<PAGE> 1
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 December 31, 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, no par value, as
of December 31, 1996: 20,790,331
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INDEX
VENTRITEX, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Condensed Financial Statements and Notes (Unaudited)
Consolidated Condensed Balance Sheets - December 31, 1996 and
June 30, 1996 3
Consolidated Condensed Statements of Operations for the three
months and six months ended December 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for the six
months ended December 31, 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 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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>
December 31, June 30,
1996 1996
----------- ----------
(Unaudited) (see Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,264 $ 9,299
Short-term investments 42,561 13,254
Accounts receivable 10,944 10,658
Inventories 18,186 15,427
Other current assets 3,319 1,349
---------- ----------
Total current assets 83,274 49,987
Property, plant and equipment, net 21,560 22,655
Debt issuance costs 1,966 ---
Other assets 1,217 819
---------- ----------
Total assets $ 108,017 $ 73,461
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,287 $ 8,027
Accrued employee compensation 3,271 2,548
Accrued royalties 2,085 1,869
Accrued warranty 7,669 1,721
Other accrued expenses 4,352 4,409
Deferred other income 927 927
---------- ----------
Total current liabilities 27,591 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, 20,790 shares and 20,878 shares issued and outstanding
on December 31, 1996 and June 30, 1996, respectively 21 21
Additional paid-in capital 154,628 158,900
Accumulated deficit (131,723) (104,961)
---------- ----------
Total stockholders' equity 22,926 53,960
---------- ----------
Total liabilities and stockholders' equity $ 108,017 $ 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 Six Months Ended
December 31, December 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 19,275 $ 10,635 $ 37,885 $ 24,860
Cost of sales 17,860 13,688 28,271 29,053
-------- -------- -------- --------
Gross profit (loss) 1,415 (3,053) 9,614 (4,193)
Operating expenses:
Research and development 8,509 8,013 17,114 15,107
Selling, general and administrative 9,586 9,058 19,297 18,048
-------- -------- -------- --------
Total operating expenses 18,095 17,071 36,411 33,155
-------- -------- -------- --------
Loss from operations (16,680) (20,124) (26,797) (37,348)
Other income (expense):
Interest income 799 831 1,407 1,824
Interest expense (829) -- (1,188) --
Other expense (123) (10) (184) (11)
-------- -------- -------- --------
Other income, net (153) 821 35 1,813
-------- -------- -------- --------
Net loss $(16,833) $(19,303) $(26,762) $(35,535)
======== ======== ======== ========
Net loss per share $ (0.81) $ (0.93) $ (1.28) $ (1.72)
Weighted average common shares outstanding 20,827 20,719 20,868 20,695
</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>
Six Months Ended
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Operating activities:
Net loss $(26,762) $(35,535)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,320 4,560
Changes in operating assets and liabilities:
Accounts receivable (286) 5,661
Inventories (2,759) 7,380
Prepaid expenses and other current assets (1,970) (241)
Other assets (2,364) (300)
Accounts payable and other
accrued expenses 8,090 1,423
---------- ----------
Net cash used in operating activities (20,731) (17,052)
Investing activities:
Purchase of short term investments (40,039) (14,644)
Proceeds from sale of short term investments 10,732 29,282
Acquisition of equipment and leasehold improvements (4,225) (5,313)
---------- ----------
Net cash provided by (used in) investing activities (33,532) 9,325
Financing activities:
Proceeds from sale of common stock 2,455 656
Repurchase and retirement of common stock (6,727) --
Proceeds from issuance of convertible
subordinated notes 57,500 --
---------- ----------
Net cash provided by financing activities 53,228 656
Decrease in cash and cash equivalents (1,035) (7,071)
Cash and cash equivalents at beginning of period 9,299 34,942
---------- ----------
Cash and cash equivalents at end of period $ 8,264 $27,871
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
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VENTRITEX, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December 31, 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 (as amended by Forms 10-K/A) 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 six months ended December 31, 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>
December 31, 1996 June 30, 1996
----------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Inventories:
Raw materials $ 10,273 $ 7,895
Work-in-process 3,972 3,091
Finished goods 3,941 4,441
-------- --------
$ 18,186 $ 15,427
======== ========
Property, plant and equipment:
Equipment $ 47,175 $ 44,347
Leasehold improvements 7,245 7,182
Construction in process 2,312 978
-------- --------
56,732 52,507
Less: Accumulated depreciation and
amortization (35,172) (29,852)
-------- --------
$ 21,560 $ 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.
6
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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- and six-month periods ended
December 31, 1995 and December 31, 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: ANTICIPATED MERGER
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 0.6 of a share of St. Jude common stock. The merger is subject
to Ventritex stockholder approval, expiration of the applicable
Hart-Scott-Rodino waiting period and other customary conditions. In connection
with the merger, Ventritex has repurchased, to date, 290,000 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.
NOTE 6: 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 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.
The Court had previously set a date of May 5, 1997, for trial of
certain claims and defenses in this action. That date has now been vacated and
all proceedings stayed pending the closing of the merger transaction between
the Company and Pacesetter.
7
<PAGE> 8
Upon closing of the merger, all claims between the Company and Intermedics are
to be dismissed, according to a settlement agreement between Intermedics and St.
Jude Medical, Inc., the parent of Pacesetter. See note 5.
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. The Company has been informed that Intermedics has recently agreed to
a settlement by which Medtronic, Inc. would receive a license to Intermedics'
patents. The litigation between Intermedics and Cardiac Pacemakers, Inc.
remains pending at this time.
Following the announcement of the merger agreement between the Company
and Pacesetter, on November 26, 1996, Guidant Corporation and Guidant Sales
Corporation (collectively "Guidant"), along with Cardiac Pacemakers, Inc.
("CPI") and Eli Lilly and Company ("Eli Lilly"), filed a lawsuit (the "Guidant
Action") in the Indiana Superior Court, Marion County, against the Company, St.
Jude Medical, Inc., Pacesetter, Inc., and Telectronics Pacing Systems, Inc.,
Telectronics Holdings, Ltd., Telectronics Pty. Ltd., Medical Telectronics
Holding, N.V., TPLC, Inc., and Telectronics, S.A. (collectively
"Telectronics"), alleging, among other things, that the recent merger between
Telectronics and Pacesetter, Inc. was ineffective to transfer certain patent
licenses that were originally granted by Guidant, CPI, and/or Eli Lilly to
Telectronics in 1995 and that any attempted use of the license by Pacesetter,
Inc. and/or St. Jude Medical, Inc. would constitute an infringement of
plaintiffs' alleged patent rights. Plaintiffs seek declaratory and other
relief. On December 19, 1996, defendants removed the Guidant Action to the
United States District Court for the Southern District of Indiana and
thereafter filed a motion to dismiss or stay the Guidant Action pending the
resolution of a related lawsuit brought by Telectronics and Pacesetter in the
United States District Court for the District of Minnesota (the "Minnesota
Action"), in which they seek an order to compel arbitration concerning the
transferability of the patent licenses. The Company is not a party to the
Minnesota Action.
On the same date that the Guidant Action was filed in Indiana State
Court, CPI, Guidant, and Eli Lilly also filed a lawsuit (the "CPI Action") in
the United States District Court for the Southern District of Indiana against
St. Jude Medical, Inc., Pacesetter, Inc., and the Company, alleging, among
other things, that the continued manufacture and sale of certain of the
Company's current products after the proposed merger between Pacesetter and the
Company will infringe on certain patent rights currently owned by CPI and Eli
Lilly. Plaintiffs allege, among other things, that a licensing agreement
between the Company, CPI, and Eli Lilly will terminate upon the consummation of
the proposed merger, and that any sales of certain of the Company's existing
products subsequent to the proposed merger consequently would infringe upon
certain of plaintiffs' alleged patent rights. Plaintiffs seek declaratory and
injunctive relief, as well as an unspecified amount of damages. On December
19, 1996, the defendants moved the court for an order dismissing the CPI Action
or, in the alternative, staying the Action pending the resolution of the
Minnesota Action (described above).
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 7: CONVERTIBLE SUBORDINATED NOTES
In the first quarter of fiscal 1997, 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).
8
<PAGE> 9
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 December 31, 1996, the Company had no
outstanding indebtedness that would have constituted senior indebtedness.
NOTE 8. WARRANTY ACCRUAL
During the second quarter of fiscal 1997, the Company increased its
reserve for warranty expense to cover anticipated costs of reprogramming and
selective replacement of its Cadence V-110 and V-112 defibrillators. See
Management's Discussion and Analysis.
9
<PAGE> 10
ITEM 2.
VENTRITEX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Operating History
The following discussion of financial condition and results of
operations of the Company should be read in conjunction with the consolidated
condensed financial statements and the related notes thereto included herein.
The following management's discussion and analysis contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
of operations could differ materially from those anticipated in such
forward-looking statements as a result of factors set forth herein and under
"Additional Risk Factors" below.
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 November 1996, a PMA Supplement
for the high voltage can versions of the Cadet and Contour was approved by the
FDA. 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 current or future
defibrillators 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 of such systems. 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.
10
<PAGE> 11
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.
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 second quarter of fiscal 1997, 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, and under "Additional Risk Factors"
below, which could cause actual results of the Company to differ materially.
Proposed Merger
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 0.6 of a share of St. Jude common stock. The merger is subject
to Ventritex stockholder approval, expiration of the applicable
Hart-Scott-Rodino waiting period and other customary conditions. In connection
with the merger, Ventritex has repurchased, to date, 290,000 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
<PAGE> 12
Product Warranty Matters
On January 16, 1997, Ventritex announced that the FDA had authorized it
to proceed with a notification and reprogramming procedure in response to the
recent failure of an electrical component in two implanted Cadence model V-110
defibrillators, which resulted in the delivery of inappropriately rapid pacing
pulses believed to have been associated with the induction of lethal ventricular
tachyarrhythmias. The reprogramming procedure will prevent the delivery of
inappropriately rapid pacing pulses, even in the event of component failure. The
low energy cardioversion, high energy defibrillation and bradycardia pacing
capabilities of the devices will be left intact. The procedure takes only a few
minutes and does not require surgery. The FDA has worked closely with Ventritex
to expedite the reprogramming of the device, and Ventritex is assisting
physicians to the fullest extent possible to notify their patients
(approximately 5,600 patients in total) and arrange for prompt reprogramming of
the devices. As of February 13, 1997, over 85% of the currently implanted
devices have been reprogrammed. In addition, Ventritex has offered Cadet V-115
products as replacements free of charge to physicians whose patients require
antitachycardia pacing (estimated to be approximately 500-800 patients).
Ventritex has offered to reimburse these patients for surgical expenses up to
$2,500. The Company has accrued the estimated costs of these actions in the
quarter ended December 31, 1996. Since commencing the reprogramming of the
devices, Ventritex has become aware of one other incident in which
inappropriately rapid pacing pulses were delivered by a Cadence V-110 which are
believed to be associated with the induction of a lethal ventricular arrhythmia.
Ventritex's current production models (Cadet V-115 and Contour V-145) are not
affected.
RESULTS OF OPERATIONS
Net sales were $19.3 million for the second quarter of fiscal 1997, an
increase of $8.7 million, or 82%, compared to $10.6 million for the
corresponding period of fiscal 1996. For the first six months of fiscal 1997,
sales were $37.9 million, an increase of $13 million, or 52%, compared to
$24.9 million during the first six months of the prior fiscal year. The number
of defibrillators shipped was approximately 53% higher in the second quarter
and 29% higher in the first six months of fiscal 1997 than in the comparable
periods of fiscal 1996. Average unit prices increased approximately 18% from
the prior year in both the three- and six-month period of the current fiscal
year. In both periods, average unit sales prices increased due to increased
sales of defibrillation leads systems and the impact of a direct sales
subsidiary in Germany. Sales invoiced in foreign currencies were approximately
12% and 11%, respectively, for the second quarter and first six months of
fiscal 1997 compared to 2% and 15%, respectively, for the comparable periods of
fiscal 1996. The Company currently does not hedge the risk of currency
exchange rate fluctuations.
Gross profit for the second quarter of fiscal 1997 was a profit of $1.4
million compared to a loss of $3.1 million in the second quarter of fiscal
1996. Gross profit for the first half of fiscal 1997 was a profit of $9.6
million compared to a loss of $4.2 million for the corresponding period of
fiscal 1996. The increases in gross profit are due to decreased inventory
provisions, increases in unit shipments and higher average unit sales prices
partially offset by additional provisions for warranty and increased spending
associated with capacitor manufacturing in the current fiscal year. Fiscal
1996 results include a provision of $6.5 million for potentially excess
inventory in the second quarter and a provision of $14.0 million for
potentially excess inventory and cancellation of purchase commitments for
components, compared to a provision of $1.2 million in the first six months of
fiscal 1997.
Fiscal 1997 cost of sales also includes a warranty provision of $6.0
million related to failure of an electrical component in three implanted Cadence
model V-110 defibrillators, which resulted in the delivery of inappropriately
rapid pacing pulses. The warranty provision assumes replacement of approximately
15% of the currently implanted Cadence V-110 and V-112 units and includes cost
of the devices, limited reimbursement of medical costs for patients and
administrative costs of the procedure.
12
<PAGE> 13
The provision does not include amounts for potential litigation which could
arise from any of the three incidents of which Ventritex is aware. But in light
of insurance coverage, these litigation costs are not expected to be material.
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 $18.1 million in the second quarter of fiscal
1997, a 6% increase over the $17.1 million of such expenditures in the second
quarter of fiscal 1996. For the first six months of fiscal 1997, operating
expenses increased 10% to $36.4 million, compared to $33.2 million of operating
expenses in the comparable period of fiscal 1996.
Research and development expenses were $8.5 million and $17.1 million,
respectively, for the second quarter and first six months of fiscal 1997,
compared to $8.0 million and $15.1 million for the corresponding periods of
fiscal 1996. The increase in spending for the second quarter is primarily due
to increases in the number of people, including employees and consultants,
involved in research and development activities. For the first six months,
increases in the number of people involved in research and development
activities, costs incurred associated with early production stages of the
Contour defibrillator system and design costs for future products were
responsible for the increase in spending. The Company's research and
development activities 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
increase in dollar amount in the future.
Selling, general and administrative expenses totaled $9.6 million in the
second quarter of fiscal 1997, compared to $9.1 million in the second quarter
of fiscal 1996, and $19.3 million in the first six months of fiscal 1997
compared to $18.0 million in the first six months of fiscal 1996. The increases
in spending reflect increases in the expenses 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, variable
expenses associated with the increase in net sales, and travel costs partially
offset by decreases in consulting expenses. Legal expenses were approximately
the same in the second quarter of fiscal 1997 as in the second quarter of fiscal
1996 and decreased moderately in the first six-month period. See Footnote 6 of
the Consolidated Condensed Financial Statements.
13
<PAGE> 14
Interest income was $0.8 million for the second quarter and $1.4 million
for the first six months of fiscal 1997 compared to $0.8 million for the second
quarter and $1.8 million for the first six months of fiscal 1996, reflecting
changes in invested cash balances and interest rates. Interest expense in
fiscal 1997 of $0.8 million in the second quarter and $1.2 million in the first
six months resulted from the issuance of $57.5 million aggregate principal
amount of 5-3/4% convertible subordinated notes due August 15, 2001.
Amortization of issuance costs for the notes resulted in other expense in
fiscal 1997.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $50.8
million at December 31, 1996 compared to $22.6 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 of $20.7 million, repurchase
of 290,000 shares of common stock on the open market for $6.7 million, and
investments in capital equipment of $4.2 million in the six months ended
December 31, 1996. Cash used in operations is primarily attributable to the
net loss of $26.8 million partially offset by the increase in warranty
provision of $6.0 million. See Results of Operations.
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. 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 at least for the next twelve months. 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.
ADDITIONAL RISK FACTORS
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 product warranty matters, 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.
14
<PAGE> 15
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.
In addition, the Company's stock price may be affected by matters
which relate to the Company's pending merger into Pacesetter, including changes
in the market price of St. Jude's common stock, 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 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. 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 at least for the next twelve months. 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.
15
<PAGE> 16
VENTRITEX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Consolidated Financial Statements set forth under
Item 1 of Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Ventritex, Inc. was held on
November 14, 1996 for the purposes of electing directors of the Company,
approving and ratifying an amendment to the 1991 Employee Stock Purchase Plan,
approving and ratifying an increase in the authorized number of shares of the
Company's common stock and confirming the appointment of Ernst & Young LLP as
the independent auditors of the Company for the fiscal year ended June 30,
1997. All nominees for directors were elected and all proposals were approved.
The voting on each matter is set forth below:
Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Frank M. Fischer 18,304,610 132,372
Richard L. Karrenbrock 18,305,138 131,844
C. Raymond Larkin, Jr. 18,305,538 131,444
Robert R. Momsen 18,305,038 131,944
</TABLE>
Proposal to approve and ratify an amendment to the 1991 Employee Stock Purchase
Plan to increase the number of shares of common stock reserved for issuance
thereunder by 250,000 shares:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
16,733,810 1,053,098 90,509
</TABLE>
Proposal to approve and ratify an amendment to the Company's certificate of
incorporation to increase the authorized number of shares of the Company's
common stock by 65,000,000 shares:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
13,381,222 4,672,981 72,879
</TABLE>
Proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company for fiscal 1997:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
18,277,906 31,337 127,739
</TABLE>
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
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.
17
<PAGE> 18
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: February 13, 1997 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)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Document
No.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,264
<SECURITIES> 42,561
<RECEIVABLES> 11,428
<ALLOWANCES> 484
<INVENTORY> 18,186
<CURRENT-ASSETS> 83,274
<PP&E> 56,732
<DEPRECIATION> 35,172
<TOTAL-ASSETS> 108,017
<CURRENT-LIABILITIES> 27,591
<BONDS> 57,500
0
0
<COMMON> 21
<OTHER-SE> 22,926
<TOTAL-LIABILITY-AND-EQUITY> 108,017
<SALES> 37,885
<TOTAL-REVENUES> 37,885
<CGS> 28,271
<TOTAL-COSTS> 28,271
<OTHER-EXPENSES> 36,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35)
<INCOME-PRETAX> (26,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,762)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
