-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N8QReEwMJnd2HyFoXLqywkqZooyWOsQKqcyOmIDymqBR5dyy43VSXj0iq3GnbrmI MVCVDK6ceHIfDmKI0RNMNA== 0000891618-96-002000.txt : 19960913 0000891618-96-002000.hdr.sgml : 19960913 ACCESSION NUMBER: 0000891618-96-002000 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENTRITEX INC CENTRAL INDEX KEY: 0000793354 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 770056340 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-91540 FILM NUMBER: 96628878 BUSINESS ADDRESS: STREET 1: 709 EAST EVELYN AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087384883 MAIL ADDRESS: STREET 1: 709 E EVELYN AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K/A 1 FORM 10-K/A FOR THE FISCAL YEAR ENDED 6/30/96 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED JUNE 30, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 0-19713 VENTRITEX, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0056340 94086 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER (ZIP CODE) INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
701 East Evelyn Avenue, Sunnyvale, CA 94086 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 738-4883 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate value of voting stock held by non-affiliates of the Registrant was approximately $295,631,108 as of August 9, 1996, based upon the closing sale price of the Registrant's Common Stock reported for such date on the Nasdaq National Market. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 30, 1996, the Registrant had outstanding 20,878,095 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant's 1996 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. Certain information is incorporated into Parts II and IV of this report by reference to the Registrant's annual report to stockholders for the year ended June 30, 1996. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. Financial Statements The following Financial Statements of Ventritex, Inc. and Report of Ernst & Young LLP, Independent Auditors are incorporated by reference in the respective portions of the Registrant's 1996 annual report to stockholders and included in Exhibit 13.1 to this report: Report of Ernst & Young LLP, Independent Auditors Balance Sheets, June 30, 1996 and 1995 Statements of Operations, Years Ended June 30, 1996, 1995 and 1994 Statements of Stockholders' Equity, Years Ended June 30, 1996, 1995 and 1994 Statements of Cash Flows, Years Ended June 30, 1996, 1995 and 1994 Notes to Financial Statements 2. Financial Statement Schedules The financial statement schedule entitled "Valuation and Qualifying Accounts" is included at page S-1 of this Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. 3. Exhibits Refer to (c) below. (B) Reports on Form 8-K The Company was not required to and did not file any reports on Form 8-K during the three months ended June 30, 1996. (C) Exhibits
EXHIBIT NO. DESCRIPTION - ------- --------------------------------------------------------------------------------- 3.1 (4) Certificate of Incorporation filed October 24, 1994 3.2 (4) Bylaws, as amended 3.3 (4) Certificate of Designations of Rights, Preferences and Privileges of Series A 3.4 (4) Participating Preferred Stock Preferred Shares Rights Agreement, dated as of August 16, 1994, as amended 4.2 (6) Form of Convertible Subordinated Note (included in Exhibit 4.3) 4.3 (6) Form of Indenture 10.1 (7) Form of Indemnification Agreement for directors and officers 10.2A (3) Amended 1985 Incentive Stock Option Plan and forms of agreements thereunder 10.3 (1) 1991 Employee Stock Purchase Plan 10.4 (1) Representative Preferred Stock Purchase Agreement 10.5 (1) Registration Rights Agreement dated November 22, 1991 10.6 (1) Industrial Building Lease dated April 11, 1988 between the Registrant and J.J. and W., a general partnership (Building Lease) with First Amendment dated October 21, 1988 and second Amendment dated March 8, 1991
21 3
EXHIBIT NO. DESCRIPTION - ------- --------------------------------------------------------------------------------- 10.6A (2) Third Amendment dated May 1, 1992 and Fourth Amendment dated August 2, 1992, to Building Lease 10.6B (5) Fifth Amendment dated October 21, 1993, to Building Lease 10.6C + Sixth Amendment dated October 11, 1995, to Building Lease 10.9 (1) Agreement dated May 8, 1991 between the Registrant and Messrs. Grundfest, Gershman and Reznek 10.10 (1) Agreement dated November 24, 1991 between the Registrant and Thomas J. Fogarty, M.D. 10.11 (2)* License and Covenant Not to Sue dated May 7, 1992, effective February 11, 1992 between the Registrant and Medtronic, Inc. 10.12 (3)* License Agreement dated July 27, 1993 among the Registrant, Eli Lilly and Company and affiliates of Lilly 10.13 (3)* Settlement and License Agreement dated July 27, 1993 among the Registrant, Telectronics Pacing Systems, Inc. and affiliates of Telectronics 10.14 (7) 1995 Stock Option Plan and forms of agreements thereunder 10.15 (7) 1995 Director Option Plan and forms of agreements thereunder 11.1 + Statement of Computation of Earnings Per Share 13.1 Portions of Annual Report to Stockholders Incorporated by Reference 23.1 + Consent of Ernst & Young LLP, Independent Auditors 24.1 + Power of Attorney 27.1 + Financial Data Schedule
- --------------- * Confidential treatment granted. + Previously filed. (1) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-44360), as amended. (2) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. (3) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (4) Incorporated by reference to Registrant's Registration Statement on Form 8-A (No. 0-19713) filed with the Securities and Exchange Commission on December 29, 1994. (5) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (6) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Registration Statement on Form S-3 (No. 333-07651), as amended. (7) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. (D) Financial Statement Schedules See Item 14(a)(2) above. 22 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of September, 1996. VENTRITEX, INC. By: * ------------------------------------ Frank M. Fischer President, Chief Executive Officer, Director and Acting Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - --------------------------------------------- ------------------------------------------------- PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER: * President, Chief Executive September 11, 1996 - --------------------------------------------- Officer, Director and Acting Frank M. Fischer Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ DAVID R. BUNKER Controller September 11, 1996 - --------------------------------------------- David R. Bunker * Director September 11, 1996 - --------------------------------------------- Richard L. Karrenbrock * Director September 11, 1996 - --------------------------------------------- C. Raymond Larkin, Jr. * Director September 11, 1996 - --------------------------------------------- Robert R. Momsen Director - --------------------------------------------- Walter J. McNerney By: /s/ DAVID R. BUNKER - --------------------------------------------- David R. Bunker Attorney-in-Fact
23 5 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------- 3.1 (4) Certificate of Incorporation filed October 24, 1994 3.2 (4) Bylaws, as amended 3.3 (4) Certificate of Designations of Rights, Preferences and Privileges of Series A 3.4 (4) Participating Preferred Stock Preferred Shares Rights Agreement, dated as of August 16, 1994, as amended 4.2 (6) Form of Convertible Subordinated Note (included in Exhibit 4.3) 4.3 (6) Form of Indenture 10.1 (7) Form of Indemnification Agreement for directors and officers 10.2A (3) Amended 1985 Incentive Stock Option Plan and forms of agreements thereunder 10.3 (1) 1991 Employee Stock Purchase Plan 10.4 (1) Representative Preferred Stock Purchase Agreement 10.5 (1) Registration Rights Agreement dated November 22, 1991 10.6 (1) Industrial Building Lease dated April 11, 1988 between the Registrant and J.J. and W., a general partnership (Building Lease) with First Amendment dated October 21, 1988 and second Amendment dated March 8, 1991 10.6A (2) Third Amendment dated May 1, 1992 and Fourth Amendment dated August 2, 1992, to Building Lease 10.6B (5) Fifth Amendment dated October 21, 1993, to Building Lease 10.6C + Sixth Amendment dated October 11, 1995, to Building Lease 10.9 (1) Agreement dated May 8, 1991 between the Registrant and Messrs. Grundfest, Gershman and Reznek 10.10 (1) Agreement dated November 24, 1991 between the Registrant and Thomas J. Fogarty, M.D. 10.11 (2)* License and Covenant Not to Sue dated May 7, 1992, effective February 11, 1992 between the Registrant and Medtronic, Inc. 10.12 (3)* License Agreement dated July 27, 1993 among the Registrant, Eli Lilly and Company and affiliates of Lilly 10.13 (3)* Settlement and License Agreement dated July 27, 1993 among the Registrant, Telectronics Pacing Systems, Inc. and affiliates of Telectronics 10.14 (7) 1995 Stock Option Plan and forms of agreements thereunder 10.15 (7) 1995 Director Option Plan and forms of agreements thereunder 11.1 + Statement of Computation of Earnings Per Share 13.1 Portions of Annual Report to Stockholders Incorporated by Reference 23.1 + Consent of Ernst & Young LLP, Independent Auditors 24.1 + Power of Attorney 27.1 + Financial Data Schedule
- --------------- * Confidential treatment granted. + Previously filed. (1) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-44360), as amended. (2) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. (3) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 6 (4) Incorporated by reference to Registrant's Registration Statement on Form 8-A (No. 0-19713) filed with the Securities and Exchange Commission on December 29, 1994. (5) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (6) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Registration Statement on Form S-3 (No. 333-07651), as amended. (7) Incorporated by reference to the same-numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. EX-13.1 2 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS INCORPORATED BY REFERENCE SELECTED CONSOLIDATED FINANCIAL DATA
1996 1995 1994 1993 1992 --------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AND EMPLOYEE DATA) OPERATING RESULTS FOR THE YEAR: Net sales.................................. $ 54,942 $126,922 $105,616 $ 25,116 $ 9,479 Cost of sales.............................. 48,774 55,960 45,947 17,029 5,039 ------ ------ ------ ------ ------ Gross profit............................. 6,168 70,962 59,669 8,087 4,440 Operating Expenses: Research and development................. 30,796 27,716 23,334 12,940 8,399 Selling, general and administrative...... 38,100 36,513 28,947 12,974 4,487 Intellectual property settlements........ -- -- -- 18,600 -- ------ ------ ------ ------ ------ Total operating expenses.............. 68,896 64,229 52,281 44,514 12,886 Income (loss) from operations.............. (62,728) 6,733 7,388 (36,427) (8,446) Other income, net.......................... 2,747 3,275 1,591 3,111 1,405 Income (loss) before provision for income taxes.................................... (59,981) 10,008 8,979 (33,316) (7,041) Provision for income taxes................. -- 1,000 -- -- -- ------ ------ ------ ------ ------ Net income (loss).......................... (59,981) 9,008 8,979 (33,316) (7,041) Net income (loss) per share................ $ (2.89) $ 0.43 $ 0.44 $ (1.85) $ (0.48) Shares used in per share calculation....... 20,752 20,853 20,611 17,992 14,606 FINANCIAL POSITION AT JUNE 30: Working capital............................ $ 30,486 $ 86,207 $ 80,268 $ 33,321 $ 74,355 Total assets............................... 73,461 130,339 116,764 75,415 84,825 Accumulated deficit........................ (104,961) (44,980) (53,988) (62,967) (29,651) Stockholders' equity....................... $ 53,960 $112,344 $101,373 $ 47,601 $ 80,242 ADDITIONAL INFORMATION: Number of employees........................ 548 511 500 355 157 Capital spending........................... $ 9,071 $ 13,415 $ 10,713 $ 10,457 $ 5,451
The comparability of the above data is affected by the receipt of PMA approval for the Cadence system on April 30, 1993, a charge of $18.6 million relating to intellectual property settlements during fiscal 1993, a follow-on stock offering in September 1993 and PMA approval of competitors' defibrillator in March 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception, the Company and its subsidiaries have engaged in the design, development, manufacture and sale of implantable defibrillators and related products. In April 1993, the United States Food and Drug Administration ("FDA") approved the Company's premarket approval application ("PMA") for commercial release of the Cadence V-100 system. In July 1994, the FDA approved the Company's PMA supplement for the Cadence V-110 system, a smaller, lighter version of the Cadence V-100. In December 1995, the FDA approved a PMA supplement for the Cadet V-115 defibrillator system for abdominal implantation only. In May 1996, the FDA approved a PMA supplement to label the Cadet V-115 for pectoral implantation. Also in May 1996, the FDA approved a PMA Application for the TVL transvenous lead system. The Cadet V-115 is smaller and lighter than the Cadence V-100 and V-110 implantable defibrillators but has the same or improved functional and performance characteristics. During June 1996, the Company submitted a PMA supplement for the Contour(TM) V-145 defibrillator system. The Contour V-145 is designed to be smaller and lighter than the Cadet V-115 implantable defibrillator and have the same functional and performance characteristics. In July 1996, the Company submitted a PMA supplement for the high voltage can versions of the Cadet and the Contour. In March 1995, the FDA approved the commercial release of new defibrillators manufactured by Cardiac Pacemakers, Inc. ("CPI"), a subsidiary of Guidant Corporation and Medtronic, Inc. ("Medtronic") which are small enough to allow pectoral implantation, rather than abdominal implantation, in suitable patients. Until receipt of regulatory approval relating to the Cadet in May 1996, the Company could not offer an implantable defibrillator labeled for pectoral implantation in patients in the United States. Commercial release of pectorally implantable defibrillators significantly increased competition in the implantable defibrillator market and resulted in a significant decline in the Company's market share and sales of the Company's products. The Company now has products, the Cadet and Contour, which it believes are competitive; however, there can be no assurance that the Company's products will compete successfully with products currently manufactured by others or future products under development by competitors which have new features, such as dual chamber and rate-responsive pacing capabilities. In addition, while the Contour has been commercially released in Europe, it has not yet been approved by the FDA for commercial release in the U.S. Medtronic and CPI have regulatory approval of and are commercially marketing single lead transvenous lead systems. In May 1996, the Company began marketing the TVL transvenous lead system, a dual lead system. Some physicians prefer a single lead system due to the perceived ease of implanting such a system as compared to a dual lead system. The Company is engaged in clinical trials of single lead transvenous defibrillation lead systems and must receive regulatory approval prior to commercialization. There can be no assurance as to when or whether the Company will receive regulatory approval for these systems. To date, a large percentage of the Company's sales of defibrillators have been at the direction of physicians who used the Company's defibrillators in combination with commercially available transvenous lead systems supplied by the Company's competitors. Therefore, there can be no assurance that physicians will purchase transvenous lead systems for which the Company obtains regulatory approval. In particular, physicians preferring single lead systems may choose to continue to combine competitors' transvenous leads with the Company's defibrillators, at least until such time as the Company obtains PMA approval for its single lead systems. Furthermore, there can be no assurance that manufacturers of competing transvenous lead systems will not attempt to discourage or prevent use of their leads with the Company's defibrillators through product labeling, availability, pricing or other means. In general, unless the FDA-approved labeling includes use with any transvenous lead system sold by its competitors, the FDA or other government agencies may take further actions, including restrictions on reimbursement, to restrict 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. 2 3 The Company incurred net losses from its inception in January 1985 through the year ended June 30, 1993, incurred net losses from the fourth quarter of fiscal 1995 through fiscal 1996, currently expects to incur a net loss for the first quarter of fiscal 1997 and may incur a net loss for the first half of fiscal 1997. If regulatory approval to market the Contour in the United States is not obtained on a timely basis or at all, the Company's results of operations will be adversely affected. Results of operations have varied and may continue to fluctuate significantly from quarter to quarter and will depend upon numerous factors including timing of regulatory approvals, market acceptance of the Company's products, introductions of new products with advanced features by the Company or its competitors, technological advances in the treatment of arrhythmias, the outcome of intellectual property litigation and competition. The segment of the medical device market that includes implantable defibrillators has been characterized by extensive litigation regarding patents and other intellectual property rights. The Company has resolved intellectual property disputes to date through licensing arrangements, when appropriate and on terms it believes to be commercially reasonable. Under certain agreements, Ventritex pays royalties based on commercial sales of implantable defibrillator systems. The Company anticipates that such royalties will continue for future implantable defibrillator systems developed by the Company. Additionally, the agreements do not include all patents that may be issued to the licensors, thus future patent disputes with these companies are possible. Certain of these licenses contain significant restrictions that may have the effect of preventing or substantially impeding an acquisition of, change-of-control of, or certain minority investments in, the Company. Such restrictions include the possible termination of various licenses to the Company and the requirement that the Company make a substantial payment to one of the licensors upon such event. Intermedics, Inc. has filed claims against the Company for patent infringement which are still pending, and there can be no assurance that other parties will not institute additional litigation against the Company. The foregoing statements regarding the Company's defibrillators, transvenous lead systems and the period of time for which the Company expects to incur additional losses are forward-looking and involve risks and uncertainties, such as those noted above, which could cause actual results of the Company to differ materially. RESULTS OF OPERATIONS Net Sales Net sales for fiscal 1996 were $54.9 million, compared to $126.9 million during fiscal 1995 and $105.6 million in fiscal 1994. The fiscal 1996 decrease of $72.0 million, or 57%, reflects lower unit shipments and average unit pricing as compared to fiscal 1995 due primarily to the introduction by the Company's principal competitors of defibrillators capable of being implanted pectorally. Fiscal 1996 unit shipments decreased approximately 55% from fiscal 1995 levels and average unit prices decreased approximately 3%. As compared to the third quarter of fiscal 1996, unit shipments in the fourth quarter increased approximately 30% and average unit prices increased approximately 4% due to regulatory approval for pectoral implantation of the Cadet. Sales in fiscal 1995 increased compared to fiscal 1994 as a result of increased unit shipments. Sales of defibrillators provided substantially all of the Company's revenues in these periods. A majority of the Company's sales in each period were to hospitals at the request of physicians who used Ventritex defibrillators in combination with a competitor's transvenous defibrillation lead systems. Sales invoiced in foreign currencies are less than 5% of total net sales. The Company currently does not hedge the risk of currency exchange rate fluctuations. Gross Profit Gross profit for fiscal 1996 was $6.2 million compared to $71.0 million in fiscal 1995 and $59.7 million in fiscal 1994. Gross margin (gross profit as a percent of net sales) was approximately 11% for fiscal 1996, as compared to approximately 56% in both fiscal 1995 and 1994. However, the gross margin was 41% for the fourth quarter of fiscal 1996, reflecting the somewhat stronger sales in the fourth quarter. The decrease in gross profit from fiscal 1995 to fiscal 1996 reflects substantial reductions in unit shipments, increased provisions for excess and obsolete inventory, decreased production levels and lower average unit pricing in the current fiscal year. Fiscal 1996 includes a provision of $17.1 million for potentially excess inventory and cancellation of 3 4 purchase commitments for components. These provisions resulted from the rapid adoption of competitors' defibrillators that allow pectoral, rather than abdominal, implantation in suitable patients and the approval of additional competitive defibrillator systems labeled for pectoral implantation. The increase in gross profit from fiscal 1994 to fiscal 1995 was primarily due to increases in sales volume and lower per-unit component costs, partially offset by increases in royalty expenses, increased spending to establish leads manufacturing capability and increased provisions for product obsolescence. During the first half of fiscal 1996, in anticipation of regulatory approval, the Company began production of its Cadet V-115 defibrillator system and TVL transvenous lead system, and initially experienced shortages of certain critical components due to manufacturing yield problems at its suppliers. As a result, supplies of the Cadet V-115 defibrillator system were limited. There can be no assurance that future production problems will not be encountered in producing the Cadet, expanding production of the Contour and the TVL or establishing production of other new products currently under development. Failure to manufacture new or existing products on a timely and cost effective basis could result in substantial unanticipated expenses, delays in the commercial availability of such products, and could have a material adverse effect on the Company's business, financial condition and results of operations. Gross margins have fluctuated historically due to variations in production volume, manufacturing efficiencies, product obsolescence, new product introductions by the Company or its competitors, royalty rates, warranty expense, component price fluctuations, competitive pricing, and other factors. Gross profits may fluctuate in the future in both dollar amount and as a percentage of net sales due to these and other factors, including component part availability, regulatory actions and changes in reimbursement policies by either government or private insurance companies. At June 30, 1996, the Company has provided a reserve for potentially excess or obsolete inventory and believes that no loss will be incurred upon its disposition. There can be no assurance, however, that the actual sales will not differ materially from the sales forecast in the near term. The foregoing statements regarding the Company's defibrillators, transvenous lead systems, gross profits and sufficiency of inventory reserves are forward-looking and involve risks and uncertainties, such as those noted above, which could cause actual results of the Company to differ materially. Operating Expenses Operating expenses were $68.9 million in fiscal 1996 compared to $64.2 million in fiscal 1995 and $52.3 million in fiscal 1994. Research and development expenditures increased approximately 11% to $30.8 million in fiscal 1996, compared to $27.7 million in fiscal 1995 and $23.3 million in fiscal 1994. The increase in spending during fiscal 1996 was primarily due to costs associated with early production stages of the Cadet defibrillator system in addition to design costs for Contour, transvenous lead systems and future products. The Company's research and development expenses relate to various research, product and process development, clinical trial and quality assurance activities. Ventritex plans to continue to invest in research and development and expects such expenses to continue to increase in dollar amount in the future. Selling, general and administrative expenses increased to $38.1 million in fiscal 1996 from $36.5 million in fiscal 1995 and $28.9 million in fiscal 1994. The increase for fiscal 1996 reflects increases in amortization costs of external equipment to support defibrillators (which are supplied to customers on long-term loan, typically at no charge, in accordance with industry practice) and the expenses of a direct operating subsidiary in Germany formed in fiscal 1996. These increases were partially offset by decreases in compensation expense, commission expenses as a result of decreased revenues as discussed above, insurance expense, software system implementation costs and the impact of provisions for potential doubtful accounts. Management incentive bonuses were not accrued, and provisions for potential doubtful accounts were not booked in fiscal 1996, while such accruals and provisions were booked in fiscal 1995. Legal expenses decreased approximately $0.3 million from fiscal 1995 to fiscal 1996, but are expected to increase significantly in future periods as the Intermedics litigation moves beyond jurisdictional matters. Fiscal 1995 expenses were greater than those of fiscal 1994 due to increased staffing and associated expenses, amortization costs of external equipment, costs associated with 4 5 implementation of a new software system, research grants and donations, insurance expense and costs related to unit sales volume increase. Other Income Other income, consisting primarily of interest income, was $2.7 million in fiscal 1996 compared to $3.3 million and $1.6 million in fiscal 1995 and fiscal 1994, respectively. Fluctuations in interest income reflect changes in invested cash balances and interest rates. Income Taxes The Company has established a valuation allowance for deferred tax assets resulting from operating losses incurred in fiscal 1996 and fiscal 1994; accordingly no tax benefits were recorded in such years. For fiscal 1995, the provision for income taxes was 10% of pre-tax income, reflecting the benefit from the utilization of tax net operating loss carryforwards. FLUCTUATIONS IN OPERATING RESULTS; PROFITABILITY UNCERTAIN; VOLATILITY OF STOCK PRICE The Company incurred net losses from its inception in January 1985 through the year ended June 30, 1993, incurred net losses from the fourth quarter of fiscal 1995 through fiscal 1996, expects to incur a net loss for the first quarter of fiscal 1997 and may incur a net loss for the first half of fiscal 1997. If regulatory approval to market the Contour in the United States is not obtained on a timely basis or at all, the Company's results of operations will be adversely affected. There can be no assurance that the FDA will approve the Contour for marketing in the U.S. on a timely basis, if at all. Results of operations have varied and may continue to fluctuate significantly from quarter to quarter and will depend upon numerous factors including timing of regulatory approvals, market acceptance of the Company's products, introductions of new products with advanced features by the Company or its competitors, technological advances in the treatment of arrhythmias, the outcome of intellectual property litigation and competition. Sales have fluctuated significantly in the past, especially in fiscal 1995 and fiscal 1996, as competitors introduced products with advanced features. The Company's gross margins will be dependent on production volumes, manufacturing efficiencies, royalties under patent license agreements, warranty expense, component price fluctuations, competitive pricing, varying product sales mix and other factors. There can be no assurance that gross margins will improve in the future. In addition, a significant portion of the Company's operating expenses are relatively fixed in nature and planned expenditures are based, in part, on anticipated orders. Any inability to adjust spending quickly enough to compensate for revenue shortfalls may magnify the adverse impact of such revenue shortfall on the Company's results of operations. Furthermore, there can be no assurance that the Company will achieve profitability in the future or that profitability, if achieved, will be sustained. The market price of the Company's Common Stock has been and is likely to continue to be highly volatile. In addition, the stock market and the medical technology sector in particular have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, shortfalls in revenue or earnings from levels expected by securities analysts, new product introductions by the Company or its competitors, announcements of technological innovations or new products by the Company or its competitors, governmental regulation, developments with respect to patents or proprietary rights and litigation relating thereto, public concern as to the safety of products developed by the Company or others and general market conditions may have a significant adverse effect on the market price of the Common Stock. Substantially all of the shares of Common Stock held by current stockholders of the Company are eligible for immediate sale in the public market, subject in some cases to the public information, manner of sale, volume limitation and notice of sale provisions of federal securities laws. Future sales of such shares could lead to a decline in the market price of the Common Stock. The foregoing statements regarding the Company's operating results are forward-looking and involve risks and uncertainties, such as those noted above, which could cause actual results of the Company to differ materially. 5 6 LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents and short-term investments totaled $22.6 million at June 30, 1996, compared to $73.9 million at June 30, 1995. The decrease of $51.3 million reflects cash used in operations of $43.1 million and investments in capital equipment and leasehold improvements of $9.1 million partially offset by proceeds from exercise of stock options and an employee stock purchase plan of $1.6 million. In view of current and anticipated capacity requirements, the Company expects capital expenditures of approximately $6.0 million in fiscal 1997, compared with $9.1 million in fiscal 1996 and $13.4 million in fiscal 1995. Fiscal 1997 capital expenditures are expected to be made principally in connection with the purchase of new equipment. The Company's liquidity and capital requirements will depend on numerous factors, including the extent to which the Company's existing and future products gain market acceptance, the duration and magnitude of operating losses, FDA regulatory actions, changes in health care reimbursement policies and intellectual property litigation to which the Company is or may become a party. In August 1996, the Company completed a public offering of $57.5 million aggregate principal amount of 5 3/4% Convertible Subordinated Notes due August 15, 2001. The Company believes that its existing cash, cash equivalents and short-term investment balances, combined with cash forecasted to be generated from operations, will be sufficient to meet its capital requirements for the foreseeable future. Should fiscal 1997 results of operations fall significantly short of forecasted levels, the Company could consider either seeking additional capital or restructuring its operations. In addition, the Company may use other means of financing, including the issuance of equity securities or debt, if necessary or financially advantageous. The foregoing statements regarding the sufficiency of the Company's capital resources to meet its liquidity needs are forward-looking and involve risk and uncertainties, such as those noted above, which could cause actual results of the Company and the period of time for which such capital resources are sufficient to differ materially. 6 7 VENTRITEX, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, ---------------------- 1996 1995 --------- -------- ASSETS Current assets: Cash and cash equivalents........................................... $ 9,299 $ 34,942 Short-term investments.............................................. 13,254 39,006 Accounts receivable, net of allowance for doubtful accounts of $484............................................................. 10,658 11,376 Inventories......................................................... 15,427 17,103 Prepaid expenses.................................................... 1,030 1,242 Other current assets................................................ 319 533 --------- -------- Total current assets............................................. 49,987 104,202 Equipment and leasehold improvements, net............................. 22,655 26,119 Other assets.......................................................... 819 18 --------- -------- Total assets................................................ $ 73,461 $130,339 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 8,027 $ 3,541 Accrued employee compensation....................................... 2,548 4,879 Accrued royalties................................................... 1,869 2,200 Accrued warranty.................................................... 1,721 1,647 Other accrued expenses.............................................. 4,409 4,801 Deferred other income............................................... 927 927 --------- -------- Total current liabilities................................... 19,501 17,995 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.001, 5,000 shares authorized, none issued and outstanding........................................... -- -- Common stock, par value $.001, 35,000 shares authorized, 20,878 shares and 20,643 shares issued and outstanding in 1996 and 1995, respectively..................................................... 21 21 Additional paid-in capital.......................................... 158,900 157,303 Accumulated deficit................................................. (104,961) (44,980) --------- -------- Total stockholders' equity.................................. 53,960 112,344 --------- -------- Total liabilities and stockholders' equity.................. $ 73,461 $130,339 ========= ========
See Notes to Consolidated Financial Statements 7 8 VENTRITEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30, ---------------------------------- 1996 1995 1994 -------- -------- -------- Net sales.................................................. $ 54,942 $126,922 $105,616 Cost of sales.............................................. 48,774 55,960 45,947 -------- -------- -------- Gross profit............................................. 6,168 70,962 59,669 Operating expenses: Research and development................................. 30,796 27,716 23,334 Selling, general and administrative...................... 38,100 36,513 28,947 -------- -------- -------- Total operating expenses.............................. 68,896 64,229 52,281 -------- -------- -------- Income (loss) from operations....................... (62,728) 6,733 7,388 Other income (expense) Interest income............................................ 2,804 3,366 1,548 Interest expense......................................... -- (8) (42) Other income (expense)................................... (57) (83) 85 -------- -------- -------- Other income, net..................................... 2,747 3,275 1,591 -------- -------- -------- Income (loss) before provision for income taxes............ (59,981) 10,008 8,979 Provision for income taxes................................. -- 1,000 -- -------- -------- -------- Net income (loss).......................................... $(59,981) $ 9,008 $ 8,979 ======== ======== ======== Net income (loss) per share................................ $ (2.89) $ 0.43 $ 0.44 Shares used in per share calculation....................... 20,752 20,853 20,611
See Notes to Consolidated Financial Statements 8 9 VENTRITEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK RECEIVABLE -------------------- PAID IN FROM ACCUMULATED SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL ------ --------- -------- ------------ ----------- -------- Balance at June 30, 1993......... 18,144 $ 110,580 -- $(12) $ (62,967) $ 47,601 Sales of common stock............ 494 1,966 -- 12 -- 1,978 Sale of common stock in follow-on public offering, net of underwriting discounts and issuance costs of $2,844....... 1,450 42,815 -- -- -- 42,815 Net income....................... -- -- -- -- 8,979 8,979 ------ --------- -------- ---- --------- -------- Balance at June 30, 1994......... 20,088 155,361 -- -- (53,988) 101,373 Sales of common stock............ 555 1,963 -- -- -- 1,963 Reincorporation in Delaware...... -- (157,303) 157,303 -- -- -- Net income....................... -- -- -- -- 9,008 9,008 ------ --------- -------- ---- --------- -------- Balance at June 30, 1995......... 20,643 21 157,303 -- (44,980) 112,344 Sales of common stock............ 235 -- 1,597 -- 1,597 Net loss......................... -- -- -- -- (59,981) (59,981) ------ --------- -------- ---- --------- -------- Balance at June 30, 1996......... 20,878 $ 21 $158,900 -- $(104,961) $ 53,960 ====== ========= ======== ==== ========= ========
See Notes to Consolidated Financial Statements 9 10 VENTRITEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ---------------------------------- 1996 1995 1994 -------- -------- -------- Increase (decrease) in cash and cash equivalents Operating activities: Net income (loss)........................................ $(59,981) $ 9,008 $ 8,979 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 12,487 8,204 3,964 Loss from disposal of equipment....................... 48 168 -- Changes in operating assets and liabilities: Accounts receivable................................. 718 6,146 (10,020) Inventories......................................... 1,676 6,043 (2,913) Prepaid expenses and other current assets........... 426 217 (1,188) Accounts payable, accrued warranty, and other accrued expenses................................. 4,168 3,269 1,196 Accrued employee compensation....................... (2,331) 736 2,364 Accrued royalties................................... (331) (1,331) 2,741 Accrued intellectual property settlements........... -- -- (18,600) -------- -------- -------- Net cash provided by (used in) operating activities..................................... (43,120) 32,460 (13,477) Investing activities: Purchase of short-term investments....................... (37,623) (83,293) (35,551) Proceeds from maturities of short-term investments....... 63,375 67,472 12,366 Acquisition of equipment and leasehold improvements...... (9,071) (13,415) (10,713) Change in other assets................................... (801) 11 (5) -------- -------- -------- Net cash provided by (used in) investing activities..................................... 15,880 (29,225) (33,903) Financing activities: Proceeds from follow-on common stock offering, net....... -- -- 42,815 Proceeds from sales of common stock...................... 1,597 1,963 1,978 Principal payments under capital lease obligations....... -- (70) (124) -------- -------- -------- Net cash provided by financing activities........ 1,597 1,893 44,669 Increase (decrease) in cash and cash equivalents........... (25,643) 5,128 (2,711) Cash and cash equivalents at beginning of year............. 34,942 29,814 32,525 -------- -------- -------- Cash and cash equivalents at end of year................... $ 9,299 $ 34,942 $ 29,814 ======== ======== ======== Supplemental Cash Flow Information Cash paid for: Interest................................................. $ -- $ 8 $ 42 Income taxes............................................. $ 65 $ 689 $ --
See Notes to Consolidated Financial Statements 10 11 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization -- Ventritex, Inc., a Delaware corporation, and its wholly-owned subsidiaries (the Company) designs, develops, manufactures and sells implantable defibrillators and related products for the treatment of ventricular tachycardia and ventricular fibrillation. Implantable defibrillators are generally purchased by hospitals upon the recommendation of electrophysiologists. The principal markets for the Company's products are the United States and Europe. The implantable defibrillator market is characterized by rapid technological change and intense competition. As a result of the commercial release by competitors of pectorally implantable defibrillators in 1995, the Company experienced a significant decline in market share and revenues during fiscal 1996, resulting in a net loss of $60 million. The Company believes that its recently approved products and products currently awaiting regulatory approval will lead to increased revenues and improved cash flows from operations. If the Company experiences delays in new product approvals or significant shortfalls in results of operations from forecasted levels, the Company could consider either seeking additional capital or restructuring its operations. The Company believes that its existing cash, cash equivalents and short-term investment balances, combined with cash forecasted to be generated from operations, will be sufficient to meet capital requirements through at least fiscal 1997. In addition, the Company intends to issue convertible debt during the first quarter of fiscal 1997, which offering, if successfully completed, will provide sufficient capital for the foreseeable future. Should fiscal 1997 results of operations fall significantly short of forecasted levels and should the convertible debt offering not be completed as anticipated, the Company would be required to restructure its operations in order to preserve liquidity. Such restructuring could include delaying product development efforts, reducing or delaying capital expenditures, reducing personnel related costs, and other similar actions. In addition, the Company may use other means of financing, including the issuance of equity securities or debt, if necessary or financially advantageous. The Company has entered into licensing arrangements which require the payment of royalties on sales of defibrillators. Certain of these licenses contain significant restrictions that may have the effect of preventing or substantially impeding an acquisition of, change-of-control of, or minority investment in, the Company. The Company's products include components that must meet strict quality standards. The Company currently has sole source supply arrangements for a number of critical components. Although management believes that alternative sources of supply are available for most components and subcontracted manufacturing services, the time required to locate and qualify other suppliers could cause a delay in manufacturing that may be financially disruptive to the Company. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The market for implantable defibrillator is subject to rapid technological change and obsolescence of inventory. Any product developed by the Company that gains approval from the United States Food and Drug Administration will have to compete for market acceptance and market share. An important factor in such competition may be the timing of market introduction of competitive products. Management has developed a sales forecast based upon the expected timing of regulatory approval and market acceptance of its products and those of competitors. At June 30, 1996, the Company has provided a reserve for potentially excess or obsolete inventory and believes that no loss will be incurred upon its disposition. There can be no assurance, however, that the actual sales will not differ materially from the sales forecast in the near term. Basis of Presentation -- The accompanying consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The functional currency for the Company's foreign subsidiaries is the U.S. dollar. The Company currently 11 12 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) does not hedge the risk of currency exchange rate fluctuations. Foreign currency losses were $46,000, $14,000, and $8,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. Cash Equivalents -- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments -- The Company invests in short-term debt securities consisting of commercial paper with maturities of less than twelve months and overnight deposits (including repurchase agreements for which, due to their short term nature, the Company normally does not take possession of the underlying securities). Due to the short duration to maturity, the cost basis of these securities materially approximates their fair market value. By policy, all investments have a minimum short-term investment rating of A-1 or P-1. As of June 30, 1996, one investment represented 24% of total investments; this investment matured in July 1996. No other issuer represented greater than 12% of total investments. The Company classifies all investments as "available-for-sale". Available-for-sale securities are carried at fair value based upon quoted market prices, with the unrealized gains and losses (if significant) reported in a separate component of stockholders' equity. Inventories -- Inventories are valued at the lower of cost (first-in, first-out method) or market. Equipment and Leasehold Improvements -- Equipment, including capital equipment leases, and leasehold improvements are carried at cost less accumulated depreciation and amortization. Equipment is depreciated by the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized by the straight-line method over the shorter of the life of the related asset or the term of the lease. Depreciation expense includes amortization of capital leases and leasehold improvements. The Company periodically reviews the useful lives of specific property and equipment based upon changes in technology and products. In fiscal 1996, as a result of such a review, the Company recorded additional depreciation expense of $3.0 million related to certain equipment. Other Assets -- At June 30, 1996, other assets is comprised primarily of an $800,000 note receivable from an officer of the Company. The note bears interest at 5.33%, is due in April 1998 and is secured by shares of the Company's stock held by the officer and other assets. The carrying value of the note materially approximates its fair value based on a discounted cash flow analysis. Warranty -- The Company warrants its implantable defibrillators for three years or 100 high voltage capacitor charges. A provision for future warranty costs is recorded based on management estimates. Revenue Recognition -- Revenue from sales of the Company's products is recognized upon receipt of a purchase order and shipment of the product. Net Income (Loss) Per Share -- Net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and common equivalent shares, if dilutive. Accounting for Long-Lived Assets -- In 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The Company will adopt Statement No. 121 in the first quarter of fiscal 1997 and, based on current circumstances, does not believe the effect of adoption will be material. Stock-Based Compensation -- The Company accounts for stock options under Accounting Principles Board No. 25. In 1995, the FASB issued Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Under this standard, the Company will provide expanded disclosures reflecting the amount of compensation expense related to stock-based compensation, including pro forma net income and earnings per share, beginning in fiscal 1997. 12 13 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2: SHORT-TERM INVESTMENTS Short-term investments, at amortized cost, which approximate fair value, are comprised of the following:
JUNE 30, -------------------- 1996 1995 ------- -------- (IN THOUSANDS) Overnight deposits.............................................. $ 1,639 $ 12,155 Overnight repurchase agreements................................. 5,670 13,990 U.S. government obligations..................................... 3,521 -- Commercial paper................................................ 9,733 41,470 ------- -------- Total available-for-sale investments.......................... 20,563 67,615 Less cash equivalent investments.............................. (7,309) (28,609) ------- -------- Short-term investments.......................................... $13,254 $ 39,006 ======= ========
During the years ended June 30, 1996 and 1995, there were no sales prior to maturity and therefore no realized gains or losses. NOTE 3: CONSOLIDATED BALANCE SHEET COMPONENTS Certain balance sheet components are as follows:
JUNE 30, --------------------- 1996 1995 -------- -------- (IN THOUSANDS) Inventories: Raw materials................................................ $ 7,895 $ 4,698 Work-in-process.............................................. 3,091 8,121 Finished goods............................................... 4,441 4,284 -------- -------- $ 15,427 $ 17,103 ======== ======== Property, plant, and equipment: Equipment.................................................... $ 44,347 $ 34,660 Leasehold improvements....................................... 7,182 7,077 Construction in process...................................... 978 2,099 -------- -------- 52,507 43,836 Less: accumulated depreciation and amortization................ (29,852) (17,717) -------- -------- $ 22,655 $ 26,119 ======== ========
NOTE 4: STOCKHOLDERS' EQUITY Stock Option Plans and Stock Purchase Plan Under the 1995 Stock Option Plan, the Company may grant incentive stock options and non-statutory stock options to employees and consultants. Options may be granted to purchase common stock at exercise prices that will be no less than the fair market value of the stock at the grant date, as determined by the Board of Directors, and with terms of five to ten years. The options generally become exercisable over four years from the date of grant. Under the Director Option Plan, non-employee directors of the Company ("Outside Directors") receive nondiscretionary, automatic option grants exercisable for 15,000 shares upon their initial election to the Board 13 14 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of Directors and on July 1 of each year thereafter exercisable for 5,000 shares, provided that the first such automatic grant on July 1, 1996 will be exercisable for 7,500 shares. Options granted to Outside Directors have a term of ten years from the date of grant and have an exercise price equal to the closing price of the Company's common stock on the last trading day prior to the date of the grant. Initial options to Outside Directors become exercisable ratably over 36 months and subsequent annual grants become exercisable ratably over twelve months. The following is a summary of activity during fiscal 1994, 1995 and 1996 under all of the Company's plans:
AGGREGATE SHARES AVAILABLE SHARES SUBJECT EXERCISE PRICE EXERCISE PRICE FOR GRANT TO OPTIONS PER SHARE (IN THOUSANDS) ---------------- -------------- --------------- -------------- Balance at June 30, 1993........ 37,388 1,933,409 $ 0.40 - $37.75 $ 19,965 Authorized.................... 900,000 -- -- -- Granted....................... (445,609) 445,609 $17.25 - $43.87 11,857 Exercised..................... -- (450,354) $ 0.40 - $29.50 (1,126) Canceled...................... 75,329 (75,329) $ 0.47 - $43.87 (1,184) ---------- --------- --------------- ------- Balance at June 30, 1994........ 567,108 1,853,335 $ 0.40 - $43.87 $ 29,512 Authorized.................... 1,900,000 -- -- -- Granted....................... (829,077) 829,077 $14.06 - $28.75 18,054 Exercised..................... -- (491,836) $ 0.47 - $26.00 (854) Canceled...................... 136,447 (136,447) $ 0.40 - $43.87 (3,348) Plan shares expired........... (199,128) -- -- -- ---------- --------- --------------- ------- Balance at June 30, 1995........ 1,575,350 2,054,129 $ 1.00 - $43.87 $ 43,364 Authorized.................... -- -- -- -- Granted....................... (1,009,845) 1,009,845 $15.63 - $21.50 16,243 Exercised..................... -- (153,870) $ 1.00 - $17.25 (416) Canceled...................... 198,500 (198,500) $ 1.00 - $43.87 (4,995) Plan shares expired........... (149,298) -- -- -- ---------- --------- --------------- ------- Balance at June 30, 1996........ 614,707 2,711,604 $ 1.00 - $43.87 $ 54,196 ========== ========= =============== =======
At June 30, 1996, 1,093,616 of the options outstanding were exercisable. At June 30, 1995, 796,540 of the options outstanding were exercisable. The Company has a 1991 Employee Stock Purchase Plan for which a total of 325,000 shares of common stock have been authorized for issuance. Eligible employees may invest up to 10% of compensation through payroll deductions and purchase shares of the Company's stock at 85% of fair market value at specified dates. The Company has issued 206,732 shares since inception of the plan, including 80,808 shares during the fiscal year ended June 30, 1996. Stockholder Rights Plan Under the Company's Stockholder Rights Plan, one preferred share purchase right (a "Right") is attached to each share of common stock of the Company. Each Right will entitle stockholders to purchase 1/1000 of a share of Series A participating preferred stock of the Company, a designated series of preferred stock for which each 1/1000 of a share has economic attributes and voting rights equivalent to one share of the Company's common stock, at an exercise price of $100. The Rights only become exercisable in certain limited circumstances involving acquisitions of or tender offers for 15% or more of the Company's capital stock. For a 14 15 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) limited period of time after the announcement of any such acquisition or offer, the Rights are redeemable at a price of $.01 per Right. After becoming exercisable, in certain more limited circumstances, each Right entitles its holder to purchase for $100 an amount of common stock of the Company, or in certain circumstances, securities of the acquiror, having a then current market value equal to $200. The Rights expire on August 16, 2004. NOTE 5: LEASE AND PURCHASE COMMITMENTS The Company leases facilities and equipment under noncancelable lease agreements. Future minimum lease payments at June 30, 1996 were as follows:
OPERATING LEASES ---------------- (IN THOUSANDS) 1997.......................................... $1,451 1998.......................................... 1,516 1999.......................................... 1,505 2000.......................................... 798 ------ Total minimum lease payments.................. $5,270 ======
The Company leases its facilities under non-cancelable lease agreements that extend through December 2000. Rental expense totaled approximately $1,377,000, $1,351,000 and $1,033,000 for fiscal years ended June 30, 1996, 1995 and 1994, respectively. At June 30, 1996, the Company had approximately $7,000,000 in non-cancelable commitments with suppliers to provide components in the normal course of business. NOTE 6: INCOME TAXES The provision for income tax consists of the following:
1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Current Federal............................................... $ -- $ 349 $ -- State................................................. -- 651 -- ------ ------ ------ $ -- $1,000 $ -- ====== ====== ======
The reconciliation of income tax provision (benefit) computed at the U.S. federal statutory rate to the provision for income taxes is as follows:
1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Tax provision (benefit) at U.S. statutory............ $(20,394) $ 3,503 $ 3,053 State taxes net of federal benefit................... -- 423 -- Utilization of tax net operating loss carryforwards...................................... (6,835) -- Valuation allowance for deferred tax assets.......... 20,394 3,793 (3,053) Other................................................ -- 116 -- ----- ----- ----- $ -- $ 1,000 $ -- ===== ===== =====
15 16 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows:
JUNE 30, --------------------- 1996 1995 -------- -------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards............................. $ 33,960 $ 17,408 Tax credit carryforwards..................................... 3,418 3,347 Accrued liabilities.......................................... 2,612 2,666 Inventory reserves........................................... 8,168 6,247 Capitalized research and development costs................... 2,027 2,761 Other........................................................ 2,601 1,252 ------ ------ 52,786 33,681 Valuation allowance.......................................... $(52,786) $(33,681) ------ ------ $ -- $ -- ====== ======
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets as of June 30, 1996 and 1995, has been established to reflect these uncertainties. Approximately $10,238,000 of the deferred tax assets subject to the valuation allowance at June 30, 1996 relates to the tax benefits of stock option deductions. These benefits, when realized, will be credited directly to stockholders' equity and will not reduce the provision for income taxes. The change in valuation allowance was a net increase of $19,105,000 and $1,028,000 for fiscal years 1996 and 1995, respectively. At June 30, 1996, the Company has net operating loss and research and development tax credit carryforwards for federal tax purposes of approximately $99,882,000 and $2,806,000, respectively, that will expire through 2011 if not utilized. In addition, the Company has a federal minimum tax credit carryover of $454,000 and a California investment tax credit carryforward of $240,000. NOTE 7: LITIGATION The Company is currently in litigation with one of its competitors, Intermedics, Inc. In response to threats from Intermedics, the Company filed a declaratory judgment action in the United States District Court in the Northern District of California in January 1993, asking the court to declare that certain patents which Intermedics had asserted were being infringed by the Company were, in fact, invalid, unenforceable or not infringed. Intermedics then filed several actions in the United States District Court in the Southern District of Texas alleging infringement by the Company of nine Intermedics patents. Initially, this litigation was focused on procedural issues relating to whether the dispute would be tried in California or Texas. On October 12, 1994, the United States District Court for the Northern District of California denied Intermedics motion to transfer Ventritex's pending suits to Texas and granted Ventritex's motion to enjoin Intermedics from further prosecution of its aforementioned suits in Texas. The United States District Court for the Southern District of Texas thereafter issued an order transferring to California all of the Texas cases which Intermedics had served upon Ventritex. The Court has indicated that the trial in connection with the above described actions will begin May 5, 1997. The Company filed a further action in the Northern District of California in July 1993 seeking a declaratory judgment that the patents that Intermedics has asserted against the Company are not infringed by Ventritex, are invalid and are unenforceable. This action, which was filed against Intermedics, its parent and 16 17 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) affiliate companies, SulzerMedica and Sulzer, Inc., seeks damages based upon claims for antitrust law violations, malicious prosecution, conspiracy and breach of contract. Intermedics, SulzerMedica and Sulzer, Inc. have moved to stay or dismiss the Company's damage claims, and the Court ordered that certain of these claims be dismissed without prejudice and that others be stayed pending determination of other issues in the parties' various lawsuits. In the above actions, Intermedics seeks judgments against Ventritex for damages, attorneys fees and injunctive relief. It is expected that Intermedics will, during the course of the litigation, seek to obtain various types of pretrial relief which include, but are not limited to, summary judgments, dismissals of Ventritex's claims and preliminary injunctions. In January 1995, Intermedics filed a motion for partial summary judgment and for issuance of a preliminary injunction based on alleged infringement of one of its patents. Ventritex vigorously contested these motions and requested the United States Patent and Trademark Office to conduct a reexamination of claim 28 of Intermedics U.S. Patent No. 4,880,005 upon which these motions are based. The Court denied Intermedics' partial summary judgment motion, and, as a result, Intermedics' preliminary injunction request was withdrawn. The Patent Office, on May 28, 1996, issued a second final rejection of claim 28 of the 4,880,005 patent. Intermedics subsequently requested reconsideration of the final rejection. As a result of this reconsideration, on August 5, 1996 the United States Patent and Trademark Office reissued the 4,880,005 patent with claim 28 intact. The Company believes that Intermedics will make renewed efforts to obtain partial summary judgment and a preliminary injunction. On June 6, 1996, Intermedics filed with the United States Patent and Trademark Office a request for reexamination of U.S. Patent No. 4,830,006 and on June 7, 1996, Intermedics filed a request for reexamination of U.S. Patent No, 4,913,145. Both patents are being asserted by Intermedics against the Company. The requests are based on references identified by Ventritex as being pertinent to the patents in response to discovery requests by Intermedics. Since the Company brought a declaratory relief action against Intermedics in January 1993, Intermedics has filed suits against the Company's two principal competitors, Medtronic and CPI, alleging infringement of several of the same patents which it has asserted against the Company. None of these actions has yet been set for trial. In addition to its patent infringement claims, Intermedics had previously alleged trade secret misappropriation and related acts by the Company and two of its officers, who were formerly employees of Intermedics. In this lawsuit, the Company filed counterclaims against Intermedics for infringement of two of Ventritex's patents. These counterclaims are still pending. Certain of the trade secret misappropriation and related claims were tried in 1992 before a United States District Court jury in San Francisco. The jury returned a unanimous verdict in favor of the Company and its officers and found that Intermedics had acted in bad faith in continuing to pursue the trade secret misappropriation claims. The Court set aside the bad faith portion of the verdict based on Intermedics claim of an erroneous jury instruction. A new trial on the bad faith issue has been ordered, but no trial date has been set. The judgment dismissed all of Intermedics trade secret claims against the Company and its officers and was affirmed on appeal. In addition to the above-mentioned litigation, the Company is also involved in other litigation in the normal course of business. Although an adverse determination in the Intermedics proceedings or in other litigation or administrative proceedings could have a material adverse effect on the Company, based upon the nature of the claims made and the investigation completed to date, the Company believes the outcome of the described actions will not have a material adverse effect on the financial position or results of operations of the Company. NOTE 8: EMPLOYEE BENEFIT PLAN The Company sponsors an employee salary deferral plan that allows voluntary contributions by employees after completion of six months of service. Eligible employees may elect to contribute from 2% to 15% of their respective compensation, and the Company at its discretion may elect to make matching contributions. During 17 18 VENTRITEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fiscal 1995, the Company matched 50% of the first 6% of an employee's contributions to a maximum of $1,000 per calendar year. In fiscal 1996, the Company continued to match an employee's contribution on the same basis to a maximum of 50% of the annual limits on salary deferrals established by tax regulations. The Company's fiscal 1995 and 1996 contributions under this plan were approximately $419,000 and $659,000, respectively. NOTE 9: CONCENTRATION OF CREDIT RISK The Company sells primarily to hospitals. In the fiscal year ended June 30, 1996, one customer accounted for 10% of net sales. In the fiscal years ended June 30, 1995 and 1994, no customer accounted for more than 10% of sales. The Company performs ongoing credit evaluations of its customers, but does not require collateral. The Company maintains reserves for potential credit losses, and to date such losses have been within management's expectations. NOTE 10: SUBSEQUENT EVENT On August 21, 1996, the Company completed a public offering of $57,500,000 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 of the Company at a conversion rate of 58.1818 shares per $1,000 principal amount of the Notes, subject to adjustment in certain circumstances. The Notes are redeemable in whole or in part at the Company's option at any time on or after August 16, 1999. 18 -----END PRIVACY-ENHANCED MESSAGE-----