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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-8145
THORATEC LABORATORIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 94-2340464
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
6035 STONERIDGE DRIVE, PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 847-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: COMMON
STOCK
Indicate by a 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 a check mark if disclosure 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 market value of the voting stock held by non-affiliates was
$91,965,000 computed by reference to the last sale reported of such stock on
March 16, 1998 as reported by the Nasdaq National Market tier of The Nasdaq
Stock Market.(1)
As of March 16, 1998, registrant had 20,295,301 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant is incorporating by reference into Part III (Items 10, 11,
12 and 13) certain portions of the registrant's definitive Proxy Statement for
the 1998 Annual Meeting of Shareholders.
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1 Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to cause the
direction of the management or policies of the issuer, or that such person is
controlled by or under common control with the issuer.
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PART 1
The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in any forward-looking statements as a result of a variety of
factors, including those set forth below and elsewhere in this Annual Report on
Form 10-K. The risk factors set forth at pages 15 to 21 should be considered
carefully in evaluating the Company and its business by the Company's
shareholders and prospective investors in the Company.
ITEM. 1. BUSINESS
GENERAL
Thoratec Laboratories Corporation ("Thoratec" or the "Company") develops,
manufactures and markets medical devices for circulatory support and vascular
graft applications. The Company's first product, the Thoratec Ventricular Assist
Device System ("VAD System") is being marketed in the U.S. and internationally
for use as a bridge to heart transplant and is currently the only device
approved by the U.S. Food and Drug Administration (the "FDA") that can provide
left, right or biventricular support for this indication. The Company believes
that the VAD System provides a number of significant advantages over other
ventricular assist devices. The Company is pursuing additional indications for
the VAD System and is developing other circulatory support products for patients
suffering from heart failure. The Company is also developing vascular grafts for
hemodialysis and coronary artery bypass surgery. All of the Company's products
utilize its proprietary biomaterial, Thoralon, which provides improved
thromboresistance, biocompatibility, patency and durability.
CIRCULATORY SUPPORT PRODUCTS
Cardiac failure is the leading cause of death in the U.S., accounting for
more deaths than all forms of cancer combined. Deaths associated with cardiac
failure fall into two broad categories: chronic congestive heart failure
("CHF"), which is a slow, degenerative process leading to cardiac insufficiency;
and acute cardiac failure resulting from heart attacks and various infections of
the heart muscle (myocarditis).
CHF is a chronic disorder that occurs when the pumping power of the heart
is reduced by a weakening of the heart muscle. This results in a decreased
supply of oxygen and nutrient rich blood to various vital organs such as the
lungs, brain and kidneys. CHF tends to be progressive and is associated with
profound symptoms that limit daily activities. Long-term survival rates are low
and it is estimated that more than 85% of patients die within eight to twelve
years of diagnosis. CHF is estimated to be the most common cause of
hospitalization in patients over 65 years of age. According to the American
Heart Association, there are approximately four to five million CHF patients in
the U.S., and approximately 400,000 newly diagnosed patients each year. Most
patients suffering from CHF are initially treated with medication and, while
conventional drug therapy may delay the progress of CHF, it is not curative. The
only available method of treating end-stage CHF is a heart transplant.
Although heart transplants have been very successful, there are too few
donor hearts available to address adequately the problem of cardiac failure. The
United Network for Organ Sharing reported that there were only approximately
2,400 hearts available for transplant in the U.S. in 1996, a level that has
remained relatively unchanged for the last several years. However, published
government sources estimate that the number of patients suffering from CHF who
could benefit from some form of permanent cardiac assist is 30,000 to 50,000 per
year. The average wait for a donor heart by patients on a heart transplant
waiting list is approximately eight months, and many patients have to wait as
long as one to two years before receiving one of the few donor hearts available
each year. In 1996, approximately 20% of such patients died while waiting for a
donor heart.
Ventricular assist devices are mechanical systems used to assist the
heart's function, and, when other therapies are unsuccessful, they can be used
to support one or both sides of the patient's heart until a donor
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heart can be found. In patients awaiting heart transplants, the decision to use
a ventricular assist device is made when death appears imminent. In addition to
providing a bridge to heart transplant, ventricular assist devices have
potential usefulness for other applications. It is estimated that out of
approximately 600,000 open heart surgeries performed annually in the U.S., some
15,000 to 18,000 patients die following such procedures. Many of these deaths
are caused by heart failure when the heart, weakened by disease and the
additional trauma of surgery, fails to maintain adequate blood circulation. The
use of a ventricular assist device after surgery can provide support to the
heart until it can recover. In addition, ventricular assist devices may also be
useful in assisting the recovery of the heart in a small portion of patients
suffering from acute cardiac failure that may result from myocardial infarction,
myocarditis or other acute cardiomyopathies.
While there is significant demand for effective ventricular assist devices,
most systems available today or under development have certain limitations.
Certain systems cannot be used in smaller patients because the blood pump must
be implanted in the abdomen and is too large to fit in such patients. Other
systems require large incisions at the apex of the heart muscle, making recovery
of the heart more difficult if too large an incision is made. Some systems
cannot be used for more than a few days because their blood contacting parts
cause an adverse reaction in the body, resulting in clotting which clogs the
system or can cause a stroke. In addition, much of the development work on
ventricular assist devices has historically been in the area of left ventricular
support, and most systems available today or under development only provide left
ventricular support. While many patients do well with isolated left ventricular
support, some patients supported with systems designed solely for isolated left
ventricular assist also have or can develop right ventricular failure and
require right ventricular device support with another system. Mortality and
morbidity are extremely high for this patient group. It has been reported that
20% to 40% of patients supported by a left ventricular assist device either died
of right heart failure or required the placement of a right heart ventricular
assist device. The one available system that provides biventricular assistance
for postcardiotomy recovery confines the patient to the bed and is recommended
for short term use only. There are no risk factors that allow a surgeon to
predict reliably which patients will require biventricular support.
Thoratec believes that the VAD System is able to make ventricular support
available to a broader patient population and to better serve the existing
patient population by (i) providing biventricular support, which is necessary in
20% to 40% of patients receiving ventricular assistance, (ii) placing the pump
paracorporeally (worn on the outside of the body), enabling it to support
patients of varying sizes, including very small patients, (iii) providing the
surgeon with multiple options in positioning the cannulae and in the size and
shape of the cannulae used, potentially reducing damage to the heart, (iv)
incorporating proprietary Thoralon in most blood contacting parts, potentially
reducing or eliminating the risks of certain adverse reactions by the body and
permitting the system to be used for potentially extended periods, and (v)
providing circulatory support for both bridge to transplant and, subject to
regulatory approval, postcardiotomy recovery of the natural heart.
VASCULAR GRAFTS
Vascular Access. The principal use of vascular access grafts is for
hemodialysis. Severe acute and chronic diseases, including kidney disease,
diabetes and hypertension, may destroy normal kidney function, resulting in
acute renal failure. End stage renal disease is irreversible and currently
approximately 60% of all patients suffering from this disease are maintained by
hemodialysis. According to the U.S. Renal Data Systems database, there were
187,000 patients in the U.S. at the end of 1995 undergoing hemodialysis. The
Company estimates that the U.S. represents less than one-half of the worldwide
hemodialysis patient population.
Hemodialysis removes blood from the body and routes it to an artificial
kidney machine where it is cleansed and returned to the patient. Patients
undergoing hemodialysis require easy, routine access to the blood stream at a
high flow rate, which generally requires the attachment of a high pressure
artery to a low pressure vein. Two different methods are typically used. The
first, called an autologous arterio-venous ("A/V") fistula, involves cutting one
of the arteries in the patient's arm and sewing the artery to an adjacent vein.
The second method uses a prosthetic vascular graft, most often an expanded
polytetrafluorethylene ("ePTFE") graft, which is surgically connected between an
artery and a vein. A hemodialysis technician inserts two large needles into
either the vein of the A/V fistula or the synthetic graft. One needle removes
the
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blood and routes it to the artificial kidney machine and the second returns the
blood to the patient. This procedure is generally repeated three times per week.
Vascular access methods currently available for hemodialysis applications
have certain limitations. Both natural and ePTFE access grafts must mature for
three to four weeks before use and therefore patients receiving such grafts
require temporary routes of access. These temporary access procedures entail
additional cost and risk to the patient. ePTFE grafts are relatively inflexible,
which often leads to kinking and a higher risk of thrombosis. ePTFE grafts also
lose integrity after repeated punctures, which renders the patient susceptible
to bleeding and infection. If prosthetic grafts bleed profusely when needles
used for hemodialysis are removed, a technician may need to apply pressure to
the graft for up to 20 minutes to permit clotting. Such problems associated with
currently available vascular grafts sometimes require them to be surgically
replaced or modified on a periodic basis. The Company estimates that
approximately 200,000 new and existing hemodialysis patients per year worldwide
undergo vascular access procedures. The Company estimates that approximately 50%
to 60% of these patients receive prosthetic grafts.
Coronary Artery Bypass Surgery. Currently, obstructed coronary arteries are
either partially cleared through the use of angioplasty or related procedures or
treated surgically through coronary artery bypass surgery. Coronary artery
bypass surgery involves connecting one or more new vessels from the aorta to the
heart to re-route blood around blockages in the coronary arteries. Autologous
grafts using saphenous veins (from the leg) or the internal mammary artery have
been successfully used in bypass procedures for a number of years and have shown
a relatively high patency with no risk of tissue rejection. The Company
estimates that in 1996 there were approximately 500,000 coronary artery bypass
surgery procedures performed in the U.S. and approximately 250,000 performed
outside of the U.S. The Company estimates that on average three bypasses are
performed in each surgical procedure.
While the use of natural vessels is the standard of care in coronary artery
bypass surgery, the harvesting of vessels for autologous grafts involves
significant trauma and expense. Use of these vessels requires additional time in
surgery and results in patient morbidity associated with removal of the blood
vessel. In addition, a significant number of patients requiring coronary artery
bypass surgery have insufficient autologous vessels as a result of previous
bypass surgeries, or their vessels are of inferior quality due to trauma or
disease. The Company estimates that these patients may represent as much as 20%
of the total. No synthetic graft is currently commercially available in the U.S.
for coronary artery bypass surgery, but the Company believes a significant
market opportunity for such grafts exists. The major reason for the
unavailability of a synthetic graft for this indication has been that synthetic
grafts configured in small diameters (less than five mm) necessary for this
indication generally do not remain patent.
THORATEC BIOMATERIALS -- THORALON(TM)
The Company has developed expertise in the design and production of
proprietary biomaterials that are highly biocompatible (i.e., they do not cause
adverse reactions within the body), strong and flexible. This technology is
critical to the successful performance of all of Thoratec's products that come
into contact with human tissue. All of the Company's current products and those
under development incorporate these proprietary biomaterials in order to
minimize clotting and inflammatory responses. In addition, these products must
maintain their strength and flexibility. A VAD System blood pump, for instance,
must contract and expand approximately 40 million times per year without a
decrease in performance or failure. The two major components of Thoralon are
surface modifying additives ("SMAs") and BPS-215 polyurethaneurea ("BPS-215"), a
high flex life elastomer.
SMAs are proprietary multipolymers designed to enhance the biocompatibility
of the surface of a device that comes into contact with blood or other tissues.
SMAs are added to the base polymer component of the biomaterial in the bulk
fabrication stage. A unique property of SMAs is their ability to concentrate at
the surface of any finished part, thus determining its surface properties
independent of the base polymer. This SMA-based surface layer is not a coating
but a fully integrated part of the polymer which is not soluble in water or
blood. The result is a biocompatible, thromboresistant surface. BPS-215 is the
base component that provides the bulk properties of strength and flexibility to
Thoralon.
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The combination of bulk and surface properties provided by SMAs and BPS-215
provides Thoralon with the critical properties necessary for implantable
cardiovascular and other medical devices. In 1992, Thoratec granted COBE a
royaltybearing license and sublicense to use Thoratec's SMAs in certain COBE
medical devices.
CIRCULATORY SUPPORT PRODUCTS
Thoratec received FDA clearance in December 1995 to market the VAD System
as a bridge to heart transplant in patients suffering from heart failure, and
began marketing the VAD System in the U.S. in January 1996. The VAD System has
also received regulatory clearance and is currently being marketed in major
European countries, Canada and certain other major international markets.
Building on the proprietary technologies contained in the VAD System, Thoratec
is attempting to develop a broad line of circulatory support products to meet
the wide range of needs of patients suffering from heart failure.
Overview of the VAD System. The VAD System consists of three major
components: the blood pump, a type of artificial heart; the Thoratec Dual Drive
Console (the "Dual Drive Console"), which pneumatically activates the blood
pump; and cannulae which connect the blood pump to the heart and vessels. The
VAD System provides partial or total circulatory assistance when the natural
heart is unable to maintain adequate circulation to perfuse vital organs and
permits left, right, or biventricular support.
Advantages of the VAD System. Compared to other ventricular assist devices,
Thoratec believes that the VAD System has the following principal advantages:
- Biventricular Support. Development of ventricular assist devices evolved
from the concept that most patients could be successfully supported with
a left ventricular assist device ("LVAD"). While many patients do well
with isolated left ventricular support, some patients supported with
systems designed solely for isolated left ventricular assist also have or
can develop right ventricular failure and require right ventricular
assist device ("RVAD") support with another system. Mortality and
morbidity are extremely high for this patient group if not adequately
supported. Most systems available today provide only left ventricular
support and the only system other than the VAD System that provides
biventricular support is indicated for temporary use in postcardiotomy
recovery and post-transplant patients and severely limits patient
mobility. There are no risk factors that allow a surgeon to predict
reliably which patients will require biventricular support.
The decision for univentricular or biventricular support is simplified
with the VAD System. In situations where there are no physiologic markers
of right heart failure, an LVAD can be used. An RVAD can be used in
addition to an LVAD if right heart failure is evident or subsequently
occurs. Biventricular support is also indicated in patients with
potentially lethal arrhythmias, or severe right ventricular infarction
that could result in death during univentricular support. With the VAD
System, RVAD support may be employed at the time of LVAD placement, thus
eliminating the need for reoperation to insert an RVAD. Isolated RVAD
support may also be suitable for patients with right heart failure only.
- Paracorporeal Attachment. In the VAD System, the pump is worn outside of
the body, allowing the system to support patients of varying sizes,
including very small patients such as small women and adolescents. To
date, the VAD System has been used in patients as small as 49 pounds. In
contrast, other commercially available ventricular assist devices for
bridge to heart transplant must be implanted and can only be used in
patients large enough to accommodate the device within their abdomen. The
other benefit derived from paracorporeal attachment is that it does not
require invasive abdominal surgery. This makes the VAD System more
suitable for critically ill patients who may potentially recover normal
function of the heart without this additional surgical trauma. Finally,
the attachment of the pump to the body facilitates patient movement,
allowing patients to walk, exercise and move around the hospital.
- Multiple Cannulation Options. Cannulae for the VAD System come in a
number of shapes and sizes, allowing the surgeon to fit the size of the
cannulae to the size of the patient and to place the cannulae
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in different parts of the heart. Other commercially available systems
have only limited cannula shape and size. The small size of the Thoratec
cannulae, compared to other systems, could make it easier for the heart
to recover when the cannulae are removed. Variations of the Thoratec
cannulae also allow the surgeon to place the cannulae in places other
than the apex of the heart (the only place used by the currently
available left ventricular only system) when heart shape or disease state
make apex cannulation undesirable.
- Thoratec Biomaterials. Thoratec's proprietary biomaterials are used in
most portions of the VAD System that contact blood or are implanted in
the body, providing biocompatibility, thromboresistance, flex life and
strength.
- Multiple Indications. The Company believes that if it receives clearance
for the postcardiotomy recovery indication, the VAD System will be the
only device cleared to provide circulatory support for both indications.
To date, the VAD System has been used to support patients for periods
ranging from a few hours to over one year.
Current and Potential Indications. Thoratec has identified three basic
clinical needs for circulatory support products: as a bridge to heart
transplant; for recovery of the natural heart weakened or damaged by surgery or
disease; and as permanent support as an alternative to heart transplant.
BRIDGE TO HEART TRANSPLANT
The Company commenced marketing the VAD System in the U.S. in January 1996
for use as a bridge to heart transplant in patients suffering from heart failure
following receipt of pre-market approval ("PMA") approval from the FDA in
December 1995. In 1997, the Company sold 262 VAD pumps to heart transplant
centers worldwide. As of December 1997, the VAD System had been used in more
than 880 patients worldwide ranging in age from 8 to 77 years and in weight from
49 to 316 pounds (22 to 144 kg). The Company's submission to the FDA included
clinical results in 375 patients (299 males, 76 females), all of whom were
awaiting donor hearts and were in imminent risk of dying without ventricular
assistance. In spite of the extreme illness and the zero percent survival rate
expected with the use of conventional therapy alone for these patients, the VAD
System was successful in assisting 233 (62%) of the 375 patients to survive
until a donor heart was available. Of the 233 patients who received a heart
transplant, 85% survived the transplant and were discharged from the hospital,
and the longest duration of VAD System support was 247 days. Sixty-five percent
of the 375 patients received biventricular ("BiVAD") support and 34% received
LVAD-only support. The large percentage of patients needing BiVAD support
reflects the greater severity of disease in patients selected for biventricular
support with the VAD System. As a result, LVAD and RVAD patients showed
correspondingly improved survival rates: 92% for LVAD and RVAD and 82% for BiVAD
post-transplant. The PMA approval was granted based on an in-depth analysis
performed in 71 of the 375 patients. Of these patients, 49 (69%) survived to
receive a heart transplant and 44 of those (90%) were discharged. None of the
control patients survived to receive a heart transplant. Based on these clinical
results, the FDA determined that the VAD System was safe and effective in
restoring hemodynamic stability to patients awaiting heart transplant.
RECOVERY OF THE NATURAL HEART
A certain portion of patients who undergo open heart surgery have
difficulty recovering normal cardiac function, which makes it difficult to wean
the patient from the heart/lung machine. Patients can only stay on the
heart/lung machine after surgery for a limited period of time (generally less
than six hours), and if they are unable to regain normal heart function, they
will not survive without ventricular support. The use of a ventricular assist
device after surgery can provide support to the heart until the heart can
recover. The Company has completed clinical trials in this indication and
submitted a PMA Supplement to the FDA in October 1997 for approval to market the
VAD System for postcardiotomy recovery of the natural heart. In addition,
ventricular assist devices may also be useful in assisting the recovery of
hearts in patients suffering from acute heart failure, such as myocardial
infarction and myocarditis, or other acute cardiomyopathies.
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Thoratec believes that since the Thoralon used in the blood-contacting
parts of the VAD System may not cause an adverse reaction by the body, the VAD
System may be used for both short-term and long-term support. In contrast, the
one system that is currently approved for the post-cardiotomy recovery
indication can only be used for temporary circulatory support and requires that
the patient remain bed-ridden. Thoratec believes that other ventricular assist
devices currently available or under development are not suitable for recovery
of the natural heart because (i) they require surgical implantation and removal
of the blood pump from the abdomen, which adds greater surgical trauma to
critically ill patients, (ii) they cannot be used in smaller patients due to
their size, (iii) the large incision required to be made at the apex of the
heart may make recovery of the natural heart more difficult, leaving heart
transplant or chronic ventricular assist device support as the only alternatives
and (iv) they do not provide biventricular support, which is often required by
patients in recovery.
As of August 1997, the VAD System had been used in 147 patients who were
unable to regain normal heart function following surgery requiring
cardiopulmonary bypass and were, therefore, unable to be removed from the
heart/lung machine following surgery. Of the 147 patients who have been placed
on the VAD System, 38% (56 patients) recovered sufficiently to be weaned from
the heart/lung machine, and of those patients, 57% were discharged from the
hospital. Duration of patient cardiac support ranged from one to 80 days.
Although most patients were supported less than ten days, several required
support for between one and three months before they successfully recovered
cardiac function.
ALTERNATIVE TO HEART TRANSPLANT
Given the shortage of donor hearts for patients requiring heart transplant,
the Company believes that ventricular assist devices may become a long-term
solution for many patients who would otherwise require a heart transplant. To
address this need, the Company has developed the TLC-II(TM), a compact and
lightweight portable driver to substitute for the Dual Drive Console currently
used with the VAD System. The Company believes that this product may enable
patients to eventually return home and to work and receive long-term ventricular
support without undergoing a heart transplant.
Products Under Development. Thoratec currently has under development the
circulatory support products described below. There can be no assurance that the
Company will successfully develop any of these products, or if successfully
developed, that these products will obtain regulatory approval or market
acceptance or can be manufactured and sold on commercially acceptable terms.
TLC-II PORTABLE VAD DRIVER ("TLC-II")
Although patients supported with the Dual Drive Console can ambulate
throughout the hospital and transfer from critical care units to general wards,
they usually cannot leave the hospital because of the size of the console.
Thoratec has developed the TLC-II, a compact and lightweight (8kg), battery or
line-operated biventricular pneumatic drive unit designed to promote greater
mobility and self-care. It is intended to allow the patient to more easily
exercise and move freely around the hospital grounds, and eventually away from
the medical facility. This device provides several portability options, either
by hand-carrying the driver or by using a shoulder strap or a small custom
trolley. This portable device will connect with a central system cart, which
will house a battery charger and the external monitoring computer.
The first clinical use of this product was in Germany in the fall of 1997.
Thoratec is pursuing a CE mark (an international symbol of quality which allows
products to be distributed in the European Community) for this product and
expects to introduce the TLC-II in Europe by the end of the first quarter of
1998. Thoratec submitted data in support of an Investigational Device Exemption
("IDE") application to the FDA in 1998 to begin a clinical trial of this device
in the U.S. for use in conjunction with the approved VAD System. The Company
believes that the regulatory path to approval for this device will be
facilitated by the fact that it activates the same VAD System blood pumps that
have received FDA approval.
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IMPLANTABLE VAD
While the paracorporeal placement of the VAD System has certain advantages,
especially for small patients and patients in whom additional abdominal surgery
presents a high risk, Thoratec is developing an implantable version of its
existing VAD blood pump and cannulae to provide additional options for surgeons.
Thoratec believes that the regulatory process for this product may be
facilitated, in part, by the fact that the VAD System has already undergone
preclinical testing in the implantable configuration prior to being introduced
for clinical use in the paracorporeal configuration.
MUSCLE-POWERED VAD ("MVAD")
Thoratec is in the early stage of developing an implantable, muscle-powered
circulatory support device to serve as an alternative to heart transplant. The
MVAD utilizes conventional pacemaker technology, along with a linear
mechanical-tohydraulic energy converter, to harness the power available in a
patient's latissimus dorsi muscle to drive an implanted ventricular assist
device. This system is designed to operate without batteries, electrical power
transmission systems or other bulky hardware required with electromechanical
systems. The MVAD is undergoing laboratory testing, and the Company has received
a $500,000 Phase II grant from the Small Business Technology Transfer Program of
the National Institutes of Health to support research and development of the
energy converter. Extensive technical development and laboratory testing will be
required before clinical trials could begin, and this project could be
discontinued at any time if feasibility is not demonstrated. There can be no
assurance that this product can be successfully developed.
VASCULAR GRAFT PRODUCTS
Thoratec is developing small diameter vascular graft products intended
initially to address the vascular access and coronary artery bypass surgery
markets. Both products utilize the Company's proprietary biomaterial, Thoralon,
and are protected by several patents covering Thoralon as well as the graft
design and manufacturing processes. Thoratec believes that its vascular grafts
are highly compliant, have excellent handling and suturing properties and have
the "feel" of a natural vessel. The fabrication process creates a structure in
which the three different layers in the wall have different properties which
make the graft closely resemble natural blood vessels. The inner textured layer
is designed for contact with blood and provides improved thromboresistance, the
solid middle layer gives the graft its strength and self sealing properties, and
the outer textured layer is designed to promote tissue ingrowth to promote graft
stability.
Vascular Access Graft ("VAG"). Currently available vascular access grafts
are commonly made out of ePTFE, which can lose integrity after repeated
punctures and render the patient susceptible to bleeding and infection. The VAG
is designed for use as a shunt between an artery and a vein, primarily to
provide access to the bloodstream for renal hemodialysis patients requiring
frequent needle punctures during treatment. The Company believes that the VAG
may provide significant advantages over existing synthetic vascular access
grafts and may encourage its use by surgeons who are currently using natural
vessels for vascular access. The VAG received marketing approval from the
Canadian Ministry of Health in March 1996, from the Japanese Ministry of Health
in May 1997, and the CE Mark in January 1998. The VAG is also marketed in
several other countries, including Australia, Taiwan and South America. Thoratec
is conducting preclinical testing and filed an IDE application with the FDA in
December 1997 to commence clinical trials in the U.S. The Company believes that
these clinical trials will be necessary to support the submission of a 510(k)
premarket notification to the FDA. The Company received a request for additional
information from the FDA in January 1998 and hopes to submit a response in the
first quarter of 1998.
Clinical experience with the VAG has been very encouraging. In one
retrospective study of the VAG in Australia, 134 patients who were implanted by
31 different surgeons were evaluated. Based on data obtained in this study as
well as other clinical trials conducted outside the U.S., the Company believes
that the VAG offers the following advantages: (i) reduced inflammatory response
after implantation; (ii) the ability to begin hemodialysis within one to three
days after implantation, as opposed to several weeks for ePTFE grafts; (iii)
reduced bleeding complications during routine use because of the VAG's
self-sealing properties; and (iv) improved handling and suturability. In the
Australian study, the median hospital stay was four days and
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initial use of the VAG for dialysis was performed with a median time after
implant of three days. The median follow-up period was 306 days. The patency at
both one and two years of dialysis use was comparable to or better than ePTFE
grafts, notwithstanding that 73% of the patients who received the Thoratec graft
previously demonstrated that they could not tolerate ePTFE grafts. In the second
phase of a Japanese 87-patient study, the current model of the Thoratec VAG was
implanted in 51 hemodialysis patients. These patients had a three-month
cumulative patency rate (unobstructed grafts) of 100% and a 12-month cumulative
patency rate of 91%. In contrast, a recent review of literature reporting
patency rates for standard ePTFE grafts in 13 different studies demonstrated
oneyear weighted-average patency of 69.7%. A form of Teflon, ePTFE is the
material used in products currently marketed in the U.S.
Coronary Artery Bypass Graft ("CABG"). Coronary artery bypass surgery
requires the insertion of substitute vessels to bypass one or more blocked
arteries in the heart. These substitute vessels typically require either
harvesting the patient's saphenous veins or using the internal mammary artery.
These procedures, however, can involve significant trauma and expense, and are
sometimes not an option for patients who have undergone previous bypass surgery
or who have vessels of inferior quality. The CABG graft is designed for use in
coronary artery bypass surgery patients who have no suitable vessels of their
own. To date, a total of 27 patients in Canada and Germany have received
Thoratec's CABG grafts, ranging in size from 2.0 to 3.5mm. All patients were
extremely ill at the time of surgery, and the grafts were implanted on a
compassionate use basis (i.e., the patients were found to have no other viable
therapeutic options). Follow-up data in a small number of these patients have
demonstrated that some CABG grafts remained patent up to one year after surgery.
All 22 surviving patients were asymptomatic as of December 1997, with the
longest term patient implanted for over four and a half years. None of the
remaining five patients are known to have died from causes related to the graft.
Long-term test results from a controlled clinical trial on a much larger patient
population are required before the capabilities of this graft can be
demonstrated.
The potential for improved long-term patency in small diameter grafts is
the most unique aspect of the CABG graft. The Company believes that to date no
other suitable small diameter graft has been developed which will remain patent
over long periods of time when used in this critical application. Thoratec is
currently in preclinical testing of the CABG graft in the U.S. The Company
believes this product will require submission of a PMA application to the FDA.
Peripheral Graft Applications. In addition to the VAG and CABG graft,
Thoratec's graft products may potentially be used in other applications such as
peripheral vascular grafts for patients who require restoration of circulation
to their arms or legs due to blockages caused by certain disease processes.
While the Company is not currently pursuing development of these applications,
it has performed limited early stage preclinical work in this area and believes
its graft products could be developed for these applications.
SALES AND MARKETING
Circulatory Support Products. The potential customers for Thoratec's
circulatory support products are hospitals that perform open heart surgery
procedures and heart transplants. Based on published sources, the Company
estimates that 130 of the approximately 800 hospitals in the U.S. that perform
open heart surgery also perform heart transplants. The Company is initially
targeting these 130 heart transplant hospitals plus an additional 110 heart
transplant hospitals in Europe.
Thoratec has recruited and trained a direct sales force that is comprised
of seven experienced cardiovascular salespeople to sell the VAD System in the
United States, Canada, Germany and France. The sales effort is complemented by
five direct clinical specialists that conduct clinical educational seminars,
assist with a new open heart center's first VAD implant and resolve clinical
questions or issues. Thoratec also partners with universities, experienced
clinicians and opinion leaders to assist with expanding clinical educational
needs. The sales team focuses on cardiac surgeons that perform heart
transplantation as well as transplant cardiologists, perfusionists and the
transplant nursing staff. In addition to its direct selling effort, Thoratec has
established a network of international distributors that cover those markets
that represent the majority of ventricular assist device potential. The
Company's internal marketing staff includes a director of marketing, a product
manager, a marketing communications manager and an administrator. Thoratec
employs
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sales and marketing tactics commonly found within the cardiovascular capital
equipment device market such as direct mail, clinical education seminars,
symposia, equipment purchase and lease programs, and journal advertisement.
Thoratec has also assembled a Medical Advisory Board consisting of opinion
leaders who provide clinical input and direction on product development,
marketing and market issues.
Hospitals or other medical institutions that acquire the VAD System
generally purchase two Dual Drive Consoles (to ensure that a back up Console is
available), VADs, related disposables and training. The time from the initial
contact with the cardiac surgeon until purchase is generally between nine and
eighteen months, due to the expense of the product and common hospital capital
equipment acquisition procedures. Upon receipt of a purchase order, the Company
will usually ship the products within thirty days.
The introduction of a new system requires training of the appropriate
personnel. Thoratec provides initial training for the surgical as well as the
clinical support teams when a center purchases and takes delivery of the VAD
System. As a follow-up to the initial training, Thoratec provides clinical
support at the first implant whenever possible. The Company also provides
24-hour access to clinically trained personnel. The Thoratec sales force also
assists customers with obtaining reimbursement from third-party payors.
Vascular Graft Products. The Company intends to market the VAG through
distributors both domestically and internationally and to market the CABG graft
through a direct sales force in the U.S. and Europe and through distributors in
other international markets. The Company envisions the market positioning of the
VAG as one which replaces an existing product used in an accepted procedure, and
at a comparable price. The Company plans to commission studies comparing its
products to ePTFE grafts. The Company believes the VAG will have significant
advantages over these existing products and will therefore offer significant
benefits to users and patients, without the need for additional clinical
training. The Company also believes that more clinicians using natural A/V
fistulas will utilize a synthetic option when presented with these benefits, and
intends to target these users as well.
The CABG graft will be positioned initially as a preferable clinical option
for patients who lack suitable native vessels. The Company believes that more
clinician education will be required for the CABG graft in terms of patient
indications, product use, and product capabilities. This may be accomplished
through Company-sponsored educational programs, video educational tools, and
scientific lecture programs. The Company also anticipates a much larger domestic
sales force structure to effectively market the CABG graft, which may overlap or
work with the VAD System sales force. Finally, the Company recognizes the impact
of clinical thought-leaders in any surgical specialty, and will begin
cultivating these relationships during the clinical trials of the graft.
MANUFACTURING
Thoratec manufactures specialty polymers for use in the grafts, VAD blood
pumps and cannulae, fabricates the grafts, VAD blood pumps and cannulae, and
assembles and tests the VAD System at its Berkeley, California facility. This
facility is cGMP-approved for the U.S. market and has received ISO 9001
certification.
The Company's manufacturing processes for the VAD System consist of the
assembly of standard and custom component parts, including blood-contacting
components fabricated from Thoratec's proprietary biomaterials, and the testing
of completed products. The Company relies on single sources of supply for
several components of the VAD System. The Company is aware of alternative
suppliers for all single-sourced items other than the mechanical valves, and
believes the loss of any one supplier would have only a short-term impact on its
production schedule. The supplier of mechanical valves for the VAD System
stopped production in 1995. The Company negotiated a contract for supply of the
valves that it believes will satisfy its needs at least through October 1998. In
October 1997, the Company executed a four-year supply agreement with Arrow and
now must qualify this new vendor for the current valve.
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean-room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing
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process for adherence to specifications. Finished components are shipped to
outside processors for sterilization through radiation or treatment with
ethylene oxide gas. After sterilization, the products are quarantined and tested
before they are shipped to customers.
The Company believes its Berkeley facility is capable of supplying the
Company's expected sales of VAD Systems through 1998. The Company plans to
relocate its manufacturing to a larger facility in Pleasanton, California, in
the San Francisco Bay Area, where in 1997 it already moved the corporate,
research and development, and sales offices. A lease was executed in 1996 for
this new 62,000 square foot facility. The scale-up and validation of a new
manufacturing facility and the purchase of necessary equipment at the new
facility will require significant expenditures in 1998.
PATENTS AND PROPRIETARY RIGHTS
The Company has adopted a policy of seeking to patent certain aspects of
its technology. The Company holds, or has exclusive rights to, 17 U.S. patents
and has three U.S. patent applications currently in prosecution. Except for the
biomaterials patents mentioned below, which are utilized in the VAD blood pump
and cannulae, the VAD System is not protected by any patents. The Company does
not believe that this lack of patent protection will have a material adverse
effect on the Company or its ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. The Company is not aware of any ventricular assist devices currently
approved by the FDA or undergoing clinical trials based on the Company's product
design. Thoratec's proprietary biomaterials technology is covered by seven
patents. Five of these were sold to Th. Goldschmidt AG ("Goldschmidt"), a German
chemical manufacturer, in 1989, but the Company has retained worldwide,
royalty-free, exclusive rights to these patents for most medical applications.
The Company's vascular graft products are covered by three manufacturing process
patents. The MVAD is currently covered by four U.S. patents, three of which are
held by the Company, and one of which is owned by Dr. Hill, Chairman of the
Board of Directors of the Company, and the Company currently has a nonexclusive
right to use that patent. Of the three patents held by the Company, one covers
the overall MVAD system design and operation, one covers a component of the MVAD
energy conversion system, and one covers methods of surgically attaching a
skeletal muscle to a component of the MVAD energy conversion system. Dr. Hill's
patent also covers the overall design of the device. Four of the Company's 17
patents are for products which are not commercially pertinent to Thoratec today.
The Company holds, or has exclusive rights to, 35 international patents,
with 31 applications currently in prosecution. All 35 international patents
apply to products for which patents have been applied for or issued under U.S.
patent law. Twenty-six biomaterial patents, valid in 13 countries, are licensed
from Goldschmidt. The three graft patents held by the Company are valid in
Canada, France and the U.K., and one of these patents is valid in Japan. Of the
31 currently pending patent applications, one is a design patent for the TLC-II
and most of the other applications relate to biomaterials.
The validity of any patents issued to the Company may be challenged by
others, and the Company could encounter legal and financial difficulties in
enforcing its patent rights against alleged infringers. In addition, there can
be no assurance that other technologies cannot or will not be developed or that
patents will not be obtained by others which would render the Company's patents
obsolete. Although the Company does not believe the patents are the sole
determinant in the commercial success of its products, the loss of a significant
percentage of its patents or its patents relating to its graft products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has developed significant technical knowledge which, although
nonpatentable, is considered by the Company to be significant in enabling it to
compete. However, the proprietary nature of such knowledge may be difficult to
protect. The Company has entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets of the Company. In addition, these agreements also provide that any
inventions or discoveries relating to the business of the Company by these
individuals will be assigned to the Company and become the Company's sole
property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is
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characterized by frequent and substantial intellectual property litigation. The
cardiovascular device market is characterized by extensive patent and other
intellectual property claims. Intellectual property litigation is complex and
expensive and the outcome of this litigation is difficult to predict. Any future
litigation, regardless of outcome, could result in substantial expense to the
Company and significant diversion of the efforts of the Company's technical and
management personnel. An adverse determination in any such proceeding could
subject the Company to significant liabilities or require the Company to seek
licenses from third parties or pay royalties that may be substantial.
Furthermore, there can be no assurance that necessary licenses would be
available on satisfactory terms, or at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing or selling
certain of its products, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
COMPETITION
Principal competitors of the VAD System include Thermo Cardiosystems Inc.,
which manufactures and markets an implantable left ventricular assist device
approved only for bridge to heart transplant in the U.S., and ABIOMED, Inc.,
which manufactures and markets an FDA-cleared biventricular assist device for
temporary circulatory support of patients in postcardiotomy shock and treatment
of cardiogenic shock following heart transplants. In addition, Novacor, a
division of Baxter International, Inc., is developing a left ventricular assist
device currently in clinical trials in the U.S. The Company believes that the
principal competitive factors in the ventricular assist device market are impact
on patient outcomes, product performance, size and portability, quality,
cost-effectiveness and customer service. The Company believes that its principal
competitive advantages are the fact that the VAD System can provide left, right
or biventricular support, the smaller size and paracorporeal placement of the
system that allows its use with a greater range of patients than competitive
devices, the greater range of cannulation options available and the quality of
its biomaterials. Although Thoratec believes that these attributes of the VAD
System offer certain advantages over existing ventricular assist devices,
current competitors can be expected to defend their market positions vigorously.
The principal competitors in the vascular access graft market are W.R.
Gore, Inc., IMPRA, Inc. (C.R. Bard) and Meadox (Boston Scientific), which
manufacture and market ePTFE grafts, Corvita Corporation (Pfizer) and Cardiotech
International, Inc., which are developing polyurethane grafts, and Possis
Medical, Inc. ("Possis"), which is developing spun polyester grafts. In
addition, Possis is developing coronary artery bypass grafts. There are
currently no coronary artery bypass graft products approved for use in the U.S.
The Company believes that the principal competitive factors in the graft market
are biocompatibility, patency, reliability, cost, suturability and ease of use.
The Company expects that significant competition in the synthetic vascular graft
market will continue.
There are many companies focusing on the development of circulatory support
devices or vascular grafts that have substantially greater financial resources,
have substantially larger and more experienced sales and marketing organizations
and engage in substantially greater research and development efforts than the
Company. One or more of these or other companies could design and develop
products that compete directly with the Company's products, in which case the
Company would face intense competition. Moreover, certain academic institutions,
government agencies and other research organizations are conducting research in
areas in which the Company is working. These institutions are becoming
increasingly aware of the commercial value of their findings and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties for use of technology that they have developed. These institutions may
also market competitive commercial products on their own or through joint
ventures and will compete with the Company in recruiting highly qualified
scientific personnel. Competition from commercial or other institutions or
organizations could have a material adverse effect on the Company's business,
financial condition and results of operations.
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GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacture and marketing of the Company's current
and future products and in its ongoing product research and development
activities. All of the Company's proposed products will require regulatory
approval prior to commercialization. In particular, medical devices are subject
to rigorous preclinical testing as a condition of approval by the FDA and by
similar authorities in foreign countries.
U.S. REGULATIONS
In the U.S., the FDA regulates the manufacture, distribution and promotion
of medical devices pursuant to the Federal Food, Drug, and Cosmetic Act and the
regulations promulgated thereunder (the "FDC Act and Regulations"). The VAD
System, TLC-II, MVAD and graft products are, or will be regulated as medical
devices. To obtain FDA approval to market medical devices similar to those under
development by the Company, the FDA requires proof of safety and efficacy in
human clinical trials performed under an IDE. An IDE application must contain
preclinical test data demonstrating the safety of the product for human
investigational use, information on manufacturing processes and procedures, and
proposed clinical protocols. If the IDE application is accepted, human clinical
trials may begin. The results obtained from these trials, if satisfactory, are
accumulated and submitted to the FDA in support of either a PMA application or a
510(k) premarket notification. Premarket approval from the FDA is required
before commercial distribution of devices similar to those under development by
the Company is permitted in the U.S.
The PMA application must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device. By regulation, the FDA has 180 days to review a PMA application and
during that time an advisory committee may evaluate the application and provide
recommendations to the FDA. While the FDA has responded to PMA applications
within the allotted time period, reviews more often occur over a significantly
protracted period, usually 18 to 36 months, and a number of devices have never
been cleared for marketing. This is a lengthy and expensive process and there
can be no assurance that such FDA approval will be obtained.
Under the FDA's requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a legally marketed device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification with the FDA. The 510(k) premarket
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device
requires a more rigorous review, the FDA will require that the manufacturer
submit a PMA application that must be reviewed and approved by the FDA prior to
sale and marketing of the device in the U.S. Both a 510(k) and a PMA, if
granted, may include significant limitations on the indicated uses for which a
product may be marketed. FDA enforcement policy strictly prohibits the promotion
of approved medical devices for unapproved uses. In addition, product approvals
can be withdrawn for failure to comply with regulatory requirements or the
occurrence of unforeseen problems following initial marketing.
In December 1995, the Company received FDA approval of its PMA for the
bridge to heart transplant indication for the VAD System. The same system
continues to be sold in the U.S. for controlled clinical use under an IDE for
recovery of the natural heart. The VAD System is classified as a Class III
medical device under the FDC Act. Prior to approval by the FDA, this device was
marketed pursuant to an IDE for use in clinical trials under controlled
conditions by a limited number of qualified medical institutions. The process of
obtaining FDA approval for the VAD System required 13 years after approval of
the IDE.
The Company expects that its graft products will be classified as either
Class II or Class III medical devices. The Company filed an IDE for its VAG in
December 1997, but believes that it will then be able to file a 510(k) after the
clinical data is gathered. The Company has limited clinical experience with its
CABG graft product, all outside the U.S. Substantial additional preclinical
testing will need to be completed in the U.S. before commencement of clinical
trials on the CABG grafts in the U.S.
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The approval process for any of the Company's products is expensive and
time consuming and no assurance can be given that any regulatory agency will
grant its approval. The inability to obtain, or delays in obtaining, such
approval would adversely affect the Company's ability to commence marketing
therapeutic applications of its products. There can be no assurance that the
Company will have sufficient resources to complete the required testing and
regulatory review processes. Furthermore, the Company is unable to predict the
extent of adverse governmental regulation which might arise from future United
States or foreign legislative or administrative action.
In addition, any products distributed by the Company pursuant to the above
authorizations are subject to pervasive and continuing regulation by the FDA.
Products must be manufactured in registered establishments and must be
manufactured in accordance with Quality System (cGMP) and GLP regulations.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The failure to comply with
the FDA's regulations can result in enforcement action, including seizure,
injunction, prosecution, civil penalties, recall and suspension of FDA approval.
The export of devices also is subject to regulation in certain instances.
INTERNATIONAL REGULATIONS
The Company is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries.
To position itself for access to European and other international markets,
Thoratec sought and obtained certification under the ISO 9000 Series of
Standards. ISO 9000 is a set of integrated requirements, which when implemented,
form the foundation and framework for an effective quality management system.
These standards were developed and published by the ISO, a worldwide federation
of national bodies, founded in Geneva, Switzerland in 1946. ISO has over 92
member countries. ISO certification is widely regarded as essential to enter
Western European markets. The Company obtained certification and was registered
as an ISO 9002 compliant company in January 1995. Commencing in mid 1998, all
companies will be required to obtain CE marking for medical devices sold or
distributed in the European Community. The CE Mark is an international symbol of
quality and with it, medical devices can be distributed within the European
Community which is comprised of fifteen European countries representing a
population of over 360 million people. A prerequisite for the Company obtaining
authority to CE Mark its products is to achieve full quality system
certification in accordance with ISO 9001 and EN 46001. These are quality
standards that cover design, production, installation and servicing of medical
devices. The Company received its ISO 9001/EN 46001 certification in September
1997. The Company received authority to CE Mark the VAG in January 1998 and
plans to obtain authority to CE Mark the TLC-II and other VAD System accessories
later in 1998.
OTHER REGULATIONS
The Company is also subject to various federal, state and local laws and
regulations relating to such matters as safe working conditions, laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with the Company's research
and development work. Specifically, the manufacture of the Company's
biomaterials is subject to compliance with federal environmental regulations and
by various state and local agencies. Although the Company believes it is in
compliance with these laws and regulations in all material respects, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws or regulations in the future.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased primarily by hospitals and other
users, which then bill various third party payors for the services provided to
the patients. These payors, which include Medicare, Medicaid,
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private insurance companies and managed care organizations, reimburse part or
all of the costs and fees associated with the procedures performed with these
devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Third party payors are
increasingly challenging the prices charged for medical products and services
and may deny reimbursement if they determine that a device was not used in
accordance with cost-effective treatment methods as determined by the payor, was
experimental or was used for an unapproved application. Changes in reimbursement
policies and practices of third party payors could have a substantial and
material impact on sales of certain of the Company's products. The development
or increased use of more cost-effective treatment could cause such payors to
decrease or deny reimbursement to favor these treatments. To date, HCFA and some
private insurers have determined to reimburse the costs of the VAD System. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payors for health care goods and services may take to limit
their payments for such goods and services. The Company cannot predict whether
the VAD System will be approved for reimbursement and cannot predict the effect
the changes in the health care system may have on its business. As a result, no
assurance can be given that any such changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
As of February 28, 1998, the Company had 108 full-time employees, 34 of
whom worked in manufacturing, 20 in engineering, 11 in quality control and
regulatory affairs, 18 in marketing and sales support, 12 in administration and
finance and 13 in other support functions (including personnel, management
information, purchasing, facility). None of the Company's employees are covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
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RISK FACTORS
The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in any forward-looking statements as a result of a variety of
factors, including those set forth below and elsewhere in this Annual Report on
Form 10-K. The following risk factors should be considered carefully in
evaluating the Company and its business by the Company's shareholders and
prospective investors in the Company.
LACK OF PROFITABILITY; EXPECTED FUTURE LOSSES
The Company was formed in 1976 and has reported a loss from operations in
all but one year of its existence. As of January 3, 1998, the Company's
accumulated deficit was approximately $51,082,000. Thoratec expects to continue
to incur additional losses until it can achieve substantial product revenues.
Furthermore, the Company expects that its expenses will increase as a result of
increased research and development, preclinical and clinical testing, and
selling, general and administrative expenses. Although sales of the VAD System
as a bridge to heart transplant have commenced in the U.S., sales of the
Company's other products in the U.S. cannot begin until the products have
received FDA approval, which may not occur for several years, if at all. There
can be no assurance that any other products of the Company will be approved, can
be successfully commercialized or that the Company will achieve significant
revenues from sales of such products. In addition, there can be no assurance
that the Company will achieve profitability in the future. Failure to achieve
significant revenues or profitability would have a material adverse effect on
the Company's business, financial condition and results of operations, and would
require the Company to seek additional funds primarily through public or private
offerings of debt or equity securities. There can be no assurance that
additional financing will be available on acceptable terms, if at all.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company anticipates that its working capital will be sufficient to meet
its present operating and capital requirements for at least the next year, but
that it will need substantial additional funds to expand operations thereafter.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of clinical trials, the timing and cost
of future filings with, and obtaining approval from, the FDA and foreign
government authorities, the timing and cost of product introductions, the cost
of developing marketing and distribution capabilities assuming the required
regulatory approvals are received, and market acceptance of the Company's
products. The Company anticipates that it will seek additional funds primarily
through public or private offerings of debt or equity securities. There can be
no assurance that additional financing will be available on acceptable terms, if
at all. The unavailability of such financing could delay research and
development, regulatory approval, manufacturing or marketing of some or all of
the Company's products and would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTIES FOR SUPPLIES
Thoratec depends on single source suppliers for certain of the raw
materials used in the manufacture of its products. The Company also utilizes
materials and component parts supplied by third parties in its products. In the
event the Company must obtain alternative sources for key raw materials or
component parts, there can be no assurance that such materials or component
parts will be available for purchase from alternative suppliers, that
alternative suppliers will agree to supply the Company, that the Company's use
of such suppliers would be approved by the FDA, or if unavailable, that the
Company would have the expertise or resources necessary to produce such
materials or component parts internally. As such, any interruption in supply of
raw materials or component parts could have a material adverse effect on the
Company's ability to manufacture its products until a new source of supply is
located and, therefore, could have a material adverse effect on its business,
financial condition and results of operations.
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In 1995, the supplier of mechanical valves for the VAD System stopped
production. The Company negotiated a contract for supply of the valves that it
believes will satisfy its needs through at least October 1998. In October 1997,
the Company executed an agreement with Arrow International, Inc. ("Arrow") to
supply these valves for a four-year term. Arrow was, until June 1997, the
Company's distributor for certain European countries of its VAD System, may also
be a future competitor of the Company in the circulatory support market and is
currently the single source of supply for such valves. The Company will need to
qualify Arrow under rules prescribed by the FDA. If the Company is unable to
qualify this supplier, the Company would have to cease manufacturing and selling
its VAD System when its current supply of valves is exhausted. Sales of the VAD
System accounted for substantially all of the Company's revenue in 1996, for
over 90% of revenue in 1997 and are expected to account for over 90% of the
Company's revenue for at least the next year. Cessation or interruption of VAD
System sales would have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED MANUFACTURING CAPABILITY
The Company currently manufactures its biomaterials, the VAD System and the
VAG at its Berkeley, California facility. The Company is leasing a build-to-suit
62,000 square foot corporate headquarters and manufacturing plant in Pleasanton,
California, the first phase of which was completed in 1997, with manufacturing
to follow in mid-1998. To date, the Company's manufacturing activities have
consisted primarily of manufacturing limited quantities of the VAD System and
the VAG. Although the Company believes that it currently has the ability to
produce sufficient quantities of the VAD System and the VAG to support its
current needs and its needs for early-stage clinical trials of the TLC-II, MVAD
and certain of its graft products, it will need to complete the move to the new
Pleasanton production facility and improve its manufacturing technology in order
to meet the volume and cost requirements for significant commercial sales of
these products. In addition, the Company does not have experience in
manufacturing its products in the commercial quantities that might be required
if the Company successfully receives FDA approval of several or all of the
products currently under development. The failure to commence manufacturing at
the Pleasanton facility or to develop the necessary manufacturing expertise
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the manufacture of the Company's products is complex and
costly, involving a number of separate processes and components. Certain
manufacturing processes of the VAD System are labor intensive, and achieving
significant cost reductions will depend in part upon reducing the time required
to complete these processes. There can be no assurance that the Company will be
able to achieve cost reductions in the manufacture of its products. In addition,
manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures and lack of qualified personnel. The Company has and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that Thoratec will be able to obtain or
manufacture such products in a timely fashion at acceptable quality and prices,
that it can comply with the FDA's current Quality System ("cGMP") or Good
Laboratory Practice ("GLP") requirements, or that it or its suppliers will be
able to manufacture an adequate supply of products.
NO ASSURANCE OF MARKET ACCEPTANCE
The commercial success of the Company's current and future products will
require acceptance by cardiovascular and vascular surgeons and interventional
cardiologists. Such acceptance will depend on clinical results and the
conclusion by these physicians that the Company's products are safe,
cost-effective and acceptable alternative methods of treatment. There can be no
assurance that the Company's products will provide benefits considered adequate
by providers of cardiovascular and vascular treatments or that a sufficient
number of such providers will use the Company's products for commercial success
to be achieved. In addition, because the Company's products are based on
innovative technologies and, in some cases, represent new methods of treatment,
there may be greater reluctance to accept these products than would occur with
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<PAGE> 18
products utilizing established technologies or methods of treatment. Even if the
safety and efficacy of these products are established, physicians may elect not
to use them for a number of reasons, including the high cost of equipment and
training associated with the use of the Company's products or unfavorable
reimbursement from health care payors. Failure of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. A limited
number of cardiovascular and vascular surgeons and interventional cardiologists
influence medical device selection and purchase decisions for a large portion of
the target cardiac patient population. The Company has developed working
relationships with cardiac surgeons and cardiologists at a number of leading
medical centers in connection with the development of the VAD System. In
addition, surgical teams at these medical institutions have performed clinical
trials to support the Company's applications to be filed with the FDA. A
continuing working relationship with these and other physicians and medical
centers will be important to the commercial acceptance of the VAD System and
future circulatory support and graft products. No assurance can be given that
existing relationships and arrangements can be maintained or that new
relationships will be established in support of the Company's circulatory
support and graft technology. Furthermore, economic, psychological, ethical and
other concerns may limit general acceptance of ventricular assist devices.
SUBSTANTIAL DEPENDENCE ON LIMITED PRODUCT LINE; DEPENDENCE ON DEVELOPMENT AND
INTRODUCTION OF NEW PRODUCTS
To date, substantially all of the Company's revenues have resulted from
sales of the VAD System. The Company expects sales from the VAD System worldwide
and limited sales of the VAG products in certain markets outside of the U.S. to
account for a significant portion of the Company's near-term revenues. As a
result, factors adversely affecting the pricing of or demand for such products,
such as market acceptance, competition or technological change, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future financial performance will depend,
in significant part, on the successful development, introduction and customer
acceptance of its products under development. Existing preclinical and clinical
data relating to the Company's products under development are very limited.
Prior to any commercial use, the products and technologies currently under
development by the Company will require significant additional research and
development efforts, extensive preclinical and clinical testing and regulatory
approval. New product development is highly uncertain and unanticipated
developments, clinical and regulatory delays, adverse or unexpected side effects
or inadequate therapeutic efficacy could slow or prevent the successful
completion of the Company's product and technology development efforts. There
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, regulatory approval, introduction
or market acceptance of these products.
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE UPON DISTRIBUTORS
The Company currently has limited sales and marketing capabilities, and
expects to expend substantial resources in 1998 to increase its sales and
marketing capabilities in the U.S. and Europe. There can be no assurance that
the Company will be able to recruit and train adequate sales and marketing
personnel or that such sales and marketing efforts will be successful. In
addition, Thoratec competes with other companies that have extensive and
well-funded sales and marketing organizations. There can be no assurance that
Thoratec's sales and marketing staff will compete successfully against such
other companies. The Company sells the VAD System in foreign markets (other than
Canada and Europe) through distributors. In addition, Thoratec sells its graft
products in foreign markets through distributors and intends to rely on
distributors for sales of the VAG in the U.S., if regulatory approval is
received. To the extent the Company relies on distributors, its success will
depend upon the efforts of others, over which it may have little control. The
loss of, or lack of performance by, distributors could have a material adverse
effect on the Company's business, financial condition and results of operations.
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<PAGE> 19
COMPETITION
Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and expected to increase.
Many of the Company's competitors have substantially greater financial,
technical, distribution and marketing resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in obtaining regulatory approvals for medical devices. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. Furthermore, many of these competitors have
superior manufacturing capabilities, and such competitors may be able to
manufacture products more efficiently and at a lower cost than the Company and,
therefore, offer comparable products at a lower cost. Any product developed by
the Company that gains regulatory approval 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. Accordingly, the relative
speeds with which the Company can develop products, complete clinical testing,
receive regulatory approval and manufacture and sell commercial quantities of
products are expected to be important competitive factors. The Company believes
that the primary competitive factors in the market for ventricular assist
devices are impact on patient outcomes, product performance, quality and
cost-effectiveness, and that the primary competitive factors for vascular graft
products are biocompatibility, patency, reliability, cost, suturability and ease
of use. The Company also believes that physician relationships and customer
support are important competitive factors.
U.S. GOVERNMENT REGULATIONS
The research and development, manufacturing, marketing and distribution of
the Company's products in the U.S. are governed by the Federal Food, Drug, and
Cosmetic Act and the regulations promulgated thereunder (the "FDC Act and
Regulations"). The FDA administers the FDC Act and Regulations, and the Company
is subject to inspection by the FDA for compliance with such regulations and
procedures. The process of obtaining FDA approval is lengthy and uncertain. In
order for the Company to market future products in the U.S., the Company must
obtain clearance from the FDA of a 510(k) premarket notification or approval of
a more extensive submission known as a PMA. The Company is also subject to the
FDA's cGMP and GLP regulations. These regulations require that the Company
manufacture its products and maintain its records in a prescribed manner. The
FDA periodically inspects the Company's facilities for compliance with cGMP.
Under FDA requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a device marketed prior to
1976, the manufacturer may seek marketing clearance by filing a 510(k) premarket
notification with the FDA. The 510(k) premarket notification must be supported
by data establishing the claim of substantial equivalence to the satisfaction of
the FDA. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. If substantial equivalence cannot be established, or
if the FDA determines that the device requires a more rigorous review, the FDA
will require that the manufacturer submit a PMA application that must be
reviewed and approved by the FDA prior to sale and marketing of the device in
the U.S. The process of obtaining approval for a PMA can be expensive, uncertain
and lengthy, frequently requiring anywhere from one to several or more years
from the date of FDA submission. Both a 510(k) and a PMA, if accepted or
approved, may include significant limitations on the indicated uses for which a
product may be marketed. FDA enforcement policy strictly prohibits the promotion
of approved medical devices for unapproved indications. In addition, product
approvals can be withdrawn for failure to comply with regulatory requirements or
the occurrence of unforeseen problems following initial marketing.
In December 1995, the Company received FDA approval to market the VAD
System in the U.S. as a bridge to heart transplant. The same system is also sold
in the U.S. for controlled clinical use under an IDE for recovery of the natural
heart. In October 1997, the Company submitted a PMA Supplement to the FDA for
final review for the postcardiotomy recovery indication, and the Company may
file other PMA Supplements. The Company submitted data supporting an IDE
application for the TLC-II in early 1998. All of the Company's other circulatory
support products are in preclinical development. The Company filed an IDE
application for the VAG in December 1997 and expects to file a 510(k) premarket
notification after the
18
<PAGE> 20
clinical data is gathered. However, submissions of data do not constitute
filings, and there can be no assurance that filings will be made or that the
filings will be accepted or products will be approved by the FDA. The Company
will need to complete its preclinical testing before an IDE application can be
filed for the CABG graft. The PMA application required for the CABG graft will
need to include the results of extensive clinical studies and manufacturing
information.
There can be no assurance that the FDA will act favorably or quickly in its
review of the Company's 510(k) submissions or PMA applications, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
graft or additional circulatory support products in the U.S. Furthermore, there
can be no assurance that the FDA will not limit the intended use of the
Company's products as a condition of 510(k) acceptance or PMA approval. Further,
if the Company proposes modifications to a product after FDA clearance of a
510(k) premarket notification or approval of a PMA, including changes in
indications (as is the case with the VAD System) or other significant
modifications to labeling or manufacturing, the Company will be required to
obtain additional approvals from the FDA. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for extensive
clinical trials or additional data as a prerequisite to clearance or approval,
or any FDA limitations on the intended use of the Company's products, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
INTERNATIONAL REGULATIONS
A significant percentage of the Company's product revenues are derived from
sales outside the U.S., and distribution of the Company's products outside the
U.S. is subject to extensive government regulation. These regulations, including
the requirements for approvals or clearance to market, and the time required for
regulatory review and the sanctions imposed for violations, vary from country to
country. There can be no assurance that the Company will obtain regulatory
approvals in such countries or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. In addition,
the export by the Company of certain of its products which have not yet been
cleared for domestic commercial distribution may be subject to FDA export
restrictions. Failure to obtain necessary regulatory approvals, the restriction,
suspension or revocation of existing approvals or any other failure to comply
with regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
To position itself for access to European and other international markets,
Thoratec has obtained certification under the International Standards
Organization (the "ISO") 9000 Series of Standards. ISO 9000 is a set of
integrated requirements which, when implemented, form the foundation and
framework for an effective quality management system. Commencing in mid-1998,
all companies will be required to obtain CE marking for medical devices sold or
distributed in the European Community. The CE mark is an international symbol of
quality and with it, medical devices can be distributed within the population of
over 360 million people in the European Community. A prerequisite for the
Company obtaining authority to CE mark its products is to achieve full quality
system certification in accordance with ISO 9001 and EN 46001. These are quality
standards that cover design, production, installation and servicing of medical
devices. The Company received its ISO 9001/EN 46001 certification in September
1997. The Company received authority to CE Mark the VAG in January 1998 and
plans to obtain authority to CE mark the TLC-II and other VAD System accessories
later in 1998. Failure to receive a CE mark certification for subsequently
developed products will prohibit the Company from selling such products in
Europe and would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be successful in meeting such certification requirements for
its future products.
RISK OF TECHNOLOGICAL OBSOLESCENCE
There can be no assurance that third parties will not succeed in developing
or marketing technologies and products that are more effective than those
developed or marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive. Additionally, new surgical
procedures and medications could be developed that replace or reduce the
importance of current procedures that use the Company's products. Accordingly,
the Company's success will depend in part on its ability to respond quickly
19
<PAGE> 21
to medical and technological changes through the development and introduction of
new products, or modification of existing products. There can be no assurance
that the Company will be successful in these efforts.
UNCERTAINTY RELATED TO THIRD PARTY REIMBURSEMENT FOR THE VAD SYSTEM
Significant uncertainty exists as to the reimbursement status of newly
approved health care products such as the VAD System. Government and other third
party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement of new therapeutic
products and by refusing in some cases to provide any coverage of uses of
approved products for disease indications other than those for which the FDA has
granted marketing approval. To date, the Health Care Financing Administration
("HCFA"), the federal agency responsible for determining whether, and to what
extent, medical products and procedures are reimbursable under Medicare and
Medicaid, and some private insurers, have determined to reimburse the costs of
the VAD System. The Company cannot predict whether the VAD System will continue
to be approved for reimbursement and cannot predict the effect that changes in
the health care system may have on the reimbursability of future products.
Failure to obtain such reimbursement could have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to maintain the proprietary nature of its
technology, products and manufacturing processes. The Company relies on patents,
trade secrets and know-how to maintain its competitive position. The Company has
been issued or has licensed a number of U.S. and foreign patents covering its
core biomaterials technology and its graft technologies. In addition, many other
U.S. and foreign patent applications have been filed. Aside from the
biomaterials patents mentioned above, which are utilized in the VAD blood pump
and cannulae, the VAD System is not protected by any patents. The Company does
not believe that this lack of patent protection will have a material adverse
effect on the Company or its ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. The Company is not aware of any ventricular assist devices currently
approved by the FDA or undergoing clinical trials based on the Company's product
design. There can be no assurance that any existing or future patent
applications by the Company will result in issued patents or that any current or
future issued or licensed patents, trade secrets or know-how will afford
sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the same
as or substantially equivalent to those of the Company. Further, there can be no
assurance that the Company will not infringe prior or future patents owned by
others, that the Company will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to the
Company, or that such licenses will be available to the Company, if at all, on
terms acceptable to the Company. The Company could incur substantial costs in
defending itself in suits brought against it on such patents or in bringing
suits to protect the Company's patents or patents licensed by the Company
against infringement. The Company also protects its proprietary technology and
processes in part by confidentiality agreements with its licensees, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors.
EXPOSURE TO CLAIMS
The Company's business exposes it to an inherent risk of potential product
liability claims related to the manufacturing, marketing and sale of human
medical devices. The Company maintains only a limited amount of product
liability insurance but will seek to obtain additional product liability
insurance as its products are commercialized. The Company also maintains
commercial general and property insurance. The Company's insurance policies
generally must be renewed on an annual basis. There can be no assurance that the
Company will be able to maintain or increase such insurance on acceptable terms
or at reasonable costs, or that such
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<PAGE> 22
insurance will provide the Company with adequate coverage against potential
liabilities. A successful claim brought against the Company in excess of, or
outside of, its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. Claims
against the Company, regardless of their merit or potential outcome, may also
have a material adverse effect on the Company's ability to obtain physician
endorsement of its products or expand its business.
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company's future business and operating results will depend in
significant part on the continued contributions of principal members of its
management and scientific staff, the loss of any of whose services might
adversely impact the achievement of planned development and product introduction
objectives. In addition, the Company's anticipated growth and product
introductions will require additional expertise in the areas of clinical
testing, government approvals, finance, engineering and marketing, all of which
will place increased demand on the Company's resources. These demands are
expected to require the addition of new management personnel and the development
of additional expertise by existing management personnel. Recruiting and
retaining qualified personnel to perform these functions will be critical to the
Company's success. Competition for such personnel is intense and there can be no
assurance that the Company will be able to recruit and retain such individuals
on acceptable terms given the competition for experienced personnel from
numerous medical device, health care and pharmaceutical companies and academic
and other research institutions. The loss of key employees, the Company's
inability to attract and retain skilled employees, as needed, or the failure to
acquire or develop necessary expertise could have a material adverse effect on
the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The price of the Common Stock has been, and is likely to continue to be,
highly volatile. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, introduction of new products or
changes in product pricing policies by the Company or its competitors,
acquisition or loss of significant customers, partners, distributors and
suppliers, changes in earnings estimates by analysts, regulatory developments,
or fluctuations in the economy or general market conditions, among other
factors, could cause the market price of the Common Stock to fluctuate
substantially. In addition, stock markets in general, and the market for shares
of health care stocks in particular, have experienced extreme price and volume
fluctuations in recent years which have frequently been unrelated to the
operating performance of the affected companies. These broad market fluctuations
may adversely affect the market price of the Common Stock. There can be no
assurance that the market price of the Common Stock will not decline below its
current price or that it will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
ITEM 2. PROPERTY
FACILITIES
Thoratec occupies leased facilities in Pleasanton, California totaling
approximately 62,000 square feet and in Berkeley, California, totaling
approximately 28,000 square feet where its manufacturing activities are carried
out. The manufacturing areas have been inspected, approved, and licensed by the
U.S. FDA and the State of California Department of Health Services, Food and
Drug Section for the manufacture of medical devices. The lease on the Berkeley
building will expire in August 1999. The Company also has small leased
facilities in the United Kingdom.
In 1996, the Company entered into a lease agreement on a new manufacturing
facility in Pleasanton. This building, when completed, will accommodate all of
the Company's manufacturing, engineering and administrative activities. The
administrative and engineering portion of the building was completed and
occupied in late 1997. The manufacturing portion is scheduled to be completed in
mid-1998. The Company will invest approximately $9 million in equipment and
leasehold improvements tot he building, approximately $6 million of which had
been invested at January 3, 1998. Annual payments under the amended lease are
approximately
21
<PAGE> 23
$699,000 for a lease term of 15 years and commenced in August 1997. The lease
includes provisions, among others, for annual cost of living adjustments to the
lease payments, two five-year renewal options, a purchase option, and a security
deposit of $885,600, which the Company paid in 1996, and an additional $500,000
paid in 1997. A significant portion ($1,250,000) of the security deposit can be
reduced or eliminated before the end of the initial lease term if the Company
meets certain criteria as specified by the contract.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
D. KEITH GROSSMAN, President, Chief Executive Officer and Director -- Mr.
Grossman joined Thoratec Laboratories Corporation as President and Chief
Executive Officer in January 1996. He was elected to the Board of Directors in
February 1996. Prior to joining Thoratec, Mr. Grossman was a Division President
of Major Pharmaceuticals, Inc., from June 1992 to September 1995, at which time
it was sold. From July 1988 to June 1992, Mr. Grossman served as the Vice
President of Sales and Marketing for Calcitek, Inc., a manufacturer of
implantable medical devices, and division of Sulzermedica (formerly Intermedics,
Inc.). Prior to 1988, Mr. Grossman held various other sales and marketing
management positions within the McGaw Laboratories Division of American Hospital
Supply Corporation.
CHERYL D. HESS, Vice President -- Finance, Chief Financial Officer and
Secretary -- Ms. Hess joined the Company as Vice President - Finance and Chief
Financial Officer in December 1983 and became Secretary in 1994. Prior to
joining Thoratec, Ms. Hess was a manager with the public accounting firm of
Deloitte & Touche LLP, where she specialized in audit and financial advisory
services for entrepreneurial, rapidly-growing, high technology companies. Ms.
Hess is responsible for the direction of all financial management, control and
reporting activities for Thoratec, as well as certain administrative and
operational activities. Ms. Hess is a Certified Public Accountant.
THOMAS E. BURNETT, JR., Vice President -- Sales and Marketing -- Mr.
Burnett joined the Company as Vice President - Sales and Marketing in August
1996. Prior to joining Thoratec, Mr. Burnett was Vice President of Sales and
Marketing at Calcitek, Inc. from June 1992 to August 1996, where he was
responsible for global sales and marketing which included a direct domestic
sales force and an international network encompassing 30 countries as well as
new business development, strategic and operational planning. Other positions at
Calcitek, included Director of Sales from January 1992 to June 1992 and National
Sales Manager from January 1991 to January 1992. Prior to Calcitek, Mr. Burnett
held a variety of sales and sales management positions for Kendall McGaw
Laboratories, a producer of intravenous solutions, infusion equipment and
parenteral pharmaceuticals.
DAVID J. FARRAR, PH.D., Vice President -- Research and Development -- Dr.
Farrar joined the Company as Program Manager of the VAD System in January 1980
and became Vice President - Circulatory Support Products in 1988, and Vice
President -- Research & Development in 1996. In addition, Dr. Farrar has a
research appointment in the Department of Cardiac Surgery at the California
Pacific Medical Center of San Francisco. Dr. Farrar has over 20 years of
research experience in the cardiovascular and medical device industry.
DONALD A. MIDDLEBROOK, Vice President -- Regulatory Affairs/Quality
Assurance -- Mr. Middlebrook joined the Company as Vice President -- Regulatory
Affairs/Quality Assurance in September 1996. Before joining Thoratec, he held
the position of Senior Director, Global Regulatory Affairs and Assurance for
Chiron Vision Corporation, a manufacturer of implantable ophthalmic devices and
surgical equipment. Prior to this, Mr. Middlebrook spent fifteen years with
Baxter International in a number of progressing positions, including Vice
President of Regulatory Affairs and Quality Assurance for the
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<PAGE> 24
CardioVascular Group, a producer of a wide range of cardio, critical care,
vascular, and less invasive cardiovascular products.
JOSEPH G. SHARPE, Vice President -- Operations -- Mr. Sharpe joined the
Company as Vice President-Operations in September 1997. Prior to joining
Thoratec, Mr. Sharpe was Director of Operations for the IV Systems Division of
Baxter International, Inc. from 1992 to September 1997. Prior thereto, Mr.
Sharpe held a number of other positions at Baxter International, Inc., including
Director of Engineering of the Pharmaseal Division, and Honeywell Information
Systems.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is currently traded on the Nasdaq National
Market under the symbol "THOR". The following table sets forth, for the periods
indicated, the high and low bid prices per share for the common stock as
reported prior to June 27, 1996 by the Boston Stock Exchange or the Nasdaq Small
Cap Market, and since June 27, 1996, the high and low closing sales price per
share for the common stock, as reported by the Nasdaq National Market. At
February 28, 1998 there were approximately 800 registered holders of the
Company's common stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter................................ $21.75 $14.63
Second Quarter............................... 31.00 12.00
Third Quarter................................ 13.50 9.00
Fourth Quarter............................... 11.50 9.00
1997
First Quarter................................ $11.00 $ 8.00
Second Quarter............................... 8.13 4.88
Third Quarter................................ 8.75 6.75
Fourth Quarter............................... 7.50 4.38
</TABLE>
The Company has not declared any dividends on its common stock.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
ITEM 1997 1996 1995 1994 1993
---- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenue................................ $10,195 $ 8,087 $ 3,548 $ 2,788 $ 3,933
Research and development..................... 4,583 3,724 1,984 1,360 1,478
Net loss..................................... (4,402) (3,263) (1,894) (1,647) (725)
Basic and diluted loss per share............. (0.24) (0.20) (0.13) (0.12) (0.05)
Number of shares used in the computation*.... 18,360 16,694 14,429 14,193 14,122
BALANCE SHEET DATA:
Working capital.............................. $15,885 $17,266 $ 2,808 $ 2,025 $ 2,106
Total assets................................. 28,477 21,847 4,380 3,605 3,599
Long-term obligations........................ 1,675 1,675
Shareholders' equity......................... 24,027 19,330 1,663 1,057 2,637
</TABLE>
- ---------------
* As adjusted to reflect the one-for-three reverse split of the Company's Common
Stock effected in June 1996.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those set forth under "Item 1 -- Risk Factors" and
elsewhere in this Annual Report on Form 10-K. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company
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<PAGE> 26
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
At the end of 1997 the Company had working capital of $15,885,000 compared
with $17,266,000 at the end of 1996. The decrease in working capital was due to
expenditures on the Company's new manufacturing facility, including deposits on
leased facilities, and the loss from continuing operations partially offset by
proceeds received from the public offering of the Company's common stock
discussed below and proceeds received from stock option exercises. Receivables
increased principally due to increased sales. Inventory increased in preparation
for planned increases in sales activity and the introduction of a new product.
Accounts payable and accrued liabilities increased principally due to
construction and other capital asset purchases outstanding at year-end as well
as increased personnel costs.
In November 1997, the Company sold through a public offering 2,000,000
shares of common stock at five dollars per share. Net cash proceeds received by
the Company related to this offering were approximately $8,809,000 after
placement agents' fees and approximately $491,000 of other costs.
In 1996, the Company entered into a lease agreement on a new manufacturing
facility located in Pleasanton, California. This building, when completed, will
accommodate all of the Company's manufacturing, engineering and administrative
activities. The administrative and engineering portion of the building was
completed and occupied in late 1997. The manufacturing portion is scheduled for
completion in mid-1998. The Company will invest approximately $9 million in
equipment and leasehold improvements to the building, approximately $6 million
of which had been invested at January 3, 1998. Annual payments under the amended
lease are approximately $699,000 for a lease term of 15 years and commenced in
August 1997. The lease includes provisions, among others, for annual cost of
living adjustments to the lease payments, two five-year renewal options, a
purchase option, and a security deposit of $885,600, which the Company paid in
1996, and an additional $500,000 paid in 1997. A significant portion
($1,250,000) of the security deposit can be reduced or eliminated before the end
of the initial lease term if the Company meets certain criteria as specified by
the contract.
With the proceeds of the above noted public offering, the Company believes
that it has sufficient funds to increase its marketing efforts, to increase
manufacturing efficiencies through construction of its new manufacturing
facility and to develop new sources of revenue, including new products for at
least the next year. However, the Company expects that its operating expenses
will increase in future periods as the Company expends increased amounts on
product manufacturing, marketing, and research and development of new product
lines. As a result, the Company expects to incur net losses for at least the
next year. There can be no assurance that the Company will achieve profitability
or positive cash flow.
The Company does not expect that inflation will have a material impact on
its operations.
RESULTS OF OPERATIONS
Product sales in 1997 were $9,441,000 compared to $7,503,000 in 1996. The
26% increase is primarily the result of increased sales of the VAD System in the
United States following FDA approval of the System in late 1995 and efforts of a
direct sales organization established in late 1995 and early 1996. Domestic
sales increased $2,085,000, or 38% in 1997. Interest and other income increased
$169,000 to $753,000 in 1997 due principally to interest earned on higher
average cash balances obtained from the Company's public stock offerings in
November 1997 and September 1996.
Cost of sales increased $752,000, or 23%, in 1997 compared to 1996 as a
result of the higher sales volume in 1997. Gross margins increased from 57% in
1996 to 58% in 1997 due to the ability of the Company to raise selling prices of
its VAD pumps beginning in the second quarter of 1996 partially offset by
increased operating costs in 1997 associated with the new manufacturing facility
and increased personnel and related costs.
25
<PAGE> 27
Research and development expenses for 1997 increased $859,000, or 23%,
compared to 1996 due to increased costs associated with the Company's graft
products and continued development of the Company's portable VAD driver, the
TLC-II. Selling, general and administrative expenses in 1997 increased
$2,075,000, or 53%, compared to 1996 principally from costs associated with
implementing a direct sales strategy in Europe and continued development and
expansion of the domestic sales and marketing organization.
The Company expects profitability will continue to be adversely impacted by
various fixed costs until all its current products have received pre-market
approval in the United States and approval for sale in its major international
markets. In December 1995, the Company received FDA approval for its VAD System
as a bridge to transplantation. In October 1997, the Company filed a PMA
Supplement for an additional indication for the VAD System for recovery of the
natural heart.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant applications is substantially complete.
The Company plans on completing the testing process of all significant
applications by December 31, 1998.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, together with the report thereon
by Deloitte & Touche LLP, Independent Auditors, are set forth at pages F-1 to
F-14 of this Report on Form 10-K.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
26
<PAGE> 28
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Company will file its definitive Proxy Statement for its
Annual Meeting for Shareholders to be held on May 18, 1998, pursuant to
Regulation 14A of the Securities and Exchange Act of 1934, as amended (the
"Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section titled "Executive Officers" in
Part I, Item 4 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Reporting Delinquencies" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
27
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a). EXHIBITS AND INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
3(a) Registrant's Certificate of Incorporation, as amended.(1)
3(b) Registrant's By-Laws, as amended.(1)
4(a) Form of Convertible Secured Promissory Note.(7)
10(p) Lease Agreement dated July 5, 1979, between the Registrant
and Scenic Arts Incorporated, as amended.(2)
10(ii) Amended 1984 Incentive Stock Option Plan.(4)
10(eee) Amended 1988 Non-Qualified Stock Option Plan.(4)
10(fff) 1993 Stock Option Plan.(6)
10(ggg) Agreement for the Acquisition of Th. Goldschmidt AG of
Certain of the Assets of Thoratec Laboratories Corporation
dated as of March 29, 1989.(3)
10(jjj) Thoratec Laboratories Corporation and COBE Laboratories,
Inc. Common Stock Purchase Agreement dated November 23,
1992.(5)
10(kkk) License Agreement Between Thoratec Laboratories Corporation
and COBE Laboratories, Inc. dated as of November 23,
1992.(5)
10(lll) Lease Agreement dated July 25, 1996, between Registrant and
Main Street Associates, as amended.(8)
10(mmm) 1996 Stock Option Plan.(9)
10(nnn) 1996 Nonemployee Directors Stock Option Plan.(9)
10(ooo) First Amendment to Lease Agreement Originally By and Between
Mainstreet Associates and Thoratec Laboratories Corporation
dated July 25, 1996.(10)
10(ppp) 1997 Stock Option Plan.(11)
10(qqq) Amended 1996 Nonemployee Directors Stock Option Plan.(10)
10(rrr) Second Amendment to Lease Agreement Originally By and
Between Mainstreet Associates and Thoratec Laboratories
Corporation dated July 25, 1996.(12)
23 Independent Auditors' Consent -- Deloitte & Touche LLP.
24 Power of Attorney -- Reference is made to page 31 hereof.
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Registration Statement on Form S-1 (Registration No. 2-87293) and
incorporated herein by reference.
(2) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Registration Statement on Form S-1 (Registration No. 2-70903) and
incorporated herein by reference.
(3) Filed as an Exhibit with corresponding exhibit number to Thoratec's Annual
Report for the fiscal year ended December 30, 1989 and incorporated herein
by reference.
(4) Filed as an Exhibit with corresponding exhibit number to Thoratec's Annual
Report for the fiscal year ended December 29, 1990 and incorporated herein
by reference.
(5) Filed as an Exhibit with corresponding exhibit number to Thoratec's Annual
Report for the fiscal year ended January 2, 1993 and incorporated herein by
reference.
(6) Filed as an Exhibit with corresponding exhibit number to Thoratec's Annual
Report for the fiscal year ended January 1, 1994 and incorporated herein by
reference.
(7) Filed as an Exhibit with corresponding exhibit number to Thoratec's Annual
Report for the fiscal year ended December 31, 1994 and incorporated herein
by reference.
28
<PAGE> 30
(8) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996
and incorporated herein by reference.
(9) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Registration Statement on Form S-8 (Registration No. 333-11883) and
incorporated herein by reference.
(10) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997
and incorporated herein by reference.
(11) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Registration Statement on Form S-8 (Registration No. 333-32223) and
incorporated herein by reference.
(12) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 27,
1997 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None filed in 1997.
29
<PAGE> 31
SIGNATURES
In accordance with Section 13 or Section 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THORATEC LABORATORIES CORPORATION
By: /s/ D. KEITH GROSSMAN
------------------------------------
D. Keith Grossman, Chief Executive
Officer
Date: March 19, 1998
-----------------------------------
30
<PAGE> 32
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints D. Keith Grossman, his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, to act for
him and in his name, place and stead, in any and all capacities to sign any and
all amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, and fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ D. KEITH GROSSMAN Chief Executive Officer, February 20, 1998
- ----------------------------------------------------- President and Director
D. Keith Grossman
/s/ CHRISTY W. BELL Director February 20, 1998
- -----------------------------------------------------
Christy W. Bell
/s/ HOWARD E. CHASE Director February 20, 1998
- -----------------------------------------------------
Howard E. Chase
/s/ J. DANIEL COLE Director February 20, 1998
- -----------------------------------------------------
J. Daniel Cole
/s/ J. DONALD HILL Director and Chairman of the February 20, 1998
- ----------------------------------------------------- Board of Directors
J. Donald Hill
/s/ WILLIAM M. HITCHCOCK Director February 20, 1998
- -----------------------------------------------------
William M. Hitchcock
/s/ GEORGE W. HOLBROOK, JR. Director February 20, 1998
- -----------------------------------------------------
George W. Holbrook, Jr.
/s/ DANIEL M. MULVENA Director February 20, 1998
- -----------------------------------------------------
Daniel M. Mulvena
/s/ CHERYL D. HESS Vice President -- Finance, February 20, 1998
- ----------------------------------------------------- Chief Financial Officer and
Cheryl D. Hess Secretary (Principal
Financial and Accounting
Officer)
</TABLE>
31
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Thoratec Laboratories Corporation:
We have audited the accompanying consolidated balance sheets of Thoratec
Laboratories Corporation and subsidiary (the "Company") as of January 3, 1998,
and December 28, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years ended January 3, 1998,
December 28, 1996, and December 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Thoratec Laboratories
Corporation and Subsidiary at January 3, 1998 and December 28, 1996 and the
results of their operations and their cash flows for the fiscal years ended
January 3, 1998, December 28, 1996 and December 30, 1995 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
San Francisco, California
February 20, 1998
F-1
<PAGE> 34
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FISCAL YEAR END
---------------------------
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,469,311 $ 5,348,000
Short-term investments available-for-sale (Note 3)........ 5,390,663 10,631,990
Receivables (Note 9)...................................... 1,302,323 833,700
Inventories (Note 4)...................................... 3,901,258 2,703,196
Prepaid expenses and other................................ 270,865 266,519
----------- -----------
Total current assets................................... 20,334,420 19,783,405
EQUIPMENT AND IMPROVEMENTS -- AT COST (Note 5):
Equipment................................................. 2,671,015 1,714,407
Leasehold improvement..................................... 4,851,701 794,692
Construction in progress.................................. 1,300,963 534,089
----------- -----------
Total.................................................. 8,823,679 3,043,188
Accumulated depreciation and amortization................... (2,154,105) (1,908,667)
----------- -----------
Equipment and improvements -- net........................... 6,669,574 1,134,521
OTHER ASSETS (Note 5)....................................... 1,473,180 929,495
----------- -----------
TOTAL ASSETS......................................... $28,477,174 $21,847,421
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 2,804,400 $ 1,352,732
Accrued compensation........................................ 929,920 527,497
Product sales advances...................................... 255,199 267,128
Other....................................................... 460,378 370,174
----------- -----------
Total current liabilities.............................. 4,449,897 2,517,531
COMMITMENTS (Notes 5 and 12)
SHAREHOLDERS' EQUITY: (Notes 2, 6, 7, 8, and 9)
Preferred shares -- none issued and outstanding
Common shares, 100,000,000 authorized; issued and
outstanding -- 20,172,445 in 1997 and 17,942,117 in
1996................................................... 72,664,107 63,519,139
Additional capital.......................................... 2,482,229 2,471,877
Accumulated deficit......................................... (51,081,554) (46,679,195)
Unrealized gain(loss) on investments -- net................. (7,539) 5,651
Cumulative translation adjustment........................... (29,966) 12,418
----------- -----------
Total shareholders' equity............................. 24,027,277 19,329,890
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $28,477,174 $21,847,421
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 35
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
REVENUE:
Product sales -- net (Notes 9 and 11)........... $ 9,441,302 $ 7,502,536 $ 3,488,599
Interest and other.............................. 753,369 584,406 59,326
----------- ----------- -----------
Total revenue................................... 10,194,671 8,086,942 3,547,925
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products sold........................... 4,005,242 3,253,626 1,972,467
Research and development........................ 4,582,745 3,723,713 1,984,101
Selling, general, and administrative............ 6,027,365 3,952,277 1,297,815
Debt conversion expense (Note 6)................ 378,295
Interest expense (Note 6)....................... 45,811 184,886
Foreign currency expense........................ (18,322) (4,039) 2,822
----------- ----------- -----------
Total costs and expenses........................ 14,597,030 11,349,683 5,442,091
----------- ----------- -----------
NET LOSS........................................ $(4,402,359) $(3,262,741) $(1,894,166)
=========== =========== ===========
Basic and diluted loss per share (Note 14)...... $ (0.24) $ (0.20) $ (0.13)
=========== =========== ===========
Shares used to compute basic and diluted loss
per share..................................... 18,360,336 16,693,820 14,428,539
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 36
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS) CUMULATIVE TOTAL
COMMON ADDITIONAL ACCUMULATED ON TRANSLATION SHAREHOLDERS'
STOCK CAPITAL DEFICIT INVESTMENTS ADJUSTMENT EQUITY
----------- ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........ $40,245,803 $2,333,689 $(41,522,288) $ 1,057,204
Exercise of 49,329 common stock
options for cash and exchange
for 832 shares of common stock
which were canceled............. 59,053 59,053
Issuance of 641,029 shares of
common stock for cash........... 2,441,565 2,441,565
Foreign currency translation
adjustments..................... $ (985) (985)
Net Loss.......................... (1,894,166) (1,894,166)
----------- ---------- ------------ -------- -------- -----------
BALANCE, DECEMBER 30, 1995........ 42,746,421 2,333,689 (43,416,454) (985) 1,662,671
Issuance of 342,537 shares of
common stock for conversion of
notes payable................... 1,675,000 1,675,000
Exercise of 880,304 common stock
warrants for cash and exchange
for 83 shares of common stock
which were canceled............. 1,340,034 1,340,034
Issuance of 1,644,000 shares of
common stock for cash........... 17,591,204 17,591,204
Exercise of 146,185 common stock
options for cash and exchange
for 3,518 shares of common stock
which were canceled............. 166,480 166,480
Issuance of common stock options
for nonemployee services........ 138,188 138,188
Unrealized gain on investments.... $ 5,651 5,651
Foreign currency translation
adjustments..................... 13,403 13,403
Net Loss.......................... (3,262,741) (3,262,741)
----------- ---------- ------------ -------- -------- -----------
BALANCE, DECEMBER 28, 1996........ 63,519,139 2,471,877 (46,679,195) 5,651 12,418 19,329,890
Exercise of 241,937 common stock
options for cash and exchange
for 11,609 shares of common
stock which were canceled....... 335,681 335,681
Issuance of common stock options
for nonemployee services........ 10,352 10,352
Unrealized loss on investments.... (13,190) (13,190)
Issuance of 2,000,000 shares of
common stock for cash........... 8,809,287 8,809,287
Foreign currency translation
adjustments..................... (42,384) (42,384)
Net Loss.......................... (4,402,359) (4,402,359)
----------- ---------- ------------ -------- -------- -----------
BALANCE, JANUARY 3, 1998.......... $72,664,107 $2,482,229 $(51,081,554) $ (7,539) $(29,966) $24,027,277
=========== ========== ============ ======== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 37
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,402,359) $ (3,262,741) $(1,894,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Debt conversion expense (Note 6)............. 378,295
Common stock options granted for services
(Note 9)................................... 10,352 138,188
Depreciation and amortization................... 260,895 195,441 119,400
Changes in assets and liabilities:
Receivables.................................. (468,623) (252,402) (273,115)
Prepaid expenses and other................... (4,346) (17,471) (188,582)
Inventories.................................. (1,198,062) (1,329,032) 128,835
Other assets................................. (595,444) (791,947) 149,413
Accounts payable and other liabilities....... 816,745 1,188,741 169,562
------------ ------------ -----------
Net cash used in operating activities........ (5,580,842) (3,752,928) (1,788,653)
------------ ------------ -----------
Cash flows from investing activities:
Purchases of short-term investments
available-for-sale........................... (85,482,972) (69,738,523)
Maturities of short-term investments
available-for-sale........................... 83,400,000 47,560,000
Sales of short-term investments
available-for-sale........................... 7,311,109 11,552,184
Capital expenditures............................ (4,670,952) (637,679) (92,671)
------------ ------------ -----------
Net cash provided by (used in) investing
activities................................. 557,185 (11,264,018) (92,671)
------------ ------------ -----------
Cash flows from financing activities:
Common stock issued in private placement -- net 2,441,565
Common stock issued upon exercise of warrants... 961,739
Common stock issued in public
placement -- net............................. 8,809,287 17,591,204
Common stock issued upon exercise of options.... 335,681 166,480 59,053
------------ ------------ -----------
Net cash provided by financing activities.... 9,144,968 18,719,423 2,500,618
------------ ------------ -----------
Net increase in cash and cash equivalents......... 4,121,311 3,702,477 619,294
Cash and cash equivalents at beginning of year.... 5,348,000 1,645,523 1,026,229
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 9,469,311 $ 5,348,000 $ 1,645,523
============ ============ ===========
Noncash Financing Transaction:
Conversion of notes into common stock (Note
6)........................................... $ 1,675,000
Noncash Investing Transactions:
Construction costs and capital assets in
accounts payable (Note 5).................... $ 1,402,045 $ 286,424
Other Cash Flow Information:
Interest paid (Note 6)....................... $ 45,811 $ 184,886
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 38
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations -- Thoratec Laboratories Corporation and its subsidiary (the
"Company") manufactures and markets medical devices utilizing specialty polymers
and is engaged in ongoing research and development. Thoratec's products are
marketed worldwide.
The Company reports on a 52-53 week fiscal year, which ends on the Saturday
closest to December 31. The fiscal year ended January 3, 1998 (fiscal 1997)
includes 53 weeks. The fiscal years ended December 28, 1996 (fiscal 1996) and
December 30, 1995 (fiscal 1995) include 52 weeks.
Principles of Consolidation -- The consolidated financial statements
include Thoratec Laboratories Corporation (a California corporation) and its
subsidiary company, Thoratec Europe Limited. All significant intercompany
balances and transactions are eliminated in consolidation.
Use of Estimates -- The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the consolidated balance sheet dates and the reported
amounts of revenues and expenses for the periods presented. Actual results could
differ from these estimates.
Cash and Cash Expenditures -- Cash and cash equivalents include money
market securities stated at cost, which approximates market value.
Investments -- The Company's short-term investments are classified as
available-for-sale and reported at fair value. Net unrealized gains and losses
are excluded from earnings and reported as a separate component of shareholders'
equity.
A portion of the funds provided by the public offerings of the Company's
common stock in 1996 and 1997 are currently being held for investment until such
time that the funds are needed by the Company for operations and capital
expenditures. As of the end of 1997, short-term investments were comprised
primarily of certificates of deposit, commercial paper and corporate notes with
maturity dates within 12 months of the date of investment.
Inventories are stated at the lower of first-in, first-out cost or market.
Depreciation and Amortization -- Equipment is depreciated over estimated
useful lives which range from two to eight years. Leasehold improvements are
amortized over the remaining period of the lease or over the estimated useful
life of the improvement, whichever is shorter. The straight-line method is used
for depreciation and amortization.
Income Taxes -- The Company follows an asset and liability approach for
financial accounting and reporting of income taxes. Under this approach, the
Company computes its tax liability at each consolidated financial statement date
by applying provisions of current tax laws to temporary differences between
consolidated financial statement and income tax bases. Changes in tax law may
result in an adjustment to deferred tax assets.
Fair Value of Financial Instruments -- The Company's financial instruments
include cash and equivalents, short-term investments available-for-sale,
customer receivables, accounts payable, and certain other accrued liabilities.
The carrying amounts of these items are a reasonable estimate of their fair
values.
Foreign Currency Translation -- All assets and liabilities of the Company's
non-United States operations are translated into United States dollars at fiscal
period-end exchange rates, and the resulting translation adjustments are
recorded as cumulative translation adjustments in shareholders' equity. Income
items are translated at actual or average monthly rates of exchange.
F-6
<PAGE> 39
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition and Product Warranty -- The Company recognizes product
revenues upon shipment of the related product. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped.
Accounting for Stock-Based Compensation -- The Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) effective for the fiscal year ended December 28, 1996.
SFAS No. 123 established accounting and disclosure requirements using a fair
value based method of accounting for stock based employee compensation plans. As
allowed under provisions of SFAS No. 123, the Company has chosen to continue the
intrinsic value based method and provide pro forma disclosures of net earnings
and earnings per share as if the accounting provisions of SFAS No. 123 had been
adopted.
Loss Per Share -- In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). The Company adopted SFAS 128 in the year ended
January 3,1998 as required and all earnings per share (EPS) data presented
conforms with SFAS 128, including all prior periods presented.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Diluted EPS for 1997, 1996 and 1995 excludes any effect from
such securities as their inclusion would be antidilutive.
Statement of Cash Flows -- Cash equivalents consist of money market funds
carried at cost which is equal to market value. Significant noncash investing
and financing activities are discussed in Notes 6 and 8.
Recently Issued Accounting Standards -- During June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), which requires that an enterprise report the change in its
net assets from nonowner sources by major components and, as a single total. The
FASB also issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), which establishes annual and interim standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these Statements will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. Such Statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
Reclassifications -- Certain reclassifications have been made to the 1996
amounts to conform to the 1997 presentation.
2. FINANCIAL POSITION AND LIQUIDITY
In November 1997, the Company sold through a public offering 2,000,000
shares of common stock at five dollars per share. Net cash proceeds received by
the Company related to this offering were approximately $8,809,000 after
placement agents' fees and approximately $491,000 of other costs.
In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of common stock at $12.00 per share. Included in the 1,644,000
shares are 144,000 shares sold pursuant to an underwriters' over-allotment
option. Also issued to the underwriters in connection with the public offering
were five-year warrants to purchase 164,400 shares of the Company's common stock
at $14.40 per share. The warrants are currently exercisable and include a net
exercise provision. Net cash proceeds received by the Company related to this
offering were approximately $17,591,000. Underwriters' commissions, the fair
value
F-7
<PAGE> 40
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of warrants issued to the underwriters, and approximately $1,050,000 of other
estimated costs have been recorded as an offset to common stock at the closing
of the offering.
With the proceeds of these offerings, the Company believes that it has
sufficient funds to increase its marketing efforts, to increase manufacturing
efficiencies through construction of a new manufacturing facility, and to
develop new sources of revenue, including new products, for at least the next
year. However, the Company expects that its operating expenses will increase in
future periods as the Company expends increased amounts on product
manufacturing, marketing, and research and development of new product lines. As
a result the Company expects to incur net losses for at least the next year.
There can be no assurance that the Company will achieve profitability or
positive cash flow.
3. SHORT-TERM INVESTMENTS
Short term investments available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
JANUARY 3, 1998
Corporate debt instruments.......... $ 5,398,202 $ 79 $(7,618) $ 5,390,663
=========== ====== ======= ===========
DECEMBER 28, 1996
Debt instruments issued by:
Federal government and its
agencies......................... $ 636,715 $ 997 $ 0 $ 637,712
Corporate debt instruments.......... 9,989,624 5,072 (418) 9,994,278
----------- ------ ------- -----------
Total....................... $10,626,339 $6,069 $ (418) $10,631,990
=========== ====== ======= ===========
</TABLE>
The Company classifies those investments which mature in less than one year
as short-term investments.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
JANUARY 3, 1998 DECEMBER 28, 1996
--------------- -----------------
<S> <C> <C>
Finished goods........................ $1,652,312 $1,516,420
Work-in process....................... 803,606 648,622
Raw materials......................... 1,445,340 538,154
---------- ----------
Total....................... $3,901,258 $2,703,196
========== ==========
</TABLE>
5. LEASES
The Company leases offices, laboratory and manufacturing space under
noncancelable operating leases. In 1996 the Company entered into a lease
agreement on a new manufacturing facility located in Pleasanton, California.
This building, when completed, will accommodate all of the Company's
manufacturing, engineering and administrative activities. The administrative and
engineering portion of the building was completed and occupied in late 1997. The
manufacturing portion is scheduled to be completed in mid-1998. The Company will
invest approximately $9 million in equipment and leasehold improvements to the
building, approximately $6 million of which had been invested at January 3,
1998. Annual payments under the amended lease are approximately $699,000 for a
lease term of 15 years and commenced in August 1997. The lease includes
provisions, among others, for annual cost of living adjustments to the lease
payments, two five-year renewal options, a purchase option, and a security
deposit of $885,600, which the Company paid in 1996, and
F-8
<PAGE> 41
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
an additional $500,000 paid in 1997. A significant portion ($1,250,000) of the
security deposit can be reduced or eliminated before the end of the initial
lease term if the Company meets certain criteria as specified by the contract.
Future minimum lease payments as of January 3, 1998 are noted below:
<TABLE>
<CAPTION>
AS OF
JANUARY 3, 1998
---------------
<S> <C>
Fiscal year:
1998........................... $ 883,476
1999........................... 830,050
2000........................... 723,200
2001........................... 723,200
2002........................... 723,200
Thereafter..................... 6,847,514
-----------
Total................ $10,730,640
===========
</TABLE>
Rent expense for all operating leases was $473,237 in 1997, $200,121 in
1996, and $180,324 in 1995.
6. LONG-TERM DEBT
In 1994, the Company placed $1.675 million of convertible secured debt with
private lenders. The notes were convertible into common stock at rates ranging
from $4.92 to $6.38 per share, bore interest at 11% and were due in three years.
The debt was secured by the royalties payable pursuant to the Licensing
Agreement with COBE Laboratories, Inc. ("COBE") (see Note 9), all accounts
receivable, equipment and inventory. Five-year warrants to purchase 210,201
shares of Thoratec common stock at $6.38 per share were also issued with the
convertible notes.
In the first quarter of 1996, all $1.675 million of these notes were
converted into 342,537 shares of common stock, according to the terms of the
original transaction. In connection with this conversion, the Company reduced
the exercise price of the related five-year warrants to $4.50 per share for a
thirty day period. All warrants issued in connection with the above noted
convertible secured debt (representing 213,720 shares as adjusted for
antidilutive provisions) were exercised for a total of approximately $960,000.
As all warrants were exchanged and the exercise price reduced, $378,000 of
noncash debt conversion expense was recorded.
7. COMMON AND PREFERRED STOCK
The Company has authorized 100,000,000 no par common shares, and 2,500,000
shares of preferred stock, of which 540,541 shares have been designated Series A
and 500,000 shares designated Series B. On April 26, 1996, the Board of
Directors authorized a one-for-three reverse split of the Company's common stock
which was approved by the shareholders on June 3, 1996. All references in the
consolidated financial statements to number of shares, per share amounts and
prices of the Company's common stock have been retroactively restated to reflect
the decreased number of common shares outstanding. For other common stock
transactions, see Note 2.
The Series A preferred stock is entitled to cumulative annual dividends of
$1.30 per share and has a liquidation preference of $9.25 plus cumulative unpaid
dividends. The Company may redeem the Series A preferred stock at any time for
its liquidation preference. Each share of preferred stock is convertible into
one-third shares of common stock, after adjusting for earned but unpaid
dividends. At January 3, 1998, no shares of Series A preferred stock were
outstanding.
Series B preferred stock is senior to Series A in all preferences. Series B
is entitled to cumulative annual dividends of $.96 per share and has a
liquidation preference of $8.00 plus cumulative unpaid dividends. The Series B
preferred stock is redeemable by the Company five years after issuance for $8.00
per share plus
F-9
<PAGE> 42
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cumulative unpaid dividends. Each share of Series B preferred stock is
convertible at any time into three and one-third shares of common stock and has
certain anti-dilution provisions. Series B preferred votes on an as-converted
basis. At January 3, 1998, no shares of the Series B preferred stock were
outstanding.
8. OPTIONS AND WARRANTS
In 1993, the Directors approved the 1993 Stock Option Plan ("1993 SOP"),
which permits the Company to grant options to purchase up to 666,667 shares of
common stock. During 1996 and 1995, 69,693 and 66,667 options, respectively,
were granted under this plan. No options were granted under this plan in 1997.
In 1996, the Directors adopted the 1996 Stock Option Plan ("1996 SOP") and
the 1996 Nonemployee Directors Stock Option Plan ("Directors Option Plan"). The
1996 SOP consists of two parts. Part One permits the Company to grant options to
purchase up to 500,000 shares of common stock. During 1997 and 1996, 653,166 and
184,333 options, respectively, were granted at fair market value under this Part
of the Plan. Part Two related to the Chief Executive Officer (CEO) and permits
the Company to grant non-qualified options to the CEO to purchase up to 333,333
shares of common stock. During 1996, 333,333 options were granted at fair market
value under this Part of the Plan. In November 1997, these options were repriced
to the then fair market value of five dollars per share. All other options of
the CEO were canceled in conjunction with the repricing. The Directors Option
Plan permits the Company to grant options to purchase up to 150,000 shares of
common stock. The Company currently has seven non-employee directors who are
eligible to participate in the Directors Option Plan. During 1997 and 1996,
45,000 and 16,665 options, respectively, were granted at fair market value.
In 1997, the Directors adopted the 1997 Stock Option Plan ("1997 SOP"). The
1997 SOP permits the Company to grant options to purchase up to 1,000,000 shares
of common stock. During 1997, 294,834 options were granted at fair market value
under this plan. The 1997 SOP was approved by Shareholders at the Annual Meeting
of Shareholders held on May 16, 1997.
Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, the 1997
SOP, and several older plans, the Company had nine common stock option plans.
Options may be granted by the Board of Directors at fair market value at the
date of grant. Options under plans become exercisable within four or five years
of grant and expire between five and ten years from date of grant. At January 3,
1998, 1,069,376 common shares remain available for grant.
Agreements have been entered into with selected consultants whereby options
to purchase the Company's common stock were accepted by these consultants as
partial payment for the services they render to the Company. The fair market
value of the consulting service is the basis for recording the transaction in
the Company's financial records and is recognized as the related services are
performed. Options issued under these agreements totaled 61,358 and are included
in the grant activity previously discussed.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of FASB Statement 123, the Company's net loss and net loss per share
would have been increased to the proforma amounts indicated in the following
table. As 1996 was the initial phase-in period for applying this Statement, the
proforma results indicated are
F-10
<PAGE> 43
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not necessarily representative of the effects on proforma disclosures of net
income for future periods as they exclude options that were granted prior to
January 1, 1995, with vesting periods in 1995 and later.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss As reported $(4,402,359) $(3,262,741) $(1,894,166)
Pro Forma (6,582,359) (5,182,741) (1,944,166)
Basic and diluted loss per share As reported $ (0.24) $ (0.20) $ (0.13)
Pro Forma (0.36) (0.31) (0.13)
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1997, 1996: risk-free interest rates of
6.32% in 1997, 5.81% in 1996, and 6.41% in 1995; expected volatility of 88% for
1997, 67% for 1996, and 67% for 1995; expected lives in all years of two years
beyond each incremental vesting period (total life of 2 1/2 to 7 years,
depending upon each grant's individual vesting schedule). No dividends are
assumed for any plan in any year.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at fiscal year end 1994
(721,891 exercisable at $1.20 weighted average exercise
price per share).......................................... 1,297,566 $ 1.68
Granted ($3.81 weighted average fair value per share)..... 66,667 6.28
Canceled.................................................. (14,079) 1.49
Exercised(1).............................................. (49,329) 1.31
--------- ------
Outstanding at fiscal year end 1995
(807,468 exercisable at $1.37 weighted average exercise
price per share).......................................... 1,300,825 $ 1.94
Granted ($7.71 weighted average fair value per share)..... 604,024 14.14
Canceled and expired...................................... (183,473) 6.06
Exercised(2).............................................. (146,185) 1.47
--------- ------
Outstanding at fiscal year end 1996
(783,396 exercisable at $2.18 weighted average exercise
price per share).......................................... 1,575,191 $ 6.18
Granted ($3.59 weighted average fair value per share)..... 993,000 6.06
Canceled and expired...................................... (531,135) 12.02
Exercised(3).............................................. (241,937) 1.81
--------- ------
Outstanding at fiscal year end 1997 (844,747 exercisable at
$3.56 weighted average exercise price per share).......... 1,795,119 $ 4.98
========= ======
</TABLE>
- ---------------
(1) Includes 44,290 options exercised for $59,053 cash and 5,039 options
exercised by exchange for 832 shares of common stock, which were canceled.
(2) Includes 110,204 options exercised for $166,480 cash and 35,981 options
exercised by exchange for 3,518 shares of common stock, which were canceled.
(3) Includes 193,371 options exercised for $335,681 cash and 48,566 options by
exchange for 11,609 shares of common stock, which were canceled.
F-11
<PAGE> 44
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The status of options outstanding as of January 3, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
PRICE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
CATEGORY OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.18 to $.75 278,018 1.18 years $ .63 262,113 $ .64
$1.14 to $2.25 380,412 5.59 years 2.20 335,728 2.19
$4.375 to $5.875 716,167 9.61 years 5.21 128,333 5.19
$6.00 to $9.875 221,332 8.53 years 7.71 50,599 7.19
$10.00 to $15.75 185,858 8.48 years 11.23 54,642 12.33
$30.00 13,332 8.42 years 30.00 13,332 30.00
--------- ---------- ------ ------- ------
$.18 to $30.00 1,795,119 7.19 years $ 4.98 844,747 $ 3.56
========= ========== ====== ======= ======
</TABLE>
In the second quarter of 1996 the Company amended the terms of an
outstanding warrant to purchase 666,667 shares of the Company's common stock at
$.003 per share to add a net exercise provision. Subsequently, the warrant was
exercised using this provision and the Company issued 666,584 shares of stock to
the warrant holder and withheld 83 shares to effect the exercise. For other
warrant transactions, see Note 2.
9. RELATED PARTIES
In 1992 the Company entered into an agreement to sell common stock,
representing 26% of the Company, to COBE Laboratories, Inc., which included
several provisions, including two seats on the Company's Board of Directors for
COBE designees, a standstill agreement, and a participation agreement for future
financings. The Company and COBE also finalized a licensing, manufacturing, and
distribution agreement which provides for a royalty-bearing license to the
Company's biomaterial technology for use in certain of COBE's products, the
right for the Company to manufacture these biomaterials for a period of time
before the royalty provisions become effective, a provision that COBE and the
Company negotiate for COBE to be the distributor of certain future products of
the Company, and a right of COBE to first negotiation on certain future
licensing rights. For the fiscal years 1997, 1996 and 1995, COBE purchases of
materials from the Company under the manufacturing agreement totaled $310,000,
$99,000 and $87,000, respectively.
Receivables at the end of fiscal 1997 included $1,000 from COBE affiliates.
There were no receivables outstanding from COBE affiliates at the end of fiscal
1996.
For other related party transactions, see Note 11.
10. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
F-12
<PAGE> 45
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforward (as adjusted for $ 6,600,000 $ 5,400,000
the limitation on change in ownership).......
State tax loss carryforward..................... 350,000 325,000
Other, net................................... 1,500,000 60,000
----------- -----------
Total................................... 8,450,000 5,785,000
Less: Valuation allowance.................... (8,450,000) (5,785,000)
----------- -----------
-- --
=========== ===========
</TABLE>
At January 3, 1998, the Company had net operating loss ("NOL")
carryforwards of approximately $19.5 million. The majority of such carryforwards
expire from 2003 through 2012. Use of the $7.4 million NOL which arose prior to
the greater than 50% change in ownership which occurred in 1992 is limited to
approximately $440,000 per year due to such change.
Due to these limitations and due to the fact that the Company has sustained
cumulative losses, the potential future benefit from these deferred assets are
fully reserved by means of a valuation allowance and will therefore produce a
financial statement benefit if and when utilized.
11. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company's sales for each year are shown in the table below for each
major geographic area:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Export sales:
Europe............................... $1,094,516 $1,731,642 $1,524,080
All Other............................ 793,339 302,170 438,462
---------- ---------- ----------
Subtotal..................... 1,887,855 2,033,812 1,962,542
Domestic sales......................... 7,553,447 5,468,724 1,526,057
---------- ---------- ----------
Total........................ $9,441,302 $7,502,536 $3,488,599
========== ========== ==========
</TABLE>
Included in European sales for 1997, 1996, and 1995 are $1,932, $116,674,
and $688,610, respectively, of sales to COBE and its affiliates, which began
distributing the Thoratec VAD System in several European markets in late 1992.
In the Spring of 1995, Thoratec signed an agreement with Arrow International
("Arrow") to take over the distribution in most of the COBE territories.
Included in European sales for 1997, 1996 and 1995 are $282,275, $1,476,253, and
$632,639, respectively, of sales to Arrow. In July 1997, the Company terminated
its distribution agreement with Arrow.
Included in domestic sales for 1997 and 1996 are approximately $461,000 and
$250,000 of income earned from the rental of certain Company product.
12. COMMITMENTS
In 1995, the supplier of mechanical valves for the VAD System stopped
production. The Company negotiated a contract for supply of the valves that it
believes will satisfy its needs through at least October 1998. In October 1997,
the Company executed an agreement with Arrow International, Inc. to supply
F-13
<PAGE> 46
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these valves for a four-year term. As of January 3, 1998, the long-term purchase
commitment associated with this agreement was approximately $2.4 million.
In January 1996, the Company entered into a four-year employment agreement
with a key executive officer. This employment agreement provides for, among
other provisions, a minimum base salary, an annual bonus based on performance, a
severance package and the issuance of 333,333 non-qualified stock options.
The Company is not party to any legal proceedings other than ordinary
routine litigation incidental to the Company's business. The Company believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's consolidated financial statements taken as a whole. See
Notes 5 and 8.
13. RETIREMENT SAVINGS PLAN
Effective January 1997, the Company implemented a 401(k) Plan (the "Plan")
covering all employees who have met certain eligibility requirements. Under the
Plan, employees may elect to contribute up to 18% of their eligible compensation
to the Plan, subject to certain limitations. The Company matches employee
contributions at 25% up to the first 6% of employees' compensation. Employees
vest at the rate of 25% per year with full vesting after four years of service
with the Company. As of January 3, 1998, the Company had made contributions to
the Plan of approximately $40,000.
14. EARNINGS PER SHARE
The Company calculates basic earnings per share (EPS) and diluted EPS in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128). Basic EPS is computed by dividing net income (loss) for
the period by the weighted average number of common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, and uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted average
number of shares outstanding. Diluted EPS for 1997, 1996 and 1995 excludes any
effect of such instruments because their inclusion would be antidilutive.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Shares used to compute basic EPS....... 18,360,336 16,693,820 14,428,539
Add: effect of dilutive securities..... -- -- --
---------- ---------- ----------
Shares used to compute diluted EPS..... 18,360,336 16,693,820 14,428,539
========== ========== ==========
</TABLE>
F-14
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-32223, Registration Statement No. 33-11883, Registration Statement No.
33-35549, Registration Statement No. 33-35719, Registration Statement No.
33-72502, Post-Effective Amendment No. 1 to Registration Statement No. 2-97542,
Post-Effective Amendment No. 1 to Registration Statement No. 2-78926, and
Post-Effective Amendment No. 3 to Registration Statement No. 2-78925 on Forms
S-8 of our report dated February 20, 1998, appearing in this Annual Report on
Form 10-K of Thoratec Laboratories Corporation for the year ended January 3,
1998.
/s/ DELOITTE & TOUCHE, LLP
San Francisco, California
March 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet, statement of operations and statement of cash flows of Thoratec
Laboratories Corporation and is qualified in its entirety by reference to such
Annual Report pursuant to section 13 or 15(d) of the Securities and Exchange Act
of 1934 for the annual period ended January 3, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 9,469,311
<SECURITIES> 5,390,663
<RECEIVABLES> 1,302,323
<ALLOWANCES> 0
<INVENTORY> 3,901,258
<CURRENT-ASSETS> 20,334,420
<PP&E> 8,823,679
<DEPRECIATION> (2,154,105)
<TOTAL-ASSETS> 28,477,174
<CURRENT-LIABILITIES> 4,449,897
<BONDS> 0
0
0
<COMMON> 72,664,107
<OTHER-SE> (48,636,830)
<TOTAL-LIABILITY-AND-EQUITY> 28,477,174
<SALES> 9,441,302
<TOTAL-REVENUES> 10,194,671
<CGS> 4,005,242
<TOTAL-COSTS> 4,005,242
<OTHER-EXPENSES> 10,591,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,402,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,402,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,402,359)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
