SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
December 6, 1996
Date of Report (Date of earliest event reported)
ST. JUDE MEDICAL, INC.
(Exact name of registrant as specified in charter)
Minnesota 0-8672 41-1276891
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
One Lillehei Plaza, St. Paul, MN 55117
(Address of principal executive offices) (Zip Code)
(612) 483-2000
Registrant's telephone number including area code
Not Applicable
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
St. Jude Medical, Inc. (the "Company") is filing this Current Report on Form 8-K
to present the supplemental financial statements, supplemental management's
discussion and analysis of financial condition and results of operations, and
other financial information that give effect to the May 31, 1996 acquisition of
Daig Corporation ("Daig") (previously reported on Form 8-K dated January 29,
1996), accounted for as a pooling of interests, by restating 1995 and certain
prior years financial statements and information as if the Company and Daig
always had been combined.
Effective May 31, 1996, Company and Partner Acquisition Corp. acquired Daig
under an Agreement and Plan of Merger (the "Agreement"). Pursuant to this
Agreement, the Company acquired all the outstanding shares of Daig common stock
in exchange for Company common stock. Each share of Daig's outstanding common
stock was converted into the right to receive .651733 shares of Company common
stock.
Based on the 15,236,144 shares of Daig common stock shares outstanding, St. Jude
issued 9,929,897 shares of its common stock to acquire Daig. The acquisition was
accounted for as a pooling of interests and is intended to qualify as a
reorganization (tax free to the Daig shareholders) under the provisions of
Section 368(a) of the Internal Revenue Code.
Daig is a Minnesota based manufacturer of specialized cardiovascular devices for
the electrophysiology and interventional cardiology markets. Daig will continue
to operate as a wholly owned subsidiary of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following supplemental consolidated financial statements of the
Company that give effect to the merger of Daig Corporation are included
herein:
Supplemental Management Discussion and Analysis of
Financial Condition and Results of Operations
Report of Management
Report of Independent Auditors
Supplemental Consolidated Statements of Income - Years
Ended December 31, 1995, 1994 and 1993
Supplemental Consolidated Balance Sheets - December 31,
1995 and 1994
Supplemental Consolidated Statements of Shareholders'
Equity - Years ended December 31, 1995, 1994 and 1993
Supplemental Consolidated Statements of Cash Flows - Years
ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Exhibit 23 Consent of Independent Auditors
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.
ST. JUDE MEDICAL, INC.
Date December 4, 1996 By /s/STEPHEN L. WILSON
---------------- -----------------------------------
Stephen L. Wilson
Vice President - Finance
and Chief Financial Officer
Supplemental Management's Discussion and Analysis of Results of Operations and
Financial Condition
(Dollars in thousands)
RESULTS OF OPERATIONS
INTRODUCTION:
The Company designs, manufactures and markets medical devices and provides
services primarily for the cardiovascular segment of the medical device market.
Principal products include the world's most frequently implanted mechanical
heart valves, tissue heart valves, bradycardia pacemakers, pacemaker leads and
specialty catheters.
The principal objective for management is to increase shareholder value. This is
accomplished through a focus on customer satisfaction, product innovation,
continual product and process improvement and investment in medical
technologies. The Company has implemented a long-term business strategy which
focuses investment on specific medical device technologies which will provide
innovative solutions to health care providers and patients.
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a
Minnesota based manufacturer of specialized cardiovascular devices for the
electrophysiology and interventional cardiology markets. Each share of Daig
common stock was converted into approximately .652 shares of Company common
stock. The Company issued 9,929,897 shares to Daig shareholders. Additionally,
one outstanding option to acquire 128,000 shares of Daig common stock was
converted to an option to acquire 83,422 shares of Company common stock. The
transaction qualifies as a tax free reorganization and was accounted for as a
pooling of interests. The accompanying financial statements, for all periods
presented, have been restated to include the results of Daig.
Effective September 30, 1994, St. Jude Medical acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the Company's
product offerings and provided a medical technology platform for potential
further diversification of its business. The Company's 1994 fourth quarter and
full year 1995 financial results include Pacesetter's operations.
The commentary that follows should be read in conjunction with the Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements. The
Company's fiscal year is the 52 or 53 week period ending the Saturday nearest
December 31. Fiscal years 1995, 1994 and 1993 consisted of 52 weeks.
Shown in the following table for the periods indicated are the percentage
relationships of certain items in the consolidated statements of income to net
sales and the percentage change of the dollar amounts of such items as compared
with the prior period. Due to the impact of the Pacesetter acquisition, amounts
are not directly comparable between years.
<TABLE>
<CAPTION>
Year-to-Year
Percent of Net Sales Increase/(Decrease)
- --------------------------------------------------------------------------------------------
1995 1994
Year Ended December 31 Compared Compared
1995 1994 1993 TO 1994 to 1993
............................................................................................
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 94% 41%
Cost of sales 30.8% 28.6% 25.3% 110% 59%
------ ------ ------
Gross profit 69.2% 71.4% 74.7% 88% 35%
------ ------ ------
Selling, general and
administrative 32.5% 27.0% 20.1% 133% 89%
Research and
development 9.5% 6.0% 4.6% 208% 82%
Purchased research
and development -- 10.4% -- (100%) --
------ ------ ------
Operating profit 27.2% 28.0% 50.0% 89% (21%)
Other income (expense), net (.8%) 1.9% 5.1% (175%) (46%)
------ ------ ------
Income before taxes 26.4% 29.9% 55.1% 72% (23%)
Income tax provision 8.2% 7.8% 13.9% 103% (20%)
------ ------ ------
Net income 18.2% 22.1% 41.2% 61% (25%)
.............................................................................................
</TABLE>
NET SALES: Net sales totalled $761,835 in 1995, a $369,886, or 94%, increase
over 1994 net sales of $391,949. Approximately $349,000 of the increase was
attributable to the full year effect of the Pacesetter transaction and increased
Pacesetter sales. On a comparable business basis, net sales were almost
$307,000, which was approximately a 7% increase over 1994 net sales.
Mechanical heart valve net sales increased in 1995 in all geographic markets
despite worldwide health care reform and increased competition which continued
to put pressure on the number of procedures performed as well as on pricing
flexibility. Domestic mechanical heart valve net sales increased in 1995 due to
the full year availability of the St. Jude Medical(R) Hemodynamic Plus Series
valves and collagen-impregnated aortic valved grafts and general price increases
that were partially offset by a slight reduction in unit sales. International
mechanical heart valve net sales in 1995 were more than 10% higher than 1994.
This resulted mainly from increased unit sales in the developing markets of
Latin America and the Middle East. In Western Europe, net sales were positively
impacted by approximately $7,500 in 1995 due to the depreciation of the U.S.
dollar from 1994 levels.
Tissue heart valve net sales in 1995 increased significantly from 1994 levels
due to the continuing physician acceptance of the Toronto SPVTM valve. Cardiac
assist device 1995 net sales increased by almost 15% from 1994 levels as a
result of new product introductions and market share penetration.
Daig 1995 net sales increased approximately 20% over 1994 due to increased sales
and marketing activities in the U.S. market and to the introduction of new
electrophysiology catheters.
Pacesetter net sales totalled almost $455,000. This represented an increase of
approximately $349,000 from 1994 levels which only included net sales subsequent
to the purchase of the business on September 30, 1994. The higher sales level
also resulted from the 1995 introduction of the TrilogyTM line of bradycardia
pacemakers and several advanced pacemaker leads. International net sales were
41% of total net sales in 1995 which was consistent with 1994.
Net sales in 1994 of $391,949 were 41% higher than 1993 net sales. The increase
principally resulted from the fourth quarter 1994 Pacesetter net sales, higher
mechanical heart valve sales in emerging international markets and increased
Daig sales due to new product introductions and expanded marketing programs.
Domestic mechanical heart valve sales increased due to the introduction of the
collagen-impregnated aortic valved graft and general price increases that were
partially offset by a reduction in unit sales.
COST OF SALES: As a percentage of net sales, cost of sales in 1995 increased to
30.8% from 28.6% in 1994 primarily as a result of Pacesetter operations.
Although Pacesetter margins are consistent with the industry, its margins are
not as high as the Company's heart valve margins. Cost of sales includes
royalties paid in connection with various license agreements. In addition, cost
of sales increased in 1995 due to a price increase from the Company's supplier
of pyrolytic carbon components, the major components of the mechanical heart
valve. Also, a higher percentage of mechanical heart valve unit sales were
generated in the lower margin markets of Latin America and the Middle East.
These increases were partially offset by reduced royalty payments due to the
expiration of a license agreement pertaining to mechanical heart valve sales
during the first quarter 1995.
In 1994, cost of sales as a percentage of sales increased to 28.6% from 25.3% in
1993. The increase was principally attributable to lower margin Pacesetter
sales, a higher percentage of mechanical heart valve sales into lower margin
emerging markets and a price increase from the Company's supplier of pyrolytic
carbon components. These increases were partially offset by reduced royalty
payments to the Company's pyrolytic carbon supplier due to the expiration of a
contract during the first quarter 1994.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative (SG&A)
expense increased in 1995 to $247,389 from $105,971 in 1994. As a percentage of
net sales, SG&A increased to 32.5% in 1995 from 27.0% in 1994. The higher dollar
amount and percentage of net sales increase were mainly due to the Pacesetter
operations. Selling efforts for pacemakers are much more labor intensive and the
Company uses a commission-based independent contractor sales force in the U.S.
and distributors in all international markets except Western Europe. Also,
Pacesetter related goodwill amortization was recorded for the full year in 1995
compared to only one quarter in 1994. In addition, SG&A expenses increased due
to additional marketing costs attributable to expanded coverage in the Pacific
Rim and Latin American markets and an increased infrastructure in Western Europe
as a result of the Pacesetter acquisition. Operating expenses denominated in
foreign currencies also increased approximately $4,500 due to the depreciation
of the U.S. dollar.
During 1994, selling, general and administrative expense increased $49,999 over
1993 levels. The increase was mainly attributable to the Pacesetter operations,
higher domestic mechanical heart valve marketing costs associated with increased
competition and ISO 9000 certification activities.
RESEARCH AND DEVELOPMENT: Research and development (R&D) expense in 1995
increased to $72,305 from $23,471 recorded in 1994 and as a percentage of net
sales increased to 9.5% from 6.0%. The increase was attributable to the full
year effect of Pacesetter operations. Pacesetter has major ongoing R&D programs
in the areas of bradycardia pacemakers and tachycardia defibrillators as well as
development of a new programmer. A slight decrease in R&D for the heart valve
business resulted from the completion of certain phases of the development of
the rotatable SJM(R) Masters Series rotatable heart valve which was introduced
in 1995. The Daig R&D expense increased in 1995 principally due to
electrophysiological catheter development.
In 1994, research and development expense increased to $23,471 from $12,869
recorded in 1993. The increase mainly resulted from Pacesetter's fourth quarter
operations. Other R&D expenses decreased from 1993 levels due to the completion
of certain phases of research and development which was offset by increased
spending for mechanical heart valves, tissue heart valves and catheters.
PURCHASED RESEARCH AND DEVELOPMENT: The Pacesetter acquisition was accounted for
as a purchase and, on this basis, a pre-tax charge of $40,800 for purchased
research and development was incurred in 1994. Specifically, purchased research
and development was analyzed by an independent appraisal firm through interviews
and evaluation of identifiable developmental projects. Anticipated future cash
flows of certain projects were discounted to present values considering risks
associated with uncertainties and obstacles in completing projects,
technological innovations which could decrease the expected cash flows and other
potential market changes. Other projects were valued using the cost approach
which values projects based on the buyer's ability to avoid previously incurred
costs for projects with no alternative future use.
OTHER INCOME (EXPENSE): Other expense totalled $5,790 in 1995 compared to other
income of $7,680 in 1994. The Pacesetter acquisition which was effective
September 30, 1994 decreased the Company's cash and marketable securities
position by $275,000 and increased debt by $255,000. During 1995, $135,000 of
debt was repaid; however, interest expense in 1995 increased significantly over
1994 levels as a result of a full year of debt as opposed to one quarter of
debt. Due to fluctuations in the U.S. dollar and a shift in the relationship
between European currencies, foreign exchange contract gains and foreign
exchange transaction gains were recorded in 1995 compared to losses recorded in
1994.
Net other income decreased to $7,680 in 1994 from $14,126 in 1993 mainly due to
the financing of the Pacesetter acquisition. Interest expense was $3,776 in 1994
and negligible in 1993 and interest income was significantly reduced. Also
partnership and joint venture losses were higher in 1994 as significant costs
were incurred with respect to The Heart Valve Company's development of the SJM
X-Cell(TM) bioprosthesis.
INCOME TAX PROVISION: The Company's 1995 effective income tax rate increased to
31.1% which was 4.8 percentage points higher than the 1994 effective rate. The
higher rate resulted from lower tax advantaged investment income, income from
Pacesetter operations which is generally taxed at a higher rate than the
Company's previously existing business and reduced tax benefits derived from the
Company's Puerto Rican operations.
The Omnibus Budget Reconciliation Act of 1993 significantly reduced the tax
benefits which were previously available from income generated by the Company's
Puerto Rican operations under Internal Revenue Code (IRC) Section 936. As a
result of this legislation, Puerto Rican tax benefits were reduced by an
additional 5% in 1995 on top of a 40% reduction in 1994.
OUTLOOK: The Company expects that market demands, government regulation and
societal pressures will continue to change the health care industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to pursue diversification opportunities
in the form of acquisitions, joint ventures, partnerships and strategic business
alliances. In addition, the Company will participate with industry groups to
promote the introduction and use of advanced medical device technology within a
cost conscious environment. Finally, customer service in the form of cost
effective clinical outcomes will continue to be a primary focus for the Company.
In 1995, competition continued to increase in the Company's heart valve
business; however, the Company estimates it held its share of the worldwide
heart valve market. During 1995, domestic hospital inventory reduction programs
and increased competition resulted in a slight reduction in domestic unit demand
for the Company's products. International unit sales growth exceeded 10%
reflecting continued penetration of emerging markets. Competition is anticipated
to place downward pressure on pricing and health care reform is expected to
result in further hospital consolidations over time.
The Company's cardiac rhythm management business is also in a highly competitive
market. During 1995, the Company introduced to the market a number of new pulse
generators and pacemaker lead products. The Company estimates that it held its
share of the worldwide bradycardia segment of cardiac rhythm market in 1995.
The Company has a goal to achieve 15% annual growth in earnings per share.
However, achievement of this goal could be materially affected by factors
including, but not limited to, the Company's inability to execute its
diversification strategy or successfully integrate acquired companies;
legislative or administrative reform of the U.S. Medicare and Medicaid systems
in a manner that would significantly reduce reimbursement for procedures using
the Company's medical devices; unexpected failures of the Company's products or
continuation of or increases in existing failure modes for the Company's
implanted products; unfavorable developments in the area of product liability
laws affecting medical devices; the acquisition of key patents by competitors
that would have the effect of excluding the Company from new market segments; or
a serious earthquake affecting the Company's Pacesetter facility in Los Angeles.
The Company anticipates that its 1996 effective income tax rate will increase
due a higher ratio of Pacesetter income which is generally taxed at a higher
rate, reduced Puerto Rican income as a percentage of total income and a lower
Puerto Rican tax benefit as IRC Section 936 tax benefits are reduced by an
additional 5% per year through 1998. There are additional changes to IRC Section
936 regulations being proposed by the Internal Revenue Service which, if
finalized in its present form, would further negatively impact the Company's
effective tax rate. There are also legislative proposals to eliminate the
Section 936 tax benefit. The Company cannot predict when, or if the regulation
or legislative changes will be adopted.
Subsequent to December 31, 1995, the Company had several unusual transactions
which will be reflected in the first quarter 1996 financial statements. Sale of
the cardiac assist business for $25,000 will result in a gain of approximately
$10,000. Acquisition of The Heart Valve Company for $1,000 and approximately
149,000 shares of Company common stock will result in a purchased research and
development charge of approximately $5,000. Settlement of litigation related to
an acquisition break up fee will result in a gain of approximately $3,000. The
acquisition of Daig Corporation will result in transaction related expenses of
approximately $5,500.
FINANCIAL CONDITION
SUMMARY: The financial condition of the Company was strengthened during 1995.
The debt incurred with respect to the Pacesetter acquisition was reduced in 1995
to $120,000 from $255,000 at the end of 1994. Cash and marketable securities
increased to $187,382 at December 31, 1995, from $150,577 at December 31, 1994.
Working capital, the difference between current assets and current liabilities,
was $354,771 at December 31, 1995, a $14,927 increase from the prior year end
level.
LIQUIDITY: Company operations provide a strong, positive cash flow which is more
than sufficient to meet the Company's operational requirements. Cash provided by
operations in 1995 amounted to $185,172 compared to $96,271 in 1994. The current
ratio was 2.8 to 1 at December 31, 1995.
The Company has a $260,000 long-term revolving line of credit through September
1999 with an eleven member banking syndicate comprised of banks in the United
States and other countries where it conducts its business. At December 31, 1995,
the Company had $140,000 available under the line.
Accounts receivable increased approximately $19,000 in 1995 principally due to a
shift in sales to emerging markets with longer payment cycles. Inventories
increased about $30,000 primarily as a result of expanded product offerings in
both the heart valve and cardiac rhythm management businesses. Net property,
plant and equipment increased almost $25,000 due to Pacesetter plant expansion,
pacemaker programmer investments and further development of the Company's
Woodridge carbon technology center.
Cash flow from operations and access to additional capital will enable the
Company to pursue further diversification opportunities and to fund expected
capital additions. During 1996 and 1997, the Company will expand pacemaker
manufacturing capacity in both the U.S. and Sweden. In addition, the Company
will invest in its information systems and communications infrastructure.
CAPITAL: The Company's capital structure consists of equity and interest bearing
debt. Interest bearing debt as a percent of total capital was 14.0% at December
31, 1995 a reduction from 30.7% at December 31, 1994. More importantly, the
ratio of debt to cash flow from operations was reduced from 2.6/1 to .6/1.
Cash dividends paid to shareholders in 1994 were $13,935. The Company
discontinued its cash dividend subsequent to the third quarter 1994 in order to
accelerate debt repayment and to provide additional funds for investment in new
businesses. No repurchases of shares of common stock were made during 1995 or
1994. The Company may repurchase approximately 1,000,000 additional shares under
a currently outstanding Board of Directors authorization.
OUTLOOK: Management is unaware of any adverse business trends that would
materially affect the Company's strong financial position. Should suitable
investment opportunities arise that would require additional financing,
management believes that the Company's excellent earnings , strong cash flow and
solid balance sheet provide a substantial basis to obtain additional financing
at highly competitive rates and terms.
Report of Management
The management of St. Jude Medical, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements were prepared in accordance with generally accepted
accounting principles and include amounts which reflect management's best
estimates based on its informed judgement and consideration given to
materiality. Management is also responsible for the accuracy of the related data
in the annual report and its consistency with the financial statements.
In the opinion of management, the Company's accounting systems and procedures,
and related internal controls, provide reasonable assurance that transactions
are executed in accordance with management's intention and authorization, that
financial statements are prepared in accordance with generally accepted
accounting principles, and that assets are properly accounted for and
safeguarded. The concept of reasonable assurance is based on the recognition
that there are inherent limitations in all systems of internal control, and that
the cost of such systems should not exceed the benefits to be derived therefrom.
Management reviews and modifies the system of internal controls to improve its
effectiveness. The effectiveness of the controls system is supported by the
selection, retention and training of qualified personnel, an organizational
structure that provides an appropriate division of responsibility and a strong
budgeting system of control.
St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and business conduct. This responsibility is
reflected in the Company's business ethics policy.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. The independent auditors and internal
auditor meet with, and have confidential access to, the Audit Committee to
discuss the results of their audit work.
/s/RONALD A. MATRICARIA
Ronald A. Matricaria
Chairman, President and Chief Executive Officer
/s/STEPHEN L. WILSON
Stephen L. Wilson
Vice President, Finance and Chief Financial Officer
Report of Independent Auditors
St. Jude Medical, Inc.
We have audited the supplemental consolidated balance sheets of St. Jude
Medical, Inc. (formed as a result of the consolidation of St. Jude Medical, Inc.
and Daig Corporation) as of December 31, 1995 and 1994 and the related
supplemental consolidated statements of income for each of the three years in
the period ended December 31, 1995. The supplemental consolidated financial
statements give retroactive effect to the merger of St. Jude Medical, Inc. and
Daig Corporation on May 31, 1996, which has been accounted for using the pooling
of interests method as described in the notes to the supplemental consolidated
financial statements. These supplemental financial statements are the
responsibility of the management of St. Jude Medical, Inc. Our responsibility is
to express an opinion on these supplemental financial statements based on our
audits. We did not audit the financial statements of Daig Corporation, which
statements reflect total assets constituting 4% for 1995 and 3% for 1994 of the
related supplemental consolidated financial statement totals, and which reflect
net income constituting approximately 7% of the related supplemental
consolidated financial statement totals for the three year period ended December
31, 1995. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Daig Corporation, is based solely on the report of the other auditors.
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 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of St. Jude Medical at
December 31, 1995 and 1994 and the consolidated results and its operations for
each of the three years in the period ended December 31, 1995, after giving
retroactive effect to the merger of Daig Corporation, as described in the notes
to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Minneapolis, Minnesota
February 5, 1996 (except for the pooling of interests
with Daig Corporation described in Note 2, for which
the date is May 31, 1996)
<TABLE>
<CAPTION>
Supplemental Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Year Ended December 31 1995 1994 1993
...............................................................................................
<S> <C> <C> <C>
Net sales $ 761,835 $ 391,949 $ 278,320
Cost of sales 234,830 112,087 70,433
Gross profit 527,005 279,862 207,887
Selling, general and administrative expense 247,389 105,971 55,972
Research and development expense 72,305 23,471 12,869
Purchased research and development charge -- 40,800 --
Operating profit 207,311 109,620 139,046
Other income (expense), net (5,790) 7,680 14,126
Income before taxes 201,521 117,300 153,172
Income tax provision 62,673 30,850 38,599
Net income $ 138,848 $ 86,450 $ 114,573
Earnings per share:
Primary $ 1.71 $ 1.08 $ 1.42
Fully diluted $ 1.70 $ 1.07 $ 1.42
Cash dividends paid per share $ -- $ 0.20 $ 0.27
Average shares outstanding:
Primary 80,988,000 80,085,000 80,499,000
Fully diluted 81,464,000 80,432,000 80,528,000
...............................................................................................
See notes to supplemental consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Supplemental Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31 1995 1994
...................................................................................................
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,767 $ 24,400
Marketable securities 152,615 126,177
Accounts receivable, less allowance (1995 - $9,361, 1994 - $5,782) 169,690 150,710
Inventories:
Finished goods 82,176 61,039
Work in process 27,544 21,974
Raw materials 53,583 50,234
----------- -----------
Total inventories 163,303 133,247
Prepaid income taxes 15,930 4,448
Other current assets 15,909 16,835
----------- -----------
Total current assets 552,214 455,817
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land 9,949 12,049
Buildings and improvements 46,014 43,764
Machinery and equipment 142,311 99,578
Construction in progress 19,315 12,811
----------- -----------
Gross property, plant and equipment 217,589 168,202
Less accumulated depreciation (55,519) (31,117)
----------- -----------
Net property, plant and equipment 162,070 137,085
----------- -----------
OTHER ASSETS 339,532 353,920
----------- -----------
TOTAL ASSETS $ 1,053,816 $ 946,822
...................................................................................................
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 79,894 $ 43,151
Accrued income taxes 41,346 21,644
Accrued employee compensation and related taxes 45,503 33,179
Other accrued expenses 30,700 17,999
----------- -----------
Total current liabilities 197,443 115,973
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 120,000 255,000
----------- -----------
CONTINGENCIES
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share -
25,000, 000 shares authorized; no shares issued
Common stock, par value $.10 per share -
100,000,000 shares authorized; issued and outstanding
1995 - 79,921,597 shares; 1994 - 79,627,665 shares 7,992 7,963
Additional paid-in capital 34,769 28,488
Retained earnings 680,042 541,194
Cumulative translation adjustment 4,319 (2,484)
Unrealized gain on available-for-sale securities 9,691 686
Receivable for stock issued (440) --
----------- -----------
Total shareholders' equity 736,373 575,849
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,053,816 $ 946,822
...................................................................................................
See notes to supplemental consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Supplemental Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except per share amounts)
Common Stock
---------------------------- Additional Cumulative Unrealized
Number of Paid-In Retained Translation Gain on
Shares Amount Capital Earnings Adjustment Investments
....................................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 80,220,797 $ 8,022 $ 59,815 $ 372,892 $ (1,485) $
----------- ----------- ----------- ----------- ----------- -----------
Net income 114,573
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 1,065,760 108 2,580
Tax benefit realized upon
exercise of stock options 355
Cash dividends
($.27 per share) (18,786)
Purchase and retirement
of common shares (1,766,550) (177) (35,062)
Translation adjustment (2,124)
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1993 79,520,007 7,953 27,688 468,679 (3,609)
----------- ----------- ----------- ----------- ----------- -----------
Net income 86,450
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 107,658 10 704
Tax benefit realized upon
exercise of stock options 223
Cash dividends
($.20 per share) (13,935)
Purchase and retirement
of common shares (125)
Translation adjustment 1,125
Unrealized gain on investments,
net of taxes 686
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1994 79,627,665 7,963 28,490 541,194 (2,484) 686
----------- ----------- ----------- ----------- ----------- -----------
Net income 138,848
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 293,932 29 4,930
Tax benefit realized upon
exercise of stock options 1,349
Translation adjustment 6,803
Unrealized gain on investments,
net of taxes 9,005
Receivable for stock issued
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 79,921,597 $ 7,992 $ 34,769 $ 680,042 $ 4,319 $ 9,691
....................................................................................................................................
[WIDE TABLE CONTINUED FROM ABOVE]
Receivable Total
for Stock Shareholders'
Issued Equity
................................................................
Balance December 31, 1992 $ $ 439,244
----------- -----------
Net income 114,573
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 2,688
Tax benefit realized upon
exercise of stock options 355
Cash dividends
($.27 per share) (18,786)
Purchase and retirement
of common shares (35,239)
Translation adjustment (2,124)
----------- -----------
Balance December 31, 1993 500,711
----------- -----------
Net income 86,450
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 714
Tax benefit realized upon
exercise of stock options 223
Cash dividends
($.20 per share) (13,935)
Purchase and retirement
of common shares (125)
Translation adjustment 1,125
Unrealized gain on investments,
net of taxes 686
----------- -----------
Balance December 31, 1994 -- 575,849
----------- -----------
Net income 138,848
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 4,959
Tax benefit realized upon
exercise of stock options 1,349
Translation adjustment 6,803
Unrealized gain on investments,
net of taxes 9,005
Receivable for stock issued (440) (440)
----------- -----------
Balance December 31, 1995 (440) $ 736,373
................................................................
See notes to supplemental consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Supplemental Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31 1995 1994 1993
.................................................................................................................
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 138,848 $ 86,450 $ 114,573
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 21,524 9,218 5,662
Amortization 20,102 7,816 4,458
Purchased research and development charge 40,800
Changes in operating assets and liabilities net of acquisition:
Decrease (increase) in accounts receivable (19,245) (23,885) (139)
Increase in inventories (23,499) (4,965) (6,343)
Decrease (increase) in other current assets 1,289 (9,516) (1,593)
Increase (decrease) in accounts payable and accrued expenses 38,482 8,018 (2,807)
Increase (decrease) in accrued income taxes 20,288 (3,334) 8,083
Increase in prepaid and deferred income taxes (12,617) (14,331) (458)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 185,172 96,271 121,436
---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (44,935) (20,836) (18,631)
Purchases of marketable securities (26,524) (88,760) (157,908)
Proceeds from sale or maturity of marketable securities 14,500 308,761 83,681
Investments in companies, joint ventures and partnerships (3,701) (13,564) (12,253)
Acquisition of Pacesetter 13,000 (524,300)
Other investing activities 2,694 (7,686) (3,273)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (44,966) (346,385) (108,384)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 4,514 644 1,789
Cash dividends paid (13,935) (18,786)
Common stock repurchased (125) (35,239)
Proceeds from the issuance of long-term debt 255,000
Repayment of long-term debt (135,000)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,486) 241,584 (52,236)
---------- ---------- ----------
Effect of currency exchange rate changes on cash 647 567 (381)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,367 (7,963) (39,565)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,400 32,363 71,928
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,767 $ 24,400 $ 32,363
..................................................................................................................
See notes to supplemental consolidated financial statements
</TABLE>
Supplemental Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 1 SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: St. Jude Medical, Inc. develops, manufactures and
distributes medical device products with an emphasis on cardiac care products.
The Company's products are sold in more than 70 countries. Principal products
sold are prosthetic heart valves, pacemakers and specialized catheters. The main
markets for these products are the United States, Western Europe and Japan. In
the United States, the Company uses a direct employee-based sales organization
for its heart valve products and a combination of independent contractors and
employee-based sales organizations for its pacemaker and catheter products. In
Western Europe, the Company has a direct sales presence in thirteen countries.
Throughout the rest of the world the Company uses distributor-based sales
organizations.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform with the current year presentation.
USE OF ESTIMATES: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period ending
the Saturday nearest December 31. Fiscal years 1995, 1994 and 1993 consist of 52
weeks.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates in effect on reporting
dates and differences due to changing exchange rates are recorded as "cumulative
translation adjustment" in shareholders' equity. Income and expenses are
translated at rates which approximate those in effect on transaction dates.
CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, are stated at cost which
approximates market.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method. Allowances are made for
slow-moving, obsolete, unsalable or unusable inventories.
STOCK OPTIONS: The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for stock options. Pro forma information regarding
net income and earnings per share as calculated under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," will be
disclosed in complete financial statements filed for fiscal years beginning
subsequent to December 15, 1995.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight line method over their
estimated useful lives ranging from three to 39 years. Accelerated depreciation
is used by the Company for tax accounting purposes only.
LONG-LIVED ASSETS: Statement of Financial Accounting Standards (FAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The Company will adopt FAS No. 121 which was issued
in March 1995 in the first quarter of 1996 and, based on current circumstances,
does not believe the effect of adoption will be material.
REVENUE RECOGNITION: The Company's general practice is to recognize revenues
from product sales as shipped and for services as performed.
RESEARCH AND DEVELOPMENT: Research and development expense includes all
expenditures for general research into scientific phenomena, development of
useful ideas into merchantable products and continuing support and upgrading of
various products. All such expense is charged to operations as incurred.
EARNINGS PER SHARE: Primary and fully diluted earnings per share are computed by
dividing net income for the year by the weighted average number of shares of
common stock and common stock equivalents outstanding.
Note 2 ACQUISITIONS
On September 30, 1994, the Company acquired substantially all of the Siemens AG
worldwide cardiac rhythm management business ("Pacesetter") for $511,300. The
acquisition was accounted for under the purchase accounting method. Goodwill is
amortized on a straight line basis over 20 years. The results of Pacesetter's
operations have been included in the consolidated results of operations from the
date of acquisition.
In conjunction with the acquisition, the Company recorded a non-cash pre-tax
charge of $40,800 ($25,300, or $.36 per share, after tax) relating to that
portion of the purchase price attributable to purchased research and
development. The purchased research and development charge represents the
appraised value of the in-process research and development that must be expensed
under generally accepted accounting principles.
The following unaudited pro forma information has been prepared assuming that
the acquisition of Pacesetter had occurred at the beginning of the period
presented. Permitted adjustments include amortization of goodwill, increased
interest expense, decreased interest income and the related income tax effects.
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
the expected results of future operations. The 1993 pro forma results include a
$25,300, or $.31 per share after-tax, Pacesetter related purchased research and
development charge.
1995 1994 1993
.............................................................................
Net sales $761,835 $696,739 $639,686
Net income $138,848 $119,174 $ 98,429
Earnings per share $1.71 $1.49 $1.22
.............................................................................
Effective May 31, 1996, the Company acquired Daig Corporation ("Daig"), a
Minnesota based manufacturer of specialized cardiovascular devices for the
electrophysiology and interventional cardiology markets. Each share of Daig
common stock was converted into .651733 shares of Company common stock. The
Company issued 9,929,897 shares to Daig shareholders. Additionally, one
outstanding option to acquire 128,000 shares of Daig common stock was converted
to an option to acquire 83,422 shares of Company common stock. The transaction
qualifies as a tax free reorganization and was accounted for as a pooling of
interests. The accompanying financial statements, for all periods presented,
have been restated to include the results of Daig.
Daig's fiscal year ended on September 30 and, accordingly, the statements of
income for the years ended September 30, 1995, 1994 and 1993 have been combined
with the Company's statements of income for the years ended December 31, 1995,
1994 and 1993. An adjustment of $1,553 has been made to beginning retained
earnings, principally to reflect Daig's results for the three month period ended
December 31, 1995.
Separate results of operations for the periods prior to the merger with Daig are
as follows:
1995 1994 1993
--------- --------- ---------
Net Sales
- ---------
St. Jude Medical $ 723,513 $ 359,640 $ 252,642
Daig 38,322 32,309 25,678
--------- --------- ---------
Combined $ 761,835 $ 391,949 $ 278,320
========= ========= =========
Net Income
- ----------
St. Jude Medical $ 129,418 $ 79,234 $ 109,643
Daig 9,898 7,574 5,229
Adjustments (468) (358) (299)
--------- --------- ---------
Combined $ 138,848 $ 86,450 $ 114,573
========= ========= =========
Other Changes in Shareholders' Equity
- -------------------------------------
St. Jude Medical $ 21,670 ($ 11,257) ($ 54,441)
Daig 6 (55) 1,335
--------- --------- ---------
Combined $ 21,676 ($ 11,312) ($ 53,106)
========= ========= =========
Note 3 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which was adopted
in 1993 on a prospective basis. The statement requires use of the asset and
liability approach for financial accounting and reporting for income taxes. The
cumulative effect of the accounting change was not material.
The components of income before taxes were as follows:
1995 1994 1993
..........................................................
Domestic $183,525 $108,249 $148,253
Foreign 17,996 9,051 4,919
-------- -------- --------
Income before taxes $201,521 $117,300 $153,172
..........................................................
The components of the income tax provision were as follows:
1995 1994 1993
...............................................................................
Current:
Federal $ 47,281 $ 36,368 $ 24,526
State and Puerto Rico 11,518 10,217 12,576
Foreign 6,226 3,107 1,953
-------- -------- --------
Total current 65,025 49,692 39,055
-------- -------- --------
Deferred:
Prepaid (7,329) (5,757) 274
Deferred 4,977 (13,085) (730)
-------- -------- --------
Total deferred (2,352) (18,842) (456)
-------- -------- --------
Income tax provision $ 62,673 $ 30,850 $ 38,599
...............................................................................
Deferred income tax assets (liabilities) were comprised of the following at
December 31:
1995 1994
...............................................................................
Net deferred income tax asset:
Inventory (intercompany profit in inventory
and excess of tax over book valuation) $ 16,590 $ 5,811
Intangibles 10,728 12,753
Accruals not currently deductible and other 7,923 3,806
-------- --------
Deferred income tax asset 35,241 22,370
...............................................................................
Net deferred income tax liability:
Accumulated depreciation (7,037) (1,927)
Unrealized gain on investments (5,830) (421)
-------- --------
Deferred income tax liability (12,867) (2,348)
-------- --------
Net deferred income tax asset $ 22,374 $ 20,022
...............................................................................
The Company's effective income tax rate varied from the statutory U.S. federal
income tax rate of 35% as follows:
1995 1994 1993
...............................................................................
Income tax provision at U.S.
statutory rate $ 70,533 $ 41,055 $ 53,610
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 4,434 1,763 2,959
Tax benefits from Foreign
Sales Corporation (1,886) (1,557) (2,190)
Tax benefits from Puerto
Rican operations (8,442) (7,880) (13,782)
Tax exempt income -- (2,274) (3,403)
Foreign taxes at higher
(lower) rates (1,640) 194 358
Other (326) (451) 1,047
-------- -------- --------
Income tax provision $ 62,673 $ 30,850 $ 38,599
-------- -------- --------
Effective income tax rate 31.1% 26.3% 25.2%
...............................................................................
The Company's effective income tax rate is favorably affected by Puerto Rican
tax exemption grants which result in Puerto Rican earnings being partially tax
exempt through the year 2003.
Consolidated U.S. federal income tax returns filed by the Company have been
examined by the Internal Revenue Service through the year 1989. The Company's
1990 through 1994 federal income tax returns are presently under audit. Field
examiners have indicated that the IRS may assert substantial additional taxes on
Puerto Rican earnings. Management believes any additional taxes which may
ultimately result from the audit would not have a material adverse effect on the
Company's liquidity or financial position, but could potentially be material to
the net income of a particular future period if resolved unfavorably.
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries ($17,967 at December 31, 1995) because
distribution of these earnings generally would not require additional taxes due
to available foreign tax credits.
The Company made income tax payments of $52,624, $49,565 and $31,366 in 1995,
1994 and 1993, respectively.
Note 4 STOCK PURCHASE AND OPTION PLANS
STOCK PURCHASE: The Company's employee stock purchase savings plan allows
participating employees to purchase, through payroll deductions, shares of
common stock at 85% of the fair market value at specified dates. Under the terms
of the plan, 750,000 shares of common stock have been reserved for purchase by
plan participants. Employees purchased 97,525 and 26,041 shares in 1995 and
1994, respectively. At December 31, 1995, 603,237 shares were available for
purchase under the plan.
STOCK OPTIONS: Under the terms of the Company's various stock plans, 8,434,396
shares of common stock have been reserved for issuance to directors, officers
and employees upon the grant of restricted stock or the exercise of stock
options. Stock options are exercisable over periods up to 10 years from date of
grant and may be "incentive stock options" or "non-qualified stock options" and
may have stock appreciation rights attached. At December 31, 1995, there were a
maximum of 5,190,595 shares available for grant and 3,327,223 options
outstanding, of which 2,507,524 were exercisable. Stock option activity was as
follows:
Options Price
Outstanding Per Share
.................................................................
Balance at December 31, 1993 2,113,162 $ 3.06 - 33.08
Granted 1,148,625 17.25 - 26.42
Cancelled (320,495) 7.29 - 32.17
Exercised (8,250) 7.20 - 14.63
---------
Balance at December 31, 1994 2,933,042 3.06 - 33.08
Granted 756,552 21.10 - 39.50
Cancelled (165,744) 17.83 - 32.25
Exercised (196,627) 3.56 - 32.25
---------
Balance at December 31, 1995 3,327,223 3.06 - 39.50
.................................................................
Pursuant to the terms of the Company's various stock plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related tax
liabilities. Shares are acquired from the optionee at the fair market value of
the stock on the transaction date.
All options have been granted at not less than fair market value at dates of
grant. When stock options are exercised, the par value of the shares issued is
credited to common stock and the excess of the proceeds over the par value is
credited to additional paid-in capital. When non-qualified options are
exercised, the Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and the stock option
exercise price. These tax benefits do not affect the income tax provision, but
rather are credited directly to additional paid-in capital.
In connection with a stock option grant, Daig issued 20,855 shares of its common
stock in exchange for a $440 non-interest bearing promissory note collateralized
by the stock acquired.
Under the terms of the Company's shareholder rights agreement, upon the
occurrence of certain events which result in a change in control as defined by
the agreement, registered holders of common shares are entitled to purchase
one-tenth of a share of Series A Junior Participating Preferred Stock at a
stated price, or to purchase either the Company's shares or shares of the
acquiring entity at half their market value.
Note 5 FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included in
other income (expense).
The Company had contracts totalling $12,483 at December 31, 1995 and $4,215 at
December 31, 1994, to exchange French Francs, German Marks and Italian Lira into
U.S. dollars. These instruments were recorded at their fair value at each
balance sheet date. The cumulative gain (loss) on these contracts totalled $45
and ($128) at December 31, 1995 and December 31, 1994, respectively and was
recorded as other income (expense).
LONG-TERM DEBT: The Company has an unsecured $260,000 committed revolving line
of credit with a group of 11 banks that terminates in September 1999. The rate
of interest payable under this borrowing facility is a floating rate and is a
function of the London Interbank Offered Rate. The weighted average rate at
December 31, 1995 and December 31, 1994, was 6.1% and 5.9%, respectively. A
facility fee of .085% of the total commitment is paid quarterly.
The credit agreement contains various covenants which require the Company to
maintain a specified financial ratio, limit liens, regulate asset disposition
and subsidiary indebtedness and restrict certain acquisitions and investments.
At December 31, 1995, the Company was in compliance with these covenants.
LINE OF CREDIT: Daig has a $4,000,000 revolving line of credit agreement with a
commercial bank. Interest on borrowings under this agreement is payable monthly
at the reference rate of the bank. Borrowings under the agreement are payable on
demand.
OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity
instruments, bank certificates of deposit and Puerto Rico industrial development
bonds. Under Statement of Financial Accounting Standards (FAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that the Company does not have the positive intent to hold to
maturity and all marketable equity securities are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses on securities classified as available-for-sale are carried as a separate
component of shareholders' equity. The Company adopted the provisions of the new
standard for investments held or acquired after January 1, 1994, and has
classified all investments as available-for-sale and carried them at fair value.
In accordance with FAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. No net realized gains or
losses were recorded in 1995. A net realized loss of $419 was recorded on sales
of available-for-sale securities in 1994. The net unrealized holding gain on
available-for-sale securities included as a separate component of shareholders'
equity was $9,691 (net of $5,830 of current deferred income taxes) at December
31, 1995.
1995 1994
Estimated Estimated
Fair Fair
Cost Value Cost Value
Assets:
Cash and Cash Equivalents $ 13,438 $ 13,438 $ 11,791 $ 11,791
Marketable Securities $137,094 $152,615 $124,070 $125,177
The Company also guarantees certain obligations of its subsidiaries. As of
December 31, 1995 and 1994, the maximum amounts of such guarantees were $7,500
and $5,000, respectively.
CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable
securities and foreign exchange contracts are the financial instruments which
may subject the Company to concentration of credit risk.
Within the European Economic Union, payment of certain accounts receivable is
made by the national health care system within several countries. Although the
Company does not anticipate collection problems with these receivables, payment
is contingent to a certain extent upon the economic situation within these
countries. The credit risk associated with the balance of the trade receivables
is limited due to dispersion of the receivables over a large number of customers
in many geographic areas. The Company monitors the credit worthiness of its
customers to which it grants credit terms in the normal course of business.
Marketable securities are placed with high credit qualified financial
institutions and Company policy limits the credit exposure to any one financial
institution. Counterparties to foreign exchange contracts are major financial
institutions; therefore, credit loss from counterparty nonperformance is
unlikely.
Note 6 RETIREMENT PLANS
DEFINED CONTRIBUTION 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
Company performance. The Company has additional defined contribution programs
for employees outside the United States. The benefits under these plans are
based primarily on compensation levels. Total retirement plan expense was
$6,558, $2,873 and $1,265 in 1995, 1994 and 1993, respectively.
DEFINED BENEFIT PLANS: In certain countries outside the United States, the
Company maintains defined benefit plans. At December 31, 1995, the Company's
obligations under these plans approximated $6.0 million.
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, the Company must
purchase a minimum of 20% of its component needs from the supplier through 1998
at negotiated prices. The contract may be renewed annually subsequent to 1998.
As part of this contract, the Company has granted the supplier a license to
produce and sell the supplier's bileaflet mechanical heart valve in countries
where patents have been issued covering the St. Jude Medical(R) mechanical heart
valve. Under this portion of the contract, the supplier will pay royalties to
the Company through mid-1998. Under a separate agreement, the Company paid a
royalty to the supplier based on the number of mechanical heart valves the
Company produced from its self-manufactured carbon components through August
1993. Amortization of these royalty amounts paid was completed in the second
quarter 1994.
Note 8 GEOGRAPHIC AREA
The Company operates in the medical products industry and is segmented into two
geographic areas -- the United States and Canada (including export sales to
unaffiliated customers except to customers in Europe, the Middle East and
Africa) and Europe (including export sales to unaffiliated customers in the
Middle East, Africa, Latin America and Asia Pacific).
Sales between geographic areas are made at transfer prices which approximate
prices to unaffiliated third parties. Export sales from the United States to
unaffiliated customers were $65,835, $52,024 and $36,434 for 1995, 1994 and
1993, respectively.
Net sales by geographic area were as follows:
United States Europe Eliminations Net Sales
and Canada
................................................................................
1995
Customer sales $ 512,999 $ 248,836 $ -- $ 761,835
Intercompany sales 97,550 -- (97,550) --
---------- ---------- ---------- ---------
$ 610,549 $ 248,836 $ (97,550) $ 761,835
................................................................................
1994
Customer sales $ 283,553 $ 108,396 $ -- $ 391,949
Intercompany sales 71,184 -- (71,184) --
---------- ---------- ---------- ---------
$ 354,737 $ 108,396 $ (71,184) $ 391,949
................................................................................
1993
Customer sales $ 198,391 $ 79,929 $ -- $ 278,320
Intercompany sales 59,908 -- (59,908) --
---------- ---------- ---------- ---------
$ 258,299 $ 79,929 (59,908) $ 278,320
................................................................................
Operating profit by geographic area was as follows:
United States Europe Corporate Total
and Canada
................................................................................
1995 $ 169,669 $ 51,345 $ (13,703) $ 207,311
1994 $ 84,347 $ 36,814 $ (11,541) $ 109,620
1993 $ 106,850 $ 41,046 (8,850) $ 139,046
................................................................................
Identifiable assets by geographic area were as follows:
United States Europe Corporate Total
and Canada
................................................................................
1995 $ 626,845 $ 203,044 $ 223,927 $1,053,816
1994 $ 576,700 $ 181,470 $ 188,652 $ 946,822
1993 $ 111,054 $ 40,947 $ 393,787 $ 545,788
................................................................................
Corporate expenses consist principally of non-allocable general and
administrative expenses. Corporate identifiable assets consist principally of
cash and cash equivalents and marketable securities.
Note 9 OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following:
1995 1994 1993
........................................................................
Interest income $ 8,056 $ 14,351 $ 14,800
Interest expense (12,962) (3,776) (113)
Foreign exchange gains (losses) 541 (1,937) (526)
Other (1,425) (958) (35)
-------- -------- --------
Other income (expense), net $ (5,790) $ 7,680 $ 14,126
........................................................................
Note 10 OTHER ASSETS
Other assets as of December 31, 1995 and 1994, net of accumulated amortization
of $34,923 and $25,316, respectively consisted of the following:
1995 1994
..................................................................
Investments in companies, joint ventures
and partnerships $ 22,356 $ 20,651
Intangibles and other 317,176 333,269
-------- --------
Other assets $339,532 $353,920
..................................................................
Investments in companies, joint ventures, and partnerships are stated at cost
which approximates market. Intangibles and other assets consist principally of
the excess of cost over net assets of certain acquired businesses and
technology. Intangibles and other assets are being amortized over periods
ranging from ten to 20 years.
Note 11 CONTINGENCIES
The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. In connection with
two pacemaker lead models, the Company may be subject to future uninsured
claims. The Company's products liability insurance carrier has denied coverage
for these models and has filed suit against the Company seeking rescission of
the policy covering Pacesetter business retroactive to the date the Company
acquired Pacesetter. The Company was a codefendant in a 1995 class action suit
with respect to these leads. This case was settled in November 1995. The
Company's share of the settlement was approximately $7,000. Additional claims
could be filed by patients with these leads who were not class members. Further,
claims may be filed in the future relative to events currently unknown to
management. Management believes losses that might be sustained from such actions
would not have a material adverse effect on the Company's liquidity or financial
position, but could potentially be material to the net income of a particular
future period if resolved unfavorably.
Note 12 SHAREHOLDERS' EQUITY
On October 17, 1995, the Board of Directors declared a three for two stock split
in the form of a 50% stock dividend to shareholders of record on November 2,
1995. Earnings per share, dividends per share, shares outstanding and weighted
average shares outstanding have been restated to reflect the stock dividend.
Note 13 SUBSEQUENT EVENTS
On January 5, 1996, the Company acquired The Heart Valve Company, previously a
50% owned joint venture with Hancock Jaffee Laboratories (HJL). Under the
agreement, the Company will pay $1,000 and issue 149,153 shares of its common
stock to HJL. The acquisition will be accounted for under the purchase
accounting method.
On January 19, 1996, the Company sold its Cardiac Assist Division assets to C.R.
Bard, Inc. for approximately $25,000 in cash. The selling price exceeded the net
asset value of the assets and the resulting gain of approximately $10,000 will
be recorded in the first quarter 1996.
Note 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarterly data for 1995 and 1994 was as follows:
Quarter
- ---------------------------------------------------------------------------------------
First Second Third Fourth
.......................................................................................
<S> <C> <C> <C> <C>
Year Ended
December 31, 1995:
Net sales $189,138 $195,072 $186,176 $191,449
Gross profit $127,202 $136,087 $129,775 $133,941
Net income $ 32,635 $ 35,613 $ 34,400 $ 36,200
Earnings per share $ .40 $ .44 $ .42 $ .44
Year Ended
December 31, 1994:
Net sales $ 73,735 $ 74,788 $ 71,209 $172,217
Gross profit $ 54,344 $ 55,497 $ 52,801 $117,220
Net income $ 28,907 $ 28,846 $ 27,659 $ 1,038*
Earnings per share $ .36 $ .36 $ .35 $ .01*
.......................................................................................
* Includes a $25,300 ($.32 per share primary, $.31 per share fully diluted)
charge for purchased research and development associated with the Pacesetter
acquisition.
</TABLE>
Primary and fully diluted per share results are the same for all quarters in
1995 and 1994. The full year 1995 and 1994 primary earnings per share were both
$.01 higher than fully diluted earnings per share due to rounding.
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(Dollars in thousands, except per share amounts)
1995 1994** 1993 1992 1991
...............................................................................................................................
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS FOR THE YEAR ENDED:
Net sales $ 761,835 $ 391,949 $ 278,320 $ 258,734 $ 221,064
----------- ----------- ----------- ------------ ----------
Gross profit $ 527,005 $ 279,862 $ 207,887 $ 191,008 $ 155,248
----------- ----------- ----------- ------------ ----------
Percent of sales 69.2% 71.4% 74.7% 73.8% 70.2%
----------- ----------- ----------- ------------ ----------
Operating profit $ 207,311 $ 109,620 $ 139,046 $ 127,100 $ 101,647
----------- ----------- ----------- ------------ ----------
Percent of sales 27.2% 28.0% 50.0% 49.1% 46.0%
----------- ----------- ----------- ------------ ----------
Net income $ 138,848 $ 86,450 $ 114,573 $ 105,185 $ 84,445
----------- ----------- ----------- ------------ ----------
Percent of sales 18.2% 22.1% 41.2% 40.7% 38.2%
----------- ----------- ----------- ------------ ----------
Primary earnings per share* $ 1.71 $ 1.08 $ 1.42 $ 1.30 1.05
----------- ----------- ----------- ------------ ----------
FINANCIAL POSITION AT YEAR END:
- -------------------------------------------------------------------------------------------------------------------------------
Cash and marketable securities $ 187,382 $ 150,577 $ 377,434 $ 342,772 $ 263,907
----------- ----------- ----------- ------------ ----------
Working capital $ 354,771 $ 339,844 $ 421,859 $ 384,514 $ 304,603
----------- ----------- ----------- ------------ ----------
Total assets $ 1,053,816 $ 946,822 $ 545,788 $ 482,056 $ 382,664
----------- ----------- ----------- ------------ ----------
Long-term debt $ 120,000 $ 255,000 $ 495 969
----------- ----------- ----------- ------------ ----------
Total shareholders' equity $ 736,373 $ 575,849 $ 500,711 $ 439,244 $ 347,947
----------- ----------- ----------- ------------ ----------
OTHER DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ .20 $ .27 $ .20
----------- ----------- ----------- ------------ ----------
Primary weighted average shares outstanding 80,988,000 80,085,000 80,499,000 81,203,000 80,718,000
----------- ----------- ----------- ------------ ----------
Total employees 2,579 2,480 917 865 732
...............................................................................................................................
* Earnings per share and share data have been adjusted for a 50% stock dividend
paid in 1995.
** Results for 1994 include a $40,800 pre-tax ($25,300, or .31 per share,
after-tax) charge for purchased research and development associated with the
Pacesetter acquisition.
</TABLE>
EXHIBIT 23
Consent of Independent Auditors
We 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 report dated February 5, 1996, with respect to the
supplemental consolidated financial statements of St. Jude Medical, Inc.
included in this Report on Form 8-K dated as of December 6, 1996.
/s/ERNST & YOUNG LLP
Minneapolis, Minnesota
December 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<PERIOD-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<CASH> 34,767 24,400 0
<SECURITIES> 152,615 126,177 0
<RECEIVABLES> 179,051 156,492 0
<ALLOWANCES> 9,361 5,782 0
<INVENTORY> 163,303 133,247 0
<CURRENT-ASSETS> 552,214 455,817 0
<PP&E> 217,589 168,202 0
<DEPRECIATION> 55,519 31,117 0
<TOTAL-ASSETS> 1,053,816 946,822 0
<CURRENT-LIABILITIES> 197,443 115,973 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 7,992 7,963 0
<OTHER-SE> 728,381 567,886 0
<TOTAL-LIABILITY-AND-EQUITY> 1,053,816 946,822 0
<SALES> 761,835 391,949 278,320
<TOTAL-REVENUES> 761,835 391,949 278,320
<CGS> 234,830 112,087 70,433
<TOTAL-COSTS> 234,830 112,087 70,433
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 2,510 730 584
<INTEREST-EXPENSE> 12,962 3,776 113
<INCOME-PRETAX> 201,521 117,300 153,172
<INCOME-TAX> 62,673 30,850 38,599
<INCOME-CONTINUING> 138,848 86,450 114,573
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 138,848 86,450 114,573
<EPS-PRIMARY> 1.71 1.08 1.42
<EPS-DILUTED> 1.70 1.07 1.42
</TABLE>
