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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 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 Number)
701 EAST EVELYN AVE., SUNNYVALE, CA 94086
(Address of principal executive office) (Zip Code)
(408) 738-4883
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
Number of shares outstanding of the registrant's common stock, par
value $.001 per share, as of September 30, 1996: 20,940,044
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INDEX
VENTRITEX, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements and Notes
(Unaudited)
Consolidated Condensed Balance Sheets - September 30, 1996 and
June 30, 1996 3
Consolidated Condensed Statements of Operations - for the three
months ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows - for the three
months ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
VENTRITEX, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
--------- ---------
(Unaudited) (see Note 1)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,223 $ 9,299
Short-term investments 33,838 13,254
Accounts receivable, net 10,239 10,658
Inventories 16,270 15,427
Other current assets 2,301 1,349
--------- ---------
Total current assets 97,871 49,987
Property, plant and equipment, net 21,253 22,655
Debt issuance costs 2,071 --
Other assets 818 819
--------- ---------
Total assets $ 122,013 $ 73,461
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,995 $ 8,027
Accrued employee compensation 3,044 2,548
Accrued royalties 2,007 1,869
Accrued warranty 1,754 1,721
Other accrued expenses 4,028 4,409
Deferred other income 927 927
--------- ---------
Total current liabilities 19,755 19,501
Commitments and contingencies
Convertible subordinated notes 57,500 --
Stockholders' equity:
Preferred stock, par value $.001, 5,000 shares
authorized, none issued and outstanding
Common stock, par value $.001, 35,000 shares
authorized, 20,940 shares and 20,878 shares issued and outstanding
on September 30, 1996 and June 30, 1996, respectively 21 21
Additional paid-in capital 159,627 158,900
Accumulated deficit (114,890) (104,961)
--------- ---------
Total stockholders' equity 44,758 53,960
--------- ---------
Total liabilities and stockholders' equity $ 122,013 $ 73,461
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
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VENTRITEX, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
Net sales $ 18,610 $ 14,225
Cost of sales 10,411 15,365
-------- --------
Gross profit (loss) 8,199 (1,140)
Operating expenses:
Research and development 8,605 7,094
Selling, general and administrative 9,711 8,990
-------- --------
Total operating expenses 18,316 16,084
-------- --------
Loss from operations (10,117) (17,224)
Other income (expense):
Interest income 608 993
Interest expense (358) --
Other expense (62) (1)
-------- --------
Other income, net 188 992
Loss before provision for income taxes (9,929) (16,232)
Provision for income taxes -- --
-------- --------
Net loss $ (9,929) $(16,232)
======== ========
Net loss per share $ (0.47) $ (0.79)
======== ========
Weighted average common shares outstanding 20,908 20,671
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
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VENTRITEX, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net loss $ (9,929) $(16,232)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,712 2,388
Changes in operating assets and liabilities:
Accounts receivable 419 3,403
Inventories (843) 2,766
Prepaid expenses and other current assets (952) 407
Other assets (2,123) --
Accounts payable, accrued warranty, and other
accrued expenses (380) 2,505
Accrued employee compensation 496 (449)
Accrued royalties 138 (557)
-------- --------
Net cash used in operating activities (10,462) (5,769)
Investing activities:
Purchase of short-term investments (25,454) (9,724)
Proceeds from sale of short-term investments 4,870 24,438
Acquisition of equipment and leasehold improvements (1,257) (3,541)
-------- --------
Net cash provided by (used in) investing activities (21,841) 11,173
Financing activities:
Proceeds from sale of common stock 727 630
Proceeds from issuance of Convertible
Subordinated Notes 57,500 --
-------- --------
Net cash provided by financing activities 58,227 630
Increase in cash and cash equivalents 25,924 6,034
Cash and cash equivalents at beginning of period 9,299 34,942
-------- --------
Cash and cash equivalents at end of period $ 35,223 $ 40,976
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
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VENTRITEX, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The financial statements should be read in conjunction with the audited
financial statements included in Ventritex Inc.'s (the Company's) Annual Report
on Form 10-K for the year ended June 30, 1996, filed with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
The results of operations for the three months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the
entire year ending June 30, 1997.
NOTE 2: CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Inventories:
Raw materials $ 9,168 $ 7,895
Work-in-process 3,293 3,091
Finished goods 3,809 4,441
-------- --------
$ 16,270 $ 15,427
======== ========
Property, plant and equipment:
Equipment $ 45,613 $ 44,347
Leasehold improvements 7,205 7,182
Construction in process 923 978
-------- --------
53,741 52,507
Less: Accumulated depreciation and
amortization (32,488) (29,852)
-------- --------
$ 21,253 $ 22,655
======== ========
</TABLE>
The Company classifies all its short-term investments as
available-for-sale securities. Available-for-sale securities are carried at
market value with unrealized gains and losses reported as a separate component
of stockholders' equity net of related tax effects. Realized gains and losses
are included in investment income. The cost of all securities sold is based on
the specific identification method.
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The Company's short-term investments mature within twelve months and
the amounts of unrealized gains or losses are immaterial.
NOTE 3: NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding and common equivalent shares from stock
options and warrants, if dilutive. Common equivalent shares from stock options
were excluded from the computation for the three months ended September 30, 1995
and September 30, 1996, as their effect is antidilutive.
NOTE 4: INCOME TAXES
The Company has established a valuation allowance for deferred tax
assets resulting from operating losses incurred in fiscal 1997 and 1996;
accordingly, no tax benefits have been recorded.
NOTE 5: 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 re-examination of claim 28 of
Intermedics U.S. Patent No. 4,880,005 upon which these motions are based. On
August 5, 1996 the United States Patent and Trademark Office reissued the
4,880,005 patent with claim 28 intact. Intermedics has recently renewed its
efforts to obtain partial summary judgment and a preliminary injunction. In
October 1996, the Special Master
7
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recommended that the Court enter partial summary judgment confirming that
Ventritex may not challenge the validity of the 4,880,005 patent, but that claim
interpretation and infringement issues remain for trial. The Court has not yet
entered an order deciding this issue. The preliminary injunction motion has been
partially briefed but has been taken off calendar without any recommendation. 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. The Company
filed a separate request for reexamination of U.S. Patent No. 4,830,006 on
September 5, 1996 presenting the Company's argument of invalidity. Both requests
for reexamination of the 4,830,006 patent have been granted, and the two
reexamination proceedings on this patent were merged October 24, 1996.
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 Cardiac Pacemakers, Inc., 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. The Company has been
informed that Intermedics has recently agreed to a settlement by which
Medtronic, Inc. would receive a license to Intermedics' patents.
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. See note 7.
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 6: CONVERTIBLE SUBORDINATED NOTES
In the first quarter the Company issued $57.5 million aggregate
principal amount of 5-3/4% convertible subordinated notes due August 15, 2001.
The notes are convertible at any time prior to maturity, unless previously
redeemed or repurchased, into shares of common stock at a conversion rate of
58.1818 shares per $1,000 principal amount of notes (equivalent to a conversion
price of approximately $17.188 per share). The notes are unsecured obligations
subordinated in right of payment to all existing and future senior indebtedness
of the Company and effectively subordinated in right of payment to all
indebtedness and other liabilities of the Company's subsidiaries. As of
September 30, 1996, the Company had no outstanding indebtedness that would have
constituted senior indebtedness.
8
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NOTE 7: SUBSEQUENT EVENT
On October 22, 1996 Ventritex, St. Jude Medical, Inc. ("St. Jude") and
Pacesetter, Inc., a wholly-owned subsidiary of St. Jude ("Pacesetter") executed
a definitive agreement providing for the merger of Ventritex into Pacesetter. In
the merger, each outstanding share of Ventritex common stock will be converted
into .6 of a share of St. Jude common stock. The merger is subject to St. Jude's
prior completion of the acquisition of substantially all of the cardiac rhythm
management assets, including intellectual property rights, of Telectronics
Pacing Systems Inc., Ventritex stockholder approval, expiration of the
applicable Hart-Scott-Rodino waiting period and other customary conditions. In
connection with the merger, Ventritex will repurchase at least 200,000 shares of
its stock on the open market. St. Jude also has entered into an agreement with
Intermedics which provides, among other things, for the settlement of all
outstanding litigation between Ventritex and Intermedics upon completion of the
merger and for royalty-free (except as to certain third party patent agreements)
cross-license agreements for cardiac stimulation devices covering both Ventritex
and Intermedics patents.
9
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ITEM 2.
VENTRITEX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, Ventritex and its subsidiaries ("the Company")
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(R) V-100 system. In
July 1994, the FDA approved the Company's PMA Supplements 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(R) 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(R) 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. In September 1996, the FDA approved a PMA Supplement for the
Contour(TM) V-145 defibrillator system. The Contour V-145 is smaller and lighter
than the Cadet V-115 implantable defibrillator and has 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 Contour. The high
voltage can utilizes the defibrillator case as the second electrode.
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.
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
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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.
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 the first quarter of fiscal 1997, currently
expects to incur a net loss for the second quarter and may incur a net loss for
fiscal 1997. If the Company is unable to manufacture significant quantities of
the Contour on a timely basis or at all, the Company's results of operations
could 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.
On October 22, 1996 Ventritex, St. Jude Medical, Inc. ("St. Jude") and
Pacesetter, Inc., a wholly-owned subsidiary of St. Jude ("Pacesetter") executed
a definitive agreement providing for the merger of Ventritex into Pacesetter. In
the merger, each outstanding share of Ventritex common stock will be converted
into .6 of a share of St. Jude common stock. The merger is subject to St. Jude's
prior completion of the acquisition of substantially all of the cardiac rhythm
management assets, including intellectual property rights, of Telectronics
Pacing Systems Inc., Ventritex stockholder approval, expiration of the
applicable Hart-Scott-Rodino waiting period and other customary conditions. In
connection with the merger, Ventritex will repurchase at least 200,000 shares of
its stock on the open market. St. Jude also has entered into an agreement with
Intermedics which provides, among other things, for the settlement of all
outstanding litigation between Ventritex and Intermedics upon completion of the
merger and for royalty-free (except as to certain third party patent agreements)
cross-license agreements for cardiac stimulation devices covering both Ventritex
and Intermedics patents.
11
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RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1997 were $18.6 million, an
increase of $4.4 million, or 31%, from $14.2 million in the corresponding period
of fiscal 1996 as a result of increased unit shipments and higher average unit
pricing. The number of defibrillators shipped in the current fiscal quarter was
approximately 10% higher than in the same period of the prior fiscal year, while
average unit prices increased approximately 18% from the same period of the
prior fiscal year. Average unit prices increased due to increased sales of
defibrillation lead systems and the impact of a direct sales subsidiary in
Germany. Compared with the fourth quarter of fiscal 1996, net sales for the
first quarter of fiscal 1997 rose 8%. Sales invoiced in foreign currencies were
approximately 9% of total net sales in the first quarter of fiscal 1997, while
no such sales were included in the first quarter of fiscal 1996. The Company
currently does not hedge the risk of currency exchange rate fluctuations.
Gross profit for the first quarter of fiscal 1997 was a profit of $8.2
million compared to a loss of $1.1 million in the first quarter of fiscal 1996.
The increase is due to lower inventory provisions, higher average unit pricing
and increased unit shipments, partially offset by increased spending associated
with capacitor manufacturing in the most recent quarter. The first quarter of
fiscal 1996 included a provision of $7.5 million for potentially excess
inventory and cancellation of purchase commitments for components, compared to a
provision of $1.2 million in fiscal 1997.
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.
The Company typically manufactures to its internal sales forecast,
fills orders as received and has no significant backlog of orders for its
products. In addition, major components of the Company's defibrillator systems
require firm purchase commitments (which may not be cancellable) well in advance
of the anticipated delivery of such components. As a result, failure to
accurately anticipate future demand may result in substantial excess inventory,
significant cancellation costs for purchase commitments, or inability to meet
demand for the Company's products and could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows.
There can be no assurance that future production problems will not be
encountered in 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.
Operating expenses were $18.3 million in the first quarter of fiscal
1997, a 14% increase over the $16.1 million of such expenditures in the first
quarter of fiscal 1996.
Research and development expenses increased approximately 21% to $8.6
million in the first fiscal quarter of 1997 compared to $7.1 million during the
corresponding period of fiscal 1996. The increase in spending is primarily due
to increases in the number of employees involved in research and development
activities as well as costs incurred associated with early
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production stages on the Contour defibrillator system in addition to design
costs for future products. The Company's research and development expenses
relate to various research, product development, process development, clinical
trial and quality assurance activities. Ventritex plans to continue to invest in
research and development and expects such expenses to increase in dollar amount
in the future.
Selling, general and administrative expenses totaled $9.7 million in
the first quarter of fiscal 1997 compared to $9.0 million during the
corresponding period of fiscal 1996. The increase in spending reflects increases
in the costs of direct operations in Europe, amortization of 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),
an increase in the number of employees, and travel costs partially offset by
decreases in insurance and legal expenses. Legal expenses are expected to
increase in future quarters as the Intermedics litigation trial date approaches.
See footnote 7 of the Consolidated Condensed Financial Statements.
Interest income was $0.6 million and $1.0 million in the first quarter
of fiscal 1997 and 1996, respectively, reflecting changes in invested cash
balances and interest rates. Interest expense in fiscal 1997 was $0.4 million
and resulted from the issuance of $57.5 million aggregate principal amount of
5-3/4% convertible subordinated notes due August 15, 2001. Other expense in
fiscal 1997 was primarily due to amortization of issuance costs for the notes.
Both interest and amortization expense will increase in the second fiscal
quarter, since the notes were issued at approximately the middle of the first
fiscal quarter.
The Company has established a valuation allowance for deferred tax
assets resulting from operating losses incurred in fiscal 1997 and 1996;
accordingly, no tax benefits have been recorded.
FLUCTUATIONS IN QUARTERLY RESULTS; PROFITABILITY UNCERTAIN; VOLATILITY OF STOCK
PRICE
Results of operations have varied and may continue to fluctuate
significantly from quarter to quarter and will depend upon numerous factors
including market acceptance of the Company's products, introductions of new
products with advanced features by the Company or its competitors, timing of
regulatory approvals, 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.
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
13
<PAGE> 14
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.
In addition, the Company's stock price may be affected by matters which
relate to the Company's pending merger into Pacesetter, including consummation
of St. Jude's acquisition of substantially all of the cardiac rhythm management
assets of Telectronics Pacing Systems, Inc., Ventritex stockholder approval,
expiration of the applicable Hart-Scott-Rodino waiting period and other
customary conditions.
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, cash equivalents and short-term investments totaled $69.1 million
compared to $22.5 million at June 30, 1996. The $55.4 million net proceeds of
the sale of $57.5 million aggregate principal amount of 5-3/4% convertible
subordinated notes due August 15, 2001 and proceeds from exercise of stock
options and an employee stock purchase plan were partially offset by cash used
in operations and investments in capital equipment of $1.3 million. Cash used in
operations is primarily attributable to the net loss of $9.9 million.
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. In connection with the merger, the Company will repurchase at least
200,000 shares of its stock on the open market. If the merger is not
consummated, 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 its capital requirements for the
foreseeable future. Should fiscal 1997 results of operations fall significantly
short of forecasted levels, the Company could consider either seeking additional
capital or restructuring its operations. 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 risks 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.
14
<PAGE> 15
VENTRITEX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Consolidated Financial Statements set forth under
Item 1 of Part I.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Sequentially
Exhibit Numbered
Number Description Page
11.1 Statement of Computation of Net Income Per Share
b) Reports on Form 8-K
A Form 8-K was filed on October 29, 1996 in connection
with the Company's Agreement and Plan of Merger with
St. Jude Medical, Inc. and Pacesetter, Inc., a
wholly-owned subsidiary of St. Jude Medical, Inc.
15
<PAGE> 16
VENTRITEX, INC.
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.
Date: November 5, 1996 VENTRITEX, INC.
/s/ Frank M. Fischer
---------------------------------
Frank M. Fischer
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ David R. Bunker
---------------------------------
David R. Bunker
Controller
(Chief Accounting Officer)
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