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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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CALIFORNIA 94-2340464
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
$141,778,000 computed by reference to the last sale reported of such stock on
March 22, 2000 as listed on The Nasdaq Stock Market(R)(1)
As of March 22, 2000, registrant had 20,629,940 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 2000 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 I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated by
reference in this annual report, includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Our actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements include, but are not necessarily limited
to, those relating to:
- our ability to obtain and maintain regulatory approval of our products in
the United States and internationally;
- the other competing therapies that may in the future be available to
heart failure patients;
- our plans to develop and market new products; and
- our ability to improve our financial performance.
Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this annual
report. We are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances.
You should assume that the information appearing in this annual report is
accurate as of the date on the front cover of this annual report only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
Thoratec, the Thoratec logo and Thoralon are registered trademarks, and
TLC-II, Vectra and Aria are trademarks of Thoratec Laboratories Corporation.
ITEM 1. BUSINESS
GENERAL
We began our business in March 1976 and are incorporated in the State of
California. Our initial public offering of common stock was in 1981. We develop,
manufacture and market proprietary medical devices used for circulatory support
and for vascular graft applications. We currently market the Thoratec
Ventricular Assist Device System (which we call the Thoratec VAD System or the
VAD System) in the United States and internationally for use as a bridge to
heart transplant and for use in the recovery of the heart after open-heart
surgery. We have also developed small diameter vascular grafts for use in
hemodialysis access and coronary artery bypass surgery. All of our products that
come into contact with human tissue or blood incorporate Thoralon, our
proprietary biomaterial. Thoralon is a unique biomaterial that provides strength
and flexibility to our products with surface properties designed to minimize
patient blood clotting and inflammatory response.
Our VAD System is currently the only device approved by the FDA that can
provide left, right or biventricular support for both bridge to heart transplant
and for recovery of the heart after open-heart surgery. We are also pursuing
additional indications for the VAD System and developing other circulatory
support products for patients suffering from heart failure. At March 14, 2000,
our VAD System had been used in more than 1,200 patients worldwide ranging in
age from seven to 77 years and in weight from 38 to 316 pounds (17 to 144 kg).
Our hemodialysis access graft product, which we call the Vectra, is
undergoing clinical trials in the United States and is currently marketed in
Europe through Guidant Corporation and in Japan through Goodman Co., Ltd. We
believe this graft offers significant advantages over currently available
prosthetic grafts
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used in hemodialysis. Unlike current grafts, which require up to several weeks
of patient recovery prior to use, the Vectra's self-sealing design allows
patient use as soon as 24 hours after surgical implantation. We are applying the
same technological expertise used in the Vectra for use in coronary artery
bypass surgery through our development of our Aria CABG (coronary artery bypass
graft) product. This small diameter graft is designed for use by patients who
have no or too few suitable blood vessels of their own. We expect to commence
clinical trials in the United States of our Aria coronary graft in the first
half of 2000.
OUR STRATEGY
Our goal is to be a leading developer and manufacturer of medical devices
to the congestive heart failure, cardiac surgery and vascular graft markets. Our
key strategies to achieve this goal are:
Increase VAD System Market Penetration. The Thoratec VAD System is the only
ventricular assist device with approvals for both bridge-to-transplant and
recovery after open-heart surgery indications. Our VAD System can be used to
treat both ventricles for patients of all sizes, and in a less invasive manner.
We intend to utilize our existing sales channels throughout the world to
continue to gain acceptance and adoption by both transplant and non-transplant
open heart centers, and to treat a greater number and variety of patients within
our current customer base. In addition, in order to further expand the clinical
utility of the VAD System, we intend to pursue:
- the U.S. launch of the TLC-II Portable VAD Driver, which weighs
approximately 20 pounds and operates interchangeably with current
products. The TLC-II improves patient mobility, and is designed to allow
patients to be discharged from the hospital while still using the VAD
System;
- the development of our implantable ventricular assist device, which we
call the IVAD, for use in longer term bridge-to-transplant patients as
well as some alternative-to-transplant patients;
- the education of cardiac surgeons and heart failure cardiologists as to
the benefits of the Thoratec VAD System; and
- the regulatory approval of a therapeutic recovery indication.
The therapeutic use of the Thoratec VAD System in treating specific types
of end-stage heart failure patients could represent a significant market
expansion opportunity for us. We estimate there are as many as 160,000 late
stage CHF patients in the United States whose cardiac recovery may potentially
be facilitated by the use of our VAD System.
Obtain U.S. Approval and Support European and the U.S. Market Launch of
Vectra. We believe the clinical use of synthetic grafts for dialysis access is
an established clinical practice. However, existing commercial graft
technologies have significant shortcomings that are widely recognized. We
believe the Vectra device will address some of the most significant of those
shortcomings. We have completed patient enrollment in our U.S. clinical trial
and intend to submit a 510(k) to the FDA this year for U.S. approval to market
the Vectra. We have established distribution partnerships for the Vectra product
line, the most significant of which is Guidant. We will continue to identify and
pursue opportunities for product line extensions that enhance the Vectra product
offering.
Attain Global Approval to Commercialize the Aria Coronary Artery Bypass
Graft. We intend to initiate and complete Aria coronary artery bypass clinical
trials and seek approvals in all major medical device markets. Through clinical
trials, we expect to demonstrate the efficacy of the Aria as an option for
completing the revascularization of coronary artery bypass patients. These
patients' only other option may be very poor quality veins, or even no available
veins at all. Therefore, our objective in these clinical trials is to show that
the Aria has similar or superior patency rates as compared to poor quality
veins. We believe that in as many as 20% of the 900,000 bypass surgeries
performed worldwide, the unavailability of any or enough suitable vessels
creates a treatment problem.
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Explore the Use of Thoralon for Additional Medical Products. Thoralon was
developed for safe and effective use in long-term cardiovascular implants, with
properties designed to provide:
- excellent blood and tissue compatibility;
- thromboresistance, which means resistance to blood clotting;
- durability; and
- stability.
These properties allow Thoralon biomaterials to be configured and applied
in a variety of ways and may allow its use for other medical device applications
as a coating or stand-alone material. We intend to apply our biomaterials
technologies to those applications where our high-value, critical care
implantable medical devices are desired.
Explore the Acquisition of, or Partnership with, Companies that Possess
Complementary Products or Technologies. We expect to leverage our expertise and
technologies with other products and technologies being developed by other firms
or research centers. We have established a strong direct sales presence with
some of the world's largest heart centers. We believe other companies, product
lines or technologies may benefit from this sales and distribution capability.
We intend to pursue opportunities to acquire products or technologies that
complement our products and allow us to leverage our competencies in selling and
marketing, regulatory affairs and manufacturing.
CIRCULATORY SUPPORT MARKET
Cardiac failure is the leading cause of death in the United States,
accounting for more deaths than all forms of cancer combined. Deaths associated
with cardiac failure fall into two broad categories:
- congestive heart failure, which is a chronic disorder that occurs when a
weakening of the heart muscle reduces the pumping power of the heart; and
- acute cardiac failure resulting from heart attacks and various infections
of the heart muscle.
CONGESTIVE HEART FAILURE
CHF is a slow, degenerative process leading to cardiac insufficiency
resulting 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. We estimate that more than 85% of patients die within
eight to twelve years of diagnosis. CHF is the most common cause of
hospitalization in patients over 65 years of age. According to the American
Heart Association, there are currently four million to five million CHF patients
in the United States, and approximately 550,000 newly diagnosed patients each
year. While most patients suffering from CHF are initially treated with
medication, which may delay the progression of CHF, conventional drug therapy
cannot cure the disease. 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 adequately address 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 United States in 1998, 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 median wait for a donor heart by patients on a heart transplant
waiting list is approximately seven 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 1998, approximately 19% of such patients died while waiting for a
donor heart.
When other therapies are unsuccessful, ventricular assist devices can be
used to support one or both sides of the patient's heart until a donor heart can
be found. Ventricular assist devices are mechanical systems used
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to assist the heart's function. In patients awaiting heart transplants,
physicians decide to use a ventricular assist device when the death of the
patient appears imminent.
ACUTE CARDIAC FAILURE
In addition to providing a bridge to heart transplant, ventricular assist
devices have other potential applications. It is estimated that out of
approximately 800,000 open-heart surgeries performed annually in the United
States, some 15,000 to 20,000 patients die following such procedures, resulting
in a total market potential of over $300 million. We believe that only
approximately ten percent of the potential market is currently being treated
with VAD devices. 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 heart attack and various infections of the
heart muscle.
There is significant demand for effective ventricular assist devices.
However, most systems available today or under development have 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 can
cause an adverse reaction in the body. This adverse reaction results in blood
clotting which clogs the system or can cause a stroke in the patient.
THORATEC CIRCULATORY SUPPORT PRODUCTS
We received FDA approval in December 1995 to market the Thoratec VAD System
as a bridge to heart transplant in patients suffering from heart failure, and
began marketing the VAD System in the United States 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.
At March 14, 2000, our VAD System had been used in more than 1,200 patients
worldwide ranging in age from seven to 77 years and in weight from 38 to 316
pounds (17 to 144 kg). Building on the proprietary technologies contained in the
VAD System, we are 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 THORATEC VAD SYSTEM
The VAD System consists of three major components:
- the single-use blood pump, a type of artificial ventricle;
- the single-use cannulae, which connect the blood pump to the heart and
vessels; and
- the Thoratec Dual Drive Console, a multi-use device which pneumatically
activates the blood pump.
Also available in international markets is the TLC-II Portable VAD Driver,
a small lightweight unit which can be used interchangeably with the Dual Drive
Console and is designed to allow the patient to move around the hospital or
return home. 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.
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[Illustration showing placement of
left and right ventricular assist devices]
ADVANTAGES OF THE THORATEC VAD SYSTEM
Compared to other ventricular assist devices, we believe that the VAD
System has the following principal advantages:
- Biventricular Support. Most longer-term systems available today provide
only left ventricular support. While many patients do well with only a
left ventricular assist device ("LVAD"), we estimate that at least 20-30%
of these patients also have or can develop right ventricular failure and
require a right ventricular assist device ("RVAD"). Death and morbidity
rates are extremely high for this patient group if not adequately
supported. Since 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 Thoratec VAD System, as 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. With the Thoratec VAD System, the blood pump is
worn outside the body. This placement facilitates patient movement and
allows patients to walk, exercise and move around the hospital. This
paracorporeal placement allows the system to support patients of varying
sizes, including very small patients such as small women, adolescents and
children. To date, our VAD System has been used in patients as small as
38 pounds and as young as seven years old. 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. In addition,
unlike implantable VAD's, paracorporeal attachment does not require two
invasive abdominal
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surgeries. 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.
- Multiple Indications. Our VAD System is the only device approved in the
United States to provide circulatory support for both post open heart
surgery recovery and bridge to transplant indications. To date, the VAD
System has been used to support patients for periods ranging from a few
hours to well over one year. This unique flexibility to treat multiple
patient groups allows hospitals to invest in a single product line and,
therefore, make a smaller investment in inventory as one product line can
be used with two patient groups. In addition, the surgical training
required for our device can apply to a broader patient population. Also,
for those post open heart surgery patients who become transplant
candidates, use of our VAD System can eliminate the need for a second
surgery to remove a device designed or approved for recovery only.
- Thoratec Biomaterials. Our proprietary biomaterials are used in most
surfaces of the VAD System that contact blood or are implanted in the
body, providing biocompatibility, resistance to blood clotting, flex life
and strength. These materials have been used in cardiovascular products
for over 14 years. We have also licensed these biomaterials to health
care manufacturers Gambro, Inc. and Cobe Cardiovascular for use in
non-competing applications.
- 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 in
different parts of the heart. Other commercially available systems have
only limited cannula shape and size. The small size of our cannulae,
compared to other systems, could make it easier for the heart to recover
when the cannulae are removed. Variations of our 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
systems).
CURRENT AND POTENTIAL INDICATIONS
We have identified the following three basic clinical needs for our
circulatory support products:
- Bridge to Heart Transplant. We commenced marketing the Thoratec VAD
System in the United States in January 1996 for use as a bridge to heart
transplant in patients suffering from heart failure following receipt of
pre-market approval from the FDA in December 1995. In 1999, we sold 534
VAD pumps to heart centers worldwide. We maintain a record of all
patients reported treated with the VAD System, which we call the
Voluntary Registry. Since FDA approval, this registry has relied upon
strictly voluntary input from our customers. As of March 14, 2000, our
Voluntary Registry included 912 patients treated with the VAD System for
bridge to transplant. At any given time, there are approximately 4,000 to
5,000 patients on the waiting list for a heart transplant in the United
States, and we believe a comparable number are waiting in Europe. We
believe that the percentage of these patients bridged to transplant will
continue to increase, as surgeons' level of comfort with the technology
increases, particularly for longer-term support cases.
- Recovery of the Natural Heart. Approximately 2% 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. We received
FDA approval for this indication in May 1998.
As of March 14, 2000, our voluntary registry reported that the VAD System
had been used in 215 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. Normally, patients who cannot be weaned from the heart/lung
machine die. Of the 215 patients who have been placed on the VAD System,
35% (75 patients) survived following removal from the heart/
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lung machine. Of those patients, 61% were discharged from the hospital.
Duration of patient cardiac support ranged from one to 118 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.
- Therapeutic Recovery as an Alternative to Heart Transplant. We believe
that for most patients recovery of their own heart is a better
alternative than either heart transplantation or permanent implantation
of a blood pumping device. Based on recently reported cases of recovery
in heart failure patients, we believe that the VAD System is a potential
therapy to reverse the complications of late-stage heart failure in
certain patients.
While this therapeutic recovery indication is not yet approved for our
device, we are actively investigating the worldwide experience with the
Thoratec VAD System and the requirements for pursuing regulatory approval
for this indication. We estimate that there are as many as five million
Americans with congestive heart failure each year, and we believe the use
of the VAD System for therapeutic recovery could represent a therapeutic
opportunity for many of these patients. We are working with physicians at
some of the leading cardiovascular centers to track the experience of all
patients who recover while being treated with the VAD System and are
formulating a regulatory and clinical strategy both in the United States
and abroad.
CIRCULATORY SUPPORT PRODUCTS UNDER DEVELOPMENT
In addition to our commercially available VAD System, we currently have
under development or in the final stages of U.S. regulatory approval the
circulatory support products described below. We may be unable to successfully
develop any of these products, or if successfully developed, these products may
not obtain regulatory approval or market acceptance or be manufactured and sold
on commercially acceptable terms.
- TLC-II Portable VAD Driver. Although patients supported with the Dual
Drive Console can walk 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. We have developed the TLC-II, a
compact and lightweight (approximately 20 pounds), battery or
line-operated biventricular pneumatic drive unit designed to promote
greater mobility and self-care. It is designed to allow the patient to
exercise more easily and move freely around the hospital grounds and
eventually leave the medical facility. This device provides several
portability options, either by hand-carrying the driver or by using a
shoulder
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strap or mobility cart. This portable device connects with a docking
station, which houses a battery charger and the external monitoring
computer.
[Picture of patient walking with
Thoratec's TLC-II on a mobility cart]
We received authority to CE Mark (an international symbol of quality
required for products to be distributed in the European Community) this
product in March 1998 and introduced the TLC-II in Europe in the middle of
that year. We received approval for an IDE from the FDA in November 1998
to begin a clinical trial of this device in the United States for use in
conjunction with the approved VAD System. We believe 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.
In 1999, we notified the FDA that we were putting a voluntary hold on
further enrollment in U.S. clinical trials for the TLC-II and on shipments
of the device to new centers in Europe, pending completion of a certain
component upgrade. We expect to resume patient enrollment in our U.S.
clinical trial and shipments of this device to Europe in the second
quarter of 2000.
- Implantable VAD ("IVAD"). While the placement of the current VAD System
outside the body of the patient has the advantages described above, we
are developing an implantable version of our existing VAD blood pump and
cannulae to provide additional options for surgeons. The Thoratec IVAD is
designed for patients who require long-term VAD support. It is also
significantly smaller than the other commercially available implantable
LVAD devices. Our IVAD weighs less than a pound, which is 50% lighter
than these competing devices. Because of its small size, the IVAD can be
used in not only smaller patients, but also, through the use of two
IVADs, in some biventricular patients, a capability unique to any
commercially available implanted VAD device. Prototypes have been
developed, and a pre-IDE filing was made in 1999. We successfully
completed the first animal implant in January 2000. We believe that the
regulatory process for the IVAD 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.
VASCULAR GRAFT MARKET
VASCULAR ACCESS FOR HEMODIALYSIS
The principal use of vascular access grafts is for hemodialysis for
patients with end stage renal disease ("ESRD"), a debilitating disorder
characterized by gradual erosion of kidney function. ESRD is irreversible,
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and the majority of all patients suffering from this disease worldwide are
maintained by hemodialysis. According to the U.S. Renal Data System's 1999
Annual Data Report, hemodialysis is the primary treatment for approximately 87%
of all end stage renal disease patients in the United States, an estimated
195,000 patients at the end of 1997. Market estimates suggest that approximately
200,000 prosthetic vascular access grafts used for hemodialysis were implanted
worldwide in 1999, representing an annual market approaching $120 million. We
estimate that the United States represents less than one-half of the worldwide
hemodialysis patient population.
Hemodialysis removes toxins and excess fluid from a patient's blood by
circulating the blood through a dialyzer, or so-called "artificial kidney." This
procedure is generally performed three times per week and lasts three to four
hours. Patients undergoing hemodialysis require easy, routine access to the
blood stream at a high flow rate. This access to the patient's blood stream is
achieved using one of three methods: creation of an arterio-venous ("A/V") shunt
from the patient's blood vessels, inserting a central venous catheter, or
implanting an artificial vascular access graft (VAG). The majority of
hemodialysis patients in the United States depends on the use of a VAG that is
surgically connected between the patient's artery and vein. The vast majority of
available VAG's are made from expanded polytetrafluorethylene (ePTFE). The graft
is accessed using needles connected to tubing that carries the patient's blood
to the dialyzer and returns it back cleansed to the patient.
Vascular access methods currently available for hemodialysis applications
have certain limitations. Both A/V shunts and ePTFE grafts must mature for two
to six weeks before use and therefore require the use of a temporary central
venous catheter until the graft is ready for use. Such catheters entail
additional cost, including those associated with catheter insertion, maintenance
and treatment for complications, and risk to the patient such as infection,
thrombosis and venous stenosis. Additionally, ePTFE VAGs are usually accompanied
by profuse and prolonged bleeding, often up to 20 minutes, when the needles used
for hemodialysis are removed, increasing patient treatment time at the dialysis
center.
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. Grafts using saphenous veins (from
the leg) or the internal mammary artery of the patient 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. We estimate that in 1997 there were
approximately 600,000 coronary artery bypass surgery procedures performed in the
United States and approximately 300,000 performed outside the United States. We
estimate 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 from the patient for 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 vessels as a result of previous bypass
surgeries, or their vessels are of inferior quality due to trauma or disease. We
estimate that these patients may represent as much as 20% of the total patients
undergoing bypass surgery. No artificial graft currently has full market
approval or is being marketed in the United States for coronary artery bypass
surgery, but we believe 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
millimeters) necessary for this indication generally do not remain patent.
THORATEC VASCULAR GRAFT PRODUCTS
We are developing small diameter vascular graft products intended initially
to address the vascular access and coronary artery bypass surgery markets. Both
products utilize our proprietary Thoralon biomaterial, and are protected by
several patents covering Thoralon as well as the graft design and manufacturing
processes.
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We believe that our vascular grafts are highly compliant, have excellent
handling and suturing properties and have the "feel" of a natural blood vessel.
Our manufacturing process creates a structure in which the three different
layers in the graft 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 resistance to blood clots. The solid middle
layer gives the graft its strength and self-sealing properties. The outer
textured layer is designed to promote tissue ingrowth to promote graft
stability.
VECTRA VASCULAR ACCESS GRAFT
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 Vectra 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. We believe that the Vectra may provide significant advantages over
existing synthetic vascular access grafts that may encourage its use by surgeons
who are currently using natural vessels for vascular access. The Vectra received
marketing approval from the Canadian Ministry of Health in March 1996, from the
Japanese Ministry of Health in May 1997, and authority to CE Mark the product in
January 1998. We received approval for an IDE from the FDA in mid-1998 to
commence clinical trials in the United States. Enrollment in that study was
completed in 1999 and patients are now in the six-month to one year follow-up
period. We believe that these clinical trials will be necessary to support the
submission of a 510(k) premarket notification to the FDA.
Based upon published data obtained in clinical trials outside the United
States and the early results of a prospective, randomized U.S. trial, we believe
that the Vectra offers the following advantages:
- reduced inflammatory response after implantation;
- the ability to begin hemodialysis as soon as 24 hours after implantation,
as opposed to several weeks for ePTFE grafts;
- reduced bleeding complications during routine use because of the Vectra's
self-sealing properties; and
- improved handling and suturability.
In one retrospective study of the Vectra in Australia, 134 patients who
were implanted by 30 different surgeons were evaluated. In nearly one-third of
the patients, initial use of the Vectra for hemodialysis was performed within
one day of implantation. The median time for initial access was three days after
implantation. Early results of the U.S. clinical trial have also been presented
with the data supporting allowance for early access, as soon as 24 hours after
implantation, without the need for temporary central venous catheters and
similar patency rates to the ePTFE control. Lastly, the preliminary results
illustrated a statistically significant improvement in the time required to seal
the graft, with bleeding cessation following needle removal averaging only three
minutes with the Vectra.
In January 1999, we entered into a distribution agreement with Guidant
Corporation. Under the terms of this agreement, Guidant receives exclusive
worldwide marketing and distribution rights to the Thoratec Vectra product line,
except in Japan. In exchange for these rights, Guidant has paid us $1.5 million,
and will pay us up to an additional $2.0 million when the Vectra product line
receives FDA approval for use in the United States.
ARIA CORONARY ARTERY BYPASS GRAFT
We have developed from our proprietary Thoralon biomaterials a small
diameter graft for use in coronary artery bypass surgery patients who have no
suitable vessels of their own. A total of 27 patients in Canada and Germany
received our Aria coronary artery bypass grafts, ranging in internal size from
2.0 to 3.5 millimeters. 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). All 22 surviving
patients were asymptomatic at follow-up points ranging from 2.5 to 5 years after
surgery. Of the five patients who did not survive, none is known to have died
from causes related to the graft. We need long-term test results from a
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controlled clinical trial on a much larger patient population before we can
demonstrate the capabilities of this graft.
The potential for improved long-term patency in small diameter grafts is
the most unique aspect of the Aria. We believe 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. In January 1999, we
submitted data to the Canadian Health authorities supporting the request to
begin a 330 patient study of the Aria graft. In January 2000, we announced that
four patients had been implanted in our AlternativE Graft Investigational Study
(AEGIS/Canada trial) at a hospital in British Columbia. The first perfusion scan
on the first patient was done and the results were normal. These scans are
designed to be done at one month and six months following implant, although that
timing is at the discretion of the surgeon. We now have permission from two
additional hospitals in British Columbia to enroll patients in this study.
We submitted an IDE for the Aria to the FDA in December 1999. Our plan is
to conduct the AEGIS/ U.S. trial at up to 15 centers and with fewer patients
than the AEGIS Canada trial. Given the similarity to its Canadian effort, we are
hopeful that we can combine data from the two trials, potentially reducing the
number of patients and time required to complete both of them. We believe this
product will require submission of a PMA application to the FDA. We received
questions from the FDA on this IDE submission and intend to respond as quickly
as possible. If the FDA approves the amended IDE, the AEGIS/U.S. trial could
begin enrolling patients in the first half of 2000.
Peripheral Graft Applications. In addition to the Vectra and Aria, our
graft products and biomaterial technologies 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, or for use as a patch material in cardiovascular or
peripheral vascular repair procedures. While we are not currently pursuing
development of these applications, we have completed sufficient early stage
preclinical work in the graft area to believe our graft products could be
developed for these applications. Guidant has a right to negotiate for these
applications for a short period if we decide to develop them during the term of
the Vectra distribution agreement.
THORATEC BIOMATERIALS -- THORALON
We have developed a proprietary biomaterials technology that is used in all
of our products and licensed to other health care manufacturers.
Our Thoralon biomaterials technology is critical to the successful
performance of all of its products that come into contact with human blood or
tissue. All of our current products and those under development incorporate
these proprietary biomaterials, which are designed to minimize blood clotting
and inflammatory response. 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. 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, we granted COBE a royalty-bearing license and sublicense to use
Thoratec's SMAs in certain COBE medical devices. In 1999, this license was
divided into two separate licenses. One is retained by COBE
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Laboratories, now called Gambro, Inc., one of our major shareholders, and the
other was granted to Sorin COBE Cardiovascular when that division of Gambro was
sold to Sorin.
SUMMARY OF EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The table below summarizes our existing products and products under
development.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CIRCULATORY SUPPORT MARKETING
PRODUCTS INDICATIONS STATUS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thoratec VAD System, which - Bridge to transplant - Currently marketed in the
consists of a single-use blood United States and internationally
pump and cannulae, and a - Recovery after heart surgery for bridge to transplant and
multi-use drive console which recovery of the heart after
pneumatically activates the - Therapeutic recovery as an heart surgery
blood pump alternative to heart
transplantation - We intend to submit in 2000 a
PMA Supplement to seek FDA
approval for therapeutic
recovery
TLC-II Portable VAD Driver, - Designed to improve patient - Currently marketed
which is a battery or line mobility and facilitate internationally; U.S. clinical
operated pneumatic mobile drive hospital discharge for the trial initiated
unit weighing approximately 20 first two indications listed
pounds above
IVAD, implantable VAD weighing - Designed to support longer term - Pre-IDE filing complete, with
less than one pound bridge to transplant and successful completion of first
alternative to transplant animal implant in January 2000
patients
- -------------------------------------------------------------------------------------------------------
VASCULAR ACCESS MARKETING
PRODUCTS INDICATIONS STATUS
- -------------------------------------------------------------------------------------------------------
Vectra, small diameter graft for - ESRD patients needing - Currently marketed
patients needing hemodialysis Hemodialysis internationally; enrollment in
U.S. clinical trial completed
and 510(k) to be submitted in
2000
Aria, small diameter graft for - CABG patients needing vessels - Canadian clinical trial
patients with blocked arteries for revascularization underway; IDE submitted to the
and inadequate vessels of their FDA to initiate trial in United
own States
- -------------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
We operate in a single business segment with different products in
circulatory support and vascular grafts. We present our business geographically
as our domestic operation, which comprises our business in the United States,
and our international operation, which comprises our business in Europe and the
rest of the world. For further enterprise and related geographic information,
see Note 11 to our financial statements.
CIRCULATORY SUPPORT PRODUCTS
The potential customers for our circulatory support products are hospitals
that perform open-heart surgery procedures and heart transplants. Based upon
published sources, we estimate that 140 of the approximately 900 hospitals in
the United States that perform open-heart surgery also perform heart
transplants. We are initially targeting these 140 heart transplant hospitals and
the largest of the remaining 900 hospitals plus an additional 110 heart
transplant hospitals in Europe.
We have recruited and trained a direct sales force that, as of February 26,
2000, is comprised of 12 experienced cardiovascular sales specialists to sell
the VAD System in the United States, Canada, France, Germany, Spain, United
Kingdom, Austria, Switzerland, Netherlands, Portugal and South Africa.
The sales effort is complemented by six 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. We also partner with
universities, experienced clinicians and opinion leaders to assist with
expanding clinical
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educational needs. The sales team focuses on cardiac surgeons that perform heart
transplantation and transplant cardiologists, perfusionists and the transplant
nursing staff. In addition to our direct selling effort, we have established a
network of international distributors that cover those markets that represent
the majority of ventricular assist device potential. We employ 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. We have 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, we will
usually ship the products within thirty days.
The introduction of a new system requires training of the appropriate
personnel. We provide initial training for the surgical and clinical support
teams when a center purchases and takes delivery of the VAD System. As a
follow-up to the initial training, we provide clinical support at the first
implant whenever possible. We also provide 24-hour access to clinically trained
personnel. Our sales force also assists customers with obtaining reimbursement
from third-party payors.
VASCULAR GRAFT PRODUCTS
We intend to market the Vectra through our distributor in Japan and through
Guidant in the rest of the world, and to market the Aria CABG device through a
direct sales force in the United States and Europe and potentially through
distributors in other international markets.
We envision the market positioning of the Vectra as one that replaces an
existing product used in an accepted procedure, and at a comparable or premium
price. We plan to commission additional studies comparing our products to ePTFE
grafts. We believe the Vectra 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. We also believe the
demand for prosthetic VAGs will continue to grow. The worldwide hemodialysis
patient population continues to grow and is older and living longer, increasing
the requirement for multiple access procedures over many years. Additionally,
this population is increasingly made up of sicker patients, such as diabetics,
who have exhausted the number of sites available for A/V fistula creation,
thereby necessitating the need for a prosthetic VAG.
We intend to initially position the Aria CABG device as a preferable
clinical option for patients who lack suitable native vessels. We believe that
more clinician education will be required for the Aria CABG device in terms of
patient indications, product use, and product capabilities. We may accomplish
this education by sponsoring educational programs, video educational tools, and
scientific lecture programs. We also anticipate that we will need a larger
domestic sales force structure to effectively market the Aria CABG device.
MANUFACTURING
We manufacture all of our products at our 62,000 square foot leased
facility in Pleasanton, California. This facility was inspected by the FDA under
their current good manufacturing practices, also called cGMP, regulation prior
to entering into production and has received the International Standards
Organization ("ISO") 9001 certification.
Our manufacturing processes for the VAD System consist of the assembly of
standard and custom component parts, including blood-contacting components
fabricated from our proprietary biomaterials, and the testing of completed
products. We rely on single sources of supply for several components of the VAD
System. We are aware of alternative suppliers for all single-sourced items other
than the mechanical valves. In October 1997, we executed a four-year supply
agreement with Arrow International Inc. for the mechanical valves for the VAD
System.
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PATENTS AND PROPRIETARY RIGHTS
We seek to patent certain aspects of our technology. We hold, or have
exclusive rights to, 20 U.S. patents and have one U.S. patent application
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 other than one patent pertaining to the TLC-II. We do
not believe that this lack of patent protection will have a material adverse
effect on our ability to sell the VAD System because of the lengthy regulatory
period required to obtain approval of a ventricular assist device. We are not
aware of any ventricular assist devices that are based on our product design
currently approved by the FDA or undergoing clinical trials. Our proprietary
biomaterials technology are covered by eight patents. Four of these were sold to
Th. Goldschmidt AG ("Goldschmidt"), a German chemical manufacturer, in 1989, but
we have retained worldwide, royalty-free, exclusive rights to these patents for
most medical applications. Our vascular graft products are covered by three
manufacturing process patents. Four of our 20 patents are for products which are
not commercially pertinent to us today.
We hold, or have exclusive rights to, 38 international patents, with 18
applications currently in prosecution. All 38 international patents apply to
products for which patents have been applied for or issued under U.S. patent
law. We license 12 biomaterial patents, valid in eight countries, from
Goldschmidt. Our four graft patents are valid in Canada, France and the U.K.,
and one of these patents is valid in Japan. Of the 18 currently pending patent
applications, all are related to biomaterials.
The validity of any of our patents may be challenged by others, and we
could encounter legal and financial difficulties in enforcing our patent rights
against alleged infringers. In addition, others could develop technologies or
obtain patents which would render our patents obsolete. Although we do not
believe patents are the sole determinant in the commercial success of our
products, the loss of a significant percentage of our patents or the patents
relating to our graft products could have a material adverse effect on our
business.
We have developed technical knowledge which, although nonpatentable, we
consider to be significant in enabling us to compete. However, the proprietary
nature of such knowledge may be difficult to protect. We have entered into an
agreement with each key employee prohibiting such employee from disclosing any
confidential information or trade secrets. In addition, these agreements provide
that any inventions or discoveries relating to our business by these individuals
will be assigned to us and become our sole property.
Claims by competitors and other third parties that our products allegedly
infringe the patent rights of others could have a material adverse effect on our
business. The medical device industry is 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 and significant diversion of the
efforts of our technical and management personnel. An adverse determination in
any such proceeding could subject us to significant liabilities or require us to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, we cannot assure you 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 us from manufacturing or selling certain of our products, any of
which could have a material adverse effect on our business.
COMPETITION
Principal competitors of the VAD System include:
- Thermo Cardiosystems Inc., and Novacor, a division of Baxter
International Inc., which manufacture and market an implantable left
ventricular assist device approved only for bridge to heart transplant in
the United States; and
- ABIOMED, Inc., which manufactures and markets an FDA-cleared
biventricular assist device for temporary circulatory support of patients
in post heart surgery shock and other recovery indications.
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We believe that the principal competitive factors in the ventricular assist
device market are patient outcomes, product performance, size and portability,
quality, cost-effectiveness and customer service. We believe that our principal
competitive advantages are:
- the VAD System can provide left, right or biventricular support;
- the smaller size and placement of the system outside the body, which
allows its use with a greater range of patients than competitive devices;
- the greater range of cannulation options available; and
- the quality of our biomaterials.
Although we believe that these attributes of the VAD System offer certain
advantages over existing ventricular assist devices, we expect our current
competitors to defend their market positions vigorously.
Our principal competitors in the vascular access graft market are W.R.
Gore, Inc., C.R. Bard, Boston Scientific/Vascular, and Baxter Corporation, who
manufacture and market ePTFE grafts worldwide. Smaller competitors include
CardioTech International, Inc., which manufactures and markets a polyurethane
graft that is available for sale outside of the United States. Finally, Possis
Medical, Inc. manufactures a self-sealing silicone rubber graft marketed with
limited indications in the U.S. through Horizon Medical Products, Inc.
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 we do.
One or more of these or other companies could design and develop products that
compete directly with our products, in which case we would face intense
competition. Moreover, certain academic institutions, government agencies and
other research organizations are conducting research in areas in which we are
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
us in recruiting highly qualified scientific personnel.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
current and future products and in our ongoing product research and development
activities. All of our 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 United States, 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, IVAD and Vectra and Aria graft products are, or will be
regulated as medical devices. To obtain FDA approval to market medical devices
similar to those under development, 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 trials must be conducted in compliance with
FDA regulations. 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 United States.
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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 approved 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 predicate
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 approved by the FDA prior to
marketing the device in the United States.
Both a 510(k) and a PMA, if approved, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy 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, we received FDA approval of our PMA for the bridge to
heart transplant indication for the VAD System and in May 1998 received FDA
approval to use the VAD system in the post-heart surgery recovery indication. In
1999 we notified the FDA that we put a voluntary hold on further enrollment in
U.S. clinical trials for the TLC-II and on shipments of the device to new
centers in Europe, pending completion of a component upgrade. We expect to
complete the testing of that component in the first half of 2000. After
completion of testing and following approval of an IDE amendment, we intend to
resume patient enrollment in its U.S. clinical trial and recommence shipment of
this device to Europe.
We submitted an IDE for the Aria to the FDA in December 1999 and received
questions from the FDA on this IDE in late January 2000. We intend to respond in
the second quarter of 2000 to these questions. We must answer these questions
before the FDA will approve the IDE.
We expect that our graft products will be classified as either Class II or
Class III medical devices. We received approval for an IDE for our Vectra in
mid-1998 and believe that we will be able to file a 510(k) after the clinical
data is gathered in 2000. We have begun clinical trials with our Aria graft
outside the United States and have begun the IDE process required to begin
clinical trials in the United States.
The approval process for each of our products is expensive and time
consuming and we cannot assure you that any regulatory agency will grant its
approval. Our inability to obtain, or delays in obtaining, such approval would
adversely affect our ability to commence marketing therapeutic applications of
our products. We cannot assure you that we will have sufficient resources to
complete the required testing and regulatory review processes. Furthermore, we
are unable to predict the extent of adverse governmental regulation which might
arise from future U.S. or foreign legislative or administrative action.
In addition, any products distributed 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 cGMP and good laboratory practice regulations and adverse events must be
reported to the FDA. 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.
On March 13, we received a warning letter from the FDA stating that our
manufacturing facility did not comply with cGMPs in several respects. We believe
that we will be able to respond to the FDA satisfactorily without a material
adverse affect on our business.
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INTERNATIONAL REGULATIONS
We are also subject to regulation in each of the foreign countries in which
we sell products with regard to product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or social
security organizations of certain countries require our products to be qualified
before they can be marketed in those countries.
In order to be positioned for access to European and other international
markets, we 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. We obtained certification and were registered as an
ISO 9002 compliant company in January 1995. Commencing in mid-1998, all
companies are required to obtain CE Marks for medical devices sold or
distributed in the European Community. The CE Mark is an international symbol of
quality. 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 obtaining authority to
CE Mark 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 has its
ISO 9001 and EN 46001 certification and has authority to CE Mark the VAD System,
the TLC-II and the Vectra. We are also certified to be in compliance with the
requirements of the European Medical Device Directive, another prerequisite for
applying the CE Mark.
OTHER REGULATIONS
We are 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 our research and
development work. Specifically, the manufacture of our biomaterials is subject
to compliance with federal environmental regulations and by various state and
local agencies. Although we believe we are in compliance with these laws and
regulations in all material respects, we cannot assure you that we will not be
required to incur significant costs to comply with environmental laws or
regulations in the future.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
Our 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, private health insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
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. To date, some private insurers and Medicare and Medicaid have
determined to reimburse the costs of the VAD System. Changes in reimbursement
policies and practices of third party payors could have a material adverse
impact on sales of our products.
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EMPLOYEES
As of February 26, 2000, we had 166 full-time employees, 65 of whom worked
in manufacturing, 26 in engineering, 21 in quality control and regulatory
affairs, 29 in marketing and sales support, 10 in administration and finance and
15 in other support functions (including personnel, management information,
purchasing and facility). None of our employees is covered by a collective
bargaining agreement. We consider relations with our employees to be good.
RESEARCH AND DEVELOPMENT
Our research and development expenses in 1999, 1998 and 1997 were $5.8
million, $5.1 million and $4.6 million.
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RISK FACTORS
We make statements in this Annual Report on Form 10-K and other statements
from time to time that relate to future plans, events or performance that 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. You
should consider each of the risks and uncertainties described in this section
and all of the other information in this Annual Report on Form 10-K in
evaluating our company and our business before deciding to invest in our common
stock.
WE HAVE A HISTORY OF NET LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We were founded in 1976 and have incurred a loss from operations in all but
one of the years of our existence. At the end of fiscal year 1999, our
accumulated deficit was approximately $55.2 million. We expect to continue to
incur additional losses until we achieve substantial product revenues. Even if
we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. In addition, we anticipate that
our expenses will increase as a result of increased preclinical and clinical
testing, research and development and selling, general and administrative
expenses. We have commenced sales in the United States of our ventricular assist
device, which we call the Thoratec VAD System, for use as a bridge to heart
transplant and for recovery after open-heart surgery. Sales of our other
products in the United States, however, cannot begin until the products have
received FDA approval. We may not receive FDA approval for several years, if at
all.
WE HAVE SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS, AND WE MAY NOT BE ABLE TO
OBTAIN SUFFICIENT CAPITAL TO SUPPORT THESE REQUIREMENTS.
We anticipate that our working capital and the Guidant line of credit (See
Management's Discussion and Analysis of Financial Condition -- Liquidity and
Capital Resources) will be sufficient to meet our present operating and capital
requirements for at least the next year, but that we will need substantial
additional funds to expand operations thereafter. Our 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 our products. We anticipate that we will seek additional funds
primarily through public or private offerings of debt or equity securities. We
may not obtain additional financing 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 our products
and would have a material adverse effect on our business, financial condition
and results of operations.
On March 17, 2000 we filed with the Securities and Exchange Commission a
registration statement on Form S-3 for an underwritten public offering of 4.5
million shares of our common stock. We may sell 3 million newly issued shares
and Gambro, Inc. (formerly COBE Laboratories, Inc.) may sell 1.5 million shares
of our currently outstanding common stock under this registration statement. We
cannot guarantee that this public offering of our stock will generate any
working capital for us.
WE ARE SUBSTANTIALLY DEPENDENT ON A LIMITED PRODUCT LINE, AND WE MAY NEED TO
DEVELOP AND INTRODUCE NEW PRODUCTS TO ACHIEVE PROFITABILITY.
To date, substantially all of our revenue has resulted from sales of the
Thoratec VAD System. We expect worldwide sales from the Thoratec VAD System and
limited sales of our Vectra vascular access graft products in markets outside of
the United States to account for a significant portion of our near-term revenue.
As a result, factors adversely affecting the pricing of or demand for such
products could have a material adverse effect on our financial condition and
results of operations. These factors include market acceptance, competition and
technological change.
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<PAGE> 21
Our future financial performance will depend, in significant part, on our
successful development, introduction and customer acceptance of products under
development. We have very little preclinical and clinical data relating to our
products under development. Prior to any commercial use, our products currently
under development will require significant additional research and development
efforts, extensive preclinical and clinical testing and regulatory approval. New
product development is highly uncertain. The factors that could slow or prevent
the successful completion of our product and technology development efforts
include clinical and regulatory delays, adverse or unexpected side effects and
inadequate therapeutic efficacy.
PHYSICIANS MAY NOT ACCEPT OR CONTINUE TO ACCEPT OUR PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.
The success of our current and future products will require acceptance or
continued acceptance by cardiovascular and vascular surgeons and interventional
cardiologists. Such acceptance will depend on clinical results and the
conclusion by these physicians that our products are safe, cost-effective and
acceptable alternative methods of treatment. Our products may not provide
benefits considered adequate by providers of cardiovascular and vascular
treatments or a sufficient number of such providers may not use our products. In
addition, because our 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 products utilizing established
technologies or methods of treatment. Even if the safety and efficacy of our
products are established, physicians may elect not to use them for a number of
reasons. These reasons could include the high cost of equipment and training
associated with the use of our Thoratec VAD System or unfavorable reimbursement
from health care payors. If our products do not achieve significant market
acceptance, we will not achieve profitability.
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. We have developed
working relationships with cardiac surgeons and cardiologists at a number of
leading medical centers in connection with developing our Thoratec VAD System.
In addition, surgical teams at these medical institutions have performed
clinical trials to support our 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 Thoratec VAD
System and future circulatory support and graft products. We may fail to
maintain existing relationships and arrangements and we may fail to establish
new relationships in support of our circulatory support and graft technology.
Furthermore, economic, psychological, ethical and other concerns may limit
general acceptance of ventricular assist and graft devices.
WE RELY ON SINGLE SOURCE SUPPLIERS. OUR BUSINESS WILL BE HARMED IF OUR SUPPLIERS
INTERRUPT THE SALE OF MATERIALS TO US.
We depend on single source suppliers for most of the critical components
and materials used in the manufacture of our products. If we need alternative
sources for key raw materials or component parts for any reason, such materials
or component parts may not be available. For example, Arrow International, Inc.
is currently the single source of supply for valves used in our VAD System.
Sales of the VAD System accounted for substantially all of our revenue in 1998
and 1999, and we expect those sales to account for substantially all of our
revenue for at least the next year. Cessation or interruption of VAD System
sales would have a material adverse effect on our business, financial condition
and results of operations.
Alternative suppliers may not agree to supply us. In addition, new
suppliers must be approved by the FDA. If alternative suppliers are not
available, we may not have the expertise or resources necessary to produce such
materials or component parts internally. For example, in 1999 we decided to
change manufacturers for a valve in our portable driver, which we call our
TLC-II. We experienced delays in shipping the TLC-II while we qualified a new
component manufacturer for these valves. As a result of this delay, we put a
voluntary hold on further enrollment in U.S. clinical trials for the TLC-II
portable driver and on shipments of this device to new centers in Europe. Any
interruption in supply of raw materials or component parts could have a material
adverse effect on our ability to manufacture products until a new source of
supply is located.
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<PAGE> 22
WE MAY ENCOUNTER PROBLEMS MANUFACTURING OUR PRODUCTS.
In 1999, we moved our manufacturing headquarters to a 62,000 square foot
leased facility in Pleasanton, California. We believe that we currently have the
ability to produce sufficient quantities of the Thoratec VAD System and the
Vectra to support our current needs, and our needs for early-stage clinical
trials of the TLC-II portable driver. We may, however, encounter difficulties
manufacturing our products for the following reasons:
- we do not have experience in manufacturing our products in the commercial
quantities that might be required if we receive FDA approval of several
or all of the products currently under development;
- the manufacture of our products is complex and costly, involving a number
of separate processes and components; and
- certain manufacturing processes for our products are labor intensive, and
achieving significant cost reductions will depend in part upon reducing
the time required to complete these processes.
In addition, manufacturers often encounter difficulties in scaling up
manufacturing of new products. These difficulties include, for example:
- problems involving product yields, quality control and assurance;
- component and service availability;
- adequacy of control policies and procedures; and
- lack of qualified personnel.
We will continue to consider whether we should internally manufacture
components that are currently provided by third parties. We will also continue
to consider the implementation of new production processes, some of which may
require prior FDA approval. We may not be able to obtain or manufacture such
products in a timely fashion at acceptable quality and prices. In addition, we
may not be able to comply with the FDA's current good manufacturing practices,
also called cGMP. We and our suppliers may not be able to manufacture an
adequate supply of products.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and expected to increase.
Many of our competitors have substantially greater financial, technical,
distribution and marketing resources than we do. In addition, many of these
competitors have significantly greater experience than we do in obtaining
regulatory approvals for medical devices. Accordingly, our competitors may
succeed in obtaining regulatory approval for products more rapidly than we.
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 we can. Our competitors may therefore offer competitive
products at a lower cost than our products. Any product we develop 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, we expect that competitive factors will
include the relative speeds with which we can:
- develop products;
- complete clinical testing;
- receive regulatory approval; and
- manufacture and sell commercial quantities of products.
OUR COMPETITORS MAY DEVELOP MORE EFFECTIVE PRODUCTS AND RENDER OUR PRODUCTS
OBSOLETE.
Our competitors may succeed in developing and marketing technologies and
products that are more effective than ours. Any such products may render our
technology and products obsolete or noncompetitive. Additionally, new surgical
procedures and medications could be developed that replace or reduce the
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<PAGE> 23
importance of current procedures that use our products. Accordingly, our success
will depend in part on our ability to respond quickly to medical and
technological changes by developing and introducing new products, or modifying
existing products.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL OUR PRODUCTS UNDER DEVELOPMENT IN THE
UNITED STATES AND IN OTHER COUNTRIES.
Before we can market new products in the United States we must obtain
clearance from the FDA. This process is lengthy and uncertain. In the United
States, one must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a premarket
approval (PMA) application. If the FDA concludes that any of our products do not
meet the requirements to obtain clearance under Section 510(k) of the Federal
Food, Drug and Cosmetic Act, then we would be required to file a PMA
application. The process for a PMA application is lengthy, expensive and
typically requires extensive preclinical and clinical trial data.
We may not obtain clearance of a 510(k) notification or approval of a PMA
application with respect to any of our products on a timely basis, if at all. If
we fail to obtain timely clearance or approval for our products, we will not be
able to market and sell our products, which will limit our ability to generate
revenue. We may also be required to obtain clearance of a 510(k) notification or
PMA application from the FDA before we can market certain previously marketed
products which we modify after they have been cleared.
The FDA also requires us to adhere to cGMP regulations, which include
production design controls, testing, quality control, storage and documentation
procedures. The FDA may at any time inspect our facilities to determine whether
we have adequately complied. Compliance with cGMP regulations for medical
devices is difficult and costly. In addition, we may not be found to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve compliance, the
FDA may withdraw marketing clearance, require product recall or take other
enforcement action. Any change or modification in a device is required to be
made in compliance with cGMP regulations, which may cause interruptions or
delays in the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.
The Federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations and policies of regulatory agencies. If we fail
to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions. Enforcement actions could include
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties.
OUR INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE
POSITION.
Our success will depend, in part, on our ability to maintain the
proprietary nature of our technology, products and manufacturing processes. We
rely on trade secrets, know-how and patents to maintain our competitive
position. We have been issued or have licensed a number of U.S. and foreign
patents covering our core biomaterials technology and our graft technologies. In
addition, we have filed many other U.S. and non-U.S. patent applications. Aside
from the biomaterials patents mentioned above, which are utilized in our VAD
System blood pump and cannulae, and one TLC-II patent, our VAD System is not
protected by any patents. We do not believe that this lack of patent protection
will have a material adverse effect on our ability to sell our VAD System
because of the lengthy regulatory period required to obtain approval of a
ventricular assist device. We are not aware of any ventricular assist devices
that are based on our product design currently approved by the FDA or undergoing
clinical trials.
Any existing or future patent applications may not result in issued
patents. In addition, current or future trade secrets, know-how or issued or
licensed patents may not sufficiently protect us from competitors with
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<PAGE> 24
similar technologies or processes. Others may independently develop proprietary
technologies and processes which are the same as or substantially equivalent to
ours. Any patents issued may be infringed upon or designed around by others.
Our products may be found to infringe prior or future patents owned by
others. We may need to acquire licenses under patents belonging to others for
technology potentially useful or necessary, and such licenses may not be
available to us. We could incur substantial costs in defending suits brought
against us on such patents or in bringing suits to protect our patents or
patents licensed by us against infringement.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our licensees, employees and consultants. These
measures may not provide adequate protection for our trade secrets or other
proprietary information. Employees and consultants may still disclose our
proprietary information, and we may not be able to meaningfully protect our
trade secrets.
WE HAVE LIMITED SALES AND MARKETING CAPABILITY, AND WE MAY NOT BE ABLE TO
SUCCESSFULLY MARKET OUR PRODUCTS.
We have limited sales and marketing capabilities. Although we expect to
increase our sales and marketing forces, we may not be able to recruit and train
adequate sales and marketing personnel. We compete with other companies that
have extensive and well-funded sales and marketing organizations. Our sales and
marketing staff may not compete successfully against such other companies.
SINCE WE DEPEND UPON DISTRIBUTORS, IF WE LOSE A DISTRIBUTOR OR A DISTRIBUTOR
FAILS TO PERFORM, OUR OPERATION WOULD BE HARMED.
With the exception of Canada and Europe, we sell our VAD System in foreign
markets through distributors. In addition, we sell our vascular access graft
products through Goodman Co. Ltd., our distributor in Japan, and through Guidant
Corporation in the rest of the world. We will rely on Guidant for sales of the
Vectra in the United States, if we receive regulatory approval. To the extent we
rely on distributors, our success will depend upon the efforts of others, over
which we may have little control. If we lose a distributor or a distributor
fails to perform, our revenues will be adversely affected.
SINCE WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS, IF THIRD PARTY
PAYORS FAIL TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS, OUR
OPERATION WOULD BE HARMED.
Significant uncertainty exists as to the reimbursement status of
newly-approved health care products such as our VAD System and our vascular
grafts. Government and other third party payors are increasingly attempting to
contain health care costs. Payors are attempting to contain costs by, for
example, limiting coverage and the level of reimbursement of new therapeutic
products. Payors are also attempting to contain costs 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, some private insurers, Medicare and Medicaid have determined to
reimburse the costs of our VAD System. Our VAD System may not continue to be
approved for reimbursement. In addition, changes in the health care system may
affect the reimbursability of future products. If we fail to obtain such
reimbursement or if the reimbursement levels are reduced, our revenues would be
reduced.
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR FINANCIAL
RESULTS.
Our business exposes us to an inherent risk of potential product liability
claims related to the manufacturing, marketing and sale of human medical
devices. We maintain only a limited amount of product liability insurance. We
also maintain general commercial and property insurance. Our insurance policies
generally must be renewed on an annual basis. We may not be able to maintain or
increase such insurance on acceptable terms or at reasonable costs, and such
insurance may not provide us with adequate coverage against potential
liabilities. A successful claim brought against us in excess of, or outside of,
our insurance coverage could have a material adverse effect on our financial
condition and results of operations. Claims against us,
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<PAGE> 25
regardless of their merit or potential outcome, may also reduce our ability to
obtain physician endorsement of our products or expand our business.
ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF HAZARDOUS
CHEMICALS AND BIOMATERIALS COULD BE TIME CONSUMING AND COSTLY.
Producing our proprietary biomaterial, Thoralon, requires the use of
hazardous materials, including chemicals and biomaterials. We cannot eliminate
the risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials.
We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from our
use or the use by third parties of these materials, and our liability may exceed
our total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development or production efforts.
IF WE MAKE ACQUISITIONS, WE COULD ENCOUNTER DIFFICULTIES THAT HARM OUR BUSINESS.
We may acquire companies, products or technologies that we believe to be
complementary to our business. If we do so, we may have difficulty integrating
the acquired personnel, operations, products or technologies. Acquisitions may
dilute our earnings per share, disrupt our ongoing business, distract our
management and employees and increase our expenses, which could hurt our
business.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Future sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock.
On March 17, 2000, we filed with the Securities and Exchange Commission a
registration statement on Form S-3 for an underwritten public offering of 4.5
million shares of our common stock. We may sell 3 million newly issued shares
and Gambro, Inc. (formerly COBE Laboratories, Inc.) may sell 1.5 million shares
of our currently outstanding common stock under this registration statement.
After giving effect to the offering, we will have 23,466,326 shares of common
stock outstanding, plus 3,139,824 shares of common stock reserved for issuance
upon exercise of outstanding options and 164,400 shares issuable upon exercise
of warrants. Holders of 7,030,502 shares of common stock and options to purchase
1,795,025 shares of common stock have agreed not to sell, transfer or otherwise
dispose of their shares of common stock for a period of 90 days from completion
of the offering. All other outstanding shares of our common stock are freely
saleable except shares held by our affiliates, which are subject to limitations
on sales imposed by Rule 144 under the Securities Act.
OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE YOUR PURCHASE PRICE.
The price of our common stock has been, and is likely to continue to be,
highly volatile. The price of our common stock could fluctuate significantly for
the following reasons:
- future announcements concerning us or our competitors;
- quarterly variations in operating results;
- introduction of new products or changes in product pricing policies by us
or our competitors;
- acquisition or loss of significant customers, distributors and suppliers;
- changes in earnings estimates by analysts;
- changes in third party reimbursement practices;
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<PAGE> 26
- regulatory developments; or
- fluctuations in the economy or general market conditions.
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 our common stock. The market price of
our common stock could decline below its current price and the market price of
our stock may fluctuate significantly in the future. These fluctuations may be
unrelated to our performance.
In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a shareholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.
THE OCCURRENCE OF A CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES
AND EQUIPMENT, WHICH WOULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
We have only one facility in the United States, which is located in
Pleasanton, California. We are vulnerable to damage from various types of
disasters, including earthquake, fire, flood, power loss, communications
failures and similar events. For example, in October 1989 a major earthquake
that caused significant property damage and a number of fatalities struck near
the area in which we are located. If any disaster were to occur, we may not be
able to operate our business at our facilities. The insurance we maintain may
not be adequate to cover our losses resulting from disasters or other business
interruptions.
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We intend to retain all of our earnings for the future operation and
expansion of our business. We do not anticipate paying cash dividends on our
common stock at any time in the foreseeable future.
ITEM 2. PROPERTY
We occupy leased facilities in Pleasanton, California totaling
approximately 62,000 square feet. The manufacturing areas have been inspected,
approved, and licensed by the FDA and the State of California Department of
Health Services, Food and Drug Section for the manufacture of medical devices.
We also have small leased facilities in the United Kingdom. We believe our
facilities will be sufficient to meet our needs for the next two years and that
additional space will be available at a reasonable price to satisfy space needs
thereafter.
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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
D. KEITH GROSSMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, joined
our company as President and Chief Executive Officer in January 1996. He was
elected to the Board of Directors in February 1996. Prior to joining us, 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.
THOMAS E. BURNETT, JR., SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER,
joined our company as Vice President -- Sales and Marketing in August 1996 and
was promoted to his current position in December 1999. Prior to joining us, 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.
CHERYL D. HESS, VICE PRESIDENT -- FINANCE, CHIEF FINANCIAL OFFICER AND
SECRETARY, joined our company as Vice President -- Finance and Chief Financial
Officer in December 1983 and became Secretary in 1994. Prior to joining us, 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 and a portion of administrative and operational activities. Ms. Hess
is a Certified Public Accountant.
DAVID J. FARRAR, PH.D., VICE PRESIDENT -- RESEARCH AND DEVELOPMENT, joined
our 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, joined our company as Vice President -- Regulatory Affairs/Quality
Assurance in September 1996. Before joining our company, 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 that, Mr. Middlebrook spent fifteen years with Baxter
International in a number of positions, including Vice President of Regulatory
Affairs and Quality Assurance for the CardioVascular Group, a producer of a wide
range of cardiopulmonary, critical care, vascular and cardiovascular products.
JOSEPH G. SHARPE, VICE PRESIDENT -- OPERATIONS, joined our company as Vice
President -- Operations in September 1997. Prior to joining us, 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
Our common stock is traded on the Nasdaq National Market under the symbol
"THOR." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock, as reported by the
Nasdaq National Market. At March 16, 2000, there were approximately 700 holders
of record of our common stock, including multiple beneficial holders at
depositories, banks and brokers listed as a single holder in the "street" name
of each respective depository, bank or broker.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year 1998
First Quarter............................................ $ 7.50 $ 5.56
Second Quarter........................................... 9.63 7.38
Third Quarter............................................ 9.06 6.13
Fourth Quarter........................................... 7.50 4.00
Fiscal Year 1999
First Quarter............................................ $ 8.63 $ 6.25
Second Quarter........................................... 11.00 6.50
Third Quarter............................................ 11.63 6.38
Fourth Quarter........................................... 9.75 5.50
</TABLE>
We have not declared any dividends on our common stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five
fiscal years ended January 1, 2000 is derived from our audited financial
statements. We have a 52 or 53 week fiscal year that ends on the Saturday
closest to December 31. Our consolidated financial statements at the fiscal
years ended January 1, 2000 and January 2, 1999 and for each of the years in the
three-year period ended January 1, 2000, and the independent auditors' report
thereon, are included elsewhere in this annual report. Our selected consolidated
financial data for fiscal 1997, 1996 and 1995 are derived from audited
consolidated financial statements not included in this annual report. You should
read the data set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes thereto appearing elsewhere in this annual report.
The selected data in this section is not intended to replace our financial
statements.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Product sales............................ $22,508 $16,320 $ 9,441 $ 7,503 $ 3,489
Cost of product sales.................... 9,739 6,504 4,005 3,254 1,972
Research and development................. 5,793 5,096 4,583 3,724 1,984
Selling, general and administrative...... 9,457 7,701 6,009 3,948 1,301
Other operating income................... 285 -- -- -- --
------- ------- ------- ------- -------
Loss from operations..................... (2,196) (2,981) (5,156) (3,423) (1,768)
Interest and other income (expense),
net.................................... 407 660 754 160 (126)
------- ------- ------- ------- -------
Net loss................................. $(1,789) $(2,321) $(4,402) $(3,263) $(1,894)
======= ======= ======= ======= =======
Basic and diluted loss per share......... $ (0.09) $ (0.11) $ (0.24) $ (0.20) $ (0.13)
======= ======= ======= ======= =======
Weighted average shares used in computing
basic and diluted loss per share....... 20,446 20,340 18,360 16,694 14,429
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................. $ 1,697 $ 2,713 $ 9,469 $ 5,348 $ 1,646
Working capital.......................... 10,533 11,251 15,885 17,266 2,808
Total assets............................. 25,060 25,208 28,477 21,847 4,380
Long-term obligations and deferred
revenue................................ 854 -- -- -- 1,675
Accumulated deficit...................... (55,191) (53,402) (51,082) (46,679) (43,416)
Total shareholders' equity............... 20,276 21,877 24,027 19,330 1,663
</TABLE>
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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 "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. We
undertake 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.
OVERVIEW
We develop, manufacture and market medical devices for circulatory support
and vascular applications. We market our first product, the Thoratec VAD System,
in the United States and internationally for use as a bridge to heart transplant
and for recovery of the heart after heart surgery. We are pursuing additional
indications for the VAD System and developing other circulatory support products
for patients suffering from heart disease. We are also developing vascular
grafts for hemodialysis and coronary artery bypass surgery. All of our products
utilize our proprietary biomaterial, Thoralon, with surface properties designed
to minimize patient blood clotting and inflammatory response.
We have experienced operating losses in all but one year since inception in
1976. We incurred net losses of $1.8 million in 1999, $2.3 million in 1998 and
$4.4 million in 1997. At January 1, 2000, we had an accumulated deficit of $55.2
million. We operate in a single business segment with different products in
circulatory support and vascular grafts. We expect to continue to incur
substantial additional losses until we can achieve substantial product revenues.
We conduct business both domestically and internationally. Our domestic business
comprises the United States, and our international operations comprise Europe
and the rest of the world.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term investments at the end of 1999
of $2.0 million compared with $4.7 million at the end of 1998. The decrease in
cash was due principally to the loss from continuing operations and capital
expenditures associated with our new manufacturing facility. Accounts receivable
increased $1.3 million in 1999 principally due to increased sales in the fourth
quarter. Inventory increased $1.3 million in 1999 in preparation for planned
increases in sales activity and the introduction of a new product. Accounts
payable and accrued liabilities increased principally due to higher inventory
balances in anticipation of increased production to meet higher planned sales,
overall higher operating costs and the short-term portion of deferred
distributor revenue associated with the Guidant agreement discussed below.
In 1999, we entered into a distribution agreement with Guidant Corporation.
Under the terms of the agreement, Guidant receives exclusive worldwide marketing
and distribution rights to the Vectra product line, except in Japan. In exchange
for these rights, Guidant has paid us $1.5 million, and will pay up to an
additional $2.0 million when the Vectra product line receives FDA approval for
use in the United States. Guidant also issued a four-year, unsecured line of
credit in the amount of $10.0 million to us, which may be used, if needed, for a
variety of business purposes. We have not utilized this line of credit to date.
We will recognize the $1.5 million contract payment received in the first
quarter of 1999 as revenue ratably over the five year life of the contract.
In 1996, we entered into a lease agreement on a new manufacturing facility
in Pleasanton, California which accommodates all of our manufacturing,
engineering and administrative activities. The administrative and engineering
portion of the building was completed and occupied in late 1997. The
manufacturing portion was completed in 1998 and occupied in April 1999. We
invested approximately $9.0 million in equipment and leasehold improvements to
the building. Annual payments under the lease are approximately $751,000 for a
lease term of 15 years beginning August 1997. The lease includes provisions,
among others, for annual cost of
30
<PAGE> 31
living adjustments to the lease payments, two five-year renewal options, a
purchase option, a security deposit of $885,600, which we paid in 1996, and an
additional $500,000, which we paid in 1997. The 1997 payment was returned to us
in 1998. We can reduce or eliminate a significant portion ($750,000) of the
remaining security deposit before the end of the initial lease term if we meet
the criteria specified in the lease.
On March 17, 2000 we filed with the Securities and Exchange Commission a
registration statement on Form S-3 for an underwritten public offering of 4.5
million shares of our common stock. We may sell 3 million newly issued shares
and Gambro, Inc. (formerly COBE Laboratories, Inc.) may sell 1.5 million shares
of our currently outstanding common stock under this registration statement. We
cannot guarantee that this public offering of our stock will generate any
working capital for us.
We believe that current cash and short-term investments together with
expected cash flow from operations and funds available from the Guidant line of
credit, will be sufficient to fund our operations for at least the next twelve
months. Any proceeds received from our public offering of common stock will
increase the cash available to fund our operations.
RESULTS OF OPERATIONS
PRODUCT SALES
Product sales in 1999 were $22.5 million compared to $16.3 million in 1998,
an increase of approximately $6.2 million, or 38%. This increase is attributable
to sales of the VAD System disposable blood pump which increased to
approximately $16.2 million in 1999 from $11.0 million in 1998, an increase of
approximately $5.2 million, or 47%. The growth of sales in VAD pumps was
primarily attributable to an increase of approximately 33% in the quantity of
VAD pumps sold, which resulted from the growth in the number of new centers
using our VAD System. An increase in the average selling price of the VAD pumps
also contributed to the increase in revenue.
Product sales in 1998 were $16.3 million compared to $9.4 million in 1997,
an increase of approximately $6.9 million, or 73%. Product sales from the sales
of VAD pumps increased to approximately $11.0 million in 1998 from $6.6 million
in 1997, an increase of approximately $4.4 million, or 67%. The growth of sales
in VAD pumps was primarily attributable to an increase of approximately 54% in
the quantity of VAD pumps sold, which resulted from the growth in the number of
centers using our VAD System. An increase in the average selling price of the
VAD pumps also contributed to the increase in revenue.
GROSS PROFIT
Gross profit was $12.8 million, representing approximately 57% of product
sales in 1999 compared to a gross profit of $9.8 million, representing
approximately 60% of product sales in 1998. The decrease in the gross profit
percentage in 1999 as compared to 1998 was due to approximately $400,000 of
higher inventory scrap and rework costs associated with a component part used in
the TLC-II portable driver, approximately $400,000 associated with higher
overall manufacturing and service overhead costs associated with the new
Pleasanton facility, and approximately $200,000 of costs associated with the
move to the Pleasanton facility. We expect gross profit to increase as a
percentage of product sales as we increase the number of devices manufactured
and improve the efficiency with which we manufacture.
Gross profit was $9.8 million, representing approximately 60% of product
sales in 1998 compared to a gross profit of $5.4 million, representing
approximately 58% of product sales in 1997. The increase in the gross profit
percentage in 1998 as compared to 1997 was primarily due to our ability to raise
selling prices in the VAD blood pumps and cannulae faster than our costs have
increased.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $5.8 million in 1999,
representing 26% of sales, from $5.1 million in 1998, representing 31% of sales,
an increase of $697,000, or approximately 14%. Of the total increase in research
and development expenses, $372,000 was associated with the implantable VAD,
which we call IVAD, $251,000 was associated with graft products, and $210,000
was associated with the TLC-II.
31
<PAGE> 32
Partially offsetting the above increases was a decrease of approximately
$216,000 in manufacturing support overhead applied to research and development
activities. Expenses for the graft products increased primarily from the
clinical trials for the Vectra. Expenses for the TLC-II included costs to
upgrade a component part. Expenses for the IVAD included product prototype and
testing costs. We expect research and development expenses to increase in 2000
principally as a result of clinical trial costs for our graft products and our
TLC-II portable driver. We expect research and development expenses to decrease
in 2000 as a percentage of product sales.
Research and development expenses increased to $5.1 million in 1998,
representing 31% of sales, from $4.6 million in 1997, representing 49% of sales,
an increase of $513,000, or approximately 11%. Of the total increase in research
and development expenses, $152,000 was associated with graft products, $133,000
was associated with the VAD blood pump, and $145,000 was associated with the
IVAD.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $9.5 million in
1999, representing 42% of sales, from $7.7 million in 1998, representing 47% of
sales, an increase of $1.8 million, or approximately 23%. Of the total increase
in selling, general and administrative expenses, $1.3 million is associated with
higher payroll and related costs associated with the continued development and
expansion of our domestic sales and marketing organization. We expect selling,
general and administrative expenses to increase in 2000 as we continue to build
our sales and marketing organization and as salaries for all personnel increase.
We expect selling, general and administrative expenses to decrease in 2000 as a
percentage of product sales.
Selling, general and administrative expenses increased to $7.7 million in
1998, representing 47% of sales, from $6.0 million in 1997, representing 64% of
sales, an increase of $1.7 million, or approximately 28%. Of the total increase
in selling, general and administrative expenses, $726,000 was associated with
the continued development and expansion of our domestic sales and marketing
organization, $420,000 was associated with higher costs of the Pleasanton
facility, $163,000 was associated with the development and expansion of our
European sales organization, and $141,000 was associated with advertising costs
associated with new product introductions.
OTHER OPERATING INCOME
Other operating income includes amortization of deferred revenue from the
1999 Guidant agreement and was approximately $285,000. We expect other operating
income to remain the same or increase if the Vectra receives FDA clearance and
Guidant pays us $2.0 million under our distribution agreement with them.
INTEREST AND OTHER INCOME
Interest and other income includes interest earned on cash income and
marketable securities and income from government research grants. Interest and
other income decreased to $407,000 in 1999 representing 2% of sales, from
$661,000 in 1998 representing 4% of sales, a decrease of $254,000, or
approximately 38%. The decrease in interest and other income was primarily
attributable to lower interest income earned on lower cash balances.
Interest and other income decreased to $661,000 in 1998 representing 4% of
sales, from $753,000 in 1997 representing 8% of sales, a decrease of $92,000, or
approximately 12%. The decrease in interest and other income was primarily
attributable to lower interest income earned on lower cash balances partially
offset by higher income from government research grants.
NET LOSS
Our net loss decreased $531,000 to approximately $1.8 million in 1999 from
$2.3 million in 1998, a decrease of approximately 23%, as a result of the
factors discussed above.
Our net loss decreased $2.1 million to approximately $2.3 million in 1998
from $4.4 million in 1997, a decrease of approximately 47%, as a result of the
factors discussed above.
32
<PAGE> 33
YEAR 2000 COMPLIANCE
We have completed our goal of an uninterrupted transition to the Year 2000.
We assessed all of our affected systems, our products and the readiness of our
third parties. We have not experienced significant Year 2000 issues subsequent
to 1999's fiscal year end. Although we believe we have taken the appropriate
steps to address our Year 2000 readiness, there is no guarantee that our efforts
will prevent a material adverse impact on the results of operations and
financial condition.
Through fiscal year end 1999, we have incurred less than $35,000 of Year
2000 costs. All costs associated with Year 2000 compliance were funded with cash
flow generated from operations and existing cash balances and were expensed as
incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk associated
with changes in interest rates, as we have no long-term debt obligations or
long-term investments outstanding. Our investment portfolio consists of
short-term corporate debt instruments and Federal government agency debt
instruments that are classified as available-for-sale. The weighted average
maturity of our investment portfolio was less than 90 days in both 1998 and
1999. Accordingly, we do not expect to be subject to material interest rate risk
with respect to our short-term investments. We do not believe we have any other
material exposure to market risk associated with interest rates.
Although we conduct business in foreign countries, our international
operations consist primarily of sales and service personnel for our VAD System.
These employees report into our U.S. sales and marketing group and are
internally reported as part of that group. Additionally, foreign currency
transaction gains and losses were not material to our results of operations for
1999. Accordingly, we do not expect to be subject to material foreign currency
risk with respect to future costs or cash flows from our foreign operations. To
date, we have not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange.
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-17 of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
33
<PAGE> 34
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 12, 2000 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.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS AND INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
1.1 Registrant's Certificate of Incorporation, as amended.(1)
1.2 Registrant's By-Laws, as amended.(1)
4.1 Form of Convertible Secured Promissory Note.(2)
10.1 Our amended 1984 Incentive Stock Option Plan.(3)
10.2 Our 1993 Stock Option Plan.(4)
10.3 Agreement for the acquisition of Th. Goldschmidt AG of
Certain of the Assets of Thoratec Laboratories Corporation
dated March 29, 1989.(5)
10.4 Common Stock Purchase Agreement between COBE Laboratories,
Inc. dated November 23, 1992.(6)
10.5 License Agreement between COBE Laboratories, Inc. and us
dated November 23, 1992.(6)
10.6 Lease Agreement dated July 25, 1996, between Main Street
Associates and us, as amended.(7)
10.7 Our 1996 Stock Option Plan.(8)
10.8 Our amended 1996 Nonemployee Directors Stock Option Plan.(9)
10.9 First Amendment to Lease Agreement originally between
Mainstreet Associates and us dated July 25, 1996.(10)
10.10 Our 1997 Stock Option Plan.(9)
10.11 Second Amendment to Lease Agreement originally between
Mainstreet Associates and us dated July 25, 1996.(11)
10.12 Distribution Agreement between Guidant Corporation and us
dated January 13, 1999.(12)
10.13 Credit Agreement between us as Borrower, and Guidant
Corporation as Lender dated January 13, 1999.(12)
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP.
24 Power of Attorney -- Reference is made to page 37 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 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 filed with the SEC on April 13, 1995, and
incorporated herein by reference.
(3) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended December 29, 1990 filed with the SEC on March 28, 1991, and
incorporated herein by reference.
(4) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 1, 1994 filed with the SEC on March 22, 1994, and
incorporated herein by reference.
(5) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended December 30, 1989 filed with the SEC on March 30, 1990, and
incorporated herein by reference.
(6) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 2, 1993 filed with the SEC on March 22, 1993, and
incorporated herein by reference.
(7) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 29, 1996, filed with the SEC on August 13, 1996, and
incorporated herein by reference.
(8) Filed as an Exhibit to our Registration Statement on Form S-8 filed with
the SEC on September 12, 1996, (Registration No. 333-11883) and
incorporated herein by reference.
(9) Filed as an Exhibit to our Registration Statement on Form S-8 filed with
the SEC on June 16, 1999 (Registration No. 333-80807), and incorporated
herein by reference.
35
<PAGE> 36
(10) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 28, 1997, filed with the SEC on July 30, 1997, and
incorporated herein by reference.
(11) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended September 27, 1997 filed with the SEC on November 12, 1997,
and incorporated herein by reference.
(12) Filed as an Exhibit to our Annual Report on Form 10-K, for the fiscal year
ended January 2, 1999, filed with the SEC on March 24, 1999, and
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None filed in 1999.
36
<PAGE> 37
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 23, 2000
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
--------- ----- ----
<C> <C> <S>
/s/ D. KEITH GROSSMAN Chief Executive Officer, March 2, 2000
- ----------------------------------------------------- President and Director
D. Keith Grossman
/s/ HOWARD E. CHASE Director March 2, 2000
- -----------------------------------------------------
Howard E. Chase
/s/ J. DANIEL COLE Director March 2, 2000
- -----------------------------------------------------
J. Daniel Cole
/s/ J. DONALD HILL Director and Chairman of March 2, 2000
- ----------------------------------------------------- the Board of Directors
J. Donald Hill
/s/ WILLIAM M. HITCHCOCK Director March 2, 2000
- -----------------------------------------------------
William M. Hitchcock
/s/ GEORGE W. HOLBROOK, JR. Director March 2, 2000
- -----------------------------------------------------
George W. Holbrook, Jr.
/s/ DANIEL M. MULVENA Director March 2, 2000
- -----------------------------------------------------
Daniel M. Mulvena
/s/ CHERYL HESS Vice President -- Finance, Chief March 2, 2000
- ----------------------------------------------------- Financial Officer and Secretary
Cheryl Hess (Principal Financial and
Accounting Officer)
</TABLE>
37
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Comprehensive Loss............... F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 39
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 1, 2000
and January 2, 1999, and the related consolidated statements of operations,
comprehensive loss, shareholders' equity and cash flows for the fiscal years
ended January 1, 2000, January 2, 1999, and January 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 as of January 1, 2000 and January 2, 1999 and the
results of their operations and their cash flows for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 18, 2000
F-2
<PAGE> 40
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FISCAL YEAR END
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 1,696,522 $ 2,712,686
Short-term investments available-for-sale (Note 3)........ 276,464 2,032,107
Receivables, net of allowance for doubtful accounts of
$32,795 in 1999 and $47,591 in 1998 (Note 9)........... 5,453,187 4,141,854
Inventories (Note 4)...................................... 6,611,487 5,290,745
Prepaid expenses and other................................ 425,317 404,737
----------- -----------
Total current assets.............................. 14,462,977 14,582,129
Equipment and Improvements -- Net (Notes 5 and 6)........... 9,560,814 9,625,390
Other Assets (Note 6)....................................... 1,036,647 1,000,898
----------- -----------
Total Assets...................................... $25,060,438 $25,208,417
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 1,703,089 $ 1,307,768
Accrued compensation...................................... 1,466,147 1,613,334
Deferred distributor revenue (Note 2)..................... 284,765 --
Other..................................................... 475,870 409,958
----------- -----------
Total current liabilities......................... 3,929,871 3,331,060
Long-term deferred distributor revenue (Note 2)........... 854,294 --
----------- -----------
Total liabilities................................. 4,784,165 3,331,060
----------- -----------
Commitments (Notes 6, 9 and 12)
Shareholders' Equity: (Notes 7, 8, and 9)
Preferred shares -- none issued and outstanding........... -- --
Common shares, 100,000,000 authorized; issued and
outstanding: 20,466,326 in 1999; and 20,422,952 in
1998................................................... 72,911,638 72,810,450
Additional capital........................................ 2,541,223 2,482,229
Accumulated deficit....................................... (55,191,216) (53,402,106)
Accumulated other comprehensive income (loss):
Unrealized gain on investments -- net.................. -- 8
Cumulative translation adjustment...................... 14,628 (13,224)
----------- -----------
Total accumulated other comprehensive income (loss)....... 14,628 (13,216)
----------- -----------
Total shareholders' equity........................ 20,276,273 21,877,357
----------- -----------
Total Liabilities and Shareholders' Equity........ $25,060,438 $25,208,417
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 41
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Product sales (Notes 9 and 11)...................... $22,507,884 $16,319,531 $ 9,441,302
Cost of product sales............................... 9,738,946 6,503,986 4,005,242
----------- ----------- -----------
Gross profit........................................ 12,768,938 9,815,545 5,436,060
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 5,792,635 5,096,110 4,582,745
Selling, general and administrative............... 9,457,308 7,701,372 6,009,043
----------- ----------- -----------
Total operating expenses.................. 15,249,943 12,797,482 10,591,788
----------- ----------- -----------
Other operating income (Notes 1 and 2).............. 284,764 -- --
----------- ----------- -----------
Loss from operations................................ (2,196,241) (2,981,937) (5,155,728)
Interest and other income, net...................... 407,131 661,385 753,369
----------- ----------- -----------
Net loss............................................ $(1,789,110) $(2,320,552) $(4,402,359)
=========== =========== ===========
Basic and diluted loss per share (Note 1)........... $ (0.09) $ (0.11) $ (0.24)
=========== =========== ===========
Shares used to compute basic and diluted loss per
share............................................. 20,445,837 20,339,816 18,360,336
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 42
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss............................................ $(1,789,110) $(2,320,552) $(4,402,359)
Other comprehensive income (loss):
Unrealized gain (loss) on investments............. (8) 7,547 (13,190)
Foreign currency translation adjustments.......... 27,852 16,742 (42,384)
----------- ----------- -----------
Comprehensive Loss.................................. $(1,761,266) $(2,296,263) $(4,457,933)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 43
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON ADDITIONAL ACCUMULATED INCOME SHAREHOLDERS'
STOCK CAPITAL DEFICIT (LOSS) EQUITY
----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, FISCAL YEAR ENDED 1996.......... $63,519,139 $2,471,877 $(46,679,195) $ 18,069 $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 2,000,000 shares of common
stock for cash......................... 8,809,287 8,809,287
Issuance of common stock options for
nonemployee services................... 10,352 10,352
Other comprehensive loss:
Unrealized loss on investments......... (13,190) (13,190)
Foreign currency translation
adjustments......................... (42,384) (42,384)
Net Loss................................. (4,402,359) (4,402,359)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1997.......... 72,664,107 2,482,229 (51,081,554) (37,505) 24,027,277
Exercise of 292,535 common stock options
for cash and exchange for 42,028 shares
of common stock which were canceled.... 146,343 146,343
Other comprehensive income:
Unrealized gain on investments......... 7,547 7,547
Foreign currency translation
adjustments......................... 16,742 16,742
Net Loss................................. (2,320,552) (2,320,552)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1998.......... 72,810,450 2,482,229 (53,402,106) (13,216) 21,877,357
Exercise of 49,116 common stock options
for cash and exchange for 5,742 shares
of common stock which were canceled.... 101,188 101,188
Issuance of common stock options for
nonemployee services................... 58,994 58,994
Other comprehensive income:
Unrealized loss on investments......... (8) (8)
Foreign currency translation
adjustments......................... 27,852 27,852
Net Loss................................. (1,789,110) (1,789,110)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1999.......... $72,911,638 $2,541,223 $(55,191,216) $ 14,628 $20,276,273
=========== ========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 44
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(1,789,110) $(2,320,552) $(4,402,359)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred distributor revenue.... (284,764) -- --
Common stock options granted for services (Note
8)............................................ 58,994 -- 10,352
Depreciation and amortization................... 1,020,634 679,669 262,540
Changes in assets and liabilities:
Receivables................................... (1,344,479) (2,827,077) (448,924)
Prepaid expenses and other.................... (21,904) (133,525) (4,613)
Inventories................................... (1,349,296) (1,380,538) (1,185,453)
Other assets.................................. (35,898) 472,389 (553,068)
Accounts payable and other liabilities........ 462,939 36,469 898,215
Deferred distributor revenue.................. 1,423,823 -- --
----------- ----------- -----------
Net cash used in operating activities...... (1,859,061) (5,473,165) (5,423,310)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments
available-for-sale.............................. (7,829,477) (16,176,045) (85,482,972)
Maturities of short-term investments
available-for-sale.............................. 6,354,000 18,620,000 83,400,000
Sales of short-term investments
available-for-sale.............................. 3,231,112 922,148 7,311,109
Capital expenditures............................... (988,860) (4,800,285) (4,823,549)
----------- ----------- -----------
Net cash provided by (used in) investing
activities............................... 766,775 (1,434,182) 404,588
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued in public placement -- net..... -- -- 8,809,288
Common stock issued upon exercise of options....... 101,188 146,343 335,681
----------- ----------- -----------
Net cash provided by financing
activities............................... 101,188 146,343 9,144,969
----------- ----------- -----------
Effect of exchange rate changes on cash.............. (25,066) 4,379 (4,936)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (1,016,164) (6,756,625) 4,121,311
Cash and cash equivalents at beginning of year....... 2,712,686 9,469,311 5,348,000
----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 1,696,522 $ 2,712,686 $ 9,469,311
=========== =========== ===========
NONCASH INVESTING TRANSACTIONS:
Construction costs and capital assets in accounts
payable......................................... $ 54,386 $ 71,828 $ 1,402,045
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 45
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 January 2, 1999, (fiscal 1998)
and January 1, 2000, (fiscal 1999) include 52 weeks.
Principles of Consolidation -- The consolidated financial statements
include Thoratec Laboratories Corporation (a California corporation) and its
subsidiary company, Thoratec Europe Limited (a corporation organized under the
laws of the United Kingdom). 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 Equivalents -- 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. As of the end of 1999, short-term investments were comprised primarily
of corporate notes with maturity dates within 12 months of the date of
investment.
Inventories -- Inventories are stated at the lower of first-in, first-out
cost or market. The Company rents certain medical devices to customers on a
month-to-month basis and includes them in inventories, net of amortization, when
the devices are expected to be sold to customers within one year.
Equipment and Improvements -- Equipment and improvements are stated at
cost. Equipment is depreciated over estimated useful lives which range from two
to eight years. Leasehold improvements are amortized over the term of the lease
or over the estimated useful life of the improvements, whichever is shorter.
Equipment and improvements includes certain medical devices rented to customers
on a long-term basis. Amortization expense of all rental equipment included in
the Company's rental program is recognized ratably over no longer than 36
months. The straight-line method is used for depreciation and amortization.
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of that asset may
not be recoverable. An impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposal is less than carrying amount.
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 cash equivalents, customer receivables, accounts payable, and
certain other accrued liabilities. The carrying amounts of these items are a
reasonable estimate of their fair values.
F-8
<PAGE> 46
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, except as follows, the resulting translation
adjustments are included in comprehensive income. Income items are translated at
actual or average monthly rates of exchange. Exchange rate fluctuations
resulting from the period-end translation of the current portion of the
intercompany obligation of the Company's wholly-owned subsidiary into United
States dollars are recorded in the income statement as foreign currency
translation gains or losses and are included in selling, general and
administrative expenses.
Revenue Recognition and Product Warranty -- The Company recognizes product
sales upon shipment of the related product. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped. The
Company rents certain medical devices to customers on a month-to-month basis.
Rentals are based on utilization and included in income as earned. Included in
product sales for 1999, 1998 and 1997 are approximately $1,082,000, $1,064,000
and $461,000, respectively, or income earned from the rental of these certain
medical devices. Sales related to training provided to customers are recognized
as services are provided.
The Company recognizes distributor revenue ratably over the life of the
related distributor agreement. Other operating income of approximately $285,000
represents the amortized distribution revenue recognized in 1999 (see Note 2).
Accounting for Stock-Based Compensation -- The Company accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Proforma disclosures of net earnings and earnings per share
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" are included in Note 8.
Loss Per Share -- Basic earnings per share are computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share for 1999, 1998 and 1997
exclude any effect from such securities as their inclusion would be
antidilutive, therefore, diluted earnings per share is the same as basic
earnings per share for all periods presented.
Comprehensive Loss -- Comprehensive loss, as recorded in the financial
statements, includes net loss, unrealized gains and losses on investments and
foreign currency translation adjustments.
Operating Segments -- The Company is organized as a single operating
segment, whereby the chief operating decision maker assesses the performance of
and allocates resources to the business as a whole. See Note 11.
Recently Issued Accounting Standard -- During June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedging accounting when certain conditions are
met. Such Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet evaluated the impact of
the new standard.
2. FINANCIAL POSITION AND LIQUIDITY
During the first quarter of 1999, the Company entered into a five-year
distribution agreement with Guidant Corporation. Under the terms of the
agreement, Guidant receives exclusive worldwide marketing and distribution
rights to the Company's Vectra vascular access graft product line, except in
Japan. In exchange for
F-9
<PAGE> 47
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these rights, Guidant made a $1.5 million non-refundable payment, and will pay
up to an additional $2 million when the Vectra product line receives FDA
approval for use in the U.S. Guidant also agreed to provide a four-year,
unsecured line of credit in the amount of $10 million to the Company, which may
be used, if needed, for a variety of business purposes. The Company is
recognizing the $1.5 million contract payment received in the first quarter of
1999 as revenue ratably over the five-year life of the contract. Other operating
income in 1999 included approximately $285,000 of such payment amortization.
With the proceeds available from this line of credit, the Company believes
that it has sufficient funds to increase its marketing efforts, to conduct
clinical trials on its new products, 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. 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>
Fiscal 1998
Corporate debt instruments........... $1,025,220 $79 $ -- $1,025,299
Federal government agency............ 1,006,879 -- (71) 1,006,808
---------- --- ---- ----------
Total........................ $2,032,099 $79 $(71) $2,032,107
========== === ==== ==========
Fiscal 1999
Corporate debt instruments........... $ 276,464 $-- $ -- $ 276,464
========== === ==== ==========
</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
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Finished goods............................................ $3,163,055 $2,712,543
Work-in-process........................................... 2,033,194 1,456,784
Raw materials............................................. 1,415,238 1,121,418
---------- ----------
Total........................................... $6,611,487 $5,290,745
========== ==========
</TABLE>
Included in finished goods for 1999 and 1998 is rental product inventory of
approximately $951,000 and $819,000, respectively.
F-10
<PAGE> 48
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Equipment................................................... $4,568,466 $3,458,804
Leasehold Improvements...................................... 7,540,866 4,875,339
Construction in Progress.................................... 119,473 4,126,612
---------- ----------
Total............................................. 12,228,805 12,460,755
Accumulated depreciation and amortization................... (2,667,991) (2,835,365)
---------- ----------
$9,560,814 $9,625,390
========== ==========
</TABLE>
Included in equipment for 1999 and 1998 is product used in the Company's
rental program of approximately $647,000 and $381,000 of cost, respectively, and
$261,000 and $120,000, of accumulated amortization, respectively.
6. LEASES
The Company leases offices, laboratory and manufacturing space under
noncancelable operating leases. In 1996 the Company entered into a lease
agreement for a new facility located in Pleasanton, California, which
accommodates 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 was completed in
1998 and occupied in 1999 after receiving clearance from the FDA. The Company
has invested approximately $9 million in equipment and leasehold improvements to
the building. Annual payments under the amended lease are approximately $751,000
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 is included in other assets. A significant portion
($750,000) of the remaining 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 the end of fiscal
year 1999 are noted below:
<TABLE>
<S> <C>
FISCAL YEAR:
2000............................................. $ 774,899
2001............................................. 774,899
2002............................................. 774,899
2003............................................. 774,899
2004............................................. 774,899
Thereafter....................................... 5,796,372
----------
Total.................................. $9,670,867
==========
</TABLE>
Rent expense for all operating leases was $871,162 in 1999, $911,609 in
1998, and $473,237 in 1997.
7. COMMON AND PREFERRED STOCK AND WARRANTS
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.
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-
F-11
<PAGE> 49
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
third of a share of common stock, after adjusting for earned but unpaid
dividends. At January 1, 2000, 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 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 1, 2000, no shares of the Series B preferred
stock were outstanding.
In November 1997, the Company sold through a public offering 2,000,000
shares of common stock at $5.00 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. In connection with the
public offering the underwriters were issued 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 of warrants issued to the
underwriters, and approximately $1,050,000 of other estimated costs have been
recorded as a deduction to the proceeds received from the sale of the common
stock.
For other common stock information, see Note 8.
8. OPTIONS
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 1998, 52,500 options were granted under this plan. No
options were granted under this plan in 1999 or 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 1999, 1998 and 1997,
6,000, 132,500 and 319,833 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 $5.00 per share.
All other options of the CEO were canceled in conjunction with the repricing.
The Directors Option Plan was amended by approval by a vote of the Company's
shareholders in May 1999. The amendments include increasing the number of shares
granted to the Board of Directors in the initial grants from 10,000 to 15,000
shares (granted in four equal installments, once when elected to the Board then
quarterly thereafter), and the annual grants from 5,000 to 7,500 shares (granted
in four equal installments after re-election). Provisions were also made for
immediate vesting of both initial and annual grants, and for changing the term
of the options from ten to five years. In addition, the number of shares
reserved for issuance under The Director's Option Plan was increased from
150,000 to 350,000 and the plan administrator has been provided with the
discretion to impose any repurchase rights in favor of the Company on any
optionee. The Company currently has seven non-employee directors who are
eligible to participate in the Directors Option Plan. During 1999, 1998 and
1997, 39,375, 35,000 and 45,000 options, respectively, were granted at fair
market value under this plan.
In 1997, the Directors adopted the 1997 Stock Option Plan ("1997 SOP"). The
1997 SOP was amended by approval of a vote of the Company's shareholders in May
1999. The 1997 SOP, as amended, permits the
F-12
<PAGE> 50
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company to grant options to purchase up to 2,800,000 shares of common stock.
During 1999, 1998, and 1997, 1,038,276, 718,960 and 294,834 options,
respectively, were granted at fair market value under this plan.
Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, the 1997
SOP, and several older plans, the Company had eight 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 generally become exercisable within six
months to five years of grant and expire between five and ten years from date of
grant. At January 1, 2000, 1,310,153 common shares remain available for grant
under all the plans.
Agreements have been entered into with selected consultants whereby options
to purchase the Company's common stock were accepted by these consultants as
full or partial payment for the services rendered to the Company. The fair
market value of the consulting service is the basis for recording the fair
market value of the transaction in the Company's financial records and is
recognized as the related services are performed. Options issued under these
agreements totaled 17,341 in 1999 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 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
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss
As reported............................... $(1,789,110) $(2,320,552) $(4,402,359)
Pro forma................................. (5,230,110) (4,565,552) (6,582,359)
Basic and diluted loss per share
As reported............................... $ (0.09) $ (0.11) $ (0.24)
Pro forma................................. (0.26) (0.22) (0.36)
</TABLE>
The fair value of each option grant is estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1999, 1998, and 1997: risk-free interest
rates of 5.71% in 1999, 5.09% in 1998, and 6.32% in 1997; expected volatility of
77% for 1999, 81% for 1998, and 88% for 1997; 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.
F-13
<PAGE> 51
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
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(1)........................................... (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
Granted ($4.08 weighted average fair value per
share).............................................. 938,960 6.44
Canceled and expired................................... (143,288) 4.45
Exercised(2)........................................... (292,535) 1.50
---------
Outstanding at fiscal year end 1998 (790,934 exercisable
at $5.60 weighted average exercise price per share).... 2,298,256 $ 6.05
Granted ($5.01 weighted average fair value per
share).............................................. 1,083,651 8.11
Canceled and expired................................... (192,967) 6.44
Exercised(3)........................................... (49,116) 3.11
---------
Outstanding at fiscal year end 1999 (1,220,699
exercisable at $6.09 weighted average exercise price
per share)............................................. 3,139,824 $ 6.78
=========
</TABLE>
- ---------------
(1) Includes 193,371 options exercised for $335,681 cash and 48,566 options
exercised by exchange for 11,609 shares of common stock, which were
canceled.
(2) Includes 68,893 options exercised for $146,343 cash and 223,642 options
exercised by exchange for 42,028 shares of common stock, which were
canceled.
(3) Includes 36,402 options exercised for $101,188 cash and 12,714 options
exercised by exchange for 5,742 shares of common stock, which were canceled.
The status of options outstanding as of the end of fiscal 1999 is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICE CATEGORY OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.75 39,447 1.25 years $ 0.75 38,076 $ 0.75
$ 1.14 to $ 2.25 230,233 3.57 years 2.18 230,233 2.18
$ 4.38 to $ 5.88 697,996 7.70 years 5.23 379,251 5.20
$ 6.00 to $ 7.81 960,415 8.13 years 6.41 309,848 6.43
$ 8.00 to $ 9.75 1,011,708 9.03 years 8.38 119,783 8.74
$10.00 to $12.00 158,668 6.79 years 10.37 103,401 10.34
$15.00 to $15.75 28,025 6.16 years 15.62 26,775 15.65
$30.00 13,332 6.42 years 30.00 13,332 30.00
--------- ---------
$ 0.75 to $30.00 3,139,824 7.81 years 6.78 1,220,699 6.09
========= =========
</TABLE>
F-14
<PAGE> 52
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES
In 1992 the Company entered into an agreement to sell common stock,
representing 26% of the Company, to COBE Laboratories, Inc., "COBE" which
included several provisions including a standstill agreement. 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, among other items. The licensing
agreement was amended in 1999 to split the license into two separate agreements
at the time of the sale of a portion of COBE's cardiovascular business. One is
retained by COBE Laboratories, now called Gambro, Inc., a major shareholder of
the Company, and the other was granted to Sorin COBE Cardiovascular when that
division of Gambro was sold to Sorin. In 1997, the Company's obligation to
manufacture biomaterials and distribute products through COBE terminated.
Sales to COBE and its affiliates for 1999, 1998 and 1997 were $167,000,
$145,000 and $312,000, respectively. Receivables from COBE and its affiliates
were $17,100 and nil at the end of fiscal years 1999 and 1998, respectively.
For other related party transactions, see Note 12.
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.
Significant components of the Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforward (as adjusted for the
limitation on change in ownership).................. $ 6,920,000 $ 7,400,000
State tax loss carryforward............................ 375,000 425,000
Deferred revenue....................................... 450,000 --
Foreign................................................ 750,000 410,000
Credits (research and manufacturing)................... 970,000 750,000
Other, net............................................. 685,000 440,000
------------ -----------
Total.......................................... 10,150,000 9,425,000
Less: Valuation allowance.............................. (10,150,000) (9,425,000)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
At the end of fiscal 1999, the Company had net operating loss ("NOL")
carryforwards of approximately $20.5 million. The majority of such carryforwards
expire from 2003 through 2018. 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.
F-15
<PAGE> 53
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the effective tax rate and the statutory federal
rate follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit at statutory
rate............................. $(608,000) (34.0)% $(789,000) (34.0)% $(1,496,000) (34.0)%
State taxes........................ (98,000) (5.5) (70,000) (3.0) (91,000) (2.1)
Increase in tax credit
carryforwards.................... (115,000) (6.4) (96,000) (4.1) (855,000) (19.4)
Increase in valuation allowance.... 725,000 40.5 975,000 42.0 2,665,000 60.6
Other, net......................... 96,000 5.4 (20,000) (.9) (223,000) (5.1)
--------- ----- --------- ----- ----------- -----
$ -- -- $ -- -- $ -- --
========= ===== ========= ===== =========== =====
</TABLE>
11. ENTERPRISE AND RELATED GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable operating
segment. (See Note 1 for a brief description of the Company's business.) Net
sales by geographic area are presented by attributing revenues from external
customers or distributors on the basis of where the products are sold.
Long-lived assets by geographic area and information about products and services
are included as enterprise-wide disclosures.
In 1997, one domestic customer accounted for slightly over 10% of total
product sales. No receivable was outstanding from this customer at the end of
fiscal 1997. No customer accounted for greater than 10% of product sales or
receivables in 1999 or 1998.
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Product Sales:
International
Europe.................................. $ 3,597,973 $ 2,718,794 $1,094,516
All Other............................... 1,606,447 1,497,584 793,339
----------- ----------- ----------
Subtotal........................... 5,204,420 4,216,378 1,887,855
Domestic................................ 17,303,464 12,103,153 7,553,447
----------- ----------- ----------
Total.............................. $22,507,884 $16,319,531 $9,441,302
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Long-lived assets:
International -- Europe................................... $ 377,958 $ 318,310
Domestic.................................................. 9,182,856 9,307,080
---------- ----------
Total............................................. $9,560,814 $9,625,390
========== ==========
</TABLE>
F-16
<PAGE> 54
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CLASSES OF SIMILAR PRODUCTS
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Product Sales:
Circulatory Support........................ $21,768,089 $15,637,756 $8,831,455
Vascular Graft............................. 739,795 681,775 300,120
Biomaterial Manufacturing.................. -- -- 309,727
----------- ----------- ----------
Total.............................. $22,507,884 $16,319,531 $9,441,302
=========== =========== ==========
</TABLE>
See Note 9 for discussion of Biomaterial Manufacturing.
12. COMMITMENTS
In October 1997, the Company executed a four-year agreement with Arrow
International, Inc. ("Arrow") to supply the mechanical valves for the VAD system
disposable blood pump used in the Company's VAD system. As of January 1, 2000,
the remaining long-term purchase commitment associated with this agreement was
approximately $1.8 million.
In July 1998, the Company established an Executive Officer Severance
Benefits Plan and an Employee Severance Benefits Plan as part of the employee
benefits package. The plans provide severance benefits to certain employees
whose employment is terminated, other than for cause. An Executive Officer's
standard severance pay benefit is equal to one times annualized base salary. An
employee's severance pay benefit is equal to an amount based on job level and
length of service.
In January 2000, 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,
and a severance package.
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 6 and 9 for additional commitments.
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. For fiscal years 1999, 1998 and 1997, the Company made
contributions to the Plan of approximately $91,000, $54,000 and nil,
respectively.
F-17
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-32223, Registration Statement No. 333-11883, 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 and Registration Statement No. 333-32684 on Form S-3 of our report dated
February 18, 2000, appearing in this Annual Report on Form 10-K of Thoratec
Laboratories for the year ended January 1, 2000.
/s/ Deloitte & Touche LLP
San Francisco, California
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THORATEC LABORATORIES
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT
ON FORM 10-K PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES & EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED JANUARY 1, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,696,522
<SECURITIES> 276,464
<RECEIVABLES> 5,485,982
<ALLOWANCES> (32,795)
<INVENTORY> 6,611,487
<CURRENT-ASSETS> 14,462,977
<PP&E> 12,228,805
<DEPRECIATION> (2,667,991)
<TOTAL-ASSETS> 25,060,438
<CURRENT-LIABILITIES> 3,929,871
<BONDS> 0
0
0
<COMMON> 72,911,638
<OTHER-SE> (52,635,365)
<TOTAL-LIABILITY-AND-EQUITY> 25,060,438
<SALES> 22,507,884
<TOTAL-REVENUES> 23,199,779
<CGS> 9,738,946
<TOTAL-COSTS> 9,738,946
<OTHER-EXPENSES> 15,249,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,789,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,789,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,789,110)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
