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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year 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: 0-19713
VENTRITEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0056340
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
701 East Evelyn Avenue, Sunnyvale, CA 94086
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 738-4883
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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 period that 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
----- -----
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate value of voting stock held by non-affiliates of the
Registrant was approximately $295,631,108 as of August 9, 1996, based upon the
closing sale price of the Registrant's Common Stock reported for such date on
the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of June 30, 1996, the
Registrant had outstanding 20,878,095 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1996 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this Form 10-K. Certain information is incorporated into Parts II
and IV of this report by reference to the Registrant's annual report to
stockholders for the year ended June 30, 1996.
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VENTRITEX, INC.
INDEX
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PAGE
NUMBER
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Implantable Defibrillators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Transvenous Lead Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Clinical Engineering, Marketing and Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Product Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Third Party Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Patents and Proprietary Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Additional Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . 15
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . 17
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Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 21
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
THE COMPANY
Since its inception, Ventritex, Inc. ("Ventritex" or the "Company")
has engaged in the design, development, manufacture and sale of implantable
defibrillators and related products for the treatment of ventricular
tachycardia and ventricular fibrillation. Ventricular tachycardia and
ventricular fibrillation are the most serious and life-threatening forms of
abnormal heart rhythms ("arrhythmias"). The Company's principal product, the
Cadet V-115 implantable defibrillator, is an electronic device that is
implanted in the patient's pectoral (chest) or abdominal region and is
connected to the patient's heart with defibrillation leads, which are typically
implanted transvenously. The Cadet V-115 is the successor to the Company's
Cadence V-100 and V-110 implantable defibrillators, which are considerably
larger than the Cadet V-115 and are implanted in the patient's abdominal
region. The Cadet has the same functional and performance characteristics as
larger Ventritex defibrillators and offers features, including high
defibrillation energy output and extended electrogram ("EGM") storage, superior
to competing defibrillators that can be implanted pectorally. As of June 30,
1996, approximately 1,000 Cadet and 17,250 Cadence implants had been performed
at over 550 sites. The Company's defibrillators monitor the heartbeat and
deliver electrical pulses or shocks to the heart to terminate ventricular
tachycardia and ventricular fibrillation in patients. In ventricular
tachycardia, the heart's ventricles contract at an abnormally rapid rate and
typically deliver less blood to the body's tissues and organs. Episodes of
ventricular tachycardia occur unpredictably and can progress to ventricular
fibrillation. In ventricular fibrillation, the heart's normal electrical
impulses become disorganized and erratic and the heart ceases to pump blood.
If ventricular fibrillation is not terminated quickly, the individual will
experience a sudden cardiac death ("SCD") episode during which the individual
will become unconscious and, without prompt medical intervention, typically
will die.
Cadence(R), Cadet(R), HVS(R), TVL(R) and Ventritex(R) are registered
trademarks of the Company and Contour(TM) and SPL(TM) are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
BACKGROUND
The heart is divided into four chambers, two upper chambers called
atria and two lower chambers called ventricles. The heart's function is to
pump blood through the body's circulatory system. Each normal heartbeat is the
result of electrical signals generated at a precise area in the right atrium,
called the sino-atrial node, the heart's natural pacemaker. These electrical
signals cause a physical contraction of the atria, which pump blood into the
ventricles. The electrical impulses then continue to the ventricles, causing
them to contract and distribute blood throughout the body.
Arrhythmias, abnormal rhythms of the heart muscle, arise from
numerous causes, including tissue damage due to previous heart attacks,
congenital defects and certain diseases. Arrhythmias originate in either the
atria, where they are generally not life-threatening, or the ventricles, where
they can significantly interfere with the pumping of oxygenated blood and can
therefore be life-threatening. During an arrhythmia, the heart beats either
too slowly or too rapidly. An abnormally slow heart rate, generally defined as
a heart rate below 50 beats per minute, is known as bradycardia. Ventricular
tachycardia, a more serious arrhythmia, occurs when abnormal electrical signals
occur in the ventricles, causing the ventricles to beat at an abnormally rapid
rate. When the ventricles beat at an abnormally rapid rate, they do not have
sufficient time to fill with blood prior to each contraction and therefore less
blood is pumped out of the heart. As a result, less oxygen is carried to the
tissues and organs of the body. This lack of oxygen can cause dizziness,
unconsciousness, cardiac arrest and, ultimately, death.
Patients experiencing heart problems are usually treated initially by
cardiologists. Cardiologists may refer patients with ventricular
tachyarrhythmias to specialists in electrophysiology, a cardiology subspecialty
requiring extensive, advanced training in the diagnosis and treatment of
arrhythmias. Typically, an electrophysiologist will conduct extensive testing
to determine the appropriate therapy, including testing various drugs to
determine their potential for preventing future spontaneous tachyarrhythmias.
Electrophysiology testing is a costly procedure and often requires
hospitalization. If an antiarrhythmic drug is successful in these tests, the
drug will usually be prescribed for the patient. If an appropriate drug cannot
be identified, or if the patient's ventricular tachyarrhythmia is judged to be
too critical to be treated by drugs alone, the electrophysiologist will
typically elect to implant a defibrillator.
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MARKET
UNITED STATES
Since the first defibrillator implant in 1981, the Company estimates
that through 1995 over 90,000 defibrillators have been implanted in the United
States, including approximately 22,000 in 1995. Implantable defibrillators are
generally purchased by hospitals upon the recommendation of
electrophysiologists. Currently, approximately 1,200 electrophysiologists
practice at medical centers in the United States where defibrillator implants
are performed. Approximately 400,000 people experience SCD in the United
States every year, accounting for about half of all cardiac mortality. The
Company believes that referrals of individuals who are at risk of SCD to
electrophysiologists have been increasing annually as physicians have become
more aware of the benefits of electrophysiology testing. Recent studies
suggest that individuals at high risk of SCD who do not receive an implantable
defibrillator but receive drug therapy alone have a significantly higher
mortality rate from SCD.
Recently, a clinical study sponsored by a competing manufacturer of
implantable defibrillators demonstrated the clinical utility of implanting
defibrillators in additional classes of patients that are at high risk of an
SCD episode. In particular, this study demonstrated the utility of implanting
defibrillators in patients who have suffered a heart attack and are at high
risk of an SCD episode but who do not exhibit other symptoms, such as sustained
ventricular tachycardia. As a result of this study, the sponsoring
manufacturer has been permitted by the United States Food and Drug
Administration ("FDA") to expand the labeling of its device to include this
class of patients. The Company is seeking FDA approval of a pre-market
approval ("PMA") supplement to similarly expand the labeling of its
implantable defibrillators. Although there can be no assurance as to the action
the FDA will take in this regard, a broadening of the classes of patients that
can receive defibrillator implants could result in an increased market for
defibrillators.
INTERNATIONAL
To date, the United States market has represented approximately 80%
of the world market for implantable defibrillators. The international market
for implantable defibrillators has been constrained by the lack of effective
emergency medical services in many developed countries. However, certain
international markets, including particularly Germany and Italy, represent
attractive markets for implantable defibrillators, and, to the extent that
emergency medical services in other countries improve, the market for
implantable defibrillators in these countries could correspondingly grow.
IMPLANTABLE DEFIBRILLATORS
An implantable defibrillator is an electronic device that is
implanted in the patient and is designed to monitor the patient's heartbeat and
deliver electric pulses or shocks to the heart to terminate ventricular
tachyarrhythmias. The limitations of first and second generation implantable
defibrillators led to the development of third-generation defibrillators
capable of providing tiered therapy. Tiered therapy defibrillators are
designed to provide three types of therapy: (i) low voltage electrical pacing
pulses to terminate ventricular tachycardia, (ii) one or more cardioversion
shocks to convert, to a normal rhythm, ventricular tachycardia that cannot be
controlled through antitachycardia pacing, and (iii) high-energy defibrillation
shocks to terminate ventricular fibrillation. Third-generation implantable
defibrillators also provide greater programmability to increase the physician's
ability to customize therapy to a patient's condition during and after implant.
The Company's Cadence V-100 defibrillator and a competitor's third-generation,
tiered therapy implantable defibrillator received PMA approval in 1993. The
Cadence V-100 was the first third-generation, tiered therapy implantable
defibrillator incorporating both electrogram ("EGM") storage and a biphasic
defibrillation waveform to receive regulatory approval. The Company's Cadence
V-110 implantable defibrillator, a smaller version of the V-100 with similar
performance characteristics, and a competitor's third-generation defibrillator
received regulatory approval in 1994.
Competition in the market for tiered therapy implantable
defibrillators increased significantly in March 1995 with FDA approval of a PMA
application for implantable defibrillators manufactured by two of the Company's
competitors, the Cardiac Pacemakers, Inc. subsidiary of Guidant Corporation
("CPI") and Medtronic, which allowed implantation in the pectoral area, rather
than the abdominal area, in suitable patients. The ability to implant the
defibrillator pectorally enables the implant procedure to be performed by an
electrophysiologist alone, rather than in conjunction with a surgeon. In May
1996, the Company received FDA approval for pectoral implantation labeling of
the Cadet V-115 implantable defibrillator. The Cadet V-115 is comparable in
size to the new defibrillators introduced by CPI and Medtronic.
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TRANSVENOUS LEAD SYSTEMS
Since the United States commercial introduction of transvenous
defibrillation leads in 1994, transvenous lead systems, in which the
defibrillation leads are implanted through a vein to connect the defibrillator
with the heart, have become the preferred type of lead system.
Defibrillation lead systems require two electrodes to deliver
electrical energy to the heart. Defibrillation lead systems can be configured
with two leads, in which case a single electrode will be placed on each lead.
In addition, two single lead configurations are possible. In one such
configuration, two electrodes are placed on a single lead. Alternatively, in a
configuration known as a "high voltage can," one or two electrodes are placed
on the lead and the housing of the defibrillator unit serves as the second or
third electrode. Certain physicians may have a preference for single lead
systems because of their belief that a single lead system is easier to implant.
However, the Company estimates that, as compared to a single lead system, a
dual lead system requires approximately five additional minutes to implant and
offers additional flexibility in electrode configuration.
In May 1996, the Company received FDA approval of a PMA application
for its TVL transvenous defibrillation lead system. The TVL is configured as a
dual lead system. The Company is currently engaged in clinical trials of two
single lead systems, one in which both electrodes are on a single lead and a
second with a single electrode on the lead and another on a high voltage can
version of the Cadet V-115 defibrillator. There can be no assurance as to when
or whether the Company will receive PMA approval for such single lead systems.
To date, a large percentage of the Company's sales of defibrillators
have been at the direction of physicians who used the Company's defibrillators
in combination with commercially available transvenous lead systems supplied by
the Company's competitors. Therefore, there can be no assurance that
physicians will purchase transvenous lead systems for which the Company obtains
regulatory approval. In particular, physicians preferring single lead systems
may choose to continue to combine competitors' transvenous leads with the
Company's defibrillators, at least until such time as the Company obtains PMA
approval for its single lead systems. Furthermore, there can be no assurance
that manufacturers of competing transvenous lead systems will not attempt to
discourage or prevent use of their leads with the Company's defibrillators
through product labeling, availability, pricing or other means. In general,
unless the FDA-approved labeling includes use with any transvenous lead system
sold by its competitors, the FDA or other government agencies may take further
actions, including restrictions on reimbursement, to restrict the combination
of the Company's defibrillators with such transvenous lead systems. Such
actions could make the Company's defibrillators, including both the Cadet and
the Contour, less attractive to physicians and could therefore have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCTS
The Cadet implantable defibrillator system consists of a Cadet
microprocessor-based implantable defibrillator; sensing/pacing and
defibrillation leads that connect the Cadet defibrillator to the patient's
heart; the Programmer, a customized personal computer that the
electrophysiologist uses to program the defibrillator's operating parameters
during and after the implant and to retrieve information from the device after
implant; and the High Voltage Stimulator ("HVS-02") that the
electrophysiologist may use during the implant procedure to ensure proper
placement of the leads, to determine the level of energy needed to defibrillate
the patient, and to perform testing before implanting the Cadet defibrillator.
CADET V-115 DEFIBRILLATOR
The Company's principal product, the Cadet V-115 implantable
defibrillator, is a third-generation, tiered therapy implantable defibrillator
that uses a sophisticated sensing system to continuously monitor the patient's
heart rate and employs a complex set of algorithms to distinguish various types
of ventricular arrhythmias. The tiered therapy Cadet system may be programmed
to initially deliver low voltage antitachycardia pacing designed to control
ventricular tachycardias that can be terminated by such pacing. The Cadet can
also be programmed to deliver cardioversion shocks in an attempt to convert
ventricular tachycardia to a normal rhythm, or deliver one or more high energy
electric shocks to the heart to terminate ventricular fibrillation. Cadet
defibrillators are programmed by the physician upon implant and periodically
thereafter to respond to a patient's changing needs.
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A Cadet defibrillator, configured for use with a Ventritex lead
system, is 73 cubic centimeters in size and has been designed to be small
enough to be implanted in the pectoral region while delivering the same
functional and performance characteristics as larger tiered therapy implantable
defibrillators that must be implanted in the abdomen. Key features of the
Cadet include the following:
. High Defibrillation Energy Output. The Cadet delivers energy
output up to approximately 38 joules, which is more than other
pectorally implantable defibrillators that are commercially available
or, to the Company's knowledge, in clinical trials in the United
States. Since certain patients require a high level of energy output
to terminate ventricular fibrillation, the Cadet's high power output
can expand the range of patients who can be effectively treated as
well as providing an additional safety margin.
. Programmability. Cadet defibrillators are configured to provide the
electrophysiologist with the ability to vary the operating parameters
of implanted units using the Programmer. This programmability allows
the physician to customize therapy to the patient's condition during
and after implant. The Programmer is menu-driven and features a
touch screen interface to simplify device programming and information
retrieval.
. Biphasic Defibrillation Waveform. Cadet defibrillators can deliver
electrical shocks to the patient in a monophasic or biphasic
waveform. Clinical studies suggest that biphasic waveforms achieve
improved defibrillation efficacy compared to monophasic waveforms.
. Electrogram Storage. Cadet defibrillators continuously collect data
to record information on the patient's arrhythmic events in EGM form.
This feature provides valuable information that enables the
electrophysiologist to analyze spontaneous arrhythmic events that the
patient has experienced, to evaluate the effectiveness of therapies
that were delivered in response to arrhythmic events and, if
appropriate, to adjust operating parameters of the device. The Cadet
provides up to 8 minutes of EGM storage. The continuous EGM storage
provided by the Cadet, as compared to the segmented EGM data provided
by certain competing defibrillators, improves the quality of EGM data
available to the electrophysiologist for arrhythmia diagnosis.
. Continuous Sensing and Non-Committed Therapy. Cadet defibrillators
continuously sense the heart's activity while the defibrillator is
charging its high voltage capacitors to the level required for the
indicated therapy, and can abort the charging process if the
patient's heart function spontaneously returns to normal. This
feature is significant because the Cadet defibrillator does not
subject the patient to unnecessary and painful electric shocks if the
patient's heart function spontaneously returns to normal.
. Backup Bradycardia Pacing. Cadet defibrillators can provide pacing
to correct an abnormally slow heartbeat. This pacing is sometimes
necessary to restart a patient's heart following a defibrillation
shock. This feature reduces the need to implant a second device for
those patients who would otherwise require a bradycardia pacemaker.
Cadet defibrillators are constructed as one-piece, hermetically
sealed units which contain hybrid circuits, high voltage capacitors and
batteries. Hybrid circuits include custom VLSI circuits, a semi-custom
microprocessor and memory chips. The hybrid circuits process and store data
and control the operation of the Cadet units. The capacitors accumulate an
electric charge and deliver high voltage shocks. The Cadet implantable
defibrillator is battery-powered and is designed to have a life of three to
five years, although battery life varies depending on the frequency and
duration of pacing and the number of times the capacitors are charged to high
voltage. The list price for the Cadet V-115, without leads, is approximately
$20,000.
CONTOUR V-145 DEFIBRILLATOR
To date, a limited number of Contour V-145 implantable defibrillators
have been implanted in patients in the United States and Europe. At 57 cubic
centimeters, the Contour is one of the smallest third-generation implantable
defibrillators. The Contour offers the same high, approximately 38 joule
energy output provided by the Cadet and provides 16 minutes of stored EGM data.
In June 1996, the Company submitted a PMA supplement for the Contour to the
FDA; however, there can be no assurance that the FDA will accept this
submission as a PMA supplement. The FDA could instead require additional
testing of the Contour and could also require clinical data in order to approve
the supplement. The Company would then be required to
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conduct additional clinical trials under an IDE and submit data from such
trials. This could result in significant delays in approval for the Contour.
Delays in receiving or failure to receive PMA approval for the Contour would
have a material adverse effect on the Company's business, financial condition
and results of operations.
TVL TRANSVENOUS LEAD SYSTEM
The Company's principal lead system which is labeled for use with
Cadet defibrillators is the TVL transvenous lead system. The Company received
regulatory approval for the TVL system in May 1996. The TVL system employs a
dual lead configuration. The TVL leads are designed to offer the flexibility
and maneuverability of pacemaker leads, which have been implanted transvenously
for many years, making them easy to handle and place in the patient. TVL leads
provide sensing and pacing and are used to monitor heart function and to
deliver antitachycardia or bradycardia pacing, as needed. The current list
price of the TVL system is approximately $5,500.
NEW SINGLE LEAD SYSTEMS
The Company has developed and is conducting clinical trials of two
single lead systems to provide additional flexibility for electrophysiologists
in selecting a lead system and to accommodate the preferences of many
electrophysiologists for a single lead system. The Company's SPL system is a
single lead with two defibrillation electrodes. The Company is also conducting
clinical trials of a "high voltage can" version of the Cadet V-115. In this
system, one electrode is on the lead and the housing of the Cadet, which is
made of titanium, serves as the other electrode. The Company submitted a PMA
supplement for the high voltage can versions of the Cadet and the Contour to
the FDA in July 1996 and intends to submit a PMA supplement for the SPL system
to the FDA. There can, however, be no assurance that the FDA will accept these
submissions as PMA supplements. The FDA could instead require additional
testing of or modification to the SPL or the Company's high voltage can
defibrillator and could also require clinical trials under an IDE and completion
of the entire PMA approval process, as opposed to the typically shorter PMA
supplement process. Delays in receiving or failure to receive PMA approval for
the SPL or the high voltage can defibrillator could have a material adverse
effect on the Company's business, financial condition and results of operations.
PROGRAMMER
Ventritex Programmers are customized personal computers that provide
communication with the Company's defibrillators using a specialized
communication wand. This feature allows the physician to alter the operating
parameters of Cadet defibrillators, to receive and display diagnostic data and
to non-invasively induce ventricular tachycardia or fibrillation in the patient
to periodically evaluate the patient's defibrillation threshold and
defibrillator performance. The Programmer is menu driven and uses a color
touch screen to highlight programming steps and changes, which simplifies the
setup and monitoring of defibrillator operating parameters. The Company
typically provides Programmers without charge for each domestic site implanting
the Company's defibrillators. As a result, the Company anticipates expensing
approximately $6 million during fiscal 1997 for Programmers and HVS-02 high
voltage stimulators provided to hospitals and other sites where the Company's
defibrillators are implanted.
HIGH VOLTAGE STIMULATOR
The HVS-02 high voltage stimulator is an external device that may be
used by the electrophysiologist during the implant procedure to facilitate
proper placement of the leads and to induce and terminate ventricular
tachycardia or fibrillation to determine the energy required to defibrillate
the patient. It provides an external defibrillator to determine defibrillation
thresholds, a pacing system analyzer to properly position the sensing/pacing
leads, and a programmable stimulator to induce either ventricular tachycardia
or fibrillation. Typically, one HVS-02 is used at each institution implanting
the Company's defibrillators and HVS-02 devices are typically provided by the
Company without charge. However, it is also possible to have the defibrillator
itself perform the functions of the HVS-02 during the implant procedure, and an
increasing number of implants are currently being performed without use of the
HVS-02.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts include various
research, product and process development, clinical trial and quality assurance
activities. These activities are performed by the Company's staff and are
supplemented by work conducted on the Company's behalf by outside sources. The
Company is engaged in research and development projects for future
defibrillator systems, transvenous defibrillation lead systems and external
equipment. Delays in development of new products by Ventritex or developments
involving competitors, including commencement of clinical trials or
commercialization of new implantable devices, pharmaceuticals, cardiac ablation
or surgical alternatives for the treatment of ventricular tachycardia or
ventricular fibrillation, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Research and development expense was $30.8 million, $27.7 million and
$23.3 million for fiscal years 1996, 1995 and 1994, respectively. The Company
expects research and development expense to continue to increase in dollar
amount in the future.
Market acceptance and sales of the Company's products could be
adversely affected by technological changes. Many companies with substantially
greater resources than the Company are engaged in the development of products
and approaches for the treatment of ventricular tachycardia and ventricular
fibrillation. These include implantable devices as well as pharmaceuticals and
cardiac ablation therapies. Future innovations in the treatment of ventricular
tachycardia and ventricular fibrillation could render existing technologies,
including the Company's systems, less competitive or obsolete.
CLINICAL ENGINEERING, MARKETING AND SALES
The Company's skilled sales, marketing, clinical engineering and
support staff consult with electrophysiologists on the features and
applications of the Company's products. In addition, sales and field clinical
engineering personnel conduct ongoing training sessions and provide clinical
support by attending defibrillator implants and patient follow-up sessions.
The Company's field sales and field clinical engineering
organizations currently include approximately 60 individuals. The field
organization enables the Company to focus its marketing program on
electrophysiology centers in the United States. In addition, the Company is
addressing international markets, typically through specialty cardiovascular
product distributors. During fiscal 1996, the Company established a direct
sales and field clinical engineering organization in Germany.
The Company sells primarily to hospitals. In the fiscal year ended
June 30, 1996, one customer accounted for 10% of net sales. In the fiscal
years ended June 30, 1995 and 1994, no customer accounted for more than 10% of
sales.
MANUFACTURING
The Company's manufacturing facility based in Sunnyvale, California
contains assembly areas where its products are assembled and tested. The
manufacturing area includes controlled environment rooms in which certain lead
systems are manufactured, and the completed defibrillators and lead systems are
packaged before being sent to an outside sterilization facility. The Company's
quality assurance group performs tests at various steps in the manufacturing
cycle to ensure compliance with the Company's specifications.
The Company relies on outside suppliers to manufacture certain major
components of its defibrillator systems. The Company currently has sole source
supply arrangements with its suppliers of hybrid circuits, high voltage
capacitors, integrated circuits, defibrillation lead components, batteries and
certain other components used in its products. For certain components, there
are relatively few potential sources of supply and establishment of additional
or replacement suppliers for these components cannot be accomplished quickly.
The Company believes that alternative sources of supply are available for most
components and subcontracted manufacturing services, and plans to qualify
additional suppliers as production volumes increase. Because of the long lead
times for some components that are currently available from only a single
source, a vendor's inability to supply acceptable components in the quantity
required could impair the Company's ability to manufacture new or existing
products on a timely and cost effective basis, could result in substantial
unanticipated expenses and delays in the commercial availability of such
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
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During the first half of fiscal 1996, in anticipation of regulatory
approval, the Company began production of its Cadet V-115 defibrillator system
and TVL transvenous lead system, and initially experienced shortages of certain
critical components due to manufacturing yield problems at its suppliers.
There can be no assurance that future production problems will not be
encountered in producing the Cadet, expanding production of the Contour and the
TVL or establishing production of other new products. Failure to manufacture
new or existing products on a timely and cost effective basis could result in
substantial unanticipated expenses, delays in the commercial availability of
such products, and could have a material adverse affect on the Company's
business, financial condition and results of operations.
PRODUCT WARRANTY
The Company's implantable defibrillator systems include a complex
electronic device and leads designed to be implanted in the human body for long
periods of time. Component failures, manufacturing errors or design defects
could result in an unsafe condition, injury or death to the patient. The
occurrence of such a problem could result in a recall of the Company's
products, explanting implanted defibrillators or leads and the implanting of
new defibrillators or leads.
The Company's defibrillators are warranted for the earlier of three
years or 100 high voltage capacitor charges, assuming nominal pacing during the
time the unit is implanted. Previously, the Company experienced certain
component failures with the Cadence defibrillator and with lead systems. For
example, during clinical trials, a number of Cadence V-100 defibrillators
experienced premature battery depletion due to defective capacitors supplied by
an outside vendor. In all these instances, the devices were explanted and
replaced with new defibrillators. The Company has experienced what it
believes, in light of industry experience, to be a typical level of returns of
defibrillator units from the field for various reasons, none of which the
Company believes are systemic or would otherwise give rise to a product recall.
There can, however, be no assurance that the Company's products will not
experience additional performance difficulties. Future product problems
resulting in a recall could have a material adverse effect on the Company's
business, financial condition and results of operations.
The manufacture and sale of the Company's products entails the risk
of product liability claims. Although the Company maintains product liability
insurance with coverage limits of $25.0 million per occurrence and $25.0
million in the aggregate per year, there can be no assurance that the coverage
limits of the Company's insurance policies will be adequate. Product liability
insurance is expensive and may not be available in the future on acceptable
terms or at all. In addition, the Company has indemnified certain of its
component suppliers for certain potential product liability. To date, the
Company has not experienced any material product liability claims. A
successful claim brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations and could adversely affect the
Company's ability to continue as a viable entity. Also, as a result of the
June 1996 United States Supreme Court decision in Medtronic, Inc. v. Lohr,
which rejected federal pre-emption of certain state law causes of action in
relation to medical devices, the Company expects that product liability claims
relating to medical devices may be pursued more aggressively in the future.
COMPETITION
Competition in the market for implantable defibrillator systems is
intense. Although patients susceptible to ventricular tachycardia and
ventricular fibrillation may be treated with antiarrhythmic drugs or cardiac
ablation therapies, the Company believes that manufacturers of implantable
defibrillators are its primary competitors. The Company's principal competitors
are Cardiac Pacemakers, Inc. ("CPI"), a subsidiary of Guidant Corporation, and
Medtronic, Inc. ("Medtronic"). Both CPI and Medtronic are large, diversified
cardiology and medical device companies and each has invested substantial
amounts in implantable defibrillator research and development. Other
competitors in the implantable defibrillator market include Telectronics Pacing
Systems, Inc., a subsidiary of Pacific Dunlop Limited ("Telectronics"),
Intermedics, Inc., a subsidiary of Sulzer Brothers Ltd. ("Intermedics") and
Angeion Corporation.
In March 1995, the FDA approved the commercial release of new
defibrillators manufactured by CPI and Medtronic which are small enough to
allow pectoral implantation, rather than abdominal implantation, in suitable
patients. Until receipt of regulatory approval relating to the Cadet in May
1996, the Company could not offer an implantable defibrillator labeled for
pectoral implantation in patients in the United States. Commercial release of
pectorally implantable defibrillators significantly increased competition in
the implantable defibrillator market and resulted in a significant decline in
the Company's market share and sales of the Company's products. The Company
now has products which it believes are competitive; however, there can be
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no assurance that the Company's products will compete successfully with
products currently manufactured by others or future products under development
by competitors which have new features, such as dual chamber and
rate-responsive pacing capabilities.
Medtronic and CPI have regulatory approval of and are commercially
marketing single lead transvenous lead systems. The Company currently is
marketing the TVL transvenous lead system, a dual lead system. Some physicians
prefer a single lead system due to the perceived ease of implanting such a
system as compared to a dual lead system. The Company is engaged in clinical
trials of single lead transvenous defibrillation lead systems and must receive
PMA approval prior to commercialization. There can be no assurance as to when
or whether the Company will receive PMA approval for these systems.
Many of the Company's competitors, including both CPI and Medtronic,
have substantially greater financial, manufacturing, marketing and technical
resources than those of the Company. The financial resources of certain of the
Company's competitors may enable them to use pricing pressures as a means of
competition. In addition, competitors have in the past and may in the future
employ litigation to gain a competitive advantage. There can be no assurance
that the Company's competitors will not develop or obtain regulatory approval
for implantable defibrillation systems, or for pharmaceuticals or surgical
alternatives, that may be more effective in treating ventricular tachycardia
and ventricular fibrillation than the Company's current or future products, or
that the Company's technologies and products would not be rendered less
competitive or obsolete by such developments. Failure of the Company's
products to gain market acceptance or limited growth in the market for
implantable defibrillators would have a material adverse effect on the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval
will have to compete for market acceptance and market share. An important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company
can develop products, complete clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market is
expected to be a critical competitive factor. The Company expects that
competition will also be based, among other things, on the ability to safely
and effectively treat ventricular tachycardia and ventricular fibrillation, the
availability of defibrillation systems that can be implanted through less
invasive surgical procedures, ease of programmability, ability to provide
improved diagnostic capability, size and weight of the device, product
reliability, physician familiarity with the device, patent position, sales and
marketing capability, third-party reimbursement policies, reputation and price.
In addition, the Company is aware that competitors are developing
and, in some instances, are conducting clinical trials of implantable
defibrillators that have features not included in the Company's defibrillators.
Moreover, these competitors may obtain expedited regulatory approval from the
FDA for these new devices. Commercial release of competitors' products with
features not available in the Company's products could have a material adverse
effect on the Company's business, financial condition and results of
operations.
THIRD PARTY REIMBURSEMENT
Implantable defibrillators are generally purchased by hospitals upon
recommendations of electrophysiologists. Typically, these hospitals then bill
various third party payors for the health care services provided to their
patients. These payors include Medicare, Medicaid and private insurers.
Government agencies reimburse hospitals for medical procedures at rates based
upon Diagnostic-Related Groups ("DRGs").
Third party payors are increasingly challenging the prices charged
for medical products and services, and current levels of reimbursement may be a
disincentive to some hospitals to perform defibrillator implants. Currently,
the sales prices of implantable defibrillators range from approximately $12,000
to $20,000, excluding leads. According to an industry study published in
January 1995, a defibrillator implant procedure, excluding electrophysiology
testing, typically costs between $30,000 and $60,000, depending on the length
of hospital stay and other variables. The same source indicated that the
average Medicare reimbursement for an initial defibrillator implant procedure
is approximately $35,000 to $40,000 and that the average Medicare reimbursement
for defibrillator replacement procedures is approximately $20,000.
Consequently, despite the Company's receipt of regulatory approvals for its
systems, third party payors may deny full reimbursement. There can be no
assurance that the Company's implantable defibrillator systems will be
considered cost effective by third party payors, that reimbursement will be
available, or if reimbursement is available, that third party payors'
reimbursement policies will not adversely affect the Company's
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ability to sell its products on a profitable basis. The failure by hospitals
and other users of the Company's products to obtain reimbursement from third
party payors could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, legislative initiatives relating to health care reform
have been introduced in Congress and certain state legislatures. These
initiatives have been focused, in large part, on health care cost containment.
Such initiatives, if enacted, could adversely affect the availability of third
party reimbursement for the Company's products and the price levels at which
the Company is able to sell its products. The Company's business, financial
condition and results of operations could be adversely affected by changes in
government and private payors' reimbursement policies relating to procedures
using the Company's products.
Medicare and Medicaid policies currently permit reimbursement for
investigational medical devices if such devices represent evolutionary
modifications to commercially available products. Under this policy, for
example, next generation implantable defibrillators in clinical trials would be
eligible for reimbursement because these devices are derived from an existing,
approved class of products. Because the Company anticipates that it will be
required to conduct clinical trials in connection with future products, changes
in this reimbursement policy could have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company files patent applications to protect technology and
inventions that are significant to the development of its business. As of June
30, 1996, the Company held 71 issued United States patents and 11 issued
foreign patents and had pending 51 United States and 28 corresponding foreign
patent applications that cover various aspects of its technology. The
Company's issued United States patents expire on dates ranging from 2006
through 2014. There can be no assurance that any of the claims in the pending
patent applications will be allowed, or that any issued patents will be upheld,
or not circumvented by competitors, or that any patents or licenses will
provide competitive advantages for the Company's products. The Company also
relies on trade secrets and proprietary know-how which it seeks to protect, in
part, through confidentiality agreements with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors.
The segment of the medical device market that includes implantable
defibrillators has been characterized by extensive litigation regarding patents
and other intellectual property rights. The Company has resolved intellectual
property disputes to date through licensing arrangements, when appropriate and
on terms it believes to be commercially reasonable. Under certain agreements,
the Company pays royalties based on commercial sales of implantable
defibrillator systems. The Company anticipates that such royalties will
continue for future implantable defibrillator systems developed by the Company.
Additionally, the agreements do not include all patents that may be issued to
the licensors, thus future patent disputes with these companies are possible.
Intermedics has filed claims against the Company for patent infringement which
are still pending, and there can be no assurance that other parties will not
institute additional litigation against the Company.
In 1990, two of the Company's competitors, Telectronics and
Intermedics, instituted patent infringement litigation against the Company.
Medtronic and CPI also notified the Company that they believed the Company
infringed patents held by them. In May 1992, the Company and Medtronic agreed
to cross-license their respective patent portfolios relating to devices for the
treatment of tachyarrhythmias. Under the license agreement, Ventritex pays
Medtronic royalties based on a percentage of net sales of Ventritex's products
covered by Medtronic's patents. In July 1993, Ventritex entered into license
agreements with Telectronics and CPI. Under the agreement with CPI, Ventritex
and CPI cross-licensed their respective patent portfolios relating to devices
for the treatment of tachyarrhythmias. Ventritex made a one-time payment to
CPI in settlement of claims relating to past activities and pays CPI royalties
based on a percentage of net sales of Ventritex's products covered by CPI's
patents. Under the agreement with Telectronics, Ventritex and Telectronics
cross-licensed their respective patent portfolios relating to devices for the
treatment of tachyarrhythmias. Ventritex also made a one-time payment to
Telectronics in settlement of ongoing patent infringement litigation between
Telectronics and Ventritex. The Company does not have ongoing royalty
obligations to Telectronics. In connection with the license agreements with
CPI and Telectronics, Ventritex recognized a charge of $18.6 million in fiscal
1993. This charge included the one-time payments and certain other related
settlement expenses.
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The Company's licenses with Medtronic, CPI and Telectronics contain
significant restrictions that may have the effect of preventing or
substantially impeding an acquisition of, change in control of, or certain
minority investments in, the Company. Such restrictions include the possible
termination of various licenses to the Company and the requirement that the
Company make a substantial payment to one of the licensors upon such event.
As a result of the above license agreements, the Company's only
pending legal dispute in the intellectual property area consists of various
claims asserted by and against Intermedics. For more information about the
Intermedics litigation, see "-- Legal Proceedings."
Although the Company believes that it has entered into license
agreements with all of the major participants in the implantable defibrillator
market other than Intermedics, there can be no assurance that other parties
will not institute litigation against the Company. In addition, the license
agreements with Medtronic, Telectronics and CPI do not include patents that are
issued under applications filed after certain specified dates and thus future
patent disputes with Medtronic, Telectronics and CPI are possible. Any future
litigation, as well as any future interference proceedings that may be declared
by the United States Patent and Trademark Office to determine the priority of
inventions, could result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel.
Additional litigation may be necessary to enforce patents issued to or held by
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. An adverse determination in litigation or interference proceedings to
which the Company is or may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek
licenses from third parties. There can, however, be no assurance that
necessary licenses would be available to the Company on satisfactory terms or
at all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations and could adversely affect the Company's ability to continue as a
viable entity.
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of the Company's products are
regulated by the FDA as medical devices. Under the Federal Food, Drug, and
Cosmetic Act, as amended, all medical devices are classified into three
classes, class I, II or III. Class III devices, such as implantable
defibrillators, are subject to the most stringent FDA review and require
submission and approval of a PMA application or a PMA supplement from the FDA
before commencement of marketing, sales and distribution in the United States.
In order to receive approval of a PMA application, a device must
undergo clinical evaluation under an Investigational Device Exemption ("IDE")
that is granted by the FDA to permit testing of the device in controlled human
trials. In addition to obtaining an IDE from the FDA, the sponsor of the
investigational research must also obtain approval for the research from a
hospital institutional review board or committee established for this purpose.
Once an IDE has been granted, the FDA may allow expansion of the IDE's scope to
additional patient implants or additional clinical sites, or both. The FDA or
the sponsor may suspend clinical trials at any point if either concludes that
clinical subjects are being exposed to an unacceptable health risk or for other
reasons.
Results of clinical trials are presented to the FDA in a PMA
application. In addition to the results of clinical investigation(s), the PMA
applicant must submit other information relevant to the safety and
effectiveness of the device including: the results of non-clinical tests; a
full description of the device and its components; a full description of the
methods, facilities and controls used for manufacturing; and proposed labeling.
The FDA staff then reviews the submitted application and determines whether or
not to accept the application for filing. If accepted for filing, the
application is further reviewed by the FDA and may be subsequently reviewed by
an FDA scientific advisory panel comprised of physicians and others with
expertise in the relevant field. The advisory panel holds a public meeting
during which the PMA application is reviewed and discussed. The scientific
advisory panel then issues an approvable or not approvable recommendation to
the FDA or recommends approval with conditions. Although the FDA is not bound
by the opinion of the advisory panel, the FDA tends to give considerable weight
to panel recommendations. The FDA also typically conducts an inspection to
determine whether the Company conforms with the current Good Manufacturing
Practice ("GMP") regulations. If the FDA's evaluation is favorable, the FDA
will subsequently publish an order approving the PMA for the device.
Interested parties can file comments on the order and seek further FDA
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review. Although the PMA review process is to be completed within 180 days
from the date the PMA is accepted for filing, this time frame is frequently
exceeded.
The process of obtaining FDA and other required regulatory approvals
is lengthy, expensive and uncertain. Moreover, regulatory approvals, if
granted, may include significant limitations on the indicated uses for which a
product may be marketed. In addition, the FDA may require testing and
surveillance programs to monitor the effect of approved products which have
been commercialized and it has the power to prevent or limit further marketing
of a product based on the results of these post-marketing programs. The FDA
actively enforces regulations prohibiting marketing of products for
non-indicated uses. In addition to FDA inspections conducted prior to the
approval of a PMA application, the FDA also conducts periodic inspections to
determine compliance with GMP and Medical Device Reporting ("MDR") regulations.
Failure to comply with applicable regulatory requirements can result in, among,
other things, fines, suspensions or delays of approvals, seizures or recalls of
products, operating restrictions and criminal prosecutions. Furthermore,
changes in existing regulations or adoption of new regulations could prevent
the Company from obtaining, or affect the timing of, future regulatory
approvals. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt
of or failure to receive such approvals or loss of previously received
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, if a PMA is
granted, significant modifications to the device, manufacturing process or
labeling will require a supplement to the PMA or require the submission of a
new PMA application, which could require substantial additional efficacy and
safety data and FDA review.
The Company has recently filed a PMA supplement for the Contour
defibrillator and anticipates filing PMA supplements for its single lead
transvenous defibrillation lead systems. The Company is likely to be required
to file additional PMA applications or PMA supplements for new products it
develops. Supplements to a PMA require submission of the same type of
information as a PMA except that the supplement is limited to that information
needed to support the change. There can be no assurance that the FDA will
accept a PMA supplement. The FDA could instead require additional testing of
the device that is the subject of the supplement or could require clinical
trials under an IDE and completion of the entire PMA approval process. Failure
to obtain FDA approval for commercial release through a PMA supplement on a
timely basis, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the MDR
regulations require that the Company provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur.
The Company is required to register as a medical device manufacturer
with the FDA and state agencies, such as the Food and Drug Branch of the
California Department of Health Services. The Company is subject to inspection
on a routine basis by the State of California and by the FDA for compliance
with the FDA's current GMP and MDR regulations. Those regulations impose
certain procedural and documentation requirements upon the Company with respect
to manufacturing and quality assurance activities and product reporting
activities.
Additionally, the Company must comply with various FDA requirements
for design, safety, advertising, labeling and record keeping. Under FDA
regulations, the Company is required to establish a method of device tracking
so that the Company will be able to trace its implantable products from the
place of manufacture to the patient in whom such products are implanted in the
United States. The purpose of this tracking requirement is to facilitate
notification to the patient or recall of the device if such actions become
necessary. The cost of establishing and maintaining a tracking system that
complies with the FDA's regulations may be significant. Failure to establish
and maintain the required tracking system would subject the Company to FDA
regulatory sanctions and the possibility of losing current product approval.
International sales of medical devices are subject to foreign
government regulation, the requirements of which vary substantially from
country to country. The Company has obtained certain foreign governmental
approvals and has applied for additional approvals. The European Community has
promulgated rules that require that medical products receive by mid-1998 the CE
mark, an international symbol of quality and compliance with applicable
European medical device directives. Failure to receive CE mark certification
will prohibit the Company from selling its products in the European Union.
International Standards Organization ("ISO") 9001 certification is one of the
CE mark certification requirements. The Company has established the process
and relationships required to obtain the necessary approvals for the CE mark
and has been granted authorization to affix that mark to all products currently
requiring the mark.
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The FDA is studying the long-term effects of materials implanted in
the human body and may require manufacturers of implantable devices to conduct
biological testing of such materials. If required, such testing would be
expensive and time consuming and could disrupt the manufacture and sale or
result in recalls of the Company's products or denials of FDA approval for
future products. Any adverse regulatory actions could have a material adverse
effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of June 30, 1996, the Company had 548 full-time employees,
including 164 in product development and process engineering, 240 in
manufacturing and quality assurance, 107 in sales, marketing and clinical
engineering, and 37 in administration. None of the Company's employees is
subject to a collective bargaining agreement. The Company believes that its
relationship with its employees is good. The Company is dependent upon a
limited number of key management and technical personnel. In addition, the
Company's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel
with other companies, academic institutions and government entities. There can
be no assurance that the Company will be successful in hiring or retaining such
qualified personnel. Loss of key personnel or inability to hire or retain
qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
ADDITIONAL RISK FACTORS
Fluctuations in Operating Results; Profitability Uncertain
The Company incurred net losses from its inception in January 1985
through the year ended June 30, 1993, incurred net losses from the fourth
quarter of fiscal 1995 through fiscal 1996, currently expects to incur a net
loss for the first quarter of fiscal 1997 and may incur a net loss for the
first half of fiscal 1997. If regulatory approval to market the Contour in the
United States is not obtained on a timely basis or at all, the Company's
results of operations will be adversely affected. Results of operations have
varied and may continue to fluctuate significantly from quarter to quarter and
will depend upon numerous factors including timing of regulatory approvals,
market acceptance of the Company's products, introductions of new products with
advanced features by the Company or its competitors, technological advances in
the treatment of arrhythmias, the outcome of intellectual property litigation
and competition. Sales have fluctuated significantly in the past, especially in
fiscal 1995 and fiscal 1996, as competitors introduced products with advanced
features. In particular, the Company's net sales declined from $126.9 million
in fiscal 1995, to $54.9 million in fiscal 1996, primarily as a result of
competitors' introductions of smaller defibrillators with advanced features.
The Company's gross margins will be dependent on production volumes,
manufacturing efficiencies, royalties under patent license agreements, warranty
expense, component price fluctuations, competitive pricing, varying product
sales mix and other factors. There can be no assurance that gross margins will
improve in the future. In addition, a significant portion of the Company's
operating expenses are relatively fixed in nature and planned expenditures are
based, in part, on anticipated orders. Any inability to adjust spending quickly
enough to compensate for revenue shortfalls may magnify the adverse impact of
such revenue shortfall on the Company's results of operations. Furthermore,
there can be no assurance that the Company will achieve profitability in the
future or that profitability, if achieved, will be sustained.
Uncertainty Relating to New Product Development
The Company's strategy involves the design and development of new
products for the treatment of ventricular tachycardia and ventricular
fibrillation. The product development process is time-consuming and there can
be no assurance that product development will be successfully completed, that
necessary regulatory clearances or approvals will be granted by the FDA on a
timely basis, or at all, or that the potential products will achieve market
acceptance. The Company expects defibrillators with advanced new features, such
as dual chamber and rate-responsive pacing capabilities, will be developed by
its competitors. Failure by the Company to develop, obtain necessary regulatory
clearances or approvals for, or successfully market potential new products with
these and other features could have a material adverse effect on the Company's
business, financial condition and results of operations.
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Technological Change Resulting in Product Obsolescence
Market acceptance and sales of the Company's products have
historically been and could in the future be adversely affected by
technological changes. Many companies with substantially greater resources than
the Company are engaged in the development of products and approaches for the
treatment of ventricular tachycardia and ventricular fibrillation. These
include implantable devices as well as pharmaceuticals and cardiac ablation
therapies. Future innovations in the treatment of ventricular tachycardia and
ventricular fibrillation could render existing technologies, and the Company's
products, less competitive or obsolete.
Uncertainty of Market Acceptance
Market acceptance of the Company's implantable defibrillator systems
will depend in part on the therapeutic capabilities and operating features of
such systems as compared to other implantable defibrillators, physicians'
willingness to use the Company's defibrillators with competitors' transvenous
defibrillation leads, and the Company's ability to convince the medical
community of the clinical efficacy of its systems. If regulatory approval to
market the Contour in the United States is not obtained on a timely basis or at
all, the Company's results of operations will be adversely affected. Failure of
the Company's products, including the Contour, to gain market acceptance or
limited growth in the market for implantable defibrillators would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel
The Company is dependent upon a limited number of key management and
technical personnel. In addition, the Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel. The
Company competes for such personnel with other companies, academic
institutions, government entities and other organizations. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. Loss of key personnel or the inability to hire or retain qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with Possible Business Combination Transactions
Although the Company has no pending agreements or commitments in this
regard, the Company has from time to time in the past evaluated and considered
and expects to continue to evaluate and consider the acquisition of
complementary businesses, products and technologies as well as other possible
business combination transactions. Accordingly, the Company may undertake
acquisitions of complementary businesses, products or technologies or become
involved in other business combination transactions in the future.
Acquisitions and other business combinations entail numerous risks, including
the potential inability to successfully integrate the respective companies'
businesses or to realize anticipated synergies, economies of scale or other
value, diversion of management's attention, and loss of key employees. Should
there be any such transaction, there can be no assurance that the Company or
its stockholders would realize value from any such acquisition or business
combination which equals or exceeds the consideration paid to other parties, or
will not suffer other adverse results from any such transaction. In addition,
future acquisitions by the company may result in issuances of additional equity
securities, the incurrence of additional debt, large one-time write-offs and
the creation of goodwill or other intangible assets that could result in
ongoing amortization expense. These factors could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Significant Restrictions on Change of Control and Certain Minority Investments
The Company has adopted a number of anti-takeover measures. The
Company has adopted a Preferred Shares Rights Agreement, sometimes referred to
as a poison pill, designed to prevent hostile takeovers not approved by the
Board of Directors. In addition, the Company is authorized to issue 5,000,000
shares of undesignated Preferred Stock. Such shares of Preferred Stock may be
issued by the Company without stockholder approval upon such terms as the
Company's board of directors may determine. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock and may adversely
-13-
<PAGE> 17
affect the market price of and the voting and other rights of, the holders of
Common Stock. At present, the Company has no plans to issue any of the
Preferred Stock.
In addition, the Company's cross-licenses with Medtronic,
Telectronics and CPI, entered into in connection with the settlement of several
intellectual property litigation matters and disputes, contain significant
restrictions that may have the effect of preventing or substantially impeding
an acquisition of, change in control of, or certain minority investments in,
the Company. Such restrictions include the termination of various licenses and
the requirement that the Company make a substantial payment to one of the
licensors upon such event.
Volatility of Stock Price
The market price of the Company's Common Stock has been and is likely
to continue to be highly volatile. In addition, the stock market and the
medical technology sector in particular have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. Factors such as fluctuations in the
Company's operating results, shortfalls in revenue or earnings from levels
expected by securities analysts, new product introductions by the Company or
its competitors, announcements of technological innovations or new products by
the Company or its competitors, governmental regulation, developments with
respect to patents or proprietary rights and litigation relating thereto,
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant adverse effect on the
market price of the Common Stock. Substantially all of the shares of Common
Stock held by current stockholders of the Company are eligible for immediate
sale in the public market, subject in some cases to the public information,
manner of sale, volume limitation and notice of sale provisions of federal
securities laws. Future sales of such shares could lead to a decline in the
market price of the Common Stock.
ITEM 2. PROPERTIES
Ventritex leases an approximately 150,000 square foot facility in
Sunnyvale, California. This facility contains approximately 60,000 square feet
of manufacturing space and approximately 90,000 square feet devoted to research
and administrative offices. The facility is leased through December 2000.
Although the Company believes that this facility is adequate to meet its
requirements at least through fiscal 1997, the Company anticipates the need to
lease additional space. The Company believes that additional space in the
Sunnyvale, California area will be available on commercially reasonable terms.
The Company also leases space in South Carolina for manufacturing activities
and in Europe for sales, clinical engineering and other activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently in litigation with one of its competitors,
Intermedics. In response to threats from Intermedics, the Company filed a
declaratory judgment action in the United States District Court in the Northern
District of California in January 1993, asking the court to declare that
certain patents which Intermedics had asserted were being infringed by the
Company were, in fact, invalid, unenforceable or not infringed. Intermedics
then filed several actions in the United States District Court in the Southern
District of Texas alleging infringement by the Company of nine Intermedics
patents. Initially, this litigation was focused on procedural issues relating
to whether the dispute would be tried in California or Texas. On October 12,
1994, the United States District Court for the Northern District of California
denied Intermedics motion to transfer Ventritex's pending suits to Texas and
granted Ventritex's motion to enjoin Intermedics from further prosecution of
its aforementioned suits in Texas. The United States District Court for the
Southern District of Texas thereafter issued an order transferring to
California all of the Texas cases which Intermedics had served upon Ventritex.
The Court has indicated that the trial in connection with the above described
actions will begin May 5, 1997.
The Company filed a further action in the Northern District of
California in July 1993 seeking a declaratory judgment that the patents that
Intermedics has asserted against the Company are not infringed by Ventritex,
are invalid and are unenforceable. This action, which was filed against
Intermedics, its parent and affiliate companies, SulzerMedica and Sulzer,
-14-
<PAGE> 18
Inc., seeks damages based upon claims for antitrust law violations, malicious
prosecution, conspiracy and breach of contract. Intermedics, SulzerMedica and
Sulzer, Inc. have moved to stay or dismiss the Company's damage claims, and the
Court ordered that certain of these claims be dismissed without prejudice and
that others be stayed pending determination of other issues in the parties'
various lawsuits.
In the above actions, Intermedics seeks judgments against Ventritex
for damages, attorneys fees and injunctive relief. It is expected that
Intermedics will, during the course of the litigation, seek to obtain various
types of pretrial relief which include, but are not limited to, summary
judgments, dismissals of Ventritex's claims and preliminary injunctions. In
January 1995, Intermedics filed a motion for partial summary judgment and for
issuance of a preliminary injunction based on alleged infringement of one of
its patents. Ventritex vigorously contested these motions and requested the
United States Patent and Trademark Office to conduct a reexamination of claim
28 of Intermedics U.S. Patent No. 4,880,005 upon which these motions are based.
The Court denied Intermedics' partial summary judgment motion, and, as a
result, Intermedics' preliminary injunction request was withdrawn. The Patent
Office, on May 28, 1996, issued a second final rejection of claim 28 of the
4,880,005 patent. Intermedics subsequently requested reconsideration of the
final rejection. As a result of this reconsideration, on August 5, 1996 the
United States Patent and Trademark Office reissued the 4,880,005 patent with
claim 28 intact. The Company believes that Intermedics will make renewed
efforts to obtain partial summary judgment and a preliminary injunction. On
June 6, 1996, Intermedics filed with the United States Patent and Trademark
Office a request for reexamination of U.S. Patent No. 4,830,006 and on June 7,
1996, Intermedics filed a request for reexamination of U.S. Patent No.
4,913,145. Both patents are being asserted by Intermedics against the Company.
The requests are based on references identified by Ventritex as being pertinent
to the patents in response to discovery requests by Intermedics.
Since the Company brought a declaratory relief action against
Intermedics in January 1993, Intermedics has filed suits against the Company's
two principal competitors, Medtronic and CPI, alleging infringement of several
of the same patents which it has asserted against the Company. None of these
actions has yet been set for trial.
In addition to its patent infringement claims, Intermedics had
previously alleged trade secret misappropriation and related acts by the
Company and two of its officers, who were formerly employees of Intermedics.
In this lawsuit, the Company filed counterclaims against Intermedics for
infringement of two of Ventritex's patents. These counterclaims are still
pending. Certain of the trade secret misappropriation and related claims were
tried in 1992 before a United States District Court jury in San Francisco. The
jury returned a unanimous verdict in favor of the Company and its officers and
found that Intermedics had acted in bad faith in continuing to pursue the trade
secret misappropriation claims. The Court set aside the bad faith portion of
the verdict based on Intermedics claim of an erroneous jury instruction. A new
trial on the bad faith issue has been ordered, but no trial date has been set.
The judgment dismissed all of Intermedics trade secret claims against the
Company and its officers and was affirmed on appeal.
In addition to the above-mentioned litigation, the Company is also
involved in other litigation in the normal course of business. Although an
adverse determination in the Intermedics proceedings or in other litigation or
administrative proceedings could have a material adverse effect on the Company,
based upon the nature of the claims made and the investigation completed to
date, the Company believes the outcome of the described actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-15-
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
(ticker symbol VNTX). The number of record holders of the Company's Common
Stock at June 30, 1996 was approximately 460. The Company has not paid any
dividends since its inception and does not intend to pay any dividends in the
foreseeable future.
The following table shows for the periods indicated the high and low
sales prices for the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26 1/2 $16 1/2
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3/4 18 1/4
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3/4 17 1/4
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3/4 13
Fiscal year ended June 30, 1996
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24 1/4 $15 1/2
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3/8 16 7/8
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1/8 12 7/8
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3/4 14 7/8
FISCAL YEAR ENDING JUNE 30, 1997
First quarter (through August 5, 1996) . . . . . . . . . . . . . . . . . $19 1/8 $12 1/2
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Selected Financial Data" and included in Exhibit 13.1 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and included in Exhibit 13.1 to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Financial Statements" and included in Exhibit 13.1 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-16-
<PAGE> 20
PART III
Certain information required by Part III is omitted from this Report
on Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A
with respect to the 1996 Annual Meeting of Stockholders (the "Proxy Statement")
to be held November 14, 1996 and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1
- -- Election of Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board
of directors, and their ages as of June 30, 1996 and principal positions are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frank M. Fischer . . . . . . . . 54 President, Chief Executive Officer, Acting Chief Financial Officer
and Director
John B. Allison . . . . . . . . . 39 Vice President of Quality Assurance and Regulatory Compliance
Eric S. Fain, M.D. . . . . . . . 35 Vice President, Systems Development
Robert D. Gaffney . . . . . . . . 36 Vice President of Manufacturing
Kevin T. Larkin . . . . . . . . . 47 Vice President of Marketing and Sales
Stephen C. Masson . . . . . . . . 37 Vice President of Defibrillator Development
Mark J. Meltzer . . . . . . . . . 46 Vice President, Patent Counsel
Sandra L. Miller . . . . . . . . 54 Vice President of Leads Operations
Benjamin D. Pless . . . . . . . . 37 Vice President of Research and Technology Development
Michael B. Sweeney . . . . . . . 45 Vice President of Clinical Engineering and Regulatory Affairs
</TABLE>
Frank M. Fischer became President, Chief Executive Officer and a
director of the Company in July 1987. From May 1977 until joining the Company,
Mr. Fischer held various positions with Cordis Corporation ("Cordis"), a
manufacturer of medical products, including cardiac pacemakers, serving most
recently as President of the Implantable Products Division. Mr. Fischer is a
director of Heartstream, Inc. and Heartport, Inc. Mr. Fischer holds an M.S.
degree from Rensselaer Polytechnic Institute.
John B. Allison joined the Company in April 1996 as Vice President of
Quality Assurance and Regulatory Compliance. From 1992 until joining the
Company, he was Corporate Senior Director of Quality Assurance of Nellcor
Puritan Bennett Incorporated. From 1989 to 1992, he was managing consultant at
Coopers & Lybrand. Mr. Allison holds a B.S. degree from Purdue University.
Eric S. Fain, M.D. joined the Company in June 1987 as Manager of
Clinical Research and was appointed Vice President, Systems Development in July
1996. Dr. Fain holds an M.D. degree from Stanford University School of
Medicine.
Robert D. Gaffney joined the Company in October 1987 as Manager of
Manufacturing and was appointed Vice President of Manufacturing in October
1991. From June 1983 until joining the Company, he was employed by Cordis,
serving most recently as Associate Manager of Mechanical Design and
Engineering. Mr. Gaffney holds a B.S. degree from the Georgia Institute of
Technology.
-17-
<PAGE> 21
Kevin T. Larkin joined the Company in February 1992 as Vice President
of Marketing and Sales. Prior to joining the Company, he was Marketing
Director of SciMed Life Systems, Inc., a manufacturer of balloon and guiding
catheters for the treatment of cardiovascular disease. From October 1986 until
December 1991, Mr. Larkin was with Medtronic, Inc. in both the pacing and
interventional catheter sales and marketing groups, most recently as Director,
Global Marketing for Medtronic Interventional. Before that, he was Director of
Marketing and Sales of Cordis.
Stephen C. Masson joined the Company in March 1987 as Project
Engineer. From 1989 until April 1995, when he was appointed Vice President of
Defibrillator Development, he held various engineering management positions.
From January 1979 until joining the Company, Mr. Masson was an engineer in the
Cardiac Pacemakers Instrument Design Division of Cordis. Mr. Masson holds a
B.S. degree from the University of Miami.
Mark J. Meltzer joined the Company in May 1992 as Vice President,
Patent Counsel. From 1989 until joining the Company, he was Vice President,
Patent Counsel of O'Neill, Inc., a manufacturer of products for aquatic sports.
From 1983 to 1989 he was employed by Hughes Aircraft Company, a manufacturer of
aerospace electronics products, where he served as Patent Counsel. Mr. Meltzer
holds a J.D. degree from Hastings College of Law and a B.S.E.E. degree from the
University of California at Berkeley.
Sandra L. Miller joined the Company in April 1994 as Vice President of
Leads Operations. From December 1992 until joining the Company, she was
Product Development Manager for angioplasty products at Boston Scientific Corp.
From 1987 through 1992, she was Manager of Manufacturing for Telectronics
Pacing Systems, a manufacturer of medical products including cardiac pacemakers
and defibrillators. Ms. Miller holds an M.S. degree from Purdue University.
Benjamin D. Pless joined the Company in July 1985 as Director of
Engineering and was appointed Vice President of Engineering in February 1986,
and Vice President of Research and Technology Development in April 1995. From
1980 to 1984 he was employed by Intermedics, where he served as a Design
Engineer and as Project Engineer for implantable antiarrhythmic devices. Mr.
Pless holds a B.S.E.E. degree from the Massachusetts Institute of Technology.
Michael B. Sweeney joined the Company in July 1985 as Vice President
of Clinical Engineering. From 1979 to 1985, he was Director of
Electrophysiologic Studies at Intermedics. From 1975 to 1979 he was employed
by Rush Presbyterian St. Luke's Medical Center in Chicago, where he served as
assistant director of the Pacemaker Surveillance Program. Mr. Sweeney holds a
B.A. degree from Drake University.
-18-
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer and the four
other most highly compensated executive officers of the Company for services
rendered during each of the three fiscal years ended June 30, 1994, 1995 and
1996:
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------- -------------
Securities
Underlying
Fiscal Options All Other
Name and Principal Position Year Salary ($) Bonus ($)(1) (# of shares) Compensation ($)
- --------------------------- ------ ---------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Frank M. Fischer, 1996 $315,000 $153,000 65,000 $ 4,655(2)
President, Chief Executive 1995 $301,154 $108,000 65,000 $ 1,500(2)
Officer and Director, Acting 1994 $276,058 $150,000 -- --
CFO
Michael B. Sweeney, 1996 $212,000 $110,000 30,000 $ 4,655(2)
Vice President of Clinical 1995 $200,769 $ 50,000 30,000 $ 1,500(2)
Engineering and Regulatory 1994 $180,692 $ 75,000 -- --
Affairs
Mark J. Meltzer, 1996 $193,113 $ 58,125 20,000 $ 6,293(2)
Vice President, Patent 1995 $181,390 $ 30,000 15,000 $ 1,500(2)
Counsel 1994 $166,862 $ 45,000 -- --
Kevin T. Larkin, 1996 $176,600 $ 95,400 20,000 $ 4,749(2)
Vice President of Marketing 1995 $168,646 $ 45,000 20,000 $ 1,500(2)
and Sales 1994 $164,194 $ 75,000 -- $ 69,542(3)
Stephen C. Masson (4) 1996 $164,999 $ 48,000 25,000 $ 4,420(2)
Vice President of 1995 $ 42,404 $ 70,000 62,500 $ 1,500(2)
Defibrillator Development 1994 -- -- -- --
</TABLE>
___________________
(1) Represents discretionary bonus payments determined by the Board of
Directors or the compensation committee thereof.
(2) Represents matching grants to salary deferral plan.
(3) Represents relocation expenses paid to Mr. Larkin.
(4) Mr. Masson was promoted to Vice President of Defibrillator Development on
April 3, 1995.
Option Grants in Last Fiscal Year. The following table sets forth
information with respect to options granted during fiscal 1996 to each
executive officer named in the Summary Compensation Table above:
-19-
<PAGE> 23
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to Potential Realizable Value
Underlying Employees Exercise or at Assumed Annual Rates of
Options in Fiscal Base Price Expiration Stock Price Appreciation
Name Granted (#)(1) Year ($/Sh) Date for Option Term(2)
- ------------------ --------------- ---------- ---------- ---------- ------------------------
5%($) 10%($)
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frank M. Fischer 65,000 6.4% $15.63 7/01/06 $638,925 $1,619,163
Michael B. Sweeney 30,000 3.0% $15.63 7/01/06 $294,889 $ 747,306
Mark J. Meltzer 20,000 2.0% $15.63 7/01/06 $196,592 $ 498,204
Kevin T. Larkin 20,000 2.0% $15.63 7/01/06 $196,592 $ 498,204
Stephen C. Masson 25,000 2.5% $15.63 7/01/06 $245,741 $ 622,755
</TABLE>
___________________
(1) All listed options were granted the Company's 1995 Stock Option Plan at an
exercise price equal to the fair market value on the date of grant. These
stock options vest as to 25% of the shares from the date of grant at the
end of the first year and 1/48th of the shares per month thereafter, with
full vesting occurring four years after the date of grant.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates mandated by the Securities and Exchange Commission's
rules and do not represent an estimate or projection by the Company as to
the future price of the Common Stock. The Company did not use an
alternative formula for a grant date valuation, as the Company does not
believe that any formula will determine with reasonable accuracy a present
value based on future factors, which include factors that are unknown and
may be volatile and/or outside the control of the Company.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values. The following table sets forth, for each of the executive
officers named in the Summary Compensation Table above, information with
respect to option exercises during fiscal 1996 and the value of unexercised
options at June 30, 1996:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
NUMBER OF UNEXERCISED OPTIONS MONEY OPTIONS AT
AT FISCAL YEAR-END: YEAR-END $(2):
----------------------------- ------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank M. Fischer -- -- 31,250 113,750 $171,044 $139,831
Michael B. Sweeney -- -- 22,500 52,500 $163,388 $64,538
Mark J. Meltzer -- -- 63,021 36,979 $3,281 $39,744
Kevin T. Larkin -- -- 89,375 50,625 $4,375 $43,025
Stephen C. Masson 9,750 $207,393 23,656 69,844 $34,569 $123,206
</TABLE>
___________________
(1) Based on the closing price of the Company's Common Stock on the date of
the exercise.
(2) Based on a fair market value of $17.13, which was the closing price of the
Company's Common Stock on June 30, 1996.
-20-
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
-21-
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following Financial Statements of Ventritex, Inc. and Report
of Ernst & Young LLP, Independent Auditors are incorporated by
reference in the respective portions of the Registrant's 1996
annual report to stockholders and included in Exhibit 13.1 to
this report:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets, June 30, 1996 and 1995
Statements of Operations, Years Ended June 30, 1996, 1995
and 1994
Statements of Stockholders' Equity, Years Ended June 30,
1996, 1995 and 1994
Statements of Cash Flows, Years Ended June 30, 1996, 1995
and 1994
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule entitled "Valuation and
Qualifying Accounts" is included at page S-1 of this Form 10-K.
All other schedules are omitted because they are not applicable
or the required information is shown in the Financial Statements
or the notes thereto.
3. EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
The Company was not required to and did not file any reports on Form
8-K during the three months ended June 30, 1996.
(C) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1(4) Certificate of Incorporation filed October 24, 1994
3.2(4) Bylaws, as amended
3.3(4) Certificate of Designations of Rights, Preferences and Privileges of Series A
Participating Preferred Stock
3.4(4) Preferred Shares Rights Agreement, dated as of August 16, 1994, as amended
4.2(6) Form of Convertible Subordinated Note (included in Exhibit 4.3)
4.3(6) Form of Indenture
10.1(7) Form of Indemnification Agreement for directors and officers
</TABLE>
-22-
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.2A(3) Amended 1985 Incentive Stock Option Plan and forms of agreements thereunder
10.3(1) 1991 Employee Stock Purchase Plan
10.4(1) Representative Preferred Stock Purchase Agreement
10.5(1) Registration Rights Agreement dated November 22, 1991
10.6(1) Industrial Building Lease dated April 11, 1988 between the Registrant and J.J. and W., a general
partnership (Building Lease) with First Amendment dated October 21, 1988 and second Amendment
dated March 8, 1991
10.6A(2) Third Amendment dated May 1, 1992 and Fourth Amendment dated August 2, 1992, to Building Lease
10.6B(5) Fifth Amendment dated October 21, 1993, to Building Lease
10.6C Sixth Amendment dated October 11, 1995, to Building Lease
10.9(1) Agreement dated May 8, 1991 between the Registrant and Messrs. Grundfest, Gershman and Reznek
10.10(1) Agreement dated November 24, 1991 between the Registrant and Thomas J. Fogarty, M.D.
10.11(2)* License and Covenant Not to Sue dated May 7, 1992, effective February 11, 1992 between the
Registrant and Medtronic, Inc.
10.12(3)* License Agreement dated July 27, 1993 among the Registrant, Eli Lilly and Company and affiliates
of Lilly
10.13(3)* Settlement and License Agreement dated July 27, 1993 among the Registrant, Telectronics Pacing
Systems, Inc. and affiliates of Telectronics
10.14(7) 1995 Stock Option Plan and forms of agreements thereunder
10.15(7) 1995 Director Option Plan and forms of agreements thereunder
11.1 Statement of Computation of Earnings Per Share
13.1 Portions of Annual Report to Stockholders Incorporated by Reference
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 21)
27.1 Financial Data Schedule
</TABLE>
___________________
* Confidential treatment granted.
(1) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 (No. 33-44360), as amended.
(2) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1992.
(3) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(4) Incorporated by reference to Registrant's Registration Statement on Form
8-A (No. 0-19713) filed with the Securities and Exchange Commission on
December 29, 1994.
(5) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1993.
(6) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-3 (No. 333-07651), as
amended.
(7) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1995.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
-23-
<PAGE> 27
SIGNATURES
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 on this 14th day of August, 1996.
VENTRITEX, INC.
By: /s/ FRANK M. FISCHER
-----------------------------------
Frank M. Fischer
President, Chief Executive Officer,
Director and Acting Chief Financial
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Frank M.
Fischer and David R. Bunker, and each of them severally, acting alone and
without the other, his true and lawful attorney-in-fact with authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments to this Report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
------------------------------------- ----------------------------------- ---------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER: President, Chief Executive Officer, August 14, 1996
Director and Acting Chief Financial
/s/ FRANK M. FISCHER Officer
-------------------------------------
Frank M. Fischer
PRINCIPAL ACCOUNTING OFFICER:
/s/ DAVID R. BUNKER Controller August 14, 1996
-------------------------------------
David R. Bunker
/s/ RICHARD L. KARRENBROCK Director August 14, 1996
-------------------------------------
Richard L. Karrenbrock
Director
-------------------------------------
C. Raymond Larkin, Jr.
/s/ ROBERT R. MOMSEN Director August 14, 1996
-------------------------------------
Robert R. Momsen
Director
-------------------------------------
Walter J. McNerney
</TABLE>
-24-
<PAGE> 28
VENTRITEX, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Costs and Deductions/ End of
Period Expenses Write-offs Period
------------ ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended June 30, 1994 . . . . . . . $ 65 $ 141 -- $ 206
Year Ended June 30, 1995 . . . . . . . $ 206 $ 278 -- $ 484
Year Ended June 30, 1996 . . . . . . . $ 484 -- -- $ 484
Accrued warranty:
Year Ended June 30, 1994 . . . . . . . $ 347 $ 788 $ (79) $1,056
Year Ended June 30, 1995 . . . . . . . $1,056 $ 640 $ (49) $1,647
Year Ended June 30, 1996 . . . . . . . $1,647 $ 136 $ (62) $1,721
</TABLE>
S-1
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.6C Sixth Amendment dated October 11, 1995, to Building Lease
11.1 Statement Re: Computation of Per Share Losses
13.1 Portions of Annual Report to Stockholders Incorporated by
Reference
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.6C
SIXTH AMENDMENT TO INDUSTRIAL BUILDING LEASE
BETWEEN J. J. AND W. AND VENTRITEX, INC.
This Amendment is entered into as of the 11th day October, 1995 by and
between J. J. AND W., a general partnership (herein "Landlord"), and VENTRITEX,
INC., a Delaware corporation (herein "Tenant").
WHEREAS, the parties hereto previously executed a written Industrial
Building Lease dated April 11, 1988, for a portion of the building commonly
known as Building "C", and originally designated as 707 East Evelyn Avenue,
Sunnyvale, Santa Clara County, California, which Post Office designation was
later changed to 709 East Evelyn Avenue, Sunnyvale, California; and
WHEREAS, the parties hereto executed a First Amendment to said
Industrial Building Lease which Amendment was dated October 21, 1988; and
WHEREAS, the parties hereto executed a Second and Third Amendment to
said Industrial Building Lease whereby Tenant leased the remaining space in
Building "C" and extended the term; and
WHEREAS, the parties hereto executed a Fourth and Fifth Amendment to
said Industrial Building Lease whereby Building "A" and Building "B" where
added to the premises leased by Tenant;
WHEREAS, said Industrial building Lease, as currently amended, expires
on July 31, 1997 but the parties desire to extend same;
NOW THEREFORE, the parties hereto hereby agree as follows:
1. The term of the Industrial Building Lease, as previously amended,
is hereby extended to December 31, 2000.
2. The monthly Minimum Base Rent for the premises for the period added
by this Amendment shall be as follows:
<TABLE>
<S> <C>
Aug. 1, 1997 - July 31, 1998: $116,700.00
Aug. 1, 1998 - July 31, 1999: $118,256.00
Aug. 1, 1999 - Dec. 31, 2000: $119,812.00
</TABLE>
3. Tenant, having occupied the premises, accepts the premises in an
"AS IS" condition. Tenant acknowledges that some of the floor tiles are damaged
and need replacement due to seepage problems related to underground water.
Tenant acknowledges that Landlord is not responsible for the repair,
maintenance, or replacement of floor tile in any portion of the premises and
Tenant agrees to pay for and install new floor tile sections as Tenant, in its
sole discretion, deems appropriate.
<PAGE> 2
Landlord shall provide an allowance of up to $20,000.00 for Landlord and/or
Tenant to obtain mutually agreed upon consulting and testing services to
develop a floor sealant process to prevent, resist, or minimize ground water
seepage. Tenant shall have no right to any unused allowance remaining as of
December 31, 2000.
4. In the event Tenant shall not then be in default hereunder and
shall have made all previous rental payments in a timely manner (no more than
one payment in each calendar year being delinquent, as defined in Paragraph 7
of the Industrial Building Lease), Tenant shall have the right, not earlier
than December 31, 1999 and no later than March 31, 2000, to renew the term of
the Lease for a further term of five (5) years commencing on January 1, 2001 on
the terms and conditions set forth in Paragraph 4(b) through 4(e), inclusive,
of the Industrial Building Lease dated April 11, 1988.
5. Each party warrants to the other that it knows of no real estate
broker or agent who is entitled to a commission in connection with this
extension. Each party agrees to indemnify and hold the other harmless from any
cost, expense, or liability for any compensation, commissions, or charges
claimed by any other broker or agent who alleges he is owed a compensation
through it.
6. In the event of any conflict between the terms of this Sixth
Amendment and any prior Amendments or the Industrial Building Lease, the terms
of this Sixth Amendment shall prevail. The parties hereto agree that except for
the right of Tenant to extend the Lease for five (5) years beginning January 1,
2001, no other right to extend the term of the Lease exists.
7. Except as set forth herein, the terms and conditions of the above
referred to Industrial Building Lease, as previously amended, are hereby
ratified and confirmed.
Landlord:
J. J. AND W., A General Partnership
By:____________________________ Date:__________________________
Tenant: VENTRITEX, INC.
By:____________________________ Date:__________________________
Title
lease/jjw2.am6101195
<PAGE> 1
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------
(In Thousands)
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Weighted average common shares outstanding . . . . 20,752 20,389 19,526
Common and common equivalent shares from stock
options . . . . . . . . . . . . . . . . . . . . -- 464 1,085
-------- ------- -------
Shares used in per share calculation . . . . . . . 20,752 20,853 20,611
-------- ------- -------
Net income (loss) $(59,981) $ 9,008 $ 8,979
-------- ------- -------
Net income (loss) per share . . . . . . . . . . . . $ (2.89) $ .43 $ .44
-------- ------- -------
</TABLE>
<PAGE> 1
EXHIBIT 13.1 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS INCORPORATED BY
REFERENCE.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(In thousands except per share and employee data)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS FOR THE YEAR:
Net sales . . . . . . . . . . . . . $ 54,942 $126,922 $105,616 $ 25,116 $ 9,479
Cost of sales . . . . . . . . . . . 48,774 55,960 45,947 17,029 5,039
--------- -------- -------- -------- --------
Gross profit . . . . . . . . . . 6,168 70,962 59,669 8,087 4,440
Operating Expenses:
Research and development . . . . 30,796 27,716 23,334 12,940 8,399
Selling, general and
administrative . . . . . . . . 38,100 36,513 28,947 12,974 4,487
Intellectual property settlements -- -- -- 18,600 --
--------- -------- -------- -------- --------
Total operating expenses . . . 68,896 64,229 52,281 44,514 12,886
Income (loss) from operations . . . (62,728) 6,733 7,388 (36,427) (8,446)
Other income, net . . . . . . . . . 2,747 3,275 1,591 3,111 1,405
Income (loss) before provision
for income taxes . . . . . . . . (59,981) 10,008 8,979 (33,316) (7,041)
Provision for income taxes . . . . -- 1,000 -- -- --
--------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . (59,981) 9,008 8,979 (33,316) (7,041)
Net income (loss) per share . . . . $ (2.89) $ 0.43 $ 0.44 $ (1.85) $ (0.48)
Shares used in per share
calculation . . . . . . . . . . 20,752 20,853 20,611 17,992 14,606
FINANCIAL POSITION AT JUNE 30:
Working capital . . . . . . . . . . $ 30,486 $ 86,207 $ 80,268 $ 33,321 $ 74,355
Total assets . . . . . . . . . . . 73,461 130,339 116,764 75,415 84,825
Accumulated deficit . . . . . . . . (104,961) (44,980) (53,988) (62,967) (29,651)
Stockholders' equity . . . . . . . $ 53,960 $112,344 $101,373 $ 47,601 $ 80,242
ADDITIONAL INFORMATION:
Number of employees . . . . . . . . 548 511 500 355 157
Capital spending . . . . . . . . . $ 9,071 $ 13,415 $ 10,713 $ 10,457 $ 5,451
</TABLE>
The comparability of the above data is affected by the receipt of PMA
approval for the Cadence system on April 30, 1993, a charge of $18.6 million
relating to intellectual property settlements during fiscal 1993, a follow-on
stock offering in September 1993 and PMA approval of competitors' defibrillator
in March 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-1-
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Since its inception, the Company and its subsidiaries have engaged in
the design, development, manufacture and sale of implantable defibrillators and
related products. In April 1993, the United States Food and Drug
Administration ("FDA") approved the Company's premarket approval application
("PMA") for commercial release of the Cadence V-100 system. In July 1994, the
FDA approved the Company's PMA supplement for the Cadence V-110 system, a
smaller, lighter version of the Cadence V-100. In December 1995, the FDA
approved a PMA supplement for the Cadet V-115 defibrillator system for
abdominal implantation only. In May 1996, the FDA approved a PMA supplement to
label the Cadet V-115 for pectoral implantation. Also in May 1996, the FDA
approved a PMA Application for the TVL transvenous lead system. The Cadet
V-115 is smaller and lighter than the Cadence V-100 and V-110 implantable
defibrillators but has the same or improved functional and performance
characteristics. During June 1996, the Company submitted a PMA supplement for
the Contour(TM) V-145 defibrillator system. The Contour V-145 is designed to
be smaller and lighter than the Cadet V-115 implantable defibrillator and have
the same functional and performance characteristics. In July 1996, the Company
submitted a PMA supplement for the high voltage can versions of the Cadet and
the Contour.
In March 1995, the FDA approved the commercial release of new
defibrillators manufactured by Cardiac Pacemakers, Inc. ("CPI"), a subsidiary
of Guidant Corporation and Medtronic, Inc. ("Medtronic") which are small enough
to allow pectoral implantation, rather than abdominal implantation, in suitable
patients. Until receipt of regulatory approval relating to the Cadet in May
1996, the Company could not offer an implantable defibrillator labeled for
pectoral implantation in patients in the United States. Commercial release of
pectorally implantable defibrillators significantly increased competition in
the implantable defibrillator market and resulted in a significant decline in
the Company's market share and sales of the Company's products. The Company now
has products, the Cadet and Contour, which it believes are competitive;
however, there can be no assurance that the Company's products will compete
successfully with products currently manufactured by others or future products
under development by competitors which have new features, such as dual chamber
and rate-responsive pacing capabilities. In addition, while the Contour has
been commercially released in Europe, it has not yet been approved by the FDA
for commercial release in the U.S.
Medtronic and CPI have regulatory approval of and are commercially
marketing single lead transvenous lead systems. In May 1996, the Company began
marketing the TVL transvenous lead system, a dual lead system. Some physicians
prefer a single lead system due to the perceived ease of implanting such a
system as compared to a dual lead system. The Company is engaged in clinical
trials of single lead transvenous defibrillation lead systems and must receive
regulatory approval prior to commercialization. There can be no assurance as
to when or whether the Company will receive regulatory approval for these
systems. To date, a large percentage of the Company's sales of defibrillators
have been at the direction of physicians who used the Company's defibrillators
in combination with commercially available transvenous lead systems supplied by
the Company's competitors. Therefore, there can be no assurance that physicians
will purchase transvenous lead systems for which the Company obtains regulatory
approval. In particular, physicians preferring single lead systems may choose
to continue to combine competitors' transvenous leads with the Company's
defibrillators, at least until such time as the Company obtains PMA approval
for its single lead systems. Furthermore, there can be no assurance that
manufacturers of competing transvenous lead systems will not attempt to
discourage or prevent use of their leads with the Company's defibrillators
through product labeling, availability, pricing or other means. In general,
unless the FDA-approved labeling includes use with any transvenous lead system
sold by its competitors, the FDA or other government agencies may take further
actions, including restrictions on reimbursement, to restrict
-2-
<PAGE> 3
the combination of the Company's defibrillators with such transvenous lead
systems. Such actions could make the Company's defibrillators, including both
the Cadet and the Contour, less attractive to physicians and could therefore
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company incurred net losses from its inception in January 1985
through the year ended June 30, 1993, incurred net losses from the fourth
quarter of fiscal 1995 through fiscal 1996, currently expects to incur a net
loss for the first quarter of fiscal 1997 and may incur a net loss for the
first half of fiscal 1997. If regulatory approval to market the Contour in the
United States is not obtained on a timely basis or at all, the Company's
results of operations will be adversely affected. Results of operations have
varied and may continue to fluctuate significantly from quarter to quarter and
will depend upon numerous factors including timing of regulatory approvals,
market acceptance of the Company's products, introductions of new products with
advanced features by the Company or its competitors, technological advances in
the treatment of arrhythmias, the outcome of intellectual property litigation
and competition.
The segment of the medical device market that includes implantable
defibrillators has been characterized by extensive litigation regarding patents
and other intellectual property rights. The Company has resolved intellectual
property disputes to date through licensing arrangements, when appropriate and
on terms it believes to be commercially reasonable. Under certain agreements,
Ventritex pays royalties based on commercial sales of implantable defibrillator
systems. The Company anticipates that such royalties will continue for future
implantable defibrillator systems developed by the Company. Additionally, the
agreements do not include all patents that may be issued to the licensors, thus
future patent disputes with these companies are possible. Certain of these
licenses contain significant restrictions that may have the effect of preventing
or substantially impeding an acquisition of, change-of-control of, or certain
minority investments in, the Company. Such restrictions include the possible
termination of various licenses to the Company and the requirement that the
Company make a substantial payment to one of the licensors upon such event.
Intermedics, Inc. has filed claims against the Company for patent infringement
which are still pending, and there can be no assurance that other parties will
not institute additional litigation against the Company.
The foregoing statements regarding the Company's defibrillators,
transvenous lead systems and the period of time for which the Company expects
to incur additional losses are forward-looking and involve risks and
uncertainties, such as those noted above, which could cause actual results of
the Company to differ materially.
RESULTS OF OPERATIONS
Net Sales
Net sales for fiscal 1996 were $54.9 million, compared to $126.9
million during fiscal 1995 and $105.6 million in fiscal 1994. The fiscal 1996
decrease of $72.0 million, or 57%, reflects lower unit shipments and average
unit pricing as compared to fiscal 1995 due primarily to the introduction by
the Company's principal competitors of defibrillators capable of being
implanted pectorally. Fiscal 1996 unit shipments decreased approximately 55%
from fiscal 1995 levels and average unit prices decreased approximately 3%. As
compared to the third quarter of fiscal 1996, unit shipments in the fourth
quarter increased approximately 30% and average unit prices increased
approximately 4% due to regulatory approval for pectoral implantation of the
Cadet. Sales in fiscal 1995 increased compared to fiscal 1994 as a result of
increased unit shipments. Sales of defibrillators provided substantially all
of the Company's revenues in these periods. A majority of the Company's sales
in each period were to hospitals at the request of physicians who used
Ventritex defibrillators in combination with a competitor's transvenous
defibrillation lead systems. Sales invoiced in foreign currencies are less
than 5% of total net sales. The Company currently does not hedge the risk of
currency exchange rate fluctuations.
-3-
<PAGE> 4
Gross Profit
Gross profit for fiscal 1996 was $6.2 million compared to $71.0
million in fiscal 1995 and $59.7 million in fiscal 1994. Gross margin (gross
profit as a percent of net sales) was approximately 11% for fiscal 1996, as
compared to approximately 56% in both fiscal 1995 and 1994. However, the gross
margin was 41% for the fourth quarter of fiscal 1996, reflecting the somewhat
stronger sales in the fourth quarter. The decrease in gross profit from fiscal
1995 to fiscal 1996 reflects substantial reductions in unit shipments,
increased provisions for excess and obsolete inventory, decreased production
levels and lower average unit pricing in the current fiscal year. Fiscal 1996
includes a provision of $17.1 million for potentially excess inventory and
cancellation of purchase commitments for components. These provisions resulted
from the rapid adoption of competitors' defibrillators that allow pectoral,
rather than abdominal, implantation in suitable patients and the approval of
additional competitive defibrillator systems labeled for pectoral implantation.
The increase in gross profit from fiscal 1994 to fiscal 1995 was primarily due
to increases in sales volume and lower per-unit component costs, partially
offset by increases in royalty expenses, increased spending to establish leads
manufacturing capability and increased provisions for product obsolescence.
During the first half of fiscal 1996, in anticipation of regulatory
approval, the Company began production of its Cadet V-115 defibrillator system
and TVL transvenous lead system, and initially experienced shortages of certain
critical components due to manufacturing yield problems at its suppliers. As a
result, supplies of the Cadet V-115 defibrillator system were limited. There
can be no assurance that future production problems will not be encountered in
producing the Cadet, expanding production of the Contour and the TVL or
establishing production of other new products currently under development.
Failure to manufacture new or existing products on a timely and cost effective
basis could result in substantial unanticipated expenses, delays in the
commercial availability of such products, and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Gross margins have fluctuated historically due to variations in
production volume, manufacturing efficiencies, product obsolescence, new
product introductions by the Company or its competitors, royalty rates,
warranty expense, component price fluctuations, competitive pricing, and other
factors. Gross profits may fluctuate in the future in both dollar amount and
as a percentage of net sales due to these and other factors, including
component part availability, regulatory actions and changes in reimbursement
policies by either government or private insurance companies.
At June 30, 1996, the Company has provided a reserve for potentially
excess or obsolete inventory and believes that no loss will be incurred upon
its disposition. There can be no assurance, however, that the actual sales
will not differ materially from the sales forecast in the near term. The
foregoing statements regarding the Company's defibrillators, transvenous lead
systems, gross profits and sufficiency of inventory reserves are
forward-looking and involve risks and uncertainties, such as those noted above,
which could cause actual results of the Company to differ materially.
Operating Expenses
Operating expenses were $68.9 million in fiscal 1996 compared to $64.2
million in fiscal 1995 and $52.3 million in fiscal 1994.
Research and development expenditures increased approximately 11% to
$30.8 million in fiscal 1996, compared to $27.7 million in fiscal 1995 and
$23.3 million in fiscal 1994. The increase in spending during fiscal 1996 was
primarily due to costs associated with early production stages of the Cadet
defibrillator system in
-4-
<PAGE> 5
addition to design costs for Contour, transvenous lead systems and future
products. The Company's research and development expenses relate to various
research, product and process development, clinical trial and quality assurance
activities. Ventritex plans to continue to invest in research and development
and expects such expenses to continue to increase in dollar amount in the
future.
Selling, general and administrative expenses increased to $38.1
million in fiscal 1996 from $36.5 million in fiscal 1995 and $28.9 million in
fiscal 1994. The increase for fiscal 1996 reflects increases in amortization
costs of external equipment to support defibrillators (which are supplied to
customers on long-term loan, typically at no charge, in accordance with
industry practice) and the expenses of a direct operating subsidiary in Germany
formed in fiscal 1996. These increases were partially offset by decreases in
compensation expense, commission expenses as a result of decreased revenues as
discussed above, insurance expense, software system implementation costs and
the impact of provisions for potential doubtful accounts. Management incentive
bonuses were not accrued, and provisions for potential doubtful accounts were
not booked in fiscal 1996, while such accruals and provisions were booked in
fiscal 1995. Legal expenses decreased approximately $0.3 million from fiscal
1995 to fiscal 1996, but are expected to increase significantly in future
periods as the Intermedics litigation moves beyond jurisdictional matters.
Fiscal 1995 expenses were greater than those of fiscal 1994 due to increased
staffing and associated expenses, amortization costs of external equipment,
costs associated with implementation of a new software system, research grants
and donations, insurance expense and costs related to unit sales volume
increase.
Other Income
Other income, consisting primarily of interest income, was $2.7
million in fiscal 1996 compared to $3.3 million and $1.6 million in fiscal 1995
and fiscal 1994, respectively. Fluctuations in interest income reflect changes
in invested cash balances and interest rates.
Income Taxes
The Company has established a valuation allowance for deferred tax
assets resulting from operating losses incurred in fiscal 1996 and fiscal 1994;
accordingly no tax benefits were recorded in such years. For fiscal 1995, the
provision for income taxes was 10% of pre-tax income, reflecting the benefit
from the utilization of tax net operating loss carryforwards.
FLUCTUATIONS IN OPERATING RESULTS; PROFITABILITY UNCERTAIN; VOLATILITY OF STOCK
PRICE
The Company incurred net losses from its inception in January 1985
through the year ended June 30, 1993, incurred net losses from the fourth
quarter of fiscal 1995 through fiscal 1996, expects to incur a net loss for the
first quarter of fiscal 1997 and may incur a net loss for the first half of
fiscal 1997. If regulatory approval to market the Contour in the United States
is not obtained on a timely basis or at all, the Company's results of
operations will be adversely affected. There can be no assurance that the FDA
will approve the Contour for marketing in the U.S. on a timely basis, if at
all. Results of operations have varied and may continue to fluctuate
significantly from quarter to quarter and will depend upon numerous factors
including timing of regulatory approvals, market acceptance of the Company's
products, introductions of new products with advanced features by the Company
or its competitors, technological advances in the treatment of arrhythmias, the
outcome of intellectual property litigation and competition. Sales have
fluctuated significantly in the past, especially in fiscal 1995 and fiscal
1996, as competitors introduced products with advanced features. The Company's
gross margins will be dependent on production volumes, manufacturing
efficiencies, royalties under patent license agreements, warranty expense,
component price fluctuations, competitive pricing, varying product sales mix
and other factors.
-5-
<PAGE> 6
There can be no assurance that gross margins will improve in the future. In
addition, a significant portion of the Company's operating expenses are
relatively fixed in nature and planned expenditures are based, in part, on
anticipated orders. Any inability to adjust spending quickly enough to
compensate for revenue shortfalls may magnify the adverse impact of such
revenue shortfall on the Company's results of operations. Furthermore, there
can be no assurance that the Company will achieve profitability in the future
or that profitability, if achieved, will be sustained.
The market price of the Company's Common Stock has been and is likely
to continue to be highly volatile. In addition, the stock market and the
medical technology sector in particular have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. Factors such as fluctuations in the
Company's operating results, shortfalls in revenue or earnings from levels
expected by securities analysts, new product introductions by the Company or
its competitors, announcements of technological innovations or new products by
the Company or its competitors, governmental regulation, developments with
respect to patents or proprietary rights and litigation relating thereto,
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant adverse effect on the
market price of the Common Stock.
Substantially all of the shares of Common Stock held by current
stockholders of the Company are eligible for immediate sale in the public
market, subject in some cases to the public information, manner of sale, volume
limitation and notice of sale provisions of federal securities laws. Future
sales of such shares could lead to a decline in the market price of the Common
Stock.
The foregoing statements regarding the Company's operating results are
forward-looking and involve risks and uncertainties, such as those noted above,
which could cause actual results of the Company to differ materially.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents and short-term investments totaled $22.6 million
at June 30, 1996, compared to $73.9 million at June 30, 1995. The decrease of
$51.3 million reflects cash used in operations of $43.1 million and investments
in capital equipment and leasehold improvements of $9.1 million partially
offset by proceeds from exercise of stock options and an employee stock
purchase plan of $1.6 million.
In view of current and anticipated capacity requirements, the Company
expects capital expenditures of approximately $6.0 million in fiscal 1997,
compared with $9.1 million in fiscal 1996 and $13.4 million in fiscal 1995.
Fiscal 1997 capital expenditures are expected to be made principally in
connection with the purchase of new equipment.
The Company's liquidity and capital requirements will depend on
numerous factors, including the extent to which the Company's existing and
future products gain market acceptance, the duration and magnitude of operating
losses, FDA regulatory actions, changes in health care reimbursement policies
and intellectual property litigation to which the Company is or may become a
party. The Company believes that its existing cash, cash equivalents and
short-term investment balances, combined with cash forecasted to be generated
from operations, will be sufficient to meet capital requirements through at
least fiscal 1997. In addition, the Company intends to issue convertible debt
during the first quarter of 1997, which offering, if successfully completed,
will provide sufficient capital for the foreseeable future. Should 1997
results of operations fall significantly short of forecasted levels and should
the convertible debt offering not be completed as anticipated, the Company
would be required to restructure its operations in order to preserve liquidity.
Such restructuring could include delaying
-6-
<PAGE> 7
product development efforts, reducing or delaying capital expenditures,
reducing personnel related costs, and other similar actions. In addition, the
Company may use other means of financing, including the issuance of equity
securities or debt, if necessary or financially advantageous. The foregoing
statements regarding the sufficiency of the Company's capital resources to meet
its liquidity needs are forward- looking and involve risk and uncertainties,
such as those noted above, which could cause actual results of the Company and
the period of time for which such capital resources are sufficient to differ
materially.
-7-
<PAGE> 8
VENTRITEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30,
-----------------------------
1996 1995
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,299 $ 34,942
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . 13,254 39,006
Accounts receivable, net of allowance for doubtful accounts of $484 . . . . 10,658 11,376
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,427 17,103
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,030 1,242
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 533
--------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 49,987 104,202
Equipment and leasehold improvements, net . . . . . . . . . . . . . . . . . . 22,655 26,119
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819 18
--------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,461 $130,339
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,027 $ 3,541
Accrued employee compensation . . . . . . . . . . . . . . . . . . . . . . . 2,548 4,879
Accrued royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869 2,200
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,721 1,647
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,409 4,801
Deferred other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 927 927
--------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 19,501 17,995
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001, 5,000 shares authorized,
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.001, 35,000 shares authorized, 20,878
shares and 20,643 shares issued and outstanding in 1996 and 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 158,900 157,303
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104,961) (44,980)
--------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 53,960 112,344
--------- --------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . $ 73,461 $130,339
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
-8-
<PAGE> 9
VENTRITEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,942 $126,922 $105,616
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 48,774 55,960 45,947
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 6,168 70,962 59,669
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . 30,796 27,716 23,334
Selling, general and administrative . . . . . . . . . . . . 38,100 36,513 28,947
-------- -------- --------
Total operating expenses . . . . . . . . . . . . . . . . 68,896 64,229 52,281
-------- -------- --------
Income (loss) from operations . . . . . . . . . . . . . (62,728) 6,733 7,388
Other income (expense)
Interest income . . . . . . . . . . . . . . . . . . . . . . 2,804 3,366 1,548
Interest expense . . . . . . . . . . . . . . . . . . . . . -- (8) (42)
Other income (expense) . . . . . . . . . . . . . . . . . . (57) (83) 85
-------- -------- --------
Other income, net . . . . . . . . . . . . . . . . . . . . 2,747 3,275 1,591
-------- -------- --------
Income (loss) before provision for income taxes (59,981) 10,008 8,979
Provision for income taxes -- 1,000 --
-------- -------- --------
Net income (loss) $(59,981) $ 9,008 $ 8,979
======== ======== ========
Net income (loss) per share $ (2.89) $ 0.43 $ 0.44
Shares used in per share calculation 20,752 20,853 20,611
</TABLE>
See Notes to Consolidated Financial Statements
-9-
<PAGE> 10
VENTRITEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Receivable
Common Stock Paid in from Accumulated
Shares Amount Capital Stockholders Deficit Total
------ --------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 . . . . . 18,144 $ 110,580 -- $ (12) $ 62,967) $ 47,601
Sales of common stock . . . . . . . 494 1,966 -- 12 -- 1,978
Sale of common stock in follow-on
public offering, net of
underwriting discounts and
issuance costs of $2,844 . . . . 1,450 42,815 -- -- -- 42,815
Net income . . . . . . . . . . . . -- -- -- -- 8,979 8,979
------ --------- -------- -------- --------- --------
Balance at June 30, 1994 . . . . . 20,088 155,361 -- -- (53,988) 101,373
Sales of common stock . . . . . . . 555 1,963 -- -- -- 1,963
Reincorporation in Delaware . . . . -- (157,303) 157,303 -- -- --
Net income . . . . . . . . . . . . -- -- -- -- 9,008 9,008
------ --------- -------- -------- --------- --------
Balance at June 30, 1995 . . . . . 20,643 21 157,303 -- (44,980) 112,344
Sales of common stock . . . . . . . 235 -- 1,597 -- 1,597
Net loss . . . . . . . . . . . . . -- -- -- -- (59,981) (59,981)
------ --------- -------- -------- --------- --------
Balance at June 30, 1996 . . . . . 20,878 $ 21 $158,900 -- $(104,961) $ 53,960
====== ========= ======== ======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
-10-
<PAGE> 11
VENTRITEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $(59,981) $ 9,008 $ 8,979
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 12,487 8,204 3,964
Loss from disposal of equipment . . . . . . . . . . . . . . . 48 168 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . 718 6,146 (10,020)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 1,676 6,043 (2,913)
Prepaid expenses and other current assets . . . . . . . . . 426 217 (1,188)
Accounts payable, accrued warranty, and other accrued
expenses . . . . . . . . . . . . . . . . . . . . . . . . . 4,168 3,269 1,196
Accrued employee compensation . . . . . . . . . . . . . . . (2,331) 736 2,364
Accrued royalties . . . . . . . . . . . . . . . . . . . . . (331) (1,331) 2,741
Accrued intellectual property settlements . . . . . . . . . -- -- (18,600)
-------- -------- --------
Net cash provided by (used in) operating activities . . . . (43,120) 32,460 (13,477)
Investing activities:
Purchase of short-term investments . . . . . . . . . . . . . . . (37,623) (83,293) (35,551)
Proceeds from maturities of short-term investments . . . . . . . 63,375 67,472 12,366
Acquisition of equipment and leasehold improvements . . . . . . (9,071) (13,415) (10,713)
Change in other assets . . . . . . . . . . . . . . . . . . . . . (801) 11 (5)
-------- -------- --------
Net cash provided by (used in) investing activities . . . . . 15,880 (29,225) (33,903)
Financing activities:
Proceeds from follow-on common stock offering, net . . . . . . -- -- 42,815
Proceeds from sales of common stock . . . . . . . . . . . . . . 1,597 1,963 1,978
Principal payments under capital lease obligations . . . . . . -- (70) (124)
-------- -------- --------
Net cash provided by financing activities . . . . . . . . . . 1,597 1,893 44,669
Increase (decrease) in cash and cash equivalents . . . . . . . . (25,643) 5,128 (2,711)
Cash and cash equivalents at beginning of year . . . . . . . . . 34,942 29,814 32,525
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 9,299 $ 34,942 $ 29,814
======== ======== ========
Supplemental Cash Flow Information
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 8 $ 42
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 65 $ 689 $ --
</TABLE>
See Notes to Consolidated Financial Statements
-11-
<PAGE> 12
VENTRITEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization -- Ventritex, Inc., a Delaware corporation,
and its wholly-owned subsidiaries (the Company) designs, develops, manufactures
and sells implantable defibrillators and related products for the treatment of
ventricular tachycardia and ventricular fibrillation. Implantable
defibrillators are generally purchased by hospitals upon the recommendation of
electrophysiologists. The principal markets for the Company's products are the
United States and Europe.
The implantable defibrillator market is characterized by rapid
technological change and intense competition. As a result of the commercial
release by competitors of pectorally implantable defibrillators in 1995, the
Company experienced a significant decline in market share and revenues during
fiscal 1996, resulting in a net loss of $60 million. The Company believes that
its recently approved products and products currently awaiting regulatory
approval will lead to increased revenues and improved cash flows from
operations.
The Company believes that its existing cash, cash equivalents and
short-term investment balances, combined with cash forecasted to be generated
from operations, will be sufficient to meet capital requirements through at
least fiscal 1997. In addition, the Company intends to issue convertible debt
during the first quarter of fiscal 1997, which offering, if successfully
completed, will provide sufficient capital for the foreseeable future. Should
fiscal 1997 results of operations fall significantly short of forecasted levels
and should the convertible debt offering not be completed as anticipated, the
Company would be required to restructure its operations in order to preserve
liquidity. Such restructuring could include delaying product development
efforts, reducing or delaying capital expenditures, reducing personnel related
costs, and other similar actions. In addition, the Company may use other means
of financing, including the issuance of equity securities or debt, if necessary
or financially advantageous.
The Company has entered into licensing arrangements which require the
payment of royalties on sales of defibrillators. Certain of these licenses
contain significant restrictions that may have the effect of preventing or
substantially impeding an acquisition of, change-of-control of, or minority
investment in, the Company.
The Company's products include components that must meet strict
quality standards. The Company currently has sole source supply arrangements
for a number of critical components. Although management believes that
alternative sources of supply are available for most components and
subcontracted manufacturing services, the time required to locate and qualify
other suppliers could cause a delay in manufacturing that may be financially
disruptive to the Company.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. The market for implantable defibrillator is subject to rapid
technological change and obsolescence of inventory. Any product developed by
the Company that gains approval from the United States Food and Drug
Administration will have to compete for market acceptance and market share. An
important factor in such competition may be the timing of market introduction
of competitive products. Management has developed a sales forecast based upon
the expected timing of regulatory approval and market acceptance of its
products and those of competitors. At June 30, 1996, the Company has provided
a reserve for potentially excess or obsolete inventory and believes that no
-12-
<PAGE> 13
loss will be incurred upon its disposition. There can be no assurance,
however, that the actual sales will not differ materially from the sales
forecast in the near term.
Basis of Presentation -- The accompanying consolidated financial
statements include the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
functional currency for the Company's foreign subsidiaries is the U.S. dollar.
The Company currently does not hedge the risk of currency exchange rate
fluctuations. Foreign currency losses were $46,000, $14,000, and $8,000 for
the fiscal years ended June 30, 1996, 1995 and 1994, respectively
Cash Equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Investments -- The Company invests in short-term debt securities
consisting of commercial paper with maturities of less than twelve months and
overnight deposits (including repurchase agreements for which, due to their
short term nature, the Company normally does not take possession of the
underlying securities). Due to the short duration to maturity, the cost basis
of these securities materially approximates their fair market value. By
policy, all investments have a minimum short-term investment rating of A-1 or
P-1. As of June 30, 1996, one investment represented 24% of total investments;
this investment matured in July 1996. No other issuer represented greater than
12% of total investments.
The Company classifies all investments as "available-for-sale".
Available-for-sale securities are carried at fair value based upon quoted
market prices, with the unrealized gains and losses (if significant) reported
in a separate component of stockholders' equity.
Inventories -- Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Equipment and Leasehold Improvements -- Equipment, including capital
equipment leases, and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Equipment is depreciated by the
straight-line method over estimated useful lives of three to seven years.
Leasehold improvements are amortized by the straight-line method over the
shorter of the life of the related asset or the term of the lease. Depreciation
expense includes amortization of capital leases and leasehold improvements.
The Company periodically reviews the useful lives of specific property and
equipment based upon changes in technology and products. In fiscal 1996, as a
result of such a review, the Company recorded additional depreciation expense
of $3.0 million related to certain equipment.
Other Assets -- At June 30, 1996, other assets is comprised primarily
of an $800,000 note receivable from an officer of the Company. The note bears
interest at 5.33%, is due in April 1998 and is secured by shares of the
Company's stock held by the officer and other assets. The carrying value of
the note materially approximates its fair value based on a discounted cash flow
analysis.
Warranty -- The Company warrants its implantable defibrillators for
three years or 100 high voltage capacitor charges. A provision for future
warranty costs is recorded based on management estimates.
Revenue Recognition -- Revenue from sales of the Company's products is
recognized upon receipt of a purchase order and shipment of the product.
Net Income (Loss) Per Share -- Net income (loss) per share is computed
using the weighted average number of shares of common stock outstanding and
common equivalent shares, if dilutive.
-13-
<PAGE> 14
Accounting for Long-Lived Assets -- In 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which standardizes the accounting practices for the
recognition and measurement of impairment losses on certain long-lived assets.
The Company will adopt Statement No. 121 in the first quarter of fiscal 1997
and, based on current circumstances, does not believe the effect of adoption
will be material.
Stock-Based Compensation -- The Company accounts for stock options
under Accounting Principles Board No. 25. In 1995, the FASB issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Under this standard, the Company will provide expanded disclosures reflecting
the amount of compensation expense related to stock-based compensation,
including pro forma net income and earnings per share, beginning in fiscal
1997.
NOTE 2: SHORT-TERM INVESTMENTS
Short-term investments, at amortized cost, which approximate fair
value, are comprised of the following:
<TABLE>
<CAPTION>
(in thousands) June 30,
------------------------
1996 1995
------- --------
<S> <C> <C>
Overnight deposits $ 1,639 $ 12,155
Overnight repurchase agreements 5,670 13,990
U.S. government obligations 3,521 --
Commercial paper 9,733 41,470
------- --------
Total available-for-sale investments 20,563 67,615
Less cash equivalent investments (7,309) (28,609)
------- --------
Short-term investments $13,254 $ 39,006
======= ========
</TABLE>
During the years ended June 30, 1996 and 1995, there were no sales
prior to maturity and therefore no realized gains or losses.
NOTE 3: CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
(in thousands) 1996 1995
-------- --------
<S> <C> <C>
Inventories:
Raw materials $ 7,895 $ 4,698
Work-in-process 3,091 8,121
Finished goods 4,441 4,284
-------- --------
$ 15,427 $ 17,103
======== ========
Property, plant, and equipment:
Equipment $ 44,347 $ 34,660
Leasehold improvements 7,182 7,077
Construction in process 978 2,099
-------- --------
52,507 43,836
Less: accumulated depreciation
and amortization (29,852) (17,717)
-------- --------
$ 22,655 $ 26,119
======== ========
</TABLE>
-14-
<PAGE> 15
NOTE 4: STOCKHOLDERS' EQUITY
Stock Option Plans and Stock Purchase Plan
Under the 1995 Stock Option Plan, the Company may grant incentive
stock options and non-statutory stock options to employees and consultants.
Options may be granted to purchase common stock at exercise prices that will be
no less than the fair market value of the stock at the grant date, as
determined by the Board of Directors, and with terms of five to ten years. The
options generally become exercisable over four years from the date of grant.
Under the Director Option Plan, non-employee directors of the Company
("Outside Directors") receive nondiscretionary, automatic option grants
exercisable for 15,000 shares upon their initial election to the Board of
Directors and on July 1 of each year thereafter exercisable for 5,000 shares,
provided that the first such automatic grant on July 1, 1996 will be
exercisable for 7,500 shares. Options granted to Outside Directors have a term
of ten years from the date of grant and have an exercise price equal to the
closing price of the Company's common stock on the last trading day prior to
the date of the grant. Initial options to Outside Directors become exercisable
ratably over 36 months and subsequent annual grants become exercisable ratably
over twelve months.
The following is a summary of activity during fiscal 1994, 1995 and
1996 under all of the Company's plans:
<TABLE>
<CAPTION>
Aggregate
Shares Available Shares Subject Exercise Price Exercise Price
for Grant to Options per Share (In thousands)
---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 37,388 1,933,409 $ 0.40 - $37.75 $ 19,965
Authorized 900,000 -- -- --
Granted (445,609) 445,609 $17.25 - $43.87 11,857
Exercised -- (450,354) $ 0.40 - $29.50 (1,126)
Canceled 75,329 (75,329) $ 0.47 - $43.87 (1,184)
---------- --------- --------------- ---------
Balance at June 30, 1994 567,108 1,853,335 $ 0.40 - $43.87 $ 29,512
Authorized 1,900,000 -- -- --
Granted (829,077) 829,077 $14.06 - $28.75 18,054
Exercised -- (491,836) $ 0.47 - $26.00 (854)
Canceled 136,447 (136,447) $ 0.40 - $43.87 (3,348)
Plan shares expired (199,128) -- -- --
---------- --------- --------------- ---------
Balance at June 30, 1995 1,575,350 2,054,129 $ 1.00 - $43.87 $ 43,364
Authorized -- -- -- --
Granted (1,009,845) 1,009,845 $15.63 - $21.50 16,243
Exercised -- (153,870) $ 1.00 - $17.25 (416)
Canceled 198,500 (198,500) $ 1.00 - $43.87 (4,995)
Plan shares expired (149,298) -- -- --
---------- --------- --------------- ---------
Balance at June 30, 1996 614,707 2,711,604 $ 1.00 - $43.87 $ 54,196
========== ========= =============== =========
</TABLE>
At June 30, 1996, 1,093,616 of the options outstanding were
exercisable. At June 30, 1995, 796,540 of the options outstanding were
exercisable.
The Company has a 1991 Employee Stock Purchase Plan for which a total
of 325,000 shares of common stock have been authorized for issuance. Eligible
employees may invest up to 10% of compensation through payroll deductions and
purchase shares of the Company's stock at 85% of fair market value at specified
dates.
-15-
<PAGE> 16
The Company has issued 206,732 shares since inception of the plan, including
80,808 shares during the fiscal year ended June 30, 1996.
Stockholder Rights Plan
Under the Company's Stockholder Rights Plan, one preferred share
purchase right (a "Right") is attached to each share of common stock of the
Company. Each Right will entitle stockholders to purchase 1/1000 of a share of
Series A participating preferred stock of the Company, a designated series of
preferred stock for which each 1/1000 of a share has economic attributes and
voting rights equivalent to one share of the Company's common stock, at an
exercise price of $100. The Rights only become exercisable in certain limited
circumstances involving acquisitions of or tender offers for 15% or more of the
Company's capital stock. For a limited period of time after the announcement
of any such acquisition or offer, the Rights are redeemable at a price of $.01
per Right. After becoming exercisable, in certain more limited circumstances,
each Right entitles its holder to purchase for $100 an amount of common stock
of the Company, or in certain circumstances, securities of the acquiror, having
a then current market value equal to $200. The Rights expire on August 16,
2004.
NOTE 5: LEASE AND PURCHASE COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments at June 30, 1996 were as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(In thousands)
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,451
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,516
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 798
-------
Total minimum lease payments . . . . . . . . . . . . . . . $ 5,270
=======
</TABLE>
The Company leases its facilities under non-cancelable lease
agreements that extend through December 2000. Rental expense totaled
approximately $1,377,000, $1,351,000 and $1,033,000 for fiscal years ended June
30, 1996, 1995 and 1994, respectively.
At June 30, 1996, the Company had approximately $7,000,000 in
non-cancelable commitments with suppliers to provide components in the normal
course of business.
-16-
<PAGE> 17
NOTE 6: INCOME TAXES
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current
Federal $ -- $ 349 $ --
State -- 651 --
-------- ------- -------
$ -- $ 1,000 $ --
======== ======= =======
</TABLE>
The reconciliation of income tax provision (benefit) computed at the
U.S. federal statutory rate to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory $(20,394) $ 3,503 $ 3,053
State taxes net of federal benefit -- 423 --
Utilization of tax net operating loss
carryforwards (6,835) --
Valuation allowance for deferred tax assets 20,394 3,793 (3,053)
Other -- 116 --
-------- ------- -------
$ -- $ 1,000 $ --
======== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows:
<TABLE>
<CAPTION>
(In thousands) June 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 33,960 $ 17,408
Tax credit carryforwards 3,418 3,347
Accrued liabilities 2,612 2,666
Inventory reserves 8,168 6,247
Capitalized research and development costs 2,027 2,761
Other 2,601 1,252
-------- --------
52,786 33,681
Valuation allowance $(52,786) $(33,681)
-------- --------
$ -- $ --
======== ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of June 30, 1996
and 1995, has been established to reflect these uncertainties.
Approximately $10,238,000 of the deferred tax assets subject to the
valuation allowance at June 30, 1996 relates to the tax benefits of stock
option deductions. These benefits, when realized, will be credited directly to
stockholders' equity and will not reduce the provision for income taxes. The
change in valuation allowance was a net increase of $19,105,000 and $1,028,000
for fiscal years 1996 and 1995, respectively.
-17-
<PAGE> 18
At June 30, 1996, the Company has net operating loss and research and
development tax credit carryforwards for federal tax purposes of approximately
$99,882,000 and $2,806,000, respectively, that will expire through 2011 if not
utilized. In addition, the Company has a federal minimum tax credit carryover
of $454,000 and a California investment tax credit carryforward of $240,000.
NOTE 7: LITIGATION
The Company is currently in litigation with one of its competitors,
Intermedics, Inc. In response to threats from Intermedics, the Company filed a
declaratory judgment action in the United States District Court in the Northern
District of California in January 1993, asking the court to declare that
certain patents which Intermedics had asserted were being infringed by the
Company were, in fact, invalid, unenforceable or not infringed. Intermedics
then filed several actions in the United States District Court in the Southern
District of Texas alleging infringement by the Company of nine Intermedics
patents. Initially, this litigation was focused on procedural issues relating
to whether the dispute would be tried in California or Texas. On October 12,
1994, the United States District Court for the Northern District of California
denied Intermedics motion to transfer Ventritex's pending suits to Texas and
granted Ventritex's motion to enjoin Intermedics from further prosecution of
its aforementioned suits in Texas. The United States District Court for the
Southern District of Texas thereafter issued an order transferring to
California all of the Texas cases which Intermedics had served upon Ventritex.
The Court has indicated that the trial in connection with the above described
actions will begin May 5, 1997.
The Company filed a further action in the Northern District of
California in July 1993 seeking a declaratory judgment that the patents that
Intermedics has asserted against the Company are not infringed by Ventritex,
are invalid and are unenforceable. This action, which was filed against
Intermedics, its parent and affiliate companies, SulzerMedica and Sulzer, Inc.,
seeks damages based upon claims for antitrust law violations, malicious
prosecution, conspiracy and breach of contract. Intermedics, SulzerMedica and
Sulzer, Inc. have moved to stay or dismiss the Company's damage claims, and the
Court ordered that certain of these claims be dismissed without prejudice and
that others be stayed pending determination of other issues in the parties'
various lawsuits.
In the above actions, Intermedics seeks judgments against Ventritex
for damages, attorneys fees and injunctive relief. It is expected that
Intermedics will, during the course of the litigation, seek to obtain various
types of pretrial relief which include, but are not limited to, summary
judgments, dismissals of Ventritex's claims and preliminary injunctions. In
January 1995, Intermedics filed a motion for partial summary judgment and for
issuance of a preliminary injunction based on alleged infringement of one of
its patents. Ventritex vigorously contested these motions and requested the
United States Patent and Trademark Office to conduct a reexamination of claim
28 of Intermedics U.S. Patent No. 4,880,005 upon which these motions are
based. The Court denied Intermedics' partial summary judgment motion, and, as a
result, Intermedics' preliminary injunction request was withdrawn. The Patent
Office, on May 28, 1996, issued a second final rejection of claim 28 of the
4,880,005 patent. Intermedics subsequently requested reconsideration of the
final rejection. As a result of this reconsideration, on August 5, 1996 the
United States Patent and Trademark Office reissued the 4,880,005 patent with
claim 28 intact. The Company believes that Intermedics will make renewed
efforts to obtain partial summary judgment and a preliminary injunction. On
June 6, 1996, Intermedics filed with the United States Patent and Trademark
Office a request for reexamination of U.S. Patent No. 4,830,006 and on June 7,
1996, Intermedics filed a request for reexamination of U.S. Patent No,
4,913,145. Both patents are being asserted by Intermedics against the Company.
The requests are based on references identified by Ventritex as being pertinent
to the patents in response to discovery requests by Intermedics.
-18-
<PAGE> 19
Since the Company brought a declaratory relief action against
Intermedics in January 1993, Intermedics has filed suits against the Company's
two principal competitors, Medtronic and CPI, alleging infringement of several
of the same patents which it has asserted against the Company. None of these
actions has yet been set for trial.
In addition to its patent infringement claims, Intermedics had
previously alleged trade secret misappropriation and related acts by the
Company and two of its officers, who were formerly employees of Intermedics. In
this lawsuit, the Company filed counterclaims against Intermedics for
infringement of two of Ventritex's patents. These counterclaims are still
pending. Certain of the trade secret misappropriation and related claims were
tried in 1992 before a United States District Court jury in San Francisco. The
jury returned a unanimous verdict in favor of the Company and its officers and
found that Intermedics had acted in bad faith in continuing to pursue the trade
secret misappropriation claims. The Court set aside the bad faith portion of
the verdict based on Intermedics claim of an erroneous jury instruction. A new
trial on the bad faith issue has been ordered, but no trial date has been set.
The judgment dismissed all of Intermedics trade secret claims against the
Company and its officers and was affirmed on appeal.
In addition to the above-mentioned litigation, the Company is also
involved in other litigation in the normal course of business. Although an
adverse determination in the Intermedics proceedings or in other litigation or
administrative proceedings could have a material adverse effect on the Company,
based upon the nature of the claims made and the investigation completed to
date, the Company believes the outcome of the described actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors an employee salary deferral plan that allows
voluntary contributions by employees after completion of six months of service.
Eligible employees may elect to contribute from 2% to 15% of their respective
compensation, and the Company at its discretion may elect to make matching
contributions. During fiscal 1995, the Company matched 50% of the first 6% of
an employee's contributions to a maximum of $1,000 per calendar year. In
fiscal 1996, the Company continued to match an employee's contribution on the
same basis to a maximum of 50% of the annual limits on salary deferrals
established by tax regulations. The Company's fiscal 1995 and 1996
contributions under this plan were approximately $419,000 and $659,000,
respectively.
NOTE 9: CONCENTRATION OF CREDIT RISK
The Company sells primarily to hospitals. In the fiscal year ended
June 30, 1996, one customer accounted for 10% of net sales. In the fiscal
years ended June 30, 1995 and 1994, no customer accounted for more than 10% of
sales. The Company performs ongoing credit evaluations of its customers, but
does not require collateral. The Company maintains reserves for potential
credit losses, and to date such losses have been within management's
expectations.
-19-
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ventritex, Inc.
We have audited the accompanying consolidated balance sheets of
Ventritex, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Ventritex, Inc. at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 25, 1996
-20-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Ventritex, Inc. of our report dated July 25, 1996, included in the 1996
Annual Report to Shareholders of Ventritex, Inc. and included in Exhibit 13.1
to this Annual Report.
We also consent to the incorporation by reference in the Post Effective
Amendment No. 2 to the Registration Statements (Forms S-8, Nos. 33-87218,
33-54406, and 33-47316) pertaining to the amended 1985 Incentive Stock Option
Plan, the 1991 Employee Stock Purchase Plan, and the 1992 Consultant Stock
Purchase Plan of Ventritex, Inc., and to the incorporation by reference in the
Registration Statement (Form S-8, No. 33-91540) pertaining to the 1995 Stock
Option Plan and the 1995 Director Option Plan of Ventritex, Inc., of our report
dated July 25, 1996, with respect to the consolidated financial statements of
Ventritex, Inc. incorporated by reference in this Annual Report (Form 10-K) for
the year ended June 30, 1996.
Our audits also included the financial statement schedule of Ventritex, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
August 13, 1996
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