-----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, LVGSdFgYB8I3h7hsP/wvRHwFMPTGf1hno7gj8LE19x0gkYb+BGGcTaYaE1Ane2nY i8+DlSJ69hKgaSltemy51w== 0000891618-97-000613.txt : 19970222 0000891618-97-000613.hdr.sgml : 19970222 ACCESSION NUMBER: 0000891618-97-000613 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19713 FILM NUMBER: 97533801 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-Q 1 FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________to___________ Commission File Number: 0-19713 VENTRITEX, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0056340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 701 EAST EVELYN AVE., SUNNYVALE, CA 94086 (Address of principal executive office) (Zip Code) (408) 738-4883 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of shares outstanding of the registrant's common stock, no par value, as of December 31, 1996: 20,790,331 2 INDEX VENTRITEX, INC. PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Consolidated Condensed Financial Statements and Notes (Unaudited) Consolidated Condensed Balance Sheets - December 31, 1996 and June 30, 1996 3 Consolidated Condensed Statements of Operations for the three months and six months ended December 31, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows for the six months ended December 31, 1996 and 1995 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND NOTES VENTRITEX, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)
December 31, June 30, 1996 1996 ----------- ---------- (Unaudited) (see Note 1) ASSETS Current assets: Cash and cash equivalents $ 8,264 $ 9,299 Short-term investments 42,561 13,254 Accounts receivable 10,944 10,658 Inventories 18,186 15,427 Other current assets 3,319 1,349 ---------- ---------- Total current assets 83,274 49,987 Property, plant and equipment, net 21,560 22,655 Debt issuance costs 1,966 --- Other assets 1,217 819 ---------- ---------- Total assets $ 108,017 $ 73,461 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,287 $ 8,027 Accrued employee compensation 3,271 2,548 Accrued royalties 2,085 1,869 Accrued warranty 7,669 1,721 Other accrued expenses 4,352 4,409 Deferred other income 927 927 ---------- ---------- Total current liabilities 27,591 19,501 Commitments and contingencies Convertible subordinated notes 57,500 --- Stockholders' equity: Preferred stock, par value $.001, 5,000 shares authorized, none issued and outstanding Common stock, par value $.001, 35,000 shares authorized, 20,790 shares and 20,878 shares issued and outstanding on December 31, 1996 and June 30, 1996, respectively 21 21 Additional paid-in capital 154,628 158,900 Accumulated deficit (131,723) (104,961) ---------- ---------- Total stockholders' equity 22,926 53,960 ---------- ---------- Total liabilities and stockholders' equity $ 108,017 $ 73,461 ========== ==========
See Notes to Consolidated Condensed Financial Statements 3 4 VENTRITEX, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $ 19,275 $ 10,635 $ 37,885 $ 24,860 Cost of sales 17,860 13,688 28,271 29,053 -------- -------- -------- -------- Gross profit (loss) 1,415 (3,053) 9,614 (4,193) Operating expenses: Research and development 8,509 8,013 17,114 15,107 Selling, general and administrative 9,586 9,058 19,297 18,048 -------- -------- -------- -------- Total operating expenses 18,095 17,071 36,411 33,155 -------- -------- -------- -------- Loss from operations (16,680) (20,124) (26,797) (37,348) Other income (expense): Interest income 799 831 1,407 1,824 Interest expense (829) -- (1,188) -- Other expense (123) (10) (184) (11) -------- -------- -------- -------- Other income, net (153) 821 35 1,813 -------- -------- -------- -------- Net loss $(16,833) $(19,303) $(26,762) $(35,535) ======== ======== ======== ======== Net loss per share $ (0.81) $ (0.93) $ (1.28) $ (1.72) Weighted average common shares outstanding 20,827 20,719 20,868 20,695
See Notes to Consolidated Condensed Financial Statements 4 5 VENTRITEX, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended December 31, 1996 1995 ---------- ---------- Operating activities: Net loss $(26,762) $(35,535) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,320 4,560 Changes in operating assets and liabilities: Accounts receivable (286) 5,661 Inventories (2,759) 7,380 Prepaid expenses and other current assets (1,970) (241) Other assets (2,364) (300) Accounts payable and other accrued expenses 8,090 1,423 ---------- ---------- Net cash used in operating activities (20,731) (17,052) Investing activities: Purchase of short term investments (40,039) (14,644) Proceeds from sale of short term investments 10,732 29,282 Acquisition of equipment and leasehold improvements (4,225) (5,313) ---------- ---------- Net cash provided by (used in) investing activities (33,532) 9,325 Financing activities: Proceeds from sale of common stock 2,455 656 Repurchase and retirement of common stock (6,727) -- Proceeds from issuance of convertible subordinated notes 57,500 -- ---------- ---------- Net cash provided by financing activities 53,228 656 Decrease in cash and cash equivalents (1,035) (7,071) Cash and cash equivalents at beginning of period 9,299 34,942 ---------- ---------- Cash and cash equivalents at end of period $ 8,264 $27,871 ========== ==========
See Notes to Consolidated Condensed Financial Statements 5 6 VENTRITEX, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS December 31, 1996 (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited financial statements included in Ventritex, Inc.'s (the Company's) Annual Report on Form 10-K (as amended by Forms 10-K/A) for the year ended June 30, 1996, filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The results of operations for the six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending June 30, 1997. NOTE 2: CONSOLIDATED BALANCE SHEET COMPONENTS Certain balance sheet components are as follows:
December 31, 1996 June 30, 1996 ----------------- ------------- (Unaudited) (In thousands) Inventories: Raw materials $ 10,273 $ 7,895 Work-in-process 3,972 3,091 Finished goods 3,941 4,441 -------- -------- $ 18,186 $ 15,427 ======== ======== Property, plant and equipment: Equipment $ 47,175 $ 44,347 Leasehold improvements 7,245 7,182 Construction in process 2,312 978 -------- -------- 56,732 52,507 Less: Accumulated depreciation and amortization (35,172) (29,852) -------- -------- $ 21,560 $ 22,655 ======== ========
The Company classifies all its short-term investments as available-for-sale securities. Available-for-sale securities are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity net of related tax effects. Realized gains and losses are included in investment income. The cost of all securities sold is based on the specific identification method. 6 7 The Company's short-term investments mature within twelve months and the amounts of unrealized gains or losses are immaterial. NOTE 3: NET LOSS PER SHARE Net loss per share is computed using the weighted average number of shares of common stock outstanding and common equivalent shares from stock options and warrants, if dilutive. Common equivalent shares from stock options were excluded from the computation for the three- and six-month periods ended December 31, 1995 and December 31, 1996, as their effect is antidilutive. NOTE 4: INCOME TAXES The Company has established a valuation allowance for deferred tax assets resulting from operating losses incurred in fiscal 1997 and 1996; accordingly, no tax benefits have been recorded. NOTE 5: ANTICIPATED MERGER On October 22, 1996 Ventritex, St. Jude Medical, Inc. ("St. Jude") and Pacesetter, Inc., a wholly-owned subsidiary of St. Jude ("Pacesetter") executed a definitive agreement providing for the merger of Ventritex into Pacesetter. In the merger, each outstanding share of Ventritex common stock will be converted into 0.6 of a share of St. Jude common stock. The merger is subject to Ventritex stockholder approval, expiration of the applicable Hart-Scott-Rodino waiting period and other customary conditions. In connection with the merger, Ventritex has repurchased, to date, 290,000 shares of its stock on the open market. St. Jude also has entered into an agreement with Intermedics which provides, among other things, for the settlement of all outstanding litigation between Ventritex and Intermedics upon completion of the merger and for royalty-free (except as to certain third party patent agreements) cross-license agreements for cardiac stimulation devices covering both Ventritex and Intermedics patents. NOTE 6: LITIGATION The Company is currently in litigation with one of its competitors, Intermedics, Inc. In response to threats from Intermedics, the Company filed a declaratory judgment action in the United States District Court in the Northern District of California in January 1993, asking the court to declare that certain patents which Intermedics had asserted were being infringed by the Company were, in fact, invalid, unenforceable or not infringed. Intermedics then filed several actions in the United States District Court in the Southern District of Texas alleging infringement by the Company of nine Intermedics patents. Initially, this litigation was focused on procedural issues relating to whether the dispute would be tried in California or Texas. On October 12, 1994, the United States District Court for the Northern District of California denied Intermedics' motion to transfer Ventritex's pending suits to Texas and granted Ventritex's motion to enjoin Intermedics from further prosecution of its aforementioned suits in Texas. The United States District Court for the Southern District of Texas thereafter issued an order transferring to California all of the Texas cases which Intermedics had served upon Ventritex. The Company filed a further action in the Northern District of California in July 1993 seeking a declaratory judgment that the patents that Intermedics has asserted against the Company are not infringed by Ventritex, are invalid and are unenforceable. This action, which was filed against Intermedics, its parent and affiliate companies, SulzerMedica and Sulzer, Inc., seeks damages based upon claims for antitrust law violations, malicious prosecution, conspiracy and breach of contract. Intermedics, SulzerMedica and Sulzer, Inc. have moved to stay or dismiss the Company's damage claims, and the Court ordered that certain of these claims be dismissed without prejudice and that others be stayed pending determination of other issues in the parties' various lawsuits. The Court had previously set a date of May 5, 1997, for trial of certain claims and defenses in this action. That date has now been vacated and all proceedings stayed pending the closing of the merger transaction between the Company and Pacesetter. 7 8 Upon closing of the merger, all claims between the Company and Intermedics are to be dismissed, according to a settlement agreement between Intermedics and St. Jude Medical, Inc., the parent of Pacesetter. See note 5. Since the Company brought a declaratory relief action against Intermedics in January 1993, Intermedics has filed suits against the Company's two principal competitors, Medtronic and Cardiac Pacemakers, Inc., alleging infringement of several of the same patents which it has asserted against the Company. The Company has been informed that Intermedics has recently agreed to a settlement by which Medtronic, Inc. would receive a license to Intermedics' patents. The litigation between Intermedics and Cardiac Pacemakers, Inc. remains pending at this time. Following the announcement of the merger agreement between the Company and Pacesetter, on November 26, 1996, Guidant Corporation and Guidant Sales Corporation (collectively "Guidant"), along with Cardiac Pacemakers, Inc. ("CPI") and Eli Lilly and Company ("Eli Lilly"), filed a lawsuit (the "Guidant Action") in the Indiana Superior Court, Marion County, against the Company, St. Jude Medical, Inc., Pacesetter, Inc., and Telectronics Pacing Systems, Inc., Telectronics Holdings, Ltd., Telectronics Pty. Ltd., Medical Telectronics Holding, N.V., TPLC, Inc., and Telectronics, S.A. (collectively "Telectronics"), alleging, among other things, that the recent merger between Telectronics and Pacesetter, Inc. was ineffective to transfer certain patent licenses that were originally granted by Guidant, CPI, and/or Eli Lilly to Telectronics in 1995 and that any attempted use of the license by Pacesetter, Inc. and/or St. Jude Medical, Inc. would constitute an infringement of plaintiffs' alleged patent rights. Plaintiffs seek declaratory and other relief. On December 19, 1996, defendants removed the Guidant Action to the United States District Court for the Southern District of Indiana and thereafter filed a motion to dismiss or stay the Guidant Action pending the resolution of a related lawsuit brought by Telectronics and Pacesetter in the United States District Court for the District of Minnesota (the "Minnesota Action"), in which they seek an order to compel arbitration concerning the transferability of the patent licenses. The Company is not a party to the Minnesota Action. On the same date that the Guidant Action was filed in Indiana State Court, CPI, Guidant, and Eli Lilly also filed a lawsuit (the "CPI Action") in the United States District Court for the Southern District of Indiana against St. Jude Medical, Inc., Pacesetter, Inc., and the Company, alleging, among other things, that the continued manufacture and sale of certain of the Company's current products after the proposed merger between Pacesetter and the Company will infringe on certain patent rights currently owned by CPI and Eli Lilly. Plaintiffs allege, among other things, that a licensing agreement between the Company, CPI, and Eli Lilly will terminate upon the consummation of the proposed merger, and that any sales of certain of the Company's existing products subsequent to the proposed merger consequently would infringe upon certain of plaintiffs' alleged patent rights. Plaintiffs seek declaratory and injunctive relief, as well as an unspecified amount of damages. On December 19, 1996, the defendants moved the court for an order dismissing the CPI Action or, in the alternative, staying the Action pending the resolution of the Minnesota Action (described above). In addition to the above-mentioned litigation, the Company is also involved in other litigation in the normal course of business. Although an adverse determination in the Intermedics proceedings or in other litigation or administrative proceedings could have a material adverse effect on the Company, based upon the nature of the claims made and the investigation completed to date, the Company believes the outcome of the described actions will not have a material adverse effect on the financial position or results of operations of the Company. NOTE 7: CONVERTIBLE SUBORDINATED NOTES In the first quarter of fiscal 1997, the Company issued $57.5 million aggregate principal amount of 5-3/4% convertible subordinated notes due August 15, 2001. The notes are convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of common stock at a conversion rate of 58.1818 shares per $1,000 principal amount of notes (equivalent to a conversion price of approximately $17.188 per share). 8 9 The notes are unsecured obligations subordinated in right of payment to all existing and future senior indebtedness of the Company and effectively subordinated in right of payment to all indebtedness and other liabilities of the Company's subsidiaries. As of December 31, 1996, the Company had no outstanding indebtedness that would have constituted senior indebtedness. NOTE 8. WARRANTY ACCRUAL During the second quarter of fiscal 1997, the Company increased its reserve for warranty expense to cover anticipated costs of reprogramming and selective replacement of its Cadence V-110 and V-112 defibrillators. See Management's Discussion and Analysis. 9 10 ITEM 2. VENTRITEX, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Operating History The following discussion of financial condition and results of operations of the Company should be read in conjunction with the consolidated condensed financial statements and the related notes thereto included herein. The following management's discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company's actual results of operations could differ materially from those anticipated in such forward-looking statements as a result of factors set forth herein and under "Additional Risk Factors" below. Since its inception, Ventritex and its subsidiaries ("the Company") have engaged in the design, development, manufacture and sale of implantable defibrillators and related products. In April 1993, the United States Food and Drug Administration ("FDA") approved the Company's Premarket Approval Application ("PMA") for commercial release of the Cadence(R) V-100 system. In July 1994, the FDA approved the Company's PMA Supplements for the Cadence V-110 system, a smaller, lighter version of the Cadence V-100. In December 1995, the FDA approved a PMA Supplement for the Cadet(R) V-115 defibrillator system for abdominal implantation only. In May 1996, the FDA approved a PMA Supplement to label the Cadet V-115 for pectoral implantation. Also in May 1996, the FDA approved a PMA Application for the TVL(R) transvenous lead system. The Cadet V-115 is smaller and lighter than the Cadence V-100 and V-110 implantable defibrillators but has the same or improved functional and performance characteristics. In September 1996, the FDA approved a PMA Supplement for the Contour(TM) V-145 defibrillator system. The Contour V-145 is smaller and lighter than the Cadet V-115 implantable defibrillator and has the same functional and performance characteristics. In November 1996, a PMA Supplement for the high voltage can versions of the Cadet and Contour was approved by the FDA. The high voltage can utilizes the defibrillator case as the second electrode. In March 1995, the FDA approved the commercial release of new defibrillators manufactured by Cardiac Pacemakers, Inc. ("CPI"), a subsidiary of Guidant Corporation, and Medtronic, Inc. ("Medtronic"), which are small enough to allow pectoral implantation, rather than abdominal implantation, in suitable patients. Until receipt of regulatory approval relating to the Cadet in May 1996, the Company could not offer an implantable defibrillator labeled for pectoral implantation in patients in the United States. Commercial release of pectorally implantable defibrillators significantly increased competition in the implantable defibrillator market and resulted in a significant decline in the Company's market share and sales of the Company's products. The Company now has products, the Cadet and Contour, which it believes are competitive; however, there can be no assurance that the Company's current or future defibrillators will compete successfully with products currently manufactured by others or future products under development by competitors which have new features, such as dual chamber and rate-responsive pacing capabilities. Medtronic and CPI have regulatory approval of and are commercially marketing single-lead transvenous lead systems. In May 1996, the Company began marketing the TVL transvenous lead system, a dual-lead system. Some physicians prefer a single-lead system due to the perceived ease of implanting such a system as compared to a dual-lead system. The Company is engaged in clinical trials of single-lead transvenous defibrillation lead systems and must receive regulatory approval prior to commercialization of such systems. There can be no assurance as to when or whether the Company will receive regulatory approval for these systems. To date, a large percentage of the Company's sales of defibrillators have been at the direction of physicians who used the Company's defibrillators in combination with commercially available transvenous lead systems supplied by the Company's competitors. 10 11 Physicians preferring single-lead systems may choose to continue to combine competitors' transvenous leads with the Company's defibrillators, at least until such time as the Company obtains PMA approval for its single-lead systems. Furthermore, there can be no assurance that manufacturers of competing transvenous lead systems will not attempt to discourage or prevent use of their leads with the Company's defibrillators through product labeling, availability, pricing or other means. In general, unless the FDA-approved labeling includes use with any transvenous lead system sold by its competitors, the FDA or other government agencies may take further actions, including restrictions on reimbursement, to restrict the combination of the Company's defibrillators with such transvenous lead systems. Such actions could make the Company's defibrillators, including both the Cadet and the Contour, less attractive to physicians and could therefore have a material adverse effect on the Company's business, financial condition and results of operations. The Company incurred net losses from its inception in January 1985 through the year ended June 30, 1993, incurred net losses from the fourth quarter of fiscal 1995 through the second quarter of fiscal 1997, and may incur a net loss for fiscal 1997. If the Company is unable to manufacture significant quantities of the Contour on a timely basis or at all, the Company's results of operations could be adversely affected. Results of operations have varied and may continue to fluctuate significantly from quarter to quarter and will depend upon numerous factors including timing of regulatory approvals, market acceptance of the Company's products, introductions of new products with advanced features by the Company or its competitors, technological advances in the treatment of arrhythmias, the outcome of intellectual property litigation and competition. The segment of the medical device market that includes implantable defibrillators has been characterized by extensive litigation regarding patents and other intellectual property rights. The Company has resolved intellectual property disputes to date through licensing arrangements when appropriate and on terms it believes to be commercially reasonable. Under certain agreements, Ventritex pays royalties based on commercial sales of implantable defibrillator systems. The Company anticipates that such royalties will continue for future implantable defibrillator systems developed by the Company. Additionally, the agreements do not include all patents that may be issued to the licensors, thus future patent disputes with these companies are possible. Certain of these licenses contain significant restrictions that may have the effect of preventing or substantially impeding an acquisition of, change-of-control of, or certain minority investments in, the Company. Such restrictions include the possible termination of various licenses to the Company and the requirement that the Company make a substantial payment to one of the licensors upon such event. Intermedics, Inc. has filed claims against the Company for patent infringement which are still pending, and there can be no assurance that other parties will not institute additional litigation against the Company. The foregoing statements regarding the Company's defibrillators, transvenous lead systems and the period of time for which the Company expects to incur additional losses are forward-looking and involve risks and uncertainties, such as those noted above, and under "Additional Risk Factors" below, which could cause actual results of the Company to differ materially. Proposed Merger On October 22, 1996 Ventritex, St. Jude Medical, Inc. ("St. Jude") and Pacesetter, Inc., a wholly-owned subsidiary of St. Jude ("Pacesetter") executed a definitive agreement providing for the merger of Ventritex into Pacesetter. In the merger, each outstanding share of Ventritex common stock will be converted into 0.6 of a share of St. Jude common stock. The merger is subject to Ventritex stockholder approval, expiration of the applicable Hart-Scott-Rodino waiting period and other customary conditions. In connection with the merger, Ventritex has repurchased, to date, 290,000 shares of its stock on the open market. St. Jude also has entered into an agreement with Intermedics which provides, among other things, for the settlement of all outstanding litigation between Ventritex and Intermedics upon completion of the merger and for royalty-free (except as to certain third party patent agreements) cross-license agreements for cardiac stimulation devices covering both Ventritex and Intermedics patents. 11 12 Product Warranty Matters On January 16, 1997, Ventritex announced that the FDA had authorized it to proceed with a notification and reprogramming procedure in response to the recent failure of an electrical component in two implanted Cadence model V-110 defibrillators, which resulted in the delivery of inappropriately rapid pacing pulses believed to have been associated with the induction of lethal ventricular tachyarrhythmias. The reprogramming procedure will prevent the delivery of inappropriately rapid pacing pulses, even in the event of component failure. The low energy cardioversion, high energy defibrillation and bradycardia pacing capabilities of the devices will be left intact. The procedure takes only a few minutes and does not require surgery. The FDA has worked closely with Ventritex to expedite the reprogramming of the device, and Ventritex is assisting physicians to the fullest extent possible to notify their patients (approximately 5,600 patients in total) and arrange for prompt reprogramming of the devices. As of February 13, 1997, over 85% of the currently implanted devices have been reprogrammed. In addition, Ventritex has offered Cadet V-115 products as replacements free of charge to physicians whose patients require antitachycardia pacing (estimated to be approximately 500-800 patients). Ventritex has offered to reimburse these patients for surgical expenses up to $2,500. The Company has accrued the estimated costs of these actions in the quarter ended December 31, 1996. Since commencing the reprogramming of the devices, Ventritex has become aware of one other incident in which inappropriately rapid pacing pulses were delivered by a Cadence V-110 which are believed to be associated with the induction of a lethal ventricular arrhythmia. Ventritex's current production models (Cadet V-115 and Contour V-145) are not affected. RESULTS OF OPERATIONS Net sales were $19.3 million for the second quarter of fiscal 1997, an increase of $8.7 million, or 82%, compared to $10.6 million for the corresponding period of fiscal 1996. For the first six months of fiscal 1997, sales were $37.9 million, an increase of $13 million, or 52%, compared to $24.9 million during the first six months of the prior fiscal year. The number of defibrillators shipped was approximately 53% higher in the second quarter and 29% higher in the first six months of fiscal 1997 than in the comparable periods of fiscal 1996. Average unit prices increased approximately 18% from the prior year in both the three- and six-month period of the current fiscal year. In both periods, average unit sales prices increased due to increased sales of defibrillation leads systems and the impact of a direct sales subsidiary in Germany. Sales invoiced in foreign currencies were approximately 12% and 11%, respectively, for the second quarter and first six months of fiscal 1997 compared to 2% and 15%, respectively, for the comparable periods of fiscal 1996. The Company currently does not hedge the risk of currency exchange rate fluctuations. Gross profit for the second quarter of fiscal 1997 was a profit of $1.4 million compared to a loss of $3.1 million in the second quarter of fiscal 1996. Gross profit for the first half of fiscal 1997 was a profit of $9.6 million compared to a loss of $4.2 million for the corresponding period of fiscal 1996. The increases in gross profit are due to decreased inventory provisions, increases in unit shipments and higher average unit sales prices partially offset by additional provisions for warranty and increased spending associated with capacitor manufacturing in the current fiscal year. Fiscal 1996 results include a provision of $6.5 million for potentially excess inventory in the second quarter and a provision of $14.0 million for potentially excess inventory and cancellation of purchase commitments for components, compared to a provision of $1.2 million in the first six months of fiscal 1997. Fiscal 1997 cost of sales also includes a warranty provision of $6.0 million related to failure of an electrical component in three implanted Cadence model V-110 defibrillators, which resulted in the delivery of inappropriately rapid pacing pulses. The warranty provision assumes replacement of approximately 15% of the currently implanted Cadence V-110 and V-112 units and includes cost of the devices, limited reimbursement of medical costs for patients and administrative costs of the procedure. 12 13 The provision does not include amounts for potential litigation which could arise from any of the three incidents of which Ventritex is aware. But in light of insurance coverage, these litigation costs are not expected to be material. Gross margins have fluctuated historically due to variations in production volume, manufacturing efficiencies, product obsolescence, new product introductions by the Company or its competitors, royalty rates, warranty expense, component price fluctuations, competitive pricing and other factors. Gross profits may fluctuate in the future in both dollar amount and as a percentage of net sales due to these and other factors, including component part availability, regulatory actions and changes in reimbursement policies by either government or private insurance companies. The Company typically manufactures to its internal sales forecast, fills orders as received and has no significant backlog of orders for its products. In addition, major components of the Company's defibrillator systems require firm purchase commitments (which may not be cancellable) well in advance of the anticipated delivery of such components. As a result, failure to accurately anticipate future demand may result in substantial excess inventory, significant cancellation costs for purchase commitments, or inability to meet demand for the Company's products and could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. There can be no assurance that future production problems will not be encountered in expanding production of the Contour and the TVL or establishing production of other new products currently under development. Failure to manufacture new or existing products on a timely and cost-effective basis could result in substantial unanticipated expenses, delays in the commercial availability of such products, and could have a material adverse effect on the Company's business, financial condition and results of operations. Operating expenses were $18.1 million in the second quarter of fiscal 1997, a 6% increase over the $17.1 million of such expenditures in the second quarter of fiscal 1996. For the first six months of fiscal 1997, operating expenses increased 10% to $36.4 million, compared to $33.2 million of operating expenses in the comparable period of fiscal 1996. Research and development expenses were $8.5 million and $17.1 million, respectively, for the second quarter and first six months of fiscal 1997, compared to $8.0 million and $15.1 million for the corresponding periods of fiscal 1996. The increase in spending for the second quarter is primarily due to increases in the number of people, including employees and consultants, involved in research and development activities. For the first six months, increases in the number of people involved in research and development activities, costs incurred associated with early production stages of the Contour defibrillator system and design costs for future products were responsible for the increase in spending. The Company's research and development activities relate to various research, product and process development, clinical trial and quality assurance activities. Ventritex plans to continue to invest in research and development and expects such expenses to increase in dollar amount in the future. Selling, general and administrative expenses totaled $9.6 million in the second quarter of fiscal 1997, compared to $9.1 million in the second quarter of fiscal 1996, and $19.3 million in the first six months of fiscal 1997 compared to $18.0 million in the first six months of fiscal 1996. The increases in spending reflect increases in the expenses of direct operations in Europe, amortization of costs of external equipment to support defibrillators (which are supplied to customers on long-term loan, typically at no charge, in accordance with industry practice), an increase in the number of employees, variable expenses associated with the increase in net sales, and travel costs partially offset by decreases in consulting expenses. Legal expenses were approximately the same in the second quarter of fiscal 1997 as in the second quarter of fiscal 1996 and decreased moderately in the first six-month period. See Footnote 6 of the Consolidated Condensed Financial Statements. 13 14 Interest income was $0.8 million for the second quarter and $1.4 million for the first six months of fiscal 1997 compared to $0.8 million for the second quarter and $1.8 million for the first six months of fiscal 1996, reflecting changes in invested cash balances and interest rates. Interest expense in fiscal 1997 of $0.8 million in the second quarter and $1.2 million in the first six months resulted from the issuance of $57.5 million aggregate principal amount of 5-3/4% convertible subordinated notes due August 15, 2001. Amortization of issuance costs for the notes resulted in other expense in fiscal 1997. The Company has established a valuation allowance for deferred tax assets resulting from operating losses incurred in fiscal 1997 and 1996; accordingly, no tax benefits have been recorded. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments totaled $50.8 million at December 31, 1996 compared to $22.6 million at June 30, 1996. The $55.4 million net proceeds of the sale of $57.5 million aggregate principal amount of 5-3/4% convertible subordinated notes due August 15, 2001 and proceeds from exercise of stock options and an employee stock purchase plan were partially offset by cash used in operations of $20.7 million, repurchase of 290,000 shares of common stock on the open market for $6.7 million, and investments in capital equipment of $4.2 million in the six months ended December 31, 1996. Cash used in operations is primarily attributable to the net loss of $26.8 million partially offset by the increase in warranty provision of $6.0 million. See Results of Operations. The Company's liquidity and capital requirements will depend on numerous factors, including the extent to which the Company's existing and future products gain market acceptance, the duration and magnitude of operating losses, FDA regulatory actions, changes in health care reimbursement policies and intellectual property litigation to which the Company is or may become a party. If the merger is not consummated, the Company believes that its existing cash, cash equivalents and short-term investment balances, combined with cash forecasted to be generated from operations, will be sufficient to meet its capital requirements at least for the next twelve months. Should fiscal 1997 results of operations fall significantly short of forecasted levels, the Company could consider either seeking additional capital or restructuring its operations. In addition, the Company may use other means of financing, including the issuance of equity securities or debt, if necessary or financially advantageous. The foregoing statements regarding the sufficiency of the Company's capital resources to meet its liquidity needs are forward-looking and involve risks and uncertainties, such as those noted above, which could cause actual results of the Company and the period of time for which such capital resources are sufficient to differ materially. ADDITIONAL RISK FACTORS Results of operations have varied and may continue to fluctuate significantly from quarter to quarter and will depend upon numerous factors including market acceptance of the Company's products, introductions of new products with advanced features by the Company or its competitors, timing of regulatory approvals, technological advances in the treatment of arrhythmias, the outcome of product warranty matters, the outcome of intellectual property litigation and competition. Sales have fluctuated significantly in the past, especially in fiscal 1995 and fiscal 1996, as competitors introduced products with advanced features. The Company's gross margins will be dependent on production volumes, manufacturing efficiencies, royalties under patent license agreements, warranty expense, component price fluctuations, competitive pricing, varying product sales mix and other factors. There can be no assurance that gross margins will improve in the future. In addition, a significant portion of the Company's operating expenses are relatively fixed in nature and planned expenditures are based, in part, on anticipated orders. Any inability to adjust spending quickly enough to compensate for revenue shortfalls may magnify the adverse impact of such revenue shortfall on the Company's results of operations. Furthermore, there can be no assurance that the Company will achieve profitability in the future or that profitability, if achieved, will be sustained. 14 15 The market price of the Company's Common Stock has been and is likely to continue to be highly volatile. In addition, the stock market and the medical technology sector in particular have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, shortfalls in revenue or earnings from levels expected by securities analysts, new product introductions by the Company or its competitors, announcements of technological innovations or new products by the Company or its competitors, governmental regulation, developments with respect to patents or proprietary rights and litigation relating thereto, public concern as to the safety of products developed by the Company or others and general market conditions may have a significant adverse effect on the market price of the Common Stock. In addition, the Company's stock price may be affected by matters which relate to the Company's pending merger into Pacesetter, including changes in the market price of St. Jude's common stock, Ventritex stockholder approval, expiration of the applicable Hart-Scott-Rodino waiting period and other customary conditions. Substantially all of the shares of Common Stock held by current stockholders of the Company are eligible for immediate sale in the public market, subject in some cases to the public information, manner of sale, volume limitation and notice of sale provisions of federal securities laws. Future sales of such shares could lead to a decline in the market price of the Common Stock. The Company's liquidity and capital requirements will depend on numerous factors, including the extent to which the Company's existing and future products gain market acceptance, the duration and magnitude of operating losses, FDA regulatory actions, changes in health care reimbursement policies and intellectual property litigation to which the Company is or may become a party. If the merger is not consummated, the Company believes that its existing cash, cash equivalents and short-term investment balances, combined with cash forecasted to be generated from operations, will be sufficient to meet its capital requirements at least for the next twelve months. Should fiscal 1997 results of operations fall significantly short of forecasted levels, the Company could consider either seeking additional capital or restructuring its operations. In addition, the Company may use other means of financing, including the issuance of equity securities or debt, if necessary or financially advantageous. The foregoing statements regarding the sufficiency of the Company's capital resources to meet its liquidity needs are forward-looking and involve risks and uncertainties, such as those noted above, which could cause actual results of the Company and the period of time for which such capital resources are sufficient to differ materially. 15 16 VENTRITEX, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 6 to the Consolidated Financial Statements set forth under Item 1 of Part I. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Ventritex, Inc. was held on November 14, 1996 for the purposes of electing directors of the Company, approving and ratifying an amendment to the 1991 Employee Stock Purchase Plan, approving and ratifying an increase in the authorized number of shares of the Company's common stock and confirming the appointment of Ernst & Young LLP as the independent auditors of the Company for the fiscal year ended June 30, 1997. All nominees for directors were elected and all proposals were approved. The voting on each matter is set forth below: Election of Directors:
Nominee For Withheld ------- --- -------- Frank M. Fischer 18,304,610 132,372 Richard L. Karrenbrock 18,305,138 131,844 C. Raymond Larkin, Jr. 18,305,538 131,444 Robert R. Momsen 18,305,038 131,944
Proposal to approve and ratify an amendment to the 1991 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance thereunder by 250,000 shares:
For Against Abstain --- ------- ------- 16,733,810 1,053,098 90,509
Proposal to approve and ratify an amendment to the Company's certificate of incorporation to increase the authorized number of shares of the Company's common stock by 65,000,000 shares:
For Against Abstain --- ------- ------- 13,381,222 4,672,981 72,879
Proposal to ratify the appointment of Ernst & Young LLP as the independent auditors of the Company for fiscal 1997:
For Against Abstain --- ------- ------- 18,277,906 31,337 127,739
16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 27 Financial Data Schedule b) Reports on Form 8-K A Form 8-K was filed on October 29, 1996 in connection with the Company's Agreement and Plan of Merger with St. Jude Medical, Inc. and Pacesetter, Inc., a wholly-owned subsidiary of St. Jude Medical, Inc. 17 18 VENTRITEX, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 13, 1997 VENTRITEX, INC. /s/ Frank M. Fischer ----------------------------------- Frank M. Fischer President, Chief Executive Officer and Director (Principal Executive Officer) /s/ David R. Bunker ----------------------------------- David R. Bunker Controller (Chief Accounting Officer) 18 19 EXHIBIT INDEX Exhibit Document No. 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 8,264 42,561 11,428 484 18,186 83,274 56,732 35,172 108,017 27,591 57,500 0 0 21 22,926 108,017 37,885 37,885 28,271 28,271 36,411 0 (35) (26,762) 0 (26,762) 0 0 0 (26,762) (1.28) (1.28)
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