SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A 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.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(3) Exhibits
Exhibit Index
2.2 Siemens Pacesetter, Inc. and Affiliate and Siemens 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 the
Company and Pacesetter for the nine months ended September
30, 1994, and the year-ended December 31, 1993.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-9262, No. 33-29085, No. 33-41459, No. 33-48502,
and No. 33-54435) of St. Jude Medical, Inc. of our report dated July 22, 1994,
relating to the consolidated financial statements of Siemens Pacesetter, Inc.
for the years ended September 30, 1993 and 1992 included within this Annual
Report on Form 10-K/A.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Woodland Hills, California
September 12, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-9262, No. 33-29085, No. 33-41459, No. 33-48502,
and No. 33-54435) of St. Jude Medical, Inc. of our report dated November 4,
1994, relating to the consolidated financial statements of Siemens Pacesetter,
Inc. for the year ended September 30, 1994 included within this Annual Report on
Form 10-K/A.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Woodland Hills, California
September 12, 1995
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports dated December 16, 1994 and July 25, 1994,
included in the Annual Report on Form 10K of St. Jude Medical, Inc. for the year
ended December 31, 1994, with respect to the combined financial statements of
the Non-U.S. operations of Siemens Cardiac Systems included in this Form 10K.
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 December 16, 1994 and July 25, 1994, with respect
to the combined financial statements included in St. Jude Medical, Inc.'s Annual
Report (Form 10K) for the year ended December 31, 1994.
Stockholm September 12, 1995
/s/ Coopers & Lybrand
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
SIEMENS PACESETTER, INC.
AND AFFILIATE
REPORT AND COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
Report of Independent Accountants
To the Board of Directors and Shareholder of
Siemens Pacesetter, Inc. and Affiliate
In our opinion, the accompanying combined balance sheet and the related combined
statements of income and retained earnings and of cash flows present fairly, in
all material respects, the financial position of Siemens Pacesetter, Inc., (a
wholly owned subsidiary of Siemens Corporation) and affiliate at September 30,
1994, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 10, the Company is a defendant in a class action suit
claiming damages in connection with certain cardiac pacing devices. The ultimate
outcome or liability resulting from this suit, if any, is not presently
determinable.
\s\ Price Waterhouse LLP
Woodland Hills, California
November 4, 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 $527 for
interest and income taxes, respectively.
SIEMENS PACESETTER, INC.
REPORT AND FINANCIAL STATEMENTS
SEPTEMBER 30, 1992 AND 1993
Report of Independent Accountants
June 22, 1994
To the Board of Directors and Shareholder of
Siemens Pacesetter, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Siemens Pacesetter, Inc. at September 30,
1993 and 1992, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 10, the Company is a defendant in a class action suit
claiming damages in connection with certain cardiac pacing devices. The ultimate
outcome or liability resulting from this suit, if any, is not presently
determinable.
\s\ Price Waterhouse
SIEMENS PACESETTER, INC.
BALANCE SHEET ($ 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
REPORT OF INDEPENDENT AUDITORS
To the management and owners of Siemens Non-US Cardiac Systems operations and
Affiliates.
We have audited the accompanying combined balance sheet of Siemens Non-US
Cardiac Systems operations and Affiliates (the Company) as of September 30,
1994, and the related combined statements of income and cash flows for the year
then ended. 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 audit.
We conducted our audit 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of September 30,
1994, and the result of its operations and its cash flow for the year then ended
in conformity with generally accepted accounting principles.
December 16, 1994
\s\ Coopers & Lybrand
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
REPORT OF INDEPENDENT ACCOUNTANTS
July 25, 1994
To the management and owners of Siemens Cardiac Systems European operations and
Affiliates
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, retained earnings and of cash flows present
fairly, in all material respects, the financial position of Siemens Cardiac
Systems European operations and Affiliates (the Company), at September 30, 1992
and 1993, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted auditing
standards which requiare that the audit is planned and performed 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 statments, assessing the accounting
principles used and significant estimates made by management, and evaluation the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
\s\ Coopers & Lybrand
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 SIEMENS PACESETTER AND AFFILIATES
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 $103,724 (1)(25,737) $500,679
Cost of sales 48,807 76,892 56,788 (1)(17,218) 165,269
Gross profit 147,082 149,911 46,936 (8,519) 335,410
Selling, general and administrative 41,647 88,952 31,837 (2)3,080 165,516
Research and development 7,786 19,241 6,606 33,633
Goodwill amortization 0 0 0 (3)11,595 11,595
Total operating expenses 49,433 108,193 38,443 14,675 210,744
Operating profit 97,649 41,718 8,493 (23,194) 124,666
Interest income 10,365 1,805 (4)(9,587) 2,583
Interest expense 0 125 733 (5)8,017 8,875
Income before taxes 108,014 43,398 7,760 (40,798) 118,374
Income tax provision 30,784 16,950 2,783 (6)(15,005) 35,512
Net income $ 77,230 $ 26,448 $ 4,977 $ (25,793) $ 82,862
</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.
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
(1) Intercompany sales and cost of sales between the U.S. and Non-U.S. Siemens
entities have been eliminated.
(2) Represents the infrastructure costs related principally to the
establishment of sales offices in Western Europe.
(3) Represents the amortization expense related to the excess cost over net
assets acquired.
(4) The Company used $270 million of cash to fund a portion of the acquisition.
This adjustment reflects the lost interest income on such funds.
(5) The Company used $255 million of bank debt to fund the balance of the
acquisition. This bank debt was reduced by the free cash flow. This
adjustment represents the interest expense on the average debt balance.
(6) Pacesetter income is generally taxed at a higher rate than the Company's
previously existing business. The Company's effective tax rate was
increased by 1.5 percentage points.
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
September 12, 1995 ST. JUDE MEDICAL, INC.
By /s/ Stephen L. Wilson
Stephen L. Wilson
Vice President, Finance and CFO
(Principal Financial and
Accounting Officer)
