<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to ______.
COMMISSION FILE NUMBER: 0-19801
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TARGET THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3962471
(State of incorporation) (I.R.S. Employer Identification No.)
47201 LAKEVIEW BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-7700
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0025 PAR VALUE
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 (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of July 26, 1996, there were 14,984,575 shares of Common Stock outstanding.
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INDEX
--------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1996
and March 31, 1996 ....................................................... 3
Consolidated Statements of Operations for the three months
ended June 30, 1996 and 1995 ............................................. 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1996 and 1995 ............................................. 5
Notes to Consolidated Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 15
Item 6. Exhibits and Reports on Form 8-K ................................ 16
SIGNATURE ................................................................ 17
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TARGET THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
---- ----
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments $ 41,429 $ 47,273
Investment in Conceptus, Inc. 16,949 20,493
Accounts receivable 16,307 15,676
Inventories 8,833 6,740
Deferred tax assets 4,214 4,214
Other current assets 1,470 1,235
--------- ---------
Total current assets 89,202 95,631
Property and equipment, net 13,232 11,136
Intangibles and other assets 10,738 7,508
--------- ---------
$ 113,172 $ 114,275
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,446 $ 2,062
Accrued compensation 2,938 3,831
Taxes payable 2,400 --
Other accrued liabilities 9,809 6,698
Deferred tax liabilities 8,911 10,311
--------- ---------
Total current liabilities 26,504 22,902
Long-term obligations 407 128
Minority interest 563 407
Commitments and contingencies
Stockholders' equity:
Common stock 38 37
Additional paid-in capital 67,311 50,759
Retained earnings 16,964 27,688
Unrealized gain on available-for-sale securities 10,169 12,265
Accumulated translation adjustments (31) 89
--------- ---------
94,451 90,838
Treasury stock, at cost (198,960 shares) (8,753) --
--------- ---------
Total stockholders' equity 85,698 90,838
--------- ---------
$ 113,172 $ 114,275
========= =========
</TABLE>
See accompanying notes.
3
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TARGET THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Revenue $ 22,049 $ 13,904
Costs and expenses:
Cost of sales 6,617 4,345
Research and development 5,129 2,836
Acquired in-process research and development 14,000 --
Selling, general and administrative 5,957 4,367
-------- --------
Total costs and expenses 31,703 11,548
-------- --------
Income/(loss) from operations (9,654) 2,356
Interest income, net 375 376
Other income 275 315
Minority interest (248) --
-------- --------
Income/(loss) before income taxes (9,252) 3,047
Provision for income taxes 1,472 914
-------- --------
Net income/(loss) $(10,724) $ 2,133
======== ========
Net income/(loss) per share $ (0.73) $ .14
======== ========
Shares used in calculation of net income/(loss)
per share 14,787 14,892
======== ========
</TABLE>
See accompanying notes.
4
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TARGET THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $(10,724) $ 2,133
Adjustments to reconcile net income/(loss) to net cash provided by
operations:
Depreciation and amortization 1,116 685
Acquired in-process research and development expense 14,000 --
Changes in assets and liabilities:
Accounts receivable (207) (683)
Inventories (1,210) (331)
Other current assets (219) (512)
Accounts payable 57 (1,295)
Accrued compensation (893) (1,305)
Taxes payable 2,381 767
Other accrued liabilities 200 553
-------- --------
Total adjustments 15,225 (2,121)
-------- --------
Net cash provided by operating activities 4,501 12
-------- --------
Cash flows from investing activities:
Capital expenditures, net (2,852) (1,713)
Purchase of securities available-for-sale (7,935) (3,700)
Maturities of securities available-for-sale 8,603 7,262
Increase in other assets 786 (134)
Net cash acquired from purchase of Interventional
Therapeutics Corporation 87 --
-------- --------
Net cash provided by (used in) investing activities (1,311) 1,715
-------- --------
Cash flows from financing activities:
Issuance of common stock 553 878
Purchase of treasury shares (8,753) --
Principal payments under capital leases (11) (8)
Repayment of note payable (202) --
Increase in notes receivable from stockholders -- (32)
-------- --------
Net cash provided by (used in) financing activities (8,413) 838
-------- --------
Net increase(decrease) in cash and cash equivalents (5,223) 2,565
Cash and cash equivalents, beginning of period 13,693 6,839
-------- --------
Cash and cash equivalents, end of period $ 8,470 $ 9,404
======== ========
</TABLE>
See accompanying notes.
5
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TARGET THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated balance sheets, consolidated statements of operations and
statements of cash flows reflect all adjustments which are of a normal
recurring nature considered necessary to present a fair statement of the
consolidated financial position at June 30, 1996 and the consolidated
statements of operations and cash flows for the interim three-month period
ended June 30, 1996 and 1995.
Certain information and footnote disclosures required by generally accepted
accounting principles for complete financial statements have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). These financial statements should be read in conjunction
with the audited financial statements and footnotes included in the Company's
1996 Annual Report to Stockholders and Annual Report on Form 10-K as filed
with the SEC for the fiscal year ended March 31, 1996. The condensed
consolidated balance sheet as of March 31, 1996 was derived from those
audited financial statements.
Results for the interim period ended June 30, 1996 are not necessarily
indicative of the results expected for future interim periods or for the full
year.
Fiscal year. Effective April 1, 1996, the Company changed its fiscal year end
from March 31 to a 52/53 week year ending on the Sunday nearest the end of
March. Fiscal 1997 year will comprise 52 weeks. For purposes of presentation,
the Company has indicated its financial statements as ending on calendar
month ends. The impact on the current year of one less day of operations is
not anticipated to have a material impact.
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2. Balance Sheet Information
<TABLE>
<CAPTION>
(In thousands) June 30, March 31,
1996 1996
-------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 8,470 $ 13,693
Short-term investments 32,959 33,580
-------- --------
$ 41,429 $ 47,273
======== ========
Accounts receivable:
Trade receivables $ 17,072 $ 16,760
Less allowance for doubtful accounts (765) (1,084)
--------- ---------
$ 16,307 $ 15,676
======== ========
Inventories:
Raw materials $ 2,495 $ 1,887
Work-in-process 2,324 1,959
Finished goods 4,014 2,894
-------- --------
$ 8,833 $ 6,740
======== ========
Property and equipment:
Machinery and equipment $ 10,220 $ 8,303
Office equipment 8,500 7,527
Leasehold improvements 1,960 1,644
-------- --------
20,680 17,474
Less accumulated depreciation and amortization (7,448) (6,338)
--------- --------
$ 13,232 $ 11,136
======== ========
Other assets:
Cost in excess of net assets acquired, net $ 2,814 $ 1,610
Patents and trademarks, net 3,107 2,979
Intangibles acquired upon purchase of ITC, net 2,799 ---
Investments in entities accounted for on the equity method 1,350 2,315
Other 668 604
-------- --------
$ 10,738 $ 7,508
======== ========
</TABLE>
3. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three months ended
(In thousands) June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ --- $ 40
Cash paid during the period for interest 11 3
Other non-cash activity
Common stock issued in connection with ITC acquisition 16,000 ---
</TABLE>
4. Net income/(loss) per share and stock split
Net income per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding. Net loss per share is
computed using the weighted average number of common shares outstanding.
Common share equivalents are not used in the calculation of the per share
loss since they are antidilutive. On November 8, 1995 the Company's Board of
Directors authorized a two-for-one stock split effected in the form of a
stock dividend on December 18, 1995. All presentations of shares outstanding,
options and amounts per share for prior periods have been restated to reflect
the stock split.
7
<PAGE> 8
5. Acquisition of Interventional Therapeutics, Inc.
On April 29, 1996, the Company signed a definitive agreement with
Interventional Therapeutics Corporation ("ITC") to acquire all the securities
of ITC and its subsidiary, ITC International, in exchange for shares of
Target common stock. The Company completed the closing of the acquisition of
ITC on May 23, 1996, at which time approximately 331,000 shares of Target
stock (inclusive of options to purchase such shares) were exchanged for all
of the outstanding shares (and options to purchase shares) of ITC stock.
ITC is a developer and manufacturer of vascular occlusion devices used in
neurovascular embolization. These devices include detachable silicone
balloons and CONTOUR (TM) embolization particulates designed for selective
placement through an angiographic catheter. As part of Target, ITC will focus
on the neuroradiology market and the combined company plans to offer
physicians an increased range of minimally invasive treatment options for
vascular diseases of the brain.
The acquisition of ITC, which was accounted for as a purchase, has been
recorded based upon available information and upon certain assumptions that
Target believes are reasonable under the circumstances. Estimated acquisition
costs include approximately $1.4 million of investment banking, legal and
accounting costs and approximately $1.5 million of exit costs associated with
termination of distributor and international lease arrangements. The purchase
price has been allocated to the acquired assets and liabilities based on
their relative fair values. These allocations are based on valuations and
other studies as of their date of acquisition.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Purchase price $ 16,000
Estimated acquisition expenses 2,920
--------
Total estimated acquisition cost $ 18,920
========
Historic net book value at May 23, 1996 $ 474
Write-up of inventories 367
Write-off of plant and equipment (76)
Goodwill 1,315
In-process research and development 14,000
Developed technology 2,000
Non-compete agreement 600
Assembled workforce 200
Trademark/tradename 40
--------
Total allocated purchase price $ 18,920
========
</TABLE>
In accordance with generally accepted accounting principles, the Company has
allocated $14 million of the purchase price to in-process research and
development (in-process R & D). This amount has been recorded as a charge to
operations for the quarter ending June 30, 1996.
The Company's results of operations for the three months ended March 31,
1996, include the results of ITC from May 23, 1996 through June 30, 1996. The
unaudited pro forma results of operations of the Company for the three months
ended June 30, 1996 and 1995, respectively, assuming the acquisition of ITC
occurred on April 1, 1995, on the basis described below with all material
intercompany transactions eliminated, are as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1996 1995
---- ----
(In thousands, except income per share)
<S> <C> <C>
Total revenues $ 22,491 $ 14,535
Net income 3,217 2,203
Net income per share 0.21 0.14
</TABLE>
8
<PAGE> 9
The unaudited pro forma net income and per share amounts above do not include
the charge for in-process R & D of $14 million arising from the acquisition
of ITC. The pro forma results reflect amortization of acquired goodwill and
other intangible assets, which are being written off over their estimated
useful lives of five to ten years.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the transaction occurred at the beginning of
the periods indicated, nor should it be used to project the Company's results
of operations for any future dates or periods.
6. Stock Repurchase Program
On May 16, 1996, the Company's Board of Directors authorized a stock
repurchase program in which up to 350,000 shares of its common stock may be
purchased in the open market from time to time. From the inception of the
stock repurchase program through June 30, 1996, the Company repurchased
198,960 shares of its common stock at an average acquisition price of
approximately $44 per share. Subsequent to June 30, 1996, the Company has
completed the repurchase of the 350,000 shares of its common stock at an
overall average acquisition price of approximately $40. The Company currently
plans to keep the repurchased shares as treasury stock and may use this stock
in various Company stock benefit plans. In addition, in August 1996, the
Board of Directors authorized the repurchase of up to 500,000 additional
shares of the Company's common stock under the repurchase program.
7. Income Taxes
For the three months ended June 30, 1996 and 1995, the Company's income tax
provision has been calculated based upon the estimated annual effective tax
rate of 31 percent (excluding the impact of the acquired in-process research
and development charge for which no tax benefit is available) and 30 percent,
respectively. The higher effective tax rate for the fiscal 1997 is primarily
due to anticipated reductions in the benefit derived from foreign tax credits
generated in Japan with respect to the Company's ownership interest in its
Japanese joint venture.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part 1-Item 1 of this
Quarterly Report. In addition, except for the historical statements contained
therein, the following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The
Company wishes to alert readers that the factors set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, under the
heading "Factors That May Affect Future Results Of Operations", as well as those
factors set forth in the discussion below and other factors, could in the future
affect, and in the past have affected, the Company's actual results and could
cause the Company's results for future periods to differ materially from those
expressed in any forward-looking statements by or on behalf of the Company.
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets specialized disposable
micro-catheters, guidewires, micro-coils, silicone balloons, embolics and
angioplasty products. These therapeutic devices are used in minimally-invasive
procedures to reach disease sites throughout the body via the circulatory
system. The Company's products allow highly targeted treatment of diseased,
ruptured or blocked vessels of the brain responsible for stroke, as well as
other disease sites in the body that are accessible through small blood vessels.
Products developed by the Company generally require clearance by the U.S. Food
and Drug Administration ("FDA") prior to commercialization in the United States.
The FDA may require clinical investigation as a prerequisite to such market
clearance.
9
<PAGE> 10
The Company's revenues have been derived primarily from the sale of its
micro-catheters, guidewires and micro-coils. Target distributes certain products
manufactured by other companies pursuant to distribution agreements.
On April 29, 1996, the Company signed a definitive agreement with Interventional
Therapeutics Corporation ("ITC") to acquire all the securities of ITC and its
subsidiary, ITC International, in exchange for shares of Target common stock.
The Company completed the closing of the acquisition of ITC on May 23, 1996, at
which time approximately 331,000 shares of Target stock (inclusive of options to
purchase such shares) were exchanged for all of the outstanding shares (and
options to purchase shares) of ITC stock.
ITC is a developer and manufacturer of vascular occlusion devices used in
neurovascular embolization. These devices include detachable silicone balloons
and CONTOUR(TM) embolization particulates designed for selective placement
through an angiographic catheter. As part of Target, ITC will focus on the
neuroradiology market and the combined company plans to offer physicians an
increased range of minimally invasive treatment options for vascular diseases of
the brain.
The acquisition of ITC was accounted for as a purchase. In accordance with
generally accepted accounting principles, the Company has allocated $14 million
of the purchase price to in-process R & D. This amount has been recorded as a
charge to operations for the quarter ending June 30, 1996.
The following table sets forth certain selected statement of operation
information of the Company as a percentage of product sales for the periods
indicated.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Product sales 100% 100%
Cost of sales 30 31
Research and development 23 20
Acquired in-process research and development expense 63 ---
Selling, general and administrative 27 31
Net income/(loss) (1) (49) 15
</TABLE>
(1) Includes a $14 million write-off of acquired in-process R & D during the
three months ended June 30, 1996. Exclusive of the write-off, net income as a
percentage of product sales would have been 15%.
Revenues
Product sales for the three months ended June 30, 1996 (first quarter) were
$22.0 million, an increase of $8.1 million, or 59 percent, from $13.9 million
for the prior-year period. The increase was primarily attributable to recent
product introductions and additional unit sales in each of Target's product
lines resulting from an increased number of treatment sites, training of
additional physicians and the continued acceptance of the Company's products.
In September 1995, the Company obtained clearance by the FDA to market its
Guglielmi Detachable Coil ("GDC") system in the United States. The Company has
launched a training program to facilitate the roll out of the product to
treatment centers in addition to those involved in the clinical trials. In
conjunction with becoming a GDC treatment site, each hospital is required to
purchase a minimum stocking order of the product. The Company's revenues include
approximately $1.8 million in sales of initial stocking orders of its GDC system
in the quarter ended June 30, 1996. As of June 30, 1996, a portion of the
revenue attributable to initial stocking orders, totaling $330,000, has been
deferred into future periods. Initial stocking order revenue should not be
viewed as indicative of future sales, as repeat orders and future revenue
streams will be driven largely by the number of procedures performed by
physicians which cannot accurately be predicted given the short period during
which the GDC system has been commercially available and which will remain
subject to numerous factors outside the Company's control. The Company is
currently pursuing regulatory clearance in Japan for the GDC system. As
previously announced and further discussed below under "Cost of Sales," the
Company has instituted a partial recall of certain lots of its GDC products but
does not believe that this action will materially affect its results of
operations.
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<PAGE> 11
The increase in the Company's product sales is also attributable to the
continued growth in the European and Japanese markets for Target's products.
Export product sales increased to $15.4 million in the first quarter of fiscal
1997 from $10.4 million in fiscal 1996. Export sales as a percentage of product
sales were 70 percent in the current year period compared with 75 percent in the
prior year period. The reduction in the percent of export sales as a percent of
product sales is due primarily to the increased level of domestic GDC sales as a
result of the FDA approval of the GDC in September 1995. Target sells products
in Japan through a joint venture formed with Century Medical, Inc. ("CMI").
Sales by the Company to CMI accounted for approximately 33 and 40 percent of the
Company's product sales in the first quarter of fiscal 1997 and 1996,
respectively. In April 1995, Target implemented a price increase of
approximately seven percent to its distributor in Japan. No other significant
price increases were effected during the balance of fiscal 1996 or the first
quarter of fiscal 1997. The Company's July 1995 investment in a 51 percent-owned
joint venture in France resulted in increased revenues due to sales to end-users
in France at prices higher than those of sales to the former distributors,
reflecting the markup previously realized only by the distributors.
The Company's continued revenue growth is subject to a number of factors,
including new product introductions, the availability of suitable alternative
products manufactured by competitors, the timeliness and availability of
regulatory clearance and the continued expansion of its customer base. Target
continues to research and develop new applications for its products in an effort
to expand its practitioner customer base. As more companies become aware of the
market potential of such products, Target anticipates an increase of competitive
forces which have had and may continue to have an adverse effect on revenues of
the Company. Several companies in the United States have introduced products
that are being used in the interventional neuroradiology market. Target is also
aware of other companies that may pursue commercialization of products which may
compete with the Company's products and may result in future pricing and margin
pressures within this market. Prior to commercialization in the United States,
sales of certain of Target's products are limited to clinical settings pursuant
to Investigational Device Exemptions ("IDE"s) granted by the FDA which limit the
number of patients treatable with such products. Target must obtain clearance
from the FDA to market these products for other than clinical investigation, and
the overall review time of such regulatory process may be lengthy. Regulatory
requirements vary in other countries in which Target markets its products.
Failure to develop new products successfully, to obtain regulatory clearance for
such products in a timely manner or to maintain regulatory clearance may have an
adverse effect on Target's revenues in the future. Target's revenue growth may
also be adversely affected by the limited number of teaching hospitals that
train practitioners in fields in which the Company's products are utilized. The
Company continues to obtain a significant amount of its revenues from CMI in
Japan. Should this customer continue to represent a significant portion of
revenues, significant changes in this customer's ordering rates will likely
cause similar changes in Target's revenues. It is Target's understanding that
physicians use certain devices, products and materials manufactured by other
companies in conjunction with the use of certain of Target's products.
Reductions in the availability or the elimination of such complementary products
have had, and may continue to have, an adverse effect on sales of the Company's
products. Currently, products sold commercially in the United States pursuant to
510(k) clearance received from the FDA may generally be marketed in Europe.
However, political and regulatory changes, particularly in Western Europe in
connection with the evolution of the European Union, as well as the Company's
ability to achieve IS09001 standards, may adversely affect the Company's product
sales in Europe. Similarly, changes in the United States and foreign national
health care policies, including third-party reimbursement issues, may have a
significant adverse effect on revenues of Target. As the Company expands its
direct international sales operations, increased amounts of its revenues will be
subject to the risks of foreign currency fluctuations. Furthermore, the future
rate of Target's revenue growth, if any, may be below that experienced in prior
annual and quarterly periods.
Cost of Sales
Cost of sales as a percentage of product sales was 30 percent for the three
months ended June 30, 1996, compared to 31 percent for the same periods of the
prior year. The Company's increased manufacturing efficiency, primarily due to
increased production volume, contributed to the reduced gross margins, and, to a
lesser degree, its July 1995 investment in a 51 percent-owned joint venture in
France also contributed favorably to cost of sales as a percentage of product
sales for the first quarter of fiscal 1997 compared to the prior year. These
decreases were partially offset by the impact of reduced margins on ITC
products. The reduced margins on ITC products are due to the application of APB
16 whereby inventory acquired from ITC is recorded in the Company's books of
account at market value less estimated costs to sell the product. The Company
anticipates that cost of sales will be adversely affected for the next two to
three quarters as the bulk of the ITC inventory is consumed.
Generally, there can be no assurance that cost of sales as a percentage of
product sales will remain at current levels or show improvement in future
periods over current or prior periods due to the distribution by Target of
certain products
11
<PAGE> 12
at lower gross margins, fluctuation in manufacturing production levels due to
product mix, potential increases in certain costs associated with the use of
third-party technology, contractual arrangements for minimum purchase levels and
potential pressure on product prices as a result of competition. Although no
significant supply issues have arisen in the past, there can be no assurance
that current or future suppliers of the Company's raw materials will be able to
continue to meet the quality and quantity demands of the Company at current
suppliers' prices.
On July 30, 1996, the Company announced that it had initiated a partial recall
of certain lots of the GDC products due to a potential problem related to
difficulty in the fluoroscopic visualization of the marker on the delivery wires
of these lots of GDC devices. The partial recall is expected to be completed
during the quarter ended September 30, 1996. The Company anticipates that the
partial recall will compress margin slightly and have an immaterial impact on
the net income in the quarter ended September 30, 1996. The Company is currently
identifying and recovering any non-conforming products in finished goods
inventory as well as in hospitals in the U.S. and abroad. The Company will
replace the non-conforming products as rapidly as possible. Although the Company
does not anticipate a recurrence of such a partial recall, no assurance can be
given that similar incidents will not occur in the future with respect to the
GDC system or other Target products.
Research and Development Expense
R&D increased 81 percent to $5.1 million in the first quarter of fiscal 1997
compared to $2.8 million in the same period of the prior year. Target attributes
the increased amounts expended for R&D primarily to increased personnel and
personnel-related costs, the expenses incurred in collecting clinical data and
preparing regulatory filings for new products and increased headcount associated
with expansion of its research activities and operation of the pilot
manufacturing line. The pilot manufacturing line was developed to aid in the
transition between the new product development and manufacturing stages of
production. As a percentage of product sales, R&D expense was 23 percent and 20
percent for the three months ended June 30, 1996 and 1995, respectively. The
increase in R&D as a percentage of sales is primarily attributable to
increases in the levels of R&D expenditures, primarily personnel and personnel
related costs at a rate that exceeds the rate of increase in revenues.
The Company believes that its investments in product development and engineering
and manufacturing processes are essential in its efforts to maintain its
competitive position and continue the development of future products.
Furthermore, the Company believes that its ability to attract qualified
engineers in the future is critical to the continued success of the Company.
Accordingly, Target expects to continue to make substantial expenditures on new
product development and to increase the dollar amount expended for R&D.
Acquired In-Process Research and Development Expense
The charge for acquired in-process R&D of $14 million in the three months
ended on June 30, 1996, was a non-recurring charge related to the acquisition of
ITC. The value attributed to the in-process R&D was determined by an
independent appraisal.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the quarter ended June
30, 1996 increased to $6.0 million from $4.4 million for the quarter ended June
30, 1995. The increase in fiscal 1997 was primarily due to costs associated with
the product launch of the GDC system including physician training and education
programs, investments in worldwide marketing, sales and training efforts to
support current and anticipated product introductions in addition to the GDC
system, costs incurred to further the Company's expansion of overseas operations
and the improvement of internal information systems. The first quarter of fiscal
1997 also reflects an increase in expenses associated with a legal action filed
by Target to protect certain of its proprietary assets. Other increases are
attributable to additional staffing, including sales and management personnel,
to expand the corporate infrastructure to support the growth in Target's product
sales. In addition, the Company incurred increased personnel and personnel
related costs resulting from the May 23, 1996, acquisition of ITC. The Company
currently anticipates that the dollar amount expended for SG&A will continue to
increase, primarily due to expanding international operations, additional
expenses associated with the legal action filed described above and planned
increases in sales and support staff to introduce, market and support
anticipated new products (including the GDC system) for which increased
physician training and education, clinical field work and sales support will be
required. These expenses may
12
<PAGE> 13
also increase if Target pursues additional operations overseas, the feasibility
of which it is currently investigating. As a percentage of product sales, SG&A
expense was 27 percent and 31 percent in the first quarter of fiscal 1997 and
1996, respectively. The decrease is primarily attributable to improved economies
of scale.
Income/(loss) from Operations
Loss from operations was $(9.2) million for the first quarter of fiscal 1997
compared to income from operations of $3.0 million in the prior-year period. The
loss from operations is due to a $14 million write-off of in-process R & D
related to the Company's acquisition during the quarter of ITC. Exclusive of
this write-off, income from operations increased 56 percent to $4.7 million in
the first quarter of fiscal 1997 compared to $3.0 million in the same period of
the prior year. The increase is attributable to increased sales, both as a
result of additional unit sales (including the GDC system) and the pricing
considerations described above, and reduced SG & A as a percentage of sales.
These factors were partially offset by the impact of increased R & D
expenditures as a percent of sales.
Although Target has experienced revenue growth since its inception and has been
profitable on a quarterly basis (exclusive of the non-recurring write-off of
in-process R & D due to the acquisition of ITC on May 23, 1996) since the
quarter ended December 31, 1990, no assurance can be given that revenue growth
or profitability on a quarterly or annual basis will be sustained. The Company's
results of operations have varied significantly from quarter to quarter, and
revenue growth rates have been inconsistent. Future operating results will
depend upon several factors in addition to those discussed above, including the
timing and amount of expenses associated with expanding Target's operations both
domestically and internationally, increased revenues and expenses in conjunction
with Target's direct sales operations in Germany and France, increased costs
associated with product launches, the Company's ability to successfully meet new
product development plans, success in achieving regulatory clearance for new
products in a timely manner, maintaining regulatory clearance, the acceptance of
new product introductions both in the United States and internationally, the mix
between pilot production of new products and full-scale manufacturing of
existing products, the mix between domestic and export sales, the availability
of complementary products and the effects this may have particularly on domestic
sales, possible changes in ordering patterns of its customers due to changes in
the healthcare environment or to potential variations in foreign exchange rates,
Target's ability to continue to attract qualified engineers to further the
development of future products, potential future partnering arrangements,
changes in domestic and foreign health care policies (including third-party
reimbursement issues), increased competitive forces, developments in the
Company's ongoing intellectual property litigation, increased expenses
associated with protecting Target's proprietary assets and the general litigious
nature of the medical device industry. Target also believes that seasonal
patterns, including a reduction in the number of procedures performed by
physicians using the Company's products during summer and holiday periods, may
affect its quarterly revenue stream. In addition, Target cannot predict ordering
rates by distributors, some of which place infrequent stocking orders while
others order at regular intervals. As a result of these and other factors, the
Company expects to continue to experience significant fluctuations in its
quarterly operating results.
The Company's common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Target's common
stock in any given period. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of Target's common stock
price.
Interest and Other Income
Net interest income remained flat at $375,000 for the three months ended June
30, 1996 compared to $376,000 in the prior-year period.
Other income decreased to $275,000 in the first quarter of fiscal 1997 from
$315,000 in the same period of the prior year. The decrease is due to an
increase in equity losses of $106,000 resulting from investments by Target in
its affiliates to further the development of these companies' products and
reduced earnings in the Company's Japanese joint venture of $140,000. These
decreases were partially offset by a pre-tax gain of $270,000 resulting from the
sale of 15,000 shares of Conceptus, Inc. common stock by the Company during the
first quarter of 1997. The Company anticipates that other income may decrease
during the remainder of the fiscal year due to a reduction of services provided
pursuant to the management agreement with the Japanese joint venture and the
recognition of further equity losses resulting from the additional investments
made by Target in its affiliates for which Target's interest is accounted for on
the equity method.
13
<PAGE> 14
Minority Interest
In June 1995 the Company and its former distributor in France formed a joint
venture to market the Company's products in France. Target holds a 51 percent
interest in the joint venture. The results of the operations in France, net of
the minority interest, are included in the consolidated results of the Company
beginning in the second quarter of fiscal 1996. Minority interest before taxes
is reflected as a separate component of the Company's Consolidated Statements of
Operations for the quarter ended March 31, 1996.
Provision for Income Taxes
For the three months ended June 30, 1996 and 1995, the Company's income tax
provision has been calculated based upon the estimated annual effective tax rate
of 31 percent (excluding the impact of the acquired in-process research and
development charge for which no tax benefit is available) and 30 percent,
respectively. The higher effective tax rate for the fiscal 1997 is primarily due
to anticipated reductions in the benefit derived from foreign tax credits
generated in Japan with respect to the Company's ownership interest in its
Japanese joint venture.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of approximately $67.9 million
and its principal sources of liquidity consisted of approximately $41.0 million
in cash, cash equivalents and short-term investments and $3.0 million available
under a line of credit which expires in October 1996. At June 30, 1996, no
amounts were outstanding under this line of credit.
Prior to February 1996, the Company accounted for its greater-than-20 percent
ownership interest in Conceptus, Inc. under the equity method. In February 1996,
Conceptus completed an initial public offering of common stock which reduced the
Company's ownership position to approximately 18 percent. Consequently, the
portion of the investment which will be available for sale, subject to certain
market trading restrictions, is accounted for in accordance with FASB Statement
115. The unrealized gain of $10.2 million at June 30, 1996 is recorded, net of
deferred taxes, as a component of stockholders' equity. The remaining investment
is recorded at cost. The estimated fair value of the entire investment as of
June 30, 1996 is approximately $16.9 million.
Conceptus' common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Conceptus'
common stock in any given period. In addition, Conceptus participates in a
highly dynamic industry, which often results in significant volatility of the
common stock price. Any changes in the Conceptus common stock price could have a
significant impact on the value of the Company's investment, resulting in a
change to the Company's working capital, deferred tax liabilities, stockholders
equity and total assets and liabilities.
Accounts receivable increased to $16.3 million at June 30, 1996 compared to
$15.7 million at March 31, 1996. The increase is due primarily to increased
sales and the results of consolidating ITC. Inventories increased to $8.8
million at June 30, 1996 from $6.7 million at March 31, 1996. The increase is
attributable to increased inventory levels of certain products to support
anticipated increases in sales, particularly of the GDC system in the United
States, and to the consolidation of ITC inventory and inventory in France. In
addition, the increase in GDC inventory levels is partially to support
anticipated sales that may result from obtaining regulatory clearance in Japan
for the GDC system. If such approval is not obtained, there can be no assurance
that such inventory can be fully absorbed through alternative sales channels.
Other assets increased to $10.7 million at June 30, 1996 from $7.5 million at
March 31, 1996, primarily due to the intangibles acquired upon the acquisition
of ITC, the net effect of equity accounting for the Company's joint venture and
affiliate companies and increased investments in proprietary assets.
Property and equipment, net, increased from $11.1 million at March 31, 1996 to
$13.2 million at June 30, 1996 due primarily to the investment in machinery and
equipment to expand manufacturing lines and research and development
laboratories. In addition, the Company continued to substantially upgrade the
Company's management information systems "MIS" infrastructure which is expected
to improve customer service turnaround times and allow for better
14
<PAGE> 15
materials planning. During the first quarter of fiscal 1997, the Company
invested approximately $200,000 on the MIS infrastructure. Target expects to
invest a total of approximately $1.0 million on this project in fiscal 1997.
There can be no assurance that this project will be completed successfully or in
a timely manner, or that the project will not result in disruptions in the
Company's operations, and it is unlikely that these improvements will result in
materially increased revenues or profits in the near term, if at all. In
addition, in March 1996, the Company expanded its facilities in Fremont,
California by moving into an additional 36,000 square-foot facility. The Company
will utilize this facility for research and development, manufacturing and
corporate administrative purposes. Target expects to invest $800,000 on
completing the move to the facility in fiscal 1997 of which approximately
$200,000 was spent during the quarter ended June 30, 1996. The Company expects
to complete this expansion during fiscal 1997.
On May 16, 1996, the Company's Board of Directors authorized a stock repurchase
program in which up to 350,000 shares of its common stock may be purchased in
the open market from time to time. From the inception of the stock repurchase
program through June 30, 1996, the Company has repurchased 198,960 shares of its
common stock at an average acquisition price of approximately $44 per share.
Subsequent to June 30, 1996, the Company has completed the repurchase of the
350,000 shares of its common stock at an overall average acquisition price of
approximately $40. The Company currently plans to keep the repurchased shares as
treasury stock and may use this stock in various company stock benefit plans. In
addition, in August 1996, the Board of Directors authorized the repurchase of up
to 500,000 additional shares of the Company's common stock under the repurchase
program.
Target believes that available cash, cash equivalents and short-term
investments, as well as funds expected to be generated from operations, will be
sufficient to meet the Company's operating expenses and cash requirements for
the foreseeable future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994 the Company filed a lawsuit in the United States District Court
(the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The Court of Appeals has temporarily stayed the preliminary injunction
pending the outcome of Cordis and SciMed's appeal of the decision.
Notwithstanding the grant of the Company's motion for a preliminary injunction,
there can be no assurance that the Company will be ultimately successful in this
lawsuit.
In addition, from time to time, the Company may be involved in legal actions,
including product liability claims and the protection of the Company's
proprietary assets, arising in the ordinary course of business. While the
outcome of such matters is currently not determinable, it is management's
opinion that these matters, both individually or in the aggregate, will not have
a material adverse effect on the Company's consolidated financial position,
results of its operations or cash flows.
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Description
11.1 Calculation of net income/(loss) per share
21.1 Press Release issued by the Registrant on August 8, 1996
(b) Reports on Form 8-K
(i) The Company has filed the following reports on Form 8-K
relating to the Company's acquisition of Interventional
Therapeutics Corporation:
Form 8-K
Report Date: May 23, 1996
Filing Date: June 7, 1996
Item 2 - Acquisition or Disposition of Assets
Item 7a - Financial Statements of Acquired Business
Item 7b - Pro Forma Financial Statements
Item 7c - Exhibits
Form 8-K/A
Report Date: May 23, 1996
Filing Date: July 25, 1996
Item 7a - Financial Statements of Acquired Business
Item 7b - Pro Forma Financial Statements
Item 7c - Exhibits
(ii) The Company has also filed the following reports on Form 8-K
relating to certain press releases by the Company:
Form 8-K
Report Date: July 24, 1996
Filing Date: July 26, 1996
Item 5 - Other Events
Item 7c - Exhibits
Form 8-K
Report Date: July 30, 1996
Filing Date: August 2, 1996
Item 5 - Other Events
Item 7c - Exhibits
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGET THERAPEUTICS, INC.
Date: August 12, 1996
/s/ Robert E. McNamara
------------------------------------
Robert E. McNamara
Vice President, Finance & Administration,
Chief Financial Officer and Assistant
Secretary
(Principal Financial Officer and Duly
Authorized Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description numbered page
- ------ ----------- -------------
<S> <C>
11.1 Calculation of net income/(loss) per share 19
21.1 Press Release issued by the Registrant on 20
August 8, 1996
27.1 Financial Data Schedule
</TABLE>
18
<PAGE> 1
TARGET THERAPEUTICS, INC.
CALCULATION OF NET INCOME/(LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
EXHIBIT 11.1
Three months ended
June 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Net income/(loss) $(10,724) $ 2,133
========= =======
Weighted average shares outstanding during the period 14,787 14,254
Common equivalent shares (1) --- 638
-------- -------
Shares used in calculation of net income per share 14,787 14,892
======== =======
Net income/(loss) per share $ (.73) $ .14
======== =======
</TABLE>
(1) Common share equivalent shares are not used in the calculation of the per
share loss since they are antidilutive.
19
<PAGE> 1
EXHIBIT 21.1
TARGET THERAPEUTICS EXTENDS STOCK REPURCHASE PROGRAM
FREMONT, CALIF. (AUGUST 8, 1996) -- Target Therapeutics, Inc. (NASDAQ: TGET)
announced today that it plans to extend its stock repurchase program by up to
500,000 additional shares of its Common Stock that may be purchased in the open
market from time to time. This buyback would represent about 3% of the
approximately 15 million shares outstanding. The Company had previously
announced the completion of the repurchase of 350,000 shares that were
authorized for repurchase upon initiation of the repurchase program in May 1996.
"The Company's decision was made in view of the prices at which the Company's
Common Stock has recently traded and underscores the confidence of the Board of
Directors in the future of the Company," stated Gary Bang, president and chief
executive officer of Target Therapeutics, Inc. Mr. Bang also stated, " We feel
that the share repurchase will be beneficial to stockholders due to the stock's
recent trading price." He continued "The Company has no specific plans for the
shares that may be repurchased."
Except for the historical information contained herein, the matters discussed in
this press release are forward looking statements, the accuracy of which is
necessarily subject to risks and uncertainties. Actual results may be affected
by, among other things, risks and other factors set forth from time to time in
the Company's Securities and Exchange Commission filings including those factors
set forth under the heading "Factors That May Affect Future Results of
Operations" in the Company's Form 10-K for the year ended March 31, 1996.
Founded in 1985, Target Therapeutics, Inc. develops, manufactures and markets
specialized disposable micro-catheters, guidewires, micro-coils, silicone
balloons, embolics, and angioplasty products. These therapeutic devices are used
in minimally-invasive procedures to reach disease sites throughout the body via
the circulatory system. The Company's products allow highly targeted treatment
of diseased, ruptured or blocked vessels of the brain responsible for stroke, as
well as other disease sites in the body that are accessible through small
vessels of the circulatory system.
CONTACT:
INVESTORS AND ANALYSTS MEDIA
Robert E. McNamara Jonathan Greer
Target Therapeutics Edelman Public Relations
510-440-7700 415-433-5381
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8470
<SECURITIES> 49908
<RECEIVABLES> 17072
<ALLOWANCES> (765)
<INVENTORY> 8833
<CURRENT-ASSETS> 89202
<PP&E> 20680
<DEPRECIATION> (7448)
<TOTAL-ASSETS> 113172
<CURRENT-LIABILITIES> 26504
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 85660
<TOTAL-LIABILITY-AND-EQUITY> 113172
<SALES> 22049
<TOTAL-REVENUES> 22049
<CGS> 6617
<TOTAL-COSTS> 25086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (9252)
<INCOME-TAX> 1472
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,724)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
