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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 1, 2000 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
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(Exact Name of Small Business Issuer as Specified in Its Charter)
California 94-2340464
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6035 Stoneridge Drive, Pleasanton, California 94588
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(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 May 8, 2000 registrant had 22,130,385 shares of common stock
outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Period Ended
-----------------------------------
First Quarter 2000 Year-end 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 2,536,395 $ 1,696,522
Short-term investments available-for-sale -- 276,464
Receivables 5,708,961 5,453,187
Inventories (Note 3) 7,298,507 6,611,487
Prepaid expenses and other 332,254 425,317
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Total Current Assets 15,876,117 14,462,977
Equipment and improvements, at cost 12,287,096 12,228,805
Accumulated depreciation and amortization (2,994,269) (2,667,991)
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Equipment and leasehold improvements - net 9,292,827 9,560,814
Other Assets 1,450,777 1,036,647
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TOTAL ASSETS $ 26,619,721 $ 25,060,438
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,229,590 $ 1,703,089
Accrued compensation 1,055,307 1,466,147
Deferred distributor revenue (Note 4) 284,765 284,765
Other 575,132 475,870
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Total Current Liabilities 4,144,794 3,929,871
Long-term deferred distributor revenue (Note 4) 783,103 854,294
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Total liabilities 4,927,897 4,784,165
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Shareholders' Equity:
Common shares, 100,000,000 authorized;
issued and outstanding 20,630,385 in 2000
and 20,466,326 in 1999 73,691,498 72,911,638
Paid-in capital 2,541,223 2,541,223
Accumulated deficit (54,542,642) (55,191,216)
Other comprehensive loss:
Cumulative translation adjustments 1,745 14,628
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Total Shareholders' Equity 21,691,824 20,276,273
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,619,721 $ 25,060,438
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See notes to condensed consolidated financial statements.
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THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarter
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2000 1999
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Product sales $ 7,605,836 $ 5,375,473
Cost of product sales 2,931,969 2,347,598
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Gross profit 4,673,867 3,027,875
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Operating expenses:
Research and development 1,604,865 1,153,225
Selling, general and administrative 2,763,852 2,374,512
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Total operating expenses 4,368,717 3,527,737
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Other operating income (Note 4) 402,794 71,191
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Income (loss) from operations 707,944 (428,671)
Interest and other income - net (Note 1) 3,531 99,046
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Income (loss) before taxes 711,475 (329,625)
Income tax expense 62,901 5,987
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Net income (loss) $ 648,574 $ (335,612)
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Earnings (loss) per share:
Basic $ 0.03 $ (0.02)
Diluted $ 0.03 $ (0.02)
Shares used to compute earnings (loss) per
share:
Basic 20,537,038 20,426,011
Diluted 22,072,229 20,426,011
See notes to condensed consolidated financial statements.
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THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
First Quarter
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2000 1999
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Net income (loss) $ 648,574 $(335,612)
Other net comprehensive income:
Unrealized loss on securities -- (920)
Foreign currency translation adjustments 12,883 (192,979)
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Comprehensive income (loss) $ 661,457 $(529,511)
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See notes to condensed consolidated financial statements.
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THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter
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2000 1999
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Cash flows from operating activities:
Net income (loss) $ 648,574 $ (335,612)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of deferred distributor revenue (71,191) (71,192)
Loss on disposal of capital assets 66,312 -
Depreciation and amortization 331,978 201,418
Changes in assets and liabilities:
Receivables (282,897) (406,359)
Prepaid expenses and other 92,928 47,091
Inventories (701,382) (92,491)
Other assets (6,549) (8,586)
Accounts payable and other liabilities (115,481) (807,033)
Deferred distributor revenue -- 1,423,823
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Net cash used in operating activities (37,708) (48,941)
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Cash flows from investing activities:
Purchases of short-term investments available-for-sale (283,888) (2,930,041)
Maturities of short-term investments available-for-sale 276,137 2,615,000
Sales of short-term investments available-for-sale 284,215 266,263
Capital expenditures (139,558) (265,614)
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Net cash provided by (used in) investing activities 136,906 (314,392)
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Cash flows from financing activities:
Common stock issued upon exercise of options 779,860 35,527
Deferred financing charges (34,874) --
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Net cash provided by financing activities 744,986 35,527
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Effect of exchange rate changes on cash (4,311) (15,714)
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Net increase (decrease) in cash and cash equivalents 839,873 (343,520)
Cash and cash equivalents at beginning of period 1,696,522 2,712,686
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Cash and cash equivalents at end of period $ 2,536,395 $ 2,369,166
=========== ===========
Noncash Investing Transaction:
Capital assets in accounts payable $ 51,716 $ 43,777
Noncash Financing Transaction:
Deferred financing charges in accounts payable $ 380,186 $ --
See notes to condensed consolidated financial statements.
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THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim consolidated financial statements presented have been
prepared by us without audit and, in our opinion, reflect all
adjustments necessary (consisting only of normal recurring adjustments)
to present fairly the financial position, results of operations and cash
flows for the three months ended April 1, 2000 (first quarter 2000) and
the three months ended April 3, 1999 (first quarter 1999). The results
of operations for any interim period are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of the end of 1999, (January
1, 2000) has been derived from the consolidated financial statements
that have been audited by our 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 our annual consolidated financial statements and
notes. We suggest that the accompanying condensed consolidated financial
statements be read in conjunction with the audited consolidated
financial statements and the notes thereto contained in our Annual
Report on Form 10-K for the 1999 year, filed with the Securities and
Exchange Commission.
The preparation of our consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires us 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.
All assets and liabilities of our non-United States operations are
translated into United States dollars at the fiscal period-end exchange
rates, and, except as follows, the resulting translation adjustments are
included in comprehensive income. Exchange rate fluctuations resulting
from the period-end translation of the current portion of the
intercompany obligation of our wholly-owned subsidiary into United
States dollars are recorded in the income statement as foreign currency
translation gains or losses and are included in interest and other
income. Net foreign currency translation loss in the first quarter of
2000 was approximately $71,000 and zero in the first quarter of 1999.
The calculation of 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 first quarter 1999 excludes the effect of any such
instruments as their inclusion would be anti-dilutive.
We have made certain reclassifications to the 1999 amounts to conform to
the 2000 presentation.
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2. RECENTLY ISSUED ACCOUNTING STANDARD
During June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. Such
Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We have not yet evaluated the impact of the new
standard.
3. INVENTORIES
Inventories consist of the following:
Period Ended
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First Quarter 2000 Year end 1999
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Finished goods $3,392,178 $3,163,055
Work in process 2,428,545 2,033,194
Raw materials 1,477,784 1,415,238
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Total $7,298,507 $6,611,487
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4. LICENSE AGREEMENT AND DISTRIBUTION AGREEMENT
In the first quarter of 2000, we amended the license granted to Gambro,
Inc., formerly known as COBE Laboratories, Inc., to be a fully paid-up,
world-wide, irrevocable field-of-use license and sublicense (with the
right to sublicense others) for our biomaterials to be used in some of
Gambro's products. The original license was granted in 1992 and was for
use in renal dialysis devices, blood component devices and blood tubing
sets and accessories used in direct connection with any of these. We
received a one-time payment of approximately $330,000 in the first
quarter of 2000 in conjunction with this amendment, which is included in
other operating income in the first quarter of 2000. Thoratec has no
continuing obligation to Gambro under this license agreement.
During the first quarter of 1999, we entered into a five-year
distribution agreement with Guidant Corporation. Under the terms of the
agreement, Guidant receives exclusive worldwide marketing and
distribution rights to our Vectra(TM) vascular access graft product
line, except in Japan. In exchange for these rights, Guidant made a $1.5
million non-refundable payment in the first quarter of 1999, and will
pay up to an additional $2 million when the Vectra product line receives
FDA approval for use in the United States. Guidant also agreed to
provide a four-year, unsecured line of credit in the amount of $10
million to us, which may be used, if needed, for a variety of business
purposes. In the first quarter of 1999, we began recognizing the $1.5
million contract payment ratably over the five-year life of the
contract. Other operating income in the first quarter of 2000 and the
first quarter of 1999 each include approximately $71,000 of such payment
amortization.
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5. SUBSEQUENT EVENT
In April 2000, subsequent to the end of the first quarter, we sold,
through an underwritten public offering, 2,000,000 shares of common
stock at $10.00 per share. Included in the 2,000,000 shares were 500,000
shares offered by Gambro Inc., a major shareholder of our company, for
which we received no proceeds. On April 19, 2000, we received a total of
$14,145,000, after deducting underwriting discounts, from which
approximately $650,000 in offering-related costs will be paid.
Underwriting discounts and the other estimated offering-related costs
were recorded as an offset to common stock at the closing of the
offering in April. In addition, the underwriters were granted a 30-day
option to purchase from us and Gambro up to 300,000 additional shares of
common stock to cover any over-allotments, of which the proceeds from up
to 225,000 shares would be received by us. As of May 3, 2000, this
over-allotment option has not yet been exercised.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
At the end of the first quarter of 2000 we had working capital of $11.7 million
compared with $10.5 million at the end of 1999. Cash, cash equivalents, and
short-term investments available for sale increased $563,000 to $2.5 million
principally due to receipt of a $350,000 license payment from Gambro, Inc.,
discussed below, and $780,000 from stock option exercises. Accounts receivable
increased $256,000 to $5.7 million on higher sales in the first quarter of 2000
compared to the fourth quarter of 1999. Inventories increased $687,000 to $7.3
million in preparation for planned increases in product sales. Current
liabilities increased $215,000 to $4.1 million, principally from accrued costs
associated with our public stock offering, costs related to our annual report to
shareholders and costs of other year-end statutory reports. These increases were
partially offset by a decrease in accrued compensation due to payment of 1999
accrued bonuses and commissions in the first quarter of 2000.
In the first quarter of 2000, we amended the license granted to Gambro, Inc.,
formerly known as COBE Laboratories, Inc., to be a fully paid-up, world-wide,
irrevocable field-of-use license and sublicense (with the right to sublicense
others) for our biomaterials to be used in some of Gambro's products. The
original license was granted in 1992 and was for use in renal dialysis devices,
blood component devices and blood tubing sets and accessories used in direct
connection with any of these. We received a one-time payment of approximately
$330,000 in the first quarter of 2000 in conjunction with this amendment, which
is included in other operating income in the first quarter of 2000. Thoratec has
no continuing obligation to Gambro under this license agreement.
In April 2000, subsequent to the end of the first quarter, we sold, through an
underwritten public offering, 2,000,000 shares of common stock at $10.00 per
share. Included in the 2,000,000 shares were 500,000 shares offered by Gambro
Inc., a major shareholder of our company, for which we received no proceeds. On
April 19, 2000, we received a total of $14,145,000, after deducting underwriting
discounts, from which approximately $650,000 in offering-related costs will be
paid. Underwriting discounts and the other estimated offering-related costs were
recorded as an offset to common stock at the closing of the offering in April.
In addition, the underwriters were granted a 30-day option to purchase from us
and Gambro up to 300,000 additional shares of common stock to cover any
over-allotments, of which the proceeds from up to 225,000 shares would be
received by us. As of May 3, 2000, this over-allotment
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option has not yet been exercised. We intend to use the net proceeds for
clinical trials of products under development, expansion of our sales and
marketing capabilities, research and development, potential acquisitions of
complementary technology, working capital and other general corporate purposes.
We believe that expected cash flow from operations, in conjunction with the
proceeds of the public offering discussed above, will be sufficient to fund our
operations for at least the next twelve months. We expect that our operating
expenses will increase in future periods as we spend more on product
manufacturing, marketing and research and development of new product lines.
Although we were profitable in the first quarter of 2000, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
We do not expect that inflation will have a material impact on our operations.
Results of Operations
First quarter of 2000 and 1999
Product sales in the first quarter of 2000 were $7.6 million compared to $5.4
million in the first quarter of 1999, an increase of approximately $2.2 million
or 41%. The increase is attributable to sales of our VAD System disposable blood
pumps and cannulae, which increased to approximately $6.7 million in the first
quarter of 2000 from $4.2 million in the first quarter of 1999, an increase of
approximately $2.5 million or 60%. The growth of sales in VAD disposables was
primarily attributable to a 43% increase in the quantity of VAD pumps sold. The
total number of centers using our VAD system increased to 140 at the end of the
first quarter of 2000 from 101 at the end of the first quarter of 1999. An
increase of 8.5% in the average selling price of our domestic VAD pumps and a
geographic sales mix favoring the United States also contributed to the increase
in revenue as compared to the first quarter of last year.
Gross profit was $4.7 million, representing approximately 61% of product sales
for the first quarter of 2000 compared to a gross profit of $3.0 million
representing approximately 56% of product sales for the first quarter of 1999.
The increase in gross profit percentage was due to a higher proportion of VAD
System disposables being sold in the United States in the first quarter of 2000
compared to the first quarter of 1999. VAD disposable products sold in the
United States generally have a higher gross margin than those sold in the rest
of the world. In addition, the average selling price of VAD pumps sold in the
United States was higher in the first quarter of 2000 compared to the first
quarter of 1999. Partially offsetting the favorable geographic sales mix and
higher domestic average selling prices for the VAD System disposables was
approximately $420,000 in higher manufacturing, service and retrofitting costs
associated with a component used in the TLC-II portable driver.
Research and development expenses remained constant at 21% of product sales in
the first quarters of both 2000 and 1999. These expenses increased to $1.6
million in the first quarter of 2000 from $1.2 million in the first quarter of
1999, an increase of $452,000, or 39%. Of the total increase in research and
development expenses, $140,000 was due to the implantable version of our
ventricular assist device, $76,000 to graft products, $76,000 to the TLC-II, and
$134,000 to indirect engineering and manufacturing expenses, representing higher
overall facilities expenses and higher levels of support from quality assurance
and manufacturing personnel.
Selling, general and administrative expenses increased to $2.8 million in the
first quarter of 2000, representing 36% of sales, from $2.4 million in first
quarter of 1999, representing 44% of sales, an increase of $389,000 or 16%. Of
the total increase in selling, general, and administrative expenses, $227,000 is
associated with the continued development of the domestic and European sales
organizations
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and other promotional activities, and $162,000 is associated with various
administrative expenses, principally related to increased personnel expenses and
expenses related to our annual report to shareholders and other year-end
statutory reports.
Forward-Looking Statements
The statements in this report that relate to future plans, events or performance
are forward-looking statements which involve risks and uncertainties. These
risks include those related to government regulatory approval processes, delays
in product development and new product introductions, announcements by our
competitors, single source suppliers, rapidly changing technology, an intensely
competitive market, market acceptance of new products, reimbursement policies
and general economic conditions. These factors, and others, are discussed more
fully in our annual report on Form 10-K for 1999 and our 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.
We undertake no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
We do not currently use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk associated
with changes in interest rates as we have no long-term debt obligations or
long-term investments outstanding. Our investment portfolio at the end of 1999
consisted of short-term corporate debt instruments and Federal government agency
debt instruments that were classified as available-for-sale. The weighted
average maturity of our investment portfolio was less than 90 days in 1999. We
did not have any investments at the end of the first quarter of 2000. We do not
expect to be subject to material interest rate risk with respect to our
short-term investments. We do not believe we have any other material exposure to
market risk associated with interest rates.
Although we conduct business in foreign countries, our international operations
consist primarily of sales and service personnel for our VAD System. These
employees report into our U.S. sales and marketing group and are internally
reported as part of that group. Our net foreign currency transaction losses were
approximately $71,000 in the first quarter of 2000 and nil in the first quarter
of 1999. We do not expect to be subject to material foreign currency risk with
respect to future costs or cash flows from our foreign operations. To date, we
have not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange.
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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.
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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: May 8, 2000 /s/ D. Keith Grossman
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D. Keith Grossman, Chief Executive Officer
Date: May 8, 2000 /s/ Cheryl D. Hess
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Cheryl D. Hess, Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Document
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27 Financial Data Schedule
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