0000203077-95-000006.txt : 19950915 0000203077-95-000006.hdr.sgml : 19950915 ACCESSION NUMBER: 0000203077-95-000006 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08672 FILM NUMBER: 95573440 BUSINESS ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 BUSINESS PHONE: 6124832000 MAIL ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A ANNUAL REPORT [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NO. 0-8672 ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive office) (612) 483-2000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS (Title of class) (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, or will not be contained, to the best of the Registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. * YES __ NO _X_ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1.73 billion at March 9, 1995, when the closing sale price of such stock, as reported on the NASDAQ National Market System, was $37.50. The number of shares outstanding of the Registrant's Common Stock, $.10 par value, as of March 9, 1995, was 46,491,032 shares. Portions of the Annual Report to Shareholders for the year ended December 31, 1994, are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated March 27, 1995, are incorporated by reference in Part III. *The Form 8K for the Pacesetter acquisition was filed without financials. Those financials are filed with this 10K. The exhibit index is set forth on pages 16, 17, 18 and 19. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (3) Exhibits Exhibit Index 2.2 Siemens Pacesetter, Inc. and Affiliate and Siemens Non-U.S. Cardiac Systems and Affiliates ("Pacesetter") audited balance sheets as of September 30, 1994, 1993, and 1992 audited income statements and statements of cash flows for each of the three years ended September 30, 1994, and related notes thereto. 2.3 Unaudited pro forma combined statements of income for the Company and Pacesetter for the nine months ended September 30, 1994, and the year-ended December 31, 1993. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-9262, No. 33-29085, No. 33-41459, No. 33-48502, and No. 33-54435) of St. Jude Medical, Inc. of our report dated July 22, 1994, relating to the consolidated financial statements of Siemens Pacesetter, Inc. for the years ended September 30, 1993 and 1992 included within this Annual Report on Form 10-K/A. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Woodland Hills, California September 12, 1995 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-9262, No. 33-29085, No. 33-41459, No. 33-48502, and No. 33-54435) of St. Jude Medical, Inc. of our report dated November 4, 1994, relating to the consolidated financial statements of Siemens Pacesetter, Inc. for the year ended September 30, 1994 included within this Annual Report on Form 10-K/A. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Woodland Hills, California September 12, 1995 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our reports dated December 16, 1994 and July 25, 1994, included in the Annual Report on Form 10K of St. Jude Medical, Inc. for the year ended December 31, 1994, with respect to the combined financial statements of the Non-U.S. operations of Siemens Cardiac Systems included in this Form 10K. We also consent to the incorporation by reference in Registration Statement No 33-9262; Registration Statement No 33-29085; Registration Statement No 33-41459, Registration Statement No 33-48502 and Registration Statement No 33-54435 on Form S-8 of our reports dated December 16, 1994 and July 25, 1994, with respect to the combined financial statements included in St. Jude Medical, Inc.'s Annual Report (Form 10K) for the year ended December 31, 1994. Stockholm September 12, 1995 /s/ Coopers & Lybrand 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 SIEMENS PACESETTER, INC. AND AFFILIATE REPORT AND COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 1994 Report of Independent Accountants To the Board of Directors and Shareholder of Siemens Pacesetter, Inc. and Affiliate In our opinion, the accompanying combined balance sheet and the related combined statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of Siemens Pacesetter, Inc., (a wholly owned subsidiary of Siemens Corporation) and affiliate at September 30, 1994, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As discussed in Note 10, the Company is a defendant in a class action suit claiming damages in connection with certain cardiac pacing devices. The ultimate outcome or liability resulting from this suit, if any, is not presently determinable. \s\ Price Waterhouse LLP Woodland Hills, California November 4, 1994 SIEMENS PACESETTER, INC. AND AFFILIATE COMBINED BALANCE SHEET ($ IN THOUSANDS) SEPTEMBER 30, 1994 ASSETS Cash $ 605 Accounts receivable (net of allowance for doubtful accounts of $611) 42,983 Inventories (Note 3) 62,164 Due from affiliates 12,500 Deferred taxes (Note 5) 6,884 Prepaid expenses 627 Total current assets 125,763 Property and equipment, net (Note 4) 32,110 Intangible assets, net 45,734 Deferred taxes (Note 5) 1,049 Other assets 5,000 Net intercompany receivable (Note 7) 79,300 Total assets $ 288,956 LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable $ 28,466 Accrued expenses 31,852 Income taxes payable (Note 5) 23,134 Due to affiliates (Note 7) 8,627 Total current liabilities 92,079 Other noncurrent liabilities (Note 8) 2,381 Commitments and contingencies (Notes 6 and 10) Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding 1 Additional paid-in capital 98,642 Retained earnings 95,853 Total shareholder's equity 194,496 Total liabilities and shareholder's equity $ 288,956 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. AND AFFILIATE COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS ($ IN THOUSANDS) FOR THE YEAR ENDED SEPTEMBER 30, 1994 Net sales $ 294,549 Cost of products sold 82,422 GROSS PROFIT 212,127 Operating expenses Selling 75,768 General and administrative 28,668 Research and development 24,988 Royalties 17,438 Depreciation and amortization 11,086 TOTAL OPERATING EXPENSES 157,948 Operating income 54,179 Interest income 2,344 Other expense (162) INCOME BEFORE INCOME TAXES 56,361 Provision for income taxes 22,013 NET INCOME 34,348 Retained earnings, beginning of year 61,505 RETAINED EARNINGS, END OF YEAR $ 95,853 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. AND AFFILIATE COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS) FOR THE YEAR ENDED SEPTEMBER 30, 1994 Cash flows from operating activities: Net income $ 34,348 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,215 Deferred income taxes 5,215 Changes in assets and liabilities: Accounts receivable, net (10,922) Inventories (6,519) Due from affiliates 1,471 Prepaid expenses 342 Other assets 94 Accounts payable 13,226 Accrued expenses (12,203) Income taxes payable 22,265 Other noncurrent liabilities (3,431) NET CASH PROVIDED BY OPERATING ACTIVITIES 57,101 Cash flows from investing activities: Net capital additions (18,589) NET CASH USED IN INVESTING ACTIVITIES (18,589) Cash flows from financing activities: Net intercompany receivable (38,240) NET CASH USED IN FINANCING ACTIVITIES (38,240) Net increase in cash 272 Cash at beginning of year 333 Cash at end of year $ 605 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS) SEPTEMBER 30, 1994 1. BASIS OF PRESENTATION Siemens Pacesetter, Inc. (the "Company"), a Delaware corporation, is engaged in the design, manufacture and sale of cardiac pacing systems. The Company is a wholly owned subsidiary of Siemens Corporation ("Siemens"). The accompanying financial statements have been prepared as if the Company had operated as an independent stand alone entity for the period presented. These financial statements also include the pacing operations of Siemens Electric, Limited, (a wholly owned subsidiary of Siemens AG) the Company's Canadian affiliate. All material intercompany accounts and transactions have been eliminated. The Company has been sold to a public company effective September 30, 1994. The accompanying financial statements do not include any adjustments which may result from this change in ownership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the more significant accounting policies followed by the Company in preparing these financial statements is as follows: REVENUES AND RECEIVABLES The Company sells its products primarily to hospitals and distributors, both domestically and internationally. Revenues and receivables are generally recorded when products are implanted in patients. The Company's sales are concentrated primarily in North America. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base and their geographic dispersion. The Company does not require collateral and maintains reserves for potential credit losses which historically have been consistent with management's expectations. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from three to eight years. Additions and betterments are capitalized. Maintenance and repairs are charged to expense as incurred. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as other income or expense. INTANGIBLE ASSETS AND AMORTIZATION Intangible assets, which arise principally from the acquisition of the Company's predecessor by Siemens in 1985, are recorded at cost, less accumulated amortization. The excess of cost over the fair value of net assets acquired at the date of acquisition is amortized over a period not exceeding 30 years. Other intangible assets, including licensing agreements, are amortized over the shorter of the term of the agreement or their estimated useful lives. Amortization is recorded using the straight-line method. Accumulated amortization totalled $39,080 at September 30, 1994. The Company monitors its goodwill and other intangibles to determine whether any impairment of these assets has occurred. In making such determination with respect to goodwill, the Company evaluates the operating performance of the underlying product lines and business which gave rise to such amount. With respect to other intangibles, the Company bases its determination on the performance of the related products. PROVISION FOR WARRANTY CLAIMS Provision for warranty costs are recorded at the time products are sold and are reviewed and adjusted by management periodically to reflect actual and anticipated experience. INCOME TAXES Siemens' consolidated income tax provision has generally been allocated to the Company as if the Company filed separate income tax returns. The Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) during fiscal 1994. Under the provisions of SFAS No. 109, deferred tax liabilities or assets reflect the tax effects of temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. In estimating deferred tax balances, the Company considers all expected future events other than enactments of changes in the tax law or rates. The cumulative and current year impact effect of this accounting change was not material to the financial position and operating results of the Company. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 3. INVENTORIES Inventories consist of the following: Raw materials $25,235 Work in process 18,142 Finished goods 18,787 $62,164 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: Programmers $30,222 Test equipment 16,615 Computer equipment 15,620 Machinery and equipment 6,652 Furniture and fixtures 4,983 Tooling and molds 4,396 Building 6,008 Land 2,841 87,337 Less - Accumulated depreciation (55,227) $32,110 Depreciation expense for the year ended September 30, 1994 aggregated $9,771. SIEMENS PACESETTER, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS) SEPTEMBER 30, 1994 5. INCOME TAXES The provision for income taxes for the year ended September 30, 1994 is comprised of the following: Current provision: Federal $ 14,751 State 2,047 16,798 Deferred provision: Federal $ 3,752 State 1,463 Total provision for income taxes $ 22,013 The difference between the provision for income taxes and income taxes computed using the U.S. federal income tax rate are as follows: Amount computed using the statutory rate $ 19,726 Increase in taxes resulting from: State and other income taxes, net of federal benefit 2,281 Amortization of intangibles 575 Research and development credit (780) Other, net 211 Provision for income taxes $ 22,013 Deferred tax liabilities and assets at September 30, 1994 comprised the following items: Deferred tax liabilities: Depreciation $ 834 Subtotal 834 Deferred tax assets: Payroll and related items 3,723 Warranties 1,858 Inventories 1,907 Pension 975 Other 304 Subtotal 8,767 Net deferred tax assets $ 7,933 SIEMENS PACESETTER, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS) SEPTEMBER 30, 1994 6. COMMITMENTS On August 26, 1992, the Company entered into a cross licensing agreement which requires royalty payments at varying rates on future sales of cardiac stimulation devices for a period of ten years. The Company has entered into employment and severance agreements with six key executive employees which expire at various dates through October 1998. The aggregate commitment for future salaries under these employment agreements is approximately $7,967. In November 1993, the Company established a supplemental executive retirement plan for the purposes of attracting and retaining key executives by providing selected executives with supplemental pension benefits. This plan also provides certain enhanced retirement benefits, based principally upon years of service, in the event of a sale of the Company prior to the executive's retirement. The Company leases its principal facility from a related party. In addition, the Company has entered into various other leases for certain facilities and equipment. Some leases require, in addition to rental payments, the payment of property taxes and maintenance costs. Net rental expense under all operating leases for the year ended September 30, 1994 were $3,644. Total minimum rental payments in each of the following five fiscal years are as follows: 1995 $ 3,729 1996 3,677 1997 3,601 1998 3,467 1999 3,338 Thereafter 3,750 7. TRANSACTIONS WITH AFFILIATES Effective October 1, 1994, the Company purchased certain facilities from an affiliate for an aggregate total purchase price of $8,800, which approximated the affiliate's net book value as of the date of sale. The Company is allocated an amount for Siemens' general corporate expenses. In addition, the Company is charged for certain other amounts incurred by Siemens that directly benefit or are specifically related to the Company, such as insurance premiums, employee benefits costs, tax services and legal fees. Corporate charges totalled $2,745 for the year ended September 30, 1994. In the opinion of management, the allocation methods used to allocate general corporate and other expense are reasonable and adequate, but not excessive, as compared to the services provided. Pursuant to an intercompany tax sharing agreement, the Company pays Siemens an amount equal to the Company's income tax liability as calculated on a separate return basis. The Company also participates in Siemens' centralized cash management system. Under this system, cash received from the Company's operations is transferred to Siemens' centralized cash accounts and cash disbursements are funded from the centralized accounts. 8. EMPLOYEE BENEFIT PLANS SIEMENS U.S. DEFINED BENEFIT PLAN The Company has a pension plan for its employees. Employees are included in Siemens Retirement Plan and, accordingly, $1,374 was allocated to the Company by Siemens for its share of salaried employees' pension expense for the year ended September 30, 1994. At September 30, 1994, accrued pension costs relating to the Company's participation in the pension plan were $2,381. This amount is reported as other noncurrent liabilities in the accompanying balance sheet. DEFINED CONTRIBUTION PLAN The Company also maintains a defined contribution plan for the benefit of its employees. This plan enables employees to contribute up to the maximum limits allowed by Internal Revenue Code Section 401(k). The Company also matches a portion of the employee's contribution. Such contributions are made in accordance with the provisions of the plan. The Company's has accrued a contribution of $1,050 related to the year ended September 30, 1994. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Statements." This Statement requires companies to disclose an estimate of the fair value of financial instruments, both on and off balance sheet, if it is practical to do so. Fair value is defined as the amount at which an instrument could be exchanged in a current transaction. The recorded amounts of the Company's financial instruments, principally cash, accounts receivable and accounts payable, approximate their fair values. 10. CONTINGENCIES The Company is a defendant in a class action lawsuit filed by recipients of certain of its cardiac pacing products. The matter is currently in pretrial discovery. Management is unable to predict the ultimate outcome of this action or its effect on the Company's results of operations and financial position. The Company is a defendant in various other lawsuits which are normal to the nature of its business. In addition, the Company is the subject of examinations being conducted by certain local tax authorities regarding both property taxes and sales and use taxes. At the present time, the examinations are not yet completed and an assessment, if any, has not yet been made. Management believes that the ultimate resolution of these matters will not have a materially adverse effect on the Company's financial position or results of operations. In January 1994, the Company's principal manufacturing facility in Sylmar, California was damaged in the Northridge Earthquake. The Company has filed insurance claims in the amount of $13,500 of which $6,500 has been collected to date. Management anticipates filing additional claims. 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the year ended September 30, 1994, the Company paid $2,120 and $527 for interest and income taxes, respectively. SIEMENS PACESETTER, INC. REPORT AND FINANCIAL STATEMENTS SEPTEMBER 30, 1992 AND 1993 Report of Independent Accountants June 22, 1994 To the Board of Directors and Shareholder of Siemens Pacesetter, Inc. In our opinion, the accompanying balance sheet and the related statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of Siemens Pacesetter, Inc. at September 30, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 10, the Company is a defendant in a class action suit claiming damages in connection with certain cardiac pacing devices. The ultimate outcome or liability resulting from this suit, if any, is not presently determinable. \s\ Price Waterhouse SIEMENS PACESETTER, INC. BALANCE SHEET ($ IN THOUSANDS) SEPTEMBER 30, 1992 1993 ASSETS Cash $ 4,933 $ 333 Accounts receivable (net of allowance for doubtful accounts of $385 and $457) 33,898 32,061 Inventories (Note 3) 66,507 55,645 Deferred taxes (Note 5) 8,261 9,558 Due from affiliates 5,345 6,321 Prepaid expenses 988 969 TOTAL CURRENT ASSETS 119,932 104,887 Property and equipment, net (Note 4) 25,814 23,377 Intangible assets, net 52,402 49,093 Deferred taxes (Note 5) 4,513 3,590 Other assets 1 5,094 Net intercompany receivable (Note 7) 40,404 TOTAL ASSETS $202,662 $226,445 LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable $ 13,387 $ 15,930 Accrued expenses 25,174 44,924 Due to affiliates (Note 7) 3,682 287 Net intercompany payable (Note 7) 11,232 TOTAL CURRENT LIABILITIES 53,475 61,141 Other noncurrent liabilities (Note 8) 4,258 5,812 Commitments and contingencies (Notes 6, 10 and 12) Common stock, $1 per share par value, 1,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 98,642 98,642 Retained earnings 46,286 60,849 TOTAL SHAREHOLDER'S EQUITY 144,929 159,492 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $202,662 $226,445 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. STATEMENT OF INCOME AND RETAINED EARNINGS ($ IN THOUSANDS) FOR THE YEAR ENDED SEPTEMBER 30, 1992 1993 Net sales $ 255,796 $ 254,701 Cost of products sold 66,861 77,374 GROSS PROFIT 188,935 177,327 Operating expenses Selling 67,810 67,991 General and administrative 35,741 21,736 Research and development 20,913 23,429 Royalties 3,565 13,663 Depreciation and amortization 11,293 11,477 TOTAL OPERATING EXPENSES 139,322 138,296 Operating income 49,613 39,031 Settlement of litigation (Note 10) 50,700 Interest income (2,081) (4,086) Interest expense 1,742 3,390 Other expense 1,352 750 INCOME (LOSS) BEFORE INCOME TAXES (2,100) 38,977 Provision for income taxes 898 15,275 NET INCOME (LOSS) (2,998) 23,702 Retained earnings, beginning of year 52,483 46,286 Less: dividends paid (3,199) (9,139) RETAINED EARNINGS, END OF YEAR $ 46,286 $ 60,849 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. STATEMENT OF CASH FLOWS ($ IN THOUSANDS) FOR THE YEAR ENDED SEPTEMBER 30, 1992 1993 Cash flows from operating activities: Net income (loss) $ (2,998) $ 23,702 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 13,733 13,607 Deferred income taxes (1,661) (374) Changes in assets and liabilities Accounts receivable, net (1,434) 1,837 Inventories (14,547) 10,862 Prepaid expenses 456 19 Due from affiliates (1,983) (4,371) Other assets 317 (5,093) Accounts payable (5,267) 2,543 Accrued expenses (24,907) 8,512 Other noncurrent liabilities 1,238 1,554 NET CASH PROVIDED BY OPERATING ACTIVITIES (37,052) 52,798 Cash flows from investing activities: Net capital additions (14,182) (7,855) NET CASH USED IN INVESTING ACTIVITIES (14,182) (7,855) Cash flows from financing activities: Dividends paid (3,199) (9,139) Net intercompany receivable 55,552 (40,404) NET CASH USED IN FINANCING ACTIVITIES 52,353 (49,543) NET INCREASE (DECREASE) IN CASH 1,119 (4,600) Cash at beginning of year 3,814 4,933 Cash at end of year $ 4,933 $ 333 The accompanying notes are an integral part of these financial statements. SIEMENS PACESETTER, INC. NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. BASIS OF PRESENTATION Siemens Pacesetter, Inc. (the "Company"), a Delaware corporation, is engaged in the design, manufacture and sale of cardiac pacing systems. The Company is a wholly owned subsidiary of Siemens Corporation ("Siemens"). The accompanying financial statements have been prepared as if the Company had operated as an independent stand alone entity for the period presented. These financial statements exclude the assets, liabilities, revenues and expenses of Siemens Infusion Systems, Inc. (including its predecessor Minimed Technologies) and Siemens Infusion Systems, Ltd., a California limited partnership, both of which are affiliates of the Company but which are not engaged in the cardiac pacing business. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the more significant accounting policies followed by the Company in preparing these financial statements is as follows: REVENUES AND RECEIVABLES The Company sells its products primarily to hospitals and distributors, both domestically and internationally. Revenues and receivables are generally recorded when products are implanted in patients. The Company's sales are concentrated primarily in North America. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base and their geographic dispersion. The Company does not require collateral and maintains reserves for potential credit losses which historically have been consistent with management's expectations. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from three to eight years. Additions and betterments are capitalized. Maintenance and repairs are charged to expense as incurred. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as other income or expense. INTANGIBLE ASSETS AND AMORTIZATION Intangible assets, which arise principally from the acquisition of the Company's predecessor by Siemens in 1985, are recorded at cost, less accumulated amortization. The excess of cost over the fair value of net assets acquired at the date of acquisition is amortized over a period not exceeding 30 years. Other intangible assets, including licensing agreements, are amortized over the shorter of the term of the agreement or their estimated useful lives. Amortization is recorded using the straight-line method. Accumulated amortization totalled $32,434, and $35,731 at September 30, 1992 and 1993, respectively. The Company monitors its goodwill and other intangibles to determine whether any impairment of these assets has occurred. In making such determination with respect to goodwill, the Company evaluates the performance of the underlying entity which gave rise to such amount. With respect to other intangibles, the Company bases its determination on the performance of the related products. PROVISION FOR WARRANTY CLAIMS Provision for warranty costs are recorded at the time products are sold and are reviewed and adjusted by management periodically to reflect actual and anticipated experience. INCOME TAXES Siemens' consolidated income tax provision has generally been allocated to the Company as if the Company filed separate income tax returns. Income taxes have been determined under Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes", which requires that any deferred tax liability or asset be determined based upon the differences between the financial statement and tax bases of assets and liabilities as measured by enacted tax rates in effect in the years in which the differences are expected to reverse. The total tax expense is the amount of income taxes expected to be payable for the current year plus (or minus) the change from the beginning of the year in the deferred tax liability or asset established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities. In February 1992, the Financial Accounting Standards Boards released Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company expects to adopt this standard in fiscal 1994. The impact on the Company's financial statements which will result from the adoption of this standard has not been determined. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 3. INVENTORIES Inventories consist of the following: SEPTEMBER 30, 1992 1993 Raw materials $16,461 $15,456 Work in process 18,245 14,975 Consigned inventory 15,915 16,661 Finished goods 15,886 8,553 $66,507 $55,645 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: SEPTEMBER 30, 1992 1993 Programmers $26,452 $28,023 Test equipment 13,360 14,532 Computer equipment 9,976 12,902 Machinery and equipment 4,376 5,944 Furniture and fixtures 7,819 4,844 Tooling and molds 2,796 3,861 64,779 70,106 Less - Accumulated depreciation 38,965 46,729 $25,814 $23,377 Depreciation expense for the years ended September 30, 1992 and 1993 aggregated $9,873 and $10,298, respectively. 5. INCOME TAXES The provision for income taxes is as follows: SEPTEMBER 30, 1992 1993 Federal income taxes: Current provision $ 1,802 $ 13,454 Deferred provision (1,661) (374) State income taxes: Current provision 757 2,195 $ 898 $ 15,275 The differences between the provision for income taxes and income taxes computed using the U.S. federal income tax rate are as follows: SEPTEMBER 30, 1992 1993 Amount computed using the statutory rate $ (714) $ 13,642 Increase in taxes resulting from: State and other income taxes, net of federal benefit 500 1,466 Amortization of intangibles 703 588 Research and development credit (339) (876) Change in tax rates 347 Other permanent items 514 157 Other, net 234 (49) Provision for income taxes $ 898 $ 15,275 The significant components of the Company's deferred tax assets are as follows: SEPTEMBER 30, 1992 1993 Payroll and related items $ 3,959 $ 3,840 Warranties 1,780 1,909 Inventories 2,613 2,272 Pension 1,822 2,379 Accrued expenses 1,498 1,349 Other, net 1,102 1,399 TOTAL DEFERRED TAX ASSETS $ 12,774 $ 13,148 6. COMMITMENTS On August 26, 1992, the Company entered into a cross licensing agreement which requires royalty payments at varying rates on future sales of cardiac stimulation devices for a period of ten years (See Note 10). The Company has entered into employment and severance agreements with six key executive employees which expire at various dates through October 1998. The aggregate commitment for future salaries under these employment agreements is approximately $10,144. In November 1993, the Company established a supplemental executive retirement plan for the purposes of attracting and retaining key executives by providing selected executives with supplemental pension benefits. This plan also provides certain enhanced retirement benefits, based principally upon years of service, in the event of a sale of the Company prior to the executive's retirement. The Company leases its principal facility from a related party. In addition, the Company has entered into various other leases for certain facilities and equipment. Some leases require, in addition to rental payments, the payment of property taxes, and maintenance costs. Net rental expense under all operating leases for the years ended September 30, 1992 and 1993 were $3,795 and $3,780, respectively. Total minimum rental payments in each of the following five fiscal years are as follows: 1994 $ 3,788 1995 3,774 1996 3,703 1997 3,475 1998 3,398 Thereafter 3,329 7. TRANSACTIONS WITH PARENT The Company is allocated an amount for Siemens' general corporate expenses. In addition, the Company is charged for certain other amounts incurred by Siemens that directly benefit or are specifically related to the Company, such as insurance premiums, employee benefits costs, tax services and legal fees. Corporate charges totalled $1,857 and $2,220 for the years ended September 30, 1992 and 1993, respectively. In the opinion of management, the allocation methods used to allocate general corporate and other expense are reasonable and adequate, but not excessive, as compared to the services provided. The Company both purchases and sells cardiac pacing devices to an affiliate in Europe. At September 30, 1992 and 1993, the Company has amounts due from this affiliate of $5,345 and $5,923, respectively. Sales made to this affiliate for the years ended September 30, 1992 and 1993 aggregated $32,666 and $30,584, respectively. In addition, the Company had purchases of $2,254 and $2,910 for the years ended September 30, 1992 and 1993, respectively, from the affiliate. Pursuant to an intercompany tax sharing agreement, the Company pays Siemens an amount equal to the Company's liability on a separate return basis. The Company also participates in Siemens' centralized cash management system. Under this system, cash received from the Company's operations is transferred to Siemens' centralized cash accounts and cash disbursements are funded from the centralized accounts. 8. EMPLOYEE BENEFIT PLANS SIEMENS U.S. DEFINED BENEFIT PLAN The Company has a pension plan for its employees. Employees are included in Siemens Retirement Plan and, accordingly, $1,657 and $1,554 was allocated to the Company by Siemens for its share of salaried employees' pension expense for the years ended September 30, 1992 and 1993, respectively. At September 30, 1992 and 1993 accrued pension costs relating to the Company's participation in the pension plan were $4,258 and $5,812, respectively. This amount is reported as other noncurrent liabilities in the accompanying balance sheet. DEFINED CONTRIBUTION PLAN The Company also maintains a defined contribution plan for the benefit of its employees in the United States. This plan enables employees to contribute up to the maximum limits allowed by Internal Revenue Code Section 401(k). The Company also matches a portion of the employee's contribution. Such contributions are made in accordance with the provisions of the plan. The Company's contribution amounted to $842 and $885 during the years ended September 30, 1992 and 1993, respectively. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Statements." This Statement requires companies to disclose an estimate of the fair value of financial instruments, both on and off balance sheet, if it is practical to do so. Fair value is defined as the amount at which an instrument could be exchanged in a current transaction. The recorded amounts of the Company's financial instruments, principally cash, accounts receivable and accounts payable, approximate their fair values. 10. LEGAL MATTERS On August 26, 1992, a patent infringement dispute with a publicly held company was settled. The settlement resulted in the Company making a $50 million nonrefundable payment, a $25 million payment which is refundable under specific conditions and payment of royalties based upon future sales of pacemakers beginning August 1, 1992 for a period of ten years. The Company is a defendant in a class action lawsuit filed by recipients of certain of its cardiac pacing products. The matter is currently in pretrial discovery. Management is unable to predict the ultimate outcome of this action or its effect on the Company's results of operations and financial position. In February 1994, Siemens Medical System, Inc., the immediate parent of the Company, entered into a Consent Order with the United States Food and Drug Administration ("FDA"). Pursuant to its terms, the Company is obligated to correct all deficiencies, if any, in the area of good manufacturing practices ("GMP") alleged by the FDA since January 1, 1992, to comply with such GMP regulations, and to certify to the FDA the actions taken to ensure such compliance. No fines, penalties or recalls were imposed as a result of this action. The certification called for by the Consent Order was submitted on April 18, 1994. Management does not believe the ultimate resolution of this matter will have a material adverse effect on the Company's financial position or results of operations. The Company is a defendant in various other lawsuits which are normal to the nature of its business. Management believes that the ultimate resolution of these matters will not have a materially adverse effect on the Company's financial position or results of operations. 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the year ended September 30, 1992, the Company paid $1,742 and $21,899 for interest and income taxes, respectively. For the year ended September 30, 1993, the Company paid $3,390 and $2,559 for interest and income taxes, respectively. 12. SUBSEQUENT EVENTS In January 1994, the Company's principal manufacturing facility in Sylmar, California was damaged in the Northridge earthquake. The Company has filed insurance claims which are subject to the insurer's audit. In October 1993, the Company agreed to purchase certain real property and buildings located near its principal facility from an affiliated company. The total purchase price approximated $9 million. Subsequent to September 30, 1993, Siemens Medical Systems, Inc. retained an investment advisor in order to pursue the sale of the Company. On June 26, 1994 an agreement was reached to sell the Company subject to the fulfillment of certain conditions precedent to the closing, including approval by certain regulatory authorities. NON-US OPERATIONS OF SIEMENS CARDIAC SYSTEMS US GAAP FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 1994 REPORT OF INDEPENDENT AUDITORS To the management and owners of Siemens Non-US Cardiac Systems operations and Affiliates. We have audited the accompanying combined balance sheet of Siemens Non-US Cardiac Systems operations and Affiliates (the Company) as of September 30, 1994, and the related combined statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 1994, and the result of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. December 16, 1994 \s\ Coopers & Lybrand NON-US OPERATIONS OF SIEMENS CARDIAC SYSTEMS COMBINED BALANCE SHEET ($ IN THOUSANDS) September 30, 1994 ASSETS Cash $ 1,038 Accounts receivable, net 42,621 Inventories, net 30,848 Due from affiliates 1,030 Deferred income taxes 3,754 Prepaid expenses 430 Total current assets 79,721 Property and equipment, net 6,734 Other assets 47 TOTAL ASSETS $ 86,502 LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY Accounts payable - to affiliates $ 12,399 Accounts payable - other 3,586 Accrued expenses 6,908 Notes payable - Siemens 3,401 Current deferred income taxes 1,067 Total current liabilities 27,361 Pension and employee termination obligations 0 Deferred income taxes 2,883 Common stock 1,684 Division equity and paid in capital 66,157 Cumulative translation adjustment - 11,583 Total shareholder's and division equity 56,258 TOTAL LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY $ 86,502 COMBINED STATEMENT OF INCOME ($ IN THOUSANDS) Year ended September 30, 1994 Net sales $152,906 Cost of products sold 74,940 Gross profit 77,966 Operating expenses Selling expenses 37,638 General and administrative 9,047 Research and development 9,282 Royalties 5,486 Other expense (income) 15 Total operating expenses 61,468 Operating income 16,498 Interest expense (income) 952 Income before income taxes 15,546 Provision for income taxes 5,575 NET INCOME $ 9,971 COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS) Year ended September 30, 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,971 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 2,790 Provision for deferred income taxes 1,321 Changes in assets and liabilities: Accounts receivable, net 10,856 Inventories, net -2,927 Other -9,896 Accounts payable and accrued expenses -2,846 Net cash provided by operating activities 9,269 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures -2,640 Net cash (used) for investing activities -2,640 CASH FLOWS FROM FINANCING ACTIVITIES: Decrease / increase in amounts due parent -6,520 Net cash (used in) financing activities -6,520 Effect of exchange rate changes on cash 65 Net increase (decrease) in cash 174 Cash at beginning of year 864 Cash at end of year $ 1,038 NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Company's primary business is the design, manufacture and sale of cardiac pacemakers. The accompanying financial statements include the accounts of the following entities which comprise the Non-US Operations of the Company: - Siemens Cardiac Systems Business in Sweden, a division of Siemens-Elema AB. - Siemens Cardiac Systems Business in Germany, a part of the Siemens Medical Division of Siemens AG. - Siemens Cardiac Systems Business in Italy, a part of Siemens S.P.A. - Siemens Pacesetter S.A. in France, a wholly-owned subsidiary of Siemens S.A. - Siemens Cardiac Systems Business in Spain, a part of Siemens S.A.. - Medical Production Ltd., in the United Kingdom, a subsidiary of Siemens plc. The combined financial statements also include sales of affiliated cardiac systems products in the United Kingdom, Denmark, Belgium, Finland, Austria, Netherlands, Portugal, Venezuela, Croatia and South Africa, and will in the following be referred to as "the Company" or "Non-US Operations". The accompanying combined financial statements have been prepared as if the Non-US Operations of the Company, described above, had operated as a stand alone entity for the period presented. These combined financial statements include substantially all of the combined assets, liabilities, revenues and expenses of certain divisions and subsidiaries of Siemens which comprise Siemens' Non-US Cardiac Pacing Operations. All material transactions between entities included in the combined financial statements have been eliminated. As further discussed in note 10, in connection with the sale of the business (see note 14), certain employee related benefit liabilities, that are the direct responsibility of Siemens-Elema AB and certain other parent companies, have been excluded from liabilities in this presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the more significant accounting policies followed by the Non-US Operations in preparing these financial statements is as follows: Revenues and receivables The Non-US Operations sell their products primarily to hospitals and distributors. Sales are concentrated primarily in Europe and Japan. Revenues and receivables are generally recorded when products are implanted in patients. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Non-US Operations' customer base and their dispersion across many different geographies. The Non-US Operations do not require collateral and maintain reserves for potential credit losses which historically have been consistent with management's expectations. Inventories Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Property and equipment Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to eight years. Additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the useful lives of the assets or the term of the lease. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as other income or expense. Provision for warranty claims Provision for warranty costs are recorded at the time products are sold and are reviewed and adjusted by management periodically to reflect actual and anticipated experience. Translation of currency Each of the divisions, parts of divisions and subsidiaries that comprise the Non-US Operations operate in their local currency environment. Assets and liabilities are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation gains and losses are accumulated in a separate component of Stockholders' Equity. Foreign currency transaction gains and losses affecting cash flows are included in current earnings. Transaction losses totalled $ 1,251 in 1994, and the gains amounted to $ 924. Income taxes Income taxes have been determined under Statement of Financial Accounting Standards No. 96, "Accounting of Income Taxes" which requires that any deferred tax liability or asset be determined based upon the differences between the financial statement tax basis of assets and liabilities as measured by enacted tax rates in effect when these differences are expected to reverse. The total tax expense is the amount of income taxes expected to be payable for the current year plus (or minus) the change from the beginning of the year in the deferred tax liability or asset established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities. In February 1992, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The impact of this standard on the Operations' results of operations and financial position is not expected to be material. The Non-US Operations have operated as various divisions, parts of divisions and subsidiaries of Siemens AG and its subsidiaries. Generally, no allocations of tax have been made to the entities comprising most of the Non-US Operations. Therefore, the income tax provision has been calculated as if the divisions had filed separate tax returns. Resulting current income taxes payable have been recorded as division equity except for certain subsidiaries which are direct taxpaying entities. Research and development Research and development costs are expensed as incurred and amounted to $ 9,282 for the year ended September 30, 1994. Cash flow information Cash paid for interest and income taxes was $ 889 and $ 5,766, respectively, for the year ended September 30, 1994. Substantially all of the Non-US Operations cash payments for income taxes are made to the parent companies in the various countries. Carve-out assumptions The Company has not historically accounted for the divisions and parts of divisions in its Non-US Operations separately. Generally, all assets, liabilities, revenue and expense associated with these divisions have been identified and reported herein. The components of beginning equity and intercompany balances cannot be identified as there has never been any specific identification of these amounts with the divisions. These amounts are aggregated and reported as division equity. Generally, the divisions have no debt and no related interest expense. This is consistent with the historical trend that most of the divisions have generated cash rather than used cash. One of the divisions has been a historical user of capital and pays interest to its parent company based on its working capital needs. This allocation is reported as interest expense of $ 454. The hypothetical debt is included in division equity. Debt and related interest and equity of subsidiary companies (rather than divisions) is reported herein as it specifically relates to the subsidiary companies. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following: September 30, 1994 Accounts receivable 46,190 Less - allowance for doubtful accounts - 3,569 $ 42,621 4. INVENTORIES Inventories consist of the following: September 30, 1993 Raw materials $ 5,872 Work in process 5,684 Consigned inventory 9,833 Finished goods 11,739 Less - obsolescence reserve - 2,280 $ 30,848 Consigned inventory consists of finished goods held by hospitals. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following: September 30, 1993 Programmers $ 5,369 Test equipment 3,484 Computer equipment 4,355 Machinery and equipment 4,887 Furniture and fixtures 1,760 Tooling and molds 1,213 21,068 Less - accum. depreciation & amortization - 14,336 $ 6,734 6. INCOME TAXES The provision for income taxes consists of the following: Current 5,388 Deferred 187 5,575 The significant components of deferred tax assets and liabilities were as follows: Deferred tax Deferred tax assets liabilities Temporary differences 1,067 Statutory deferral 2,847 Warranty and accruals 92 Intercompany profit elimination 3,662 Other 36 3,754 3,950 For presentation purposes, deferred tax assets and liabilities are offset within taxing jurisdictions but not between jurisdictions. Division equity and retained earnings of the Operations are generally considered to be permanently reinvested except in certain countries where lack of dividends would result in additional taxes. If earnings were remitted assuming a U.S. parent, the remittance would be substantially free of additional U.S. tax assuming the foreign tax credits generated could be utilized in the tax return of the parent. 7. RENTAL AND LEASE COMMITMENTS The approximate amounts of noncancellable operating lease commitments with terms of greater than one year, principally for the rental of buildings in France and the United Kingdom are as follows: Fiscal year ending September 30 1994 $ 690 1995 676 1996 596 1997 552 1998 445 Thereafter 445 $ 3,404 8. ACCRUED EXPENSES Accrued liabilities consist of the following: Licence fees $ 1,530 Employee withholding taxes 329 Warranty provision 1,028 Social fees 275 Commissions 139 Other 3,607 $ 6,908 9. TRANSACTIONS WITH PARENT AND AFFILIATES In determining the operating expenses of the entities included herein which are not stand alone entities, allocations were made of the general corporate expenses of the respective parent companies and divisions based on employees, sales and square footage as appropriate. These allocations comprise most of the operating expenses. These charges included $ 1,115 for rent of facilities. Most of the Non-US Operations are divisions of companies within their respective countries which take part in a cash management system administered by the parent company in each country. As such, the divisions have no cash and payables, and receivables are settled through division equity. Accounts payable in the financial statements consist generally of invoices which have not been forwarded to the system for payment. Accrued expenses are generally estimates of the amounts which remain unpaid through the system. From the division's perspective, these amounts are settled when forwarded to the payment system. Included in net sales is approximately $ 4,000 of sales (2.6 % of total sales) made through Siemens affiliates whose operations are not included in this presentation. These affiliates generally mark up the product additionally for sales to third parties. The additional revenues, costs and effect of any inventory held at September 30 are not reflected in these financial statements. The most significant of these arrangements involves sales to affiliates in India, Argentina, Norway and in the Czech Republic. The French subsidiary has until September 30, 1994, participated in a central foreign exchange clearing house sponsored by Siemens AG. The clearing house has allowed for short term borrowings at interest rates which range from 7.4 % to 7.8 %. The amount related to these borrowings are presented in the financial statement as "Notes payable - Siemens". The Company both purchases and sells cardiac pacing devices to an affiliate in the United States. At September 30, 1994, the Company owed $ 12,333 to this affiliate. Sales made to this affiliate for the year ended September 30, 1994 aggregated $ 233. In addition, the Company had purchases of $ 39,990 from this affiliate. 10. EMPLOYEE BENEFIT PLANS The Non-US Operations participate in various defined benefit and government sponsored plans. The benefits are generally based on years of service and employees' compensation. The required contributions vary with the legal requirements in each jurisdiction. The Non-US Operations' largest employee group is located in Sweden and participates in the Siemens-Elema AB defined benefit pension plan. Net allocated pension cost for the year ended September 30, 1994 was $ 560. The net pension cost allocated to Cardiac Systems Solna by Siemens-Elema AB which compares to $319 if pension expenses were determined in accordance with FAS 87. The plan is non-contributory and provides benefits based on salary levels and length of service. A portion of the benefits are paid up and fully insured and are therefore excluded from the analysis. The remaining benefits are the responsibility of Siemens-Elema AB, and although insured with the Pension Guarantee Mutual Insurance Company, are payable out of the assets of the company. In connection with the sale of the Non-US Operations, see note 14, the obligation of Siemens-Elema AB and the other parent companies of the Non-US Operations are to be assumed by the Buyer. In that connection, Siemens-Elema AB provided funds of approximately $7 million to the Buyer for this and certain other employee related liabilities assumed by the Buyer. Given that the Non-US Operations are only participants in the aforementioned defined benefit plans of their parent companies, i.e. multiemployer plans, and the parent company obligations were paid by Siemens-Elema AB to the buyer in connection with the sale, unfunded pension and employee termination obligations of approximately $5 million and approximately $2 million of certain other employee related obligations are not recorded in these financial statements of the Non-US Operations of Siemens Cardiac Systems at September 30, 1994. The Swedish company's pension expense is related to multiemployer pension plans agreed upon in union agreements for blue- and whitecollar employees. These could also be supplementary plans for senior management personnel. The company fulfills its obligations regarding the plan by providing for the liability in the accounting in combination with a credit insurance with FPG (a pension guarantee, mutual insurance company). The company is responsible for the pension commitment until the final payment to the employee has been made. The administrative procedure of pension payment is handled by PRI (Pension Registration Institute), which levies the corresponding amounts from the employer. PRI also calculates the pension liability each year. In order to use this pension plan system, the company must be granted the credit insurance with FPG. The transfer of the pension liability to another company is only permitted after an approval by FPG. Approximately 70 employees are participants of two other defined benefit pension plans. 11. COMMITMENTS AND CONTINGENCIES There are no material law suits pending involving the Non-US Operations. On August 26, 1992, the Company has entered into a cross licensing agreement which requires royalty payments at varying rates on future sales of cardiac stimulation devices for a period of ten years. The French subsidiary has an obligation not to terminate employees over 50 years old. In the event of termination, the Company is obligated to pay the government FF 400,000 or approximately $ 75,700 per employee. The French subsidiary is committed to deliver pacemakers at a fixed price for a fixed period. It is not anticipated that any losses will be incurred resulting from this commitment. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CURRENCY ADJUSTMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Statements". This Statement requires companies to disclose an estimate of the fair value of financial instruments, both on and off balance sheet, if it is practical to do so. Fair value is defined as the amount at which an instrument could be exchanged in a current transaction. The recorded amounts of the Non-US Operations' financial instruments, approximate the fair values. 13. DIVISION EQUITY The following schedule reflects the changes in division equity for the year ended September 30, 1994: Division equity September 30, 1993 48,804 Reclassification of employee pension obligations, see note 10 7,138 Net income 9,971 Advances (repayments) - 13,658 Net assets of entities added in 1994 955 Change in cumulative translation adjustment 3,048 Division equity September 30, 1994 $ 56,258 14. SUBSEQUENT EVENT The Non-US Operations along with the US Operations were sold by Siemens AG to the US company St. Jude Medical Incorporated, effected on September 30, 1994. Solna, December 16, 1994 SIEMENS-ELEMA AB /s/ C-G Myrin C-G Myrin Managing Director EUROPEAN OPERATIONS OF SIEMENS CARDIAC SYSTEMS US GAAP FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1993 AND 1992 REPORT OF INDEPENDENT ACCOUNTANTS July 25, 1994 To the management and owners of Siemens Cardiac Systems European operations and Affiliates In our opinion, the accompanying combined balance sheets and the related combined statements of income, retained earnings and of cash flows present fairly, in all material respects, the financial position of Siemens Cardiac Systems European operations and Affiliates (the Company), at September 30, 1992 and 1993, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards which requiare that the audit is planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statments, assessing the accounting principles used and significant estimates made by management, and evaluation the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. \s\ Coopers & Lybrand EUROPEAN OPERATIONS OF SIEMENS CARDIAC SYSTEMS COMBINED BALANCE SHEET ($ IN THOUSANDS) Sept. 30, Sept. 30, 1993 1992 ASSETS Cash $ 864 $ 551 Accounts receivable, net 48,969 53,392 Inventories, net 25,602 39,066 Due from affiliates 1,850 4,342 Deferred income taxes 2,563 3,211 Prepaid expenses 316 668 Total current assets 80,164 101,230 Property and equipment, net 6,181 6,867 Other assets 60 TOTAL ASSETS $86,405 $108,097 LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY Accounts payable - to affiliates $ 5,662 $ 5,540 Accounts payable - other 2,780 6,373 Accrued expenses 14,274 16,026 Notes payable - Siemens 6,952 1,966 Current deferred income taxes 337 138 Total current liabilities 30,005 30,043 Pension and employee termination obligations 5,970 6,792 Deferred income taxes 1,626 1,356 Common stock 1,684 1,684 Division equity and paid in capital 61,750 64,592 Cumulative translation adjustment - 14,630 3,630 Total shareholder's and division equity 48,804 69,906 TOTAL LIABILITIES, SHAREHOLDER'S AND DIVISION EQUITY $ 86,405 $108,097 See accompanying notes COMBINED STATEMENT OF INCOME ($ IN THOUSANDS) Year Year ended ended Sept. 30, Sept. 30, 1993 1992 Net sales $140,159 $145,109 Cost of products sold 66,479 73,924 Gross profit 73,680 71,185 Operating expenses Selling expenses 31,635 39,342 General and administrative 8,915 10,518 Research and development 10,285 9,460 Royalties 4,200 2,744 Other expense (income) 2,742 - 228 Total operating expenses 57,777 61,836 Operating income 15,903 9,349 Interest expense 1,911 1,321 Interest income - 1,063 - 987 Income before income taxes 15,055 9,015 Provision for income taxes 4,984 4,215 NET INCOME $ 10,071 $ 4,800 See accompanying notes COMBINED STATEMENT OF CASH FLOWS ($ IN THOUSANDS) Year ended Year ended Sept. 30, Sept. 30, 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $10,071 $ 4,800 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 2,641 3,368 Provision for deferred income taxes 1,680 - 20 Loss on sale of assets 98 35 Changes in assets and liabilities: Accounts receivable, net - 5,301 961 Inventories, net 1,697 2,121 Other assets - 60 34 Other 189 - 3 Accounts payable and accrued expenses 4,478 2,079 Dividends payable 131 20 Due to affiliates - 4,239 1,582 Other liabilities 497 253 Net cash provided by operating activities 11,882 15,230 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - 4,166 - 3,957 Proceeds from sales of assets 248 40 Net cash (used) for investing activities - 3,918 - 3,917 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings - notes payable Siemens 11,075 379 Repayments - notes payable Siemens - 5,921 - 385 Dividends paid - 133 - 103 Decrease / increase in amounts due parent - 12,645 - 11,152 Net cash (used in) financing activities - 7,624 - 11,261 Effect of exchange rate changes on cash - 27 - 43 Net increase in cash 313 9 Cash at beginning of year 551 542 Cash at end of year $ 864 $ 551 See accompanying notes NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Company's primary business is the design, manufacture and sale of cardiac pacemakers. The accompanying financial statements include the accounts of the following entities which comprise the European Operations of the Company: - Siemens Cardiac Systems Business in Sweden, a division of Siemens-Elema AB. - Siemens Cardiac Systems Business in Germany, a part of the Siemens Medical Division of Siemens AG. - Siemens Cardiac Systems Business in Italy, a part of Siemens S.P.A. - Siemens Pacesetter S.A. in France, a wholly-owned subsidiary of Siemens S.A. - Siemens Cardiac Systems Business in Spain, a part of Siemens S.A.. - Medical Production Ltd., in the United Kingdom, a subsidiary of Siemens plc. The combined financial statements also include sales of affiliated cardiac systems products in the United Kingdom, Denmark, Belgium, Finland, Austria, Netherlands, Norway, Portugal, Venezuela and South Africa, and will in the following be referred to as "the Company" or "European Operations". The accompanying combined financial statements have been prepared as if the European Operations of the Company, described above, had operated as a stand alone entity for the periods presented. These combined financial statements include substantially all of the combined assets, liabilities, revenues and expenses of certain divisions and subsidiaries of Siemens which comprise Siemens' European Cardiac Pacing Operations. All material transactions between entities included in the combined financial statements have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the more significant accounting policies followed by the European Operations in preparing these financial statements is as follows: Revenues and receivables The European Operations sell their products primarily to hospitals and distributors. Sales are concentrated primarily in Europe and Japan. Revenues and receivables are generally recorded when products are implanted in patients. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the European Operations' customer base and their dispersion across many different geographies. The European Operations do not require collateral and maintain reserves for potential credit losses which historically have been consistent with management's expectations. Inventories Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Property and equipment Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to ten years. Additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the useful lives of the assets or the term of the lease. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as other income or expense. Provision for warranty claims Provision for warranty costs are recorded at the time products are sold and are reviewed and adjusted by management periodically to reflect actual and anticipated experience. Translation of currency Each of the divisions, parts of divisions and subsidiaries that comprise the European Operations operate in their local currency environment. Assets and liabilities are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation gains and losses are accumulated in a separate component of Stockholders' Equity. Foreign currency transaction gains and losses affecting cash flows are included in current earnings. Transaction losses totalled $ 245 in 1993 and transaction gains of $ 476 occurred in 1992. Income taxes Income taxes have been determined under Statement of Financial Accounting Standards No. 96, "Accounting of Income Taxes" which requires that any deferred tax liability or asset be determined based upon the differences between the financial statement tax basis of assets and liabilities as measured by enacted tax rates in effect when these differences are expected to reverse. The total tax expense is the amount of income taxes expected to be payable for the current year plus (or minus) the change from the beginning of the year in the deferred tax liability or asset established for the expected future tax consequences resulting from differences in the financial reporting and tax bases of assets and liabilities. In February 1992, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The European Operations expect to adopt this standard in fiscal 1994. The impact of this standard on the Operations' results of operations and financial position is not expected to be material. The European Operations have operated as various divisions, parts of divisions and subsidiaries of Siemens AG and its subsidiaries. Generally, no allocations of tax have been made to the entities comprising most of the European Operations. Therefore, the income tax provision has been calculated as if the divisions had filed separate tax returns. Resulting current income taxes payable have been recorded as division equity except for certain subsidiaries which are direct taxpaying entities. Research and development Research and development costs are expensed as incurred and amounted to $ 10,285 for 1993 and $ 9,460 for 1992. Cash flow information Cash paid for interest and income taxes was $ 1,931 and $ 3,250, respectively, for the year ended September 30, 1993, and $ 1,271 and $ 4,172 respectively for the year ended September 30, 1992. Substantially all of the European Operations cash payments for income taxes are made to the parent companies in the various countries. Carve-out assumptions The Company has not historically accounted for the divisions and parts of divisions in its European Operations separately. Generally, all assets, liabilities, revenue and expense associated with these divisions have been identified and reported herein. The components of beginning equity and intercompany balances cannot be identified as there has never been any specific identification of these amounts with the divisions. These amounts are aggregated and reported as division equity. Generally, the divisions have no debt and no related interest expense. This is consistent with the historical trend that most of the divisions have generated cash rather than used cash. One of the divisions has been a historical user of capital and pays interest to its parent company based on its working capital needs. This allocation is reported as interest expense of $ 1,454 in 1993 and $ 890 in 1992. The hypothetical debt is included in division equity. Debt and related interest and equity of subsidiary companies (rather than divisions) is reported herein as it specifically relates to the subsidiary companies. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following: Sept. 30, 1993 Sept. 30, 1992 Accounts receivable $ 52,304 $ 57,101 Less - allowance for doubtful accounts - 3,335 -3,709 $ 48,969 $ 53,392 Certain accounts receivable expected to be collected in greater than one year have been discounted to their present value. At September 30, 1993 and 1992, receivables are presented net of discounts of $ 1,012 and $ 957 respectively. During 1993 and 1992 $ 957 and $ 856 of interest income was recognized respectively. 4. INVENTORIES Inventories consist of the following: Sept. 30, 1993 Sept. 30, 1992 Raw materials $ 3,364 $ 6,847 Work in process 3,114 5,549 Consigned inventory 9,707 9,353 Finished goods 11,705 21,829 Less - obsolescence reserve - 2,288 - 4,512 $ 25,602 $ 39,066 Consigned inventory consists of finished goods held by hospitals. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following: Programmers $ 5,748 $ 6,480 Test equipment 3,253 3,895 Computer equipment 4,769 5,814 Machinery and equipment 4,817 5,570 Furniture and fixtures 1,091 1,444 Tooling and molds 1,042 1,265 20,720 24,468 Less - accum. depreciation & amortization - 14,539 $ - 17,601 $ 6,181 $ 6,867 6. INCOME TAXES The provision (benefit) for income taxes consists of the following: 1993 1992 Current $ 3,304 $ 4,210 Deferred 1,680 5 $ 4,984 $ 4,215 The significant components of deferred tax assets and liabilities were as follows:
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 SIEMENS PACESETTER AND AFFILIATES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS Effective September 30, 1994, St. Jude Medical, Inc. acquired substantially all of the assets (the "Acquisition") of the worldwide cardiac rhythm management business of Siemens AG, pursuant to two asset purchase agreements: (i) the Asset Purchase Agreement dated as of June 26, 1994 among St. Jude Medical, Inc. (the "Company"), SJM Acquisition Corp., Siemens-Pacesetter, Inc. and Siemens Medical Systems, Inc., and (ii) the [Non-U.S.] Asset Purchase Agreement dated as of June 26, 1994 among the Company, St. Jude Medical International, Inc. and Siemens-Elema AB (collectively, "Pacesetter"). The Acquisition consisted of the tangible and intangible assets, properties, rights and goodwill of Siemens-Pacesetter, Inc. and the Cardiac Systems Division of Siemens-Elema AB used in their cardiac rhythm management business, excluding cash and certain other assets. In consideration for the Acquisition, the Company paid $524.3 million, of which $13.0 million was placed into an escrow account pending final adjustments based on the net book value of the net assets transferred to the Company. The terms of the Acquisition were the result of an arms-length negotiation between the parties, and the Acquisition will be accounted for as a purchase. The accompanying unaudited pro forma combined financial statements were prepared as a result of the purchase by the Company of Pacesetter. These unaudited pro forma combined financial statements have been included as required by the rules of the Securities and Exchange Commission ("SEC"). Such pro forma financial statements do not purport to be indicative of the results of future combined operations. The pro forma combined financial statements are based upon the historical financial statements of the Company and Pacesetter and should be read in conjunction with those historical financial statements as they appear elsewhere in this filing or previous filings with the SEC. The unaudited pro forma combined balance sheet has been omitted because the transaction was recorded in the Company's September 30, 1994 balance sheet. The unaudited pro forma combined statements of income for the year ended December 31, 1993 (the Company) and September 30, 1993 (Pacesetter) and for the nine months ended September 30, 1994 present the pro forma statements of income of the Company combined with Pacesetter, assuming the acquisition had been consummated as of January 1, 1993. The pro forma combination of the Company and Pacesetter has been prepared under the purchase method of accounting. Therefore, the purchase price of $524.3 million has been allocated to the fair values of the net assets acquired. The excess purchase price over the fair value of net assets acquired has been recorded as goodwill in the accompanying pro forma financial statements and amortized over a period of twenty years. In connection with the acquisition and the allocation of the purchase price, $40.8 million of purchased research and development was charged against earnings in the fourth quarter of 1994 in accordance with generally accepted accounting principles. ST. JUDE MEDICAL, INC. AND SUBSIDIARIES AND SIEMENS PACESETTER INC. AND AFFILIATES (Dollars in thousands)
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 $103,724 (1)(25,737) $500,679 Cost of sales 48,807 76,892 56,788 (1)(17,218) 165,269 Gross profit 147,082 149,911 46,936 (8,519) 335,410 Selling, general and administrative 41,647 88,952 31,837 (2)3,080 165,516 Research and development 7,786 19,241 6,606 33,633 Goodwill amortization 0 0 0 (3)11,595 11,595 Total operating expenses 49,433 108,193 38,443 14,675 210,744 Operating profit 97,649 41,718 8,493 (23,194) 124,666 Interest income 10,365 1,805 (4)(9,587) 2,583 Interest expense 0 125 733 (5)8,017 8,875 Income before taxes 108,014 43,398 7,760 (40,798) 118,374 Income tax provision 30,784 16,950 2,783 (6)(15,005) 35,512 Net income $ 77,230 $ 26,448 $ 4,977 $ (25,793) $ 82,862
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. NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (1) Intercompany sales and cost of sales between the U.S. and Non-U.S. Siemens entities have been eliminated. (2) Represents the infrastructure costs related principally to the establishment of sales offices in Western Europe. (3) Represents the amortization expense related to the excess cost over net assets acquired. (4) The Company used $270 million of cash to fund a portion of the acquisition. This adjustment reflects the lost interest income on such funds. (5) The Company used $255 million of bank debt to fund the balance of the acquisition. This bank debt was reduced by the free cash flow. This adjustment represents the interest expense on the average debt balance. (6) Pacesetter income is generally taxed at a higher rate than the Company's previously existing business. The Company's effective tax rate was increased by 1.5 percentage points. Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. September 12, 1995 ST. JUDE MEDICAL, INC. By /s/ Stephen L. Wilson Stephen L. Wilson Vice President, Finance and CFO (Principal Financial and Accounting Officer)