UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
COMMISSION FILE NUMBER: 1-8145
THORATEC LABORATORIES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2340464
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
6035 Stoneridge Drive, Pleasanton, California 94588
- -------------------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (925) 847-8600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 9, 1998 registrant had 20,381,010 shares of common
stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 3, January 3,
1998 1998
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................... $3,353,819 $9,469,311
Short-term investments available-for-sale... 2,607,658 5,390,663
Receivables................................. 2,765,096 1,302,323
Inventories (Note 3)........................ 5,774,863 3,901,258
Prepaid expenses and other.................. 249,956 270,865
------------ ------------
Total current assets 14,751,392 20,334,420
Equipment and leasehold improvements, at cost. 12,384,758 8,823,679
Accumulated depreciation and amortization..... (2,658,377) (2,154,105)
------------ ------------
Equipment and leasehold improvements - net.... 9,726,381 6,669,574
Other assets.................................. 1,520,478 1,473,180
------------ ------------
TOTAL ASSETS $25,998,251 $28,477,174
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $1,916,473 $2,804,400
Accrued compensation........................ 1,170,215 929,920
Product sales advances...................... 343,891 255,199
Other....................................... 258,744 460,378
------------ ------------
Total current liabilities................. 3,689,323 4,449,897
Commitments
Shareholders' Equity:
Common shares, 100,000,000 authorized;
issued and outstanding 20,367,677
in 1998 and 20,172,445 in 1997 ........... 72,754,940 72,664,107
Paid-in capital.............................. 2,482,229 2,482,229
Accumulated deficit.......................... (52,944,173) (51,081,554)
Other comprehensive gain (loss):
Unrealized gain (loss) on investments - net.. 1,120 (7,539)
Cumulative translation adjustments........... 14,812 (29,966)
------------ ------------
Total other comprehensive gain (loss)........ 15,932 (37,505)
------------ ------------
Total shareholders' equity................. 22,308,928 24,027,277
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $25,998,251 $28,477,174
============ ============
See notes to condensed consolidated financial statements
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue:
Product sales - net....... $3,618,193 $2,159,034 $11,329,653 $6,833,411
Interest and other income. 129,156 163,146 524,569 553,637
------------ ------------ ------------ ------------
Total revenue............. 3,747,349 2,322,180 11,854,222 7,387,048
------------ ------------ ------------ ------------
Costs and expenses:
Costs of products sold.... 1,480,101 874,876 4,457,804 2,950,123
Research and development.. 1,207,110 1,141,615 3,692,604 3,455,403
Selling, general and
administrative......... 1,678,449 1,536,987 5,566,433 4,371,730
------------ ------------ ------------ ------------
Total costs and expenses.. 4,365,660 3,553,478 13,716,841 10,777,256
------------ ------------ ------------ ------------
Net loss.................... ($618,311) ($1,231,298) ($1,862,619) ($3,390,208)
============ ============ ============ ============
Basic and diluted loss per
share (Note 5)............ ($0.03) ($0.07) ($0.09) ($0.19)
============ ============ ============ ============
Shares used to compute
basic and diluted loss
per share................. 20,355,375 18,097,725 20,320,976 18,027,534
============ ============ ============ ============
See notes to condensed consolidated financial statements.
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
--------------------------
October 3, September 27,
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss............................................. ($1,862,619) ($3,390,208)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock options granted for services.......... 9,972
Depreciation and amortization...................... 504,272 167,862
Changes in assets and liabilities:
Receivables.................................... (1,462,775) (620,935)
Prepaid expenses and other..................... 20,909 30,925
Inventories.................................... (1,873,605) (362,356)
Other assets................................... (47,298) (551,783)
Accounts payable and other liabilities......... 109,240 420,163
------------ ------------
Net cash used in operating activities....... (4,611,876) (4,296,360)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments
available-for-sale.............................. (12,465,364) (66,211,706)
Maturities of short-term investments
available-for-sale.............................. 14,875,000 64,760,000
Sales of short-term investments available-for-sale. 382,028 6,767,577
Capital expenditures............................... (4,386,113) (2,580,143)
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Net cash provided by (used in) investing
activities.............................. (1,594,449) 2,735,728
------------ ------------
Cash flows from financing activities:
Common stock issued upon exercise of options....... 90,833 299,148
------------ ------------
Net cash provided by financing activities... 90,833 299,148
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Net increase (decrease) in cash and cash equivalents. (6,115,492) (1,261,484)
Cash and cash equivalents at beginning of period..... 9,469,311 5,348,000
------------ ------------
Cash and cash equivalents at end of period........... $3,353,819 $4,086,516
============ ============
Noncash Financing Transaction:
Construction costs and capital assets
in accounts payable.............................. $417,561 $767,001
============ ============
See notes to condensed consolidated financial statements.
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements presented have
been prepared by Thoratec Laboratories Corporation (the Company)
without audit and, in the opinion of management, reflect all
adjustments necessary (consisting only of normal recurring adjustments)
to present fairly the financial position, results of operations and
cash flows at October 3, 1998 and for all periods presented. The
results of operations for any interim period are not necessarily
indicative of results for a full year.
The condensed consolidated balance sheet presented as of January 3,
1998, has been derived from the consolidated financial statements that
have been audited by the Company's independent public accountants. The
consolidated financial statements and notes are presented as permitted
by the Securities and Exchange Commission and do not contain certain
information included in the annual consolidated financial statements
and notes of the Company. It is suggested that the accompanying
condensed consolidated financial statements be read in conjunction with
the audited consolidated financial statements and the notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998, filed with the Securities and Exchange
Commission.
The preparation of the Company's condensed consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the consolidated balance sheet
dates and the reported amounts of revenues and expenses for the periods
presented.
Certain reclassifications have been made to the 1997 amounts to conform
to the 1998 presentation.
2. RECENTLY ISSUED ACCOUNTING STANDARD
During June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which establishes annual and interim standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
this Statement will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Such Statement is
effective for fiscal years beginning after December 15, 1997, with
earlier application permitted .
3. INVENTORIES
Inventories consist of the following:
October 3, January 3,
1998 1998
------------ ------------
Finished goods.................... $3,156,739 $1,652,312
Work in process................... 1,455,373 803,606
Raw materials..................... 1,162,751 1,445,340
------------ ------------
Total.......................... $5,774,863 $3,901,258
============ ============
4. COMPREHENSIVE LOSS
Effective January 4, 1998, Thoratec Laboratories Corporation adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." This Statement requires that all items
recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed
with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include
foreign currency translation adjustments, unrealized gains and losses
on marketable securities classified as available-for-sale and minimum
pension liability adjustments. Annual financial statements for prior
periods will be reclassified, as required. The Company's total
comprehensive loss is as follows:
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net loss................... ($618,311) ($1,231,298) ($1,862,619) ($3,390,208)
------------ ------------ ------------ ------------
Other net comprehensive
income:
Unrealized gain (loss)
on securities........... 1,822 (176) 8,659 (5,465)
Foreign currency
translation adjustments. 37,436 (446) 44,778 (21,734)
------------ ------------ ------------ ------------
Other comprehensive
income (loss)........... 39,258 (622) 53,437 (27,199)
------------ ------------ ------------ ------------
Comprehensive loss......... ($579,053) ($1,231,920) ($1,809,182) ($3,417,407)
============ ============ ============ ============
5. EARNINGS PER SHARE
The Company calculates basic earnings per share (EPS) and diluted EPS
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). Basic EPS is computed by dividing
net income (loss) for the period by the weighted average number of
common shares outstanding for that period. Diluted EPS takes into
account the effect of dilutive instruments, such as stock options, and
uses the average share price for the period in determining the number
of incremental shares that are to be added to the weighted average
number of shares outstanding. Diluted EPS for the three months and
nine months ended October 3, 1998 and the three months and nine months
ended September 27, 1997 exclude any effect of such instruments because
their inclusion would be antidilutive.
The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS:
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Shares used to compute
basic EPS................ 20,355,375 18,097,725 20,320,976 18,027,534
Add: effect of dilutive
securities............... -- -- -- --
------------ ------------ ------------ ------------
Shares used to compute
diluted EPS.............. 20,355,375 18,097,725 20,320,976 18,027,534
============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Liquidity and Capital Resources
At the end of the third quarter of 1998 the Company had working capital of
$11,062,000 compared with $15,885,000 at the end of 1997. The decrease in
working capital was due to a decrease in cash offset by increases in
receivables and inventories. Cash was used to support ongoing operations as
well as planned expenditures on the Company's new manufacturing facility.
Receivables increased principally due to higher sales in September compared
to December. Inventories increased in preparation for planned increases in
sales activity including the planned introduction of the Company's portable
VAD driver, the TLC-II.
While the Company believes it has sufficient funds for its current business
plan it expects that its operating expenses will increase in future periods
as the Company expends increased amounts on product manufacturing and
marketing and on research and development of new product lines. As a result,
the Company expects to incur net losses for at least the current year. There
can be no assurance that the Company will achieve profitability or positive
cash flow.
The Company does not expect that inflation will have a material impact on its
operations.
Results of Operations
Fiscal Quarters Ended October 3, 1998 and September 27, 1997
Product sales in the third quarter of 1998 were approximately $3,618,000
compared to $2,159,000 in the third quarter of 1997. The $1,459,000, or 68%,
increase is principally the result of increased sales of the Company's VAD
System in the United States and Europe. The increase is due to increases in
the number of domestic and European centers using the VAD System since direct
sales and marketing efforts were initiated in early 1996 and mid-1997,
respectively, as well as increases in the average selling price of the VAD
System domestically. Included in product sales is rental income in the third
quarter of 1998 of approximately $215,000 compared to $82,000 in the third
quarter of 1997. The $133,000, or 161%, increase is principally due to new
and existing centers renting drivers rather than purchasing the equipment.
Interest and other income in the third quarter of 1998 decreased $34,000 or
21%. The decrease is due to overall lower cash balances partially offset by
revenue received on the skeletal muscle project grant. Cost of sales
increased $605,000, or 69%, in 1998 as a result of higher sales in 1998.
Gross margin as a percentage of sales remained constant in 1998 compared to
1997. Research and development expenses for the third quarter of 1998
increased $65,000, or 6%, compared to the third quarter of 1997 due
principally to increased overhead expenses associated with the new Pleasanton
facility. Selling, general and administrative expenses in the third quarter
of 1998 increased $141,000, or 9%, compared to the third quarter of 1997.
Selling expenses increased due to growth of sales and marketing personnel,
including costs of direct sales in Europe, marketing costs associated with
new product introductions and overhead expenses related to the new Pleasanton
facility. General and administrative expenses decreased due to reduced
travel, recruiting and consulting expenses, which were partially offset by
higher facilities expenses related to the Pleasanton facility.
Nine months ended October 3, 1998 and September 27, 1997
Product sales in the first nine months of 1998 were approximately $11,330,000
compared to $6,833,000 in the first nine months of 1997. The $4,497,000, or
66%, increase is principally the result of increased sales of the Company's
VAD System in the United States and Europe. The increase is due to increases
in the number of domestic and European centers using the VAD system, as well
as increases in the average selling price of the VAD System. Included in
product sales is rental income in the first nine months of 1998 of
approximately $832,000 compared to $321,000 in the first nine months of 1997.
The $511,000, or 159%, increase is principally due to new and existing
centers renting drivers rather than purchasing the equipment. Interest and
other income in the first nine months of 1998 decreased to $525,000 from
$554,000. The decrease is due to overall lower cash balances offset by
revenue received on the skeletal muscle project grant. Cost of sales
increased $1,508,000, or 51%, in 1998 as a result of higher sales in 1998.
Gross margin increased from 57% in 1997 to 61% in 1998 due to changes in
sales mix with increased unit sales of VAD pumps and higher average selling
prices for the VAD System. Research and development expenses for the first
nine months of 1998 increased $237,000, or 7%, compared to the first nine
months of 1997 due to increased spending for ongoing product support and
increased overhead expenses from the new facility. Selling, general and
administrative expenses in the first nine months of 1998 increased
$1,195,000, or 27%, compared to the first nine months of 1997. Selling
expenses increased due to marketing efforts associated with new product
introductions and growth of sales and marketing personnel, including costs of
implementing a direct sales strategy in Europe. General and administrative
expenses increased due to overhead expenses of the new Pleasanton facility
and strategic planning projects.
Other Matters
The Year 2000 issue involves computer programs and embedded microprocessors
in computer systems and other equipment that utilize two digits rather than
four to define the applicable year. These systems may be programmed to
assume that all two digit dates are preceded by "19", causing "00" to be
interpreted as 1900 versus 2000. This could result in the possible failure
of those programs and devices to properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize date sensitive information could generate erroneous data or a
system failure.
The Company's objective is to ensure an uninterrupted transition into Year
2000. The Company has a Year 2000 compliance plan in place and a formal Year
2000 compliance project that addresses the Company's information technology
systems. The scope of the Year 2000 plan includes: (1) information
technology ("IT") such as software and hardware; (2) non-IT systems or
embedded technology such as microcontrollers contained in various
manufacturing and lab equipment, environmental and safety systems, facilities
and utilities and Company products with date sensitivity; and (3) readiness
of key third parties, including suppliers, customers and key financial
institutions.
The Company has identified the following phases of its Year 2000 project: 1)
educate IT personnel and company management about the Year 2000 issue, 2)
identify required resources to execute the Year 2000 action plan, 3) create
priority schedule for critical systems, 4) estimate total cost of Year 2000
action plan, 5) determine and implement corrections to noncompliant systems,
6) test and verify corrections, 7) place corrected systems into service, and
8) monitor Year 2000 compliance with new vendors, software and hardware.
Phases 1 through 4 have been completed. Phase 5 is currently in process and
is scheduled for completion by the end of 1998. Phases 6 and 7 are on
schedule to be completed by the end of 1999. Phase 8 will continue into the
year 2000.
The Company has requested written confirmation from what it believes to be
all of its significant vendors as to their Year 2000 compliance status, and
has taken steps to determine the extent to which the Company's systems are
vulnerable to those third parties' failures to remedy their own Year 2000
issues. There can be no assurance that the systems of other companies with
which the Company does business will be timely converted or that any such
failure to upgrade or convert would not have an adverse effect on the
Company's systems and operations. Responses to date, however, have indicated
no significant problems.
Through third quarter ended October 3, 1998, the Company has incurred less
than $25,000 of Year 2000 cost and expects to spend less than this amount
during each of 1999 and 2000. All costs associated with Year 2000 compliance
are being funded with cash flow generated from operations and existing cash
balances and are being expensed as incurred.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for its computer systems. However, the
company does not currently have nor does the Company intend to have in the
future, a formal contingency plan in the event its Year 2000 compliance
program is unsuccessful or not completed on a timely basis.
Forward-Looking Statements
The portions of this report that relate to future plans, events or
performance are forward-looking statements. Investors are cautioned that all
such statements involve risks and uncertainties, including announcements by
the Company's competitors, risks related to the government regulatory
approval processes, delays in approvals for the new manufacturing facility,
delays in product development and new product introductions, rapidly changing
technology, an intensely competitive market, market acceptance of new
products, relationships with foreign distributors, reimbursement policies and
general economic conditions. These factors, and others, are discussed more
fully in the Company's annual report on Form 10-K for the fiscal year ended
January 3, 1998, and the Company's other filings with the Securities and
Exchange Commission. Actual results, events or performance may differ
materially. These forward-looking statements speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THORATEC LABORATORIES CORPORATION
Date: November 10, 1998 /s/ D. Keith Grossman
------------------- ----------------------------------------------
D. Keith Grossman, Chief Executive Officer
Date: November 10, 1998 /s/ Cheryl D. Hess
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Cheryl D. Hess, Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Document
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27 Financial Data Schedule