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