<PAGE>
UNITED STATES
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 DATE
OF REPORT (DATE OF EARLIEST EVENT REPORTED)
SEPTEMBER 23, 1999
001-13388
(Commission File Number)
GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)
INDIANA 35-1931722
(Jurisdiction of Incorporation) (I.R.S. Employer
Identification Number)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of registrant's principal executive offices)
(317) 971-2000
(Registrant's telephone number)
<PAGE>
This Current Report on Form 8-K supplements the Current Report on Form 8-K filed
by Guidant Corporation on February 4, 1999 to include the Sulzer
Electrophysiology Combined Financial Statements as of December 31, 1998.
ITEM 2. ACQUISITION OF DISPOSITION OF ASSETS
On February 1, 1999, pursuant to a Stock and Asset Purchase Agreement,
dated as of September 20, 1998, as amended February 1, 1999, between Guidant
Corporation, an Indiana corporation ("Guidant") and Sulzer Medica USA Holding
Co., a Delaware corporation ("Sulzer"), Guidant acquired the electrophysiology
business (the "EP Business") of Sulzer. The EP Business, which includes the
operations of Intermedics, Inc., is a leader in the manufacture, marketing and
distribution of cardiac rhythm management devices, including bradycardia
pacemakers and pacemaker leads.
The original aggregate purchase price was approximately $810 million. In the
second quarter of 1999, Guidant received a $30 million purchase price adjustment
from Sulzer based on the net worth of the EP Business as reported on the closing
balance sheet received in May 1999. This reduced the aggregate purchase price to
approximately $780 million. In August 1999, Guidant and Sulzer negotiated an
additional purchase price adjustment of approximately $14 million. This will
further reduce the aggregate purchase price when recorded in the third quarter
of 1999. The final purchase price was also subject to an adjustment based on the
aggregate sales volume produced by the U.S. representatives of the EP Business
who agreed to become representatives, sub-representatives, consultants, or
employees of Guidant in the six month period following the closing of the
transaction (other than by solely remaining a sales representative of the EP
Business under such sales representative's current agreement). This adjustment
will increase the purchase price by $6 million when it is recorded in the third
quarter. The final purchase price is subject to the resolution of final closing
balance sheet items relative to the net worth of the EP Business which are
subject to arbitration.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
The combined, audited balance sheets of the EP Business as of December 31,
1998 and 1997 and statements of operations and cash flows for each of the three
years ended December 31, 1998, 1997 and 1996, and Reports of Independent
Accountants thereon are attached hereto as Exhibit 99.1.
(b) Pro Forma Financial Information
<PAGE>
Guidant Corporation and Sulzer Intermedics
Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma financial information has been prepared to
reflect the adjustments to Guidant Corporation's historical results of
operations and financial position and give effect to the acquisition of the
electrophysiology business of Sulzer Medica Ltd. (the "EP Business") using the
purchase method of accounting. The historical results of the EP Business
excludes the impact of Osypka GmbH and Oscor Inc. (hereinafter referred to as
Sulzer Intermedics), two affiliates of the EP Business that have been
subsequently disposed of by Guidant Corporation.
The unaudited pro forma combined statement of income for the year ended December
31, 1998 is based on the combined historical results of operations adjusted to
give effect to the transaction as if it had occurred on January 1, 1998. The
Unaudited Pro Forma Combined Statements of Income exclude any benefits from
synergies that may result from the EP Business acquisition.
The unaudited pro forma combined balance sheet gives effect to the transaction
as if it had occurred on December 31, 1998. The original aggregate purchase
price was approximately $810 million, including related fees. In the second
quarter of 1999, Guidant received a $30 million purchase price adjustment from
Sulzer based on the net worth of the EP Business as reported on the closing
balance sheet received in May 1999. This reduced the aggregate purchase price to
approximately $780 million. In August 1999, Guidant and Sulzer negotiated an
additional purchase price adjustment of approximately $14 million. This will
further reduce the aggregate purchase price when recorded in the third quarter
of 1999. The final purchase price was also subject to an adjustment based on the
aggregate sales volume produced by the U.S. representatives of the EP Business
who agreed to become representatives, sub-representatives, consultants, or
employees of Guidant in the six month period following the closing (other than
by solely remaining a sales representative of the EP Business under such sales
representative's current agreement). This adjustment will increase the purchase
price by $6 million when it is recorded in the third quarter. The final purchase
price is subject to the resolution of two final Closing Balance Sheet items
relative to the net worth of the EP Business which are subject to arbitration.
The unaudited pro forma combined balance sheet reflects $772 million as the
aggregate purchase price and includes the adjustments necessary to reflect the
allocation of the proposed acquisition cost to the fair values of the assets
acquired and liabilities assumed, including a pro forma charge to retained
earnings for in-process technology acquired. Such allocation has been based on
estimates of the fair value of the related assets and liabilities relative to
all information available as of the date of this filing. The final aggregate
purchase cost and allocation are subject to final closing balance sheet
adjustments, based on net worth, and final valuation of certain assets acquired
as well as other conditions. Guidant does not expect that the final allocation
of the aggregate purchase price will differ materially from the preliminary
allocation.
Pursuant to the Stock and Asset Purchase Agreement, intercompany amounts owed to
the EP Business and income tax liabilities will not be assumed by Guidant. The
excess of the adjusted purchase price over the fair value of the net tangible
assets acquired was allocated to specific intangible asset categories
(principally goodwill) and is being amortized over the estimated periods of
benefit associated with these specific intangible asset categories.
The Unaudited Pro Forma Combined Financial Information is not necessarily
indicative of Guidant's results of operations or financial position had the EP
Business acquisition reflected therein actually been consummated at its assumed
date, nor is it necessarily indicative of Guidant's results of operations or
financial position for any future period. The Unaudited Pro Forma Combined
Financial Information should be read in conjunction with Guidant's consolidated
Financial Statements and notes thereto.
<PAGE>
Guidant Corporation and Sulzer Intermedics
Unaudited Pro Forma Combined Statement of Income
December 31, 1998
In millions
<TABLE>
<CAPTION>
Guidant Pro Forma
Corporation Sulzer Intermedics Adjustments Pro Forma
Historical Historical and Reclassifications Combined
--------------- ------------------ --------------------- -----------
<S> <C> <C> <C> <C>
Net sales $1,897.0 $ 286.5 $2,183.5
Cost of products sold 422.0 94.1 516.1
----- ---- --------
Gross profit 1,475.0 192.4 1,667.4
Research and development 276.0 42.4 (1.3) (1)
2.4 (2) 319.5
Purchased research and development 118.7 118.7
Sales, marketing and administrative 558.6 124.5 7.6 (2) 690.7
Other operating expenses 10.0 (10.0) (2) -
Intangibles amortization 12.8 (12.8) (3) -
Other income (expenses)
Interest, net (15.3) (16.9) 17.3 (4) (60.9)
(46.0) (5)
Royalties, net (44.6) (1.3) (1) (45.9)
Amortization (19.1) (22.4) (6) (41.5)
Litigation charges (269.2) 200.0 (7) (69.2)
Impairment charges (40.0) (40.0)
Other, net (5.9) (0.3) - (6.2)
----- ----- ------ --------
(394.1) (17.2) 147.6 (263.7)
------- ------ ------ --------
Income before income taxes 127.6 (14.5) 161.7 274.8
Income taxes (benefit) 129.8 (0.7) (10.9) (8) 118.2
----- ----- ------ --------
Net income (loss) ($2.2) ($13.8) $172.6 $ 156.6
------ ------- ------ --------
Earnings (loss) per share:
Net income (loss) per common share:
Basic ($0.01) $ 0.53
Assuming dilution ($0.01) $ 0.52
Weighted average shares outstanding:
Basic 294.59 294.59
Assuming dilution 294.59 302.27
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Information
<PAGE>
Guidant Corporation and Sulzer Intermedics
Unaudited Pro Forma Combined Balance Sheet
December 31, 1998
In millions
<TABLE>
<CAPTION>
Guidant
Corporation Sulzer Intermedics Adjustments Pro Forma
Historical Historical and Reclassifications Combined
---------- ------------------ --------------------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15.6 $ 11.7 $ 27.3
Accounts receivable, net 435.4 45.8 (5.2) (9) 476.0
Other receivables 8.3 - 8.3
Inventories 193.4 75.6 (15.6) (9) 253.4
Deferred income taxes 83.3 2.6 17.3 (9) 103.2
Prepaid expenses 27.5 4.1 35.2 (9) 66.8
-------- ------ ----- ---------
Total Current Assets 763.5 139.8 31.7 935.0
Goodwill and other intangible assets, net 246.9 419.0 (10) 665.9
Investments 62.5 - 62.5
Deferred income taxes 73.8 73.8
Sundry 33.6 0.4 34.0
Property and equipment, net 389.2 80.6 (46.1) (9) 423.7
-------- ------ ------ ---------
Total Assets $1,569.5 $220.8 $404.6 $ 2,194.9
======== ====== ====== =========
Accounts payable and accrued expenses 332.7 20.2 1.1 (9) 354.0
Income taxes payable - -
Payable to Sulzer Medica 200.0 (200.0) (7) -
Current portion of long-term debt 54.5 0.7 50.0 (11) 105.2
Liabilities assumed - - 77.3 (12) 77.3
-------- ------ ------ ---------
Total Current Liabilities 587.2 20.9 (71.6) 536.5
-
Long-term debt 390.0 0.9 722.0 (11) 1,112.9
Other noncurrent liabilities 38.4 11.8 (9.6) (9) 40.6
-
Common stock 192.5 192.5
Other stockholders' equity 361.4 312.4
(49.0) (13)
Net assets acquired - 187.2 (187.2) (14) -
-------- ------ ------ ---------
Total Liabilities and Stockholders' Equity $1,569.5 $220.8 $404.6 $ 2,194.9
======== ====== ====== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Information
<PAGE>
Guidant Corporation and Sulzer Intermedics
Notes to Unaudited Pro Forma Combined Financial Information
(In Millions)
Following is a description of pro forma adjustments reflected in the Unaudited
Pro Forma Combined Statements of Income and Balance Sheet:
(1) Reclassification of Sulzer Intermedics' royalty expenses to conform with
Guidant's presentation.
(2) Represents the reclassification of Sulzer Medica corporate charges to
conform with Guidant's presentation.
(3) Elimination of amounts recorded by Sulzer Intermedics for amortization of
intangible assets. Amortization expense related to goodwill and other
intangibles acquired in the transaction is reflected in Note 6.
(4) Represents interest on intercompany debt payable to Sulzer Medica. This
outstanding loan was forgiven at the date of acquisition under the terms of the
Stock and Asset Purchase Agreement.
(5) Represents the estimated increase in interest expense and financing fees
resulting from the acquisition. The estimated increase in interest expense
assumes the initial financing obtained in connection with the acquisition
remained outstanding during the period presented. The Company issued seven-year
6.15% notes with a $350 million principal amount to finance a portion of the
acquisition. The remaining financing needs were met with cash raised in the
commercial paper markets, which carries a variable rate of interest. The average
interest rate used was 5.81% for commercial paper. If the average interest rate
on the commercial paper had fluctuated 1/8% for the twelve months ended December
31, 1998, the pro forma interest expense would have changed by $0.5 million.
(6) Represents the amortization of the goodwill and other intangible assets
recorded in the acquisition.
(7) When the acquisition of the Electrophysiology business was announced in the
third quarter of 1998, a charge of $200 million was recorded. This charge
represents the portion of the purchase price allocated to settlement of the
intellectual property litigation between Guidant and Sulzer Medica Ltd. As
required by Regulation S-X, this nonrecurring charge has been excluded from net
income and is reflected in Guidant's December 31, 1998 retained earnings in the
Unaudited Pro Forma Combined Balance Sheet. The resulting liability has been
reclassified to debt as it was settled with commercial paper upon consummation
of the acquisition.
(8) Represents the estimated tax effect of the Unaudited Pro Forma Combined
Statements of Income pro forma adjustments based on the statutory tax rate of
38.0%.
<PAGE>
(9) Adjustment to record fair valuation of assets and liabilities acquired as
well as tax effects generated as a result of the acquisition.
(10) Goodwill and other intangible assets resulting from this transaction are as
follows if the Closing Date was December 31, 1998:
Goodwill $391
Developed Technology 28
(11) The Company expects that a minimum of approximately $1.1 billion of
borrowings will remain outstanding through December 31, 1999, and accordingly,
has classified this portion as long-term at December 31, 1998. This represents
$772 million acquisition price less $50 million classified as short-term.
(12) Accrual of liabilities assumed which includes costs to exit certain
activities of the Electrophysiology business. Liabilities assumed include
severance, distributor terminations, and certain miscellaneous cancellation
fees.
(13) Pursuant to Regulation S-X, the in-process research and development has
been written off against combined retained earnings and has not been reflected
in the pro forma combined statement of operations.
(14) Elimination of the Sulzer Intermedics net assets account.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GUIDANT CORPORATION
By: /s/ A. Jay Graf
A. Jay Graf
Vice President
Date: September 23, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Financial Statements of Business acquired.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the inclusion of our report dated April 21, 1999, on the financial
statements of Sulzer Electrophysiology as of and for the three years ended
December 31, 1998 in the Guidant Corporation Form 8-K dated September 23, 1999.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 22, 1999
<PAGE>
EXHIBIT 99.1
Report of Independent Accountants
April 21, 1999
To the Owners of
Sulzer Electrophysiology
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of division equity and of cash flows present
fairly, in all material respects, the financial position of Sulzer
Electrophysiology (the Division, a division of Sulzer Medica Ltd.) at December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Division's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Combined Balance Sheet
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
(in thousands)
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 13,263 $ 14,206
Accounts receivable, net 48,109 61,598
Inventory 80,317 87,315
Other current assets 4,295 3,048
Deferred taxes 2,598 5,259
--------- ---------
Total current assets 148,582 171,426
Property, plant and equipment, net 82,500 81,401
Goodwill and other intangible assets, net 301,580 314,641
Other assets 731 565
Deferred taxes 1,069
--------- ---------
Total assets $ 533,393 $ 569,102
========= =========
Liabilities and Division Equity
Current liabilities:
Current portion of long-term debt $ 701 $ 380
Accounts payable 11,595 13,348
Accrued liabilities 10,409 16,708
Income taxes payable 23,258 29,800
--------- ---------
Total current liabilities 45,963 60,236
Long-term debt, less current portion 5,148 5,448
Other noncurrent liabilities 11,778 13,816
Deferred taxes 91
Intercompany debt 382,741 385,704
--------- ---------
Total liabilities 445,721 465,204
--------- ---------
Commitments and contingencies (Note 14)
Division equity:
Contributed capital 308,677 308,677
Cumulative translation adjustment, net of tax 840 (1,484)
Accumulated deficit (221,845) (203,295)
Total division equity --------- ---------
87,672 103,898
--------- ---------
$ 533,393 $ 569,102
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Combined Statement of Operations and Comprehensive Income/(Loss)
Years Ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net sale $ 305,314 $ 325,482 $ 321,812
Cost of sales 105,346 100,230 102,242
--------------- ------------- -------------
Gross profit 199,968 225,252 219,570
Selling, general and administrative expense 131,557 126,382 100,007
Research and development expense 44,226 45,288 39,507
Other operating expense 10,153 8,516 9,341
Intangible amortization 12,844 13,318 13,317
--------------- ------------- ------------
Operating income 1,188 31,748 57,398
Other income (expense):
Interest income 666 523 509
Interest expense (17,494) (18,421) (18,684)
Other (195) (2,292) (2,007)
--------------- ------------- ------------
Income/(loss) before income taxes (15,835) 11,558 37,216
Provision/(benefit) for income taxes (619) 6,882 14,259
---------------- ------------- ------------
Net income/(loss) (15,216) 4,676 22,957
Other comprehensive income, net of tax: 1,516 (2,027) (3,663)
Cumulative translation ajustments --------------- ------------- ------------
Comprehensive income/(loss) $ (13,700) $ 2,649 $ 19,294
================ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Combined Statement of Division Equity
- --------------------------------------------------------------------------------
(in thousands)
Cumulative
Contributed translation Retained
Capital adjustment earnings Total
Balance, January 1, 1996 $ 261,554 $ 7,270 $(210,117) $ 58,707
Foreign currency translation
adjustment, net of tax (5,636) (5,636)
Contribution of capital 46,283 46,283
Dividends (9,262) (9,262)
Net income 22,957 22,957
--------- --------- --------- --------
Balance, December 31, 1996 307,837 1,634 (196,422) 113,049
Foreign currency translation
adjustment, net of tax (3,118) (3,118)
Contribution of capital 840 840
Dividends (11,549) (11,549)
Net income 4,676 4,676
--------- --------- --------- --------
Balance, December 31, 1996 308,677 (1,484) (203,295) 103,898
Foreign currency translation
adjustment, net of tax 2,324 2,324
Contribution of capital
Dividends (3,334) (3,334)
Net loss (15,216) (15,216)
--------- --------- --------- --------
Balance, December 31, 1998 $ 308,677 $ 840 $(221,845) $ 87,672
========= ========= ========= ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Combined Statement of Cash Flows
Year Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:-
Net income (loss) $ (15,216) $ 4,676 $ 22,957
Adjustments to reconcile net income (loss) to
net cash provided by operations;
Depreciation 14,742 15,797 14,462
Amortization 11,087 13,547 13,726
Deferred income taxes 2,145 (384) (2,594)
Provision for bad debt 9,213 (100) 376
Provision for obsolete inventory 3,885 4,438 2,547
(Gain/loss on disposal of property, plant
and equipment 204 225 (1,392)
Change in current assets and liabilities:
(Increase) decrease in accounts receivable 3,531 (8,175) (10,400)
(Increase) decrease in inventory 3,610 (18,184) (11,719)
(Increase) decrease in other current assets 1,887 (1,177) 551
Increase (decrease) in accounts payable (1,584) 3,366 310
Increase (decrease) in accrued liabilities (6,690) (567) 5,335
Increase in current income taxes payable (6,611) 3,203 15,215
--------- --------- ---------
Net cash provided by operating activities 20,203 16,665 49,374
--------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (39,661)
Additions of property, plant and equipment (13,883) (28,014) (24,114)
Proceeds from sale of property, plant and equipment 123 2,139
Other (120) 187 412
--------- --------- ---------
Net cash used by investing activities (14,003) (27,704) (61,224)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings 2,151 3,459
Repayment of borrowings (763) (3,852) (181)
Increase (decrease) in other noncurrent liabilities (2,207) 7,744 689
Change in payable to affiliates, net (2,407) (15,960) (18,337)
Contribution of capital 840 43,000
Dividends and return of capital (4,377) (11,549) (6,053)
--------- --------- ---------
Net cash provided by (used in)
financing activities (7,603) 9,143 22,577
--------- --------- ---------
Effect of exchange rate changes on cash and
cash equivalents 460 (186) (1,900)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (943) (2,082) 8,827
Cash and cash equivalents at beginning of year 14,206 16,288 7,461
--------- --------- ---------
Cash and cash equivalents at end or year $ 13,263 $ 14,206 $ 16,288
========= ========= =========
Supplemental cash flow disclosures:
Interest paid $ 17,494 $ 18,421 $ 18,684
Income taxes paid 3,083 3,818 2,227
Noncash financing and investing activities:
Issuance of pension note payable $ 2,266
Funding of subsidiary net loss $ 1,279
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
1. General Information
On January 9, 1997 the Board of Directors of Sulzer AG, Winterthur,
Switzerland (Sulzer) approved a plan to offer a minority shareholding in
its Medica Group to the public. In order to prepare for this offering,
Sulzer transferred its ownership interest of the medical companies, either
held directly or through country holdings, to Sulzer Medica Ltd. (the
Parent), a company previously named Sulzer Orthopedics Ltd., incorporated
in Switzerland. Among the companies transferred to the Parent were four
wholly-owned companies (Sulzer Intermedics Inc., Sulzer Intermedics
International Holding Co., Sulzer Osypka GmbH and Sulzer Oscor Inc.) who
together with their direct and indirect subsidiaries, form the
Electrophysiology Division of Sulzer Medica Ltd.
Sulzer Electrophysiology designs, manufactures and markets
electrophysiology products including bradycardia pacemakers, implantable
cardioverter defibrillators (ICDs) and leads, external pacemakers,
heartwires and cardiac ablation systems.
2. Basis of Presentation
The combined financial statements have been prepared using the Parent's
historical basis in the assets and liabilities which comprise the
Electrophysiology Division of Sulzer Medica Ltd. (referred to herein as the
Division) as defined in more detail in the agreement with Guidant
Corporation (Guidant) (Note 17).
The combined financial statements reflect the financial position, results
of operations and cash flows of the Division as a component of the Parent
and may not be indicative of the financial position, results of operations
and cash flows of the Division as an entity under another ownership
structure.
3. Significant Accounting Policies
Accounting Principles
The combined financial statements are based on the following combination
and valuation principles and present fairly the financial position and
results of the Division's activities in accordance with generally accepted
accounting principles in the United States (US GAAP).
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reporting amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting
-1-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
period. The most significant estimates relate to depreciable lives of fixed
assets and intangible assets, allowances for doubtful accounts, inventory
obsolescence, provisions for accrued liabilities and deferred taxes. Actual
results could differ from estimates. Management believes the estimates are
reasonable.
Combination Principles
The combined financial statements include all of the assets, liabilities,
income and expense of companies within the Division. Acquisitions have
been accounted for using the purchase method. All material intercompany
balances are eliminated. In addition, unrealized gains on intercompany
transfers of inventory are eliminated and are recognized only upon sale to
third parties.
Foreign Currency Translation
Subsidiaries. In the individual financial statements of companies within
the Division, income and expense transactions denominated in foreign
currencies are recorded at the exchange rates applicable on the date of the
transaction. Assets and liabilities in denominated foreign currencies are
translated at the year-end exchange rates. The resulting exchange
differences are included in net income of the subsidiary.
Combination. The assets and liabilities of foreign companies within the
Division are translated into U.S. dollars using the year-end rates of
exchange. Income and expense items are translated into U.S. dollars at
average exchange rates for the year. Currency translation differences
resulting from the combination are included in division equity and as the
cumulative translation adjustment account have been accumulated separately
since January 1, 1996.
Valuation Principles
Cash and cash equivalents. Cash and cash equivalents include bank
accounts, together with current account and deposit balances with
maturities of under three months at acquisition, including deposits with
Sulzer Medica USA Inc., a subsidiary of the Parent.
Accounts receivable. Trade and other accounts receivable are stated at
fair value, net of necessary allowances for doubtful accounts.
Inventories. Raw materials, supplies and consumables are stated at the
lower of cost or market value. Finished products and work in progress are
stated at the lower of production cost or net realizable value. Production
costs include the cost of materials and direct and indirect manufacturing
cost. Inventories are valued on the basis of weighted average prices or
the FIFO method. Provisions are made for slow-moving and excess
inventories.
-2-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
Financial risk management. The Division's sales are denominated in a
variety of different currencies. The currency structure of costs deviates
to some extent from the currency structure of sales.
Property, plant and equipment. Property, plant and equipment are stated at
cost, less accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful life of the asset.
Tangible assets financed by long-term financial leases are capitalized and
amortized in the same way as other tangible fixed assets. The applicable
leasing commitments are shown as liabilities and are included under long-
term borrowings in the combined balance sheet.
Major improvements are also capitalized and amortized over their useful
lives. Other repair, maintenance and renovation costs are expensed as
incurred.
Intangible assets. Goodwill arising from acquisitions is capitalized and
amortized on a straight-line basis over its useful life, which does not
exceed 40 years. For goodwill relating to acquisitions of companies
involved in the development, manufacturing and marketing of products, the
useful life is considered to be up to 40 years; whereas for goodwill
relating to acquisitions of companies involved purely in the distribution
of products, the useful life generally does not exceed ten years. Other
intangible assets include licenses, patents, trademarks and similar rights
acquired from third parties, and are amortized over their estimated useful
lives not exceeding ten years.
Impairment of Long-Lived Assets. The Division, at each balance sheet date,
evaluates the recoverability of the carrying amount of goodwill if
circumstances suggest it has been impaired. If this review indicates that
goodwill is not recoverable, as principally determined based on the
estimated undiscounted cash flows of the entity which gave rise to the
goodwill, over the remaining amortization period, then the Division's
carrying value of the goodwill is reduced by the estimated shortfall in
cash flows. When circumstances affecting the recoverability of tangible
and intangible assets change, the Division evaluates such assets for
impairment based on expectations of undiscounted cash flows. If impairment
is determined to have occurred, the Division compares the estimated
discounted cash flows expected to be generated by the asset with its
carrying value and recognizes an impairment charge.
-3-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
Provisions. Provisions are made for all probable losses arising from
warranties and penalties, litigation risks and for the cost of
restructuring measures, which have been approved by management.
Employee benefit plans. The Division maintains various plans for providing
employee benefits, which conform to local jurisdictional circumstances and
practices. For defined contribution plans, the cost in each period is
equal to the amount of the agreed employer contributions. For defined
benefit plans, the cost in each period is determined by actuarial estimates
based upon employee service data, benefit payment commitments and the
return of plan assets.
Revenue recognition. Sales of pacemakers and leads are recorded at the
time of shipment, unless substantial rights of return exist, in which case
they are recognized at time of implant. Sales of supplies and services are
recorded at the time of delivery. Net sales exclude sales or value-added
taxes and are stated net of credits, discounts and rebates. Accruals for
estimated future returns and credits are made when the related revenue is
recognized. Such amounts are estimated based on historical rates of
returns, customer inventory levels and other factors.
Research and development costs. Research and development costs are charged
directly to income as incurred.
Income taxes. Certain of the Division's operations have historically been
included in consolidated income tax returns filed by the Parent or its
subsidiaries. Income tax expenses in the accompanying combined financial
statements have been computed assuming the Division filed separate income
tax returns. Provision is made for all income taxes assessed on the profits
earned up to the balance sheet date and for taxes based upon capital
structure in the year to which they relate. Deferred taxes are provided on
temporary differences between the value of assets and liabilities for tax
purposes and their corresponding values in the combined financial
statements using the asset and liability method prescribed by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Deferred taxes are calculated using the currently enacted tax rates and are
adjusted when these rates change. Deferred tax assets are included in the
combined balance sheet to the extent that subsequent realization is
probable. Provision is made for incremental taxes on available earnings of
foreign subsidiaries which are intended to be remitted. No provision is
made for incremental taxes on unremitted earnings which are considered to
be permanently reinvested in the operations of the related companies. The
change in the provision for deferred taxes is
-4-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
charged against income and included under "Income Taxes" in the combined
statement of income.
For the U.S. companies of the Division that are directly owned by Sulzer
Medica USA Holding Co., there has not been a plan requiring settlement of
each such subsidiary's respective tax payables or receivables. For
purposes of these combined financial statements, such balances have been
treated as though they had been settled through January 1, 1996, with
subsequent resulting current income tax receivables and payables being
reported within the Division's combined balance sheet as income taxes
payable, rather than in the intercompany accounts.
Financial Instruments
The combined balance sheet values of cash and current accounts receivable
and payable approximate their market values. The market value of long-term
borrowings is based on the current rates offered to the Division for debt
of similar maturities and approximate their stated value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Division to
significant concentrations of credit risk, consist principally of trade
accounts receivable. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the large number of customers and
their dispersion across many geographic areas. However, a significant
portion of trade accounts receivable is with national health care systems
in several countries. Although the Division does not currently foresee
significant credit risk associated with these receivables, repayment is
dependent upon the financial stability of those countries' national
economies.
The Division maintains cash and cash equivalents with various major
financial institutions. The Parent on behalf of the Division performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any institution.
Financial transactions are spread over a number of financial institutions,
each of which have a high credit rating.
4. Recently Issued Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15,
1997 and requires reclassification of prior-period financial statements.
Statement No. 130 requires the presentation of comprehensive income, which
consists of net income and other comprehensive income and its components,
in a full set of financial statements. The Division's other
-5-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
comprehensive income consist of changes in the Division's cumulative
translation adjustments, which totaled $1,516, $(2,027) and $(3,663) in
1998, 1997 and 1996, net of tax, respectively, and which currently are
reported as a component of Division equity on a net basis. The Division has
displayed comprehensive income and its components in the combined statement
of income and comprehensive income.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments
of an Enterprise and Related Information," which supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. This statement
establishes standards for reporting information about operating segments in
annual and interim financial statements. Operating segments are determined
consistently with the way management organizes and evaluates financial
information internally for making resource allocation decisions and
assessing performance. It also requires related disclosures about
products, geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits," and is effective for fiscal
years beginning after December 15, 1997. This statement revises employer's
disclosures about pension and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. The Division
does not believe this statement has a material impact on the disclosures as
set forth in Note 12.
5. Changes in the Composition of the Division
In January 1996, the Division acquired all of the outstanding shares of Dr.
Ing P. Osypka Gesellschaft fur Medizintechnik GmbH, Grenzach-Wyhlen
(German); (name changed to Sulzer Osypka GmbH) with 100% holding in Dr.
Osypka GmbH, Berlin and of Oscor Medical Corporation, Palm Harbor (Florida,
USA); (name changed to Sulzer Oscor Inc.) a producer and distributor of
pacemaker leads, external pacemakers, heartwires and cardiac ablation
systems for approximately $43,000 in cash. The Division recorded
approximately $35,000 of goodwill in connection with the transaction.
The adoption of SFAS No. 131 did not affect the results of operations or
financial position and did not affect the disclosure of segment information
in Note 15.
The operating results of subsidiaries acquired during the periods have been
included in the combination from the date of acquisition using the purchase
method of accounting. No
-6-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
agreements have been entered into in connection with these acquisitions to
make contingent payments nor are there potential commitments of any other
nature outstanding. Amounts expended by other subsidiaries of Sulzer for
these acquisitions have been included in the amounts above, but are treated
as noncash financing and investment activities in the combined statement
of cash flows.
6. Trade Accounts Receivable
Trade accounts receivable are comprised of the following at December 31:
1998 1997
Gross trade accounts receivable $ 58,603 $ 63,512
Allowance for doubtful accounts (10,494) (1,914)
--------- ---------
Trade accounts receivable, net $ 48,109 $ 61,598
========= =========
In January 1999, the Division's French distributor began court supervised
insolvency proceedings. The Division has recognized a valuation allowance
of $8,486 in December 1998 against the $12,170 balance due from the
distributor. The amount ultimately recoverable from the distributor is
uncertain.
7. Inventories
Inventories are comprised of the following at December 31:
1998 1997
Raw materials, supplies and consumables $ 29,179 $ 27,568
Work in progress 27,102 31,243
Finished products and trade merchandise 35,381 35,964
--------- ---------
91,662 94,775
Less - valuation allowances (11,345) (7,460)
--------- ---------
Total inventories $ 80,317 $ 87,315
========= =========
Valuation allowances are recorded to reduce the carrying value of
inventories to their estimated realizable amounts taking into account
excess inventory levels and obsolescence resulting from new product
introductions.
-7-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
At December 31, 1998, the Division's combined balance sheet included
$21,644 of inventory related to its tachycardia product line, net of a
valuation allowance of $3,567. The valuation allowance has been recorded in
recognition of slower than expected market acceptance of product line which
was introduced in 1997. Management believes the Parent's announcement of
it's intention to sell the Division, and the September 1998 announcement of
the proposed sale to Guidant (Note 17) negatively impacted unit sales for
the product line during the last half of 1998. Although product movement
has lagged behind expectations, management believes the related inventory
balance would be fully realizable upon continued execution of the
Division's marketing plan, in combination with possible price discounting
and that the established reserve is adequate. Should Guidant choose not to
actively market and support the Division's tachycardia products, the net
realizable value of the products may be subject to significant reduction.
8. Property, Plant and Equipment
Property, plant and equipment are comprised of the following at December
31:
<TABLE>
<CAPTION>
Estimated
useful lives
(years) 1998 1997
<S> <C> <C> <C>
Land $ 3,416 $ 3,406
Buildings 25-40 38,653 36,610
Machinery and equipment 5-15 112,607 104,414
Other fixed assets 4-5 38,830 33,731
---------- ---------
193,506 178,161
Less-accumulated
depreciation (111,006) (96,760)
---------- ---------
$ 82,500 $ 81,401
========== =========
</TABLE>
-8-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
9. Intangible Assets
Intangible and other assets are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Goodwill $ 428,665 $ 428,665
Patent 303 297
Other 1,280 375
--------- ---------
430,248 429,337
Less-accumulated amortization (128,668) (114,696)
--------- ---------
$ 301,580 $ 314,641
========= =========
</TABLE>
10. Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage loans $ 3,430 $ 3,310
Royalty note
Pension note 2,359 2,359
Other 60 159
-------- --------
5,849 5,828
Less: current portion 701 380
-------- --------
Total long-term debt $ 5,148 $ 5,448
======== ========
</TABLE>
Mortgage loans consist of a 4,500 Swiss francs note agreement with a
financial institution bearing interest at 4.75% annually, with the
principal due on July 3, 2000, and a 534 Swiss francs (334 and 434 Swiss
francs at December 31, 1998 and 1997, respectively) note agreement with the
same financial institution with a variable interest rate (approximating
5.25%) and annual principal repayments of 100 Swiss francs through final
maturity. These loans are collateralized by certain Swiss operation
facilities.
The pension note represents a noninterest bearing 4,000 Deutsche marks note
payable by the Division issued in December 1997 to fund a portion of the
previously unfunded Osypka defined benefit
-9-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
plan. The note is payable in annual instalments of 1,000 Deutsche marks
beginning April 30, 1999.
Scheduled principal maturities for the next five years follow:
1999 $ 701
2000 669
2001 669
2002 669
2003 72
Thereafter 3,069
-------
Total $ 5,849
=======
11. Income Taxes
Current and deferred income taxes consist of the following at December 31:
1998 1997 1996
Current income taxes
United States $ (2,772) $ 3,482 $ 17,278
All other countries 8 3,153 1,853
---------- -------- --------
Total current income taxes (2,764) 6,635 19,131
---------- -------- --------
Deferred income taxes
United States 1,788 387 (4,686)
All other countries 357 (140) (186)
---------- -------- --------
Total deferred taxes 2,145 247 (4,872)
========== ======== ========
Total income taxes $ (619) $ 6,882 $ 14,259
========== ======== ========
The provision for income taxes is based on income (loss) before taxes
reported for financial statement purposes. The components of income (loss)
before income taxes for the years ended December 31 were:
1998 1997 1996
United States $ (12,084) $ (326) $ 23,886
All other countries (3,751) 11,884 13,330
---------- -------- --------
Total income before taxes $ (15,835) $ 11,558 $ 37,216
========== ======== ========
-10-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
The differences between income tax expense computed at statutory rates and
income tax expense provided on earnings are as follows for the years ended
December 31 (as a percentage of revenues):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income tax expense at U.S. statutory rate 35.0% 35.0% 35.0%
Permanent differences, primarily
goodwill amortization (22.9) 15.1 9.8
Foreign sales corporation 1.8 (6.5) (1.6)
State and local taxes, net of federal
income taxes (1.7) 4.4 2.2
Foreign tax effect (including FTC) (14.2) 2.0 (5.7)
Earnings no longer permanently reinvested 21.8
Research and development credits 5.9 (12.3) (1.4)
--------- --------- ---------
Income tax expense 3.9% 59.5% 38.3%
========= ========= =========
</TABLE>
At December 31, deferred taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Intercompany profit in inventory $ 1,890 $ 2,018
Inventory cost capitalized for tax and
inventory valuation 2,562 1,399
Self-insurance reserve 436 436
Nondeductible accruals, net 1,110 2,603
Deferred income 3,481 3,713
Deferred compensation 463 1,178
Allowance for doubtful accounts 162 93
Federal tax credit carryovers 2,570 2,570
Tax loss carryforwards 1,430 1,430
Fixed asset basis differences 4,302 4,095
Deferred tax liabilities:
Expenses capitalized for books deducted
for tax (1,644)
Tax accelerated depreciation (7,949) (8,142)
Intangible asset basis difference (652)
Foreign deferred tax liabilities, net (1,296) (1,249)
Earnings reinvestment (2,542) (2,542)
--------- ---------
4,975 6,950
Valuation allowance for deferred tax assets (622) (622)
--------- ---------
Deferred taxes, net $ 4,353 $ 6,328
========= =========
</TABLE>
-11-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
At December 31, deferred taxes are classified as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Assets Liabilities
----------------------- ----------------------
Current Noncurrent Current Noncurrent
<S> <C> <C> <C> <C>
Deferred taxes $ 5,729 $ 11,164 $ 3,045 $ 10,651
Valuation allowance (82) (602)
-------- --------- -------- ----------
$ 5,647 $ 10,562 $ 3,045 $ 10,651
-------- --------- -------- ----------
<CAPTION>
1997
-------------------------------------------------
Assets Liabilities
----------------------- ----------------------
Current Noncurrent Current Noncurrent
<S> <C> <C> <C> <C>
Deferred taxes $ 6,675 $ 12,961 $ 1,324 $ 11,362
Valuation allowance (92) (530)
-------- --------- -------- ----------
$ 6,583 $ 12,431 $ 1,324 $ 11,362
-------- --------- -------- ----------
</TABLE>
At December 31, 1998, the valuation allowance relates principally to state
net operating loss carryforwards. At December 31, 1998, tax loss
carryforwards approximated $30,000 and expire between 2000 and 2008. The
potential tax savings related to these losses have been recorded as a
deferred tax asset, net of any necessary valuation allowance. For federal
income tax purposes, the Division has tax credit carryovers of
approximately $2,600, expiring in 2011. It is anticipated that all federal
tax credits will be utilized through a carryback claim.
12. Retirement Benefit Plans and Employee Costs
Defined Contribution Plans
The Division sponsors defined contribution plans which cover a substantial
number of its Swiss employees, substantially all of its U.S. employees and
employees in other countries. The Division's contributions to the plans are
based on local customs and practices in the countries concerned. Division
contributions to such plans for the years ended December 31, 1998, 1997 and
1996 were $4,056, $3,118 and $2,929, respectively.
Defined Benefit Plans
Defined benefit plans covering employees of the Division are in place in
certain countries. Two of these plans in Switzerland
- 12 -
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
and the United Kingdom, cover employees of affiliates in addition to
employees of the Division. The assets and liabilities of these plans, which
relate to Division personnel, have been determined based on actuarial
methods. Both of these funded plans have an excess of available assets over
the present value of the projected benefit obligations. The net surplus of
these plans is amortized and credited to income over the expected remaining
working lives of the employees.
Funded defined benefit plans are administered in accordance with investment
rules established for pension plans by the legislation of the related
country. Such rules are designed to ensure that investment risk is
diversified, is not excessive and their application is generally monitored
by supervisory authorities. The principal assets of such funds comprise
investments in marketable equity securities and bonds, investments in real
estate, mortgage loans to employees and short-term deposits.
Sulzer Osypka GmbH, which was acquired in 1996, maintains an unfunded
defined benefit plan. The related unrecognized net pension obligation
approximates $1,000, and is being amortized over the expected remaining
active service period of the employees concerned. The related accrued
pension cost approximates $2,200 at December 31, 1998.
Net pension cost, and the individual components thereof, for the years
ended December 31, 1998, 1997 and 1996, is not material to the Division's
combined statement of income. The funded status of defined benefit plans,
as well as the related unrecognized prior service costs, unrecognized
excess of plan assets and accrued pension cost at December 31, 1998, 1997
and 1996 for the funded plans, is not material to the Division's financial
position.
13. Settlements
In 1996, the Division agreed to the settlement of two legal actions. The
Division received a net amount of $15,000 as a result of these settlements.
Such amount has been reflected as a reduction of selling general and
administrative expense in the accompanying 1996 statement of operations.
14. Commitments and Contingencies
The Division has a contractual commitment with a vendor to acquire
customized programming units. In the event the contract is canceled prior
to completion, the Division may be obligated to pay the vendor up to
$2,000, plus certain costs related to vendor inventory in process.
-13-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
The future minimum rental commitments for operating leases at December 31
are: 1999 - $1,604; 2000 - $1,231; 2001 - $941; 2002 - $845; 2003 - $629,
thereafter - $645.
Employees and subsidiaries of the Division are committed to respecting
local laws and regulatory guidelines in the course of their business
activities. In the normal course of business, certain subsidiaries are
involved in administrative and civil proceedings which could give rise to
claims not covered, or only partly covered, by insurance. The effects of
such on future earnings cannot be foreseen. In the opinion of management,
the ultimate outcome of these situations will not have a material impact on
the combined financial position and results of operations.
The Parent has obtained umbrella insurance coverage for product liability
for its subsidiaries, with an annual deductible which varies from country
to country. The Division benefits from this insurance coverage within the
aggregate annual ceiling established for product liability claims, together
with other subsidiaries of Sulzer. The incidence and size of emerging
claims is surveyed on an annual basis and compared with the total size of
the outstanding implant population in order to project the estimated level
of claims for the coming year. The level of expected new claims is used to
negotiate deductible amounts for the next policy period. Provisions are
only recorded for product liability when it is determined that a loss
resulting from claims is probable.
-14-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
15. Segment Information by Geographical Area
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net sales to customers:
North America $ 193,266 $ 201,073 $ 192,486
Europe 67,558 77,197 84,854
Other countries 44,490 47,212 44,472
--------- --------- ---------
Total Sulzer EP $ 305,314 $ 325,482 $ 321,812
========= ========= =========
Intercompany transfers to other
geographic areas from:
North America $ 16,459 $ 20,426 $ 20,674
Europe 2,904 245 620
--------- --------- ---------
Total Sulzer EP $ 19,363 $ 20,671 $ 21,294
========= ========= =========
Operating income:
North America $ 2,573 $ 22,152 $ 45,699
Europe (1,385) 9,596 11,699
--------- --------- ---------
Total operating income $ 1,188 $ 31,748 $ 57,398
========= ========= =========
Identifiable assets:
North America $ 449,642 $ 477,670 $ 459,009
Europe 82,608 90,507 94,942
Other countries 1,143 925 828
--------- --------- ---------
Total identifiable assets $ 533,393 $ 569,102 $ 554,779
========= ========= =========
</TABLE>
The geographic segment of North America comprises primarily the United
States, as well as Canada, Bermuda and the Bahamas.
Net sales to customers represent sales to third parties by location of the
customer, and are presented after intercompany eliminations. It is the
Division's policy that transfers of goods and services between geographic
segments are made at normal terms of trade. Operating income resulting from
sales activity is reported in the geographic segment supplying the
products. Intercompany transfers to other geographic areas from, and
operating income related to the region, "other countries" is not material.
-15-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
16. Transactions with Related Parties
Intercompany debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Intercompany notes payable $ 190,788 $ 190,788 $ 190,788
Intercompany advances 191,953 194,916 180,119
--------- --------- ---------
$ 382,741 $ 385,704 $ 370,907
========= ========= =========
</TABLE>
During the three years ended December 31, 1998 the Division had
intercompany debt payable to its affiliates. The original principal amount
of the Division's indebtedness under its 1995 note agreement was $197,400.
The first $165,289 in note principal accrued interest at 10% annually. The
remainder of the intercompany indebtedness accrued interest at 6.660%,
6.375% and 6.5% annually during 1998, 1997 and 1996, respectively. Interest
is paid quarterly. In 1998, the Division refinanced this indebtedness with
Sulzer Medica USA Inc. The indebtedness has been classified as noncurrent
in the accompanying combined balance sheet based upon the ability of the
parties to extend the repayment past 1998.
The Division has recorded a receivable of $1,279 from the parent of Sulzer
Osypka GmbH to fund the statutory net losses of Sulzer Osypka GmbH at
December 31, 1998. The Division also has other intercompany advances from
its affiliates which are noninterest bearing.
Management companies of Sulzer and the Parent provide certain management
functions to the Division and incur certain administrative costs on behalf
of the Division. Charges for such services included in these financial
statements for the years ended December 31 are summarized in the following
table:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Management fees $ 8,345 $ 7,000 $ 7,609
Technology fees 1,372 1,326 1,426
Trademark fees 615 497 552
Intercompany interest expense 17,266 18,154 18,402
</TABLE>
Amounts included in the accompanying balance sheet as income taxes payable
would be settled with affiliates having the ultimate responsibility for
payment of the obligations.
-16-
<PAGE>
Sulzer Electrophysiology
(a Division of Sulzer Medica Ltd.)
Notes to Combined Financial Statements
December 31, 1998 and 1997
(in thousands)
- -------------------------------------------------------------------------------
17. Subsequent Events (unaudited)
On January 31, 1999, the Parent sold the Division to Guidant for
consideration of approximately $800 million which is subject to adjustment
based on the closing balance sheet of the Division. Intercompany debt
(Note 16) within the Division was converted into contributed capital upon
consummation of the sale to the buyer.
-17-
