced tax advantaged interest income
as a percent of total income, increased Pacesetter income which is generally
taxed at a higher rate than the Company's previously existing operations and a
lower Puerto Rican tax benefit since the Act reduces tax benefits by an
additional 5% per year from 1995 through 1998. There are additional changes to
IRC Section 936 regulations being proposed by the Internal Revenue Service
which, if finalized in its current form, would further negatively impact the
Company's effective tax rate.
The Company continues to seek further diversification opportunities in the form
of acquisitions, joint ventures, partnerships and investments in emerging
technology companies as well as through internal R&D. The size, timing and
financial impact of such efforts cannot be predicted.
FINANCIAL CONDITION
SUMMARY: The financial condition of the Company remained strong during 1994.
However, the Pacesetter transaction, funded by a combination of internal funds
and debt, materially changed the capital structure of the Company. Cash and
marketable securities decreased to $136,968 at December 31, 1994 from $368,991
at December 31, 1993. In addition, the Company financed the balance of the
acquisition with long-term debt of $255,000. Working capital, the difference
between current assets and current liabilities, was $321,402 at December 31,
1994, an $87,596 decrease from the prior year end level.
LIQUIDITY: Company operations have historically generated a significant positive
cash flow that has provided more than adequate liquidity to meet the Company's
operational requirements. Cash provided by operations in 1994 amounted to
$88,933 compared to $115,302 in 1993. The current ratio at December 31, 1994,
was 3.9 to 1.
Page 25
<PAGE>
For the Pacesetter transaction, the Company utilized $275,000 in cash and
structured a $260,000 long-term revolving line of credit with an 11-member
banking syndicate comprised of banks in the United States and other countries
where it conducts its business. At December 31, 1994, the Company had $5,000
available under the line. Pacesetter working capital requirements currently
total approximately $75,000. Cash provided by Pacesetter operations is expected
to be more than sufficient to meet its operational requirements.
[GRAPH]
CASH FLOW FROM OPERATIONS (In millions)
92 $113,210
93 $115,302
94 $ 88,933
In addition to the Pacesetter acquisition, other important items affecting
liquidity included increased accounts receivable and inventory levels, property,
plant and equipment additions and investments in emerging technologies. Accounts
receivable, net of the effect of the acquisition increased approximately $8,200
principally due to a shift in sales to emerging markets with longer payment
cycles. Excluding the effect of the acquisition, inventories increased almost
$5,300 primarily as a result of expanded product offerings. Existing operations
property, plant and equipment increased almost $11,700 mainly due to the
Company's Woodridge Carbon Technology Center. Investments were made in 1994 in
higher risk emerging technologies being developed by EndoVascular Technologies,
InControl, Hancock/Jaffe Laboratories and Advanced Tissue Sciences. These
investments were approximately $22,600 in 1994.
Cash flow from operations is anticipated to be sufficient to retire debt and to
fund expected capital improvements. In addition, access to additional capital
will enable the Company to pursue further diversification opportunities.
[GRAPH]
CAPITAL STRUCTURE (In millions)
92 $429,039
93 $484,241
94 $807,218
CAPITAL: The Company's capital structure consists of equity and interest bearing
debt. Interest bearing debt as a percent of total capital was 31.6% at December
31, 1994. The Company may use debt selectively to fund diversification and
expansion opportunities; however, the debt to equity ratio will be closely
monitored to ensure a strong financial position and flexibility to continue to
expand the business.
Cash dividends paid to shareholders in 1994 were $13,935, a $4,851 decrease from
cash dividends paid in 1993. The Company discontinued its cash dividend
subsequent to the third quarter 1994 in order to accelerate debt repayment and
to provide additional funds for reinvestment in the business. No repurchases of
shares of common stock were made during 1994. The Company is authorized to
repurchase approximately 1,000,000 additional shares under a currently
outstanding Board of Directors resolution.
OUTLOOK: Management is unaware of any adverse trends that would materially
affect the Company's strong financial position. Should suitable investment
opportunities arise that would require additional financing, management believes
that the Company's excellent earnings history, its strong cash flow and solid
balance sheet provide substantial opportunities to obtain additional financing
at competitive rates and terms.
Page 26
<PAGE>
REPORT OF MANAGEMENT
The management of St. Jude Medical, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts which reflect management's best
estimates based on its informed judgement. Management is also responsible for
the accuracy of the related data in the annual report and its consistency with
the financial statements.
In the opinion of management, the Company's accounting systems and procedures,
and related internal controls, provide reasonable assurance that transactions
are executed in accordance with management's intention and authorization, that
financial statements are prepared in accordance with generally accepted
accounting principles, and that assets are properly accounted for and
safeguarded. The concept of reasonable assurance is based on the recognition
that there are inherent limitations in all systems of internal control, and that
the cost of such systems should not exceed the benefits to be derived therefrom.
St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and business conduct. This responsibility is
reflected in the Company's business ethics policy which is publicized throughout
the organization.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. The independent certified public
accountants and internal auditors meet with, and have confidential access to,
the Audit Committee to discuss the results of their audit work.
/s/ Ronald A. Matricaria
Ronald A. Matricaria
Chairman, President and Chief Executive Officer
/s/ Stephen L. Wilson
Stephen L. Wilson
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors
St. Jude Medical, Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude Medical,
Inc. and subsidiaries at December 31, 1994 and 1993 and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 9, 1995
Page 27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Year Ended December 31 1994 1993 1992
<S> <C> <C> <C>
Net sales $359,640 $252,642 $239,547
Cost of sales 100,956 61,342 60,250
Gross profit 258,684 191,300 179,297
Selling, general and administrative expense 97,577 49,040 45,561
Research and development expense 21,008 10,972 11,478
Purchased research and development charge 40,800 -- --
Operating profit 99,299 131,288 122,258
Other income, net 7,056 13,934 14,196
Income before taxes 106,355 145,222 136,454
Income tax provision 27,121 35,579 34,796
Net income $ 79,234 $109,643 $101,658
Earnings per share:
Primary $ 1.69 $ 2.32 $ 2.12
Fully diluted $ 1.69 $ 2.32 $ 2.12
Cash dividends paid per share $ .30 $ .40 $ .30
Average shares outstanding:
Primary 46,779,000 47,222,000 47,931,000
Fully diluted 47,010,000 47,242,000 47,946,000
</TABLE>
See notes to consolidated financial statements.
Page 28
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,791 $ 26,987
Marketable securities 125,177 342,004
Accounts receivable, less allowance
(1994 - $5,760, 1993 - $1,856) 146,062 40,159
Inventories:
Finished goods 59,534 15,414
Work in process 21,723 2,677
Raw materials 48,750 14,422
Total inventories 130,007 32,513
Prepaid income taxes 4,448 2,844
Prepaid expenses 16,597 5,403
Total current assets 434,082 449,910
PROPERTY, PLANT AND EQUIPMENT
Land 12,049 2,136
Buildings and improvements 42,200 24,900
Machinery and equipment 89,957 29,958
Construction in progress 12,811 8,968
Gross property, plant and equipment 157,017 65,962
Less accumulated depreciation (24,852) (18,777)
Net property, plant and equipment 132,165 47,185
OTHER ASSETS 353,651 29,722
TOTAL ASSETS $ 919,898 $ 526,817
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 42,143 $ 6,837
Accrued income taxes 20,240 23,492
Accrued employee compensation and related taxes 32,377 6,801
Accrued royalties 7,853 2,204
Other accrued expenses 10,067 1,578
Total current liabilities 112,680 40,912
LONG-TERM LIABILITIES
Long-term debt 255,000 --
Deferred income taxes -- 1,664
CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share -
25,000,000 shares authorized; no shares issued
Common stock, par value $.10 per share -
100,000,000 shares authorized; issued and outstanding
1994 - 46,479,082 shares; 1993 - 46,414,261 shares 4,648 4,641
Additional paid-in capital 28,271 27,411
Retained earnings 521,097 455,798
Cumulative translation adjustment (2,484) (3,609)
Unrealized gain on available-for-sale securities 686 --
Total shareholders' equity 552,218 484,241
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 919,898 $ 526,817
</TABLE>
See notes to consolidated financial statements.
Page 29
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Common Stock Additional Cumulative Unrealized Total
Number of Paid-In Retained Translation Gain on Shareholders'
Shares Amount Capital Earnings Adjustment Investments Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1991 47,355,142 $4,736 $61,952 $277,553 $ 486 $-- $344,727
Net income 101,658 101,658
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 347,404 35 (1,481) (1,446)
Tax benefit realized upon
exercise of stock options 5,678 5,678
Cash dividends
($.30 per share) (14,270) (14,270)
Purchase and retirement
of common shares (185,000) (19) (5,318) (5,337)
Translation adjustment (1,971) (1,971)
Balance December 31, 1992 47,517,546 4,752 60,831 364,941 (1,485) -- 429,039
Net income 109,643 109,643
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 74,415 7 1,346 1,353
Tax benefit realized upon
exercise of stock options 355 355
Cash dividends
($.40 per share) (18,786) (18,786)
Purchase and retirement
of common shares (1,177,700) (118) (35,121) (35,239)
Translation adjustment (2,124) (2,124)
Balance December 31, 1993 46,414,261 4,641 27,411 455,798 (3,609) -- 484,241
Net income 79,234 79,234
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 64,821 7 637 644
Tax benefit realized upon
exercise of stock options 223 223
Cash dividends
($.30 per share) (13,935) (13,935)
Translation adjustment 1,125 1,125
Unrealized gain on investments,
net of taxes 686 686
BALANCE DECEMBER 31, 1994 46,479,082 $4,648 $28,271 $521,097 $(2,484) $686 $552,218
</TABLE>
See notes to consolidated financial statements.
Page 30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 79,234 $ 109,643 $ 101,658
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 8,313 4,516 3,607
Amortization 7,816 4,458 4,202
Purchased research and development charge 40,800 -- --
Changes in operating assets and
liabilities net of acquisition:
Decrease (increase) in accounts receivable (23,079) 718 (7,154)
Increase in inventories (4,024) (5,972) (3,657)
Increase in prepaid expenses (9,685) (1,920) (1,583)
Increase (decrease) in accounts payable
and accrued expenses 7,193 (2,746) 3,845
Increase (decrease) in accrued income taxes (3,227) 7,061 12,567
Increase in prepaid and deferred income taxes (14,408) (456) (275)
NET CASH PROVIDED BY OPERATING ACTIVITIES 88,933 115,302 113,210
INVESTING ACTIVITIES
Purchases of property, plant and equipment (18,789) (16,422) (11,660)
Purchases of marketable securities (88,426) (153,290) (323,322)
Proceeds from sale or maturity of marketable securities 306,360 81,630 259,347
Investments in companies, joint ventures and partnerships (13,564) (12,253) (3,091)
Acquisition of Pacesetter (524,300) -- --
Other investing activities (7,686) (3,273) (6,236)
NET CASH USED IN INVESTING ACTIVITIES (346,405) (103,608) (84,962)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 644 1,353 3,018
Cash dividends paid (13,935) (18,786) (14,270)
Common stock repurchased -- (35,239) (5,337)
Proceeds from the issuance of long-term debt 255,000 -- --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 241,709 (52,672) (16,589)
Effect of currency exchange rate changes on cash 567 (381) (258)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,196) (41,359) 11,401
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,987 68,346 56,945
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,791 $ 26,987 $ 68,346
</TABLE>
See notes to consolidated financial statements.
Page 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform with the current year presentation.
ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period ending
the Saturday nearest December 31. Fiscal years 1994 and 1993 included 52 weeks
and fiscal year 1992 included 53 weeks.
TRANSLATION OF FOREIGN CURRENCIES: All assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates in effect on reporting
dates and differences due to changing translation rates are charged or credited
to "cumulative translation adjustment" in shareholders' equity. Income and
expenses are translated at rates which approximate those in effect on
transaction dates.
CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
approximates market.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method. Allowances are made for
slow-moving, obsolete, unsalable or unusable inventories.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight line method over their
estimated useful lives ranging from three to 39 years. Accelerated depreciation
is used by the Company for tax accounting purposes only.
REVENUE RECOGNITION: The Company's general practice is to recognize revenues
from product sales as shipped and for services as performed.
RESEARCH AND DEVELOPMENT: Research and development expense includes all
expenditures for general research into scientific phenomena, development of
useful ideas into merchantable products and continuing support and upgrading of
various products. All such expense is charged to operations as incurred.
EARNINGS PER SHARE: Primary and fully diluted earnings per share are computed by
dividing net income for the year by the weighted average number of shares of
common stock and common stock equivalents outstanding.
NOTE 2 ACQUISITIONS
Effective September 30, 1994, the Company acquired from Siemens AG substantially
all of its worldwide cardiac rhythm management business ("Pacesetter") for a
price not to exceed $531,300. The initial purchase price of $511,300 can be
adjusted upward by a maximum of $20,000 or downward based upon the change in the
net asset value of Pacesetter from September 30, 1993, to September 30, 1994.
The Company and Siemens AG currently disagree about the final adjustment to the
purchase price and are following the procedures in the purchase agreements to
resolve their differences. The Company expects any adjustment to the purchase
price will be recorded in 1995.
The acquisition was accounted for under the purchase accounting method.
Accordingly, the purchase price was allocated to the assets and liabilities
based on their estimated fair market values. This treatment resulted in
approximately $309,000 of cost in excess of the net assets acquired which was
recorded as goodwill. Goodwill is amortized on a straight line basis over 20
years. The results of Pacesetter's operations have been included in the
consolidated results of operations since the date of acquisition.
In conjunction with the acquisition, the Company recorded a non-cash charge of
$40,800 ($25,300, or $.54 per share net of tax benefits) relating to that
portion of the purchase price attributable to purchased research and
development. The purchased research and development charge represents the
appraised value of the in-process research and development that must be expensed
under generally accepted accounting principles.
The following unaudited pro forma summary information presents the results of
operations of the Company and Pacesetter for the years ended December 31, 1994
and 1993, as if the acquisition had occurred at the beginning of 1993, after
giving effect to certain adjustments including amortization of goodwill,
increased interest expense, decreased interest income and the related income tax
effects. Pacesetter's fiscal year ended on September 30; therefore, Pacesetter's
results for
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<PAGE>
the years ended September 30, 1994 and 1993, have been combined with the
Company's results for the years ended December 31, 1994 and 1993.
Unaudited 1994 1993
Net sales $664,000 $614,000
Net income $110,000 $ 86,000
Earnings per share $ 2.34 $ 1.82
These pro forma results are not necessarily indicative of the results that would
have occurred had the acquisition actually taken place at the beginning of 1993,
or of the expected future results of operations. The 1993 pro forma results
include a $25,300, or $.54 per share, after-tax research and development charge.
NOTE 3 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes," which was
adopted in 1993 on a prospective basis. The statement requires use of the asset
and liability approach for financial accounting and reporting for income taxes.
The cumulative effect of the accounting change was not material.
The components of income before taxes were as follows:
1994 1993 1992
Domestic $ 97,304 $140,303 $133,477
Foreign 9,051 4,919 2,977
Income before taxes $106,355 $145,222 $136,454
The components of the income tax provision were as follows:
1994 1993 1992
Current:
Federal $ 32,958 $21,682 $21,892
State and Puerto Rico 9,898 12,400 11,272
Foreign 3,107 1,953 1,907
Total current 45,963 36,035 35,071
Deferred:
Prepaid (5,757) 274 (807)
Deferred (13,085) (730) 532
Total deferred (18,842) (456) (275)
Income tax provision $ 27,121 $35,579 $34,796
Deferred income tax assets (liabilities) were comprised of the following at
December 31:
1994 1993
Net deferred income tax asset:
Inventory (intercompany profit in inventory
and excess of tax over book valuation) $ 5,811 $ 197
Accruals not currently deductible 3,127 2,557
Intangibles 12,753 (132)
Other 679 1,483
Deferred income tax asset 22,370 4,105
Net deferred income tax liability:
Accumulated depreciation (1,927) (2,925)
Unrealized gain on investments (421) --
Deferred income tax liability (2,348) (2,925)
Net deferred income tax asset $ 20,022 $ 1,180
The Company's effective income tax rate varied from the statutory U.S. federal
income tax rate of 35% in 1994 and 1993 and 34% in 1992 as follows:
1994 1993 1992
Income tax provision at
U.S. statutory rate $ 37,224 $ 50,828 $ 46,394
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 1,188 2,610 2,651
Tax benefits from
Foreign Sales Corporation (1,433) (1,612) (1,325)
Tax benefits from
Puerto Rican operations (7,880) (13,782) (11,401)
Tax exempt income (2,274) (3,403) (3,412)
Foreign taxes at higher rates 194 358 335
Other 102 580 1,554
Income tax provision $ 27,121 $ 35,579 $ 34,796
Effective income tax rate 25.5% 24.5% 25.5%
The Company's effective income tax rate is favorably affected by Puerto Rican
tax exemption grants which result in Puerto Rican earnings being partially tax
exempt through the year 2003.
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<PAGE>
NOTE 3-INCOME TAXES (CONTINUED)
Consolidated U.S. federal income tax returns filed by the Company have been
examined by the Internal Revenue Service through the year 1989. The Company's
1990 and 1991 federal income tax returns are presently under audit. Field
examiners have indicated that the IRS may assert substantial additional taxes on
Puerto Rican earnings. Management believes any additional taxes which may
ultimately result from the audit would not have a material adverse effect on the
Company's financial condition.
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries ($26,663 at December 31, 1994) because
distribution of these earnings generally would not require additional taxes due
to available foreign tax credits.
The Company made income tax payments of $45,737, $28,385, and $22,709 in 1994,
1993 and 1992, respectively.
NOTE 4 STOCK PLANS
Under the terms of the Company's various stock plans, 5,747,180 shares of common
stock have been reserved for issuance to directors, officers and employees upon
the grant of restricted stock or the exercise of stock options. The stock
options are exercisable over periods up to 10 years from date of grant and may
be "incentive stock options" or "non-qualified stock options" and may have stock
appreciation rights attached. At December 31, 1994, there were a maximum of
3,791,813 shares available for grant and 1,955,367 options outstanding, of which
880,024 were exercisable. Stock option activity was as follows:
Options Price
Outstanding Per Share
Balance at December 31, 1992 822,643 $ 4.59-50.25
Granted 602,250 27.25-35.63
Cancelled (88,050) 21.94-50.25
Exercised (49,725) 4.59-22.63
Balance at December 31, 1993 1,287,118 4.59-49.63
Granted 765,750 25.88-39.63
Cancelled (92,001) 27.88-48.25
Exercised (5,500) 10.80-21.94
Balance at December 31, 1994 1,955,367 4.59-49.63
Pursuant to the terms of the Company's various stock plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related tax
liabilities. Shares are acquired from the optionee at the fair market value of
the stock on the transaction date.
All options have been granted at not less than fair market value at dates of
grant. When stock options are exercised, the par value of the shares issued is
credited to common stock and the excess of the proceeds over the par value is
credited to additional paid-in capital. When non-qualified options are
exercised, the Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and the stock option
exercise price. These tax benefits do not affect the income tax provision, but
rather are credited directly to additional paid-in capital.
Under the terms of the Company's shareholder rights agreement, upon the
occurrence of certain events which result in a change in control as defined by
the agreement, registered holders of common shares are entitled to purchase
one-tenth of a share of Series A Junior Participating Preferred Stock at a
stated price, or to purchase either the Company's shares or shares of the
acquiring entity at half their market value.
NOTE 5 FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included in
other expense and are intended to partially offset fluctuations in net sales due
to currency rate changes.
The Company had contracts totalling $4,215 at December 31, 1994, to exchange
French Francs and German Deutschmarks into U.S. dollars. No contracts existed at
December 31, 1993. These instruments were recorded at their fair value at each
balance sheet date. The cumulative loss on these contracts totalled $128 and was
recorded as other expense.
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<PAGE>
LONG-TERM DEBT: The Company has a $260,000 committed revolving line of credit
with a group of 11 banks that terminates in September 1999. The rate of interest
payable under this borrowing facility is a floating rate and is a function of
the London Interbank Offered Rate. The weighted average rate at December 31,
1994, was 5.9%. A facility fee of 1 1/48% of the total commitment is paid
quarterly.
The credit agreement contains various covenants which require the Company to
maintain a specified financial ratio, limit liens, regulate asset disposition
and subsidiary indebtedness and restrict certain acquisitions and investments.
At December 31, 1994, the Company was in compliance with these covenants. The
Company believes, based upon current terms, that the carrying value of the
long-term debt at December 31, 1994, approximates fair value.
OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity
instruments, bank certificates of deposit and Puerto Rico industrial development
bonds. Under Statement of Financial Accounting Standards (FAS) No. 115, "Account
ing for Certain Investments in Debt and Equity Securities," debt securities that
the Company does not have the positive intent to hold to maturity and all
marketable equity securities are classified as available-for-sale and are
carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried as a separate component of
shareholders' equity. The Company adopted the provisions of the new standard for
investments held or acquired after January 1, 1994, and has classified all
investments as available-for-sale and carried them at fair value. In accordance
with FAS No. 115, prior period financial statements have not been restated to
reflect the change in accounting principle; however, the effect of this change
to reflect the net unrealized holding gains on securities classified as
available-for-sale was to increase shareholders' equity at January 1, 1994 by
$1,248 (net of $764 of current deferred income taxes). A net realized loss of
$419 was recorded on sales of available-for-sale securities during 1994. The net
unrealized holding gain on available-for-sale securities included as a separate
component of shareholders' equity was $686 (net of $421 of current deferred
income taxes) at December 31, 1994.
1994 1993
Estimated Estimated
Fair Fair
Cost Value Cost Value
Assets:
Cash and Cash Equivalents $ 11,791 $ 11,791 $ 26,987 $ 26,987
Marketable Securities $124,070 $125,177 $342,004 $342,004
The Company also guarantees certain obligations of its subsidiaries. As of
December 31, 1994 and 1993, the maximum amount of such guarantees was $5,000.
CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable
securities and foreign exchange contracts are the financial instruments which
subject the Company to concentration of credit risk.
Within the European Economic Community, payment of certain accounts receivable
is made by the national health care system within several countries. Although
the Company does not currently anticipate collectibility problems with these
receivables, payment is contingent upon the economic stability of these
countries. The credit risk associated with the balance of the trade receivables
is limited due to dispersion of the receivables over a large number of customers
in many geographic areas. The Company monitors the credit worthiness of its
customers to which it grants credit terms in the normal course of business.
Marketable securities are placed with high credit qualified financial
institutions and, by policy, the Company limits the credit exposure to any one
financial institution. The Company limits credit risk exposure to foreign
exchange contracts by periodically reviewing the credit worthiness of the
counterparties to the transactions.
Page 35
<PAGE>
NOTE 6 RETIREMENT PLANS
DEFINED CONTRIBUTION PLAN: The Company has a defined contribution profit sharing
plan, including features under Section 401(k) of the Internal Revenue Code,
which provides retirement benefits to substantially all full-time U.S.
employees. Under the 401(k) portion of the plan, eligible employees may
contribute a maximum of 10% of their annual compensation with the Company
matching the first 3%. The Company's level of contribution to the profit sharing
portion of the plan is subject to Board of Directors approval and is based on
its earnings per share. The Company has additional defined contribution programs
for employees outside the United States. The benefits under these plans are
based primarily on compensation levels. Total retirement plan expense was
$2,873, $1,265 and $1,487 in 1994, 1993 and 1992, respectively.
DEFINED BENEFIT PLANS: In certain countries outside the United States, the
Company assumed the obligation to provide defined pension benefits to Pacesetter
employees. Pension coverage for such employees is provided through separate
plans. At December 31, 1994, the Company's obligations under these plans
approximated $7,000.
NOTE 7 SUPPLY OF HEART VALVE COMPONENTS
The Company has a long-term contract for supply of pyrolytic carbon components
used in its mechanical heart valve prosthesis. Under the terms of the contract,
the Company has agreed to purchase decreasing percentages of its component
requirements from the supplier through 1998. After 1995, provisions of the
contract retain the supplier as a back-up component source, whereby the Company
will purchase a minimum of 20% of its needs through 1998. The contract specifies
a varying, but annually fixed pricing structure in effect through 1995,
whereupon the parties have agreed to negotiate prices for the years 1996 through
1998. Subsequent to 1998, annual renewal clauses may take effect as appropriate.
As part of this contract, the Company has granted the supplier a license to
produce and sell the supplier's bileaflet mechanical heart valve in countries
where patents have been issued covering the St. Jude Medical(R) mechanical heart
valve. Under this portion of the contract, the supplier will pay royalties to
the Company through 1998. Under a separate agreement, the Company paid a royalty
to the supplier based on the number of mechanical heart valves the Company
produced from its self-manufactured carbon components through August 1993.
Amortization of these royalty amounts paid was completed in the second quarter
1994.
NOTE 8 GEOGRAPHIC AREA
The Company operates in the medical products industry and is segmented into two
geographic areas -- the United States and Canada (including all export sales to
unaffiliated customers except to customers in Europe, the Middle East and
Africa) and Europe (including export sales to unaffiliated customers in the
Middle East and Africa).
Sales between geographic areas are made at transfer prices which approximate
prices to unaffiliated third parties. Export sales from the United States to
unaffiliated customers were $44,050, $29,926, and $25,748 for 1994, 1993 and
1992, respectively.
Net sales by geographic area were as follows:
United States Europe Elimina- Net Sales
and Canada tions
1994
Customer sales $251,244 $108,396 $ -- $359,640
Intercompany sales 71,184 -- (71,184) --
$322,428 $108,396 $(71,184) $359,640
1993
Customer sales $172,713 $ 79,929 $ -- $252,642
Intercompany sales 59,908 -- (59,908) --
$232,621 $ 79,929 $(59,908) $252,642
1992
Customer sales $165,551 $ 73,996 $ -- $239,547
Intercompany sales 55,893 -- (55,893) --
$221,444 $ 73,996 $(55,893) $239,547
Operating profit by geographic area was as follows:
United States
and Canada Europe Corporate Total
1994 $74,026 $36,814 $(11,541) $ 99,299
1993 $99,092 $41,046 $ (8,850) $131,288
1992 $92,613 $38,341 $ (8,696) $122,258
Page 36
<PAGE>
Identifiable assets by geographic area were as follows:
United States
and Canada Europe Corporate Total
1994 $549,776 $181,470 $188,652 $919,898
1993 $ 92,083 $ 40,947 $393,787 $526,817
1992 $ 73,333 $ 46,669 $349,748 $469,750
Corporate expenses consist principally of non-allocable general and
administrative expenses. Corporate identifiable assets consist principally of
cash and cash equivalents and marketable securities.
NOTE 9 OTHER INCOME, NET
Other income, net consisted of the following:
1994 1993 1992
Interest income $14,001 $14,635 $13,840
Gain (loss) on sale of investments (419) 54 350
Joint venture and partnership losses (969) (243) --
Foreign exchange losses (1,937) (526) (43)
Interest expense (3,714) (5) (21)
Other 94 19 70
Other income, net $ 7,056 $13,934 $14,196
NOTE 10 OTHER ASSETS
Other assets as of December 31, 1994 and 1993, net of accumulated amortization
of $25,316 and $17,500, respectively consisted of the following:
1994 1993
Investments in companies, joint ventures
and partnerships $ 18,738 $15,259
Payments made to former distributors 1,913 4,237
Intangibles 333,000 10,226
$353,651 $29,722
Investments in companies, joint ventures and partnerships are stated at the
lower of cost or market. Pursuant to various transition agreements, payments
made to former distributors are being amortized over their benefit periods of
from four to five years. Intangibles and other assets consist principally of the
excess of cost over net assets of certain acquired businesses and technology
purchased in connection with the acquisition of certain businesses. Intangibles
and other assets are being amortized over periods ranging from five to 20 years.
NOTE 11 CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. Further, claims may
be filed in the future relative to events currently unknown to management. The
Company has insurance coverage that management considers to be adequate to
protect the Company against product liability losses and management believes the
losses that might be sustained from such actions would not have a material
adverse effect on the Company's financial condition.
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1994 and 1993 was as follows:
Quarter
First Second Third Fourth
Year Ended
December 31, 1994:
Net sales $66,685 $66,736 $62,468 $163,751
Gross profit $49,814 $50,277 $46,991 $111,602
Net income $26,537 $26,204 $24,489 $ 2,004*
Earnings per share $.57 $.56 $.52 $.04*
Year Ended
December 31, 1993:
Net sales $68,154 $ 66,944 $ 58,946 $ 58,598
Gross profit $51,225 $ 50,617 $ 44,948 $ 44,510
Net income $29,189 $ 28,843 $ 25,972 $ 25,639
Earnings per share $.61 $.61 $.55 $.55
*Net of $25,300, or $.54 per share, non-cash charge for purchased research and
development associated with the Pacesetter acquisition.
Primary and fully diluted per share results are the same for all quarters in
1994 and 1993.
Page 37
<PAGE>
TEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
1994** 1993 1992 1991
SUMMARY OF OPERATIONS
FOR THE YEAR ENDED:
<S> <C> <C> <C> <C>
Net sales $ 359,640 $ 252,642 $ 239,547 $ 209,837
Gross profit $ 258,684 $ 191,300 $ 179,297 $ 149,043
Percent of sales 71.9% 75.7% 74.8% 71.0%
Operating profit (loss) $ 99,299 $ 131,288 $ 122,258 $ 100,647
Percent of sales 27.6% 52.0% 51.0% 48.0%
Net income (loss) $ 79,234 $ 109,643 $ 101,658 $ 83,968
Percent of sales 22.0% 43.4% 42.4% 40.0%
Earnings (loss) per share* $ 1.69 $ 2.32 $ 2.12 $ 1.75
FINANCIAL POSITION AT YEAR END:
Cash and marketable securities $ 136,968 $ 368,991 $ 338,690 $ 263,314
Working capital $ 321,402 $ 408,998 $ 377,321 $ 301,094
Total assets $ 919,898 $ 526,817 $ 469,750 $ 375,093
Long-term debt $ 255,000
Total shareholders' equity $ 552,218 $ 484,241 $ 429,039 $ 344,727
OTHER DATA:
Dividends declared per share $ .30 $ .40 $ .30
Primary weighted average shares outstanding 46,779,000 47,222,000 47,931,000 48,069,000
Total employees 2,248 722 684 599
</TABLE>
*Earnings per share and share data have been adjusted for 100% stock dividends
paid in 1990, 1989 and 1986.
**Results for 1994 include a $40,800 pre-tax ($25,300, or $.54 per share,
after-tax) non-cash charge for purchased research and development associated
with the Pacesetter acquisition.
[GRAPH]
EARNINGS PER SHARE*
85 ($ .03)
86 $ .30
87 $ .40
88 $ .71
89 $1.07
90 $1.35
91 $1.75
92 $2.12
93 $2.32
94** $1.69
CLOSING STOCK PRICE*
85 2 5/8
86 3 3/4
87 6 21/32
88 10 1/32
89 24 1/8
90 34 1/2
91 55 1/2
92 42
93 26 1/2
94 39 3/4
Page 38
<PAGE>
TEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
1990 1989 1988 1987 1986 1985
SUMMARY OF OPERATIONS
FOR THE YEAR ENDED:
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 175,160 $ 147,981 $ 114,075 $ 71,806 $ 60,473 $ 26,068
Gross profit $ 114,730 $ 94,825 $ 71,754 $ 41,817 $ 32,567 $ 11,621
Percent of sales 65.5% 64.1% 62.9% 58.2% 53.9% 44.6%
Operating profit (loss) $ 77,315 $ 62,221 $ 45,697 $ 28,231 $ 21,477 $ (4,210)
Percent of sales 44.1% 42.0% 40.1% 39.3% 35.5% (16.2%)
Net income (loss) $ 64,680 $ 50,916 $ 33,473 $ 17,307 $ 12,031 $ (1,095)
Percent of sales 36.9% 34.4% 29.3% 24.1% 19.9% (4.2%)
Earnings (loss) per share* $ 1.35 $ 1.07 $ .71 $ .40 $ .30 $ (.03)
FINANCIAL POSITION AT YEAR END:
Cash and marketable securities $ 179,059 $ 120,881 $ 85,688 $ 65,025 $ 52,526 $ 18,978
Working capital $ 218,507 $ 157,063 $ 113,033 $ 80,883 $ 64,538 $ 28,100
Total assets $ 278,146 $ 201,735 $ 143,141 $ 101,671 $ 85,817 $ 39,716
Long-term debt $ 508 $ 26,083
Total shareholders' equity $ 254,405 $ 185,984 $ 129,742 $ 92,293 $ 49,769 $ 35,284
OTHER DATA:
Dividends declared per share
Primary weighted average
shares outstanding 47,852,000 47,546,000 47,016,000 42,812,000 39,944,000 37,048,000
Total employees 544 445 399 296 262 211
</TABLE>
[GRAPH]
CASH FLOW PER SHARE*
85 ($ .12)
86 $ .28
87 $ .41
88 $ .63
89 $1.05
90 $1.45
91 $2.08
92 $2.38
93 $2.48
94 $1.91
BOOK VALUE PER SHARE*
85 $ .95
86 $ 1.30
87 $ 2.05
88 $ 2.81
89 $ 3.98
90 $ 5.41
91 $ 7.28
92 $ 9.03
93 $10.43
94 $11.88
Page 39
<PAGE>
INVESTOR INFORMATION
TRANSFER AGENT
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
718-921-8293
800-937-5449
Correspondence regarding stock holdings, dividend
checks and changes of address should be directed to the transfer agent.
LEGAL COUNSEL INDEPENDENT AUDITORS
Lindquist & Vennum P.L.L.P. Ernst & Young LLP
Minneapolis, Minnesota Minneapolis, Minnesota
INVESTOR INFORMATION
Investors, shareholders and security analysts seeking additional information
about the Company should call Investor Relations at (800) 552-7664.
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K or other financial reports will be provided free of charge to any
shareholder upon written request to Investor Relations, St. Jude Medical, Inc.,
One Lillehei Plaza, St. Paul, Minnesota 55117-9983
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:30 a.m. on Wednesday, May
3, 1995, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,
Minneapolis, Minnesota.
SHAREHOLDER MAILINGS
When shares owned by one shareholder are held in different forms of the same
name (e.g., John Doe, J. Doe) or when new accounts are established for shares
purchased at different times, duplicate mailings of shareholder information
results. The Company, by law, is required to mail to each name on the
shareholder list unless the shareholder requests that duplicate mailings be
eliminated or consolidates all accounts into one. Such requests should be
directed, in writing, to American Stock Transfer, 6201 15th Avenue, Brooklyn,
New York 11219.
St. Jude Medical, Inc. will discontinue issuance of quarterly shareholder
reports starting in 1995. Shareholders can obtain the latest Company news
release information, including quarterly results, by calling a toll-free number
(1-800-552-7664) and listening to a recorded message.
CASH DIVIDENDS
St. Jude Medical, Inc. paid three quarterly cash dividends in 1994 of $.10 per
share. On June 28, 1994, St. Jude Medical, Inc. announced that its Board of
Directors voted to discontinue its cash dividend upon completion of the
acquisition of Pacesetter, which was finalized September 30, 1994.
RESEARCH COVERAGE
The following firms currently provide research coverage of St. Jude
Medical,Inc.:
Bear, Stearns & Co., New York, New York
C.J. Lawrence/Deutsche Bank Securities Corporation, New York, New York
Dain Bosworth Incorporated, Minneapolis, Minnesota
Goldman Sachs & Co., New York, New York
Hambrecht & Quist Incorporated, New York, New York
John G. Kinnard & Co., Minneapolis, Minnesota
Merrill Lynch & Co., New York, New York
Morgan Keegan & Company, Inc., Memphis, Tennessee
Morgan Stanley & Co. Incorporated, New York, New York
PaineWebber Incorporated, New York, New York
Piper, Jaffray Incorporated, Minneapolis, Minnesota
Principal Financial Securities, Minneapolis, Minnesota
Raymond James & Associates, Inc., St. Petersburg, Florida
Robert W. Baird Co., Incorporated, Milwaukee, Wisconsin
Salomon Brothers Inc., New York, New York
Sanford C. Bernstein, New York, New York
13D Research Services, Brewster, New York
UBS Securities, New York, New York
Value Line Inc., New York, New York
Vector Securities International, Inc., Deerfield, Illinois
Wertheim Schroder, New York, New York
Wessels, Arnold & Henderson, Minneapolis, Minnesota
SUPPLEMENTAL MARKET PRICE DATA
The common stock of St. Jude Medical, Inc. is traded on the Nasdaq National
Market under the symbol STJM. The range of high and low prices per share for the
Company's common stock for fiscal 1994 and 1993 are set forth below. As of
February 10, 1995, the Company had 4,752 shareholders of record.
Year Ended December 31
1994 1993
Quarter High Low High Low
First $30.50 $26.00 $42.50 $28.75
Second $32.50 $24.75 $39.00 $27.25
Third $36.25 $30.00 $39.50 $25.50
Fourth $41.00 $33.75 $29.75 $25.00
Price data reflect actual transactions. In all cases, prices shown are
inter-dealer prices and do not reflect mark-ups, markdowns or commissions.
TRADEMARKS
St. Jude Medical(R), BiFlex(R), BioImplant(R), Toronto SPV(TM), SJM X-Cell(TM),
SJM(R) Masters Series, BioXenoGraft(TM), RediFurl(R), ArmorGlide(TM),
RediGuard(R), TaperSeal(R), SureGuide(R), Lifestream(R), Isoflow(R), Phoenix(R),
Solus(R), Synchrony(R), AddVent(TM), Microny(TM), Paragon(TM), Passive PLUS(TM),
Regency(TM), Tendril(TM), Trilogy(TM), Affinity(TM), PDx(TM), FAST-PASS(R).
(C) 1995 St. Jude Medical, Inc.
Printed in U.S.A. on recyled paper. Covers and pages 1-20 are printed on paper
that contains 40% preconsumer and 10% postconsumer material. Pages 21-40 are
printed on paper that contains 50% preconsumer and 10% postconsumer material.
Page 40
<PAGE>
LEADERSHIP
ST. JUDE MEDICAL, INC.
St. Paul, Minnesota
Ronald A. Matricaria
Chairman, President and
Chief Executive Officer
John J. Alexander
Vice President,
Corporate Development
Andrew K. Balo
Vice President,
Corporate Quality and
Regulatory Compliance
John P. Berdusco
Vice President, Administration
Peter L. Gove
Vice President,
Corporate Relations
Kevin T. O'Malley
Vice President and
General Counsel
Stephen L. Wilson
Vice President, Finance and
Chief Financial Officer
ST. JUDE MEDICAL DIVISION
St. Paul, Minnesota
Terry L. Shepherd
President
Robert S. Elgin
Vice President, Operations
J. Gary Jordan
Vice President,
Sales and Marketing
Patrick J. O'Neill
Controller
Bruce D. Ward
Vice President, Technology
PACESETTER, INC.
Los Angeles, California
Eric W. Sivertson
President
John P. Aldrich
Vice President,
Personnel Management
Fred A. Colen
Managing Director,
European Operations
(Stockholm, Sweden)
Diane M. Johnson
Executive Vice President and
General Counsel
David A. Morley
Senior Vice President,
Operations
E. Phillip Palmer
Senior Vice President,
Marketing and Sales
ST. JUDE MEDICAL
INTERNATIONAL
Brussels, Belgium
Philipe Auclair
Manager, Regulatory and
Clinical Affairs
Jacques C.J. Bouwens
Manager, Human Resources
Michael D. Dale
Business Unit Director
Claude Van Droogenbroeck
Director, Finance and
Administration
Sten Elfver
Business Unit Director
David L. Vied
Director, Operations and
Planning
CARDIAC ASSIST DIVISION
Chelmsford, Massachusetts
Robert J. Helbling
President
Maria-Teresa Ajamil
Director, International Sales
and Marketing
Anthony P. Caravello
Controller
William Edelman
Director, Research and
Development
Deborah L. Iampietro
Director, Regulatory and
Quality Assurance
James T. Robinson
Director, Marketing
Jan M. Webster
Manager, Human Resources
BOARD OF DIRECTORS
[PHOTO] [PHOTO]
Left:
Frank A. Ehmann (1)
Director of Various Companies
Winnetka, Illinois
Right:
Thomas H. Garrett, III (1)
Attorney
Lindquist & Vennum P.L.L.P.
Minneapolis, Minnesota
[PHOTO] [PHOTO]
Left:
Kenneth G. Langone (2)
Managing Director
Invemed Associates, Inc.
New York, New York
Right:
Lawrence A. Lehmkuhl
Director of Various Companies
St. Paul, Minnesota
[PHOTO] [PHOTO]
Left:
Ronald A. Matricaria
Chairman, President and
Chief Executive Officer
St. Jude Medical, Inc.
St. Paul, Minnesota
Right:
William R. Miller (2)
Director of Various Companies
New York, New York
[PHOTO] [PHOTO]
Left:
Charles V. Owens (1)
Chairman
Genesis Labs, Inc.
Minneapolis, Minnesota
Right:
Walter L. Sembrowich, Ph.D.
Co-Chairman
Diametrics Medical, Inc.
St. Paul, Minnesota
[PHOTO] [PHOTO]
Left:
Roger G. Stoll, Ph.D.
Chief Executive Officer and
President
Ohmeda, Inc.
Liberty Corner, New Jersey
Right:
Gail R. Wilensky, Ph.D.
Senior Fellow
Project Hope
Washington, D.C.
(1) Denotes members of the Audit Committee
(2) Denotes members of the Compensation Committee
Page - Inside Back Cover
<PAGE>
[LOGO] ST. JUDE MEDICAL
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, MN 55117-9983
612/483-2000
Telex 298453
Fax 612/490-4333
Page - Back Cover
EXHIBIT 21
ST. JUDE MEDICAL, INC. AND SUBSIDIARIES
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
ST. JUDE MEDICAL, INC.:
Pacesetter, Inc. (Delaware)
St. Jude Medical, Inc., Cardiac Assist Division (Delaware)
St. Jude Medical S.C., Inc. (Minnesota)
St. Jude Medical Europe, Inc., (Delaware)
St. Jude Medical International, Inc. (Delaware)
St. Jude Medical Sales Corporation (Barbados)
St. Jude Medical Puerto Rico, Inc. (Delaware)
St. Jude Medical Ltd. (Canada)
151703 Canada Inc. (Canada)
Pacesetter Netherlands Distribution AB (Sweden)
Pacesetter AB (Sweden)
St. Jude Medical Sweden AB (Sweden)
St. Jude Medical Pacesetter Sales AB (Sweden)
St. Jude Medical Italia SPA (Italy)
Pacesetter France SA (France)
St. Jude Medical Danmark A/s (Denmark)
St. Jude Medical Finland O/y (Finland)
St. Jude Medical AG (Switzerland)
St. Jude Medical GmbH (Germany)
St. Jude Medical Medizintechnik Ges.m.b.H. (Austria)
N.V. St. Jude Medical Belgium, S.A. (Belgium)
St. Jude Medical France S.A. (France)
St. Jude Medical Espagna S.A. (Spain)
St. Jude Medical UK Limited (United Kingdom)
St. Jude Medical Nederland B.V. (Netherlands)
Pacesetter Medical Products Limited (United Kingdom)
SJM Acquisition Corp. (Colorado)
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of St. Jude Medical Inc. of our report dated February 9, 1995, included in the
1994 Annual Report to Shareholders of St. Jude Medical, Inc.
We also consent to the incorporation by reference in Registration Statement No.
33-9262; Registration Statement No. 33-29085; Registration Statement No.
33-41459; Registration Statement No. 33-48502 and Registration Statement No.
33-54435 on Form S-8 of our reports dated February 9, 1995, with respect to the
consolidated financial statements and schedule of St. Jude Medical, Inc.
included in or incorporated by reference in the Annual Report (Form 10K) for the
year ended December 31, 1994.
/s/ Ernst & Young, LLP
Minneapolis, Minnesota
March 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 11,791
<SECURITIES> 125,177
<RECEIVABLES> 151,822
<ALLOWANCES> 5,760
<INVENTORY> 130,007
<CURRENT-ASSETS> 434,082
<PP&E> 157,017
<DEPRECIATION> 24,852
<TOTAL-ASSETS> 919,898
<CURRENT-LIABILITIES> 112,680
<BONDS> 0
<COMMON> 4,648
0
0
<OTHER-SE> 547,570
<TOTAL-LIABILITY-AND-EQUITY> 919,898
<SALES> 359,640
<TOTAL-REVENUES> 359,640
<CGS> 100,956
<TOTAL-COSTS> 100,956
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 715
<INTEREST-EXPENSE> 3,714
<INCOME-PRETAX> 106,355
<INCOME-TAX> 27,121
<INCOME-CONTINUING> 79,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,234
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
</TABLE>
