-----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, PMy6CXR5D+97fS37x75GZqKsVDR86bu0Re3hu8XcFIgK+H6J/R9QNNbysVKS6CuB j0dY89uHHG5UeLLnYo9drw== 0000203077-96-000016.txt : 19961111 0000203077-96-000016.hdr.sgml : 19961111 ACCESSION NUMBER: 0000203077-96-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 96657027 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1996 Commission File Number 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 Identification No.) of incorporation or organization) One Lillehei Plaza, St. Paul, Minnesota 55117 (Address of principal executive offices) (612) 483-2000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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 number of shares of common stock, par value $.10 per share, outstanding at November 4, 1996 was 80,985,671. This Form 10-Q consists of 11 pages consecutively numbered. The Exhibit Index to this Form 10-Q is set forth on page 11. PART I FINANCIAL INFORMATION ST. JUDE MEDICAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the full year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE 2 - ACQUISITIONS Effective May 31, 1996, the Company acquired Daig Corporation, a Minnetonka, Minnesota based manufacturer of specialized cardiovascular devices for the electrophysiology and interventional cardiology markets. Each share of Daig common stock was converted into approximately .652 shares of St. Jude Medical common stock. The Company issued 9,929,897 shares to Daig shareholders. The transaction was accounted for as a pooling of interests. The accompanying financial statements, for all periods presented, are presented on a pooled basis. The results of Daig's operations have been included in the condensed consolidated results of operations as if the acquisition had occurred at the beginning of 1995. These results are not necessarily indicative of the results that would have occurred had the acquisition actually taken place at the beginning of 1995, or of the expected future results of operations. On January 5, 1996, the Company acquired The Heart Valve Company, previously a 50% owned joint venture with Hancock Jaffee Laboratories (HJL), as well as certain assets of HJL. Under the agreement, the Company paid $1,000 and issued 149,153 shares of its common stock to HJL shareholders. The acquisition was accounted for as a purchase and the resulting purchased research and development charge of $5,000 was recorded in the first quarter 1996. On September 23, 1996, the Company acquired the business of Biocor(R) Industria E Pesquisas Ltd., a manufacturer of tissue heart valves for $4,000 in cash and an earn-out which could result in additional cash payments of up to $4,000 over the next three years. The acquisition will be accounted for as a purchase and a purchased research and development charge will be taken in the fourth quarter. NOTE 3 - CONTINGENCIES The Company is involved in various products liability lawsuits, claims and proceedings of a nature considered normal to its business. The Company's products liability insurance carrier has denied coverage for two pacemaker lead models and has filed suit against the Company seeking rescission of a products liability policy covering Pacesetter's business from October 1, 1994 through December 31, 1995. The Company was a codefendant in a 1995 class action suit with respect to these leads. This case was settled in November 1995 and the Company's share of the settlement is estimated to be approximately $5 million. This case is more fully described in Item I Part II of this Quarterly Report on Form 10-Q. 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 actions 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. The Internal Revenue Service ("IRS") is currently examining the Company's 1992-1994 federal income tax returns. In addition, the IRS has completed an audit examination of the Company's 1990-1991 federal income tax returns and has proposed an adjustment of approximately $16,600 in additional taxes. The proposed adjustment relates primarily to the Company's Puerto Rican operations. It is likely that similar adjustments will be proposed for subsequent years. The Company is vigorously contesting the proposed adjustments and expects that the ultimate resolution will not have a material adverse effect on its financial position, liquidity or net income. NOTE 4 - SUBSEQUENT EVENTS On October 23, 1996, St. Jude Medical, Inc. ("St. Jude") entered into definitive agreements to acquire substantially all of the assets of Telectronics Pacing Systems, Inc. and Medtel, a distribution company, both wholly owned subsidiaries of Pacific Dunlop, Ltd. ("Pacific Dunlop"). Also on October 23, 1996, the Company entered into a definitive agreement with Intermedics, Inc. ("Intermedics") to acquire certain intellectual property rights. The Intermedics agreement also provided for settlement of intellectual property and other legal disputes between Intermedics and Ventritex, as well as between Intermedics and Pacesetter. In addition, on October 23, 1996, St. Jude entered into a definitive agreement providing for the merger of Ventritex, Inc. ("Ventritex") into Pacesetter, Inc. ("Pacesetter"), a wholly owned subsidiary of St. Jude. Each outstanding share of Ventritex common stock will be converted into .6 share of St. Jude common stock. The Ventritex transaction remains subject to expiration of the applicable Hart-Scott-Rodino waiting period and is expected to close in the first quarter 1997. The Pacific Dunlop transaction is expected to close in the fourth quarter 1996. The Pacific Dunlop transactions will be accounted for under purchase accounting. The Ventritex transaction will be accounted for under pooling of interest accounting. The Company expects to incur significant charges in connection with these acquisitions.
ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited) THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- ----------------------- 1996 1995 1996 1995 -------- --------- -------- --------- Net sales $193,846 $ 186,176 $596,091 $ 570,386 Cost of sales 59,053 56,401 182,931 177,322 -------- --------- -------- --------- Gross profit 134,793 129,775 413,160 393,064 Selling, general & administrative 62,610 61,043 195,740 185,220 Research & development 17,365 17,907 53,507 53,590 Purchased research & development -- -- 5,000 -- -------- --------- -------- --------- Operating profit 54,818 50,825 158,913 154,254 Other income (expense) 1,021 (897) 12,367 (5,546) -------- --------- -------- --------- Income before taxes 55,839 49,928 171,280 148,708 Income tax provision 19,544 15,528 59,948 46,060 -------- --------- -------- --------- Net income $ 36,295 $ 34,400 $111,332 $ 102,648 ======== ========= ======== ========= Earnings per share: Primary $ .44 $ .42 $ 1.36 $ 1.27 ======== ========= ======== ========= Fully diluted $ .44 $ .42 $ 1.36 $ 1.27 ======== ========= ======== ========= Shares outstanding Primary 81,967 81,358 81,754 80,846 Fully diluted 82,360 81,546 82,010 81,049 See notes to condensed consolidated financial statements.
ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) SEPTEMBER 30 DECEMBER 31 1996 1995 (Unaudited) (See Note) ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 22,442 $ 34,767 Marketable securities 143,480 152,615 Accounts receivable, less allowance (1996 - $6,642; 1995 - $9,328) 179,286 169,690 Inventories Finished goods 93,078 82,176 Work in process 23,670 27,544 Raw materials 43,484 53,583 ----------- ----------- Total inventories 160,232 163,303 Other current assets 35,210 31,839 ----------- ----------- Total current assets 540,650 552,214 Property, plant and equipment 271,345 217,589 Less accumulated depreciation (70,790) (55,519) ----------- ----------- Net property, plant and equipment 200,555 162,070 Other assets 318,060 339,532 ----------- ----------- TOTAL ASSETS $ 1,059,265 $ 1,053,816 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 191,977 $ 197,443 Long-term debt 0 120,000 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 - 250,000,000 shares authorized; issued and outstanding 1996 - 80,976,337 shares; 1995 - 79,921,597 shares 8,098 7,992 Additional paid-in capital 61,888 34,769 Retained earnings 791,372 680,042 Cumulative translation adjustment 4,758 4,319 Unrealized gain on available-for-sale securities 1,612 9,691 Receivable - stock issued (440) (440) ----------- ----------- Total shareholders' equity 867,288 736,373 ----------- ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,059,265 $ 1,053,816 =========== =========== NOTE: The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements.
ST. JUDE MEDICAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30 ------------------------- 1996 1995 --------- --------- Operating Activities: Net income $ 111,332 $ 102,648 Depreciation and amortization 32,281 31,500 Purchased research and development 5,000 -- Gain on sale of business (10,486) -- Working capital change (16,560) 4,973 --------- --------- Net cash provided by operating activities 121,567 139,121 --------- --------- Investment Activities: Purchases of property, plant and equipment (58,237) (24,311) Sales of available-for-sale securities, net 9,000 5,623 Acquisitions, net of cash acquired (7,430) 13,000 Proceeds from sale of business 24,204 -- Other investing activities (2,503) (10,950) --------- --------- Net cash used in investing activities (34,966) (16,638) --------- --------- Financing Activities: Proceeds from exercise of stock options 21,225 5,133 Repayment of long-term debt (120,000) (115,000) --------- --------- Net cash used in financing activities (98,775) (109,867) --------- --------- Effect of currency exchange rate changes on cash (151) 907 --------- --------- Increase (decrease) in cash and cash equivalents (12,325) 13,523 Cash and cash equivalents at beginning of year 34,767 20,086 --------- --------- Cash and cash equivalents at end of period $ 22,442 $ 33,609 ========= ========= See notes to condensed consolidated financial statements.
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in thousands, except per share amounts) RESULTS OF OPERATIONS: NET SALES. Net sales for the third quarter 1996 totalled $193,846, a $7,670 or 4.1% increase over net sales in the third quarter 1995. Excluding net sales from the cardiac assist division which was sold in January 1996, third quarter net sales increased 5.6% over the prior year comparable period. For the first nine months of 1996, net sales totalled $596,091, a $25,705 or 4.5% increase over net sales in the first nine months of 1995. Unfavorable foreign currency effects due to the stronger U.S. dollar reduced 1996 net sales compared to 1995 by approximately $1,100 and $2,200 for the quarter and first nine months, respectively. Third quarter 1996 heart valve net sales were slightly higher than the third quarter 1995 which had included a significant sale into Iran. The U.S. embargo on goods sold to Iran continues to preclude further sales into that market. Exclusive of the Iranian sale, third quarter 1996 net sales increased 5.6% from third quarter 1995 levels. For the first nine months, 1996 heart valve net sales increased $6,698, or 3.4% over 1995 levels. The net sales increases were mainly attributable to higher mechanical heart valve unit sales into developing markets and more tissue heart valve sales due to expanded product offerings. Pacesetter third quarter 1996 net sales increased 7.4% compared to the third quarter 1995. For the first nine months, 1996 net sales increased by $21,926, or 6.5%. The increases over 1995 resulted principally from higher unit sales in all major geographic regions, which were partially offset by lower average selling prices. GROSS PROFIT. Third quarter 1996 gross profit totalled $134,793 or 69.5% of net sales, as compared to $129,775, or 69.7% of net sales during the comparable 1995 period. For the first nine months of 1996 and 1995, gross profit was $413,160 or 69.3% of net sales, and $393,064 or 68.9% of net sales, respectively. The lower quarterly gross profit margin resulted mainly from the negative foreign currency impact on net sales, average selling price decreases due to increasing sales in developing markets and pricing pressure in the cardiac rhythm business. On a year-to-date basis, the 1996 gross profit margin improved over 1995 because of the elimination of a 2% mechanical heart valve royalty payment and continuing manufacturing efficiencies, which were partially offset by the items noted above for the quarter. SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses increased in the third quarter 1996 to $62,610, a $1,567 or 2.6% increase over the third quarter 1995. As a percentage of net sales, 1996 SG&A decreased to 32.3% from 32.8% in 1995. On a year-to-date basis, 1996 SG&A expenses totalled $195,740, a $10,520, or 5.7% increase over 1995. The increases resulted primarily from the establishment of a direct sales organization in Canada, infrastructure investments in the European and Asia Pacific markets and enhancements to information technology systems. RESEARCH AND DEVELOPMENT. Third quarter 1996 research and development (R&D) expenses were $17,365, a $542 decrease from the third quarter 1995. The first nine months of 1996 R&D expenses totalled $53,507, an $83 decrease from the 1995 comparable period. The quarter and year-to-date decreases were due to the completion of certain Pacesetter projects; however, Pacesetter continues to invest in major ongoing bradycardia, tachycardia and programmer R&D projects. PURCHASED RESEARCH AND DEVELOPMENT. The $5,000 non-cash purchased R&D charge, representing the appraised value of in-process R&D which must be expensed under generally accepted accounting principles for purchase accounting, related to the acquisition of The Heart Valve Company (see Note 2 - Acquisitions). OTHER INCOME/EXPENSE. Other income in the third quarter 1996 totalled $1,021 compared to other expense of $897 in the third quarter 1995. For the first nine months of 1996 other income totalled $12,367 versus other expense of $5,546 in the comparable 1995 period. Interest expense in third quarter 1996 decreased to $358 from $2,933 in the third quarter 1995 due to a substantial reduction in Pacesetter acquisition related debt which was totally repaid during the third quarter 1996. On a year-to-date basis, several non-recurring 1996 transactions increased other income over 1995, including a gain on sale of the Company's cardiac assist business and the successful completion of litigation related to the terminated Electromedics' acquisition which were partially offset by transaction costs associated with the Daig acquisition. INCOME TAX PROVISION. The Company's 1996 effective income tax rate was 35% compared to 31% in 1995. The increase was attributable to changes to Internal Revenue Code (IRC) regulations which were finalized in the second quarter 1996 and which were retroactive to the beginning of 1996, as well as to non-deductible expenses associated with the Daig acquisition and to separate previously legislated changes relating to taxation of Puerto Rican related income. The IRC regulation changes significantly reduce tax benefits derived from the Company's Puerto Rican operations. OUTLOOK. As provided for under the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors could cause actual future results of operations to vary from those anticipated in previously made forward-looking statements and any other forward-looking statements made in this document and elsewhere by or on behalf of the Company. Net sales could be materially affected by legislative or administrative reforms to the U.S. Medicare and Medicaid systems in a manner that would significantly reduce reimbursement for procedures using the Company's medical devices, the acquisition of key patents by competitors that would have the effect of excluding the Company from new market segments, health care industry consolidation resulting in customer demands for price concessions, products introduced by competitors with advanced technology and better features and benefits or lower prices, and fewer procedures performed in a cost conscious environment. Cost of sales could be materially affected by unfavorable developments in the area of products liability and price increases from the Company's suppliers of critical components. Operations could be affected by the Company's ability to execute its diversification strategy or to integrate acquired companies, a serious earthquake affecting the Company's Pacesetter facility in Los Angeles California and attempts by competitors to gain market share through aggressive marketing programs. In addition, the elimination of Internal Revenue Code Section 936 will result in the Company's effective income tax rate increasing over time. The Company expects to incur significant charges in connection with its acquisitions of Ventritex and Teletronics. FINANCIAL CONDITION: The Company's financial condition at September 30, 1996, continues to be strong. Long-term debt was fully repaid during the third quarter. In addition, the Company had $165,922 of cash and marketable securities. The ratio of current assets to current liabilities was 2.8 to 1 at September 30, 1996. Total assets decreased $7,916 during the third quarter 1996. Cash and marketable securities decreased $32,376 because cash flow from operations and cash on hand were used to reduce debt and to acquire the business of Biocor(R) Industria E Pesquisas Ltd. Accounts receivable decreased $4,987 principally due to third quarter net sales that were lower than the second quarter. Inventories increased $391. Net property, plant and equipment increased $16,980 primarily as a result of capital investments in pacemaker manufacturing facilities and information systems. Shareholders' equity increased $38,507 during the quarter to $867,288. The increase resulted from net income of $36,295, the exercise of stock options of $2,630 and a foreign currency translation adjustment of $1,315 which were partially offset by a net unrealized loss on investments of $1,733. PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS From 1987 to 1991, Siemens AG through its Pacesetter and other affiliates ("Siemens") manufactured and sold approximately 32,000 model 1016T and 1026T pacemaker leads of which approximately 25,000 were sold in the U.S. In March 1993 Siemens was sued in federal court in Cincinnati, Ohio ("the Wilson case"). The suit alleged that the model 1016T leads were negligently designed and manufactured. Class action status was granted by the court in September 1993. When St. Jude acquired from Siemens substantially all of its worldwide cardiac rhythm management business ("Pacesetter") on September 30, 1994, the purchase agreement specifically provided that Siemens retain all liability for the Wilson case, as well as all other litigation that was pending or threatened before October 1, 1994. The purchase agreement also provided that St. Jude would assume liability for other products liability claims which arose after September 30, 1994. Siemens and St. Jude were named defendants in a class action suit filed in March 1995 in Houston, Texas for alleged defects in models 1016T and 1026T pacemaker leads (the "Hann case"). The suit sought class action status for patients who had inner insulation failures of these leads after March 22, 1993 and who were not members of the Wilson class. Siemens and St. Jude settled the Wilson and Hann cases in November 1995. Management currently estimates the Company's share of the settlement to be approximately $5 million; however, the precise number of class members, and the corresponding financial liability, could increase or decrease as the process for filing claims is completed. The settlement agreement has an "opt out" provision for class members. Apart from this class action settlement, additional claims could be made or lawsuits brought by patients with these leads whose leads fail at a later date or whose leads fail for reasons outside the class definition. St. Jude's products liability insurance carrier, Steadfast, a wholly owned subsidiary of Zurich Insurance Company ("Zurich"), has denied coverage for this case and has filed suit against St. Jude in federal district court in Minneapolis seeking rescission of the policy covering Pacesetter business retroactive to the date St. Jude acquired Pacesetter. Zurich alleges that St. Jude made material negligent misrepresentations to Zurich including failure to disclose the Wilson case in order to procure the insurance policy. St. Jude has filed an answer denying Zurich's claim and has alleged that Zurich specifically had knowledge of the Wilson case. The terms of the products liability insurance policy which Zurich is seeking to rescind provide that St. Jude would be entitled to $10 million in coverage for the 1016T and 1026T pacemaker lead claims after payment by St. Jude of a self insured retention. St. Jude is investigating whether it may have claims against any entities, in addition to Zurich, arising from this situation, and has brought suit against its former insurance broker, Johnson & Higgins. The Company is unaware of any other pending legal proceeding which it regards as likely to have a material adverse effect on its business. Item 6. EXHIBITS and REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit ------ ------- 2 Not applicable 4 Amended and Restated Rights Agreement dated as of June 26, 1990 between the Company and Norwest Bank Minneapolis, N.A., as Rights Agent including the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock is incorporated by reference to Exhibit 1 of the Registrant's Form 8 Amendment 2 to Form 8-A dated July 6, 1990. 10 Not applicable 22 Not applicable 23 Not applicable 24 Not applicable SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. ST. JUDE MEDICAL, INC. November 8, 1996 /s /STEPHEN L. WILSON - --------------------- ------------------------------------- DATE STEPHEN L. WILSON Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 22,442 143,480 185,928 6,642 160,232 540,650 271,345 70,790 1,059,265 191,977 0 0 0 8,098 859,190 1,059,265 596,091 596,091 182,931 182,931 0 282 2,970 171,280 59,948 111,332 0 0 0 111,332 1.36 1.36
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