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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 March 31, 1997
-------------------
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, $.001 par
value, as of March 31, 1997: 20,855,865
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INDEX
<TABLE>
<CAPTION>
VENTRITEX, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements and
Notes (Unaudited)
Consolidated Condensed Balance Sheets - March
31, 1997 and June 30, 1996 3
Consolidated Condensed Statements of Operations
for the three months and nine months ended March
31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended March 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial 6
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
VENTRITEX, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---- ----
(Unaudited) (Note 1)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,025 $ 9,299
Short-term investments 24,088 13,254
Accounts receivable 12,010 10,658
Inventories 21,374 15,427
Other current assets 3,925 1,349
--------- ---------
Total current assets 71,422 49,987
Property, plant and equipment, net 21,182 22,655
Debt issuance costs 1,826 ---
Other assets 1,659 819
---------- ----------
Total assets $ 96,089 $ 73,461
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,865 $ 8,027
Accrued employee compensation 3,863 2,548
Accrued royalties 2,052 1,869
Accrued warranty 5,669 1,721
Other accrued expenses 3,267 4,409
Deferred other income 927 927
----------- ---------
Total current liabilities 22,643 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, 20,856 shares and 20,878 shares issued and outstanding
on March 31, 1997 and June 30, 1996, respectively 21 21
Additional paid-in capital 155,625 158,900
Accumulated deficit (139,700) (104,961)
--------- --------
Total stockholders' equity 15,946 53,960
---------- ---------
Total liabilities and stockholders' equity $ 96,089 $ 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 Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $20,712 $12,801 $ 58,597 $37,661
Cost of sales 11,587 9,523 39,858 38,576
--------- --------- --------- ---------
Gross profit (loss) 9,125 3,278 18,739 (915)
Operating expenses:
Research and development 7,119 7,394 24,233 22,501
Selling, general and administrative 9,469 10,092 28,766 28,140
--------- -------- --------- --------
Total operating expenses 16,588 17,486 52,999 50,641
-------- -------- -------- --------
Loss from operations (7,463) (14,208) (34,260) (51,556)
Other income (expense):
Interest income 556 590 1,963 2,414
Interest expense (827) --- (2,015) ---
Other expense (243) (21) (427) (32)
-------- --------- -------- ----------
Other income (expense), net (514) 569 (479) 2,382
Net loss $ (7,977) $(13,639) $(34,739) $(49,174)
======== ======== ======== ========
Net loss per share $ (0.38) $ (0.66) $ (1.67) $ (2.37)
Weighted average common shares outstanding 20,823 20,767 20,853 20,719
</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>
Nine Months Ended
March 31,
1997 1996
---- ----
Operating activities:
<S> <C> <C>
Net loss $(34,739) $(49,174)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 7,811 7,800
Changes in operating assets and liabilities:
Accounts receivable (1,352) 3,868
Inventories (5,947) 6,073
Prepaid expenses and other current assets (2,576) (30)
Other assets (2,666) (300)
Accounts payable and other current liabilities 3,142 1,031
--------- --------
Net cash used in operating activities (36,327) (30,732)
Investing activities:
Purchase of short-term investments (43,933) (14,644)
Proceeds from maturities of short-term investments 33,099 39,057
Acquisition of equipment and leasehold improvements (6,338) (6,857)
--------- ---------
Net cash provided by (used in) investing activities (17,172) 17,556
Financing activities:
Proceeds from sale of common stock 3,452 1,364
Repurchase and retirement of common stock (6,727) ---
Proceeds from issuance of convertible subordinated notes 57,500 ---
--------- ----------
Net cash provided by financing activities 54,225 1,364
Change in cash and cash equivalents 726 (11,812)
Cash and cash equivalents at beginning of period 9,299 34,942
--------- --------
Cash and cash equivalents at end of period $10,025 $23,130
======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
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VENTRITEX, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(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 nine months ended March 31, 1997 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>
March 31, 1997 June 30, 1996
-------------- -------------
(Unaudited)
(In thousands)
Inventories:
<S> <C> <C>
Raw materials $ 11,085 $ 7,895
Work-in-process 4,872 3,091
Finished goods 5,417 4,441
---------- ----------
$ 21,374 $ 15,427
======== ========
Property, plant and equipment:
Equipment $ 48,027 $ 44,347
Leasehold improvements 7,264 7,182
Construction in process 3,555 978
---------- ----------
58,846 52,507
Less: Accumulated depreciation and
amortization (37,664) (29,852)
--------- ---------
$ 21,182 $ 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 other income and have not been material. 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 six months, and the
amount of unrealized gains and losses is 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 all periods, as their effect is
antidilutive.
In February 1997, the Financial Accounting standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted for
periods ending after December 15, 1997. At that time, the company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. Given
the Company's net losses, there will be no impact on reported earnings per share
for fiscal 1996 or fiscal 1997.
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.
The agreement provided that, in the merger, each outstanding share of Ventritex
common stock would be converted into 0.6 of a share of St. Jude common stock. On
March 28, 1997, Ventritex and St. Jude executed an amendment to the merger
agreement. Under the terms of the amended merger agreement, each outstanding
share of Ventritex common stock will be converted into 0.5 of a share of St.
Jude common stock. The companies agreed to reduce the exchange ratio to reflect
the impact on the Ventritex business which has resulted from previously
disclosed component failures in Cadence V-110 defibrillators. The merger is
subject to Ventritex stockholder approval and other customary conditions. The
Board of Directors of Ventritex has called a Special Meeting of Stockholders to
be held on May 12, 1997, at which the stockholders will be asked to approve the
agreement. In connection with the merger, Ventritex has repurchased 290,000
shares of its stock on the open market. Pacesetter 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. See Management's Discussion and
Analysis and Notes 6 and 8.
At the Special Meeting of Stockholders of Ventritex on May 12, 1997, the
amended merger agreement among Ventritex, Pacesetter and St. Jude was approved
by the stockholders.
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
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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. Upon closing of the merger, all claims between the
Company and Intermedics are to be dismissed, according to a settlement agreement
between Intermedics and 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. On February
27, 1997, the judge in the Minnesota action denied the motion of Telectronics
and Pacesetter to compel arbitration and the complaint was dismissed. On April
10, 1997, the United States Court of Appeals for the Eighth Circuit denied a
motion in the Minnesota Action for an expedited appeal and for an injunction to
delay action in the Guidant Action. The Company is not a party to the Minnesota
Action. On April 30, 1997, the judge in the Guidant Action granted Guidant's
motion to remand, and the Guidant Action accordingly is now pending in the
Indiana Superior Court. Defendants' motion to dismiss the Guidant Action remains
pending.
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
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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). On April 30, 1997, the judge in the CPI Action denied
defendants' motion to dismiss or, in the alternative, to stay the CPI Action.
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). 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
March 31, 1997, 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.
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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 and
in conjunction with the Company's annual report on Form 10-K. 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. With the November 1996 approval of the
high voltage can versions of the Cadet and Contour, the Company has regulatory
approval of and is commercially marketing a single-lead system. The Company is
also engaged in a clinical trial of a single-lead
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transvenous defibrillation lead system and must receive regulatory approval
prior to commercialization of this system. There can be no assurance as to when
or whether the Company will receive regulatory approval for this system. 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. Physicians preferring single-lead systems may choose to continue to
combine competitors' transvenous leads with the Company's defibrillators.
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 third quarter of fiscal 1997, and will incur
a net loss for fiscal 1997. 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.
The agreement provided that, in the merger, each outstanding share of Ventritex
common stock would be converted into 0.6 of a share of St. Jude common stock. On
March 28, 1997, Ventritex and St. Jude executed an amendment to the merger
agreement. Under the terms of the amended merger agreement, each outstanding
share of Ventritex common stock will be converted into 0.5 of a share of St.
Jude common stock. The companies agreed to reduce the exchange ratio to reflect
the impact on the
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Ventritex business which has resulted from previously disclosed component
failures in Cadence V-110 defibrillators. The merger is subject to Ventritex
stockholder approval and other customary conditions. The Board of Directors of
Ventritex has called a Special Meeting of Stockholders to be held on May 12,
1997, at which the stockholders will be asked to approve the agreement. In
connection with the merger, Ventritex has repurchased 290,000 shares of its
stock on the open market. Pacesetter 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.
At a Special Meeting of Stockholders of Ventritex on May 12, 1997, the
amended merger agreement among Ventritex, Pacesetter and St. Jude was approved
by the stockholders.
Product Warranty Matters
On January 16, 1997, Ventritex announced that the FDA had authorized it
to proceed with a notification and reprogramming procedure for its Cadence model
V-110 and V-112 defibrillators in response to then recent crystal hermeticity
failures 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 a crystal hermeticity 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 devices, 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 April 22, 1997, follow-up has been completed on over 99% of
affected patients. 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 medical expenses up to $2,500. Ventritex 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 a device that had not been reprogrammed delivered
inappropriately rapid pacing pulses that are believed to have been associated
with the induction of a lethal ventricular arrhythmia. Ventritex's current
production models (Cadet V-115 and Contour V-145) are not affected.
Approximately 425 replacement units were supplied free of charge in the quarter
ended March 31, 1997.
RESULTS OF OPERATIONS
Net sales were $20.7 million for the third quarter of fiscal 1997, an
increase of $7.9 million, or 62%, compared to $12.8 million for the
corresponding period of fiscal 1996. Sales in the third quarter increased
approximately 7% compared to the immediately preceding quarter. For the first
nine months of fiscal 1997, sales were $58.6 million, an increase of $20.9
million, or 56%, compared to $37.7 million during the first nine months of the
prior fiscal year. The number of defibrillators shipped was approximately 51%
higher in the third quarter and 36% higher in the first nine months of fiscal
1997 than in the comparable periods of fiscal 1996. Average unit prices
increased approximately 7% in the third fiscal quarter and 14% in the first nine
months of the current fiscal year compared to corresponding periods of fiscal
1996. In both periods, average unit sales prices increased due to increased
sales of defibrillation lead systems and the impact of a direct sales
subsidiary in Germany. Sales invoiced in foreign currencies were approximately
9% and 10%, respectively, for the third quarter and first nine months of fiscal
1997 compared to 8% and 3%, respectively, for the comparable periods of fiscal
1996. The Company currently does not hedge the risk of currency exchange rate
fluctuations.
12
<PAGE> 13
Gross profit for the third quarter of fiscal 1997 was $9.1 million
compared to $3.3 million in the third quarter of fiscal 1996. Gross profit for
the first nine months of fiscal 1997 was a profit of $18.7 million compared to a
loss of $0.9 million for the corresponding period of fiscal 1996. The increase
in gross profit for the third quarter is due to increases in unit shipments and
higher average unit prices partially offset by increased spending associated
with capacitor manufacturing and inventory provisions in the current year. For
the first nine months, the increase is due to decreased inventory provisions,
increases in unit shipments and higher average unit sales prices partially
offset by additional warranty provisions and increased spending associated with
capacitor manufacturing in fiscal 1997. Fiscal 1996 results include provisions
of $0.7 million in the third quarter and $14.8 million in the first nine months
for potentially excess inventory and cancellation of purchase commitments,
compared to provisions of $1.2 million and $2.4 million in the corresponding
periods of fiscal 1997.
Fiscal 1997 cost of sales also includes a warranty provision of $6.0
million related to crystal hermeticity failures in three 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 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. 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, however, these litigation costs are not expected to be material.
During the third fiscal quarter, approximately 425 devices were replaced.
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 cancelable) 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 $16.6 million in the third quarter of fiscal
1997, a 5% decrease over the $17.5 million of such expenditures in the third
quarter of fiscal 1996. For the first nine months of fiscal 1997, operating
expenses increased 5% to $53.0 million, compared to $50.6 million of operating
expenses in the comparable period of fiscal 1996.
Research and development expenses were $7.1 million and $24.2 million,
respectively, for the third quarter and first nine months of fiscal 1997,
compared to $7.4 million and $22.5 million for the corresponding periods of
fiscal 1996. For the first nine months, increases in the number of people
involved in research and development activities, costs incurred associated with
manufacturing process development
13
<PAGE> 14
for the Contour defibrillator system and design costs for future products were
responsible for the increase in spending. The Company's research and development
activities related 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 $9.5 million in the
third quarter of fiscal 1997, compared to $10.1 million in the third quarter of
fiscal 1996, and $28.8 million in the first nine months of fiscal 1997 compared
to $28.1 million in the first nine months of fiscal 1996. The decrease in
spending for the third quarter reflects decreases in 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)
and advertising/sales promotion expenses partially offset by increases in
expenses of direct operations in Europe and variable expenses associated with
the increase in net sales. For the first nine months, increases in expenses of
direct operations in Europe, the number of employees, variable expenses
associated with increases in net sales and travel costs were partially offset
by decreases in consulting and other expenses. Legal expenses were
approximately the same in both third fiscal quarters and decreased moderately
in the first nine-months period. See Note 6 of the Consolidated Condensed
Financial Statements.
Interest income was $0.6 million for the third quarter and $2.0 million
for the first nine months of fiscal 1997 compared to $0.6 million for the third
quarter and $2.4 million for the first nine months of fiscal 1996, reflecting
changes in invested cash balances and interest rates. Interest expense in fiscal
1997 of $0.8 million in the third quarter and $2.0 million in the first nine
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 and the impact of changes in foreign currency
exchange rates 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 $34.1 million
at March 31, 1997 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 $36.3 million, repurchase of 290,000 shares of common
stock on the open market for $6.7 million, and investments in capital equipment
of $6.3 million in the nine months ended March 31, 1997. Cash used in operations
is primarily attributable to the net loss of $34.7 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 six months. Should 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
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.
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 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 six months. Should 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.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C>
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is due.
A Form 8-K was filed on April 3, 1997 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.
</TABLE>
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: May 12, 1997 VENTRITEX, INC.
/s/ Frank M. Fischer
-------------------------------------------
Frank M. Fischer
President, Chief Executive Officer,
Chief Financial Officer and Director
(Principal Executive and Financial Officer)
/s/ David R. Bunker
-------------------------------------------
David R. Bunker
Controller
(Chief Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 10,025
<SECURITIES> 24,088
<RECEIVABLES> 12,494
<ALLOWANCES> 484
<INVENTORY> 21,374
<CURRENT-ASSETS> 71,422
<PP&E> 58,846
<DEPRECIATION> 37,664
<TOTAL-ASSETS> 96,089
<CURRENT-LIABILITIES> 22,643
<BONDS> 57,500
0
0
<COMMON> 21
<OTHER-SE> 15,925
<TOTAL-LIABILITY-AND-EQUITY> 96,089
<SALES> 58,597
<TOTAL-REVENUES> 58,597
<CGS> 39,858
<TOTAL-COSTS> 39,858
<OTHER-EXPENSES> 52,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,015
<INCOME-PRETAX> (34,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,739)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
