-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oh67suXCN8sYjQXI7IAU0btaQroejsuPQD1vvGDELYOlHy2cGptfvHCyUSAaMAx6 VNu1cBajTrv4CvMrjTm8dw== 0000203077-96-000006.txt : 19960429 0000203077-96-000006.hdr.sgml : 19960429 ACCESSION NUMBER: 0000203077-96-000006 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960426 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: 96551883 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 AMENDMENT NO. 2 TO FORM 10-K ANNUAL REPORT [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 0-8672 ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive office) (612) 483-2000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS (Title of class) (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, or will not be contained, to the best of the Registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2.8 billion at March 8, 1996, when the closing sale price of such stock, as reported on the NASDAQ National Market System, was $40.75. The number of shares outstanding of the Registrant's Common Stock, $.10 par value, as of March 8, 1996, was 70,299,660 shares. Portions of the Annual Report to Shareholders for the year ended December 31, 1995, are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated March 27, 1996, are incorporated by reference in Part III. ------------ ============================================================================== ST. JUDE MEDICAL, INC. 1995 10-K PART I ITEM 1. BUSINESS GENERAL St. Jude Medical, Inc. ("St. Jude" or the "Company") designs, manufactures and markets medical devices and provides services for the cardiovascular segment of the medical device industry. The Company's products are distributed in more than 70 countries worldwide through a combination of direct sales personnel, independent manufacturers' representatives and distribution organizations. The main markets for the Company's products are the United States, Western Europe and Japan. Effective September 30, 1994, St. Jude acquired from Siemens AG substantially all the worldwide assets of its cardiac rhythm management operations ("Pacesetter"). The acquisition significantly expanded the Company's product offerings and provided a platform for potential further diversification of its business. The Company currently operates through three business units. The St. Jude Medical Division is responsible for the Company's heart valve disease management products including mechanical and tissue heart valves and annuloplasty rings. The Pacesetter Division is responsible for the Company's cardiac rhythm management products including bradycardia pulse generators, leads and programmers. The International Division is responsible for marketing, sales and distribution of the Company's and third party products in Europe, Africa and the Middle East. Typically, the Company's net sales are somewhat stronger in the first and second quarters and weaker in the third quarter. This results from patient tendency to defer, if possible, cardiac procedures during the summer months and from the seasonality of the domestic and Western European markets where summer vacation schedules normally result in fewer surgical procedures. Manufacturers' representatives randomly place large orders which can distort the net sales pattern noted above. In addition, new product introductions and regulatory approvals can modify the expected net sales pattern. In 1995 almost 63% of net sales were derived from pacemaker products, approximately 36% from heart valve products and the balance from cardiac assist products. In prior years the majority of net sales were derived from heart valve products. CARDIAC RHYTHM MANAGEMENT The Pacesetter Division is headquartered in Sylmar, California and has manufacturing facilities in Sylmar, Sweden and Scotland. Pacesetter pulse generators and leads treat patients with hearts that beat too slowly or irregularly; a condition known as bradycardia. Various models of bradycardia pulse generators and leads are produced by Pacesetter. Pulse generators can sense and produce impulses in both the upper and lower chambers of the heart, adapt to changes in heart rate and can be non-invasively programmed by the physician to adjust sensing, electrical pulse intensity, duration, rate and other characteristics. The pulse generator, generally referred to as a pacemaker, contains a lithium battery power source and electronic circuitry. It generates pacing pulses and monitors the heart's activity to sense abnormalities requiring correction. It is most often implanted pectorally just below the collarbone. The leads are insulated wires that carry the pulses to the heart and information from the heart back to the pacemaker. A pacemaker uses electrical currents equivalent to those in a healthy heart. In 1995 Pacesetter introduced a new platform of pacing systems called the Trilogy-TM- series. The series was an outgrowth of the highly successful Synchrony-Registered Trademark- platform circuitry and was designed with the philosophy of cardiac optimization. Trilogy-TM- has an ovoid shape, doubles memory, adds new diagnostic capabilities and in some versions has an automaticity feature. Microny-TM-, a single chamber pacemaker, which was the first pacemaker in the world to incorporate AutoCapture-TM-, was introduced in 1995 in international markets. The AutoCapture-TM- algorithm is capable of adjusting the pacemaker's output to provide the minimal amount of electrical impulse necessary to stimulate the heart and has an appropriate safety margin test on a beat by beat basis. Microny-TM- is the world's smallest pacemaker weighing only about 13 grams. The sensor is an accelerometer, a "ball in a cage" sensor which has excellent sensitivity to the intensity of the patient's body movement in determining the proper pacing rate. The Regency-TM- family of single chamber pacemakers, introduced in 1995, incorporates the AutoCapture-TM- feature and several advanced diagnostic capabilities. Pacesetter expects to release the Regency-TM- pacemaker in all international markets and to commence U.S. clinical trials in 1996. HEART VALVES The St. Jude Medical Division is headquartered in St. Paul, Minnesota and has manufacturing facilities in St. Paul, Puerto Rico, Canada and California. Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart's chambers. St. Jude offers both mechanical and tissue replacement heart valves and valve repair products. In 1996, the Company executed an agreement to provide services relating to allografts, cryopreserved human heart valves. The St. Jude Medical-Registered Trademark- mechanical heart valve is the most widely implanted valve in the world with over 650,000 valves implanted to date. In 1995, the Company introduced the SJM-Registered Trademark- Masters Series rotatable version of the mechanical heart valve which eases implantation in certain circumstances. The United States Food and Drug Administration ("FDA") approved the Masters Series for U.S. implantation in November 1995. In addition, the Company internationally markets the Toronto SPV-Registered Trademark- stentless tissue valve, the world's leading stentless tissue valve, and the SJM X-Cell-TM- bioprosthesis, a stented tissue valve. The Toronto SPV-Registered Trademark- is in domestic clinical trials. The Company executed an agreement in 1995 with Heartport, Inc. ("Heartport") to pursue less invasive heart valve surgery to repair or replace diseased heart valves. Under the agreement, St. Jude's heart valve prostheses will be used in combination with Heartport's proprietary Port-Access-TM- technology to perform less invasive heart valve surgery. In early 1996, Heartport received FDA authorization to commence U.S. clinical trials of its Port-Access-TM- mitral valve repair and replacement system. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves. In 1995, the Company executed a license agreement with Professor Jacques Seguin to manufacture and market an advanced semi-rigid annuloplasty ring. This SJM-Registered Trademark- Sguin annuloplasty ring can be used with conventional surgery and Heartport's Port-AccessTM technology. SUPPLIERS Until 1986 all pyrolytic carbon components for the mechanical heart valve were purchased from CarboMedics, Inc. ("CMI"). In 1986, the Company began selling mechanical heart valves internationally utilizing self-manufactured pyrolytic carbon coated components. In May 1991, the Company received FDA approval to domestically market the St. Jude Medical-Registered Trademark- mechanical heart valve as assembled with self-manufactured pyrolytic carbon coated components. Under an agreement with CMI, which covers the supply of pyrolytic carbon heart valve components for the mechanical heart valve, the Company must purchase a minimum of 20% of its needs through 1998 at negotiated prices. If CMI is unable or fails to perform under the agreement, the license permits the Company to self-manufacture its component requirements during the supply interruption. The agreement can be extended for additional one year terms after 1998 at the Company's option and prices the Company would pay in 1999 and beyond would be adjusted annually by a producer price index based formula established in the agreement. The Company purchases raw materials and other items from numerous suppliers for use in its products. The Company maintains sizeable inventories of up to three years of its projected requirements for certain materials, some of which are available only from a single vendor. The Company has been advised from time to time that certain of these vendors may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential products liability exposure. Some of these vendors have modified their positions and have indicated a willingness to either temporarily continue to provide product until such time as an alternative vendor or product can be qualified or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify such other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products. COMPETITION Within the medical device industry, competitors range from small start-up companies to companies with significant resources. The Company's customers consider many factors when choosing supplier partners including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. Market share can shift as a result of technological innovation, product recalls and product safety alerts. This emphasizes the need for the highest quality products and services. St. Jude expects the competition to continue to increase by using tactics such as consigned inventory, bundled product sales and reduced pricing. The Company is the world's leading manufacturer and supplier of mechanical heart valves. There are two other principal and several other smaller mechanical heart valve manufacturers. St. Jude has numerous competitors which sell significantly more tissue heart valves than the Company. Pacesetter is a technological leader in the bradycardia pacemaker market. Worldwide there are seven primary manufacturers and suppliers of bradycardia pacemakers, including the Company. One other company and Pacesetter account for well over half of the worldwide bradycardia pacemaker net sales. The Company has strong market share positions in all major developed markets. The cardiovascular segment of the medical device market is a dynamic market currently undergoing significant change due to cost of care considerations, regulatory reform, industry consolidation and customer consolidation. The ability to provide cost effective clinical outcomes is becoming increasingly more important for medical device manufacturers. MARKETING The Company sells its products directly to hospitals and distributor based organizations in the United States and throughout the world. No distributor organization or single customer accounted for more than 10% of 1995 net sales. In the United States, St. Jude sells directly to hospitals through an employee based sales organization for its heart valve products and a combination of independent manufacturers' representatives and an employee based sales organization for its pacemaker products. In Western Europe, the Company has an employee based sales organization selling in thirteen countries. Throughout the rest of the world the Company uses distributor based sales organizations. Payment terms worldwide are consistent with local practice. Orders are shipped as they are received and, therefore, no material back orders exist. RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain products and processes and to maintain the highest quality standards of existing products. The Company's research and development expenses were $68,970,000 (9.5% of net sales), $21,008,000 (5.8%) and $10,972,000 (4.3%) in 1995, 1994 and 1993, respectively. GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in some instances, by state and foreign governmental authorities. Under the Federal Food, Drug and Cosmetic Act (the "Act"), and regulations thereunder, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements, the most comprehensive of which requires the completion of an FDA approved clinical evaluation program and submission and approval of a pre-market approval ("PMA") application before a device may be commercially marketed. The Company's mechanical and tissue heart valves and certain pacemakers and leads are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads and the annuloplasty ring products are currently marketed under the 510(k) pre-market notification procedure of the Act. The FDA also regulates record keeping for medical devices and reviews hospital and manufacturers' required reports of adverse experiences to identify potential problems with FDA authorized devices. Aggressive regulatory action may be taken due to adverse experience reports. FDA device tracking and post-market surveillance requirements are expected to increase future regulatory compliance costs. Diagnostic-related groups ("DRG") reimbursement schedules regulate the amount the United States government, through the Health Care Financing Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient care of persons covered by Medicare. While the Company has been unaware of significant domestic price resistance directly as a result of DRG reimbursement policies, changes in current DRG reimbursement levels could have an adverse effect on its domestic pricing flexibility. In response to the U.S. government budget deficit and rising Medicare and Medicaid costs, several legislative proposals have been advanced which would restrict future funding increases for these programs. While it is impossible to predict the outcome of the policy debate, St. Jude believes it will increase the downward pricing pressure on health care products including the Company's products. St. Jude business outside the United States is subject to medical device laws in individual foreign countries. These laws range from extensive device approval requirements in some countries for all or some of the Company's products to requests for data or certifications in other countries. Generally, regulatory requirements are increasing in these countries. In the European Economic Union, efforts are underway to harmonize the regulatory systems. The Office of the Inspector General (the "OIG") of the United States Department of Health and Human Services ("HHS") is currently conducting an investigation regarding possible hospital submissions of improper claims to Medicare/Medicaid programs for reimbursement for procedures using cardiovascular medical devices that were not approved for marketing by the FDA at the time of use. Beginning in June 1994, approximately 130 hospitals received subpoenas from HHS seeking information with respect to reimbursement for procedures using cardiovascular medical devices (including certain products manufactured by the Company) that were subject to investigational exemptions or that may not have been approved for marketing by the FDA at the time of use. The subpoenas also sought information regarding various types of remuneration, including payments, gifts, stock and stock options, received by the hospital or its employees from manufacturers of medical devices. Civil and criminal sanctions may be imposed against any person participating in an improper claim for reimbursement under Medicare/Medicaid. The OIG's investigation and any related change in reimbursement practices may discourage hospitals from participating in clinical trials or from including Medicare and Medicaid patients in clinical trials, which could lead to increased costs in the development of new products. St. Jude believes it is too early to predict the possible outcome of this matter or when it will be resolved. There can be no assurance that the OIG's investigation or any changes in third-party payors' reimbursement practices will not materially adversely affect the medical device industry in general or the Company in particular. In 1995, HCFA, part of HHS, issued a regulation clarifying that certain medical devices subject to investigational requirements under the Act may qualify for reimbursement. In 1994 the predecessor organization to Pacesetter entered a consent decree which settled a lawsuit brought by the United States in U.S. District Court for the District of New Jersey. The consent decree which remains in effect indefinitely requires that Pacesetter comply with the FDA's Good Manufacturing Practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Pacesetter is obligated to pay certain costs of the inspections. In 1994 a state prosecutor in Germany began an investigation of allegations of corruption in connection with the sale of heart valves. As part of that investigation, the prosecutor seized documents from St. Jude's offices in Germany as well as documents from certain competitors' offices. In December 1995, the state prosecutor announced that the investigation is continuing and has been broadened to include other medical devices. Subsequently, the United States Securities and Exchange Commission issued a formal order of private investigation covering sales practices of St. Jude and other manufacturers in Germany. PATENTS AND LICENSES The Company's policy is to protect the intellectual property rights in its work on medical devices. Where appropriate, St. Jude applies for United States and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that its patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license or in process, will not be circumvented or invalidated. Further, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. The Company's principal patent covering its mechanical heart valve will expire in the United States in July 1998. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company. INSURANCE The medical device industry has historically been subject to significant products liability claims. Such claims could be asserted against the Company in the future for events not known to management at this time. Management has adopted risk management practices, including products liability insurance coverage, which management believes are prudent. The Company's former products liability insurance carrier is currently seeking to rescind its coverage of Pacesetter products for the period October 1, 1994, through December 31, 1995. Should the carrier prevail, the Company would be self-insured for Pacesetter products liability claims made during that period. St. Jude cannot predict the outcome of the dispute. See Item 3 "Legal Proceedings". California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company's earthquake and related business interruption insurance for its operations located in Los Angeles County, California does provide for limited coverage. There are several factors that preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company's manufacturing facilities, the impact of such an earthquake on the Company's California workforce and the infrastructure of the surrounding communities, and the extent, if any, of damage to the Company's inventory and work in process. While the Company's exposure to significant losses occasioned by a California earthquake would be partially mitigated by its ability to manufacture certain of the Pacesetter products at its Swedish manufacturing facility, any such losses could have a material adverse effect on the Company, the duration of which cannot be reasonably predicted. The Company is currently engaged in the expansion of manufacturing capabilities at its Swedish facility and is constructing a pacemaker component manufacturing facility in Arizona. Completion of these programs would further mitigate the adverse impact of a California earthquake. EMPLOYEES As of December 31, 1995, the Company had 2,315 full-time employees. It has never experienced a work stoppage as a result of labor disputes and none of its employees are represented by a labor organization, with the exception of the Company's Swedish employees. INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS The medical products and service industry is the single industry segment in which the Company operates. The Company's domestic and foreign net sales, operating profit and identifiable assets, and its export sales to unaffiliated third parties are described in Note 8 to the Consolidated Financial Statements on page 36 of the 1995 Annual Report to Shareholders and are incorporated herein by reference. The Company's foreign business is subject to such special risks as exchange controls, currency devaluation, dividend restrictions, the imposition or increase of import or export duties and surtaxes, and international credit or financial problems. Since its international operations require the Company to hold assets in foreign countries denominated in local currencies, many assets are dependent for their U.S. dollar valuation on the values of a number of foreign currencies in relation to the U.S. dollar. The Company may from time to time enter into purchase and sales contracts in the forward markets for various foreign currencies with the objective of protecting U.S. dollar values of assets and commitments denominated in foreign currencies. PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's 1995 financial statements and report of auditors are set forth below. These financial statements supercede the financial statements as filed by the Company on April 1, 1996, on Form 10-K/A. The only changes to the previously filed 10-K/A were to footnote 3 and footnote 11. REPORT OF MANAGEMENT - ------------------------------------------------------------------------------- The management of St. Jude Medical, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with generally accepted accounting principles and include amounts which reflect management's best estimates based on its informed judgement and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements. In the opinion of management, the Company's accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management's intention and authorization, that financial statements are prepared in accordance with generally accepted accounting principles, and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a strong budgeting system of control. St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and business conduct. This responsibility is reflected in the Company's business ethics policy. The adequacy of the Company's internal accounting controls, the accounting principles employed in its financial reporting and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent auditors and internal auditor meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work. /s/ Ronald A. Matricaria Ronald A. Matricaria CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ Stephen L. Wilson Stephen L. Wilson VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER REPORT OF INDEPENDENT AUDITORS - ------------------------------------------------------------------------------- Board of Directors St. Jude Medical, Inc. St. Paul, Minnesota We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. and subsidiaries at December 31, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MINNEAPOLIS, MINNESOTA February 5, 1996 CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------- Net sales $723,513 $359,640 $252,642 Cost of sales 222,796 100,956 61,342 - ----------------------------------------------------------------------- Gross profit 500,717 258,684 191,300 Selling, general and administrative expense 237,569 97,577 49,040 Research and development expense 68,970 21,008 10,972 Purchased research and development charge 40,800 - ----------------------------------------------------------------------- Operating profit 194,178 99,299 131,288 Other income (expense), net (6,615) 7,056 13,934 - ----------------------------------------------------------------------- Income before taxes 187,563 106,355 145,222 Income tax provision 58,145 27,121 35,579 - ----------------------------------------------------------------------- Net income $129,418 $ 79,234 $109,643 - ----------------------------------------------------------------------- Earnings per share: Primary $ 1.82 $ 1.13 $ 1.55 Fully diluted $ 1.81 $ 1.12 $ 1.55 - ----------------------------------------------------------------------- Cash dividends paid per share $ -- $ 0.20 $ 0.27 - ----------------------------------------------------------------------- Average shares outstanding: Primary 71,067,000 70,169,000 70,834,000 Fully diluted 71,543,000 70,516,000 70,863,000 - -----------------------------------------------------------------------
See notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31 1995 1994 - ---------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,438 $ 11,791 Marketable securities 152,615 125,177 Accounts receivable, less allowance 164,492 146,062 (1995 - $9,328, 1994 - $5,760) Inventories: Finished goods 79,638 59,534 Work in process 27,121 21,723 Raw materials 51,652 48,750 - ---------------------------------------------------------------------- Total inventories 158,411 130,007 Prepaid income taxes 15,930 4,448 Other current assets 15,268 16,597 - ---------------------------------------------------------------------- Total current assets 520,154 434,082 - ---------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 9,949 12,049 Buildings and improvements 44,160 42,200 Machinery and equipment 130,998 89,957 Construction in progress 19,315 12,811 - ---------------------------------------------------------------------- Gross property, plant and equipment 204,422 157,017 Less accumulated depreciation (48,174) (24,852) - ---------------------------------------------------------------------- Net property, plant and equipment 156,248 132,165 - ---------------------------------------------------------------------- OTHER ASSETS 339,532 353,651 - ---------------------------------------------------------------------- TOTAL ASSETS $1,015,934 $919,898 - ---------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 78,364 $ 42,143 Accrued income taxes 38,965 20,240 Accrued employee compensation and related taxes 44,684 32,377 Other accrued expenses 30,615 17,920 - ---------------------------------------------------------------------- Total current liabilities 192,628 112,680 - ---------------------------------------------------------------------- LONG-TERM LIABILITIES Long-term debt 120,000 255,000 - ---------------------------------------------------------------------- CONTINGENCIES - ---------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, par value $1.00 per share - 25,000,000 shares authorized; no shares issued Common stock, par value $.10 per share - 100,000,000 shares authorized; issued and outstanding 1995 - 69,991,700 shares; 1994 - 69,718,623 shares 6,999 6,972 Additional paid-in capital 31,782 25,947 Retained earnings 650,515 521,097 Cumulative translation adjustment 4,319 (2,484) Unrealized gain on available-for-sale securities 9,691 686 - ---------------------------------------------------------------------- Total shareholders' equity 703,306 552,218 - ---------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,015,934 $919,898 - ----------------------------------------------------------------------
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Common Stock --------------------- Additional Cumulative Unrealized Total Number of Paid-In Retained Translation Gain on Shareholders' Shares Amount Capital Earnings Adjustment Investments Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1992 71,276,319 $7,128 $ 58,455 $364,941 $(1,485) $ -- $429,039 - -------------------------------------------------------------------------------------------------------------------------------- Net income 109,643 109,643 Issuance of common stock upon exercise of stock options, net of taxes withheld 111,623 11 1,342 1,353 Tax benefit realized upon exercise of stock options 355 355 Cash dividends ( .27 per share) (18,786) (18,786) Purchase and retirement of common shares (1,766,550) (177) (35,062) (35,239) Translation adjustment (2,124) (2,124) - -------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1993 69,621,392 6,962 25,090 455,798 (3,609) -- 484,241 - -------------------------------------------------------------------------------------------------------------------------------- Net income 79,234 79,234 Issuance of common stock upon exercise of stock options, net of taxes withheld 97,231 10 634 644 Tax benefit realized upon exercise of stock options 223 223 Cash dividends ( .20 per share) (13,935) (13,935) Translation adjustment 1,125 1,125 Unrealized gain on investments, net of taxes 686 686 - -------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1994 69,718,623 6,972 25,947 521,097 (2,484) 686 552,218 - -------------------------------------------------------------------------------------------------------------------------------- Net income 129,418 129,418 Issuance of common stock upon exercise of stock options, net of taxes withheld 273,077 27 4,486 4,513 Tax benefit realized upon exercise of stock options 1,349 1,349 Translation adjustment 6,803 6,803 Unrealized gain on investments, net of taxes 9,005 9,005 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 69,991,700 $6,999 $31,782 $650,515 $ 4,319 $9,691 $703,306 - --------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $129,418 $ 79,234 $109,643 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 20,198 8,313 4,516 Amortization 20,102 7,816 4,458 Purchased research and development charge 40,800 Changes in operating assets and liabilities net of acquisition: Decrease (increase) in accounts receivable (18,662) (23,079) 718 Increase in inventories (21,846) (4,024) (5,972) Decrease (increase) in other current assets 1,643 (9,685) (1,920) Increase (decrease) in accounts payable and accrued expenses 37,273 7,193 (2,746) Increase (decrease) in accrued income taxes 19,969 (3,227) 7,061 Increase in prepaid and deferred income taxes (12,617) (14,408) (456) - ---------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 175,478 88,933 115,302 - ---------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment, net (42,961) (18,789) (16,422) Purchases of marketable securities (26,524) (88,426) (153,290) Proceeds from sale or maturity of marketable securities 13,500 306,360 81,630 Investments in companies, joint ventures and partnerships (3,701) (13,564) (12,253) Acquisition of Pacesetter 13,000 (524,300) Other investing activities 2,694 (7,686) (3,273) - ---------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (43,992) (346,405) (103,608) - ---------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from exercise of stock options 4,514 644 1,353 Cash dividends paid (13,935) (18,786) Common stock repurchased (35,239) Proceeds from the issuance of long-term debt 255,000 Repayment of long-term debt (135,000) - ---------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,486) 241,709 (52,672) - ---------------------------------------------------------------------------------- Effect of currency exchange rate changes on cash 647 567 (381) - ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,647 (15,196) (41,359) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,791 26,987 68,346 - ---------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,438 $ 11,791 $ 26,987 - ----------------------------------------------------------------------------------
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: St. Jude Medical, Inc. develops, manufactures and distributes medical device products with an emphasis on cardiac care products. The Company's products are sold in more than 70 countries. Principal products sold are prosthetic heart valves and pacemakers. The main markets for both products are the United States, Western Europe and Japan. In the United States, the Company uses a direct employee-based sales organization for its heart valve products and a combination of independent contractors and employee-based sales organizations for its pacemaker products. In Western Europe, the Company has a direct sales presence in thirteen countries. Throughout the rest of the world the Company uses distributor-based sales organizations. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of previously reported amounts have been made to conform with the current year presentation. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. ACCOUNTING PERIOD: The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest December 31. Fiscal years 1995, 1994 and 1993 consist of 52 weeks. TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the Company's foreign subsidiaries are translated at exchange rates in effect on reporting dates and differences due to changing exchange rates are recorded as "cumulative translation adjustment" in shareholders' equity. Income and expenses are translated at rates which approximate those in effect on transaction dates. CASH EQUIVALENTS: Cash equivalents, consisting of liquid investments with a maturity of three months or less when purchased, are stated at cost which approximates market. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Allowances are made for slow-moving, obsolete, unsalable or unusable inventories. STOCK OPTIONS: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options. Pro forma information regarding net income and earnings per share as calculated under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," will be disclosed in complete financial statements filed for fiscal years beginning subsequent to December 15, 1995. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment are stated at cost and are depreciated using the straight line method over their estimated useful lives ranging from three to 39 years. Accelerated depreciation is used by the Company for tax accounting purposes only. LONG-LIVED ASSETS: Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The Company will adopt FAS No. 121 which was issued in March 1995 in the first quarter of 1996 and, based on current circumstances, does not believe the effect of adoption will be material. REVENUE RECOGNITION: The Company's general practice is to recognize revenues from product sales as shipped and for services as performed. RESEARCH AND DEVELOPMENT: Research and development expense includes all expenditures for general research into scientific phenomena, development of useful ideas into merchantable products and continuing support and upgrading of various products. All such expense is charged to operations as incurred. EARNINGS PER SHARE: Primary and fully diluted earnings per share are computed by dividing net income for the year by the weighted average number of shares of common stock and common stock equivalents outstanding. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 ACQUISITIONS On September 30, 1994, the Company acquired substantially all of the Siemens AG worldwide cardiac rhythm management business ("Pacesetter") for $511,300. The acquisition was accounted for under the purchase accounting method. Goodwill is amortized on a straight line basis over 20 years. The results of Pacesetter's operations have been included in the consolidated results of operations from the date of acquisition. In conjunction with the acquisition, the Company recorded a non-cash pre-tax charge of $40,800 ($25,300, or $.36 per share, after tax) relating to that portion of the purchase price attributable to purchased research and development. The purchased research and development charge represents the appraised value of the in-process research and development that must be expensed under generally accepted accounting principles. Note 13 discusses the effects of the Pacesetter acquisition on the Company's reported results. NOTE 3 INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which was adopted in 1993 on a prospective basis. The statement requires use of the asset and liability approach for financial accounting and reporting for income taxes. The cumulative effect of the accounting change was not material. The components of income before taxes were as follows:
1995 1994 1993 - ------------------------------------------------------------ Domestic $169,567 $ 97,304 $140,303 Foreign 17,996 9,051 4,919 - ------------------------------------------------------------ Income before taxes $187,563 $106,355 $145,222 - ------------------------------------------------------------
The components of the income tax provision were as follows:
1995 1994 1993 - ------------------------------------------------------------ Current: Federal $43,093 $ 32,958 $21,682 State and Puerto Rico 11,178 9,898 12,400 Foreign 6,226 3,107 1,953 - ------------------------------------------------------------ Total current 60,497 45,963 36,035 - ------------------------------------------------------------ Deferred: Prepaid (7,329) (5,757) 274 Deferred 4,977 (13,085) (730) - ------------------------------------------------------------ Total deferred (2,352) (18,842) (456) - ------------------------------------------------------------ Income tax provision $58,145 $ 27,121 $35,579 - ------------------------------------------------------------
Deferred income tax assets (liabilities) were comprised of the following at December 31:
1995 1994 - --------------------------------------------------------------------------- Net deferred income tax asset: Inventory (intercompany profit in inventory and excess of tax over book valuation) $ 16,590 $ 5,811 Intangibles 10,728 12,753 Accruals not currently deductible and other 7,923 3,806 - --------------------------------------------------------------------------- Deferred income tax asset 35,241 22,370 - --------------------------------------------------------------------------- Net deferred income tax liability: Accumulated depreciation (7,037) (1,927) Unrealized gain on investments (5,830) (421) - --------------------------------------------------------------------------- Deferred income tax liability (12,867) (2,348) - --------------------------------------------------------------------------- Net deferred income tax asset $ 22,374 $20,022 - ---------------------------------------------------------------------------
The Company's effective income tax rate varied from the statutory U.S. federal income tax rate of 35% as follows:
1995 1994 1993 - --------------------------------------------------------------------------- Income tax provision at U.S. statutory rate $65,647 $37,224 $50,828 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit 4,398 1,188 2,610 Tax benefits from Foreign Sales Corporation (1,621) (1,433) (1,612) Tax benefits from Puerto Rican operations (8,442) (7,880) (13,782) Tax exempt income -- (2,274) (3,403) Foreign taxes at higher (lower) rates (1,640) 194 358 Other (197) 102 580 - --------------------------------------------------------------------------- Income tax provision $58,145 $27,121 $35,579 - --------------------------------------------------------------------------- Effective income tax rate 31.0% 25.5% 24.5% - ---------------------------------------------------------------------------
The Company's effective income tax rate is favorably affected by Puerto Rican tax exemption grants which result in Puerto Rican earnings being partially tax exempt through the year 2003. Consolidated U.S. federal income tax returns filed by the Company have been examined by the Internal Revenue Service through the year 1989. The Company's 1990 through 1994 federal income tax returns are presently under audit. Field examiners have indicated that the IRS may assert substantial additional taxes on Puerto Rican earnings. Management believes any additional income taxes which may ultimately result from the audit will not have a material adverse impact on the Company's liquidity or financial position, but could potentially be material to the net income of a particular future period if resolved unfavorably. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries ($17,967 at December 31, 1995) because distribution of these earnings generally would not require additional taxes due to available foreign tax credits. The Company made income tax payments of $48,175, $45,737 and $28,385 in 1995, 1994 and 1993, respectively. NOTE 4 STOCK PURCHASE AND OPTION PLANS STOCK PURCHASE: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, shares of common stock at 85% of the fair market value at specified dates. Under the terms of the plan, 750,000 shares of common stock have been reserved for purchase by plan participants. Employees purchased 97,525 and 26,041 shares in 1995 and 1994, respectively. At December 31, 1995, 603,237 shares were available for purchase under the plan. STOCK OPTIONS: Under the terms of the Company's various stock plans, 8,434,396 shares of common stock have been reserved for issuance to directors, officers and employees upon the grant of restricted stock or the exercise of stock options. Stock options are exercisable over periods up to 10 years from date of grant and may be "incentive stock options" or "non-qualified stock options" and may have stock appreciation rights attached. At December 31, 1995, there were a maximum of 5,190,595 shares available for grant and 3,243,801 options outstanding, of which 2,507,524 were exercisable. Stock option activity was as follows:
Options Price Outstanding Per Share - --------------------------------------------------------------- Balance at December 31, 1993 1,930,677 $ 3.06 - 33.08 Granted 1,148,625 17.25 - 26.42 Cancelled (138,010) 18.59 - 32.17 Exercised (8,250) 7.20 - 14.63 - -------------------------------------------- Balance at December 31, 1994 2,933,042 3.06 - 33.08 Granted 652,275 25.50 - 39.50 Cancelled (165,744) 17.83 - 32.25 Exercised (175,772) 3.56 - 32.25 - -------------------------------------------- Balance at December 31, 1995 3,243,801 3.06 - 39.50 - ---------------------------------------------------------------
Pursuant to the terms of the Company's various stock plans, optionees can use cash, previously owned shares or a combination of cash and previously owned shares to reimburse the Company for the cost of the option and the related tax liabilities. Shares are acquired from the optionee at the fair market value of the stock on the transaction date. All options have been granted at not less than fair market value at dates of grant. When stock options are exercised, the par value of the shares issued is credited to common stock and the excess of the proceeds over the par value is credited to additional paid-in capital. When non-qualified options are exercised, the Company realizes income tax benefits based on the difference between the fair value of the stock on the date of exercise and the stock option exercise price. These tax benefits do not affect the income tax provision, but rather are credited directly to additional paid-in capital. Under the terms of the Company's shareholder rights agreement, upon the occurrence of certain events which result in a change in control as defined by the agreement, registered holders of common shares are entitled to purchase one-tenth of a share of Series A Junior Participating Preferred Stock at a stated price, or to purchase either the Company's shares or shares of the acquiring entity at half their market value. NOTE 5 FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK FOREIGN CURRENCY INSTRUMENTS AND HEDGING ACTIVITIES: From time to time, the Company may enter into foreign exchange contracts to manage its exposure to fluctuations in foreign currency exchange rates. These contracts involve the exchange of foreign currencies for U.S. dollars at a specified rate at future dates. Counterparties to these contracts are major international financial institutions. Maturities of these instruments are typically one year or less from the transaction date. Gains or losses from these contracts are included in other income (expense). The Company had contracts totalling $12,483 at December 31, 1995 and $4,215 at December 31, 1994, to exchange French Francs, German Marks and Italian Lira into U.S. dollars. These instruments were recorded at their fair value at each balance sheet date. The cumulative gain (loss) on these contracts totalled $45 and ($128) at December 31, 1995 and December 31, 1994, respectively and was recorded as other income (expense). LONG-TERM DEBT: The Company has an unsecured $260,000 committed revolving line of credit with a group of 11 banks that terminates in September 1999. The rate of interest payable under this borrowing facility is a floating rate and is a function of the London Interbank Offered Rate. The weighted average rate at December 31, 1995 and December 31, 1994, was 6.1% and 5.9%, respectively. A facility fee of .085% of the total commitment is paid quarterly. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The credit agreement contains various covenants which require the Company to maintain a specified financial ratio, limit liens, regulate asset disposition and subsidiary indebtedness and restrict certain acquisitions and investments. At December 31, 1995, the Company was in compliance with these covenants. OTHER FINANCIAL INSTRUMENTS: Marketable securities consist of equity instruments, bank certificates of deposit and Puerto Rico industrial development bonds. Under Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," debt securities that the Company does not have the positive intent to hold to maturity and all marketable equity securities are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity. The Company adopted the provisions of the new standard for investments held or acquired after January 1, 1994, and has classified all investments as available-for-sale and carried them at fair value. In accordance with FAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. No net realized gains or losses were recorded in 1995. A net realized loss of $419 was recorded on sales of available-for-sale securities in 1994. The net unrealized holding gain on available-for-sale securities included as a separate component of shareholders' equity was $9,691 (net of $5,830 of current deferred income taxes) at December 31, 1995. 1995 1994 - ----------------------------------------------------------------------------- Estimated Estimated Fair Fair Cost Value Cost Value - ----------------------------------------------------------------------------- Assets: Cash and Cash Equivalents $ 13,438 $ 13,438 $11,791 $ 11,791 Marketable Securities $137,094 $152,615 $124,070 $125,177 - ----------------------------------------------------------------------------- The Company also guarantees certain obligations of its subsidiaries. As of December 31, 1995 and 1994, the maximum amounts of such guarantees were $7,500 and $5,000, respectively. CONCENTRATION OF CREDIT RISK: Trade accounts receivables, certain marketable securities and foreign exchange contracts are the financial instruments which may subject the Company to concentration of credit risk. Within the European Economic Union, payment of certain accounts receivable is made by the national health care system within several countries. Although the Company does not anticipate collection problems with these receivables, payment is contingent to a certain extent upon the economic situation within these countries. The credit risk associated with the balance of the trade receivables is limited due to dispersion of the receivables over a large number of customers in many geographic areas. The Company monitors the credit worthiness of its customers to which it grants credit terms in the normal course of business. Marketable securities are placed with high credit qualified financial institutions and Company policy limits the credit exposure to any one financial institution. Counterparties to foreign exchange contracts are major financial institutions; therefore, credit loss from counterparty nonperformance is unlikely. NOTE 6 RETIREMENT PLANS DEFINED CONTRIBUTION PLANS: The Company has a defined contribution profit sharing plan, including features under section 401(k) of the Internal Revenue Code, which provides retirement benefits to substantially all full-time U.S. employees. Under the 401(k) portion of the plan, eligible employees may contribute a maximum of 10% of their annual compensation with the Company matching the first 3%. The Company's level of contribution to the profit sharing portion of the plan is subject to Board of Directors approval and is based on Company performance. The Company has additional defined contribution programs for employees outside the United States. The benefits under these plans are based primarily on compensation levels. Total retirement plan expense was $6,558, $2,873 and $1,265 in 1995, 1994 and 1993, respectively. DEFINED BENEFIT PLANS: In certain countries outside the United States, the Company maintains defined benefit plans. At December 31, 1995, the Company's obligations under these plans approximated $6,000. NOTE 7 SUPPLY OF HEART VALVE COMPONENTS The Company has a long-term contract for supply of pyrolytic carbon components used in its mechanical heart valve prosthesis. Under the terms of the contract, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) the Company has agreed to purchase decreasing percentages of its component requirements from the supplier through 1998. After 1995, the Company must purchase a minimum of 20% of its component needs from the supplier through 1998 at negotiated prices. The contract may be renewed annually subsequent to 1998. As part of this contract, the Company has granted the supplier a license to produce and sell the supplier's bileaflet mechanical heart valve in countries where patents have been issued covering the St. Jude Medical-Registered Trademark- mechanical heart valve. Under this portion of the contract, the supplier will pay royalties to the Company through mid-1998. Under a separate agreement, the Company paid a royalty to the supplier based on the number of mechanical heart valves the Company produced from its self-manufactured carbon components through August 1993. Amortization of these royalty amounts paid was completed in the second quarter 1994. NOTE 8 GEOGRAPHIC AREA The Company operates in the medical products industry and is segmented into two geographic areas -- the United States and Canada (including export sales to unaffiliated customers except to customers in Europe, the Middle East and Africa) and Europe (including export sales to unaffiliated customers in the Middle East, Africa, Latin America and Asia Pacific). Sales between geographic areas are made at transfer prices which approximate prices to unaffiliated third parties. Export sales from the United States to unaffiliated customers were $56,022, $44,050 and $29,926 for 1995, 1994 and 1993, respectively. Net sales by geographic area were as follows:
United States Europe Elimina- Net Sales and Canada tions - ---------------------------------------------------------------------- 1995 Customer sales $474,677 $248,836 $ -- $723,513 Intercompany sales 97,550 -- (97,550) -- - ---------------------------------------------------------------------- $572,227 $248,836 $(97,550) 723,513 - ---------------------------------------------------------------------- 1994 Customer sales $251,244 $108,396 $ -- $359,640 Intercompany sales 71,184 -- (71,184) -- - ---------------------------------------------------------------------- $322,428 $108,396 $(71,184) $359,640 - ---------------------------------------------------------------------- 1993 Customer sales $172,713 $ 79,929 $ -- $252,642 Intercompany sales 59,908 -- (59,908) -- - ---------------------------------------------------------------------- $232,621 $ 79,929 $(59,908) $252,642 - ----------------------------------------------------------------------
Operating profit by geographic area was as follows: United States and Canada Europe Corporate Total - ---------------------------------------------------------------------- 1995 $156,536 $51,345 $(13,703) $194,178 1994 $ 74,026 $36,814 $(11,541) $ 99,299 1993 $ 99,092 $41,046 $ (8,850) $131,288 - ---------------------------------------------------------------------- Identifiable assets by geographic area were as follows: United States and Canada Europe Corporate Total - ------------------------------------------------------------------------ 1995 $588,963 $203,044 $223,927 $1,015,934 1994 $549,776 $181,470 $188,652 $ 919,898 1993 $ 92,083 $ 40,947 $393,787 $ 526,817 - ------------------------------------------------------------------------ Corporate expenses consist principally of non-allocable general and administrative expenses. Corporate identifiable assets consist principally of cash and cash equivalents and marketable securities. NOTE 9 OTHER INCOME (EXPENSE), NET Other income (expense), net consisted of the following:
1995 1994 1993 - ---------------------------------------------------------------------- Interest income $ 7,242 $ 14,001 $ 14,635 Interest expense (12,936) (3,714) (5) Foreign exchange gains (losses) 541 (1,937) (526) Other (1,462) (1,294) (170) - ---------------------------------------------------------------------- Other income (expense), net $ (6,615) $ 7,056 $ 13,934 - ----------------------------------------------------------------------
NOTE 10 OTHER ASSETS Other assets as of December 31, 1995 and 1994, net of accumulated amortization of $34,923 and $25,316, respectively consisted of the following:
1995 1994 - ---------------------------------------------------------------------- Investments in companies, joint ventures and partnerships $ 22,356 $ 20,651 Intangibles and other 317,176 333,000 - ---------------------------------------------------------------------- Other assets $ 339,532 $ 353,651 - ----------------------------------------------------------------------
Investments in companies, joint ventures, and partnerships are stated at cost which approximates market. Intangibles and other assets consist principally of the excess of cost over net assets of certain acquired businesses and technology. Intangibles and other assets are being amortized over periods ranging from ten to 20 years. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 11 CONTINGENCIES The Company is involved in various products liability lawsuits, claims and proceedings of a nature considered normal to its business. In connection with two pacemaker lead models, the Company may be subject to future uninsured claims. The Company's products liability insurance carrier has denied coverage for these models and has filed suit against the Company seeking rescission of the policy covering Pacesetter's business retroactive to the date the Company acquired Pacesetter. The Company was a codefendant in a 1995 class action suit with respect to these leads. This case was settled in November 1995. The Company's share of the settlement was approximately $7,000. Additional claims could be filed by patients with these leads who were not class members. Further, claims may be filed in the future relative to events currently unknown to management. Management believes any losses that might be sustained from such action would not have a material adverse effect on the Company's liquidity or financial position, but could potentially be material to the net income of a particular future period if resolved unfavorably. NOTE 12 SHAREHOLDERS' EQUITY On October 17, 1995, the Board of Directors declared a three for two stock split in the form of a 50% stock dividend to shareholders of record on November 2, 1995. Earnings per share, dividends per share, shares outstanding and weighted average shares outstanding have been restated to reflect the stock dividend. NOTE 13 SUBSEQUENT EVENTS On January 5, 1996, the Company acquired The Heart Valve Company, previously a 50% owned joint venture with Hancock Jaffee Laboratories (HJL). Under the agreement, the Company will pay $1,000 and issue 149,153 shares of its common stock to HJL. The acquisition will be accounted for under the purchase accounting method and the resulting purchased research and development charge of approximately $5,000 will be recorded in the first quarter 1996. On January 19, 1996, the Company sold its cardiac assist division assets to C.R. Bard, Inc. for approximately $25,000 in cash. The selling price exceeded the net asset value of the assets and the resulting gain of approximately $10,000 will be recorded in the first quarter 1996. On January 29, 1996, the Company entered into a definitive agreement to acquire Daig Corporation, a Minnetonka, Minnesota based manufacturer of specialized cardiovascular devices for the electrophysiology, atrial fibrillation and interventional cardiology markets. Each share of Daig common stock will be converted into approximately .652 shares of St. Jude Medical common stock. The Company expects to issue approximately 10,000,000 shares. The transaction is expected to close in the second quarter 1996 and will be accounted for as a pooling of interests. The following unaudited pro forma information has been prepared assuming that the Pacesetter and Daig acquisitions had occurred at the beginning of the period presented. Permitted adjustments include amortization of goodwill, increased interest expense, decreased interest income, the related income tax effects and increased outstanding shares of common stock. Pro forma results are not necessarily indicative of the results that would have occurred had the acquisitions actually taken place at the beginning of 1993, or the expected results of future operations. The 1993 pro forma results include a $25,300, or $.36 per share after-tax, Pacesetter research and development charge. 1995 1994 1993 - ---------------------------------------------------------------------- Net sales $761,835 $696,739 $639,686 Net income $138,848 $119,174 $ 98,429 - ---------------------------------------------------------------------- Earnings per share $ 1.71 $ 1.49 $ 1.22 - ---------------------------------------------------------------------- NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly data for 1995 and 1994 was as follows: Quarter - ---------------------------------------------------------------------- First Second Third Fourth - ---------------------------------------------------------------------- Year Ended December 31, 1995: Net sales $180,499 $185,551 $175,953 $181,510 Gross profit $121,393 $129,704 $122,687 $126,933 Net income $ 30,584 $ 33,124 $ 31,927 $ 33,783 Earnings per share $ .43 $ .47 $ .45 $ .47 Year Ended December 31, 1994: Net sales $ 66,685 $ 66,736 $ 62,468 $163,751 Gross profit $ 49,814 $ 50,277 $ 46,991 $111,602 Net income $ 26,537 $ 26,204 $ 24,489 $ 2,004* Earnings per share $ .38 $ .37 $ .35 $ .03* - ---------------------------------------------------------------------- *Includes a $25,300 ($.36 per share) charge for purchased research and development associated with the Pacesetter acquisition. Primary and fully diluted per share results are the same for all quarters in 1995 and 1994. The full year 1995 and 1994 primary earnings per share were both $.01 higher than fully diluted earnings per share due to rounding. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS The Consolidated Financial Statements of the Company and Report of Independent Auditors are included in Item 8 of this Form 10-K/A. (3) EXHIBITS 23 Consent of Independent Auditors SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused the Amendment to this report to be signed on its behalf by the undersigned, thereunto duly authorized. ST. JUDE MEDICAL, INC. Date: April 26, 1996 By /s/ STEPHEN L. WILSON -------------------------------------- Stephen L. Wilson VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) EX-23 2 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 5, 1996, included in the 1995 Annual Report on Form 10-K of St. Jude Medical, Inc. for the year ended December 31, 1995, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. /s/ Ernst & Young LLP - ------------------------------ Ernst & Young LLP Minneapolis, Minnesota April 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----