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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10-K/A
AMENDMENT NO. 2
TO FORM 10-K ANNUAL REPORT
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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. X
---
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 X NO
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $2.8 billion at March 8, 1996, when the
closing sale price of such stock, as reported on the NASDAQ National Market
System, was $40.75.
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of March 8, 1996, was 70,299,660 shares.
Portions of the Annual Report to Shareholders for the year ended December
31, 1995, are incorporated by reference in Parts I, II and IV. Portions of the
Proxy Statement dated March 27, 1996, are incorporated by reference in Part III.
------------
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ST. JUDE MEDICAL, INC.
1995 10-K
PART I
ITEM 1. BUSINESS
GENERAL
St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures
and markets medical devices and provides services for the cardiovascular segment
of the medical device industry. The Company's products are distributed in more
than 70 countries worldwide through a combination of direct sales personnel,
independent manufacturers' representatives and distribution organizations. The
main markets for the Company's products are the United States, Western Europe
and Japan.
Effective September 30, 1994, St. Jude acquired from Siemens AG
substantially all the worldwide assets of its cardiac rhythm management
operations ("Pacesetter"). The acquisition significantly expanded the Company's
product offerings and provided a platform for potential further diversification
of its business.
The Company currently operates through three business units. The St. Jude
Medical Division is responsible for the Company's heart valve disease management
products including mechanical and tissue heart valves and annuloplasty rings.
The Pacesetter Division is responsible for the Company's cardiac rhythm
management products including bradycardia pulse generators, leads and
programmers. The International Division is responsible for marketing, sales and
distribution of the Company's and third party products in Europe, Africa and the
Middle East.
Typically, the Company's net sales are somewhat stronger in the first and
second quarters and weaker in the third quarter. This results from patient
tendency to defer, if possible, cardiac procedures during the summer months and
from the seasonality of the domestic and Western European markets where summer
vacation schedules normally result in fewer surgical procedures. Manufacturers'
representatives randomly place large orders which can distort the net sales
pattern noted above. In addition, new product introductions and regulatory
approvals can modify the expected net sales pattern.
In 1995 almost 63% of net sales were derived from pacemaker products,
approximately 36% from heart valve products and the balance from cardiac assist
products. In prior years the majority of net sales were derived from heart valve
products.
CARDIAC RHYTHM MANAGEMENT
The Pacesetter Division is headquartered in Sylmar, California and has
manufacturing facilities in Sylmar, Sweden and Scotland. Pacesetter pulse
generators and leads treat patients with hearts that beat too slowly or
irregularly; a condition known as bradycardia. Various models of bradycardia
pulse generators and leads are produced by Pacesetter. Pulse generators can
sense and produce impulses in both the upper and lower chambers of the heart,
adapt to changes in heart rate and can be non-invasively programmed by the
physician to adjust sensing, electrical pulse intensity, duration, rate and
other characteristics.
The pulse generator, generally referred to as a pacemaker, contains a
lithium battery power source and electronic circuitry. It generates pacing
pulses and monitors the heart's activity to sense abnormalities requiring
correction. It is most often implanted pectorally just below the collarbone. The
leads are insulated wires that carry the pulses to the heart and information
from the heart back to the pacemaker. A pacemaker uses electrical currents
equivalent to those in a healthy heart.
In 1995 Pacesetter introduced a new platform of pacing systems called the
Trilogy-TM- series. The series was an outgrowth of the highly successful
Synchrony-Registered Trademark- platform circuitry and was designed with the
philosophy of cardiac optimization. Trilogy-TM- has an ovoid shape, doubles
memory, adds new diagnostic capabilities and in some versions has an
automaticity feature.
Microny-TM-, a single chamber pacemaker, which was the first pacemaker in
the world to incorporate AutoCapture-TM-, was introduced in 1995 in
international markets. The AutoCapture-TM- algorithm is capable of adjusting the
pacemaker's output to provide the minimal amount of electrical impulse necessary
to stimulate the heart and has an appropriate safety margin test on a beat by
beat basis. Microny-TM- is the world's smallest pacemaker weighing only about 13
grams. The sensor is an accelerometer, a "ball in a cage" sensor which has
excellent sensitivity to the intensity of the patient's body movement in
determining the proper pacing rate.
The Regency-TM- family of single chamber pacemakers, introduced in 1995,
incorporates the AutoCapture-TM- feature and several advanced diagnostic
capabilities. Pacesetter expects to release the Regency-TM- pacemaker in all
international markets and to commence U.S. clinical trials in 1996.
HEART VALVES
The St. Jude Medical Division is headquartered in St. Paul, Minnesota and
has manufacturing facilities in St. Paul, Puerto Rico, Canada and California.
Heart valve replacement or repair may be necessary because the natural heart
valve has deteriorated due to congenital defects or disease. Heart valves
facilitate the one-way flow of blood in the heart and prevent significant
backflow of blood into the heart and between the heart's chambers.
St. Jude offers both mechanical and tissue replacement heart valves and
valve repair products. In 1996, the Company executed an agreement to provide
services relating to allografts, cryopreserved human heart valves. The St. Jude
Medical-Registered Trademark- mechanical heart valve is the most widely
implanted valve in the world with over 650,000 valves implanted to date. In
1995, the Company introduced the SJM-Registered Trademark- Masters Series
rotatable version of the mechanical heart valve which eases implantation in
certain circumstances. The United States Food and Drug Administration ("FDA")
approved the Masters Series for U.S. implantation in November 1995. In addition,
the Company internationally markets the Toronto SPV-Registered Trademark-
stentless tissue valve, the world's leading stentless tissue valve, and the SJM
X-Cell-TM- bioprosthesis, a stented tissue valve. The Toronto
SPV-Registered Trademark- is in domestic clinical trials.
The Company executed an agreement in 1995 with Heartport, Inc. ("Heartport")
to pursue less invasive heart valve surgery to repair or replace diseased heart
valves. Under the agreement, St. Jude's heart valve prostheses will be used in
combination with Heartport's proprietary Port-Access-TM- technology to perform
less invasive heart valve surgery. In early 1996, Heartport received FDA
authorization to commence U.S. clinical trials of its Port-Access-TM- mitral
valve repair and replacement system.
Annuloplasty rings are prosthetic devices used to repair diseased or damaged
mitral heart valves. In 1995, the Company executed a license agreement with
Professor Jacques Seguin to manufacture and market an advanced semi-rigid
annuloplasty ring. This SJM-Registered Trademark- Sguin annuloplasty ring can be
used with conventional surgery and Heartport's Port-AccessTM technology.
SUPPLIERS
Until 1986 all pyrolytic carbon components for the mechanical heart valve
were purchased from CarboMedics, Inc. ("CMI"). In 1986, the Company began
selling mechanical heart valves internationally utilizing self-manufactured
pyrolytic carbon coated components. In May 1991, the Company received FDA
approval to domestically market the St. Jude Medical-Registered Trademark-
mechanical heart valve as assembled with self-manufactured pyrolytic carbon
coated components.
Under an agreement with CMI, which covers the supply of pyrolytic carbon
heart valve components for the mechanical heart valve, the Company must purchase
a minimum of 20% of its needs through 1998 at negotiated prices. If CMI is
unable or fails to perform under the agreement, the license permits the Company
to self-manufacture its component requirements during the supply interruption.
The agreement can be extended for additional one year terms after 1998 at the
Company's option and prices the Company would pay in 1999 and beyond would be
adjusted annually by a producer price index based formula established in the
agreement.
The Company purchases raw materials and other items from numerous suppliers
for use in its products. The Company maintains sizeable inventories of up to
three years of its projected requirements for certain materials, some of which
are available only from a single vendor. The Company has been advised from time
to time that certain of these vendors may terminate sales of products to
customers that manufacture implantable medical devices in an effort to reduce
their potential products liability exposure. Some of these vendors have modified
their positions and have indicated a willingness to either temporarily continue
to provide product until such time as an alternative vendor or product can be
qualified or to reconsider the supply relationship. While the Company believes
that alternative sources of raw materials are available and that there is
sufficient lead time in which to qualify such other sources, any supply
interruption could have a material adverse effect on the Company's ability to
manufacture its products.
COMPETITION
Within the medical device industry, competitors range from small start-up
companies to companies with significant resources. The Company's customers
consider many factors when choosing supplier partners including product
reliability, clinical outcomes, product availability, inventory consignment,
price and product services provided by the manufacturer. Market share can shift
as a result of technological innovation, product recalls and product safety
alerts. This emphasizes the need for the highest quality products and services.
St. Jude expects the competition to continue to increase by using tactics such
as consigned inventory, bundled product sales and reduced pricing.
The Company is the world's leading manufacturer and supplier of mechanical
heart valves. There are two other principal and several other smaller mechanical
heart valve manufacturers. St. Jude has numerous competitors which sell
significantly more tissue heart valves than the Company.
Pacesetter is a technological leader in the bradycardia pacemaker market.
Worldwide there are seven primary manufacturers and suppliers of bradycardia
pacemakers, including the Company. One other company and Pacesetter account for
well over half of the worldwide bradycardia pacemaker net sales. The Company has
strong market share positions in all major developed markets.
The cardiovascular segment of the medical device market is a dynamic market
currently undergoing significant change due to cost of care considerations,
regulatory reform, industry consolidation and customer consolidation. The
ability to provide cost effective clinical outcomes is becoming increasingly
more important for medical device manufacturers.
MARKETING
The Company sells its products directly to hospitals and distributor based
organizations in the United States and throughout the world. No distributor
organization or single customer accounted for more than 10% of 1995 net sales.
In the United States, St. Jude sells directly to hospitals through an
employee based sales organization for its heart valve products and a combination
of independent manufacturers' representatives and an employee based sales
organization for its pacemaker products. In Western Europe, the Company has an
employee based sales organization selling in thirteen countries. Throughout the
rest of the world the Company uses distributor based sales organizations.
Payment terms worldwide are consistent with local practice. Orders are
shipped as they are received and, therefore, no material back orders exist.
RESEARCH AND DEVELOPMENT
The Company is focused on the development of new products and improvements
to existing products. In addition, research and development expense reflects the
Company's efforts to obtain FDA approval of certain products and processes and
to maintain the highest quality standards of existing products. The Company's
research and development expenses were $68,970,000 (9.5% of net sales),
$21,008,000 (5.8%) and $10,972,000 (4.3%) in 1995, 1994 and 1993, respectively.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in some instances, by state and foreign governmental
authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which requires the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's
mechanical and tissue heart valves and certain pacemakers and leads are subject
to this level of approval or as a supplement to a PMA approval. Other pacemakers
and leads and the annuloplasty ring products are currently marketed under the
510(k) pre-market notification procedure of the Act.
The FDA also regulates record keeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA authorized devices. Aggressive regulatory action may
be taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.
Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company has been unaware of
significant domestic price resistance directly as a result of DRG reimbursement
policies, changes in current DRG reimbursement levels could have an adverse
effect on its domestic pricing flexibility.
In response to the U.S. government budget deficit and rising Medicare and
Medicaid costs, several legislative proposals have been advanced which would
restrict future funding increases for these programs. While it is impossible to
predict the outcome of the policy debate, St. Jude believes it will increase the
downward pricing pressure on health care products including the Company's
products.
St. Jude business outside the United States is subject to medical device
laws in individual foreign countries. These laws range from extensive device
approval requirements in some countries for all or some of the Company's
products to requests for data or certifications in other countries. Generally,
regulatory requirements are increasing in these countries. In the European
Economic Union, efforts are underway to harmonize the regulatory systems.
The Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services ("HHS") is currently conducting an
investigation regarding possible hospital submissions of improper claims to
Medicare/Medicaid programs for reimbursement for procedures using cardiovascular
medical devices that were not approved for marketing by the FDA at the time of
use. Beginning in June 1994, approximately 130 hospitals received subpoenas from
HHS seeking information with respect to reimbursement for procedures using
cardiovascular medical devices (including certain products manufactured by the
Company) that were subject to investigational exemptions or that may not have
been approved for marketing by the FDA at the time of use. The subpoenas also
sought information regarding various types of remuneration, including payments,
gifts, stock and stock options, received by the hospital or its employees from
manufacturers of medical devices. Civil and criminal sanctions may be imposed
against any person participating in an improper claim for reimbursement under
Medicare/Medicaid. The OIG's investigation and any related change in
reimbursement practices may discourage hospitals from participating in clinical
trials or from including Medicare and Medicaid patients in clinical trials,
which could lead to increased costs in the development of new products. St. Jude
believes it is too early to predict the possible outcome of this matter or when
it will be resolved. There can be no assurance that the OIG's investigation or
any changes in third-party payors' reimbursement practices will not materially
adversely affect the medical device industry in general or the Company in
particular. In 1995, HCFA, part of HHS, issued a regulation clarifying that
certain medical devices subject to investigational requirements under the Act
may qualify for reimbursement.
In 1994 the predecessor organization to Pacesetter entered a consent decree
which settled a lawsuit brought by the United States in U.S. District Court for
the District of New Jersey. The consent decree which remains in effect
indefinitely requires that Pacesetter comply with the FDA's Good Manufacturing
Practice regulations and identifies several specific provisions of those
regulations. The consent decree provides for FDA inspections and that Pacesetter
is obligated to pay certain costs of the inspections.
In 1994 a state prosecutor in Germany began an investigation of allegations
of corruption in connection with the sale of heart valves. As part of that
investigation, the prosecutor seized documents from St. Jude's offices in
Germany as well as documents from certain competitors' offices. In December
1995, the state prosecutor announced that the investigation is continuing and
has been broadened to include other medical devices. Subsequently, the United
States Securities and Exchange Commission issued a formal order of private
investigation covering sales practices of St. Jude and other manufacturers in
Germany.
PATENTS AND LICENSES
The Company's policy is to protect the intellectual property rights in its
work on medical devices. Where appropriate, St. Jude applies for United States
and foreign patents. In those instances where the Company has acquired
technology from third parties, it has sought to obtain rights of ownership to
the technology through the acquisition of underlying patents or licenses.
While the Company believes design, development, regulatory and marketing
aspects of the medical device business represent the principal barriers to entry
into such business, it also recognizes that its patents and license rights may
make it more difficult for its competitors to market products similar to those
produced by the Company. St. Jude can give no assurance that any of its patent
rights, whether issued, subject to license or in process, will not be
circumvented or invalidated. Further, there are numerous existing and pending
patents on medical products and biomaterials. There can be no assurance that the
Company's existing or planned products do not or will not infringe such rights
or that others will not claim such infringement. The Company's principal patent
covering its mechanical heart valve will expire in the United States in July
1998. No assurance can be given that the Company will be able to prevent
competitors from challenging the Company's patents or entering markets currently
served by the Company.
INSURANCE
The medical device industry has historically been subject to significant
products liability claims. Such claims could be asserted against the Company in
the future for events not known to management at this time. Management has
adopted risk management practices, including products liability insurance
coverage, which management believes are prudent.
The Company's former products liability insurance carrier is currently
seeking to rescind its coverage of Pacesetter products for the period October 1,
1994, through December 31, 1995. Should the carrier prevail, the Company would
be self-insured for Pacesetter products liability claims made during that
period. St. Jude cannot predict the outcome of the dispute. See Item 3 "Legal
Proceedings".
California earthquake insurance is currently difficult to procure, extremely
costly, and restrictive in terms of coverage. The Company's earthquake and
related business interruption insurance for its operations located in Los
Angeles County, California does provide for limited coverage. There are several
factors that preclude the Company from determining the effect an earthquake may
have on its business. These factors include, but are not limited to, the
severity and location of the earthquake, the extent of any damage to the
Company's manufacturing facilities, the impact of such an earthquake on the
Company's California workforce and the infrastructure of the surrounding
communities, and the extent, if any, of damage to the Company's inventory and
work in process. While the Company's exposure to significant losses occasioned
by a California earthquake would be partially mitigated by its ability to
manufacture certain of the Pacesetter products at its Swedish manufacturing
facility, any such losses could have a material adverse effect on the Company,
the duration of which cannot be reasonably predicted. The Company is currently
engaged in the expansion of manufacturing capabilities at its Swedish facility
and is constructing a pacemaker component manufacturing facility in Arizona.
Completion of these programs would further mitigate the adverse impact of a
California earthquake.
EMPLOYEES
As of December 31, 1995, the Company had 2,315 full-time employees. It has
never experienced a work stoppage as a result of labor disputes and none of its
employees are represented by a labor organization, with the exception of the
Company's Swedish employees.
INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS
The medical products and service industry is the single industry segment in
which the Company operates. The Company's domestic and foreign net sales,
operating profit and identifiable assets, and its export sales to unaffiliated
third parties are described in Note 8 to the Consolidated Financial Statements
on page 36 of the 1995 Annual Report to Shareholders and are incorporated herein
by reference.
The Company's foreign business is subject to such special risks as exchange
controls, currency devaluation, dividend restrictions, the imposition or
increase of import or export duties and surtaxes, and international credit or
financial problems. Since its international operations require the Company to
hold assets in foreign countries denominated in local currencies, many assets
are dependent for their U.S. dollar valuation on the values of a number of
foreign currencies in relation to the U.S. dollar. The Company may from time to
time enter into purchase and sales contracts in the forward markets for various
foreign currencies with the objective of protecting U.S. dollar values of assets
and commitments denominated in foreign currencies.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's 1995 financial statements and report of auditors are set
forth below. These financial statements supercede the financial statements as
filed by the Company on April 1, 1996, on Form 10-K/A. The only changes to the
previously filed 10-K/A were to footnote 3 and footnote 11.
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
- -------------------------------------------------------------------------------
Board of Directors
St. Jude Medical, Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude
Medical, Inc. and subsidiaries at December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MINNEAPOLIS, MINNESOTA
February 5, 1996
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $723,513 $359,640 $252,642
Cost of sales 222,796 100,956 61,342
- -----------------------------------------------------------------------
Gross profit 500,717 258,684 191,300
Selling, general and
administrative expense 237,569 97,577 49,040
Research and development expense 68,970 21,008 10,972
Purchased research and
development charge 40,800
- -----------------------------------------------------------------------
Operating profit 194,178 99,299 131,288
Other income (expense), net (6,615) 7,056 13,934
- -----------------------------------------------------------------------
Income before taxes 187,563 106,355 145,222
Income tax provision 58,145 27,121 35,579
- -----------------------------------------------------------------------
Net income $129,418 $ 79,234 $109,643
- -----------------------------------------------------------------------
Earnings per share:
Primary $ 1.82 $ 1.13 $ 1.55
Fully diluted $ 1.81 $ 1.12 $ 1.55
- -----------------------------------------------------------------------
Cash dividends paid per share $ -- $ 0.20 $ 0.27
- -----------------------------------------------------------------------
Average shares outstanding:
Primary 71,067,000 70,169,000 70,834,000
Fully diluted 71,543,000 70,516,000 70,863,000
- -----------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,438 $ 11,791
Marketable securities 152,615 125,177
Accounts receivable, less allowance 164,492 146,062
(1995 - $9,328, 1994 - $5,760)
Inventories:
Finished goods 79,638 59,534
Work in process 27,121 21,723
Raw materials 51,652 48,750
- ----------------------------------------------------------------------
Total inventories 158,411 130,007
Prepaid income taxes 15,930 4,448
Other current assets 15,268 16,597
- ----------------------------------------------------------------------
Total current assets 520,154 434,082
- ----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 9,949 12,049
Buildings and improvements 44,160 42,200
Machinery and equipment 130,998 89,957
Construction in progress 19,315 12,811
- ----------------------------------------------------------------------
Gross property, plant and equipment 204,422 157,017
Less accumulated depreciation (48,174) (24,852)
- ----------------------------------------------------------------------
Net property, plant and equipment 156,248 132,165
- ----------------------------------------------------------------------
OTHER ASSETS 339,532 353,651
- ----------------------------------------------------------------------
TOTAL ASSETS $1,015,934 $919,898
- ----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 78,364 $ 42,143
Accrued income taxes 38,965 20,240
Accrued employee compensation
and related taxes 44,684 32,377
Other accrued expenses 30,615 17,920
- ----------------------------------------------------------------------
Total current liabilities 192,628 112,680
- ----------------------------------------------------------------------
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 - 69,991,700 shares;
1994 - 69,718,623 shares 6,999 6,972
Additional paid-in capital 31,782 25,947
Retained earnings 650,515 521,097
Cumulative translation adjustment 4,319 (2,484)
Unrealized gain on available-for-sale
securities 9,691 686
- ----------------------------------------------------------------------
Total shareholders' equity 703,306 552,218
- ----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,015,934 $919,898
- ----------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Cumulative Unrealized Total
Number of Paid-In Retained Translation Gain on Shareholders'
Shares Amount Capital Earnings Adjustment Investments Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 71,276,319 $7,128 $ 58,455 $364,941 $(1,485) $ -- $429,039
- --------------------------------------------------------------------------------------------------------------------------------
Net income 109,643 109,643
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 111,623 11 1,342 1,353
Tax benefit realized upon
exercise of stock options 355 355
Cash dividends
( .27 per share) (18,786) (18,786)
Purchase and retirement
of common shares (1,766,550) (177) (35,062) (35,239)
Translation adjustment (2,124) (2,124)
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 69,621,392 6,962 25,090 455,798 (3,609) -- 484,241
- --------------------------------------------------------------------------------------------------------------------------------
Net income 79,234 79,234
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 97,231 10 634 644
Tax benefit realized upon
exercise of stock options 223 223
Cash dividends
( .20 per share) (13,935) (13,935)
Translation adjustment 1,125 1,125
Unrealized gain on
investments, net of taxes 686 686
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 69,718,623 6,972 25,947 521,097 (2,484) 686 552,218
- --------------------------------------------------------------------------------------------------------------------------------
Net income 129,418 129,418
Issuance of common stock
upon exercise of stock
options, net of taxes
withheld 273,077 27 4,486 4,513
Tax benefit realized
upon exercise of stock options 1,349 1,349
Translation adjustment 6,803 6,803
Unrealized gain on
investments, net of taxes 9,005 9,005
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 69,991,700 $6,999 $31,782 $650,515 $ 4,319 $9,691 $703,306
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $129,418 $ 79,234 $109,643
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 20,198 8,313 4,516
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 (18,662) (23,079) 718
Increase in inventories (21,846) (4,024) (5,972)
Decrease (increase) in other current assets 1,643 (9,685) (1,920)
Increase (decrease) in accounts payable
and accrued expenses 37,273 7,193 (2,746)
Increase (decrease) in accrued income taxes 19,969 (3,227) 7,061
Increase in prepaid and deferred income
taxes (12,617) (14,408) (456)
- ----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 175,478 88,933 115,302
- ----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (42,961) (18,789) (16,422)
Purchases of marketable securities (26,524) (88,426) (153,290)
Proceeds from sale or maturity of
marketable securities 13,500 306,360 81,630
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 (43,992) (346,405) (103,608)
- ----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 4,514 644 1,353
Cash dividends paid (13,935) (18,786)
Common stock repurchased (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) 241,709 (52,672)
- ----------------------------------------------------------------------------------
Effect of currency exchange rate changes
on cash 647 567 (381)
- ----------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,647 (15,196) (41,359)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 11,791 26,987 68,346
- ----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,438 $ 11,791 $ 26,987
- ----------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
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 and pacemakers. The main
markets for both 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
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
Note 13 discusses the effects of the Pacesetter acquisition on the Company's
reported results.
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:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Domestic $169,567 $ 97,304 $140,303
Foreign 17,996 9,051 4,919
- ------------------------------------------------------------
Income before taxes $187,563 $106,355 $145,222
- ------------------------------------------------------------
</TABLE>
The components of the income tax provision were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $43,093 $ 32,958 $21,682
State and Puerto Rico 11,178 9,898 12,400
Foreign 6,226 3,107 1,953
- ------------------------------------------------------------
Total current 60,497 45,963 36,035
- ------------------------------------------------------------
Deferred:
Prepaid (7,329) (5,757) 274
Deferred 4,977 (13,085) (730)
- ------------------------------------------------------------
Total deferred (2,352) (18,842) (456)
- ------------------------------------------------------------
Income tax provision $58,145 $ 27,121 $35,579
- ------------------------------------------------------------
</TABLE>
Deferred income tax assets (liabilities) were comprised of the following
at December 31:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------
</TABLE>
The Company's effective income tax rate varied from the statutory U.S.
federal income tax rate of 35% as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at
U.S. statutory rate $65,647 $37,224 $50,828
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 4,398 1,188 2,610
Tax benefits from
Foreign Sales Corporation (1,621) (1,433) (1,612)
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 (197) 102 580
- ---------------------------------------------------------------------------
Income tax provision $58,145 $27,121 $35,579
- ---------------------------------------------------------------------------
Effective income tax rate 31.0% 25.5% 24.5%
- ---------------------------------------------------------------------------
</TABLE>
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 income taxes which may
ultimately result from the audit will not have a material adverse impact 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $48,175, $45,737 and $28,385 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 3,243,801 options outstanding, of which 2,507,524
were exercisable. Stock option activity was as follows:
<TABLE>
<CAPTION>
Options Price
Outstanding Per Share
- ---------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1993 1,930,677 $ 3.06 - 33.08
Granted 1,148,625 17.25 - 26.42
Cancelled (138,010) 18.59 - 32.17
Exercised (8,250) 7.20 - 14.63
- --------------------------------------------
Balance at December 31, 1994 2,933,042 3.06 - 33.08
Granted 652,275 25.50 - 39.50
Cancelled (165,744) 17.83 - 32.25
Exercised (175,772) 3.56 - 32.25
- --------------------------------------------
Balance at December 31, 1995 3,243,801 3.06 - 39.50
- ---------------------------------------------------------------
</TABLE>
Pursuant to the terms of the Company's various stock plans, optionees can use
cash, previously owned shares or a combination of cash and previously owned
shares to reimburse the Company for the cost of the option and the related
tax liabilities. Shares are acquired from the optionee at the fair market
value of the stock on the transaction date.
All options have been granted at not less than fair market value at dates of
grant. When stock options are exercised, the par value of the shares issued
is credited to common stock and the excess of the proceeds over the par value
is credited to additional paid-in capital. When non-qualified options are
exercised, the Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and the stock
option exercise price. These tax benefits do not affect the income tax
provision, but rather are credited directly to additional paid-in capital.
Under the terms of the Company's shareholder rights agreement, upon the
occurrence of certain events which result in a change in control as defined
by the agreement, registered holders of common shares are entitled to
purchase one-tenth of a share of Series A Junior Participating Preferred
Stock at a stated price, or to purchase either the Company's shares or shares
of the acquiring entity at half their market value.
NOTE 5 FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at a specified rate at future
dates. Counterparties to these contracts are major international financial
institutions. Maturities of these instruments are typically one year or less
from the transaction date. Gains or losses from these contracts are included
in other 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 PLANS: 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 $6,000.
NOTE 7 SUPPLY OF HEART VALVE COMPONENTS
The Company has a long-term contract for supply of pyrolytic carbon
components used in its mechanical heart valve prosthesis. Under the terms of
the contract,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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-Registered Trademark- 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 $56,022, $44,050 and $29,926 for 1995, 1994 and
1993, respectively.
Net sales by geographic area were as follows:
<TABLE>
<CAPTION>
United States Europe Elimina- Net Sales
and Canada tions
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Customer sales $474,677 $248,836 $ -- $723,513
Intercompany sales 97,550 -- (97,550) --
- ----------------------------------------------------------------------
$572,227 $248,836 $(97,550) 723,513
- ----------------------------------------------------------------------
1994
Customer sales $251,244 $108,396 $ -- $359,640
Intercompany sales 71,184 -- (71,184) --
- ----------------------------------------------------------------------
$322,428 $108,396 $(71,184) $359,640
- ----------------------------------------------------------------------
1993
Customer sales $172,713 $ 79,929 $ -- $252,642
Intercompany sales 59,908 -- (59,908) --
- ----------------------------------------------------------------------
$232,621 $ 79,929 $(59,908) $252,642
- ----------------------------------------------------------------------
</TABLE>
Operating profit by geographic area was as follows:
United States
and Canada Europe Corporate Total
- ----------------------------------------------------------------------
1995 $156,536 $51,345 $(13,703) $194,178
1994 $ 74,026 $36,814 $(11,541) $ 99,299
1993 $ 99,092 $41,046 $ (8,850) $131,288
- ----------------------------------------------------------------------
Identifiable assets by geographic area were as follows:
United States
and Canada Europe Corporate Total
- ------------------------------------------------------------------------
1995 $588,963 $203,044 $223,927 $1,015,934
1994 $549,776 $181,470 $188,652 $ 919,898
1993 $ 92,083 $ 40,947 $393,787 $ 526,817
- ------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 7,242 $ 14,001 $ 14,635
Interest expense (12,936) (3,714) (5)
Foreign exchange gains (losses) 541 (1,937) (526)
Other (1,462) (1,294) (170)
- ----------------------------------------------------------------------
Other income (expense), net $ (6,615) $ 7,056 $ 13,934
- ----------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Investments in companies, joint ventures
and partnerships $ 22,356 $ 20,651
Intangibles and other 317,176 333,000
- ----------------------------------------------------------------------
Other assets $ 339,532 $ 353,651
- ----------------------------------------------------------------------
</TABLE>
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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's 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 any losses that might be sustained from such
action 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 and the resulting purchased research and development charge
of approximately $5,000 will be recorded in the first quarter 1996.
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.
On January 29, 1996, the Company entered into a definitive agreement to
acquire Daig Corporation, a Minnetonka, Minnesota based manufacturer of
specialized cardiovascular devices for the electrophysiology, atrial
fibrillation and interventional cardiology markets. Each share of Daig common
stock will be converted into approximately .652 shares of St. Jude Medical
common stock. The Company expects to issue approximately 10,000,000 shares.
The transaction is expected to close in the second quarter 1996 and will be
accounted for as a pooling of interests.
The following unaudited pro forma information has been prepared assuming that
the Pacesetter and Daig acquisitions had occurred at the beginning of the
period presented. Permitted adjustments include amortization of goodwill,
increased interest expense, decreased interest income, the related income tax
effects and increased outstanding shares of common stock. Pro forma results
are not necessarily indicative of the results that would have occurred had
the acquisitions 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 $.36 per share after-tax, Pacesetter 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
- ----------------------------------------------------------------------
NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1995 and 1994 was as follows:
Quarter
- ----------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------
Year Ended
December 31, 1995:
Net sales $180,499 $185,551 $175,953 $181,510
Gross profit $121,393 $129,704 $122,687 $126,933
Net income $ 30,584 $ 33,124 $ 31,927 $ 33,783
Earnings per share $ .43 $ .47 $ .45 $ .47
Year Ended
December 31, 1994:
Net sales $ 66,685 $ 66,736 $ 62,468 $163,751
Gross profit $ 49,814 $ 50,277 $ 46,991 $111,602
Net income $ 26,537 $ 26,204 $ 24,489 $ 2,004*
Earnings per share $ .38 $ .37 $ .35 $ .03*
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*Includes a $25,300 ($.36 per share) charge for purchased research and
development associated with the Pacesetter acquisition.
Primary and fully diluted per share results are the same for all quarters in
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company and Report of
Independent Auditors are included in Item 8 of this Form 10-K/A.
(3) EXHIBITS
23 Consent of Independent Auditors
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the Amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ST. JUDE MEDICAL, INC.
Date: April 26, 1996 By /s/ STEPHEN L. WILSON
--------------------------------------
Stephen L. Wilson
VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 5, 1996, included in the 1995
Annual Report on Form 10-K of St. Jude Medical, Inc. for the year ended December
31, 1995, with respect to the consolidated financial statements, as amended,
included in this Form 10-K/A.
/s/ Ernst & Young LLP
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Ernst & Young LLP
Minneapolis, Minnesota
April 26, 1996
