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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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<C> <S>
(Mark One)
/X/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
</TABLE>
for the transition period from to .
COMMISSION FILE NUMBER: 0-19801
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TARGET THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 95-3962471
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
47201 LAKEVIEW BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-7700
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0025 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES 'X' NO ____
Indicate by check mark if 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 of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 31, 1996, there were 14,782,718 shares of common stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $639,269,879 based upon the closing price of
the common stock on May 31, 1996 on The Nasdaq Stock Market. Shares of common
stock held by each officer, director and holder of five percent or more of the
outstanding Common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the 1996 Annual Meeting
of Stockholders are incorporated in Part III of this Form 10-K.
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Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and, in particular,
the factors described below in Part II, Item 7, under the heading "Factors That
May Affect Future Results of Operations."
PART I
ITEM 1. BUSINESS
GENERAL
Target Therapeutics, Inc. ("Target" or the "Company") develops,
manufactures and markets disposable and implantable medical devices used in
minimally invasive procedures to treat vascular diseases of the brain associated
with stroke and other disease sites accessible through small vessels of the
circulatory system. Interventional physicians can navigate Target's variable
stiffness micro-catheters and guidewires through tortuous blood vessels not
accessible using conventional catheters. The Company's products are used to
treat diseased, ruptured or blocked blood vessels in the brain responsible for
stroke, the third leading cause of death in the United States. One of these
products, the Guglielmi Detachable Coil ("GDC") system, is used to treat and
prevent the rupture of cerebral aneurysms. In September 1995, Target obtained
clearance from the United States Food and Drug Administration ("FDA") to market
the GDC system in the United States. The Company's products are also used in
regions of the body other than the brain. Target's products are used prior to or
in lieu of surgery and can significantly reduce procedural trauma, complexity,
risk to the patient, cost and recovery time. In May 1996, the Company completed
the acquisition of Interventional Therapeutics Corporation ("ITC") a
manufacturer of specialized disposable catheters and embolization devices. The
Company currently markets its products through a direct sales force in North
America and internationally through a network of 44 specialty distributors, its
German subsidiary, Target Therapeutics International (Deutschland) GmbH, its
joint venture in France, Target Guerbet Bio, and its joint venture in Japan with
Century Medical, Inc. ("CMI"), a subsidiary of ITOCHU International, Inc.
TARGET STRATEGY
The Company's strategy consists of the following principal elements:
- Focus Primarily on Neurovascular Disorders. Target focuses its resources
primarily on developing products for the minimally invasive treatment of
neurovascular disorders associated with stroke. Acute stroke is the third
leading cause of death in the United States and a major cause of
long-term disability. The Company's micro-catheters and guidewires are
specially designed to access the tortuous vascular system of the brain
for delivery of diagnostic and therapeutic agents and devices, such as
contrast agents and micro-coils. Target's GDC system provides minimally
invasive treatment for surgically high-risk or inoperable cerebral
aneurysms and other vascular malformations.
- Emphasize Technology, Innovation and Leadership. The Company has
substantial design, manufacturing and applications engineering expertise
in the development of small vessel access and delivery systems. Target
has developed proprietary techniques and customized equipment to extrude
and process its micro-catheters, as well as proprietary processes to
grind its guidewires to precise specifications. The Company has obtained
a number of patents on its products, including its variable stiffness
micro-catheter shaft design, and has other patent applications pending.
- Apply Proprietary Technology in Specialized Applications. In addition to
treatment of neurovascular disorders, Target also seeks to apply its
technology in other areas, including access to small peripheral vessels,
reproductive physiology, vascular stent-graft products and
electrophysiology. The Company pursues these opportunities directly and,
in areas outside Target's core business focus, through affiliated
companies. Target expects that in the future it may also pursue such
opportunities through strategic alliances with other companies.
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- Advance Global Presence. The field of interventional radiology and
interventional neuroradiology is global in nature with many physicians
spread throughout the world. Target intends to meet the needs of this
international marketplace by establishing a worldwide presence. This
worldwide presence is evidenced by supporting a direct sales force in
four of our largest markets and through a network of approximately 44
distributors in over 40 countries.
- Demonstrate Clinical Efficacy and Cost Effectiveness. Target believes
its products are both clinically efficacious and cost effective. The
Company's objectives include conducting its own studies and/or supporting
outside efforts to conduct studies which evidence this effectiveness.
Target's objectives also include supporting efforts to publish and
disseminate the associated data to the health care community.
- Leverage Strategic Alliances. The Company maintains close relationships
with leading interventional neuroradiologists and neurosurgeons worldwide
who are dedicated to expanding the use of interventional neurovascular
techniques. Target's strategy includes bringing new tools and
technologies to this highly specialized population of physicians. Based
on its well-developed network and close relationships with
interventionalists, Target may establish alliances with outside entities
who have appropriate technologies but lack the knowledge, distribution
capabilities, or relationships required to serve this marketplace.
PRODUCTS
The Company's products include micro-catheters and guidewires, embolic
devices and vascular angioplasty products. All of Target's products are intended
for single use and are either disposed of or, in the case of micro-coils, remain
in the patient after the procedure.
Micro-Catheters and Guidewires
Target's micro-catheters and guidewires are used to access small vessels in
the circulatory system. A catheterization procedure typically involves the
insertion of a guidewire through a needle puncture into the easily accessible
femoral artery of the upper leg. A large diameter guidewire is pushed through
the vasculature of the circulatory system and a large guiding catheter is then
advanced over the guidewire so that the tip of the guiding catheter reaches the
appropriate large artery. The guidewire is then removed. To access the
vasculature of the brain, Target's guidewires and micro-catheters are advanced
through the large guiding catheter to a blood vessel in the neck and then pushed
through the guiding catheter tip. Using x-ray imaging to monitor positioning,
the interventional physician alternately advances the guidewire and
micro-catheter through blood vessels in the brain to the diseased site. These
blood vessels are smaller than those in the neck and are typically characterized
by numerous acute curves. After the micro-catheter is positioned, the guidewire
is removed to allow the infusion of diagnostic, embolic or other therapeutic
agents through the micro-catheter directly to the diseased site.
Several design characteristics enable Target's guidewires to be manipulated
and maneuvered through small tortuous blood vessels to allow its micro-catheters
to access the diseased site. These include (i) gradual transitioning of
guidewire stiffness to provide a flexible, atraumatic tip and a more rigid
handle for manipulation and advancement, (ii) torqueability to permit steering
of the guidewire by the interventional physician (through manipulation of the
angled tip of the guidewire) into side-branch vessels, (iii) lubricious
guidewire surface coating to reduce friction as the catheter is advanced over
the guidewire, and (iv) tip radiopacity to enable the physician to view the
device under x-ray imaging. Target's Taper, Seeker, Dasher and Mach guidewires
allow the interventional physician to use a guidewire specifically designed and
engineered to match the challenges of the vasculature being catheterized.
Target's Taper guidewire is made of a precision ground, tapered stainless steel
core with a wrapped platinum coil tip. The Taper is the Company's most steerable
guidewire and is typically used to provide initial access to the tortuous
vascular anatomy. The Seeker and Dasher guidewires are more flexible than the
Taper, incorporating coatings that enhance smooth tracking of Target's
micro-catheters over the guidewire. The Mach has a hydrophillic coating
(Hydrolene) for reduced surface friction which make the wires optimal for use in
tortuous anatomy. In addition, the Mach guidewires are designed with a shapeable
tip, for customizing, and reshaping the tip angle. The Company's
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guidewires range in size from 0.010 to 0.022 inches in diameter and are often
used sequentially in a procedure. For example, to access remote sites, an
interventional physician could first use a Taper, followed by a Seeker or
Dasher.
To navigate the complex vascular anatomy of the brain and other regions
remote from large arteries, Target's micro-catheters must be rigid enough to be
pushed as much as five feet through the circulatory system, yet flexible enough
to track over a guidewire without injuring the blood vessel. All of the
Company's micro-catheters utilize Target's variable shaft stiffness design,
which is a patented design feature of Target's Tracker catheters. The Company's
micro-catheters are highly flexible at the leading (distal) end, have a slightly
stiffer middle section and are stiffer still at the trailing (proximal) end.
Target believes that this design enables the interventional physician to
navigate tortuous vessels that cannot practically be navigated by a catheter not
incorporating variable stiffness. The Company's largest selling micro-catheter,
the Tracker, is manufactured in diameters ranging from 0.014 to 0.052 inches and
in a variety of lengths. After accessing a diseased site, Target's
micro-catheters may be used by the practitioner to treat the disease by
delivering various diagnostic or therapeutic agents or embolic devices such as
the Company's micro-coils.
The FasTRACKER micro-catheter incorporates a proprietary chemically bonded
hydrophilic polymer that allows the micro-catheter to glide more easily through
the circulatory system, possibly resulting in shortened procedure times. Market
clearance for the FasTRACKER has been obtained in the United States and Japan
and Europe.
The Soft Stream micro-catheter incorporates perforations on the sides of
the distal end for more effective infusion of diagnostic and therapeutic agents.
Guidewire tracking of the Soft Stream micro-catheter into small tortuous blood
vessels is enhanced by the varied stiffness of the catheter shaft. The flexible
distal end of the Soft Stream micro-catheter is intended to minimize trauma to
occluded vessels, such as saphenous (coronary bypass) vein grafts.
The Company also markets a number of flow-assisted micro-catheters that
incorporate a highly flexible shaft material and are designed to access diseased
sites characterized by rapid blood flow. Using the "flow-assisted" technique,
the interventional physician advances the micro-catheter without a guidewire and
allows the blood flow to assist in positioning the catheter. In certain cases,
this technique enables interventional physicians to maneuver more quickly
through rapid flow vessels than would be possible using micro-catheters that
track over guidewires. In June 1993, Target introduced a redesigned Zephyr
flow-assisted micro-catheter.
Target's Retriever endovascular snare is designed to retrieve objects in
the cerebral, peripheral and coronary vasculature. The Retriever combines a
guidewire and variable stiffness catheter to allow access to remote, tortuous
vasculature. The distal end of the guidewire is radiopaque and is attached to
the distal end of the catheter, forming a loop. By extending or retracting the
guidewire through the catheter, the interventional physician can adjust the size
of the loop to encircle and grasp the desired object. Target introduced the
Retriever endovascular snare in June 1992.
The Company's micro-catheters range in domestic list price from $140 to
$340, and its guidewires range in domestic list price from $120 to $180. In a
typical procedure involving difficult-to-access vessels, multiple Target
micro-catheters and guidewires may be used.
For the fiscal years ended March 31, 1996, 1995 and 1994, sales of Target's
micro-catheters accounted for approximately 40 percent, 46 percent and 52
percent, respectively, and sales of Target's guidewires accounted for
approximately 19 percent, 20 percent and 22 percent, respectively, of Target's
product sales during such periods.
In addition, as a result of the acquisition of ITC in May 1996, the Company
has added the Non-Detachable Silicone Occlusion Balloon ("NDSB") products to its
product line. The NDSB products are non-detachable soft silicone balloons with a
radiopaque catheter and tip marker which may be flow-directed or catheter guided
to the desired site. Inflation with an iso-osmolar contrast agent completes the
occlusion. The NDSB provides effective temporary vascular occlusion with low
radial pressure, minimizing the risk of vessel trauma in cases requiring
directional flow control, temporary control of hemorrhage, pre-embolization test
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occlusion and intra-operative flow control. NDSB was cleared for marketing in
the United States in February 1990.
The following table shows the Company's principal micro-catheter and
guidewire products and indicates significant applications for which such
products are used.
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DATE FIRST
CURRENT MODEL
# OF INTRODUCED REPRESENTATIVE
PRODUCT LINE MODELS IN U.S. INDICATIONS(1) CLINICAL APPLICATIONS
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MICRO-CATHETERS
Tracker Infusion 8 Oct. 1986 Neurovascular, general Delivery of diagnostic
Catheter vascular and and therapeutic agents
cardiovascular infusion
Tracker Soft Stream 2 Dec. 1991 General vascular, Delivery of diagnostic
Infusion Catheter and cardiovascular and and therapeutic agents
Micro Soft Stream neurovascular infusion
with Hydrolene
Retriever Endovascular 2 June 1992 General vascular, Retrieval of foreign
Snare cardiovascular and objects in small
neurovascular use vessels
Zephyr Flow-Assisted 1 June 1993 Neurovascular and Delivery of therapeutic
Catheter general vascular agents
FasTRACKER Infusion 4 Aug. 1993 Neurovascular, general Delivery of diagnostic
Catheter vascular and and therapeutic agents
cardiovascular infusion
Balt Magic 4 Sept. 1993 Neurovascular infusion Infusion of contrast
Flow-Assisted materials
Catheter
FasGUIDE Guiding 4 Nov. 1994 General vascular and Conduit for other
Catheter neurovascular use medical devices and
infusion of diagnostic
agents
Non-Detachable Silicone 15 Feb. 1990 Temporary vascular Temporary occlusion for
Balloon occlusion diagnostic purposes
GUIDEWIRES
Taper Steerable 5 July 1987 Neurovascular, general Assist in placement of
Guidewire vascular and therapeutic and
cardiovascular use diagnostic catheters(2)
Seeker Steerable 3 Dec. 1988 Neurovascular, general Assist in placement of
Guidewire vascular and therapeutic and
cardiovascular use diagnostic catheters
Dasher Steerable 3 June 1992 Neurovascular, general Assist in placement of
Guidewire vascular and therapeutic and
cardiovascular use diagnostic catheters
Mach Guidewire 4 April 1995 Neurovascular and Assist in placement of
peripheral vascular use therapeutic and
diagnostic catheters
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(1) Not all models are labeled for all stated indications.
(2) Pursuant to an agreement with Eli Lilly and Company, Target cannot market
this product for use in coronary angioplasty applications. See "Patents,
Trade Secrets and Licensees."
Embolic Devices
The Company's family of embolic devices includes micro-coils that are
pushed through a catheter for delivery to a diseased site, micro-coils that are
mechanically or electrolytically detached, or released in applications and
procedures where highly precise coil placement is necessary, embolic particles
and detachable silicone balloon products.
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Target's pushable coils include complex helical and straight platinum
coils, and Braided Occlusion Devices. The Company's complex helical and straight
platinum micro-coils are designed to be inserted through a Tracker
micro-catheter to occlude the diseased area of a blood vessel. These micro-coils
are placed by positioning the distal tip of a Tracker micro-catheter at the
desired delivery site and pushing the micro-coil through the catheter and out
the tip with a coil pusher. The Company's complex helical coils, when released,
twist and take on a complex shape to fill and block the diseased vessel.
Target's micro-coils are used to treat arteriovenous malformations ("AVM"s),
which are aberrant interconnections of arteries and veins. In these cases, the
Company's micro-coils are delivered to the diseased region to block blood
vessels and restrict blood flow. (This allows for surgical removal of the AVM
with possibility of reduced blood loss.) Many models of Target's micro-coils
incorporate polyester fibers to enhance space filling and promote occlusion. The
Company's micro-coils vary in length and shape, and range in domestic list price
from $160 to $370 for a box of five. Target has also developed its Braided
Occlusion Devices, all of which are densely covered with polyester fibers and
are manufactured in relatively simple shapes. The greatly increased density of
polyester fibers, relative to Target's other micro-coil products, promotes
occlusion.
The Company's detachable coils include its GDC system, which provides
detachment through electrolysis, and its Interlocking Detachable Coil ("IDC")
system, which provides detachment through release of an interlocking mechanical
coupling.
Target's GDC system is used for (a) the treatment of high-risk or
inoperable neurovascular aneurysms which are balloon-like enlargements stemming
from weakened vessel walls, or (b) embolizing other vascular malformations such
as arteriovenous malformations and arteriovenous fistulae of the neuro
vasculature. The GDC system incorporates a micro-coil which is attached to a
delivery wire. This allows a micro-coil to be retracted into the catheter and
then reinserted if initial micro-coil placement is sub-optimal. In addition,
movement of the micro-coil is eliminated until detachment, which reduces the
risk that the micro-coil will be dislodged. Precise coil placement is essential
for effective treatment but is difficult to achieve and may require a number of
attempts. If placed improperly in an aneurysm, the micro-coil may become
dislodged or released into the bloodstream. Application of a slight electric
current to the wire produces controlled, electrolytic detachment of a coil after
it has been placed precisely in the aneurysm. Once in place, the GDC disrupts
blood supply to the aneurysm, occluding and sealing off the aneurysm from the
blood vessel. Three patents have been issued and eleven additional patents have
been applied for with respect to the GDC system.
In October 1993, the Company announced that it was pursuing certain changes
to the GDC system as a result of magnetic resonance imaging ("MRI") tests which
indicated a potential for the creation of small metallic particles during the
electrolytic detachment of the coil. Upon completion of certain laboratory tests
of these changes a supplement to the existing IDE was filed with the FDA in
January 1994 and approved in March 1994. The revised IDE protocol submitted to
the FDA by Target required commencement of limited clinical trials for the
modified GDC system. Target exchanged modified product for any original product
that customers still had in their inventory as treatment sites were converted to
the modified product. The limited clinical trials in the United States were
commenced in April 1994. The clinical trials with the modified GDC system showed
an apparent reduction in both the frequency of the occurrence and the size of
these microscopic particles. The results of these clinical trials were then
included in a new application for 510(k) clearance for the modified GDC system,
which the Company submitted in March 1995. In September 1995, the Company
obtained clearance by the FDA to market the GDC system in the United States.
Regulatory clearance to market the modified product in France was obtained
during the quarter ended December 31, 1994, and the Company is currently
pursuing regulatory clearance in Japan for such product.
Unlike the GDC, the IDC is not released by an electrical charge but through
mechanical means. Currently, the IDC system is principally marketed in Japan.
Target may seek regulatory clearance to use the IDC in United States for the
treatment of peripheral fistulae and AVMs in the future.
For the fiscal years ended March 31, 1996, 1995 and 1994, the Company's
micro-coil products, including the GDC system, accounted for 40 percent, 31
percent and 24 percent, respectively, of Target's product sales.
In addition, as a result of the acquisition of ITC in May 1996, the Company
has added the CONTOUR Emboli ("Contour") and Detachable Silicone Occlusion
Balloon Catheter ("DSB") products to its product
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line. Contour are dry, sterile polyvinyl alcohol foam particles that can be
suspended in contrast media or saline, as appropriate at the user's desired
concentration to suit catheter selection. Contour provide rapid, effective
vascular occlusion following selective placement via an appropriate catheter.
Contour was cleared for marketing in the United States in November 1993.
The DSB products are detachable soft silicone balloons with a radiopaque
catheter and tip marker which may be flow-directed or catheter directed to the
desired site. Inflation with an iso-osmolar contrast agent completes the
occlusion. The balloon is then detached simply and rapidly either by gentle
traction or coaxial detachment. The DSB is designed to provide immediate and
permanent vascular occlusion. The DSB products are currently cleared for sale
only in European countries. The Company anticipates conducting additional
studies of the DSB and submitting a 510(k) in the United States in fiscal 1997.
The following table shows the Company's principal micro-coil products and
indicates significant applications for which such products are used.
<TABLE>
<CAPTION>
DATE FIRST
CURRENT MODEL
# OF INTRODUCED REPRESENTATIVE
PRODUCT LINE MODELS IN U.S. INDICATIONS CLINICAL APPLICATIONS
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<S> <C> <C> <C> <C>
EMBOLIC DEVICES
Complex Helical and 27 Sept. 1989 Neurovascular and Embolization of AVMs
Straight Platinum peripheral vascular and trauma-induced
Coils occlusion vessel rupture
035 Coils 13 (1) Peripheral vascular Embolization of AVMs
occlusion and trauma-induced
vessel rupture in
peripheral vessels
Guglielmi Detachable 58 Sept. 1995 Neurovascular aneurysm, Aneurysm embolization
Coil System AVM and AVF occlusion
Interlocking Detachable 26 (1) Neurovascular and Embolization of AVMs
Coil System peripheral vascular and fistulae
occlusion
Braided Occlusion 7 Dec. 1992 Neurovascular and Embolization of AVMs
Device peripheral vascular and trauma-induced
occlusion vessel rupture
Berenstein Coils....... 12 (1) Neurovascular and Embolization of AVMs
peripheral vascular
occlusion
Contour Embolization 7 Nov. 1993 Vascular occlusion Embolization of AVMs
Particles and fistulae
Detachable Silicone 5 (1) Neurovascular occlusion Carotid cavernous
Balloon Catheter fistulae parent artery
occlusion
</TABLE>
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(1) Not yet approved for sale in the United States.
Vascular Angioplasty
Target has developed its Stealth balloon angioplasty micro-catheters,
including the FasSTEALTH (which incorporates a hydrophilic polymer), for use in
dilation of certain arteries of the peripheral vasculature that have become
narrowed due to atherosclerotic disease. These balloon-tipped micro-catheters
are inserted into the vessel system and guided through the arteries over a
guidewire to the site of a blockage, using a technique similar to that used to
maneuver Target's other micro-catheters. The deflated balloon is positioned
across the occluded area and inflated and deflated once or several times,
resulting in expansion of the arterial narrowing to improve blood flow. The
Company's Stealth balloon angioplasty micro-catheter utilizes a proprietary
single lumen (or channel) design and incorporates variable shaft stiffness to
impart guidewire tracking characteristics similar to those of the Tracker
micro-catheter. The Company believes that other balloon angioplasty catheters
are less maneuverable because they either use a single lumen with a fixed wire
or
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two lumens, i.e., one to track over the guidewire and a second to allow infusion
of liquids to inflate the balloon located at the tip of the catheter. Target's
trackable, single lumen design and variable shaft stiffness allow the Stealth to
track through tortuous vascular paths. The Stealth is used to dilate peripheral
arteries diseased by atherosclerotic plaque that are not accessible by
conventional angioplasty catheters. The Stealth and FasSTEALTH micro-catheters
are each available in six balloon diameters and have a domestic list price of
$650 and $695, respectively.
Target Therapeutics, Tracker, Soft Stream, The Retriever, Zephyr,
FasTRACKER, Taper, Seeker, Dasher, GDC, Stealth, HYDROLENE, FasGUIDE, MACH and
FasSTEALTH are registered U.S. trademarks of Target Therapeutics, Inc. IDC
is a trademark of Target Therapeutics, Inc.
CONTOUR and DSB are registered U.S. trademarks of Interventional
Therapeutics Corporation, a subsidiary of Target. Magic is a registered
trademark of Balt Extrusion.
MARKETS
Interventional Neuroradiology. Acute stroke is the third leading cause of
death in the United States and a major cause of adult long-term disability.
Stroke is the disruption of blood supply to critical areas of the brain. The
reduced blood flow results in a lack of oxygen to the brain, known as ischemia,
and often causes the loss of normal brain functions. Patients who survive a
stroke may experience partial paralysis or may lose the ability to speak or
comprehend language. Strokes are typically caused either by ruptures
(hemorrhagic stroke) or blockages (vaso-occlusive stroke) of arteries within or
leading to the brain.
Hemorrhagic strokes are generally caused by the rupture of arteries
resulting from vascular defects such as cerebral aneurysms or AVMs. Cerebral
aneurysms and AVMs are estimated to occur in one-half of one percent to five
percent of the general population in the United States. Without treatment, these
vascular defects typically grow with time and may cause a variety of symptoms or
may remain asymptomatic until they rupture. In some people, these defects never
become symptomatic or rupture. The treatment of hemorrhagic stroke typically
requires highly invasive neurosurgery, which involves the opening of a portion
of the skull, manipulation of the brain, extensive blood loss, prolonged
hospitalization and a long recovery period.
In the case of aneurysms, neurosurgery is generally performed either before
or after an aneurysm ruptures, although many patients who survive a ruptured
aneurysm are not treated surgically due to the high risk of such surgery.
Approximately 19,000 aneurysm surgeries were performed in the United States in
1995. Target's GDC system, used with a Tracker micro-catheter, is a specialized
micro-coil designed for use in aneurysms. The Company believes the GDC system
may in certain cases be an effective, minimally invasive treatment to lessen
blood loss or reduce the risk of a re-rupture for patients suffering from
hemorrhagic stroke due to ruptured aneurysms, or as prophylactic treatment for
non surgical patients by embolizing aneurysms prior to rupture.
Approximately 4,000 AVMs were surgically removed in the United States in
1995. Target's micro-coils enable interventional physicians to occlude AVMs
prior to surgery. After occluding the vessels of or leading to an AVM, the
neurosurgeon may perform surgery to remove the abnormal vasculature more rapidly
and with less blood loss than if the surgery was performed without first using
the micro-coil, reducing the attendant surgical risks. In some cases, the
micro-coils may occlude the AVM sufficiently, so that highly-invasive surgery
can be avoided.
Vaso-occlusive stroke is typically caused by the existence of a blood clot
within an artery causing a complete blockage of blood flow or by the narrowing
of blood vessels due to the formation of atherosclerotic plaque on the inside of
vessel walls, causing a reduction in the flow of blood and increasing the risk
that a blood clot will cause a complete blockage.
There are a number of conventional treatments for cerebral atherosclerotic
disease. Pharmacological treatment using drugs to dilate narrowed vessels often
has limited effectiveness, especially in highly diseased blood vessels. Vascular
surgery to remove the atherosclerotic tissue within a diseased artery has proven
to be somewhat more effective but currently is limited to blood vessels within
the neck. Arteries within the brain are
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generally too small and difficult to reach for this procedure and have typically
been treated by highly invasive bypass grafting techniques. Balloon angioplasty,
which is considered to be less invasive and more cost-effective as a means of
treating coronary and peripheral atherosclerosis, has not been used extensively
to treat cerebral atherosclerosis primarily due to the limitations of standard
catheter systems. The Company is not aware of any balloon catheter currently on
the market indicated for cerebral angioplasty. Target's Stealth micro-catheter
has been cleared by the FDA for performing minimally invasive balloon
angioplasty procedures to access and dilate small vessels of the peripheral
vascular system to permit the restoration of normal blood flow.
The conventional treatment for a cerebral blood clot involves the use of
thrombolytic drugs. However, such drugs appear to be relatively ineffective when
delivered intravenously and may cause significant bleeding in other parts of the
body as a side effect. Certain of Target's catheter products are cleared for
delivery of therapeutic agents, but additional clearances must be obtained with
respect to the use of a particular drug to treat a specific indication.
Similarly, the Company believes that its Soft Stream micro-catheter may be used
to deliver certain therapeutic agents through perforations in its side holes
directly to a disease site. By delivering such agents through the side-hole zone
of the micro-catheter, the entire length of the diseased area can be treated at
once, potentially accelerating treatment. Regulatory clearance of Target's
catheter products for site-specific drug delivery will depend in part on
clinical proof of efficacy and safety, and there can be no assurance that such
clinical proof will be obtained. While the Company is aware that others are
conducting or planning to conduct such studies, Target does not currently intend
to initiate independent studies in this area.
Peripheral Vascular Intervention. The Company's products are used to treat
many site-specific disorders affecting the peripheral vascular system. These
disorders, which include gastro-intestinal bleeding, peripheral vascular blood
clots, internal bleeding from trauma, and peripheral AVMs and other
malformations, are not easily accessible by conventional catheters and therefore
have traditionally been treated by highly invasive surgery. Tracker
micro-catheters can be used to deliver embolizing agents or devices to address
certain cases of gastro-intestinal bleeding, trauma-induced bleeding or AVMs and
other malformations. Occluded peripheral vessels can be treated by dilation
using a Stealth balloon angioplasty micro-catheter in the case of
atherosclerosis.
Target's infusion micro-catheters are also being used to treat liver
cancer, primarily in Japan where the incidence of that disease is relatively
high. The micro-catheters are used to deliver embolizing agents to the blood
vessels that feed the tumor to reduce or eliminate its blood supply. Although
not curative, such treatment may contribute to an improved quality of life for
such patients.
MARKETING AND SALES
The Company's marketing strategy is designed to promote awareness of the
clinical efficacy and cost-effectiveness of the minimally invasive
interventional procedures in which Target's products are employed. The Company
implements this strategy by providing clinical and technical information to its
sales force, subsidiaries, joint ventures and worldwide distributors that
encourages the interventionalist to perform procedures utilizing Target's
products. Target places particular marketing emphasis on physician assistance
and support for physician training.
In North America, the typical user of the Company's products is the
interventional neuroradiologist. Target believes that the number of
interventional neuroradiologists and neurosurgeons trained to use its vascular
access and delivery products to treat neurovascular disorders is relatively
small and the growth in the number of neuro-interventional physicians is
constrained by the lengthy training programs required to educate these
physicians in the United States. The Company supports these programs through
consultation with these practitioners. The expansion of these training programs,
and increased usage of Target's products by these practitioners, are important
factors in the growth of the Company's domestic market for treating
neurovascular disorders with its products. In addition, an important source of
product promotion comes from referrals within the medical community. As of March
31, 1996, there were ongoing programs training approximately 30 fellows at 20
teaching hospitals in North America. Target believes that future growth in the
United States market also depends significantly on the unpredictable, costly and
time-consuming process of obtaining regulatory clearance to market its products.
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Internationally, the Company's products are typically used by
interventional neuroradiologists, neurosurgeons, cardiologists and peripheral
vascular radiologists. These practitioners provide peer training, expanding the
use of Target's products. To date, the Company is not aware of any formal
fellowship programs outside of the United States. However, there are several
interventional centers where physicians are trained in the field of
interventional neuroradiology.
Future growth of the market for the Company's neurovascular
micro-catheters, guidewires and embolic devices will depend upon success in
obtaining necessary regulatory clearances and expansion of the number of trained
interventional practitioners. To the extent that physicians do not adopt these
products for use in treating neurovascular disorders or sufficient physicians
are not trained in the use of Target's products, both in the United States and
abroad, the market for the Company's products will remain limited.
Of the 1,500 hospitals in the United States providing interventional
radiology services, approximately 450 provide some treatment for neurovascular
disease. Approximately 100 hospitals in the United States accounted for a
substantial portion of the Company's domestic revenues in the fiscal year ended
March 31, 1996. Internationally, approximately 275 centers provide
neurointerventional therapy. In Japan, the majority of cases are performed by
neurosurgeons trained in these techniques.
Sales to customers outside North America are made through a network of 44
international specialty distributors in over 40 countries, Target's German
subsidiary, Target's new French joint venture and the Japanese joint venture
with CMI, all of which are described below. Target promotes its products through
trade shows, seminars, publications and direct mailings to interventional
practitioners. Export product sales accounted for 71 percent, 69 percent and 60
percent of total product sales for the fiscal years ended March 31, 1996, 1995
and 1994, respectively. Target anticipates that product sales to customers in
Europe and Japan will generate a large portion of total product sales through at
least fiscal 1997. The Company's international operations are subject to certain
risks common to foreign operations in general, including governmental
regulations, reimbursement practices, and import and export restrictions.
Changes in such governmental regulations or import and export restrictions could
adversely affect sales of the Company's products and Target's results of
operations.
In addition to selling its own products, the Company has exclusive rights
in the United States and Canada to distribute Balt's Magic line of flow-assisted
catheters, guiding-catheters and catheter valve introducers. The agreement
between Target and Balt, effective in June 1992 expires in August 1996 and is
renewable at the option of Target for an additional three-year term if certain
sales and regulatory milestones are achieved.
In 1991, the Company formed a distribution joint venture with CMI in order
to provide Target a direct presence in Japan. CMI initially contributed
approximately $200,000 for 100 percent ownership in the joint venture, and in
November 1992, CMI sold a 50 percent ownership interest in the joint venture to
Target for approximately $120,000. The joint venture, Target-CMI, Inc.,
commenced selling in Japan certain of the Company's products for coronary
applications in December 1991 and Target's products for neuro and peripheral
vascular intervention in April 1992. Sales to CMI accounted for approximately 35
percent of the Company's product sales for the years ended March 31, 1996 and
1995, and 29 percent of the Company's product sales for the year ended March 31,
1994, respectively.
In October 1994, the Company acquired certain assets and liabilities of the
former distributor of Target's products in Germany. Target has formed a
subsidiary that is responsible for the direct sales operations of the Company in
Germany.
In June 1995 the Company and its former distributor in France, Guerbet
Biomedical, formed a joint venture to market the Company's products in France.
Target currently holds a majority ownership interest in the joint venture,
Target Guerbet Bio. The results of the operations in France, net of the minority
interest, are included in the consolidated results of the Company's beginning in
the second quarter of fiscal 1996.
MANUFACTURING
Target's manufacturing organization fabricates certain proprietary
components of the Company's products and assembles, inspects, tests and packages
all components into finished products. By designing and
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manufacturing all of its products from raw materials, the Company believes it
maintains greater control of quality and manufacturing process changes and is
better able to limit outside access to its proprietary technology.
The Company believes that its custom-designed, proprietary process
equipment is an important component of its manufacturing strategy. In some
cases, Target has added proprietary software to standard equipment and, in
others, has developed proprietary enhancements for existing production machinery
to facilitate the manufacture of its products to exacting standards. The Company
has also developed core manufacturing technologies and processes, including (i)
proprietary extrusion techniques and equipment and polymer processing
capabilities, including composite lamination, welding of dissimilar materials,
balloon-forming, tubing expansion and silicone-coating, and (ii) proprietary
precision guidewire grinding techniques enabling fabrication of a large variety
of guidewire core profiles using many core alloys, thermal treating, variable
pitch spring winding and soldering. Other areas of Target's technological
expertise include braiding, teflon-spray coating, hydrophilic coatings,
electroplating and material cleaning and surface preparation.
Most of the Company's subassemblies and products are assembled and tested
in a controlled clean-room environment by trained production personnel. At
various assembly stages each lot of product undergoes thorough testing to ensure
compliance with applicable regulations. Target's quality assurance group
independently verifies that product fabrication and inspection process steps
meet the Company's specifications and applicable regulatory requirements. Upon
successful completion of these tests, the products are sterilized, packaged and
prepared for shipment.
Raw materials utilized in the Company's products are purchased from outside
vendors. Target's manufacturing group procures, tests and inspects all raw
materials used in the Company's products. Target relies on single sources for
certain of its key components. The Company believes, however, that alternative
sources for these components are available and generally maintains adequate raw
material inventory supply to avoid product flow interruptions. Nevertheless, any
unanticipated interruption in the supply of these components could have a
material adverse effect on the Company.
PRODUCT DEVELOPMENT
The Company's product development strategy is to improve its current
products and to develop new products to meet the needs of physicians performing
small-vessel interventional procedures. Target is developing new products and
enhanced versions of its existing products to perform an expanded range of
diagnostic and therapeutic procedures within the Company's core interventional
neurovascular and peripheral vascular markets. Target's future success will
depend upon, among other factors, its ability to develop or acquire from third
parties, introduce and manufacture new products or enhanced versions of, or new
uses for, existing products, and to obtain regulatory clearance on a timely
basis for such products.
For the embolization of peripheral aneurysms and AVMs, the Company has
developed its IDC coils that are detached by mechanical, rather than
electrolytic, means as described above. The initial intended use of the IDC
system is the treatment of AVMs or fistulae. The IDC system may have
applications where speed of detachment is important or where a high degree of
accuracy of placement is not as critical. Seven patents have been issued and an
additional six patents have been applied for with respect to IDC. In addition,
the Company has acquired rights from a third party with respect to an IDC. The
IDC system is currently being marketed commercially in Japan as the Mechanical
Detachable Coil.
Target believes its technology may be used for applications other than
those for which its products are currently marketed or under development. For
example, in December 1992, Target formed a partially owned affiliate, Conceptus,
Inc., to focus on the diagnosis and treatment of female and male reproductive
disorders such as infertility and impotence. The Company has granted to
Conceptus certain rights to its current and future proprietary technologies for
exclusive use in developing and commercializing products for application in the
field of reproductive physiology. In March and June 1994, May and June 1995 and
February 1996, Conceptus completed additional rounds of financing. The February
1996 financing was the initial public offering of Conceptus stock. As of May 31,
1996, Target held an approximate 18 percent equity position in Conceptus.
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In May 1993, Target formed another partially owned affiliate, Cardima, Inc.
("Cardima"), which is engaged in the development of products for diagnosis and
treatment of cardiac rhythm disorder. The Company has granted Cardima certain
rights to its current and future proprietary technologies for exclusive use in
developing and commercializing products primarily for electrophysiology
applications. In December 1994, December 1995 and February 1996, Cardima
completed additional rounds of financing. As of May 31, 1996, Target held an
equity interest in Cardima of approximately 16 percent.
In June 1993, the Company, along with Collagen Corporation ("Collagen") and
Celtrix Pharmaceuticals, Inc., formed another partially owned affiliate,
Prograft Medical, Inc. ("Prograft"), by contributing cash and granting certain
rights to its current and future proprietary technologies for exclusive use in
developing and commercializing products for applications in the field of
vascular prostheses. Prograft is focusing its development efforts on vascular
stents (devices that hold arteries open from within), grafts (that allow for the
repair of narrowed, blocked or weakened arteries and veins) and stent-grafts. In
July and August of 1994 and March 1995, Prograft completed additional rounds of
financing. As of May 31, 1996 Target held approximately 21 percent of the equity
in Prograft.
Target's expenditures for research and development totaled approximately
$12.9 million, $10.3 million and $7.6 million in the years ended March 31, 1996,
1995 and 1994, respectively.
COMPETITION
The medical device industry is characterized by rapidly evolving technology
and competition. The Company currently experiences competition in the
interventional neuroradiology market and expects such competition to increase
substantially. Target believes that procedures using its interventional
products, including the recovery period, are substantially less costly than
highly invasive, traditional surgical procedures and may ultimately replace
these procedures in some applications. In many other applications, the Company's
products can be used prior to surgery to enable the physician to perform
procedures less invasively, with greater efficiency and reduced patient trauma
in a shorter period of time. Several companies in the United States, including
large companies with resources significantly greater than those of Target, have
introduced products that are being used in the interventional neuroradiology
market. The Company is also aware of other companies that may pursue
commercialization of products which may compete with Target's products and may
result in future pricing and margin pressures within this market. There can be
no assurance that these companies will not succeed in developing technologies
and products that are more effective than any which have been or are being
developed by the Company or that would render Target's technologies or products
obsolete or not competitive.
The cardiovascular and peripheral vascular interventional markets are
substantially more developed than the neuroradiology market and are subject to
intense competition. There are many large companies with significantly greater
financial, manufacturing, marketing, distribution and technical resources, and
experience than the Company focusing principally on cardiovascular and
peripheral applications for their catheter technologies. As a result, Target
focuses its product development and marketing strategies on market segments
where its small vessel access and delivery systems can be used in applications
not presently addressed by conventional catheter and other interventional
products. There can be no assurance, however, that competitors will not
successfully enter these markets with superior products. In addition, Target is
aware of several other companies that have introduced guidewires to the
marketplace and attributes the slower growth rate of its guidewire product line
to increased competitive pressures. Such competition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that the primary competitive factors in the market for
interventional small vessel access and delivery products are safety, efficacy,
ease of use, reliability, innovation and price. In addition, Target believes
that customer service and physician relationships, as well as the time in which
companies can develop products, complete the clinical testing and regulatory
clearance process, and supply commercial quantities of the products to the
market are important competitive factors.
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PATENTS, TRADE SECRETS AND LICENSES
Target's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business. As of May 31, 1996, Target held or was the exclusive licensee of
51 issued United States patents, 93 United States applications pending and had
numerous foreign patents issued and applications pending covering various
aspects of its products and core technology, including patents and applications
acquired in connection with the acquisition of ITC. The issued patents relate to
the variable stiffness design of Target's Tracker micro-catheters, the patent
for which expires in April 2005, and other important aspects of the Company's
technologies. No assurance can be given that pending patent applications will be
approved or that any patents will provide competitive advantages for Target's
products or will not be challenged or circumvented by competitors. In order to
preserve its competitive position, it is Target's intent to actively pursue any
patent infringement issues of which it becomes aware.
The Company also relies upon trade secrets and technical know-how and
continuing technological innovation to develop and maintain its competitive
position. Target typically requires its employees, consultants and advisors to
execute appropriate confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationship with the
Company. There can be no assurance, however, that these agreements will not be
breached or that Target will have adequate remedies for any breach. Furthermore,
no assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that Target can
meaningfully protect its rights in unpatented proprietary technology.
The Company was founded in June 1985 as a corporate joint venture between
Collagen and Eli Lilly and Company ("Lilly"). In January 1988, Lilly sold its
interest in Target to Collagen. In connection with the transfer of ownership,
Lilly and its wholly owned subsidiary, Advanced Cardiovascular Systems, Inc.
("ACS"), transferred to the Company all rights to certain patents and
confidential information developed through the transfer date by the joint
venture. Additionally, Target granted to Lilly and ACS a royalty-free worldwide
license to make, use and sell products, other than in the field of therapeutic
embolization, under certain patents and know-how relating to the Taper
guidewire. Such license is exclusive, except that Target retained a
non-exclusive, royalty-free worldwide right under such patent rights and
know-how to make, have made, use and sell products, other than in the field of
diagnosis and treatment of coronary angioplasty. Lilly and ACS further agreed
not to assert against the Company any intellectual property right relating to
Target's Tracker micro-catheter and Taper guidewire, or any products
substantially similar to such products and for the applications for which such
products were then being used.
In June 1990, the Company obtained an exclusive, worldwide, royalty-bearing
license from The Regents of the University of California to certain pending
patent applications relating to the construction and method of use of the GDC
system. The license requires Target to make certain minimum payments and to pay
a royalty based on net sales of products utilizing the licensed technology. This
license extends for the life of the patents unless terminated earlier in the
event of Target's breach of certain covenants or agreements, including failure
to obtain regulatory clearance or market the GDC system within specified
periods. Under the license, the licensor retained the rights to use the
invention and associated technology for educational and research purposes.
In March 1992, the Company obtained an exclusive, worldwide,
royalty-bearing license to certain inventions, technical information, know-how
and patents which it may use with respect to an endovascular retrieval device.
Target commenced marketing a product using this technology, the Retriever
endovascular snare, in June 1992. The license requires the Company to pay a
royalty based on net sales of products utilizing the licensed technology. The
license extends for the life of the patents, after which Target shall have a
royalty-free, paid-up license.
In October 1992, September 1993, March 1994 and May 1995, Target obtained
certain royalty-bearing licenses to certain inventions, technical information,
know-how and patents with respect to the surface treatment of guidewires,
temporary use infusion catheters, devices used to introduce other neurovascular
catheters or embolics and for a balloon dilatation catheter. Such licenses are
non-exclusive except for infusion
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catheters sold exclusively for neurovascular infusion usage. The Company
commenced marketing an infusion catheter product line using this technology, the
FasTRACKER product family, during fiscal 1994. During fiscal 1995 Target
introduced a line of guide catheters used to introduce other neurovascular
catheters, the FasGUIDE product family and a line of balloon dilation products,
the FasSTEALTH product family, using this technology. In August 1995, the
Company commenced sales of guidewire products, the Mach product family, which
use this technology. These licenses require the Company to make certain minimum
payments and to pay royalties based on net sales of products utilizing the
licensed technology. The licenses extend for the life of the patents but may be
terminated at Target's discretion with no future right to the technology.
In addition to the licenses described above, Target may, in the future,
license from third parties rights to certain products and processes related to
the Company's business.
The patent which relates to the variable stiffness design of the Company's
Tracker micro-catheters (the "Tracker patent") has been the subject of four
reexamination proceedings in the United States Patent and Trademark Office
("USPTO"). Following the completion of the first such proceeding, the USPTO
issued a reexamination certificate and confirmed the patentability of the patent
claims set forth in the certificate. Requests for second, third and fourth
reexaminations of the patent were initiated by one of the Company's competitors,
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of Boston Scientific
Corporation, and after the USPTO's review of such petitions the Company recently
received notice from the USPTO that it had reaffirmed the patentability of the
claims of the Company patent. Notwithstanding this result, no assurance can be
given that SciMed will not mount a legal challenge to the validity of the
Company patent or that the Company would prevail in any such action.
In November 1994 the Company filed a lawsuit in the United States District
Court (the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The District Court has denied Cordis and SciMed's request for a stay.
However, Target is currently awaiting a ruling from the Court of Appeals on a
motion by Cordis and SciMed seeking a stay of the preliminary injunction pending
the outcome of the appeals. The Court of Appeals has temporarily stayed the
preliminary injunction while it considers the motion. Notwithstanding the grant
of the Company's motion for a preliminary injunction, there can be no assurance
that the Company will be ultimately successful in this lawsuit.
The Company is also aware that at least one competitor in Europe has sold
micro-catheters that may infringe a patent that could issue on the Company's
patent application which is pending in the European Patent Office. The Company
is investigating its options for enforcement of its rights with respect to such
infringement. The patent which relates to the variable stiffness design of the
Company's Tracker micro-catheter is being opposed in Japan by an undisclosed
party.
GOVERNMENT REGULATION AND PRODUCT TESTING
The Company's research and development activities are subject to regulation
by numerous governmental authorities in the United States and other countries,
and the production and marketing of any products developed by Target are also
significantly regulated, particularly as to safety and efficacy. In the United
States, medical device products are subject to rigorous FDA review. The Federal
Food, Drug, and Cosmetic Act (the "FDC Act"), the Public Health Service Act and
other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, market clearance,
advertising and promotion of such products. Non-compliance with applicable
requirements can result in fines, civil penalties, injunctions, suspensions or
losses of regulatory clearance, recall or seizure of products, operating
restrictions, refusal of the
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government to approve product license applications or allow Target to enter into
supply contracts with government entities, and criminal prosecution.
Certain of the Company's products are sold pursuant to IDEs obtained from
the FDA. According to IDE regulations, sale of the applicable device for
clinical use may not constitute commercialization. As a result, Target sells
products subject to an IDE at prices which allow only for the recovery of
research and development, manufacturing and handling costs. In addition,
products sold under an IDE are limited by the FDA as to the number of
investigation sites and the number of patients treatable in clinical trials.
In order to obtain FDA clearance or approval of a new medical device,
Target must submit proof of safety and efficacy. In most cases, such proof
entails extensive pre-clinical, clinical and laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and time consuming and may take several years to complete.
There is no assurance that the FDA will act favorably or quickly in making such
reviews, and significant difficulties or costs may be encountered by the Company
in its efforts to obtain FDA clearance that could delay or preclude Target from
marketing any product it may develop. The FDA may also require post-marketing
testing and surveillance to monitor the effects of proposed products or place
conditions on any clearance that could restrict commercial applications of such
products. Product clearances may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing. In
addition, delays imposed by the governmental review process may materially
reduce the period during which the Company may have the exclusive right to
commercialize patented products or technologies.
The two principal methods by which medical devices may be submitted to the
FDA for clearance to market include a premarket notification filing under
Section 510(k) and a PMA application. To obtain a PMA, the applicant is required
to submit clinical data to the FDA, and the FDA may also request that a 510(k)
include clinical data. Before beginning a clinical study, the applicant must
submit an IDE application to the FDA for approval. The IDE application requires
that in vitro and in vivo animal tests be completed in order to demonstrate
sufficient safety of the product. Clinical studies must be done under a clinical
protocol with assurance of adherence to the protocol, informed consent from
clinical subjects, approval of an Institutional Review Board of the applicable
hospital, maintenance of required documentation, proper monitoring and
appropriate statistical evaluations.
Applications under the 510(k) procedure must demonstrate substantial
equivalence to a device that was on the market prior to the Medical Device
Amendments of 1976 or to devices marketed thereafter under the 510(k) procedure.
Applicants must defer marketing until a favorable response to the 510(k) is
received from the FDA. While reviewing the 510(k), the FDA may require
additional data, which can have the effect of materially extending the time
required to commence marketing. Each 510(k) for a separate application may
require the submission of clinical data concerning human patients relating to
the safety and the effectiveness for each specific proposed medical use. The FDA
may also refer the device to an advisory panel of experts for consideration and
recommendation, which may delay the 510(k) clearance process.
The preparation and processing of a PMA application is significantly more
complex and time consuming than a 510(k). Once the clinical investigation is
completed, the applicant must assemble and submit to the FDA a significant
quantity of clinical, animal testing, manufacturing, and other data. The PMA
approval process may take several years or longer and no assurance can be given
concerning the ultimate outcome of PMAs submitted by an applicant. In addition,
there can be no assurance that required approval from the FDA for any proposed
potential medical use will be granted, or that the FDA process will not be
unduly expensive or lengthy.
To date, all of the Company's FDA marketing clearances for commercially
available products have been obtained through the 510(k) process. It is possible
that future potential applications of existing products or that future products
may require PMA approval, with corresponding increases in the costs and time
required to obtain governmental clearance.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies. Target is subject to inspection on a routine
basis by both the FDA and the State of California for
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compliance with the FDA's current Good Manufacturing Practice ("GMP")
regulations. Under GMP regulations, Target is subject to certain procedural and
documentation requirements with respect to manufacturing and control activities,
and the Company's manufacturing facilities are subject to periodic inspections
by the FDA, as well as by state and foreign regulatory authorities. Target's
existing facilities have been inspected by the FDA in the past. The Company
believes its manufacturing facilities are in compliance in all material respects
with all applicable local, state and federal regulations.
Target must also comply with various FDA requirements for design, safety,
advertising, labeling, record keeping and reporting of adverse experiences with
the use of its products. The FDA actively enforces regulations prohibiting
marketing of products for unapproved uses. Failure to comply with applicable
regulatory requirements can result in, among other things, fines, civil
penalties, injunctions, suspensions or loss of clearances, seizures or recalls
of products, operating restrictions, refusal of the government to approve
product license applications or allow Target to enter into supply contracts,
injunctions and criminal prosecutions. Changes in existing requirements or
adoption of new requirements could adversely affect the ability of the Company
to comply with regulatory requirements. Failure to comply with regulatory
requirements could have a material adverse affect on Target's business,
financial condition and results of operations.
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act and other present and potential future federal, state or local
regulations. To date, compliance with these regulations has not had any material
effect on the Company's financial results, capital requirements or competitive
position.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States. Other countries, such as Japan, have standards
similar to those of the FDA. This disparity in the regulation of medical devices
may result in more rapid product clearance in certain countries than in the
United States, while clearance in countries such as Japan may require longer
periods than in the United States. In addition, the European Union has developed
a new approach to the regulation of medical products which may significantly
change the situation in those countries. The receipt or denial of FDA clearance
for a particular product may affect the receipt or denial of regulatory
clearance for that product in certain other countries.
Export sales of investigational devices or devices not cleared for
commercial distribution in the United States are subject to FDA export permit
requirements. In order to obtain such a permit, Target must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the sale of the device is not a
violation of that country's medical device laws.
PRODUCT LIABILITY LITIGATION AND INSURANCE
Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
results in personal injury claims. The Company's products are often used in the
brain, where there is a high risk of serious injury or death, and in other
life-threatening situations. Such risks will exist even with respect to those
products that have received, or in the future may receive, regulatory clearance
for commercial sale. While the Company seeks to maintain product liability
insurance with coverage that Target believes is comparable to that maintained by
companies similar in size and serving similar markets, there can be no assurance
that the Company's product liability insurance will be adequate or that such
insurance will remain available at acceptable costs, or at all. A successful
claim brought against Target for which insurance coverage is denied or in excess
of its insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, it is
possible that adverse product liability actions could negatively affect Target's
ability to obtain and maintain regulatory clearance for its products.
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THIRD-PARTY REIMBURSEMENT
The Company's products are purchased by hospitals, which, in the United
States, then bill various third-party payers, including Medicare, Medicaid and
private insurers, for the healthcare services provided to patients. Government
agencies reimburse hospitals for medical procedures at a fixed rate according to
diagnosis-related groups. Federal and state laws and regulations govern
reimbursement by such government agencies. Such laws and regulations also
influence reimbursement by private insurance companies of medical fees. Changes
in current policies could reduce or eliminate such reimbursements and thereby
adversely affect future sales of Target's products. Third-party payers may deny
reimbursement if they determine that the device used in the procedure is
unnecessary, inappropriate, not cost-effective, experimental or for a non-
approved indication. Third-party payers may deny reimbursement for treatments
using the Company's products, regardless of the FDA clearance status of such
products. Third-party payers are increasingly challenging the prices charged for
medical products and services. There can be no assurance that reimbursement from
third-party payers will be available, or if available, that reimbursement will
not be limited, thereby adversely affecting Target's ability to sell its
products profitably. Although the Company has not experienced any significant
problems to date, uncertainty exists as to the reimbursement status of newly
approved health care products and the current political issues being addressed
by the Clinton Administration, and there can be no assurance that adequate
third-party coverage will be available to patients. Similar circumstances exist
in many international markets and are subject to various foreign health care
policies. In such circumstances, sales of the Company's products could be
adversely affected.
EMPLOYEES
As of May 31, 1996, the Company and its wholly owned subsidiaries had 402
full-time and part-time employees, including 80 in research and development, 33
in regulatory, clinical and quality assurance, 200 in manufacturing and quality
assurance, 41 in sales, marketing and customer service and 48 in finance and
administration. Target is dependent upon a limited number of key management and
technical personnel. The Company's future success will depend in part upon its
ability to attract and retain highly qualified personnel. Target competes for
such personnel with other companies, academic institutions, government entities
and other organizations. The Company attempts to maintain competitive
compensation, benefits, equity participation and work environment policies to
assist in attracting and retaining qualified personnel as Target believes that
the success of its business will depend, in part, on its ability to attract and
retain such employees. None of Target's employees is covered by a collective
bargaining agreement. The Company believes its relationship with its employees
is good.
17
<PAGE> 18
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of June 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Gary R. Bang......................... 50 President, Chief Executive Officer and Director
Erik T. Engelson..................... 36 Senior Vice President, Operations and Research
and Development
Abhi Acharya, Ph.D. ................. 55 Vice President, Regulatory, Quality and Clinical
Affairs
Richard E. Cappetta.................. 37 Vice President, Europe
U. Hiram Chee........................ 36 Vice President, Peripheral Vascular Products
Ray H. Dormandy, Jr. ................ 48 Vice President, Silicone and PVA Technologies
Edward R. LeMoure.................... 41 Vice President and General Manager,
Robert E. McNamara................... 39 Vice President, Finance and Administration,
Chief Financial Officer and Assistant
Secretary
John C. Meyer........................ 52 Vice President, Human Resources
Timothy C. Mills, Ph.D. ............. 39 Vice President, New Business Development and
Chief Scientific Officer
Kevin P. Riley....................... 36 Vice President, Sales and Marketing
Patrick A. Rivelli, Jr. ............. 32 Vice President, Manufacturing
</TABLE>
The officers of the Company are appointed by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
the directors or officers of Target.
Mr. Bang joined Target in May 1993 as President and Chief Executive Officer
and a director. Prior to joining Target, Mr. Bang worked for Baxter
International, a diversified multinational manufacturer of health care products
("Baxter"), for 19 years. In his most recent position with Baxter, Mr. Bang
served from April 1990 to April 1993 as President of the Pharmaseal Surgical
Division, a world leader in disposable products sold to hospital operating
rooms. Mr. Bang served as President of the Gloves Strategic Business Unit from
November 1989 to April 1990. From October 1986 to November 1989, Mr. Bang served
as Vice President, Sales and Marketing of Baxter U.K. in England. Prior to 1986,
he served in various capacities including President, Vice President, Division
Controller of divisions of Baxter, whose products included solutions, dialysis
products and disposable hospital products. Mr. Bang is also a Director of
Spectranetics, Inc.
Mr. Engelson joined Target in 1985 as Project Manager. He became Manager of
Research and Development in January 1987 and served in that position until March
1988 when he became Director of Research and Development. He was appointed Vice
President, Research and Development in October 1988 and Senior Vice President,
Operations and Research and Development in September 1992. Prior to joining
Target, Mr. Engelson served as a research and development engineer at ACS, an
intravascular catheter company, from November 1984 to October 1985.
Dr. Acharya joined Target in June 1994 as Vice President, Regulatory,
Quality and Clinical Affairs. Prior to joining Target, he served as Senior
Technical Consultant at Biometri Research Institute, Inc., a healthcare
consulting firm, from July 1993 until June 1994. Dr. Acharya served as Director
of the Division of Cardiovascular, Respiratory and Neurological Devices at the
FDA from September 1985 until July 1993 and as Senior Reviewer in the FDA's
Office of Device Evaluation from 1977 until September 1985.
Mr. Cappetta joined Target in March 1994 as Marketing Manager. In December
of 1994, he was promoted to Director of Worldwide Marketing and was appointed
Vice President, Europe in November 1995. Prior to joining Target, he served as
an International Marketing Manager and Senior Product Manager for Scimed Life
Systems (1990-1994). Prior to joining Scimed, he held various sales and
marketing positions with Trimedyne, Eleceth and CR Bard.
18
<PAGE> 19
Mr. Chee joined Target in September 1987 as Senior Research and Development
Engineer. He became Project Manager in September 1988 and served in that
position until December 1990 when he became Project Director, Research and
Development. He was appointed Vice President, New Product Development in October
1992 and Vice President, Peripheral Vascular Products in December 1995. Before
joining Target, Mr. Chee held various engineering positions from June 1983 to
September 1987 with the Edwards Critical Care Division of Baxter.
Mr. Dormandy joined Target in May 1996 as Vice President, Silicone & PVA
Technologies. Prior to joining Target, he was President and co-founder of
Interventional Therapeutics Corporation from 1986 until it was acquired by
Target in May 1996. He has previously held positions as Director or Manager of
Research and Product Development for McGhan Medical Corporation, Mentor
Corporation, Pudenz-Schulte Medical Research and American Heyer-Schulte. Prior
to his medical industry experience, he held various engineering and management
positions in the petroleum industry.
Mr. LeMoure joined Target in April 1990 as Vice President, International
Sales and served in that position until April 1995 when he became Vice President
and General Manager, International. He has been a director of Target-CMI, Inc.
since April 1, 1992. From March 1986 to April 1990, he held various sales and
marketing positions with the Bard Japan Division ("Bard Japan") of Bard,
including Senior Product Manager, Cardiovascular Products from March 1986 to
December 1988 and Manager of Sales and Marketing, Cardiovascular Products from
December 1988 to April 1990. Mr. LeMoure served on the Bard Japan Management
Board from 1987 to 1990. Before joining Bard Japan, Mr. LeMoure was employed
with the U.S.C.I. Division of Bard from 1979 to 1986.
Mr. McNamara joined the Company in April 1995 as Vice President, Finance
and Administration, Chief Financial Officer and Assistant Secretary. Prior to
joining Target he served as Chief Financial Officer of Guittard Chocolate
Company from August 1994 to April 1995 and as Director of Finance for Target
from April 1994 to July 1994. From July 1987 to April 1994 Mr. McNamara held
various professional and management positions at Tandem Computers Incorporated,
a multinational manufacturer of mainframe computers, including Sales and
Marketing Finance Manager, Customer Engineering Business Manager and Materials
Control Manager.
Mr. Meyer joined Target in March 1996 as Vice President, Human Resources.
Prior to joining Target, he served as Vice President, Human Resources at
Chipcom, Inc., a computer networking equipment firm from September 1991 until
October 1995. Prior to that, he was Senior Vice President Human Resources and
Administration at PHH Fleet-America, a financial services company in Hunt
Valley, Maryland from June 1987 to October 1990. Mr. Meyer also served in senior
Human Resources positions at NBI, Inc. (1982-1987) and Digital Equipment
Corporation (1976-1982).
Dr. Mills joined Target in April 1994 as Vice President, New Business
Development and was appointed to Chief Scientific Officer in May 1996. Prior to
joining Target, he served as Director of Business Development of the
Interventional Cardiology Division of Baxter from September 1991 to April 1994.
Dr. Mills served as Director of the Artificial Heart Program at the University
of California, Irvine Medical Center from September 1988 to September 1991. From
June 1984 to June 1987, he was a research faculty member in the Department of
Radiology at the University of California, San Francisco.
Mr. Riley joined Target in September 1987 as a sales manager. In September
1989, he took on the role of Marketing Manager until October 1992 when he was
promoted to Director of Marketing. Mr. Riley was appointed Vice President,
Worldwide Marketing in April 1994 and Vice President, Sales and Marketing in
November 1995. Prior to joining Target, Mr. Riley held various sales positions
with Elecath, a manufacturer of invasive electrophysiology devices, with Davis
and Geck Surgical, a manufacturer of surgical products, and with Baxter.
Mr. Rivelli joined Target in January 1996 as Vice President, Manufacturing.
Prior to joining Target, he served as a Principal at Integral Inc., a new
product development and operations consulting firm, from 1992 to 1996. He served
as a management consultant at Bain & Company from 1991 to 1992.
19
<PAGE> 20
ITEM 2. PROPERTIES
In October 1991, Target signed a ten-year lease for a 76,000 square foot
building in Fremont, California and in early fiscal 1993, consolidated its
operations in this facility. In October 1994, the Company subleased from
Cardima, for a period of two years with the option to extend, certain space in
Cardima's Fremont location primarily to be utilized for Target's finished goods
storage and shipping needs.
In June 1995, Target signed a 40-month lease with the option to extend and
for additional space to expand its facilities in Fremont, California by moving
into a 36,000 square-foot facility. The Company anticipates using the new
facility for research and development, manufacturing and corporate
administrative purposes. In connection with its acquisition of ITC, the Company
acquired approximately 24,590 additional square feet of manufacturing and office
space in Fremont under lease through June 2004. The Company believes that these
facilities will be adequate to meet its requirements through calendar 1996.
Target currently anticipates that it will require additional office space in
calendar 1997 and is currently reviewing alternatives to handle its anticipated
future space requirements.
In addition, the Company leases through subsidiaries, additional sales and
distribution facilities in Germany and France.
ITEM 3. LEGAL PROCEEDINGS
In November 1994 the Company filed a lawsuit in the United States District
Court (the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The District Court has denied Cordis and SciMed's request for a stay.
However, Target is currently awaiting a ruling from the Court of Appeals on a
motion by Cordis and SciMed seeking a stay of the preliminary injunction pending
the outcome of the appeals. The Court of Appeals has temporarily stayed the
preliminary injunction while it considers the motion. Notwithstanding the grant
of the Company's motion for a preliminary injunction, there can be no assurance
that the Company will be ultimately successful in this lawsuit.
In addition, from time to time, the Company may be involved in various
legal actions, including product liability claims, arising in the ordinary
course of business. While the outcome of such matters is currently not
determinable, it is management's opinion that these matters will not, either
individually or in the aggregate, have a material adverse effect on the
company's consolidated financial position or results of its operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "TGET". The high and low closing sales prices (excluding retail markup,
markdowns and commissions) for the two years in the period ended March 31, 1996
are as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED MARCH 31, 1996
First quarter.................................................... $23.88 $16.34
Second quarter................................................... 35.13 20.75
Third quarter.................................................... 43.00 30.75
Fourth quarter................................................... 66.00 37.50
YEAR ENDED MARCH 31, 1995
First quarter.................................................... $13.25 $10.25
Second quarter................................................... 15.13 9.88
Third quarter.................................................... 16.13 11.88
Fourth quarter................................................... 19.88 13.63
</TABLE>
Per share amounts reflect a two-for-one stock split effected on December
18, 1995.
As of May 31, 1995, there were approximately 146 stockholders of record and
approximately 11,500 beneficial holders of the Company's common stock. The
Company's stock price may be subject to significant volatility, particularly on
a quarterly basis. Any shortfall in revenue or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of, or be able to confirm, revenue or
earnings variations from estimates until late in the fiscal quarter which could
result in an even more immediate and adverse effect on the trading price of the
Company's common stock. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of the Company's common
stock price.
DIVIDEND POLICY
The Company has not historically paid cash dividends, with the exception of
a $7.0 million dividend to Collagen and other holders of record of the Company's
preferred stock as of January 15, 1992. The Company currently intends to retain
any future earnings for use in its business and does not anticipate paying any
further cash dividends in the foreseeable future. Target's line of credit
prohibits the payment of cash dividends.
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Product sales............................ $69,795 $47,508 $35,353 $28,117 $19,049
Total revenues........................... 69,795 47,508 35,353 28,117 20,449
Gross margin on product sales............ 48,317 32,357 21,985 18,460 12,129
Income from operations................... 14,654 8,465 5,116 4,421 3,735
Income before cumulative effect of
accounting change...................... 11,702 7,378 4,320 3,580 2,500
Net income............................... 11,702 7,378 4,951 3,580 2,500
Income per share before cumulative effect
of accounting change(2)................ .77 .51 .30 .25 --
Net income per share(2).................. .77 .51 .35 .25 --
Pro forma net income (unaudited)......... -- -- -- -- 2,599(1)
Pro forma net income per share
(unaudited)(2)......................... -- -- -- -- .51(1)
Shares used in calculating per share
information(2)......................... 15,280 14,466 14,206 14,150 10,186
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital......................... $ 72,729 $44,952 $41,527 $37,370 $34,602
Total assets............................ 114,275 70,399 57,130 46,827 42,103
Long-term obligations................... 128 115 124 152 138
Stockholders' equity.................... 90,838 57,863 49,064 42,462 37,983
</TABLE>
- ---------------
(1) Collagen was the majority stockholder of the Company until November 1992.
For periods prior to February 1, 1992, the Company's tax provisions and tax
liabilities were calculated in accordance with the Tax Allocation
Agreements that existed between Collagen and Target. Such provision may not
reflect the Company's actual tax rate had it not been consolidated with
Collagen for tax purposes. Unaudited pro forma net income per share
information for the year ended March 31, 1992 has been calculated assuming
the Company did not have a tax allocation agreement with Collagen and filed
its tax returns on a separate company basis.
(2) All share and per share amounts reflect a two-for-one stock split effected
on December 18, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets innovative, highly
specialized disposable micro-catheters, guidewires and micro-coils for use in
minimally invasive procedures to treat vascular diseases of the brain associated
with stroke, as well as to treat diseases of other parts of the body that are
accessible through small vessels of the circulatory system.
Products developed by the Company generally require clearance by the U.S.
Food and Drug Administration ("FDA") prior to commercialization in the United
States. The FDA may require clinical investigation as a prerequisite to such
market clearance.
22
<PAGE> 23
The Company's revenues have been derived primarily from the sale of its
micro-catheters, guidewires and micro-coils. Target distributes certain products
manufactured by other companies pursuant to distribution agreements.
The following table sets forth certain selected statement of income
information of the Company as a percentage of product sales for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Product sales................................................... 100 % 100 % 100 %
Cost of sales................................................... 31** 32 38*
Research and development........................................ 19 22 22
Selling, general and administrative............................. 30 29 26
Net income...................................................... 17 16 14
</TABLE>
- ---------------
* Includes $1.5 million charge for costs associated with changes made to the
Guglielmi Detachable Coil system as described under "Cost of Sales" below.
Cost of sales, exclusive of this charge, was 34 percent of product sales.
** Includes a $500,000 reversal of a charge described at * above. Cost of sales,
exclusive of this charge, was unchanged at 31 percent of product sales.
Revenues
Product sales for the year ended March 31, 1996 were $69.8 million, an
increase of $22.3 million, or 47 percent, from $47.5 million for the prior year.
Product sales for the year ended March 31, 1995 increased 34 percent from $35.4
million in fiscal 1994. These increases were primarily attributable to recent
product introductions and additional unit sales in each of Target's product
lines resulting from an increased number of treatment sites, training of
additional physicians and the continued acceptance of the Company's products. In
September 1995, the Company obtained clearance by the FDA to market its
Guglielmi Detachable Coil ("GDC") system in the United States. The Company has
launched a training program to facilitate the roll out of the product to
treatment centers in addition to those involved in the clinical trials. In
conjunction with becoming a GDC treatment site, each hospital is required to
purchase a minimum stocking order of the product. The Company's revenues include
approximately $3.9 million in sales of initial stocking orders of its GDC system
in fiscal 1996. As of March 31, 1996, a portion of the revenue attributable to
these initial stocking orders, totaling $805,000, has been deferred into future
periods. Initial stocking order revenue should not be viewed as indicative of
future sales, as repeat orders and future revenue streams will be driven largely
by the number of procedures performed by physicians which cannot accurately be
predicted given the short period during which the GDC system has been
commercially available and which will remain subject to numerous factors outside
the Company's control. The Company is currently pursuing regulatory clearance in
Japan for the GDC system.
The increase in the Company's product sales is also attributable to the
continued growth in the European and Japanese markets for Target's products.
Export product sales increased to $49.4 million in fiscal 1996 from $32.5
million in fiscal 1995 and $21.1 million in fiscal 1994. Export sales as a
percentage of product sales were 71 percent in fiscal 1996, 69 percent in fiscal
1995 and 60 percent in fiscal 1994. Target sells products in Japan through a
joint venture formed with Century Medical, Inc. ("CMI"). Sales by the Company to
CMI accounted for approximately 35 percent of the Company's product sales in
fiscal 1996 and 1995, and 29 percent of product sales in fiscal 1994. In April
1995, Target implemented a price increase of approximately seven percent to its
distributor in Japan. No other significant price increases were effected during
fiscal 1996, 1995, and 1994. The commencement of the Company's direct sales
operation in Germany during fiscal 1995 and, to a lesser degree, its July 1995
investment in a 51 percent-owned joint venture in France resulted in increased
revenues due to sales to end-users in Germany and France at prices higher than
those of sales to the former distributors, reflecting the markup previously
realized only by the distributors.
23
<PAGE> 24
The Company's continued revenue growth is subject to a number of factors,
including new product introductions, the availability of suitable alternative
products manufactured by competitors, the timeliness and availability of
regulatory clearance and the continued expansion of its customer base. Target
continues to research and develop new applications for its products in an effort
to expand its practitioner customer base. As more companies become aware of the
market potential of such products, Target anticipates an increase of competitive
forces which have had and may continue to have an adverse effect on revenues of
the Company. Several companies in the United States have introduced products
that are being used in the interventional neuroradiology market. Target is also
aware of other companies that may pursue commercialization of products which may
compete with the Company's products and may result in future pricing and margin
pressures within this market. Prior to commercialization in the United States,
sales of certain of Target's products are limited to clinical settings pursuant
to Investigational Device Exemptions ("IDE"s) granted by the FDA which limit the
number of patients treatable with such products. Target must obtain clearance
from the FDA to market these products for other than clinical investigation, and
the overall review time of such regulatory process may be lengthy. Regulatory
requirements vary in other countries in which Target markets its products.
Failure to develop new products successfully, to obtain regulatory clearance for
such products in a timely manner or to maintain regulatory clearance may have an
adverse effect on Target's revenues in the future. Target's revenue growth may
also be adversely affected by the limited number of teaching hospitals that
train practitioners in fields in which the Company's products are utilized. The
Company continues to obtain a significant amount of its revenues from CMI in
Japan. Should this customer continue to represent a significant portion of
revenues, significant changes in this customer's ordering rates will likely
cause similar changes in Target's revenues. It is Target's understanding that
physicians use certain devices, products and materials manufactured by other
companies in conjunction with the use of certain of Target's products.
Reductions in the availability or the elimination of such complementary products
have had, and may continue to have, an adverse effect on sales of the Company's
products. This is believed to have been a contributing factor to the decrease in
the percentage of total revenues derived from domestic sources during fiscal
1995 and the first half of fiscal 1996. Currently, products sold commercially in
the United States pursuant to 510(k) clearance received from the FDA may
generally be marketed in Europe. However, political and regulatory changes,
particularly in Western Europe in connection with the evolution of the European
Union, as well as the Company's ability to achieve IS09001 standards, may
adversely affect the Company's product sales in Europe. Similarly, changes in
the United States and foreign national health care policies, including
third-party reimbursement issues, may have a significant adverse effect on
revenues of Target. As the Company expands its direct international sales
operations, increased amounts of its revenues will be subject to the risks of
foreign currency fluctuations. Furthermore, the future rate of Target's revenue
growth, if any, may be below that experienced in prior annual and quarterly
periods.
Cost of Sales
Cost of sales as a percentage of product sales was 31 percent for fiscal
1996 compared to 32 percent and 38 percent for fiscal 1995 and 1994,
respectively. Included in the fiscal 1996 cost of sales is the reversal of
approximately $500,000 of a larger charge recorded in fiscal 1994 to provide for
the anticipated costs associated with exchanging GDC system inventory as a
result of the Company's changes to the original design of that product.
Excluding this reversal, cost of sales as a percentage of product sales remained
unchanged at 31 percent for fiscal 1996. Due to contractual arrangements, in
fiscal 1996, the Company has provided for a loss contingency of approximately
$300,000 for the required purchase of certain products that may be in excess of
its sales forecasts for the near term, resulting in an adverse effect of 0.5% on
cost of sales as a percentage of product sales. Partially offsetting this
increase in cost of sales is the commencement in fiscal 1995 of the direct sales
operation in Germany and, to a lesser degree, its July 1995 investment in a 51
percent-owned joint venture in France which contributed favorably to cost of
sales as a percentage of product sales for fiscal 1996 compared to the prior
year. The Company's increased manufacturing efficiency, primarily due to
increased production volume, also contributed to the reduced gross margins.
Generally, there can be no assurance that cost of sales as a percentage of
product sales will remain at current levels or show improvement in future
periods over current or prior periods due to the distribution by Target of
certain products at lower gross margins, fluctuation in manufacturing production
levels due to
24
<PAGE> 25
product mix, potential increases in certain costs associated with the use of
third-party technology, additional contractual arrangements for minimum purchase
levels and potential pressure on product prices as a result of competition.
Although no significant supply issues have arisen in the past, there can be no
assurance that current or future suppliers of the Company's raw materials will
be able to continue to meet the quality and quantity demands of the Company at
current suppliers' prices.
In fiscal 1994, Target provided for the estimated costs of exchanging
customer's inventory and disposition of the Company's remaining inventory of
original GDC product. A $1.5 million charge was included in cost of sales in
fiscal 1994. The effect of this charge on net income after benefit for income
taxes was approximately $975,000, or $0.07 per share (adjusted to reflect a
two-for-one stock split effected on December 18, 1995). As discussed above,
approximately $500,000 of this charge was reversed in fiscal 1996. The effect of
this reversal on fiscal 1996 net income was approximately $350,000 or $.02 per
share. Although the Company does not anticipate a recurrence of such a charge,
no assurance can be given that similar incidents will not occur in the future
with respect to the GDC system or other Target products.
Research and Development Expense
Research and development ("R&D") expense, which includes expenditures for
regulatory compliance and quality assurance, increased 25 percent to $12.9
million in fiscal 1996 compared to $10.3 million in fiscal 1995. R&D expense
increased 36 percent in fiscal 1995 from $7.6 million in fiscal 1994. Target
attributes the increases primarily to the expenses incurred in collecting
clinical data and preparing regulatory filings for new products and increased
headcount associated with expansion of its research activities and pilot
manufacturing line. The pilot manufacturing line was developed to aid in the
transition between the new product development and manufacturing stages of
production. As a percentage of product sales, R&D expense was 19 percent for
fiscal 1996 and was 22 percent for both fiscal 1995 and 1994. The decrease is
primarily attributable to increased revenues and a slower-than-anticipated
increase in the number of R&D personnel.
The Company believes that its investments in product development and
engineering and manufacturing processes are essential in its efforts to maintain
its competitive position and continue the development of future products.
Furthermore, the Company believes that its ability to attract qualified
engineers in the future is critical to the continued success of the Company.
Accordingly, Target expects to continue to make substantial expenditures on new
product development and to increase the dollar amount expended for R&D.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the year ended
March 31, 1996 increased to $20.7 million from $13.6 million and $9.2 million
for the years ended March 31, 1995 and 1994, respectively. The increase in
fiscal 1996 was primarily due to expenses associated with the commencement of
direct sales operations in Germany and, to a lesser degree, its July 1995
investment in a 51 percent-owned joint venture in France, the product launch of
the GDC system including physician training and education programs, investments
in worldwide marketing, sales and training efforts to support current and
anticipated product introductions in addition to the GDC system, costs incurred
to further the Company's expansion of overseas operations and the improvement of
internal information systems. Fiscal 1996 and 1995 SG&A reflects increases in
expenses associated with a legal action filed by Target to protect certain of
its proprietary assets. Other increases in fiscal 1996, 1995, and 1994 are
attributable to additional staffing, including sales and management personnel,
to expand the corporate infrastructure to support the growth in Target's product
sales. The Company currently anticipates that the dollar amount expended for
SG&A will continue to increase, primarily due to costs associated with direct
operations in Germany, the consolidation of expenses incurred by the joint
venture in France, expanding international operations, additional expenses
associated with the legal action filed described above and planned increases in
sales and support staff to introduce, market and support anticipated new
products (including the GDC system) for which increased physician training and
education, clinical field work and sales support will be required. These
expenses may also increase if Target pursues additional operations overseas, the
feasibility of which it is currently investigating. As a percentage of product
sales, SG&A expense was 30 percent, 29 percent and 26 percent in fiscal 1996,
1995 and 1994, respectively.
25
<PAGE> 26
These increases are primarily attributable to increased costs to support future
sales growth and the expenses associated with the legal action filed by Target.
Income from Operations
Income from operations was $14.7 million in fiscal 1996, an increase of 73
percent from $8.5 million in fiscal 1995. The increase is primarily attributable
to increased sales, both as a result of additional unit sales (including
commercial sales of the GDC system), the pricing considerations described above
and the reversal of approximately $500,000 of estimated costs associated with
the changes to the GDC system as described above. Income from operations was
$8.5 million in fiscal 1995, an increase of 65 percent from $5.1 million in
fiscal 1994. The increase is attributable to increased sales in fiscal 1995 and
a charge to cost of sales in fiscal 1994 for estimated costs associated with the
changes to the GDC system as described above.
Although Target has experienced revenue growth since its inception and has
been profitable on a quarterly basis since the quarter ended December 31, 1990,
no assurance can be given that revenue growth or profitability on a quarterly or
annual basis will be sustained. The Company's results of operations have varied
significantly from quarter to quarter, and revenue growth rates have been
inconsistent. Future operating results will depend upon several factors in
addition to those discussed above, including the timing and amount of expenses
associated with expanding Target's operations both domestically and
internationally, increased revenues and expenses in conjunction with Target's
direct sales operations in Germany and France, increased costs associated with
product launches, the Company's ability to successfully meet new product
development plans, success in achieving regulatory clearance for new products in
a timely manner, maintaining regulatory clearance, the acceptance of new product
introductions both in the United States and internationally, the mix between
pilot production of new products and full-scale manufacturing of existing
products, the mix between domestic and export sales, the availability of
complementary products and the effects this may have particularly on domestic
sales, possible changes in ordering patterns of its customers due to changes in
the healthcare environment or to potential variations in foreign exchange rates,
Target's ability to continue to attract qualified engineers to further the
development of future products, potential future partnering arrangements,
changes in domestic and foreign health care policies (including third-party
reimbursement issues), increased competitive forces, developments in the
Company's ongoing intellectual property litigation, increased expenses
associated with protecting Target's proprietary assets and the general litigious
nature of the medical device industry. Target also believes that seasonal
patterns, including a reduction in the number of procedures performed by
physicians using the Company's products during summer and holiday periods, may
affect its quarterly revenue stream. In addition, Target cannot predict ordering
rates by distributors, some of which place infrequent stocking orders while
others order at regular intervals. As a result of these and other factors, the
Company expects to continue to experience significant fluctuations in its
quarterly operating results.
The Company's common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Target's common
stock in any given period. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of Target's common stock
price.
Interest and Other Income
Net interest income increased to $1.9 million in fiscal 1996 compared to
$1.3 million in fiscal 1995 and $954,000 in fiscal 1994. These increases are
primarily attributable to increased amounts of cash generated from operating
activities which were available for investment and, in fiscal 1995, to slight
increases in interest rates from the prior year.
Other income decreased to $736,000 in fiscal 1996 from $792,000 in fiscal
1995. The decrease from fiscal 1996 to 1995 is due, in part, to a $122,000
increase in equity losses in affiliates resulting from additional investments by
Target in its affiliates to further the development of these companies' products
and a $103,000 reduction in earnings in the Company's Japanese joint venture.
Partially offsetting these decreases was a
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<PAGE> 27
$165,000 increase in fees payable to the Company pursuant to a management
agreement with the 50 percent-owned Japanese joint venture whereby Target is
required to provide certain services for which the joint venture reimburses the
Company. The amount recognized in fiscal 1996 pursuant to this arrangement was
approximately $465,000, compared to $300,000 in fiscal 1995 and $445,000 in
fiscal 1994. Other income increased to $792,000 in fiscal 1995 from $515,000 in
fiscal 1994. In fiscal 1995, the Company recognized an increase of approximately
$1.2 million of equity earnings from the Japanese joint venture which were
offset by an increase of approximately $830,000 of equity losses. The Company
anticipates that other income may decrease in the future due to a reduction of
services provided pursuant to the management agreement with the Japanese joint
venture and the recognition of increased equity losses resulting from the
additional investments made by Target in its affiliates for which Target's
interest is accounted for on the equity method.
Minority Interest
In June 1995 the Company and its former distributor in France formed a
joint venture to market the Company's products in France. Target holds a 51
percent interest in the joint venture and has guaranteed a line of credit of up
to approximately 4.0 million French Franc (approximately $792,000 as of March
31, 1996) to fund its operations. As of March 31, 1996, $534,000 was outstanding
under this line of credit. The results of the operations in France, net of the
minority interest, are included in the consolidated results of the Company
beginning in the second quarter of fiscal 1996. Minority interest before taxes
is reflected as a separate component of the Company's Consolidated Statements of
Income for the year ended March 31, 1996.
Provision for Income Taxes
The Company's combined effective federal and state tax rate was
approximately 30 percent in fiscal 1996 and 1995 compared to 34 percent in
fiscal 1994. The rates reflect the benefits derived from Target's foreign sales
corporation, research credits and certain nontaxable investment income. The
fiscal 1996 and 1995 rate of 30 percent reflects a reduction from fiscal 1994
due to increased benefits derived from foreign tax credits generated in Japan
with respect to Target's ownership interest in its Japanese joint venture.
Effective April 1, 1993, the Company adopted Financial Accounting Standards
Board ("FASB") Statement 109, "Accounting for Income Taxes." As permitted by
Statement 109, the Company elected to report the cumulative effect of the change
currently rather than restate the financial statements of prior years. The
positive cumulative effect of the change in method of accounting for income
taxes of $631,000 was recorded in the first quarter of fiscal 1994. Target has
considered the evidence supporting the realizability of net deferred tax assets
at March 31, 1996 and 1995, including carrybacks, future reversal of temporary
differences and future taxable income exclusive of temporary differences, and
has recorded a valuation allowance of $378,000 and $434,000, respectively, to
reduce the net deferred tax assets to the amount that is more likely than not to
be realized.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, Target had working capital of approximately $72.7
million. Its principal sources of liquidity consisted of approximately $47.3
million in cash, cash equivalents and short-term investments, cash provided by
operating activities, proceeds from the issuance of common stock and $3.0
million available under a line of credit which expires in July 1996. At March
31, 1996 and 1995, no amounts were outstanding under this line of credit. Net
cash provided by operating activities and from the issuance of common stock for
the year ended March 31, 1996 was $12.1 million and $5.3 million, respectively.
Prior to February 1996, the Company accounted for its greater-than-20
percent ownership interest in Conceptus, Inc. under the equity method. In
February 1996, Conceptus completed an initial public offering of common stock
which reduced the Company's ownership position to approximately 18 percent.
Consequently, the portion of the investment which will be available for sale,
subject to certain market trading restrictions, approximately 1.1 million
shares, is accounted for in accordance with FASB Statement 115. The unrealized
gain of $12.3 million at March 31, 1996 is recorded, net of deferred taxes, as a
component of stockholders'
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<PAGE> 28
equity. The remaining investment of approximately 600,000 shares is recorded at
cost. The estimated fair value of the entire investment as of March 31, 1996 is
approximately $20.5 million.
Conceptus' common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Conceptus'
common stock in any given period. In addition, Conceptus participates in a
highly dynamic industry, which often results in significant volatility of the
common stock price. Any changes in the Conceptus common stock price could have a
significant impact on the value of the Company's investment resulting in a
change to the Company's working capital, deferred tax liabilities, stockholders
equity and total assets and liabilities.
Accounts receivable increased to $15.7 million at March 31, 1996 compared
to $9.4 million at March 31, 1995. The increase is due primarily to increased
sales and the results of consolidating the accounts receivable of the German
subsidiary (for which sales are also increasing) and the French joint venture.
Inventories increased to $6.7 million at March 31, 1996 from $5.4 million at
March 31, 1995. The increase is primarily attributable to increased levels of
certain products to support anticipated increases in sales, particularly of the
GDC system, and to the consolidation of the inventory in France.
Other assets increased to $7.5 million at March 31, 1996 from $6.5 million
at March 31, 1995, primarily due to the net effect of equity accounting for the
Company's joint venture and affiliate companies, increased investments in
affiliates and proprietary assets and reduced long-term receivables from
affiliates pursuant to lease-line agreements under which Target is the lessor.
Property and equipment, net, increased from $6.5 million at March 31, 1995
to $11.1 million at March 31, 1996 due primarily to the continuation of a
program to upgrade substantially the Company's management information systems
infrastructure which is expected to improve customer service turnaround times
and allow for better materials planning. Target expects to invest a total of
approximately $1.0 million on this project in fiscal 1997. There can be no
assurance that this project will be completed successfully or in a timely
manner, or that the project will not result in disruptions in the Company's
operations, and it is unlikely that these improvements will result in materially
increased revenues or profits in the near term, if at all. In addition, in March
1996, the Company expanded its facilities in Fremont, California by moving into
an additional 36,000 square-foot facility. The Company will utilize this
facility for research and development, manufacturing and corporate
administrative purposes. Target expects to invest $800,000 on completing the
move to the facility in fiscal 1997. The Company expects to complete this
expansion during fiscal 1997.
In May 1996, the Company's Board of Directors authorized the repurchase of
up to 350,000 shares of the Company's common stock in the open market. As of May
31, 1996, no shares had been repurchased under such authorization.
Target believes that available cash, cash equivalents and short-term
investments, as well as funds expected to be generated from operations, will be
sufficient to meet the Company's operating expenses and cash requirements for
the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Volatility of Stock Price and Quarterly Fluctuations in Operating
Results. The Company's stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Furthermore, The Company participates in a
highly dynamic industry, which often results in significant volatility of the
Company's common stock price. The trading price of the Company's common stock
also may vary on the basis of numerous other factors, including the timing and
amount of expenses associated with expanding the Company's operations both
domestically and internationally, the Company's ability to successfully meet new
product development plans, success in achieving regulatory clearance for new
products in a timely manner, the acceptance of new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing products, the mix between
domestic and
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<PAGE> 29
export sales, the availability of complementary products and the effects this
may have, particularly on domestic sales, possible changes in ordering patterns
of its customers due to changes in the business environment or to potential
variations in foreign exchange rates, the Company's ability to continue to
attract qualified engineers to further the development of future products,
potential future partnering arrangements, changes in the domestic and foreign
health care policies (including third-party reimbursement issues), increased
competitive forces, developments in the Company's ongoing intellectual property
litigation, and the general litigious nature of the medical device industry. The
Company also believes that seasonal patterns, including a reduction in the
number of procedures performed by physicians using the Company's products during
summer and holiday periods, may affect its quarterly revenue stream. In
addition, the Company cannot predict ordering rates by distributors, some of
which place infrequent stocking orders while others order at regular intervals.
Although the Company has experienced revenue growth since its inception and has
been profitable on a quarterly basis since the quarter ended December 31, 1990,
no assurance can be given that revenue growth or profitability on a quarterly or
annual basis will be sustained. The Company's results of operations have varied
significantly from quarter to quarter, and revenue growth rates have been
inconsistent. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in the trading price of its
common stock and in its quarterly operating results.
Reliance on Future Products and New Applications. The Company has an
ongoing and active research and development program pursuant to which it is
developing several new and enhanced versions of its catheters, guidewires and
micro-coils. The Company's future success will depend upon, among other factors,
its ability to develop or acquire from third parties, introduce and manufacture
new products or enhanced versions of existing products and to obtain regulatory
clearance on a timely basis for such products or for use of existing products
for new indications. The Company is also developing technology that enhances the
performance of its existing catheter and guidewire products. In addition, the
Company has several new versions of its micro-coils under development. There can
be no assurance that the Company will be able to develop or acquire new products
successfully, to manufacture new products in commercial volumes, to obtain
regulatory clearances on a timely basis to use such products in existing or new
clinical applications or to gain satisfactory market acceptance for such
products. Delays in commercial introduction or acceptance of new products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Governmental Regulation. The manufacture and marketing of the Company's
products are subject to extensive and rigorous federal and state regulations in
the United States and to various regulatory requirements in other countries. The
process of obtaining and maintaining required regulatory clearances is lengthy,
expensive and uncertain. The FDA requires that a new medical device or a new
indication for use of an existing medical device obtain either a 510(k)
premarket notification clearance or an approved Premarket Approval application
("PMA") prior to being introduced into the market. The process of obtaining a
510(k) clearance has recently taken about six months from the date of filing of
the application and generally requires the submission of supporting data, which
can be extensive and extend the process for a considerable length of time. In
addition, the FDA may require review by an advisory panel as a condition for
510(k) clearances, which can further lengthen the process. The PMA process
generally takes more than two years from initial filing and requires the
submission of extensive supporting data and clinical information. No assurance
can be given that any future products or applications developed by the Company
will not require clearance under the more lengthy and expensive PMA process. If
the Company is required to obtain clearance for any products pursuant to the PMA
procedure or if the 510(k) process with respect to any products is extended for
a considerable length of time, the commencement of commercial marketing could be
delayed substantially.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States. Other countries, such as Japan, have standards
similar to those of the FDA. This disparity in the regulation of medical devices
may result in more rapid product clearance in certain countries than in the
United States, while clearance in countries such as
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<PAGE> 30
Japan may require longer periods than in the United States. In addition, the
European Community (EC) has developed a new approach to the regulation of
medical products which may significantly change the situation in those
countries. The Company is in the process of acquiring the right to affix the CE
Mark to its product, signifying compliance with the regulatory requirements of
the EC, through a formal process mandated by its regulations. It is expected
that the CE Mark will facilitate the market entry of the Company's product into
the European Community. The receipt or denial of FDA clearance for a particular
product may affect the receipt or denial of regulatory clearance for that
product in certain other countries.
There can be no assurance that the Company will obtain timely regulatory
clearance for its future products, or that existing clearances will not be
withdrawn. Moreover, regulatory clearances, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can, among other consequences,
result in fines, civil penalties, injunctions, suspensions or losses of
regulatory clearances, product recalls, seizure of products, operating
restrictions, refusal of the government to approve product license applications
or allow the Company to enter into supply contracts, and criminal prosecution.
In addition, governmental regulations may be established that could prevent or
delay regulatory clearance of the Company's products. Delays in receipt of, or
failure to receive, clearances, or the loss of previously received clearances,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Product Liability Litigation; Insurance. The Company faces the risk of
financial exposure to product liability claims alleging that the use of the
Company's products resulted in adverse effects. The Company's products are often
used in life-threatening situations and in the brain, where there is a high risk
of serious injury or death. Such risks will exist even with respect to those
products that have received, or in the future may receive, regulatory clearance
for commercial sale. The Company is currently a party to several legal actions
involving product liability claims. While the Company seeks to maintain product
liability insurance with coverage that the Company believes is comparable to
that maintained by companies similar in size and serving similar markets, there
can be no assurance that the Company will avoid significant product liability
claims and attendant adverse publicity. Furthermore, there can be no assurance
that the Company's product liability insurance will be adequate or that such
insurance coverage will remain available at acceptable costs. A successful claim
brought against the Company for which coverage is denied or in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, it is
possible that adverse product liability actions could negatively affect the
Company's ability to obtain and maintain regulatory clearance for its products.
Concentrated Customer Base and Adoption of Technology. The Company
believes that the number of interventional neuroradiologists and neurosurgeons
trained to use its vascular access and delivery products to treat neurovascular
disorders is relatively small, both in the United States and abroad. The growth
in the number of neuro-interventional physicians in the United States is
constrained by the lengthy training programs required to educate these
physicians. Future growth of the market for the Company's neurovascular products
will require continued expansion of the number of trained interventional
practitioners. To the extent that physicians do not adopt micro-catheters for
use in treating neurovascular disorders or sufficient physicians are not trained
in the use of the Company's products, both in the United States and abroad, the
market for the Company's products may remain limited.
Competition. The medical device industry is characterized by rapidly
evolving technology and competition. The Company currently experiences
competition in the interventional neuroradiology market and expects such
competition to increase substantially. Several companies in the United States,
including large companies with resources significantly greater than those of the
Company, have introduced products that are being used in the interventional
neuroradiology market. The Company is also aware of other companies that may
pursue commercialization of products which may compete with the Company's
products and may result in pricing and margin pressures within this market.
There can be no assurance that these companies will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive.
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<PAGE> 31
The cardiovascular and peripheral vascular interventional markets are
substantially more developed than the neuroradiology market and are subject to
intense competition. There are many large companies with significantly greater
financial, manufacturing, marketing, distribution and technical resources, and
experience than the Company focusing principally on cardiovascular and
peripheral applications for their catheter technologies. As a result, the
Company focuses its product development and marketing strategies on market
segments where the Company's small vessel access and delivery systems can be
used in applications not presently addressed by conventional catheter and other
interventional products. There can be no assurance, however, that competitors
will not successfully enter these markets with superior products. In addition,
the Company is aware of several other companies that have introduced guidewires
to the marketplace and attributes the slower growth rate of its guidewire
product line to increased competitive pressures. Such competition could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents and Proprietary Technology. The medical device market is
characterized by substantial litigation regarding patent and other intellectual
property rights. The Company is aware of certain United States patents with
which certain of the Company's current or proposed products may be in conflict.
Two United States patents held by third parties may cover certain of the
Company's micro-catheter products. With respect to one of these patents, based
upon the Company's analysis with the assistance of its patent counsel, the
Company believes that such patent is invalid. With respect to the other of these
patents, although the Company has not obtained a formal opinion of counsel, the
Company believes that it has available defenses to a claim of infringement with
respect to such patent. However, the invalidity of any particular patent and the
availability of the Company's defenses must be determined by a court in the
event of litigation, and no assurance can be given that any dispute will be
resolved in a manner satisfactory to the Company. With respect to another patent
that may cover one element in the fabrication of a particular guidewire product
and one potential guidewire product, the Company has designed a guidewire
product that the Company believes avoids the risk of infringement. However, the
Company has continued and expects to continue to market the existing guidewire
product for the foreseeable future. The above-described patents are held by
large companies, each of which has substantial resources, and no assurance can
be given that such companies will not be successful in maintaining the validity
of their patents. If legal action is commenced against the Company to enforce
these patents and the plaintiff in such action prevails, the Company could be
prevented from practicing the subject matter claimed in such patents. In such
event or under other appropriate circumstances, the Company may attempt to
obtain licenses to such patents or redesign its products. The Company is also
aware that certain of its products under development may be covered by existing
patents, in which event the Company may be required to obtain licenses prior to
the introduction and commercial shipment of such products. There can be no
assurance that such licenses will be available or, if available, will be
available on terms acceptable to the Company, or that the Company will be
successful in any attempt to redesign its products or processes to avoid
infringement. Moreover, there can be no assurance that the Company has
identified all patents that may pose a risk of infringement by the Company's
current or proposed products. The Company's business, future operating results
and financial condition could be materially and adversely affected if its
products are found to infringe any of these patents. The Company has depended
and will continue to depend substantially on its technological expertise in the
development and manufacture of its current and future products. In addition, the
Company depends and will likely continue to depend on trade secret protection
and on various patents, such as its patent covering the variable stiffness shaft
design of its micro-catheters, to strengthen its proprietary position. There can
be no assurance that the Company will be successful in the future in obtaining
patents or that patents will not be challenged by third parties. There can be no
assurance that measures to protect trade secrets will be successful, or that
others will not independently develop similar products, duplicate any of the
Company's products, or design around any patents owned or licensed by the
Company. Litigation, which could result in substantial costs to and diversion of
effort by management of the Company, may be necessary to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company or to
defend the Company against claimed infringement of the rights of others and to
determine the scope and validity of the patents or other proprietary rights of
other entities. The resolution of these claims generally involves complex legal
and factual questions and is highly uncertain. Adverse determinations in any
litigation could subject the Company to significant liabilities to third
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<PAGE> 32
parties, require the Company to seek licenses from third parties and prevent the
Company from manufacturing and selling its products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The patent which relates to the variable stiffness design of the Company's
Tracker micro-catheters (the "Tracker patent") has been the subject of four
reexamination proceedings in the United States Patent and Trademark Office
("USPTO"). Following the completion of the first such proceeding, the USPTO
issued a reexamination certificate and confirmed the patentability of the patent
claims set forth in the certificate. Requests for second, third and fourth
reexaminations of the patent were initiated by one of the Company's competitors,
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of Boston Scientific
Corporation, and after the USPTO's review of such petitions the Company recently
received notice from the USPTO that it had reaffirmed the patentability of the
claims of the Tracker patent. Notwithstanding this result, no assurance can be
given that SciMed will not mount a legal challenge to the validity of the
Tracker patent or that the Company would prevail in any such action.
In November 1994 the Company filed a lawsuit in the United States District
Court (the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The District Court has denied Cordis and SciMed's request for a stay.
However, Target is currently awaiting a ruling from the Court of Appeals on a
motion by Cordis and SciMed seeking a stay of the preliminary injunction pending
the outcome of the appeals. The Court of Appeals has temporarily stayed the
preliminary injunction while it considers the motion. Notwithstanding the grant
of the Company's motion for a preliminary injunction, there can be no assurance
that the Company will be ultimately successful in this lawsuit.
The Company is also aware that at least one competitor in Europe has sold
micro-catheters that may infringe a patent that could issue on the Company's
patent application which is pending in the European Patent Office. The Company
is investigating its options for enforcement of its rights with respect to such
infringement. The patent which relates to the variable stiffness design of the
Company's Tracker micro-catheter is being opposed in Japan by an undisclosed
party.
Importance of Foreign Sales. Export product sales outside of the United
States were 71% of product sales for the fiscal year ended March 31, 1996. The
Company anticipates that export product sales to customers will continue to
generate a significant portion, if not a majority, of total product sales.
Fluctuations in the value of foreign currencies relative to the U.S. dollar
could adversely affect the Company's sales and results of operations from time
to time. The Company's international operations are also subject to certain
other risks common to foreign operations in general, including governmental
regulations and import and export restrictions. Changes in such governmental
regulations or import and export restrictions could adversely affect sales of
the Company's products and the Company's results of operations.
Third-Party Reimbursement. The Company's products are purchased by
hospitals, which, in the United States, then bill various third-party payors
including Medicare, Medicaid and private insurers for the healthcare services
provided to patients. Government agencies reimburse hospitals for medical
procedures at a fixed rate according to diagnosis-related groups. Federal and
state laws and regulations govern reimbursement by such government agencies.
Such laws and regulations also influence reimbursement of medical fees by
private insurance companies. Changes in current policies could reduce or
eliminate such reimbursements and thereby adversely affect future sales of the
Company's products. In addition, third-party payors may deny reimbursement if
they determine that the device used in the procedure is unnecessary,
inappropriate, not cost-effective, experimental or for a non-approved
indication. Third-party payors may deny reimbursement for treatments using the
Company's products, regardless of the FDA clearance status of such products.
Third-
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party payors are increasingly challenging the prices charged for medical
products and services. There can be no assurance that reimbursement from
third-party payors will be available, or if available, that reimbursement will
not be limited, thereby adversely affecting the Company's ability to sell its
products profitably. Although the Company has not experienced any material
problems to date, significant uncertainty exists as to the reimbursement status
of newly approved healthcare products, and there can be no assurance that
adequate third-party coverage will be available to patients. In such event,
sales of the Company's products could be adversely affected.
Dependence on Key Personnel. The Company is dependent upon a limited
number of key management and technical personnel. The Company's future success
will depend in part upon its ability to attract and retain highly qualified
personnel. The Company competes for such personnel with other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining
qualified personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
Single Manufacturing Facility. The Company's principal manufacturing
capacity is located in a single facility. An earthquake, fire or other similar
calamity could result in significant disruptions and delays in the Company's
manufacturing and distribution process. The Company currently maintains only
limited amounts of certain finished product inventory, and the Company's
business, financial position and results of operations could be materially
adversely affected in such event.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of March 31, 1996 and
1995 and for each of the three years in the period ended March 31, 1996 are
included in this Form 10-K. The financial statements of Target-CMI, Inc. as of
March 31, 1996 and 1995 and for each of the three years in the period ended
March 31, 1996 are included as Exhibit 99.1.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of income data for the
fiscal years ended March 31, 1996 and 1995. This information has been derived
from unaudited consolidated financial statements which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. These
operating results are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996
Product sales............................. $13,904 $15,741 $18,980 $21,170
Gross margin on product sales............. 9,559 10,694 13,420 14,644
Income from operations.................... 2,356 3,243 4,746 4,309
Net income................................ 2,133 2,700 3,621 3,248
Net income per share(1)................... .14 .18 .24 .21
YEAR ENDED MARCH 31, 1995
Product sales............................. $10,475 $11,543 $12,479 $13,011
Gross margin on product sales............. 7,057 7,792 8,588 8,920
Income from operations.................... 1,942 2,106 2,272 2,145
Net income................................ 1,648 1,711 1,898 2,121
Net income per share(1)................... .12 .12 .13 .14
</TABLE>
- ---------------
(1) All per share amounts reflect a two-for-one stock split effected on December
18, 1995.
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<PAGE> 34
Although Target has experienced revenue growth since its inception and has
been profitable on a quarterly basis since the quarter ended December 31, 1990,
no assurance can be given that revenue growth or profitability on a quarterly or
annual basis will be sustained. The Company's results of operations have varied
significantly from quarter to quarter, and revenue growth rates have been
inconsistent. Future operating results will depend upon several factors in
addition to those discussed above, including the timing and amount of expenses
associated with expanding Target's operations both domestically and
internationally, increased revenues and expenses in conjunction with Target's
direct sales operations in Germany and France, increased costs associated with
product launches, the Company's ability to successfully meet new product
development plans, success in achieving regulatory clearance for new products in
a timely manner, the acceptance of new product introductions both in the United
States and internationally, the mix between pilot production of new products and
full-scale manufacturing of existing products, the mix between domestic and
export sales, the availability of complementary products and the effects this
may have particularly on domestic sales, possible changes in ordering patterns
of its customers due to changes in the healthcare environment or to potential
variations in foreign exchange rates, Target's ability to continue to attract
qualified engineers to further the development of future products, potential
future partnering arrangements, changes in domestic and foreign health care
policies (including third-party reimbursement issues), increased competitive
forces, developments in the Company's ongoing intellectual property litigation,
increased expenses associated with protecting Target's proprietary assets and
the general litigious nature of the medical device industry. Target also
believes that seasonal patterns, including a reduction in the number of
procedures performed by physicians using the Company's products during summer
and holiday periods, may affect its quarterly revenue stream. In addition,
Target cannot predict ordering rates by distributors, some of which place
infrequent stocking orders while others order at regular intervals. As a result
of these and other factors, the Company expects to continue to experience
significant fluctuations in its quarterly operating results.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors will be set forth under the
caption "Election of Directors -- Nominees" in Registrant's proxy statement for
use in connection with the 1996 Annual Meeting of Stockholders (the "1996 Proxy
Statement") and is incorporated herein by reference. The 1996 Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant's fiscal year.
Information regarding Registrant's executive officers is set forth in this
Form 10-K in Part I, Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Compensation of
Executive Officers" in the Company's 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Company's 1996
Proxy Statement.
34
<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) CERTAIN DOCUMENTS FILED AS PART OF THIS FORM 10-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors................................... 43
Consolidated Balance Sheets at March 31, 1996 and 1995.............................. 44
Consolidated Statements of Income for the years ended March 31, 1996, 1995 and
1994............................................................................. 45
Consolidated Statement of Stockholders' Equity for the years ended March 31, 1996,
1995 and 1994.................................................................... 46
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994............................................................................. 47
Notes to Consolidated Financial Statements.......................................... 48
FINANCIAL STATEMENT SCHEDULES:
Schedule II Valuation and Qualifying Accounts....................................... 60
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
The following financial statements and schedule of Target-CMI, Inc. are
included in Exhibit 99.1:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets at March 31, 1996 and 1995
Statements of Income and Retained Earnings for the years ended March 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994
Notes to Financial Statements
Schedule of Valuation and Qualifying Accounts and Reserves
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of Target Therapeutics, Inc.
3.2(2) By-laws of Target Therapeutics, Inc., as amended.
4.1(3) Preferred Shares Rights Agreement dated September 21, 1994 between Target
Therapeutics, Inc. and The First National Bank of Boston.
4.2 Amendment to Preferred Shares Rights Agreement, dated May 7, 1996, between Target
Therapeutics, Inc. and The First National Bank of Boston.
4.3 Declaration of Registration Rights, Exhibit E to the Agreement and Plan of
Reorganization dated April 29, 1996 among Target Therapeutics, Inc., TTI
Acquisition Corporation and Interventional Therapeutics Corporation.
10.1(4) Form of Indemnification Agreement for directors and officers.
10.2(5)+ 1988 Stock Option Plan, as amended, and forms of agreements thereunder.
10.3(4)+ 1991 Director Option Plan and form of option agreements thereunder.
10.4(6)+ 1991 Employee Stock Purchase Plan, as amended, and form of subscription
agreements thereunder.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<S> <C>
10.5(4) Stock Purchase and Technology License Agreement between Eli Lilly, ACS, Collagen
Corporation and Target Therapeutics, Inc. dated as of January 28, 1988.
10.12(4) Lease Agreement between Target Therapeutics, Inc. and Renco Investment Company, a
California general partnership, dated as of October 2, 1991.
10.15(4) Joint Venture Agreement between Target Therapeutics, Inc. and Century Medical
Inc., a Japanese corporation, dated as of September 27, 1991.
10.16(4)++ Distribution Agreement between Target Therapeutics, Inc. and Century Medical
Inc., a Japanese corporation, dated as of September 27, 1991.
10.17(4)++ Subdistribution Agreement between Century Medical Inc., a Japanese corporation
and Target-CMI, Inc., a Japanese corporation, dated as of September 27, 1991.
10.18(4) Supplemental Agreement between Target Therapeutics, Inc., Century Medical Inc., a
Japanese corporation, and Target-CMI, Inc., a Japanese corporation, dated as of
December 3, 1991.
10.26(4)++ Exclusive License Agreement for Treatment of Intracranial Aneurysms with an
Endovascular Guidewire between Target Therapeutics, Inc. and the Regents of the
University of California, dated as of June 30, 1990.
10.27(7)++ Exclusive License Agreement dated March 1, 1992 between Target Therapeutics, Inc.
and Alan Rappe.
10.28(6)++ Distribution Agreement between Target Therapeutics, Inc. and Balt Extrusion, a
French Societe, dated as of June 16, 1992.
10.31(6)++ Neurovascular Guidewire License Agreement dated October 23, 1992 between Target
Therapeutics, Inc. and [a materials company].
10.35(8)++ License Agreement dated December 28, 1992 between Target Therapeutics, Inc. and
Conceptus, Inc.
10.36(8)++ License Agreement dated May 21, 1993 between Target Therapeutics, Inc. and
Cardima, Inc.
10.37(8)+ Letter Agreement dated as of April 25, 1993 between Target Therapeutics, Inc. and
Gary R. Bang.
10.38(9)++ License Agreement dated July 2, 1993 between Target Therapeutics, Inc. and
Prograft Medical, Inc.
10.39(10)++ September 1993 Restated Infusion Catheter License Agreement dated September 24,
1993 between Target Therapeutics, Inc. and [a materials company].
10.41(11)++ September 1993 Neuroradiology [type] Catheter License Agreement dated September
24, 1993 between Target Therapeutics, Inc. and [a materials company].
10.42(12) Master Lease Agreement dated December 9, 1993 between Target Therapeutics, Inc.
and Cardima, Inc.
10.44(5)++ Agreement dated July 13, 1993 between Target Therapeutics, Inc., Century Medical,
Inc., a Japanese corporation, and Target-CMI, Inc., a Japanese corporation.
10.45(6) Agreement dated January 1, 1994 between Target Therapeutics, Inc. and Target-CMI,
Inc., a Japanese corporation.
10.46(5) Master Lease Agreement dated March 30, 1994 between Target Therapeutics, Inc. and
Conceptus, Inc.
10.47(5) Secured Note Purchase Agreement dated March 30, 1994 between Target Therapeutics,
Inc. and Conceptus, Inc. including Secured Promissory Notes and Security
Agreement.
10.48(5)++ March 1994 Balloon Dilatation Catheter License Agreement dated March 30, 1994
between Target Therapeutics, Inc. and [a materials company].
10.49(5) Amendment No. 1 to Subdistribution Agreement dated April 15, 1994 between Century
Medical, Inc., a Japanese corporation, and Target-CMI, Inc., a Japanese
corporation.
10.50(12)++ Amended and Restated License Agreement dated July 8, 1994 between Target
Therapeutics, Inc. and Prograft Medical, Inc.
10.52(13)+ Consulting Agreement dated June 1, 1994 between Target Therapeutics, Inc. and
Charles M. Strother, M.D.
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<S> <C>
10.53(13) Credit Agreement dated July 18, 1994 between Target Therapeutics, Inc. and Union
Bank.
10.54(13)++ May 1995 Restated Neurovascular Infusion Catheter License Agreement dated May 30,
1995 between Target Therapeutics, Inc. and [a materials company].
10.55++ Amendment to Exchange Profit/Loss Sharing Agreement dated December 1, 1995
between Target Therapeutics, Inc. and Century Medical, Inc., a Japanese
Corporation.
10.56+ Target Therapeutics, Inc. Deferred Compensation Plan.
10.57+ Employment Agreement between Target Therapeutics, Inc. and Ray H. Dormandy, Jr.
10.58+ Letter Agreement dated as of March 12, 1996 between Target Therapeutics, Inc. and
John C. Meyer.
10.59+ Letter agreement dated as of March 9, 1994 between Target Therapeutics, Inc. and
Abhi Acharya, Ph.D.
11.1 Calculation of net income per share.
21.1 Subsidiaries of Target Therapeutics, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 41).
24.1 Power of Attorney (see page 40).
27 Financial Data Schedule.
99.1 Financial Statements and Schedule of Target-CMI, Inc. as of March 31, 1996 and
1995 and for each of the three years in the period ended March 31, 1996 with
Report of Independent Auditors.
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit No. 3.1 filed with the Company's Form
10-Q filed for the quarter ended December 31, 1991.
(2) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-K for the year ended March 31, 1995.
(3) Incorporated by reference to Exhibit Number 1 filed with the Company's Form
8-A filed on September 22, 1994.
(4) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 33-44675) filed on December 20, 1991,
or with Amendment No. 1 or Amendment No. 2 thereto, which became effective
on January 24, 1992.
(5) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-K for the year ended March 31, 1994.
(6) Exhibit Nos. 10.4, 10.28, 10.31, 10.32, 10.33 and 10.34 are incorporated by
reference to Exhibit Nos. 19.2, 19.3, 19.6, 19.7, 19.8 and 19.9,
respectively, filed with the Company's Form 10-Q filed for the quarter
ended September 30, 1992.
(7) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-K for the year ended March 31, 1992.
(8) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-K for the year ended March 31, 1993.
(9) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-Q for the quarter ended June 30, 1993.
(10) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-Q for the quarter ended September 30, 1993.
(11) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-Q for the quarter ended December 31, 1993.
(12) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated by reference to identically numbered exhibits filed with the
Company's Form 10-Q for the quarter ended September 30, 1994.
37
<PAGE> 38
++ Confidential treatment granted or requested as to a portion of this
Exhibit.
+ Constitutes a management contract or compensatory contract, plan or
arrangement.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended March 31, 1996.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 28, 1996 TARGET THERAPEUTICS, INC.
(REGISTRANT)
By: /s/ GARY R. BANG
------------------------------------
Gary R. Bang
President and Chief Executive
Officer
39
<PAGE> 40
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary R. Bang and Robert E. McNamara,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ GARY R. BANG President, Chief Executive June 28, 1996
- --------------------------------------------- Officer and Director
Gary R. Bang (Principal Executive Officer)
/s/ ROBERT E. MCNAMARA Vice President, Finance and June 28, 1996
- --------------------------------------------- Administration, Chief Financial
Robert E. McNamara Officer (Principal Financial and
Accounting Officer) and Assistant
Secretary
/s/ CHARLES M. STROTHER Chairman of the Board, Director June 28, 1996
- ---------------------------------------------
Charles M. Strother, M.D.
/s/ WILLIAM G. DAVIS Director June 28, 1996
- ---------------------------------------------
William G. Davis
/s/ KATHLEEN MURRAY Director June 28, 1996
- ---------------------------------------------
Kathleen Murray, M.S.N.
/s/ HOWARD D. PALEFSKY Director June 28, 1996
- ---------------------------------------------
Howard D. Palefsky
/s/ RICHARD D. RANDALL Director June 28, 1996
- ---------------------------------------------
Richard D. Randall
/s/ JOHN C. VILLFORTH Director June 28, 1996
- ---------------------------------------------
John C. Villforth
</TABLE>
40
<PAGE> 41
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-49456, 33-62978, 33-89148 and 333-04453) pertaining to the
1988 Stock Option Plan, the 1991 Director Option Plan, the 1991 Employee Stock
Purchase Plan of Target Therapeutics, Inc. and the 1990 Stock Option Plan of
Interventional Therapeutics Corporation of our report dated April 26, 1996, with
respect to the consolidated financial statements and schedule of Target
Therapeutics, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
June 27, 1996
41
<PAGE> 42
TARGET THERAPEUTICS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
WITH
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
42
<PAGE> 43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Target Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Target
Therapeutics, Inc. as of March 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 1996. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Target Therapeutics, Inc. at March 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
April 26, 1996
43
<PAGE> 44
TARGET THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments..................... $ 47,273 $38,070
Investment in Conceptus, Inc.......................................... 20,493 --
Accounts receivable................................................... 15,676 9,442
Inventories........................................................... 6,740 5,423
Deferred tax assets................................................... 4,214 4,014
Other current assets.................................................. 1,235 424
-------- -------
Total current assets.......................................... 95,631 57,373
Property and equipment, net............................................. 11,136 6,502
Other assets............................................................ 7,508 6,524
-------- -------
$114,275 $70,399
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 2,062 $ 1,646
Accrued compensation.................................................. 3,831 3,361
Taxes payable......................................................... -- 1,480
Accrued product replacement costs..................................... -- 1,030
Other accrued liabilities............................................. 6,698 3,506
Deferred tax liabilities.............................................. 10,311 1,398
-------- -------
Total current liabilities..................................... 22,902 12,421
Long-term obligations................................................... 128 115
Minority interest....................................................... 407 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value (shares authorized: 2,000,000; issued
and outstanding: none)............................................. -- --
Common stock, $.0025 par value (shares authorized: 25,000,000; issued
and outstanding: 14,714,661 and 14,197,238 at March 31, 1996 and
1995, respectively)................................................ 37 36
Additional paid-in capital............................................ 50,759 41,839
Retained earnings..................................................... 27,688 15,986
Unrealized gain on available-for-sale securities...................... 12,265 --
Accumulated translation adjustments................................... 89 35
Notes receivable from stockholders.................................... -- (33)
-------- -------
Total stockholders' equity.................................... 90,838 57,863
-------- -------
$114,275 $70,399
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE> 45
TARGET THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Product sales................................................. $69,795 $47,508 $35,353
Costs and expenses:
Cost of sales............................................... 21,478 15,151 13,368
Research and development.................................... 12,937 10,336 7,624
Selling, general and administrative......................... 20,726 13,556 9,245
------- ------- -------
Total costs and expenses............................ 55,141 39,043 30,237
------- ------- -------
Income from operations........................................ 14,654 8,465 5,116
Interest income, net.......................................... 1,926 1,271 954
Other income.................................................. 736 792 515
Minority interest............................................. (607) -- --
------- ------- -------
Income before income taxes and cumulative effect of change
in method of accounting for income taxes.................... 16,709 10,528 6,585
Provision for income taxes.................................... 5,007 3,150 2,265
------- ------- -------
Income before cumulative effect of accounting change.......... 11,702 7,378 4,320
Cumulative effect of change in method of accounting for
income taxes................................................ -- -- 631
------- ------- -------
Net income.................................................... $11,702 $ 7,378 $ 4,951
======= ======= =======
Net income per share:
Income before cumulative effect of accounting change........ $ .77 $ .51 $ .30
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- .05
------- ------- -------
Net income per share........................................ $ .77 $ .51 $ .35
======= ======= =======
Shares used in calculating per share information.............. 15,280 14,466 14,206
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE> 46
TARGET THERAPEUTICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED NOTES
ADDITIONAL TRANSLATION RECEIVABLE TOTAL
COMMON PAID-IN DEFERRED RETAINED AND OTHER FROM STOCKHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS ADJUSTMENTS STOCKHOLDERS EQUITY
------ ---------- ------------ -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1993..... $ 35 $ 39,002 $ (232) $ 3,657 $ -- $ -- $ 42,462
Exercise of common stock
options and issuance under
stock purchase plan
(536,528 shares), net of
notes
receivable................ 1 687 -- -- -- (31) 657
Amortization of deferred
compensation.............. -- -- 108 -- -- -- 108
Income tax benefit of
disqualifying
dispositions.............. -- 886 -- -- -- -- 886
Net income................... -- -- -- 4,951 -- -- 4,951
--- ------- ----- ------- ------- ---- -------
Balances at March 31, 1994..... 36 40,575 (124) 8,608 -- (31) 49,064
Exercise of common stock
options and issuance under
stock purchase plan
(148,000 shares), net of
notes
receivable................ -- 1,038 -- -- -- (2) 1,036
Amortization of deferred
compensation.............. -- -- 124 -- -- -- 124
Income tax benefit of
disqualifying
dispositions.............. -- 226 -- -- -- -- 226
Translation adjustments...... -- -- -- -- 35 -- 35
Net income................... -- -- -- 7,378 -- -- 7,378
--- ------- ----- ------- ------- ---- -------
Balances at March 31, 1995..... 36 41,839 -- 15,986 35 (33) 57,863
Exercise of common stock
options and issuance under
stock purchase plan
(517,423 shares).......... 1 5,326 -- -- -- -- 5,327
Repayment of notes
receivable................ -- -- -- -- -- 33 33
Income tax benefit of
disqualifying dispositions... -- 3,594 -- -- -- -- 3,594
Unrealized gain on
available-for-sale
securities................ -- -- -- -- 12,265 -- 12,265
Translation adjustments...... -- -- -- -- 54 -- 54
Net income................... -- -- -- 11,702 -- -- 11,702
--- ------- ----- ------- ------- ---- -------
Balances at March 31, 1996..... $ 37 $ 50,759 $ -- $ 27,688 $12,354 $ -- $ 90,838
=== ======= ===== ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE> 47
TARGET THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 11,702 $ 7,378 $ 4,951
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization......................... 3,106 2,393 1,524
Changes in assets and liabilities:
Accounts receivable................................. (6,207) (2,882) (501)
Inventories......................................... (1,310) (2,432) 606
Deferred tax assets................................. (200) (1,920) (2,094)
Other current assets................................ (811) (135) 289
Accounts payable.................................... 417 194 584
Accrued compensation................................ 470 1,210 381
Taxes payable....................................... (1,468) 815 661
Accrued product replacement costs................... (1,030) (111) 1,141
Other accrued liabilities........................... 2,712 1,630 384
Deferred tax liabilities............................ 733 800 598
Income tax benefit of disqualifying dispositions.... 3,594 226 886
Minority interest................................... 407 -- --
-------- -------- --------
Total adjustments..................................... 413 (212) 4,459
-------- -------- --------
Net cash provided by operating activities................ 12,115 7,166 9,410
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures, net............................. (7,029) (3,624) (1,938)
Purchase of securities available-for-sale............. (49,991) (68,967) (65,266)
Maturities of securities available-for-sale........... 47,593 66,615 62,782
Increase in other assets.............................. (1,694) (4,010) (1,895)
-------- -------- --------
Net cash used in investing activities.................... (11,121) (9,986) (6,317)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock for cash..................... 5,327 1,036 657
Borrowings from bank.................................. 534 -- --
Principal payments under capital leases............... (34) (56) (48)
Payments received on notes receivable................. 33 -- --
-------- -------- --------
Net cash provided by financing activities................ 5,860 980 609
Net increase (decrease) in cash and cash equivalents....... 6,854 (1,840) 3,702
Cash and cash equivalents, beginning of year............... 6,839 8,679 4,977
-------- -------- --------
Cash and cash equivalents, end of year..................... $ 13,693 $ 6,839 $ 8,679
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE> 48
TARGET THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Target Therapeutics, Inc. (the "Company" or "Target") was incorporated in
California in June 1985 and reincorporated in the State of Delaware in January
1992. The Company is in the business of developing, manufacturing and marketing
disposable medical devices used in minimally invasive procedures to treat
vascular diseases of the brain associated with stroke and other diseases
accessible through small vessels of the circulatory system.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The subsidiaries fiscal years
which end on February 28, are included in the Company's consolidated results for
the year ended March 31, 1996. Investments in jointly owned companies and other
investments in which the Company has a 20 to 50 percent interest are accounted
for on the equity method. Investments in less-than-20 percent owned companies
are accounted for under the cost method. The investments are carried at the
lower of cost or estimated realizable value. The marketable portion of the
investments are accounted for in accordance with Financial Accounting Standards
Board ("FASB") Statement 115.
Net income per share and stock split
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding. On November 8, 1995
the Company's Board of Directors authorized a two-for-one stock split effected
in the form of a stock dividend on December 18, 1995. All presentations of
shares outstanding, options and amounts per share for prior periods have been
restated to reflect the stock split.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Translation of foreign currencies
All assets and liabilities of the Company's foreign subsidiary and
majority-owned joint venture are translated at exchange rates in effect on
reporting dates and differences due to changing translation rates are charged or
credited to "accumulated translation" in stockholders' equity. Income and
expenses are translated at rates which approximate those in effect during the
respective periods.
Cash equivalents and short-term investments
Cash equivalents consist of highly liquid investments, primarily money
market accounts, with maturities at the date of purchase of 90 days or less.
Short-term investments consist primarily of municipal government debt securities
and money auction preferred stock.
Effective April 1, 1994, the Company adopted FASB Statement 115,
"Accounting for Certain Investments in Debt and Equity Securities." Short-term
investments are classified as available-for-sale and are stated at market value.
In accordance with FASB Statement 115 prior period financial statements have not
been restated to reflect the change in accounting principle. The impact of
adopting the Statement was not material. Unrealized gains or losses are recorded
as a separate component of stockholders' equity and the
48
<PAGE> 49
Company includes in current period earnings any decline in fair value below cost
that is deemed other than temporary. The fair value of short-term investments
was estimated based on quoted market prices at year end.
Concentration of credit risk
The Company sells its products primarily to hospitals in North America,
Germany and France and to medical device distributors in Europe and Asia. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses. See Note 10 for discussion of export sales and major customers.
The Company invests its excess cash in deposits, government debt securities
and corporate debt securities. These securities typically mature within 365 days
and, therefore, bear minimal risk. The Company has not experienced any material
losses on its investments.
Concentration of other risks
The Company's operating results are subject to various risks and
uncertainties, including uncertainties related to:
Revenue Growth: The Company's continued revenue growth is subject to
a number of factors, including new product introductions, the availability
of suitable alternative products manufactured by competitors, the
timeliness and availability of regulatory clearance and the continued
expansion of its customer base. Target continues to research and develop
new applications for its products in an effort to expand its practitioner
customer base. As more companies become aware of the market potential of
such products, Target anticipates an increase of competitive forces which
may have an adverse effect on revenues of the Company. Several companies in
the United States have introduced products that are being used in the
interventional neuroradiology market. Target is also aware of other
companies that may pursue commercialization of products which may compete
with the Company's products and may result in future pricing and margin
pressures within this market. Prior to commercialization in the United
States, sales of certain of Target's products are limited to clinical
settings pursuant to Investigational Device Exemptions ("IDE"s) granted by
the U.S. Food and Drug Administration ("FDA") which limit the number of
patients treatable with such products. Target must obtain clearance from
the FDA to market these products for other than clinical investigation, and
the overall review time of such regulatory process may be lengthy.
Regulatory requirements vary in other countries in which Target markets its
products. Failure to develop new products successfully, to obtain
regulatory clearance for such products in a timely manner or to maintain
regulatory clearance may have an adverse effect on Target's revenues in the
future. Target's revenue growth may also be adversely affected by the
limited number of teaching hospitals that train practitioners in fields in
which the Company's products are utilized. The Company continues to obtain
a significant amount of its revenues from Century Medical, Inc. ("CMI") in
Japan. Should this customer continue to represent a significant portion of
revenues, significant changes in this customer's ordering rates will likely
cause similar changes in Target's revenues. It is Target's understanding
that physicians use certain devices, products and materials manufactured by
other companies in conjunction with the use of certain of Target's
products. Reductions in the availability or the elimination of such
complementary products have had, and may continue to have, an adverse
effect on sales of the Company's products. Currently, products sold
commercially in the United States pursuant to 510(k) clearance received
from the FDA may generally be marketed in Europe. However, political and
regulatory changes, particularly in Western Europe in connection with the
evolution of the European Union, as well as the Company's ability to
achieve IS09001 standards, may adversely affect the Company's product sales
in Europe. Similarly, changes in the United States and foreign national
health care policies, including third-party reimbursement issues, may have
a significant adverse effect on revenues of Target. Furthermore, the future
rate of Target's revenue growth, if any, may be below that experienced in
prior annual and quarterly periods.
International Operations: The Company's international business is an
important contributor to the Company's net revenues and profits. As the
Company expands its direct international sales operations,
49
<PAGE> 50
increased amounts of its revenues will be subject to the risks of foreign
currency fluctuations. The operating expenses of and any dividends declared
by Target's international affiliates, including those of the 50 percent
owned Japanese joint venture, are paid in local currencies and are subject
to the effects of fluctuations in foreign currency exchange rates. Although
the Company engages in hedging transactions that may offset the effect of
such fluctuations, financial exposure may nonetheless result, primarily
from the timing of transactions and the movement of exchange rates. As of
March 31, 1996 and 1995, there were no open forward exchange contracts.
Further, any significant change in the political, regulatory or economic
environment where the Company conducts international operations may have a
material impact on revenues and profits.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs, which approximate actual costs, under the first-in,
first-out method.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to five years. Leasehold improvements are amortized on a
straight-line basis over five years or the remaining lease term, whichever is
shorter.
Patents and trademarks
Patents and trademarks are stated at cost, net of accumulated amortization.
Amortization is provided using the straight-line method over an estimated
seven-year useful life beginning with the effective dates or over the remainder
of such periods from the dates acquired.
Revenue recognition and deferred revenue
Product sales are generally recognized upon shipment. In September 1995,
the Company obtained clearance by the FDA to market its Guglielmi Detachable
Coil ("GDC") system in the United States. The Company has launched a training
program to facilitate the roll out of the product to treatment centers in
addition to those involved in the clinical trials. In conjunction with becoming
a GDC treatment site, each hospital is required to purchase a minimum stocking
order of the product. The Company's fiscal 1996 revenues include approximately
$3.9 million in sales of initial stocking orders of its GDC system. As of March
31, 1996, a portion of the revenue attributable to these initial stocking
orders, totaling $805,000 has been deferred into future periods. Initial
stocking order revenue should not be viewed as indicative of future sales, as
repeat orders and future revenue streams will be driven largely by the number of
procedures performed by physicians which cannot accurately be predicted given
the short period during which the GDC system has been commercially available and
which will remain subject to numerous factors outside the Company's control.
Income taxes
Effective April 1, 1993, the Company adopted FASB Statement 109,
"Accounting for Income Taxes," under which the liability method is used in
accounting for income taxes. As permitted by FASB Statement 109, the Company
elected to report the cumulative effect of the change in the year adopted rather
than restate the financial statements of prior years. The cumulative positive
effect of the change in method of accounting for income taxes increased net
income by $631,000, or $.05 per share, for the year ended March 31, 1994.
Future accounting changes
In March 1995, the FASB issued FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain
50
<PAGE> 51
situations, an impairment loss would be recognized. FASB Statement 121 is
effective for the Company's 1997 fiscal year. The Company is evaluating the
impact of the new standard on its financial position, results of operations, and
cash flows, and expects the effect to be immaterial.
In October 1995, the FASB issued FASB Statement 123 "Accounting for
Stock-Based Compensation" which also will be effective for the Company's 1997
fiscal year. FASB Statement 123 allows companies which have stock-based
compensation arrangements with employees to adopt a new fair-value basis of
accounting for stock options and other equity instruments, or to continue to
apply the existing accounting rules under Accounting Practices Board (APB)
Opinion 25 "Accounting for Stock Issued to Employees" but with additional
financial statement disclosure. The Company expects to continue to account for
stock-based compensation arrangements under "APB" Opinion 25 and therefore does
not expect FASB Statement 123 to have a material impact on its financial
position, results of operations and cash flows.
2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments:
Cash and cash equivalents...................................... $13,693 $ 6,839
Short-term investments......................................... 33,580 31,231
------- -------
$47,273 $38,070
======= =======
Accounts receivable:
Trade receivables.............................................. $16,760 $ 9,990
Less allowance for doubtful accounts........................... (1,084) (548)
------- -------
$15,676 $ 9,442
======= =======
Inventories:
Raw materials.................................................. $ 1,887 $ 781
Work-in-process................................................ 1,959 1,037
Finished goods................................................. 2,894 3,605
------- -------
$ 6,740 $ 5,423
======= =======
Property and equipment:
Machinery and equipment........................................ $ 8,303 $ 7,159
Office equipment............................................... 7,527 3,795
Leasehold improvements......................................... 1,644 935
------- -------
17,474 11,889
Less accumulated depreciation and amortization................. (6,338) (5,387)
------- -------
$11,136 $ 6,502
======= =======
Other assets:
Cost in excess of net assets acquired, net..................... $ 1,610 $ 2,009
Patents and trademarks, net.................................... 2,979 1,846
Investments in joint ventures and affiliated companies......... 2,315 1,508
Other.......................................................... 604 1,161
------- -------
$ 7,508 $ 6,524
======= =======
</TABLE>
51
<PAGE> 52
3. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities as of March 31,
1996 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money auction preferred stock.................. $13,550 $ -- $ -- $ 13,550
Government debt securities..................... 20,024 11 (5) 20,030
------- ------- --- -------
Total debt securities................ 33,574 11 (5) 33,580
Equity securities.............................. 6 1 -- 7
------- ------- --- -------
33,580 12 (5) 33,587
Investment in Conceptus, Inc................... 49 20,444 -- 20,493
------- ------- --- -------
$33,629 $ 20,456 $ (5) $ 54,080
======= ======= === =======
</TABLE>
The following is a summary of available-for-sale securities as of March 31,
1995 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money auction preferred stock.................. $ 7,700 $ -- $ -- $ 7,700
Government debt securities..................... 23,640 16 (131) 23,525
------- --- ----- -------
Total debt securities................ 31,340 16 (131) 31,225
Equity securities.............................. 6 -- -- 6
------- --- ----- -------
$31,346 $ 16 $ (131) $ 31,231
======= === ===== =======
</TABLE>
The gross realized gains, gross realized losses and the net adjustment to
unrealized holding gains (losses) on maturities of available-for-sale securities
were not significant.
The amortized cost and estimated fair value of debt and marketable equity
securities at March 31, 1996, and 1995 are shown below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1996 1995 1995
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less........................ $33,574 $ 33,580 $27,840 $ 27,766
Due after one year through three years......... -- -- 3,500 3,459
------- ------- ------- -------
33,574 33,580 31,340 31,225
Equity securities.............................. 6 7 6 6
------- ------- ------- -------
33,580 33,587 31,346 31,231
Investment in Conceptus, Inc................... 49 20,493 -- --
------- ------- ------- -------
$33,629 $ 54,080 $31,346 $ 31,231
======= ======= ======= =======
</TABLE>
4. INVESTMENT IN CONCEPTUS, INC.
Prior to February 1996, the Company accounted for its greater-than-20
percent ownership interest in Conceptus, Inc. under the equity method. In
February 1996, Conceptus completed an initial public offering of common stock
which reduced the Company's ownership position to approximately 18 percent.
Consequently, the portion of the investment which will be available for sale,
subject to certain market trading restrictions, approximately 1.1 shares, is
accounted for in accordance with FASB Statement 115. The unrealized gain of
$12.3 million at March 31, 1996 is recorded, net of deferred taxes, as a
component of stockholders' equity. The remaining investment of approximately
600,000 shares is recorded at cost. The estimated fair value of the entire
investment as of March 31, 1996 is approximately $20.5 million.
52
<PAGE> 53
5. COMMITMENTS
Line of credit arrangement
The Company maintains a $3.0 million bank line of credit which expires in
July 1996. Borrowings under the line of credit bear interest at the bank's prime
rate, are unsecured and are subject to certain covenants related to financial
ratios and profits. There were no amounts outstanding under this line at March
31, 1996 and 1995.
Lease obligations
The Company leases its facilities and certain equipment under operating
leases. The Company recognizes rent expense on a straight-line basis over the
lease term. The future minimum lease commitments by fiscal year as of March 31,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................................ $1,152
1998........................................................................ 1,159
1999........................................................................ 1,036
2000........................................................................ 869
2001........................................................................ 868
Thereafter.................................................................. 724
------
$5,808
======
</TABLE>
The following schedule shows the composition of net rental expense for all
operating leases (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rent expense.................................................. $964 $848 $914
Less sublease rental income................................... -- -- (77)
---- ---- ----
$964 $848 $837
==== ==== ====
</TABLE>
6. STOCKHOLDERS' EQUITY
Stock option and purchase plans
The 1988 Stock Option Plan (the "Plan") is an incentive and nonstatutory
option plan providing for the issuance of common stock to employees, officers,
directors and consultants of the Company. At March 31, 1996 the Company had
reserved 4,400,000 shares of common stock for issuance under the Plan. Options
granted generally become exercisable over a 48-month period. Under the Plan, the
exercise price of incentive stock options may not be less than 100 percent of
the fair market value at the date of grant, and the exercise price of
nonstatutory options must be at least 85 percent of the fair market value at the
date of grant. In the case of an option holder who owns more than ten percent of
the voting power of all outstanding stock, the incentive option exercise price
must be at least 110 percent of fair market value and the option must be
exercised, if at all, within five years of the grant date.
The Company recorded deferred compensation expense for the difference
between the grant price and the deemed fair value for financial statement
presentation purposes of the Company's common stock for certain options granted
in fiscal 1992. Amortization of deferred compensation was $124,000 and $108,000
for the years ended March 31, 1995 and 1994, respectively. No amortization of
such deferred compensation was recognized for the year ended March 31, 1996. The
deferred compensation amount was amortized over a four-year period.
53
<PAGE> 54
Information with respect to the 1988 Stock Option Plan is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ------------------------------------------
AVAILABLE NUMBER AGGREGATE PRICE
FOR GRANT OF SHARES PRICE PER SHARE
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balances at March 31, 1993.............. 1,330,396 916,222 $ 2,937,680 $ .065-13.38
Options granted....................... (605,750) 605,750 6,035,300 8.88-12.13
Options exercised..................... -- (504,226) (416,980) .065-12.82
Options canceled...................... 57,028 (57,028) (425,976) .165-13.00
--------- --------- -----------
Balances at March 31, 1994.............. 781,674 960,718 8,130,024 .065-13.38
Additional shares reserved............ 1,000,000 -- -- --
Options granted....................... (827,430) 827,430 10,084,991 10.72-18.13
Options exercised..................... -- (114,124) (741,206) .065-13.38
Options canceled...................... 59,454 (59,454) (601,990) .065-13.00
--------- --------- -----------
Balances at March 31, 1995.............. 1,013,698 1,614,570 16,871,819 .065-18.13
Options granted....................... (570,945) 570,945 16,233,171 17.50-56.25
Options exercised..................... -- (484,115) (4,505,801) .0625-36.25
Options canceled...................... 117,840 (117,796) (1,460,287) 2.50-56.25
--------- --------- -----------
Balance at March 31, 1996............... 560,593 1,583,604 $27,138,902 $.0625-56.25
========= ========= ===========
</TABLE>
As of March 31, 1996, options for 624,761 shares were exercisable.
During fiscal 1996 and 1995 the Company granted options to purchase up to
195,000 and 203,200 shares respectively, under the Plan that vest in either the
fifth or sixth year after the date of grant or upon the Company's achievement of
certain market valuation criteria. As of March 31, 1996, 183,547 such options
were exercisable.
In December 1991, the Company's Board of Directors (the "Board") adopted
the 1991 Director Option Plan ("Director Option Plan"). A total of 200,000
shares of common stock have been reserved for issuance under the Director Option
Plan which provides for the grant of nonstatutory options to non employee
directors of the Company. As of March 31, 1996, options to purchase up to
100,000 shares under this plan were outstanding and become exercisable over a
three year period from the grant date. As of March 31, 1996, options for 30,667
shares were exercisable. As of March 31, 1996, 4,000 options under the Director
Option Plan have been exercised.
The Board also adopted the 1991 Employee Stock Purchase Plan (the "Purchase
Plan") in December 1991. The Purchase Plan allows for the issuance of up to
200,000 shares of common stock to employees of the Company. During the years
ended March 31, 1996 and 1995, 29,308 shares and 33,876 shares, respectively,
were issued at prices of $12.22 and $15.41 per share and $7.55 and $10.42 per
share, respectively, under the Purchase Plan. As of March 31, 1996, a total of
95,486 shares have been issued under this plan.
7. STOCKHOLDER RIGHTS PLAN
On September 21, 1994, the Board of Directors adopted a Stockholders Rights
Plan (the "Rights Plan") and declared a dividend of one one-thousandth of a
share of the Company's Series A Participating Preferred Stock for each
outstanding share of common stock. Such rights only become exercisable, or
transferable, ten business days after a person or group (an "Acquiring Person")
acquires beneficial ownership of, or commences a tender or exchange offer for,
15% or more of the Company's common stock.
Each right entitles stockholders to buy one one-thousandth of a share of
the Company's Series A Participating Preferred Stock at an exercise price of
$67.50. The Company is entitled to redeem the rights at $0.01 per right at any
time on or before the tenth day following acquisition by a person or group of
15% or more of the Company's common stock.
54
<PAGE> 55
If a person or group acquires 15% or more of Target's common stock prior to
redemption of the rights, the rights will entitle stockholders other than the
potential acquiror to purchase, at the then current price, that number of shares
of Target's common stock (or, in certain circumstances as determined by the
Board, cash, other property or other securities) having a market value at that
time of twice the exercise price. If, after the tenth day following acquisition
by a person or group of 15% or more of the Company's common stock, the Company
sells more than 50% of its assets or earning power or is acquired in a merger or
other business transaction, the acquiror must assume the obligations under the
rights, and the rights will become exercisable to acquire common stock of the
acquiror at the discounted price. The ownership position of Collagen Corporation
does not trigger exercisability of the rights so long as Collagen does not
increase its holdings above its ownership level at the time that the Rights Plan
was adopted (approximately 33%), without the approval of Target's Board. Under
certain circumstances the Target Board of Directors may also exchange the rights
(other than those owned by the acquiror or its affiliates) for its common stock
at an exchange ratio of one share of common stock per right.
8. INCOME TAXES
The Company's provision for income taxes for the years ended March 31, 1996
and 1995 and 1994 consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Current:
Federal............................................... $3,480 $ 3,613 $2,353
State................................................. 660 657 674
Foreign............................................... 334 -- --
------ ------- ------
Total current...................................... 4,474 4,270 3,027
Deferred:
Federal............................................... 343 (992) (614)
State................................................. 190 (128) (148)
------ ------- ------
Total deferred..................................... 533 (1,120) (762)
------ ------- ------
Total provision......................................... $5,007 $ 3,150 $2,265
====== ======= ======
</TABLE>
At March 31, 1996, the Company had available net operating loss
carryforwards for tax purposes of approximately $1.2 million which expire in the
year 2001. Because of the "change in ownership" provisions of the Tax Reform Act
of 1986, the loss carryforwards will be subject to an annual limitation
regarding their utilization against future taxable income.
The Company realizes tax benefits as a result of the exercise and
subsequent sale of certain employee stock options (disqualifying dispositions).
For financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits, $3.6 million, $226,000 and $886,000 in fiscal
1996, 1995 and 1994, respectively, is credited to additional paid-in capital.
55
<PAGE> 56
The provision for income taxes for the years ended March 31, 1996, 1995 and
1994 differs from the amount computed by applying the statutory federal income
tax rate to income before taxes. The reconciliation between the federal
statutory rate and the effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 34.0% 34.0% 34.0%
Foreign tax credits............................................ (5.0) (5.7) --
Unrealized losses on investments accounted for on the equity
method....................................................... 2.5 3 .6 1.5
Foreign sales corporation tax benefit.......................... (2.7) (3.5) (3.7)
State income taxes............................................. 3.6 3.7 5.3
Tax exempt interest............................................ (2.7) (3.0) (2.6)
Other.......................................................... 0.3 0 .8 (0.1)
---- ---- ----
Provision for income tax..................................... 30.0% 29.9% 34.4%
==== ==== ====
</TABLE>
Deferred taxes for the years ended March 31, 1996, 1995 and 1994 reflect
the net tax effects of loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant amounts of the Company's
deferred tax assets and liabilities as of March 31, 1996, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Inventory valuation accounts.......................... $ 892 $ 461 $ 382
Reserves and accruals not currently tax deductible.... 1,593 1,152 861
Foreign tax credits................................... 1,470 1,605 --
Benefit of net operating loss carryforwards........... 434 490 546
Accrued cost of exchanging GDC inventory.............. -- 414 578
State income taxes.................................... 61 174 159
Other................................................. 142 152 58
------- ------ ------
4,592 4,448 2584
Valuation allowance................................... (378) (434) (490)
------- ------ ------
$ 4,214 $4,014 $2,094
======= ====== ======
Deferred tax liabilities:
Patent costs.......................................... $ 936 $ 580 $ 328
Depreciation and amortization......................... 238 64 128
Unrealized gains and dividend income related to
investments accounted for on equity method......... 1,285 700 142
Unrealized gain on available-for-sale securities...... 8,180
Other................................................. (328) 54 --
------- ------ ------
$10,311 $1,398 $ 598
======= ====== ======
</TABLE>
9. JOINT VENTURE AND AFFILIATE COMPANIES
In September 1991, the Company entered into a joint venture agreement with
Century Medical Inc. ("CMI"), a Japanese corporation, to distribute the
Company's products in Japan. The Company accounts for this 50 percent-owned
investment under the equity method and includes its share of joint venture net
income in "Other income" in the Consolidated Statements of Income. These amounts
were $1.5 million, $1.6 million and $520,000 in fiscal 1996, 1995 and 1994,
respectively. In conjunction with establishing the joint venture, the Company
also entered into a distribution agreement with CMI, and CMI entered into a
subdistribution agreement with the joint venture.
56
<PAGE> 57
The Company entered into an agreement with the joint venture, effective in
January 1994, in which the Company is obligated to provide certain management
services, assist in marketing, development and planning activities and provide
certain literature to the joint venture. In consideration for the Company
providing such services, the joint venture has agreed to reimburse costs
incurred by the Company, of which $465,000, $318,000 and $445,000 have been
included in "Other income" for the years ended March 31, 1996, 1995 and 1994,
respectively.
Summarized information for the joint venture is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Current assets................................................... $18,039 $18,540
Non current assets............................................... 1,291 755
Current liabilities.............................................. 13,766 13,604
Non current liabilities.......................................... 173 --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales............................................. $49,720 $37,349 $22,894
Gross profit.......................................... 17,442 15,243 8,896
Income from operations................................ 7,626 6,837 2,876
Net income............................................ 3,250 3,213 1,038
</TABLE>
The Company's other investments are comprised of cash investments in and
the granting of technology licenses to Cardima, Inc., and Prograft Medical, Inc.
for which the Company's ownership interest was approximately 16 percent, and 20
percent, respectively, at March 31, 1996. During fiscal 1995 and 1994, the
Company also accounted for its investment in Conceptus, Inc. under the equity
method. During fiscal 1996, the Company's ownership interest in Conceptus, Inc.
fell below 20 percent. The equity losses for the investments accounted for under
the equity method were $1.2 million, $1.1 million and $292,000 for fiscal 1996,
1995 and 1994, respectively.
10. EXPORT SALES AND MAJOR CUSTOMERS
The Company markets its products both domestically and internationally.
Export product sales are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Europe................................................ $20,362 $12,708 $ 8,651
Asia, principally Japan............................... 26,127 17,699 11,019
Other................................................. 2,940 2,152 1,469
------- ------- -------
$49,429 $32,559 $21,139
======= ======= =======
</TABLE>
One customer, CMI, accounted for approximately 35 percent of the Company's
product sales for the years ended March 31, 1996 and 1995 and 29 percent for the
year ended March 31, 1994.
11. FORMATION OF FRENCH JOINT VENTURE
In June 1995 the Company and its former distributor in France formed a
joint venture to market the Company's products in France. Target holds a 51
percent interest in the joint venture and has guaranteed a line of credit of up
to approximately 4.0 million French Franc (approximately $792,000 as of March
31, 1996) to fund its operations. As of March 31, 1996, $534,000 was outstanding
under this line of credit. The results of the operations in France, net of the
minority interest, are included in the consolidated results of the Company's
beginning in the second quarter of fiscal 1996. Minority interest before taxes
is reflected as a separate component of the Company's Consolidated Statements of
Income for the year ended March 31, 1996.
57
<PAGE> 58
12. FORMATION OF GERMAN SUBSIDIARY
In October 1994, the Company and Target Therapeutics International
(Deutschland) GmbH ("Target GmbH") entered into an Asset Purchase Agreement (the
"Agreement") with Rehaforum Medical GmbH ("Rehaforum"), a distributor of the
Company's products in Germany. The Company and Target GmbH acquired certain of
the assets of Rehaforum attributable to the Target portion of Rehaforum's
business, including inventory of Target products, property and equipment and
assumed certain liabilities. Pursuant to the terms of the Agreement, Rehaforum
no longer has distribution rights to the Company's products and is limited as to
sales of competitive products for a five-year period from the date of the
agreement. The purchase price in excess of the fair value of net tangible assets
acquired is being amortized over a five year period.
13. EXPECTED COSTS OF PRODUCT REPLACEMENT
In October 1993, the Company announced that it was pursuing certain changes
to a product currently sold under an investigational device exemption ("IDE") by
the FDA. Pursuant to a supplement to the IDE which was approved by the FDA in
March 1994, limited FDA clinical trials of the modified product were commenced
in April 1994. As treatment sites were converted to the modified product, the
Company exchanged such modified product for any original product that customers
still had in their inventory. The Company provided $1.5 million, which was
included in cost of sales in fiscal 1994, for the estimated costs of such
exchange including the disposition of the Company's inventory of such product.
In September, 1995, the Company obtained FDA approval to market the GDC system
in the United States. During fiscal 1996, the Company reversed $500,000 of such
provision.
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes........... $4,874 $3,785 $1,573
Cash paid during the period for interest............... 8 24 17
Supplemental schedule of non cash investing and financing
activities:
Issuance of common stock options in exchange for a note
receivable.......................................... $ -- $ -- $ 31
</TABLE>
15. RELATED PARTY TRANSACTIONS
In December 1993, the Company entered into a lease line agreement as lessor
with a less than 50 percent-owned affiliate. The maximum available lease line of
$1.0 million expired March 31, 1995 and required monthly payments to be made on
the outstanding balance over 36 or 48 months with interest at approximately 8.5
percent per year. During December 1995, the Company converted the outstanding
balance owed under the lease line of $781,000, $148,000 in other receivables,
and an additional cash payment of $371,000 into equity in the affiliate. As of
March 31, 1995 there was $521,000 outstanding under this agreement.
In March 1994, the Company loaned approximately $200,000 to a less than 50
percent-owned affiliate in exchange for promissory notes bearing interest at 8.5
percent per year. Monthly payments are required over 36 and 48 months. The
Company also entered into a lease line agreement as lessor with this affiliate
in March 1994. The maximum available lease line of $300,000 expired March 1,
1995 and requires monthly payments to be made on the outstanding balance over 36
or 48 months with interest at approximately 8.5 percent per year. At March 31,
1996 and 1995 there was $180,000 and $288,000, respectively, outstanding under
this agreement.
58
<PAGE> 59
16. LEGAL MATTERS
In November 1994 the Company filed a lawsuit in the United States District
Court (the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The District Court has denied Cordis and SciMed's request for a stay.
However, Target is currently awaiting a ruling from the Court of Appeals on a
motion by Cordis and SciMed seeking a stay of the preliminary injunction pending
the outcome of the appeals. The Court of Appeals has temporarily stayed the
preliminary injunction while it considers the motion. Notwithstanding the grant
of the Company's motion for a preliminary injunction, there can be no assurance
that the Company will be ultimately successful in this lawsuit.
In addition, from time to time, the Company may be involved in legal
actions, including product liability claims and the protection of the Company's
proprietary assets, arising in the ordinary course of business. While the
outcome of such matters is currently not determinable, it is management's
opinion that these matters, both individually or in the aggregate, will not have
a material adverse effect on the Company's consolidated financial position,
results of its operations or cash flows.
17. SUBSEQUENT EVENTS (UNAUDITED)
On April 29, 1996, the Company entered into a definitive agreement with
Interventional Therapeutics Corporation (ITC) to acquire ITC, a closely held,
Fremont, California-based corporation. Target will acquire ITC and its
subsidiary, ITC International, in exchange for approximately 330,000 shares of
Target common stock subject to certain adjustments as called for in the merger
agreement. The acquisition is to be accounted for as a purchase with a majority
of the purchase price to be written off as a non-recurring charge for the
acquisition of inprocess research and development. The transaction was
consummated on May 23, 1996.
In meetings subsequent to March 31, 1996, the Company's Board of Directors
authorized (i) the amendment of the Rights Plan to increase the exercise price
per right from $67.50 to $300.00, and (ii) the repurchase of up to 350,000
shares of the Company's common stock on the open market. In addition, the Board
authorized, subject to stockholder approval, an amendment to the Certificate of
Incorporation to increase the number of authorized shares of common stock from
25 million to 120 million and an amendment of the Company's stock plans to (a)
increase the shares reserved for issuance under the Plan by 1,500,000 shares,
(b) increase the shares reserved for issuance under the Purchase Plan by 100,000
shares and make certain other changes to participation standards and offering
periods, and (c) make certain changes to the formulas pursuant to which options
are granted under the Director Option Plan and to the provisions regarding
adjustments under such plan necessitated by changes in the Company's capital
structure.
59
<PAGE> 60
TARGET THERAPEUTICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1994
Allowance for doubtful accounts................ $397 $357 $ (340) $ 414
Year ended March 31, 1995
Allowance for doubtful accounts................ 414 150 (17) 548
Year ended March 31, 1996
Allowance for doubtful accounts................ 548 536 -- 1,084
</TABLE>
60
<PAGE> 61
TARGET THERAPEUTICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
4.2 Amendment to Preferred Shares Rights Agreement, dated May 7, 1996, between Target
Therapeutics, Inc. and The First National Bank of Boston.
4.3 Declaration of Registration Rights, Exhibit E to the Agreement and Plan of
Reorganization dated April 29, 1996 among Target Therapeutics, Inc., TTI Acquisition
Corporation and Interventional Therapeutics Corporation.
10.55 Amendment to Exchange Profit/Loss Sharing Agreement dated December 1, 1995 between
Target Therapeutics, Inc. and Century Medical, Inc., a Japanese Corporation.
10.56 Target Therapeutics, Inc. Deferred Compensation Plan
10.57 Employment Agreement between Target Therapeutics, Inc. and Ray H. Dormandy, Jr.
10.58 Letter Agreement dated as of March 12, 1996 between Target Therapeutics, Inc. and
John C. Meyer.
10.59 Letter agreement dated as of March 9, 1994 between Target Therapeutics, Inc. and
Abhi Acharya, Ph.D.
11.1 Calculation of net income per share.
21.1 Subsidiaries of Target Therapeutics, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 41).
24.1 Power of Attorney (see page 40).
27 Financial Data Schedule
99.1 Financial Statements and Schedule of Target-CMI, Inc. as of March 31, 1996 and 1995
and for each of the three years in the period ended March 31, 1996 with Report of
Independent Auditors.
</TABLE>
61
<PAGE> 1
EXHIBIT 4.2
AMENDMENT TO
PREFERRED SHARES RIGHTS AGREEMENT
Amendment dated as of May 7, 1996 (the "Amendment") to the Preferred
Shares Rights Agreement dated as of September 21, 1994 (the "Agreement") between
Target Therapeutics, Inc. a Delaware corporation (the "Company") and The First
National Bank of Boston (the "Rights Agent").
RECITALS
The Board of Directors of the Company has determined that it is in the
best interests of the Company to amend the Agreement to increase the Purchase
Price (as defined in the Agreement) from $67.50 (after giving effect to
adjustments resulting from the Company's 1-for-1 stock dividend declared on
November 8, 1995) to $300 (after giving effect to such adjustments).
The Company and the Rights Agent have determined that, pursuant to
Section 27 of the Agreement, the Agreement may be amended as set forth herein
without the approval of the holders of the Rights (as defined in the Agreement).
The parties agree as follows:
1. Section 7(b) of the Agreement is hereby amended in its entirety to
read as follows:
(b) The Purchase Price for each one-thousandth of a Preferred Share
issuable pursuant to the exercise of a Right shall initially be
$300 (after giving effect to adjustments resulting from the
Company's 1-for-1 stock dividend declared on November 8, 1996) and
shall be subject to adjustment from time to time as provided in
Sections 11 and 13 hereof and shall be payable in lawful money of
the United States of America in accordance with paragraph (c)
below.
2. All other terms and conditions of the Agreement shall remain in full
force and effect.
3. This Amendment may be executed in any number of counterparts, each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
TARGET THERAPEUTICS, INC.
By: /s/ Robert E. McNamara
-----------------------------------
Name:Robert E. McNamara
----------------------------------
Title:Chief Financial Officer
---------------------------------
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Lori Chamoun
----------------------------------
Name:Lori Chamoun
----------------------------------
Title:Director of Client Services
---------------------------------
-2-
<PAGE> 1
EXHIBIT 4.3
TARGET THERAPEUTICS, INC.
DECLARATION OF REGISTRATION RIGHTS
This Declaration of Registration Rights ("DECLARATION") is made by
Target Therapeutics, Inc., a California corporation ("TARGET"), for the benefit
of shareholders of Interventional Therapeutics Corporation, a California
corporation ("ITC") acquiring shares of the Common Stock of Target pursuant to
that Agreement and Plan of Reorganization, dated as of April 29, 1996 (the
"REORGANIZATION AGREEMENT"), among Target, ITC and Target Merger Subsidiary
Corporation, a California corporation ("SUB") and wholly-owned subsidiary of
Target and the related Agreement of Merger (the "AGREEMENT OF MERGER") between
ITC and Sub and in consideration of such shareholders approving the
Reorganization Agreement and the transactions contemplated thereby.
1. Definitions. As used in this Declaration:
a. "1934 ACT" means the Securities Exchange Act 1934, as amended.
b. "ACT" means the Securities Act of 1933, as amended.
c. "EFFECTIVE TIME OF THE MERGER" means the earlier of the time of
confirmation of the filing of the Agreement of Merger with the California
Secretary of State or the time that the Agreement of Merger is deemed filed with
the California Secretary of State.
d. "FORM S-3" means such form under the Act as in effect on the
date hereof or any registration form under the Act subsequently adopted by the
Commission which similarly permits inclusion or incorporation of substantial
information by reference to other documents filed by Target with the Commission.
e. "HOLDER" means: (i) a shareholder of ITC to whom shares of
Common Stock of Target are issued pursuant to the Reorganization Agreement and
the Agreement of Merger (including shares of Target Common Stock issued upon the
exercise of ITC Options assumed by Target pursuant to Section 1.5 of the
Reorganization Agreement), or (ii) each of the escrow agents described in the
Reorganization Agreement, or (iii) a transferee of a Holder to whom registration
rights granted under this Declaration are granted pursuant to Section 10 of this
Declaration.
f. "REGISTRABLE SECURITIES" means for each Holder the number of
shares of Target Common Stock issued to such Holder pursuant to the
Reorganization Agreement and the Agreement of Merger (including shares of Target
Common Stock issued upon the exercise of ITC Options assumed by Target pursuant
to Section 1.5 of the Reorganization Agreement and shares issued to the Escrow
Agent pursuant to Section 11.2 thereof; provided, that if the shares of Target
Common Stock issued or issuable upon the exercise of such assumed ITC Options
are subject to an effective registration statement of Form S-8, then such shares
shall not be deemed "Registrable Securities" hereunder), and for all Holders the
sum of the Registrable Securities held
<PAGE> 2
by them, which have not previously been sold or transferred pursuant to an
effective registration statement under the Act.
g. "SEC" means the Securities and Exchange Commission.
Terms not otherwise defined herein have the meanings given to them in
the Reorganization Agreement.
2. Registration. Target shall use its best efforts to cause the
Registrable Securities held by each Holder to be registered under the Act so as
to permit the sale thereof, and in connection therewith shall prepare and file
with the SEC and shall use its best efforts to cause to become effective on or
before the dates and for the periods specified below, up to three (3)
registration statements in such form as is then available under the Act covering
the Registrable Securities; provided, however, that each Holder shall provide
all such information and materials and take all such action as may be required
in order to permit Target to comply with all applicable requirements of the SEC
and to obtain any desired acceleration of the effective date of any such
registration statement, such provision of information and materials to be a
condition precedent to the obligations of Target pursuant to this Declaration
with respect to the Registrable Securities held by such Holder. Target will use
its best efforts to cause the first such registration statement, which
registration will apply to fifty percent (50%) of the Registrable Securities
then held by each Holder, to become effective at the beginning of the second
month of the first full calendar quarter following the Closing (as defined in
the Reorganization Agreement) and to remain in effect for the duration of such
month. Similarly, Target will use its best efforts to cause the second and third
such registration statements, each of which will apply to all Registrable
Securities then held by each Holder to become effective at the beginning of the
second month of the third and fifth full calendar quarters, respectively,
following the Closing and to remain in effect for the duration of each of such
months. Target shall not be required to effect more than three (3) registrations
under this Declaration. The offerings made pursuant to such registrations shall
not be underwritten, unless specifically requested in writing by the holders of
at least ninety percent (90%) of the Registrable Securities then outstanding.
3. Postponement of Registration. Notwithstanding Section 2 above,
Target shall be entitled to postpone the declaration of effectiveness of the
registration statement prepared and filed pursuant to Section 2 for a reasonable
period of time, but not in excess of forty-five (45) calendar days after the
applicable deadline, if the Board of Directors of Target, acting in good faith,
determines that it would be seriously detrimental to the Company and its
stockholders for such registration statement to become effective and it is
therefore essential to defer the filing of such registration statement. In the
event that a registration statement is postponed pursuant to this Section or is
otherwise not declared effective at the beginning of the month for which it is
to be kept effective, Target agrees to use its best efforts to keep such delayed
or belated registration statement effective for at least thirty (30) calendar
days from the time that it is declared effective.
4. Obligations of Target. Target shall (i) prepare and file with the
SEC the registration statements in accordance with Section (2) hereof with
respect to the shares of Registrable Securities and shall use its best efforts
to cause such registration statements to become effective by the applicable date
and to keep such registration statements effective for a one-month period
following the effective date of such registration statements; (ii) prepare and
file
-2-
<PAGE> 3
with the SEC such amendments and supplements to such registration statements and
the prospectus used in connection therewith as may be necessary and to comply
the provisions of the Act with respect to the sale or other disposition of all
securities proposed to be registered in such registration statements; (iii)
furnish to each Holder such number of copies of any prospectus (including any
preliminary prospectus any amended or supplemented prospectus) in conformity
with the requirements of the Act, and such other documents, as each Holder may
reasonably request in order to effect the offering and sale of the shares of the
Registrable Securities to be offered and sold, but only while Target shall be
required under the provisions hereof to cause the registration statement to
remain current; (iv) use its commercially reasonable efforts to register or
qualify the shares of the Registrable Securities covered by such registration
statements under the securities or blue sky laws of such jurisdictions as Target
reasonably determines (provided that Target shall not be required in connection
therewith or as a condition thereto to qualify to do business or file a general
consent to service of process in any such jurisdiction where it has not been
qualified), and do any and all other acts or things which may be necessary or
advisable to enable each Holder to consummate the public sale or other
disposition of such stock in such jurisdictions; (v) notify each Holder upon the
happening of any event as a result of which the prospectus included in such
registration statements, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing; (vi) so long as the applicable registration
statement remains effective, promptly prepare, file and furnish to each Holder a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of the Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing; (vii) notify each Holder, promptly
after it shall receive notice thereof, of the date and time the applicable
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed; (viii) notify each Holder promptly of any request by
the SEC for the amending or supplementing of such registration statement or
prospectus or for additional information; and (ix) advise each Holder, promptly
after it shall receive notice or obtain knowledge thereof, of the issuance of
any stop order by the SEC suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for that purpose
and promptly use its best efforts to prevent the issuance of any stop order or
to its withdrawal if such stop order should be issued. If requested by the
holders of at least ninety percent (90%) of the Registrable Securities then
outstanding, and provided that the underwriter or underwriters selected by such
holders are reasonably satisfactory to Target, shall enter into and perform its
obligations under an underwriting agreement with a nationally recognized
investment banking firm or firms containing representations, warranties,
indemnities and agreements then customarily included by an issuer in
underwriting agreements with respect to secondary distributions, provided,
however, that each Holder with shares of Registrable Securities included in the
offering shall also enter into and perform its obligations under such an
agreement. In connection with any offering of shares of Registrable Securities
registered pursuant to this Declaration, Target shall (x) furnish each Holder,
at Target's expense, with unlegended certificates representing ownership of the
shares of Registrable Securities being sold in such denominations as each Holder
shall request and (y) instruct the transfer agent and registrar of the
-3-
<PAGE> 4
Registrable Securities to release any stop transfer orders with respect to the
shares of Registrable Securities being sold.
5. Availability of Form S-3. Target represents that if Form S-3 (or a
successor form) is not available for use by Target, Target shall file a
registration statement on Form S-1 to satisfy its obligations under Section 2
hereof. Target further represents that it believes it is currently eligible to
utilize Form S-3 and currently believes that there is no material non-public
information which would preclude it from filing a registration statement on Form
S-3.
6. No Further Participation. Target agrees that the registration rights
granted hereunder are solely for the benefit of the Holders and that, without
the prior written consent of the Holders of two thirds (66.7%) of the
Registrable Securities then outstanding, Target will not include any shares
being sold for the account of Target or any other party other than a Holder in
any registration effected pursuant to this Declaration.
7. Expenses. Target shall pay all of the out-of-pocket expenses
incurred, other than underwriting discounts and commissions, in connection with
any registration of Registrable Securities pursuant to this Declaration,
including, without limitation, all SEC, NASD and blue sky registration and
filing fees, printing expenses, transfer agents' and registrars' fees, and the
reasonable fees and disbursements of Target's outside counsel and independent
accountants and a single counsel for all the Holders.
8. Indemnification. In the event of any offering registered pursuant to
this Declaration:
a. Target will indemnify each Holder, each of its officers,
directors and partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they are made, not misleading, or any
violation by Target of any rule or regulation promulgated under the Securities
Act, or state securities laws, or common law, applicable to Target in connection
with any such registration, qualification or compliance, and will reimburse each
such Holder, each of its officers, directors and partners and such Holder's
legal counsel and independent accountants, and each person controlling such
Holder, each such Underwriter and each person who controls any such underwriter,
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action; provided, however, that Target will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out of
or is based in any untrue statement or omission or alleged untrue statement or
omission, made in
-4-
<PAGE> 5
reliance upon and in conformity with written information furnished to Target and
an instrument duly executed by a Holder or underwriter and stated to be
specifically for use therein.
b. Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify Target, each of its directors and
officers and its legal counsel and Independent accountants, each underwriter, if
any, of Target's securities covered by such a registration statement, each
person who controls Target or such underwriter within the meaning of Section 15
of the Securities Act, and each other Holder, its officers, directors and
persons controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) or a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
Target, such Holders, such directors, officers, legal counsel, independent
accountants, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to Target by an instrument duly
executed by such Holder and stated to be specifically for use therein; provided,
however, that the obligations of such Holders hereunder shall be limited to an
amount equal to the gross proceeds before expenses and commissions to each such
Holder of Registrable Securities sold as contemplated herein.
c. Each party entitled to indemnification under this Section 12
(the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has written notice of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against such claim or
litigation is impaired as a result of such failure to give notice. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
d. If the indemnification provided for in this Section 8 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, will contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion
-5-
<PAGE> 6
as is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions that resulted in such loss, liability, claim, damage, or
expense as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party will be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
e. The obligations of Target and each Holder under this Section 8
shall survive the completion of any offering stock in a registration statement
under this Declaration and otherwise.
9. Reports Under Securities Exchange Act of 1934. Target agrees to:
a. use its commercially reasonable efforts to file with the SEC in
a timely manner all reports and other documents required of Target under the Act
and the 1934 Act; and
b. furnish to each Holder, forthwith upon request (i) a written
statement by Target that it has complied with the reporting requirements of the
Act and the 1934 Act, or that it qualifies as a registrant whose securities may
be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy
of the most recent annual or quarterly report of Target and (iii) such other
information as may be reasonably requested in availing each Holder of any rule
or regulation of the SEC which permits the selling of any such securities
pursuant to Form S-3.
10. Assignment of Registration Rights. The rights to cause Target to
register Registrable Securities pursuant to this Declaration may be assigned by
a Holder to a transferee of Registrable Securities only if: (a) Target is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee and the Registrable Securities with
respect to which such registration rights are being assigned and a copy of a
duly executed written instrument in form reasonably satisfactory to Target by
which such transferee assumes all of the obligations and liabilities of its
transferor hereunder and agrees itself to be bound hereby; and (b) immediately
following such transfer the disposition of such Registrable Securities by the
transferee is restricted under the Act.
11. Amendment of Registration Rights. Holders of a majority of the
Registrable Securities may, with the consent of Target, amend the registration
rights granted hereunder.
12. Termination. The registration rights set forth in this Declaration
shall terminate with respect to a Holder at the earlier of such time as all of
the Registrable Securities then held by such Holder can be sold by such Holder
in a three-month period in accordance with Rule 144 under the Act or such time
as Target has effected the three (3) registrations required under Section 2
above.
13. Third Party Beneficiaries. It is intended that the shareholders
and, where applicable, the optionholders of ITC be third party beneficiaries to
this Declaration of Registration Rights.
-6-
<PAGE> 1
EXHIBIT 10.55
AMENDMENT TO EXCHANGE PROFIT/LOSS SHARING AGREEMENT
This Amendment (the "Amendment") is made and entered into this 1st day
of December, 1995, by and between Target Therapeutics, Inc., a California
corporation having its principal place of business at 47201 Lakeview Blvd.,
Fremont, California 94537-5120 (hereinafter called as "Target") and Century
Medical, Inc., a Japanese corporation having its principal place of business at
4-10-2, Yoga, Setagaya-ku, Tokyo, 158, Japan (hereinafter called "CMI"), with
reference to the Agreement (hereinafter called "Agreement") defining terms and
conditions for sharing the Exchange Profit and Loss between the parties dated as
of March 1st, 1993. Captioned terms used and not defined herein shall have the
respective meanings set forth in the Agreement. In consideration of the mutual
agreements and acknowledgments herein made the parties hereto agree as follows.
1. Section 2 of the Agreement
The formula to determine the amount to be shared between Target and CMI
is hereby replaced with the following.
a. For the FOB price of which sales price for the same Products
sold by CMI to TCI is calculated by *
* * *
b. For the FOB price of which sales price for the same Products
sold by CMI to TCI is calculated by *
* * *
2. The Agreement, as amended hereinabove, is hereby reconfirmed and is
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized representative on the date first above
written.
TARGET THERAPEUTICS, INC.
By: /s/Edward R. LeMoure
-----------------------------------
Name: Edward R. LeMoure
Title: Vice President and General Manager
CENTURY MEDICAL, INC.
By: /s/ Mitsunari Suzuki
-----------------------------------
Name: Mitsunari Suzuki
Title: President and CEO
CONFIDENTIAL TREATMENT REQUESTED
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EXHIBIT 10.56
TARGET THERAPEUTICS, INC.
DEFERRED COMPENSATION PLAN
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TARGET THERAPEUTICS, INC.
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C> <C>
PREAMBLE............................................................................... 1
ARTICLE I -- GENERAL............................................................. 1
ARTICLE II -- DEFINITIONS AND USAGE............................................... 1
ARTICLE III -- ELIGIBILITY AND PARTICIPATION....................................... 3
ARTICLE IV -- PARTICIPANT ACCOUNT................................................. 3
ARTICLE V -- PAYMENT OF PARTICIPANT ACCOUNT...................................... 4
ARTICLE VI -- PAYMENT OF BENEFIT ON OR AFTER DEATH................................ 5
ARTICLE VII -- ADMINISTRATION...................................................... 5
ARTICLE VIII CLAIMS PROCEDURE.................................................... 6
ARTICLE IX MISCELLANEOUS PROVISIONS............................................ 6
APPENDIX I............................................................................. 8
</TABLE>
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TARGET THERAPEUTICS, INC.
DEFERRED COMPENSATION PLAN
PREAMBLE
WHEREAS, Target Therapeutics, Inc. (the "Company") recognizes the unique
qualifications of certain key employees and the valuable services they provide
and desires to establish an unfunded deferred compensation plan for such
employees; and
WHEREAS, the Company has determined that the implementation of such a plan
will best serve its interest in retaining key employees;
NOW, THEREFORE, the Company hereby establishes the Target Therapeutics,
Inc. Deferred Compensation Plan (the "Plan") as hereinafter provided:
ARTICLE I
GENERAL
SECTION 1.1 Effective Date. This Plan shall be effective as of March 31,
1996. The rights, if any, of any person whose status as an employee of the
Employer has terminated shall be determined pursuant to the Plan as in effect on
the date such employee terminated, unless a subsequently adopted provision of
the Plan is made specifically applicable to such person.
SECTION 1.2 Intent. The Plan is intended to be an unfunded plan primarily
for the purpose of providing deferred compensation to a select group of
management or highly compensated employees, as such group is described under
Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
ARTICLE II
DEFINITIONS AND USAGE
SECTION 2.1 Definitions. Wherever used in the Plan, the following words
and phrases shall have the meaning set forth below unless the context plainly
requires a different meaning:
"Account" means the account established on behalf of a Participant as
described in Section 4.1.
"Beneficiary" means the person or trust designated by the Participant,
in his most recent written designation filed with the Committee before his
death; provided, however, that if the Participant fails to make a
designation, or if no person so designated is alive, and no successor
Beneficiary who has been designated is alive, the term "Beneficiary" shall
mean in order of priority (a) the spouse of the deceased Participant, or
(b) if no spouse is alive, the surviving children of the deceased
Participant, or (c) if no children are alive, the parent or parents of the
deceased Participant, or (d) if no parent is alive, the legal
representative of the deceased Participant's estate.
"Board" means the Board of Directors of the Company.
"Change of Control" means (1) the purchase or other acquisition by any
person, entity or group of persons, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 ("the Act"), or any comparable
successor provisions, of beneficial ownership (within the meaning of Rule
13d-3 under the Act) of fifteen percent (15%) or more of either the
outstanding shares of common stock or the combined voting power of the
Employer's then outstanding voting securities entitled to vote generally
without the approval of the Board, or (2) a merger or consolidation of the
Employer, whether or not approved by the Board, in each case with respect
to which persons who were stockholders of the Employer immediately prior to
such merger or consolidation do not, immediately thereafter, own at least
fifty percent (50%) of the total voting power of the Employer or the
surviving entity outstanding immediately after such merger or
consolidation, or (3) a liquidation or dissolution of the Employer, or
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(4) an agreement for the sale of all or substantially all of the Employer's
assets, or (5) a change in the composition of the Board, as a result of
which fewer than a majority of the directors are Incumbent Directors.
Incumbent Directors shall mean directors who either (i) are directors as of
the Effective Date of the Plan; or (ii) are elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of
the Incumbent Directors casting votes at the time of such election or
nomination.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time. Any reference to a particular Code section shall include any
provision which modifies, replaces, or supersedes it.
"Committee" means the Compensation Committee of the Board, if any;
otherwise, the Board or its designate.
"Company" means Target Therapeutics, Inc., a corporation organized
under the laws of the state of Delaware, and any successor thereto.
"Compensation" means the base salary and bonuses payable to a
Participant by the Employer for the period in question, but excluding other
occasional nonsalary payments, reimbursements or other expense allowances,
fringe benefits (cash and noncash), moving expenses, deferred compensation,
stock grants or stock option exercises, and welfare benefits, but including
Employee Deferral Contributions as defined in Section 2.1 under this Plan
and elective contributions made by the Employer on behalf of the
Participant with respect to such period and which are not includable in the
Participant's income under Section 125 or Section 402(h) of the Code.
"Deemed Investment Election Form" means the forms to be used by a
Participant, if approval is obtained from the Committee, to provide
investment recommendations for a Participant's Account.
"Employee" means any common law Employee of the Employer.
"Employee Deferral Contribution" means the amount that an Employee
elects to contribute to the Plan from his Compensation on a pre-tax basis
pursuant to his Participation Agreement.
"Employer" means Target Therapeutics, Inc., and any of its wholly
owned subsidiaries that adopt the Plan with its consent and any successor
through merger, consolidation, or purchase of substantially all of the
Employer's assets or business, which within ninety (90) days after such
succession, agrees to continue this Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time. Any reference to a particular ERISA section
shall include any provision which modifies, replaces, or supersedes it.
"Fund" means the Fund established under Article I of the Target
Therapeutics, Inc. Deferred Compensation Plan Trust Agreement.
"Normal Retirement Date" means the date on which the Participant
attains normal retirement age, as defined in the Company's 401(k) Plan.
"Participant" means an eligible Employee of an Employer who is
participating in the Plan in accordance with Section 3.2.
"Participation Agreement" or "Agreement" means an agreement between
the Participant and the Company pursuant to which the Participant agrees to
a reduction in his Compensation before such Compensation is earned by the
Participant in exchange for the promise of an equal amount to be paid by
the Company to the Participant under this Plan.
"Plan" means the Target Therapeutics, Inc. Deferred Compensation Plan,
as it may be amended from time to time.
"Plan Year" means the Plan's accounting year of twelve (12) months
commencing January 1st of each year and ending the following December 31st,
except that the first Plan Year shall commence March 31, 1996.
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"Separation from Service Date" means the date that a Participant
leaves the employ of the Company, whether voluntarily or involuntarily,
including disability. Disability shall be as defined in the Company's
401(k) Plan.
"Trust" means the Trust which is established under the Target
Therapeutics, Inc. Deferred Compensation Plan Trust Agreement.
"Trustee" means such independent third party as the Employer shall
select pursuant to the "Trust Agreement." The Trust Agreement refers to a
trust established on , 1996 by and between the Company and
.
"Valuation Date" means the last day of each Plan Year, or any other
date designated by the Employer, on which date the fair market value of
Trust assets shall be determined.
SECTION 2.2 Usage. Except where otherwise indicated by the context, any
masculine terminology used herein shall also include the feminine and vice
versa, and the definition of any term herein in the singular shall also include
the plural and vice versa.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.1 Eligibility. An Employee of an Employer shall be eligible to
participate in the Plan only to the extent, and for the period, that he is a
member of a select group of management or highly compensated employees as such
group is described under Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
SECTION 3.2 Participation. An Employee who is eligible to participate in
the Plan pursuant to Section 3.1 shall become a Participant at such time and for
the period he is designated as such by the Committee, provided that such
Employee completes a Participation Agreement on a timely basis as described in
Section 3.3 hereof.
SECTION 3.3 Agreement Procedure.
(a) Each Participant and the Company may execute one or more
Agreements for the portion of the Participant's Compensation that shall be
credited to his Account in accordance with Section 4.2. Such Agreement
shall be effective only with respect to Compensation earned after the
Agreement becomes effective. No more than one Agreement may be entered into
with respect to a Plan Year.
(b) For the initial Plan Year of participation, the Agreement shall be
properly completed, executed and delivered to the Committee prior to the
later of (i) the first day of the Plan Year in which the Participant's
participation commences, or (ii) thirty (30) days after the date on which
the Participant became eligible for participation.
(c) For any subsequent Plan Year in which a Participant is eligible to
participate in the Plan, the Agreement shall be properly completed,
executed and delivered to the Committee at least thirty (30) days prior to
the first day of the Plan Year for which the Agreement shall be effective.
(d) An Agreement shall be effective no earlier than the date on which
it is delivered to the Committee and shall continue in effect for all
succeeding Plan Years unless changed or revoked by the Participant. Written
modification must be given by the Participant at least thirty (30) days
prior to the next Plan Year affected by the modification.
ARTICLE IV
PARTICIPANT ACCOUNT
SECTION 4.1 Establishment of Participant Account. The Committee or its
agents shall establish and maintain an Account as a bookkeeping entry in the
name of each Participant to which the Committee shall
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credit all amounts allocated to each such Participant as set forth herein. All
amounts credited to a Participant's Account shall remain assets of the Company,
subject to the claims of the Company's general creditors.
SECTION 4.2 Employee Deferral Contributions. Each Plan Year, each
Participant may authorize the Employer to defer receipt of a specified amount or
percentage of his Compensation as specified in the Participation Agreement
including his bonus for that year (in lieu of receiving cash compensation), and
to have such amount credited to the Participant's account as an Employee
Deferral Contribution. Such Employee Deferral Contribution shall be paid by the
Employer to the Trustee to be held and administered in accordance with the terms
of the Trust, provided that the Company shall withhold from such amounts any
employment taxes due with respect thereto. Each Participant has the option of
changing or ceasing his Employee Deferral Contribution, effective the first day
of the next Plan Year following the Plan Year during which such change is made,
provided that such change shall not affect any amounts deferred during or prior
to the Plan Year in which such change is made. The minimum Employee Deferral
Contribution under this Plan shall be $10,000 per Plan Year.
SECTION 4.3 Investment Authority. Each Participant shall have the ability
to direct the Employer as to the deemed investment of amounts in his Account
through the filing of a written election with the Committee (which the Committee
in its discretion may then forward to the Trustee) prior to the date that he
becomes a Participant specifying the manner in which all amounts credited to his
Account shall be deemed to be invested. The election of the Participant shall
remain in effect unless a new election is filed with the Committee. The
Committee shall retain overriding discretion over the selection of investment
vehicles, and the Committee may change, alter or modify its investment policy as
it deems appropriate, from time to time.
SECTION 4.4 Distributions in the Case of Unforeseeable Emergency. A
distribution from the Participant's Account may be made to a Participant in the
event of an unforeseeable emergency. An unforeseeable emergency is defined as a
severe financial hardship to the Participant resulting from (i) a sudden and
unexpected illness or accident of the Participant or of a dependent, (ii) loss
of the Participant's property due to casualty, or (iii) other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Participant. This determination shall be made by the
Committee and such distributions shall only be made out of the Participant's
Employee Deferral Contributions. Distributions shall be limited to the amount
necessary to satisfy the emergency.
The circumstances that will constitute an unforeseeable emergency will
depend upon the facts of each case, but, in any case, payment may not be made to
the extent that such hardship is or may be relieved:
(i) Through reimbursement or compensation by insurance or otherwise;
or
(ii) By liquidation of the participant's assets, other than hardship
withdrawals in the Company's 401(k) Plan, to the extent the liquidation of
such assets would not itself cause severe financial hardship; or
(iii) By cessation of deferrals under the Plan.
SECTION 4.5 Valuation of Account. The income and gains and losses, both
realized and unrealized, from investments made pursuant to Section 4.3, shall be
determined from time to time (but at least once annually). The amount so
determined shall be allocated to each Participant's Account in accordance with
procedures established by the Committee. A Participant's Account shall be
reduced by the amount of any benefits distributed to or on behalf of the
Participant pursuant to Articles V and VI.
ARTICLE V
PAYMENT OF PARTICIPANT ACCOUNT
SECTION 5.1 Timing of Payment of Participant Account. The Participant
shall be entitled to, and shall receive the value of his Participant Account,
determined in accordance with Section 4.5 upon the earliest to occur of the
following: Separation from Service; Normal Retirement Date; and age 59 1/2. It
is provided,
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<PAGE> 7
however, that the Participant may elect at the time of the deferral election to
begin receiving payment of such deferred amount at a specified date (not less
than three (3) years after the first day of the Plan Year in which the deferral
is made). Notwithstanding the foregoing, the Participant shall be entitled to,
and shall receive the value of his Participant Account, in the event of a Change
of Control. The value of the Participant's Account shall be distributed pursuant
to the payment provisions of this Plan.
SECTION 5.2 Form of Payment of Participant Account. To the extent a
benefit is payable to a Participant, it shall be paid in the form of a lump sum
payment to be made within sixty (60) days of Participant being entitled to
payment, as specified in Section 5.1. Notwithstanding the preceding, at the
discretion of the Participant at the time of execution of his Participation
Agreement and in accordance with such written procedures as may be adopted by
the Committee, such benefit may be paid in the form of quarterly installments
over a period not to exceed ten (10) years, such payments to begin within sixty
(60) days of Participant being entitled to payment, as specified in Section 5.1.
SECTION 5.3 Payment Procedure. The Employer shall establish and maintain
an Account for each Participant and Beneficiary receiving benefits under the
Plan. Immediately prior to any distribution hereunder to any Participant or
Beneficiary, the Employer shall credit the amount of such distribution to such
Account and then immediately distribute the amount so credited to the
Participant, or as applicable, to his Beneficiary. Neither the Participant nor
his Beneficiary(s) shall have any interest or right in any such Account at any
time.
ARTICLE VI
PAYMENT OF BENEFIT ON OR AFTER DEATH
SECTION 6.1 Commencement of Benefit Payments. If a Participant dies before
receiving his entire Account, the remainder of the Account otherwise payable
with respect to the Participant shall be paid to the Participant's Beneficiary
or Beneficiaries as a single lump-sum amount within sixty (60) days following
the date on which the Committee is notified of the Participant's death.
ARTICLE VII
ADMINISTRATION
SECTION 7.1 General. Except as otherwise specifically provided in the
Plan, the Committee shall be responsible for administration of the Plan. The
Committee shall be the "named fiduciary" within the meaning of Section 402(c)(2)
of ERISA.
SECTION 7.2 Administrative Rules. The Committee may adopt such rules of
procedure as it deems desirable for the conduct of its affairs, except to the
extent that such rules conflict with the provisions of the Plan.
SECTION 7.3 Duties. The Committee shall have the following rights, powers
and duties:
(a) The decision of the Committee in matters within its jurisdiction
shall be final, binding and conclusive upon the Employer and upon any other
person affected by such decision, subject to the claims procedure
hereinafter set forth.
(b) The Committee shall have the duty and authority to interpret and
construe the provisions of the Plan, to determine eligibility for benefits
and the appropriate amount of any benefits, to decide any question which
may arise regarding the rights of employees, Participants, and
Beneficiaries, and the amounts of their respective interests, to adopt such
rules and to exercise such powers as the Committee may deem necessary for
the administration of the Plan, and to exercise any other rights, powers or
privileges granted to the Committee by the terms of the Plan.
(c) The Committee shall maintain full and complete records of its
decisions. Its records shall contain all relevant data pertaining to the
Participant and his rights and duties under the Plan. The Committee shall
have the duty to maintain Account records of all Participants.
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<PAGE> 8
(d) The Committee shall cause the principal provisions of the Plan to
be communicated to the Participants, and a copy of the Plan and other
documents shall be available at the principal office of the Employer for
inspection by the Participants at reasonable times determined by the
Committee.
(e) The Committee shall periodically report to the Board with respect
to the status of the Plan.
(f) The Employer shall be responsible for the payment of expenses and
income taxes for the Plan.
SECTION 7.4 Fees. No fee or compensation shall be paid to any person for
services as the Committee.
ARTICLE VIII
CLAIMS PROCEDURE
SECTION 8.1 General. Any claim for Benefits under the Plan shall be filed
by the Participant or Beneficiary ("claimant") on the form prescribed for such
purpose with the Committee.
SECTION 8.2 Denials. If a claim for Benefits under the Plan is wholly or
partially denied, notice of the decision shall be furnished to the claimant by
the Committee within a reasonable period of time after receipt of the claim by
the Committee.
SECTION 8.3 Notice. Any claimant who is denied a claim for Benefits shall
be furnished written notice setting forth:
(a) the specific reason or reasons for the denial;
(b) specific reference to the pertinent provisions of the Plan upon
which the denial is based;
(c) a description of any additional material or information necessary
for the claimant to perfect the claim; and
(d) an explanation of the claim review procedure under the Plan.
SECTION 8.4 Appeals Procedure. In order that a claimant may appeal a
denial of a claim, the claimant or the claimant's duly authorized representative
may:
(a) request a review by written application to the Committee, or its
designate, no later than sixty (60) days after receipt by the claimant of
written notification of denial of a claim;
(b) review pertinent documents; and
(c) submit issues and comments in writing.
SECTION 8.5 Review. A decision on review of a denied claim shall be made
not later than sixty (60) days after receipt of a request for review, unless
special circumstances require an extension of time for processing, in which case
a decision shall be rendered within a reasonable period of time, but not later
than one-hundred and twenty (120) days after receipt of a request for review.
The decision on review shall be in writing and shall include the specific
reason(s) for the decision and the specific reference(s) to the pertinent
provisions of the Plan on which the decision is based.
ARTICLE IX
MISCELLANEOUS PROVISIONS
SECTION 9.1 Amendment and Termination. The Company reserves the right to
amend or terminate the Plan in any manner that it deems advisable, by a
resolution of the Company's Board. Notwithstanding the preceding, no amendment
or termination of the Plan shall reduce the benefit of any Participant
determined as of the day immediately preceding the effective date of such
amendment or termination.
SECTION 9.2 Spendthrift Provision. The Participant shall not have the
power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or
dispose of in advance any interest in amounts payable
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hereunder or any of the payments provided for herein, nor shall any interest in
amounts payable hereunder or in any payments be subject to seizure for payments
of any debts, judgments, alimony or separate maintenance, or be reached or
transferred by operation of law in the event of bankruptcy, insolvency or
otherwise, except as required by applicable law.
SECTION 9.3 Discretionary Acts. Any discretionary acts to be taken under
the Plan with respect to the classification of Employees, contributions, or
benefits shall be nondiscriminatory and uniform in nature and applicable to all
persons similarly situated.
SECTION 9.4 Interpretation. If any provision or provisions of the Plan
shall for any reason be invalid or unenforceable, the remaining provisions of
the Plan shall be carried into effect unless the effect thereof would be to
materially alter or defeat the purpose of the Plan. All terms of the Plan and
all discretion granted hereunder shall be uniformly and consistently applied to
all the Employees, Participants, and Beneficiaries.
SECTION 9.5 Successors and Assigns. The provisions of the Plan are binding
upon and inure to the benefit of each Employer, its successors and assigns, and
the Participants, their Beneficiaries, heirs, legal representatives and assigns.
SECTION 9.6 Governing Law. The Plan shall be subject to and construed in
accordance with the laws of the State of California, to the extent not preempted
by the provisions of ERISA.
SECTION 9.7 No Guarantee of Employment. Nothing contained in the Plan
shall be construed as a contract of employment or deemed to give any Participant
the right to be retained in the employ of an Employer or any equity or other
interest in the assets, business or affairs of an Employer. No Participant
hereunder shall have a security interest in assets of an Employer used to make
contributions or pay benefits.
SECTION 9.8 Notification of Addresses. Each Participant and each
Beneficiary shall file with the Committee, from time to time, in writing, the
post office address of the Participant, the post office address of each
Beneficiary, and each change of post office address. Any communication,
statement or notice addressed to the last post office address filed with the
Committee (or if no address was filed, then to the last post office address of
the Participant or Beneficiary as shown on the Employer's records) shall be
binding on the Participant and each Beneficiary for all purposes of the Plan and
neither the Committee nor any Employer shall be obligated to search for or
ascertain the whereabouts of any Participant or Beneficiary.
SECTION 9.9 Bonding. The Committee and all agents and advisors employed by
it shall not be required to be bonded, except as otherwise required by ERISA.
SECTION 9.10 No Funding. The Plan constitutes a mere promise by the
Employer to make payments in accordance with the terms of the Plan and
Participants and Beneficiaries shall have the status of general unsecured
creditors of the Employer. Nothing in the Plan will be construed to give any
Employee, or any other person, rights to any specific assets of the Employer or
of any other person. In all events, it is the intent of the Employer that the
Plan be treated as unfunded for tax purposes and for purposes of Title I of
ERISA.
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<PAGE> 10
APPENDIX I
Executives participating in this plan shall be revised from time to time:
Gary R. Bang
President/CEO
Robert McNamara
CFO
Erik Engelson
Sr. Vice President, Operations and R&D
Abhi Acharya
Vice President, Regulatory, Clinical, QA
Rich Cappetta
Vice President, Europe
Hiram Chee
Vice President, Peripheral Vascular Products
Ed LeMoure
Vice President, International Sales
Timothy Mills
Vice President, New Business Development
Kevin Riley
Vice President, Sales & Marketing
Patrick Rivelli
Vice President, Manufacturing
John Meyer
Vice President, Human Resources
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EXHIBIT 10.57
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into by and between Ray H.
Dormandy, Jr. ("EMPLOYEE") and Target Therapeutics, Inc. (the "COMPANY")
effective as of date of and contingent upon the closing of the merger of TTI
Acquisition Corporation, a wholly-owned subsidiary of the Company, and
Interventional Therapeutics Corporation (the "MERGER"), such date being
hereafter referred to as the "EFFECTIVE DATE" of this Agreement.
BACKGROUND:
WHEREAS, according to the terms of a Letter of Intent dated March 7,
1996 by and between the Company and Interventional Therapeutics Corporation, the
parties have agreed to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Company and Employee agree as follows:
1. Term of Agreement. This Agreement shall commence on the Effective
Date and shall have a term of two (2) years. This Agreement may be terminated by
either party, with or without cause, on thirty (30) days written notice to the
other party.
2. Duties. Employee shall be employed as Vice President, Silicone and
PVA Technologies, and shall perform for the Company such duties as may be
designated by the Company from time to time in a mutually acceptable position to
both Employee and the Company. Employee shall devote his or her full time,
effort and attention during regular business hours to the business and affairs
of the Company.
3. At-Will Employment. The Company and Employee acknowledge that
Employee's employment is for an unspecified period of time and shall continue to
be at-will, as defined under applicable law. Any representation to the contrary
is unauthorized and not valid unless obtained in writing and signed by an
officer of the Company. If Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, award or
compensation other than as provided in this Agreement, or as may otherwise be
available in accordance with the Company's established written plans and written
policies at the time of termination.
4. Compensation. For the duties and services to be performed by
Employee hereunder, the Company shall pay Employee, and Employee agrees to
accept, the salary, stock options, bonuses and other benefits described below in
this Section 4.
(a) Salary. Employee shall receive a base salary of $120,000 per
annum, payable in accordance with the Company's normal payroll practices.
(b) Stock Options and Other Incentive Programs. Employee shall be
eligible to participate in the stock option or other incentive programs
available to employees of the Company. Employee will receive a stock option of
6,600 shares. These options will be priced at
<PAGE> 2
the close of the business day of the next Compensation Committee meeting
following the Effective Date.
(c) Bonuses. Employee will commence participation in and, to the
extent earned or otherwise payable thereunder, be eligible to receive a cash
bonus of up to 40% at plan target pursuant to the bonus program of the Company.
Employee's entitlement to incentive bonuses from the Company is discretionary
and shall be determined by the Board, its Compensation Committee or the Chief
Executive Officer of the Company in good faith based upon the extent to which
Employee's individual performance objectives and the Company's profitability
objectives and other financial and nonfinancial objectives are achieved during
the applicable bonus period.
(d) Additional Benefits. Employee will be eligible to participate
in the Company's employee benefit plans of general application, including
without limitation, those plans covering medical, disability and life insurance
in accordance with the rules established for individual participation in any
such plan and under applicable law. Employee will be eligible for vacation and
sick leave in accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company generally provides
to its senior executives.
5. Salary Continuation.
(a) Termination of Employment. In the event Employee's employment
terminates for any reason during the original term of this Agreement, then
Employee shall be entitled to receive salary continuation as follows:
(i) Voluntary Resignation. If Employee's employment
terminates by reason of Employee's voluntary resignation (and is not an
Involuntary Termination or a Termination for Cause), then Employee shall not be
entitled to receive salary continuation. Employee's benefits will be continued
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in accordance
with the terms of this Agreement.
(ii) Involuntary Termination. If Employee's employment is
terminated as a result of Involuntary Termination other than for Cause, Employee
will be entitled to receive salary continuation equal to Employee's regular
monthly salary for the number of months remaining in the original term of this
Agreement (the "Salary Continuation Period"). Such payments shall be made
ratably over the Salary Continuation Period according to the Company's standard
payroll schedule. Health insurance benefits with the same coverage provided to
Employee prior to the termination (e.g. medical, dental, optical) and in all
other respects significantly comparable to those in place immediately prior to
the termination will be provided at the Company's cost over the Salary
Continuation Period.
(iii) Involuntary Termination for Cause. If Employee's
employment is terminated for Cause, then Employee shall not be entitled to
receive salary continuation. Employee's benefits will be continued under the
Company's then existing benefit plans and policies
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<PAGE> 3
in accordance with such plans and policies in effect on the date of termination
and in accordance with the terms of this Agreement.
b. Other Employment. In the event Employee commences new
employment with a company whose business or proposed business in any way
involves products or services which would be competitive with the services or
proposed products or services of the Company, then any salary continuation
pursuant to this Section 5 shall cease.
6. Definition of Cause. For purposes of this Agreement, "cause"
shall mean gross negligence or willful misconduct where such gross negligence or
willful misconduct has resulted or is likely to result in substantial and
material damage to the Company or its subsidiaries.
7. Confidentiality Agreement. Employee shall sign a Confidentiality and
Invention Agreement in the form attached hereto as Exhibit A.
8. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
9. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Employee shall be
addressed to Employee at the home address from which Employee most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its company headquarters in Fremont, California,
and all notices shall be directed to the attention of John Meyer,
Vice-President, Human Resources.
10. Miscellaneous Provisions.
(a) Waivers, etc. No amendment of this Agreement and no waiver of
any one or more of the provisions hereof shall be effective unless set forth in
writing by such person against whom enforcement is sought.
(b) Sole Agreement. This Agreement, including the Exhibit hereto,
constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.
(c) Amendment. This Agreement may be amended, modified, suppressed
or canceled only by an agreement in writing executed by both parties hereto.
-3-
<PAGE> 4
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(e) Severability. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
TARGET THERAPEUTICS, INC.
By: /s/ Gary R. Bang
-----------------------------------
Gary R. Bang
President and Chief Executive Officer
"EMPLOYEE"
/s/ Ray H. Dormandy, Jr.
------------------------------------
Ray H. Dormandy, Jr.
-4-
<PAGE> 5
EXHIBIT A
CONFIDENTIALITY AND INVENTION AGREEMENT
-5-
<PAGE> 1
EXHIBIT 10.58
[TARGET THERAPEUTICS(R) LOGO]
March 12, 1996
Mr. John C. Meyer
5 Elisabeth Drive
Westboro, MA 01581
Dear John:
I am very excited about your joining Target. I feel you will add tremendous
value to the company and that you will really enjoy the culture, the people, and
our business. I am pleased to extend an offer of employment to Target
Therapeutics, Inc. Following is our "standard" offer letter, with additional
specifics outlined below:
Status: Active Full Time (Exempt)
Job Title: Vice President, Human Resources
Reports To: President and CEO, Gary Bang
Salary: $2,884.62 per week of employment to be paid
on a bi-weekly basis.
Sign-on Bonus: Special one-time bonus of $20,000 to be paid
with the first paycheck (gross. Taxes to be
deducted.)
Start Date: March 18, 1996
Benefits: Per Company policy
Terms and conditions of this offer between you and Target shall be kept in
confidence.
With the Board of Directors' Compensation Committee approval, you will be
granted options to purchase 18,000 shares of Common Stock of Target Therapeutics
at the market price on your date of hire. Subsequently, you will be eligible to
participate in Target's annual option program after your first full year of
employment - beginning May 1997.
In addition, through a bonus program, you will be eligible to earn 40% of your
annual base salary through successful achievement of corporate and individual
objectives for FY97. Actual bonus could exceed 40% if objectives are exceeded,
and it could be lower if objectives are not achieved.
Target is prepared to assist you with your relocation by providing a
reimbursement that will keep you "whole" in your transition to California. This
will be a complete relocation package that will consist of such elements as
temporary housing, movement of household goods, packing and unpacking of
household goods, storage, and paying for the sales commission on your home. The
specifics of the relocation will be outlined in a separate letter once they have
been determined. Should you voluntarily leave the employment of Target within
the first year of employment, you will be required to repay the relocation
assistance that Target provides.
Target is also prepared to pay you a mortgage differential over a 3-year period,
based on a cost of living differential between your current residence and the
San Francisco Bay Area. You will receive a mortgage differential of $12,000
during the first year, $8,000 during the second year, and $4,000 during the
third year, for a total of $24,000 over a three year period.
For purposes of federal immigration law, you will be required to provide to the
Company documentary evidence of your identity and eligibility for employment in
the United States. Such documentation must be provided to us within three (3)
business days of your date of hire, or our employment relationship with you may
be terminated.
If your employment is terminated by the Company for any reason other than for
cause, you will be paid six months' salary as severance. If the Company
experiences a change in control during your employment, the above severance will
also be available at your option.
<PAGE> 2
John, if you have any questions at all, please feel free me at (510) 440-7708.
If you would like to discuss the benefits package further, you may also wish to
call Kim Morton at (510) 440-7824.
If these terms are acceptable, please sign the enclosed second copy of this
letter and return it to me. We look forward to your favorable response. The
enclosed copy is for your records.
If you accept this offer, please also return to me a signed copy of the enclosed
Confidentiality and Non-Disclosure Agreement.
Sincerely,
/s/ Gary R. Bang
Gary R. Bang
President and CEO
I accept this offer of employment,
/s/ John C. Meyer 3/18/96
- ----------------------------- --------------------
John C. Meyer Date
47201 LAKEVIEW BLVD. P.O. BOX 5120 FREMONT, CA 94537-5120
PHONE 510/440-7700 FAX 510/440-7780
<PAGE> 1
EXHIBIT 10.59
[TARGET THERAPEUTICS LETTERHEAD]
March 9, 1994
Dr. Abhi Acharya
1025 Tracy Drive
Silver Springs,Maryland 20904
Dear Abhi:
It was a pleasure talking to you yesterday about Target, your opportunities and
aspirations, and our mutual match of interest. We would be delighted to have
you join us. As we discussed, Target is prepared to make you an offer of
employment. Following is our "standard" offer letter, with additional specifics
outlined below:
Status: Active Full Time (Exempt)
Job Title: Vice President of Regulatory and Quality Affairs
Reports To: Gary Bang, President and CEO
Salary: $2,692.30 per week of employment, to be paid on a
biweekly basis
Start Date: To be determined
Benefits: Per company policy (please see attached summary)
Terms and conditions of this offer between you and Target shall be kept in
confidence. All employment is considered "at will" and may be terminated by
either party at any time during the employment relationship, with or without
cause.
With the Board of Directors' approval, you will be granted options to purchase
25,000 shares of Common Stock of Target Therapeutics at the market price the
day of the Board of Directors' meeting following your date of hire.
In addition, through a bonus program, you will be eligible to earn 20% of your
annual base salary through successful achievement of corporate and individual
objectives.
Target is prepared to assist with your relocation by providing either a lump sum
amount or a reimbursement that will keep you "whole" in your transition to
California. This will be a complete relocation package that will consist of
such elements as temporary housing, movement of household goods, packing and
unpacking of household goods, storage, and paying for the sales commission on
your home. The specifics of the relocation will be outlined in a separate
letter once they have been determined. An individual named Mark Urban from
Relocation Financial Services will soon be calling you to discuss specifics
about your home, so that we can arrive at an appropriate relocation package. If
you wish to call Mark, his number is (408) 261-2500. Should you voluntarily
leave the employment of Target within the first year of employment, you will be
required to repay the relocation assistance that Target provides.
47201 LAKEVIEW BLVD. P.O. BOX 5120 FREMONT, CA 94537-5120
PHONE 510/440-7700 FAX 510/440-7780
<PAGE> 2
Target is also prepared to pay you a mortgage differential over a 3-year
period, if appropriate based on cost of living differentials between your
current residence and the San Francisco Bay Area. This will also be determined
and outlined in the letter which describes the relocation specifics.
We have enclosed a brochure on the Bay Area which you may find of interest
called "Living in the Bay Area."
While we have every expectation that our relationship will be a success, we are
realistic enough to recognize that work relationships sometimes do not succeed
because there is not the right fit between individuals or due to other
unforeseen circumstances. For that reason, we believe it is beneficial for both
of us to clarify in advance our rights and expectations in the event our
relationship does not succeed, as follows:
You shall have the right to terminate your employment relationship with Target
at any time upon two weeks' notice. Target shall have the right to terminate
your employment for cause at any time. In the event you are terminated for
cause, your employment relationship with Target will end immediately and you
will not be entitled to any further payments other than salary and benefits
earned as of the date of termination. Target also has the right to terminate
your employment at any time without cause. In the event that you are terminated
without cause, you will receive 9 months' salary as severance pay and Target
will continue to provide benefits to you for 9 months following your
termination date. In consideration of such severance payments and benefits, you
agree that you have no further rights or remedies in connection with your
termination.
Abhi, Target is so pleased to be making you this offer of employment. If you
have any questions at all, please feel free to call me at (510) 440-7706.
If you would like to discuss the benefits package further, you may also wish to
call Janet Blum, Target's Director of Human Resources, at (510) 440-7765.
If these terms are acceptable, please sign the enclosed second copy of this
letter and return it to me by March 21. We look forward to your favorable
response.
Sincerely,
/s/ Gary Bang
- ------------------------------
Gary Bang
President and CEO
/s/ Abhi Acharya 3/16/94
- ------------------------------ ---------------------------------
Accepted, Abhi Acharya Date
47201 LAKEVIEW BLVD. P.O. BOX 5120 FREMONT, CA 94537-5120
PHONE 510/440-7700 FAX 510/440-7780
<PAGE> 1
TARGET THERAPEUTICS, INC.
----------------------------------------
CALCULATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
EXHIBIT 11.1
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before cumulative effect of accounting change $11,702 $ 7,378 $ 4,320
Cumulative effect of change in method of accounting
for income taxes --- --- 631
------- ------- -------
Net income $11,702 $ 7,378 $ 4,951
======= ======= =======
Weighted average shares outstanding during the year 14,414 14,110 13,736
Common equivalent shares 866 356 470
------- ------- -------
Shares used in calculation of net income per share 15,280 14,466 14,206
======= ======= =======
Net income per share:
Income before cumulative effect of accounting change $ .77 $ .51 $ .30
Cumulative effect of change in method of accounting
for income taxes --- --- .05
------- ------- -------
Net income per share $ .77 $ .51 $ .35
======= ======= =======
</TABLE>
The difference between the computation of the primary and fully-diluted earnings
per share is less than 3 percent. Therefore, only primary net income per share
is shown above.
<PAGE> 1
TARGET THERAPEUTICS, INC.
----------------------------------------
SUBSIDIARIES OF TARGET THERAPEUTICS, INC.
EXHIBIT 21.1
Target Therapeutics, Inc. owns the following percentages of the outstanding
voting securities of the following corporations:
<TABLE>
<CAPTION>
Percent ownership
of outstanding
voting securities Jurisdiction
Name at March 31, 1996 of incorporation
- ---- ----------------- ----------------
<S> <C> <C>
Target Therapeutics International (Deutschland) GmbH 100% Germany
Target Therapeutics International Sales Corporation 100% Barbados
Target Therapeutics International, Inc. 100% State of Delaware
Target-CMI, Inc. 50% Japan
Target Guerbet-Bio 51% France
Interventional Therapeutics Corporation 100%(1) California
Interventional Therapeutics International 100%(2) California
</TABLE>
- -----------------------
(1) Ownership of this subsidiary was acquired by merger on May 23, 1996.
(2) All shares in this subsidiary are held by Interventional Therapeutics
Corporation, the acquisition of which is described in Note (1).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13693
<SECURITIES> 54073
<RECEIVABLES> 16760
<ALLOWANCES> 1084
<INVENTORY> 6740
<CURRENT-ASSETS> 95631
<PP&E> 17474
<DEPRECIATION> 6338
<TOTAL-ASSETS> 114275
<CURRENT-LIABILITIES> 22902
<BONDS> 0
0
0
<COMMON> 50796
<OTHER-SE> 12354
<TOTAL-LIABILITY-AND-EQUITY> 114275
<SALES> 69795
<TOTAL-REVENUES> 69795
<CGS> 21478
<TOTAL-COSTS> 33663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 16709
<INCOME-TAX> 5007
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11702
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FINANCIAL STATEMENTS
TARGET-CMI, INC.
MARCH 31, 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
TARGET-CMI, INC.
FINANCIAL STATEMENTS
MARCH 31, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................................................... 1
Audited Financial Statements
Balance Sheets........................................................................ 2
Statements of Income and Retained Earnings............................................ 3
Statements of Cash Flows.............................................................. 4
Notes to Financial Statements......................................................... 5
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Target-CMI, Inc.
We have audited the accompanying balance sheets of Target-CMI, Inc. as of
March 31, 1996 and 1995 and the related statements of income and retained
earnings and cash flows for each of the two years in the period ended March 31,
1996. Our audits also included the financial statement schedule for the two
years ended March 31, 1996. These financial statements and schedule are the
responsibility of Target-CMI, Inc.'s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Target-CMI, Inc. as of March
31, 1996 and 1995 and the results of its operations and its cash flows for each
of the two years in the period ended March 31, 1996 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the two years ended March
31, 1996, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
Tokyo, Japan
April 25, 1996
1
<PAGE> 4
TARGET-CMI, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---------- ----------
(Thousands of yen)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... Y 29,917 Y 277,030
Accounts and notes receivable (Note 2)............................ 1,473,475 969,158
Inventories....................................................... 385,690 329,670
Deferred tax assets (Note 5)...................................... 37,075 59,500
Other current assets.............................................. 2,910 1,279
---------- ----------
Total current assets...................................... 1,929,067 1,636,637
Property and equipment, net (Note 2)................................ 12,174 4,023
Lease deposits (Note 7)............................................. 43,996 33,257
Other assets........................................................ 88,401 33,733
---------- ----------
Total assets.............................................. Y2,073,638 Y1,707,650
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowing (Note 4)..................................... Y 10,000 --
Accounts payable to Century Medical, Inc. (Note 7)................ 922,782 Y 682,072
Income taxes payable.............................................. 162,008 296,792
Accrued bonus payable............................................. 154,536 130,878
Service fee and other payables to Century Medical, Inc. (Note
7)............................................................. 53,244 --
Service fee and other payables to Target Therapeutics, Inc. (Note
7)............................................................. 54,412 6,000
Accrued expenses and other current liabilities.................... 119,897 61,648
---------- ----------
Total current liabilities................................. 1,476,879 1,177,390
Deferred tax liability (Note 5)..................................... 18,613 --
Stockholders' equity (Note 8):
Common stock, par value Y50,000:
Authorized -- 2,400 shares
Issued and outstanding -- 600 shares........................... 30,000 30,000
Legal reserve..................................................... 7,500 --
Retained earnings................................................. 540,646 500,260
---------- ----------
Total stockholders' equity................................ 578,146 530,260
---------- ----------
Total liabilities and stockholders' equity................ Y2,073,638 Y1,707,650
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 5
TARGET-CMI, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
(Thousands of yen) (Unaudited)
<S> <C> <C> <C>
Product sales.......................................... Y4,801,956 Y3,697,597 Y 2,451,925
Costs and expenses (Note 7):
Cost of sales........................................ 3,124,973 2,208,629 1,499,191
Selling, general and administrative expenses......... 972,887 793,833 647,302
---------- ---------- ----------
Total cost and expenses...................... 4,097,860 3,002,462 2,146,493
---------- ---------- ----------
Income from operations................................. 704,096 695,135 305,432
Other income (expenses):
Interest income...................................... 491 1,008 5,354
Interest expense..................................... (1,471) (608) (1,764)
Other -- net......................................... 23 (1,835) 557
---------- ---------- ----------
(957) (1,435) 4,147
---------- ---------- ----------
Income before income taxes............................. 703,139 693,700 309,579
Provision for income taxes (Note 5):
Current.............................................. 374,215 393,874 196,911
Deferred............................................. 41,038 (25,721) (29,354)
---------- ---------- ----------
415,253 368,153 167,557
---------- ---------- ----------
Net income............................................. 287,886 325,547 142,022
Retained earnings at beginning of year................. 500,260 174,713 32,691
Dividends paid (Note 8)................................ (240,000) -- --
Legal reserve for dividends appropriated from
retained earnings (Note 8)........................... (7,500) -- --
---------- ---------- ----------
Retained earnings at end of year....................... Y 540,646 Y 500,260 Y 174,713
========== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 6
TARGET-CMI, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1996 1995 1994
--------- --------- -----------
(Thousands of yen)(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. Y 287,886 Y 325,547 Y 142,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 3,288 1,670 233
Disposal of fixed assets.............................. 4,112 -- --
Allowance for doubtful accounts....................... (31,695) 20,625 38,162
Change in operating assets and liabilities:
Accounts and notes receivable...................... (472,622) (331,157) (263,755)
Inventories........................................ (56,020) (195,831) (101,989)
Deferred tax assets................................ 22,425 (25,721) (29,354)
Other current assets............................... (1,631) 3,679 (10,217)
Accounts payable to Century Medical, Inc........... 240,710 261,375 57,211
Income taxes payable............................... (134,784) 121,598 135,167
Accrued bonus payable.............................. 23,658 52,272 50,358
Service fees and payables to stockholders.......... 101,656 (41,451) 47,451
Deferred tax liabilities........................... 18,613 -- --
Accrued expenses and other current liabilities..... 58,249 11,245 34,624
--------- --------- ---------
Net cash provided by operating activities............... 63,845 203,851 99,913
CASH FLOWS USED IN INVESTING ACTIVITIES
Loan made to shareholder................................ -- -- (30,000)
Short-term loan collected from shareholder.............. -- 30,000 --
Capital expenditures.................................... (15,551) (4,214) (1,474)
Increase in lease deposits and other assets............. (65,407) (34,914) (14,784)
--------- --------- ---------
Net cash used in investing activities................... (80,958) (9,128) (46,528)
CASH FLOWS USED IN FINANCING ACTIVITIES
Dividends paid.......................................... (240,000) -- --
Short-term borrowing.................................... 10,000 -- --
--------- --------- ---------
Net cash used in financing activities................... (230,000) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (247,113) 194,723 53,655
Cash and cash equivalents, beginning of year............ 277,030 82,307 28,652
--------- --------- ---------
Cash and cash equivalents, end of year.................. Y 29,917 Y 277,030 Y 82,307
========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 7
TARGET-CMI, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Target-CMI, Inc. (the "Company"), is a 50-50 joint venture of Target
Therapeutics, Inc. (Target), based in Fremont, California, and Century Medical
Inc. (CMI), based in Tokyo, Japan. The Company is engaged in marketing
disposable medical devices used in minimally invasive procedures to treat
vascular diseases of the brain associated with stroke and other diseases
accessible through small vessels of the circulatory systems .
Basis of Financial Statements
The Company maintains its official accounting records and prepares its
financial statements in Japanese yen. The books of account reflect accounting
principles customarily followed by commercial enterprises in Japan; such
accounting principles usually give recognition to the accounting methods
required by Japanese income tax laws. The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States and differ from those prepared for domestic purposes in Japan.
Accordingly, the financial statements reflect certain adjustments which are not
recorded in the official accounting records of the Company, and, of necessity,
include some amounts that are based upon management judgments. Future actual
results could differ from such estimates. The adjustments for fiscal years 1996,
1995 and 1994 relate to the recording of deferred income taxes and for fiscal
year 1996 also reflects adjustments for the cash surrender value of life
insurance contracts and certain accruals.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers
deposits in banks and short-term investments with an original maturity of three
months or less to be cash equivalents.
Concentration of Credit Risk
The Company sells its products primarily to distributors and hospitals
throughout Japan. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses. Substantially all of the Company's cash
and cash equivalents are maintained in accounts with two financial institutions.
Income Taxes
The Company computes and records income taxes currently payable based upon
its determination of taxable income. Certain temporary differences exist between
taxable income and income reported for financial statement purposes. For
financial statement purposes only, deferred income taxes are provided for these
temporary differences.
Inventories
Inventories which consist of finished goods are stated at the lower of cost
or market. Cost is determined applying the weighted moving average method.
Property and Equipment
Property and equipment, which consists of furniture and equipment, are
stated at cost, net of accumulated depreciation. Depreciation is provided using
the declining-balance method over the estimated useful lives of the respective
assets ranging from six to fifteen years.
5
<PAGE> 8
Revenue Recognition
Product sales are recognized upon shipment.
2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1996 1995
---------- ----------
(Thousands of yen)
<S> <C> <C>
Accounts and notes receivable:
Trade accounts receivable................................. Y 780,928 Y 470,982
Trade notes receivable.................................... 726,713 564,037
---------- ----------
1,507,641 1,035,019
Less allowance for doubtful accounts........................ (34,166) (65,861)
---------- ----------
Y1,473,475 Y 969,158
========== ==========
Property and equipment...................................... Y 16,387 Y 6,118
Less accumulated depreciation............................... (4,213) (2,095)
---------- ----------
Y 12,174 Y 4,023
========== ==========
</TABLE>
3. FINANCIAL INSTRUMENTS
Cash, cash equivalents and short-term borrowings are financial instruments
and their carrying value in the balance sheet approximates their fair value.
4. COMMITMENTS
The Company maintains a bank overdraft line of credit of Y600 million.
Borrowings under the line of credit bear interest at the bank's short-term prime
rate (1.625 percent at March 31, 1996) and are unsecured. The outstanding
balance under the line as of March 31, 1996 was Y10,000 thousand.
The Company leases its facilities and certain equipment under
noncancellable leases which contain renewal options. The future minimum lease
commitments by fiscal year as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
(Thousands of yen)
<S> <C>
1997........................................ Y65,280
1998........................................ 21,321
1999........................................ 6,919
2000........................................ 1,307
2001........................................ --
Thereafter.................................. --
--------
Y94,827
========
</TABLE>
The following schedule shows rental expense for all leases:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1996 1995 1994
------- ------- -----------
(Unaudited)
(Thousands of yen)
<S> <C> <C> <C>
Rent expense................................ Y75,476 Y56,772 Y37,011
======= ======= =======
</TABLE>
5. INCOME TAXES
The Company follows the liability method required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" in calculating
income taxes payable. Deferred income taxes reflect
6
<PAGE> 9
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts reported
for income tax purposes.
The Company's provision for income taxes for the years ended March 31,
1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1996 1995 1994
-------- -------- -----------
(Unaudited)
(Thousands of yen)
<S> <C> <C> <C>
Current:
National tax............................ Y250,585 Y255,138 Y 127,510
Inhabitant and Enterprise tax........... 123,630 138,736 69,401
-------- -------- --------
Total current................... 374,215 393,874 196,911
Deferred:
National tax............................ 21,314 (12,043) (14,685)
Inhabitant and Enterprise tax........... 19,724 (13,678) (14,669)
-------- -------- --------
Total deferred.................. 41,038 (25,721) (29,354)
-------- -------- --------
Total provision................. Y415,253 Y368,153 Y 167,557
======== ======== ========
</TABLE>
The provision for income taxes for the years ended March 31, 1996, 1995,
and 1994 differ from amounts computed by applying the statutory income tax rate
to income before taxes. The reconciliation between the statutory tax rate and
the effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Statutory tax rate................................ 51.4% 51.4% 51.4%
Nondeductible expenses............................ 6.3 -- --
Special tax....................................... -- -- 1.0
Entertainment expense............................. 0.8 0.5 0.2
Directors' bonus.................................. 0.6 1.9 0.3
Other............................................. -- (0.7) 1.2
---- ----
- -
---- -
Effective tax rate................................ 59.1% 53.1% 54.1%
===== ===== =====
</TABLE>
The Company's deferred tax assets and liabilities as of March 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
-------------------
1996 1995
------- -------
(Thousands of yen)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ Y 7,710 Y26,728
Enterprise tax......................................... 13,044 32,772
Accrued expense........................................ 16,321 --
------- -------
Total deferred tax assets...................... Y37,075 Y59,500
======= =======
Deferred tax liability:
Cash surrender value of life insurance................. Y(18,613) Y --
======= =======
</TABLE>
7
<PAGE> 10
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1996 1995 1994
-------- -------- -----------
(Unaudited)
(Thousands of yen)
<S> <C> <C> <C>
Interest paid............................. Y 1,471 Y 608 Y 1,764
======== ======== =======
Income taxes paid......................... Y508,999 Y272,276 Y21,717
======== ======== =======
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company purchases substantially all of its inventory from CMI, which
imports the products from Target. Purchases from CMI amounted to Y3,093,366
thousand in 1996, Y2,338,807 thousand in 1995 and Y1,528,575 thousand in 1994
(unaudited).
The Company subleases office space from CMI. Office rental expense paid to
CMI was Y6,645 thousand in 1996, Y7,239 thousand in 1995 and Y22,048 thousand in
1994 (unaudited).
In fiscal year 1996, the Company paid lease deposits amounting to Y6,116
thousand for sales office space it continues to sublease from CMI. The Company
also leases equipment from Century Leasing Co. which is 23.5% owned by Itochu
Corporation, the parent company of CMI. Equipment lease expense paid to Century
Leasing Co. was Y35,562 thousand in 1996, Y22,049 thousand in 1995, and Y14,858
thousand in 1994 (unaudited).
Service fees charged by Target and CMI for various consulting and
assistance services rendered were Y50,000 thousand each for a total of Y100,000
thousand in fiscal 1996. Amounts were Y31,321 thousand and Y15,000 thousand,
respectively, in 1995 and Y47,451 thousand and Y75,000 thousand, respectively,
in 1994 (unaudited).
Dividends paid in fiscal year 1996 to Target Therapeutics and CMI amounted
to Y120,000 thousand each.
8. STOCKHOLDERS' EQUITY
Under the Japanese Commercial Code, amounts equal to at least 10% of cash
dividends and other cash appropriations of retained earnings must be set aside
as a legal reserve until the reserve equals 25% of common stock. This reserve is
not available for dividends, but may be used to reduce a deficit by resolution
of the stockholders or may be capitalized by resolution of the Board of
Directors.
The amount of retained earnings available for dividends under the Japanese
Commercial Code is based on the amount recorded in the Company's books
maintained in accordance with Japanese accounting practices. Therefore, the
maximum amount of retained earnings of the Company available for cash dividends,
subject to the stockholders' approval, was Y561,723 thousand at March 31, 1996.
8
<PAGE> 11
TARGET-CMI, INC.
SCHEDULE OF
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSES DEDUCTIONS BALANCE
--------- ---------- ---------- -------
(Thousands of yen)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1996...................... Y65,861 -- Y 31,695 Y34,166
======= ======== ======== =======
Year ended March 31, 1995...................... Y45,236 Y 20,625 -- Y65,861
======= ======== ======== =======
Year ended March 31, 1994 (unaudited).......... Y 7,074 Y 38,162 -- Y45,236
======= ======== ======== =======
</TABLE>
9
