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 March 31, 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
May 3, 1996 is 70,647,285.
This Form 10-Q consists of 12 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
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 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
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 to Daig shareholders. 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 summary information presents the results of
operations of the Company and Daig Corporation for the three months ended March
31, 1996 and March 31, 1995, as if the acquisition had occurred at the beginning
of 1995.
Three Months Ending March 31
------------------------------
1996 1995
(Unaudited) (Unaudited)
Net sales $198,200 $189,100
Net income $ 38,400 $ 32,600
Primary earnings per share $ 0.47 $ 0.41
These pro forma results are not necessarily indicative of the results that would
have occurred had the acquisition actually taken place at the beginning of 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. 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.
NOTE 3 - 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. These cases are 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 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.
ST. JUDE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS
ENDED MARCH 31
---------------------
1996 1995
--------- ---------
Net sales $ 188,101 $ 180,499
Cost of sales 57,469 59,106
--------- ---------
Gross profit 130,632 121,393
Operating expenses:
Selling, general & administrative 63,267 58,251
Research & development 17,106 16,028
Purchased research & development 5,000 --
--------- ---------
Total operating expenses 85,373 74,279
--------- ---------
Operating profit 45,259 47,114
Other income (expense) 8,942 (2,789)
--------- ---------
Income before taxes 54,201 44,325
Income tax provision 18,428 13,741
--------- ---------
Net income $ 35,773 $ 30,584
========= =========
Earnings per share:
Primary $ 0.50 $ 0.43
========= =========
Fully diluted $ 0.50 $ 0.43
========= =========
Shares outstanding
Primary 71,727 70,497
Fully diluted 71,727 70,715
ST. JUDE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
MARCH 31 DECEMBER 31
1996 1995
(UNAUDITED) (SEE NOTE)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 15,527 $ 13,438
Marketable securities 159,657 152,615
Accounts receivable, less allowance
(1996 - $9,703; 1995 - $9,328) 169,660 164,492
Inventories
Finished goods 85,545 79,638
Work in process 32,424 27,121
Raw materials 38,513 51,652
----------- -----------
Total inventories 156,482 158,411
Other current assets 35,205 31,198
----------- -----------
Total current assets 536,531 520,154
Property, plant and equipment 209,770 204,422
Less accumulated depreciation (50,594) (48,174)
----------- -----------
Net property, plant and equipment 159,176 156,248
Other assets 319,388 339,532
----------- -----------
TOTAL ASSETS $ 1,015,095 $ 1,015,934
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 184,685 $ 192,628
Long-term debt 81,000 120,000
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 - 70,337,860 shares; 1995 - 69,991,700 shares 7,034 6,999
Additional paid-in capital 43,270 31,782
Retained earnings 686,288 650,515
Cumulative translation adjustment 3,101 4,319
Unrealized gain on available-for-sale securities 9,717 9,691
----------- -----------
Total shareholders' equity 749,410 703,306
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,015,095 $ 1,015,934
=========== ===========
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)
THREE MONTHS ENDED
MARCH 31
--------------------
1996 1995
-------- --------
Operating Activities:
Net income $ 35,773 $ 30,584
Depreciation and amortization 10,662 9,735
Purchased research and development 5,000 --
Gain on sale of business (10,486) --
Working capital change (21,811) 717
-------- --------
Net cash provided by operating activities 19,138 41,036
-------- --------
Investment Activities:
Purchases of property, plant and equipment (10,621) (5,559)
Sales of available-for-sale securities, net 5,000 261
Acquisition, net of cash acquired (Note 2) (606) --
Proceeds from sale of business 24,204 --
Other investing activities (1,335) (2,817)
-------- --------
Net cash provided by (used in) investing activities 16,642 (8,115)
-------- --------
Financing Activities:
Proceeds from exercise of stock options 5,523 1,574
Repayment of long-term debt (39,000) (30,000)
-------- --------
Net cash used in financing activities (33,477) (28,426)
-------- --------
Effect of currency exchange rate changes on cash (214) 651
-------- --------
Increase in cash and cash equivalents 2,089 5,146
Cash and cash equivalents at beginning of year 13,438 11,791
-------- --------
Cash and cash equivalents at end of period $ 15,527 $ 16,937
======== ========
ST. JUDE MEDICAL, INC.
MANAGEMENT'S 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 first quarter 1996 totalled $188,101, a 4% increase
over net sales in the first quarter 1995. Excluding operations of the cardiac
assist business which was sold in January 1996, first quarter sales increased 6%
over the prior year first quarter. Favorable foreign currency translation
effects due to the weaker U.S. dollar added approximately $1,100 to first
quarter 1996 net sales.
Heart valve net sales increased approximately 8% over the 1995 first quarter.
The increase was primarily attributable to strong sales in international
markets. Domestic mechanical heart valve sales increased slightly as compared to
the first quarter 1995.
Pacesetter net sales increased approximately 4% over 1995 first quarter net
sales. Net sales increases were recorded in all principal geographic regions.
GROSS PROFIT. The first quarter 1996 gross profit totalled $130,632, or 69.4% of
net sales as compared to $121,393, or 67.3% of net sales in last year's first
quarter. The gross margin increase was due to the elimination of a 2% royalty
payment on mechanical heart valve sales as well as from continuing manufacturing
efficiencies. The gross margin improvement was achieved despite higher costs of
purchased heart valve components and average selling price decreases due to
increasing sales in developing markets.
SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses increased in the first quarter 1996 to $63,267 from $58,251 in the
comparable period of 1995. As a percentage of net sales, first quarter 1996 SG&A
increased to 33.6% from 32.3% in 1995. The increase was due primarily to the
establishment of a direct sales organization in Canada and an increased
marketing presence in Latin America and Asia/Pacific, as well as infrastructure
enhancements in Europe and in information technology.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses totalled
$17,106 in the first quarter 1996, a $1,078 increase over the first quarter 1995
level. As a percentage of sales, first quarter R&D expense increased in 1996 to
9.1% from 8.9% in 1995. The R&D increase reflects continuing Pacesetter programs
in the bradycardia and tachycardia areas, as well as development of a new
programmer.
PURCHASED RESEARCH AND DEVELOPMENT. The non-cash charge of $5,000 related to
purchased R&D in connection with the acquisition of The Heart Valve Company (see
note 2 - Acquisitions). This represents the appraised value of in-process R&D
which must be expensed under generally accepted accounting principles for
purchase accounting.
OTHER INCOME (EXPENSE). Other income in the first quarter of 1996 totalled
$8,942 compared with other expense of $2,789 in the first quarter of 1995.
Several non-recurring transactions were recorded in the first quarter of 1996
including the gain on sale of the cardiac assist business, the successful
completion of litigation related to the terminated Electromedics' acquisition
and the expected transaction expenses of $5,500 relating to the Daig Corporation
acquisition.
Interest expense decreased to approximately $1, 600 in the first quarter 1996
from approximately $4,000 in 1995 as the Company continued to reduce the debt
related to the Pacesetter acquisition. Interest income totalled almost $2,000
compared to approximately $1,600 in the first quarter 1995.
INCOME TAX PROVISION. The Company's effective income tax rate was 34% in the
first quarter 1996, a 3 percentage point increase over the 31% effective income
tax rate in the first quarter 1995. The higher effective tax rate was due
primarily to the non-tax deductibility of Daig Corporation transaction expenses
and also from a legislated increase in taxes on Puerto Rico related income.
OUTLOOK. The Company expects that market demands, government regulation and
societal pressures will continue to change the health care industry worldwide
resulting in further business consolidations and alliances. The Company intends
to selectively pursue diversification opportunities in the form of acquisitions,
joint ventures, partnerships and strategic business alliances. In addition, the
Company will participate with industry groups to promote the introduction and
use of advanced medical device technology within a cost conscious environment.
Finally, providing customers with the highest quality products for cost
effective clinical outcomes will continue to be a primary focus for the Company.
The Company has a goal to achieve 15% annual growth in earnings per share. As
provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in the previous forward-looking statement and any other
forward looking statements made in this document and elsewhere by or on behalf
of the Company. Achievement of the annual earnings per share growth goal could
be materially affected by factors including, but not limited to, the Company's
inability to execute its diversification strategy or successfully integrate
acquired companies; legislative or administrative reform of the U.S. Medicare
and Medicaid systems in a manner that would significantly reduce reimbursement
for procedures using the Company's medical devices; unexpected failures of the
Company's products or continuation of or increases in existing failure modes for
the Company's implanted products; unfavorable developments in the area of
product liability laws affecting medical devices; the acquisition of key patents
by competitors that would have the effect of excluding the Company from new
market segments or a serious earthquake affecting the Company's Pacesetter
facility in Los Angeles.
In May, 1996, the Internal Revenue Service issued new Internal Revenue Code
(IRC) Section 936 final regulations which the Company expects will increase its
1996 effective income tax rate. The increased rate will be reflected beginning
with the second quarter 1996 results. There are also various legislative
proposals to further reduce or eliminate the IRC Section 936 tax benefit. The
Company cannot predict when, or if, any of these proposals will be adopted.
FINANCIAL CONDITION. The financial condition of the Company at March 31, 1996,
continues to be strong. Long-term debt was reduced to $81,000, a $39,000
decrease during the first quarter 1996. The ratio of current assets to current
liabilities was 2.9 to 1 at March 31, 1996.
Total assets decreased $839 during the first quarter of 1996. Cash and
marketable securities increased $9,131 primarily as a result of the inclusion in
marketable securities of the Company's investment in Endovascular Technologies,
Inc. (EVT). EVT became a publicly traded company in the first quarter 1996. The
investment was previously recorded in other assets. Accounts receivable
increased $5,168 mainly as a result of the increased sales level from the
previous quarter. Inventories decreased $1,929 during the quarter primarily as a
result of the sale of the Company's cardiac assist business in the first quarter
1996.
Shareholders' equity increased $46,104 during the quarter to $749,410. The
increase resulted from net income of $35,773, a net unrealized gain on
investments of $26, issuance of $6,000 of common stock related to the HJL
acquisition, the exercise of stock options of $5,523, and a foreign currency
translation adjustment of ($1,218).
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 pacing 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. St. Jude's anticipated
financial responsibility for the settlement is approximately $7
million. 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 product 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.
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 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
Item 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 9,
1996. In conjunction therewith, proxies were solicited in
accordance with Regulation 14A. The following actions were taken:
(1) Thomas H. Garrett III, Roger G. Stoll and Paul J. Chiapparone were
elected to the Board of Directors for terms ending in 1999.
Shareholders approved management's nominees to the Board of
Directors by votes as follows: 58,188,200, 58,189,094 and
58,168,776 in favor, 430,128, 429,234 and 449,552 withheld for
Messrs. Garrett, Stoll and Chiapparone, respectively. Six other
directors are serving unexpired terms as follows: Charles V.
Owens, Ronald A. Matricaria and Walter L. Sembrowich - through
1997; and William R. Miller, Kenneth G. Langone and Gail R.
Wilensky - through 1998.
(2) The shareholders approved an amendment to St. Jude Medical, Inc.'s
Articles of Incorporation to increase the number of authorized
shares of common stock from 100,000,000 to 250,000,000 by a vote
of 44,297,217 in favor of the amendment, 14,152,971 opposed to the
amendment and 168,140 abstained from voting.
(3) The shareholders ratified the reappointment of Ernst & Young LLP
as the Company's independent auditor for the current fiscal year
by a vote of 58,345,396 in favor of the reappointment, 102,161
opposed to the reappointment and 170,771 abstained from voting.
Item 5. OTHER INFORMATION
None
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
(b) Form 8-K dated January 29, 1996.
Item 5. Other Events
Announcement of execution of Agreement
and Plan of Merger between St. Jude
Medical, Inc., Partner Acquisition
Corporation and Daig Corporation dated
February 13, 1996.
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.
May 14, 1996 /s/ STEPHEN L. WILSON
DATE STEPHEN L. WILSON
Vice President - Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)